<PAGE>
KEYSTONE CAPITAL PRESERVATION
AND INCOME FUND
PROSPECTUS DECEMBER 10, 1996
AS SUPPLEMENTED JANUARY 1, 1997
Keystone Capital Preservation and Income Fund (the "Fund") is a mutual fund
that seeks a high level of current income consistent with low volatility of
principal by investing under ordinary circumstances at least 65% of its assets
in adjustable rate securities issued or guaranteed by the United States ("U.S.")
government, its agencies or instrumentalities, such as adjustable rate mortgage
securities, loan pools and collateralized mortgage obligations. The Fund does
not attempt to maintain a constant price per share. The Fund does, however,
follow a strategy that seeks to minimize changes in its net asset value per
share by investing primarily in adjustable rate securities whose interest rates
are periodically reset when market rates change. The Fund seeks to maintain a
relatively stable net asset value while providing high current income relative
to high quality, short-term investment alternatives.
The Fund offers Class, A, B and C shares. Information on share classes and
their fee and sales charge structures may be found in the "Expense Information,"
"How to Buy Shares," "Alternative Sales Options," "Contingent Deferred Sales
Charge and Waiver of Sales Charges," "Distribution Plans and Agreements" and
"Fund Shares" sections of this prospectus.
This prospectus concisely states information about the Fund that you should
know before investing. Please read it and retain it for future reference.
Additional information about the Fund is contained in a statement of
additional information dated December 10, 1996, as supplemented, which has been
filed with the Securities and Exchange Commission and is incorporated by
reference into this prospectus. For a free copy, or for other information about
the Fund, write to the address or call the telephone number provided on this
page.
KEYSTONE CAPITAL PRESERVATION
AND INCOME FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
TABLE OF CONTENTS Page
Expense Information 2
Financial Highlights 3
The Fund 6
Investment Objective and Policies 6
Investment Restrictions 9
Risk Factors 10
Pricing Shares 11
Dividends and Taxes 12
Fund Management and Expenses 12
Distribution Plans and Agreements 15
How to Buy Shares 18
Alternative Sales Options 19
Contingent Deferred Sales Charge and Waiver of Sales Charges 22
How to Redeem Shares 23
Shareholder Services 24
Performance Data 26
Fund Shares 27
Additional Information 27
Additional Investment Information (i)
Exhibit A A-1
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT INSURED OR OTHERWISE PROTECTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
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>
EXPENSE INFORMATION
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of shares of the Fund will
bear directly or indirectly. For more complete descriptions of the various costs
and expenses, see the following sections of this prospectus: "Fund Management
and Expenses"; "How to Buy Shares"; "Alternative Sales Options"; "Contingent
Deferred Sales Charge and Waiver of Sales Charges"; "Distribution Plans and
Agreements"; and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT-END BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION(1) OPTION(2)
----------- -------------- ---------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases ............ 3.25%(3) None None
(as a percentage of offering price)
Deferred Sales Load ................................ 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original declining to 1.00% in year and 0.00%
purchase price or redemption proceeds, the sixth year and 0.00% thereafter
as applicable) thereafter
Exchange Fee ....................................... None None None
ANNUAL FUND OPERATING EXPENSES(5)
After Expense Reimbursements
(as a percentage of average net assets)
Management Fees .................................... 0.64% 0.64% 0.64%
12b-1 Fees ......................................... 0.23% 1.00%(6) 1.00%(6)
Other Expenses ..................................... 0.03% 0.01% 0.01%
----- ----- -----
Total Fund Operating Expenses ...................... 0.90% 1.65% 1.65%
==== ==== ====
<CAPTION>
EXAMPLES(7) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each period:
Class A ......................................................... $41 $60 $ 81 $140
Class B ......................................................... $67 $82 $110 $166
Class C ......................................................... $27 $52 $90 $195
You would pay the following expenses on the same investment, assuming
no redemption at the end of each period:
Class A ......................................................... $41 $60 $81 $140
Class B ......................................................... $17 $52 $90 $166
Class C ......................................................... $17 $52 $90 $195
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
<FN>
- ----------
(1) Class B shares purchased after January 1, 1997, convert to Class A shares after seven years. See "Class B Shares"
for more information.
(2) Class C shares are available only through broker-dealers who have entered into special distribution agreements
with Evergreen Keystone Distributor, Inc., the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A
Shares."
(4) Purchases of Class A shares made after January 1, 1997, in the amount of $1,000,000 or more are not subject to a
sales charge at the time of purchase, but may be subject to a contingent deferred sales charge. See the "Class A
Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges" sections of this prospectus for an
explanation of the charge.
(5) Expense ratios are estimated for the Fund's fiscal year ending September 30, 1997 after giving effect to the
reimbursement by Keystone Investment Management Company ("Keystone") of expenses in accordance with certain
voluntary expense limitations. Currently, Keystone has voluntarily limited annual expenses of the Fund's Class A,
B and C shares to 0.90%, 1.65% and 1.65% of average net class assets, respectively. Keystone intends to continue
the foregoing expense limitations on a calendar month-by-month basis and may modify or terminate them in the
future. The Estimated expense ratios above assume the extension of the limitations until September 30, 1997, which
Keystone is under no obligation to do. Absent voluntary expense limits, expense ratios for the Fund's Class A, B
and C shares are estimated to be 1.31%, 2.10% and 2.10%, of average net assets for the fiscal year ending
September 30, 1997, respectively. Total Fund Operating Expenses will include indirectly paid expenses.
(6) 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").
(7) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example.
Actual return for the Fund may be greater or less than 5%.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of
additional information. Additional information about the Fund's performance is
contained in its Annual Report, which will be made available upon request and
without charge.
DECEMBER 30, 1994
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING) TO
SEPTEMBER 30, 1996(d) SEPTEMBER 30, 1995
--------------------- ------------------
NET ASSET VALUE BEGINNING OF YEAR ..... $9.68 $9.51
----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................. 0.61 0.46
Net realized and unrealized gain
on investments ....................... 0.01 0.14
----- -----
Total from investment operations 0.62 0.60
----- ----
LESS DISTRIBUTIONS FROM:
Net investment income ................. (0.53) (0.42)
In excess of net investment
income .............................. 0 (0.01)
Tax basis return of capital ........... (0.03) 0
----- ----
Total distributions ................... (0.56) (0.43)
---- ----
NET ASSET VALUE END OF YEAR ........... $9.74 $9.68
===== =====
TOTAL RETURN (a) ...................... 6.56% 6.36%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses (b) .................. 0.91% 0.86%(c)
Total expenses excluding
reimbursement ..................... 1.33% 1.27%(c)
Net investment income ............... 6.31% 6.37%(c)
Portfolio turnover rate ............... 74% 67%
NET ASSETS END OF YEAR (THOUSANDS) .... $22,684 $19,293
- ----------
(a) Excluding applicable sales charges.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would
have been 0.90% for the year ended September 30, 1996 and 0.82%
(annualized) for the period December 30, 1994 (Date of Initial Public
Offering) to September 30, 1995.
(c) Annualized.
(d) Calculation based on average shares outstanding.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of
additional information. Additional information about the Fund's performance is
contained in its Annual Report, which will be made available upon request and
without charge.
<TABLE>
<CAPTION>
JULY 1, 1991
YEAR ENDED SEPTEMBER 30, (COMMENCEMENT OF
-------------------------------------------------------- OPERATIONS) TO
1996(d) 1995 1994 1993 1992 SEPTEMBER 30, 1991
------- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $ 9.68 $ 9.62 $ 9.91 $ 9.88 $ 10.06 $ 10.00
------- ------- ------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............. 0.55 0.52 0.47 0.45 0.58 0.18
Net realized and unrealized
gain (loss) on investments ....... 0.01 0.03 (0.41) (0.05) (0.21) 0.06
------- ------- ------- -------- -------- -------
Total from investment
operations ...................... 0.56 0.55 0.06 0.40 0.37 0.24
------- ------- ------- -------- -------- -------
LESS DISTRIBUTIONS FROM:
Net investment income ............. (0.46) (0.48) (0.34) (0.37) (0.55) (0.18)
In excess of net
investment income ............... 0 (0.01) (0.01) 0 0 0
Tax basis return of
capital .......................... (0.03) 0 0 0 0 0
------- ------- ------- -------- -------- -------
Total distributions ............... (0.49) (0.49) (0.35) (0.37) (0.55) (0.18)
-------- -------- ------- -------- -------- -------
NET ASSET VALUE END OF YEAR $ 9.75 $ 9.68 $ 9.62 $ 9.91 $ 9.88 $ 10.06
======= ======= ======= ======== ======== =======
TOTAL RETURN (a) .................. 5.90% 5.81% 0.58% 4.16% 3.71% 2.43%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses .................. 1.63%(b) 1.53%(b) 1.50% 1.50% 1.36% 1.19%(c)
Total expenses excluding
reimbursement ................. 2.09% 2.09% 1.93% 1.94% 2.03% 3.19%(c)
Net investment income ........... 5.63% 5.46% 4.05% 4.44% 5.50% 6.42%(c)
Portfolio turnover rate ........... 74% 67% 34% 60% 41% 2%
NET ASSETS END OF YEAR
(THOUSANDS) ..................... $44,096 $62,998 $95,761 $144,725 $186,742 $25,769
<FN>
- ----------
(a) Excluding applicable sales charges.
(b) Ratio of total expenses to average net assets includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratios would have been 1.62% and 1.50% for the years ended September 30, 1996 and 1995,
respectively.
(c) Annualized.
(d) Calculation based on average shares outstanding.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of
additional information. Additional information about the Fund's performance is
contained in its Annual Report, which will be made available upon request and
without charge.
FEBRUARY 1, 1993
(DATE OF INITIAL
PUBLIC OFFERING) TO
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ------------
1996(d) 1995 1994 1993
------- ---- ---- ----
NET ASSET VALUE
BEGINNING OF YEAR .... $ 9.67 $ 9.60 $ 9.90 $ 9.82
====== ====== ====== =======
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.54 0.52 0.40 0.23
Net realized and
unrealized gain
(loss) on investments 0.02 0.04 (0.35) 0.09
------ ------ ----- -------
Total from investment
operations ......... 0.56 0.56 0.05 0.32
------ ----- ----- -------
LESS DISTRIBUTIONS FROM:
Net investment income (0.46) (0.48) (0.34) (0.24)
In excess of net
investment income . 0 (0.01) (0.01) 0
Tax basis return
of capital ......... (0.03) 0 0 0
----- ----- ----- -------
Total distributions .. (0.49) (0.49) (0.35) (0.24)
----- ----- ----- -------
NET ASSET VALUE
END OF YEAR ........ $ 9.74 $ 9.67 $ 9.60 $ 9.90
====== ====== ====== =======
TOTAL RETURN (a) ..... 5.91% 5.93% 0.48% 3.28%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ..... 1.64%(b) 1.53%(b) 1.50% 1.50%(c)
Total expenses
excluding
reimbursement .... 2.09% 2.08% 1.94% 1.67%(c)
Net investment income 5.60% 5.51% 4.08% 2.91%(c)
Portfolio turnover rate 74% 67% 34% 60%
NET ASSET END OF YEAR
(THOUSANDS) ..... $4,152 $2,755 $2,874 $2,077
- ----------
(a) Excluding applicable sales charges.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 1.62% and 1.50% for the years ended September 30, 1996 and 1995,
respectively.
(c) Annualized.
(d) Calculations based on average shares outstanding.
<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 more than thirty funds advised and managed
by Keystone Investment Management Company ("Keystone"), the Fund's investment
adviser.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income, consistent with low volatility
of principal. The investment objective of the Fund is fundamental and may not be
changed without the approval of the holders of a majority of the Fund's
outstanding voting shares (as defined in the Investment Company Act of 1940 (the
"1940 Act")), which means the lesser of (1) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are represented or (2)
more than 50% of the outstanding shares (a "1940 Act Majority").
Any investment involves risk, and there is no assurance that the Fund will
achieve its investment objective.
PRINCIPAL INVESTMENTS
Under ordinary circumstances, the Fund pursues its investment objective by
investing 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. However, the
Fund does 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 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.
INVESTMENT POLICIES AND APPROACH
Keystone believes that, by investing primarily in Mortgage Securities and Loan
Pools with adjustable rates of interest that are 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.
Unlike fixed rate mortgages and loans, 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 without
materially increasing the volatility of the net asset value per share. 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, FNMA and FHLMC (each as hereinafter
defined) fixed rate Mortgage Securities. The expected price behavior of fixed
rate GNMA, FNMA and FHLMC 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. For further information, see
"Other Permitted Investments."
PERMITTED INVESTMENTS
LOAN POOL SECURITIES
A loan pool security is an interest in a pool of loans which generally
includes 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 such 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.
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. When the Fund invests for temporary defensive purposes, it may not be
pursuing its investment objective.
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. The Fund may employ new investment techniques related to any of
its investment policies.
For further information about the types of investments and investment
techniques available to the Fund, including the associated risks, see the "Risk
Factors" and "Additional Investment Information" sections of this prospectus 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.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restrictions summarized below, which may
not be changed without the vote of a 1940 Act Majority of the Fund's outstanding
shares. These restrictions and certain other fundamental and nonfundamental
restrictions are set forth in the statement of additional information. Unless
otherwise stated, all references to the Fund's assets are in terms of current
market value.
Generally, the Fund may not do the following:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets in the securities of any one issuer; this limitation
does not apply to investments in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities;
(2) borrow money or enter into reverse repurchase agreements, except that
the Fund may (a) enter into reverse repurchase agreements or (b) borrow money
from banks for temporary or emergency purposes in aggregate amounts up to
one-third of the value of its net assets; provided that, while borrowings from
banks (not including reverse repurchase agreements) exceed 5% of the Fund's
net assets, any such borrowings will be repaid before additional investments
are made.
The Fund intends to follow policies of the Securities and Exchange Commission
as they are adopted from time to time with respect to illiquid securities,
including at this time (1) treating as illiquid, securities that may not be sold
or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued such securities on its
books and (2) limiting its holdings of such securities to 15% of net assets.
RISK FACTORS
Like any investment, your investment in the Fund involves an element of risk.
Before you buy shares of the Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses.
By itself the Fund does not constitute a balanced investment program. You
should take into account your own investment objectives as well as your other
investments when considering an investment in the Fund.
Certain risks related to the Fund are discussed below. In addition to the
risks discussed in this section, specific risks attendant to individual
securities or investment practices are discussed in "Additional Investment
Information" and the statement of additional information.
Should the Fund need to raise cash to meet a large number of redemptions it
might have to sell portfolio securities at a time when it would be
disadvantageous to do so.
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 Fund invests in AR Loan Pools, ARMS and adjustable rate CMOs that hold
securities whose interest rates 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. Shareholders could lose some of their principal 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 Fund invests in AR Loan Pools, ARMS and adjustable rate CMOs whose
underlying securities will frequently have caps and floors that 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). An increase in interest rates above cap rate
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
In an environment where interest rates on short-term fixed-rate debt
securities are rising faster than interest rates in long-term fixed-rate debt
securities, the market value of Mortgage Securities will typically under-
perform other fixed-rate debt securities. In addition, because of the reset risk
described above, the Fund's investments may not perform as expected.
ARMS and AR Loan Pools may be less effective as a means of "locking in"
long-term interest rates than fixed rate debt securities, since their market
values generally vary inversely with changes in market interest rates (i.e., 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, the market value of ARMS and AR Loan Pools is less
likely to decline than that of fixed-rate debt securities of comparable
maturities during periods of rapidly rising rates. In addition ARMS and AR Loan
Pools have less potential than fixed-rate debt securities for capital
appreciation due to their adjustable rate features and the likelihood of
increased prepayments of mortgages or loans as interest rates decline.
If 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.
For further information about the risks associated with the Fund's investments
and investment techniques, see "Additional Investment Information" and the
statement of additional information.
PRICING SHARES
The Fund computes its net asset value as of the close of trading (currently
4:00 p.m. eastern time) on each day that the New York Stock Exchange (the
"Exchange") is open. However, the Fund does not compute its net asset value on
days when changes in the value of the Fund's portfolio securities do not affect
the current net asset value of its shares. The Exchange is currently closed on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share of the Fund is arrived at by determining the value of the Fund's
assets, subtracting its liabilities and dividing the result by the number of its
shares outstanding.
The Fund values 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.
Current values for the Fund's portfolio securities are determined as follows:
(1) Short-term investments with initial or remaining maturities of sixty days
or less are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market.
(2) Short-term investments with greater than sixty days to maturity for which
market quotations are readily available are valued at current market value;
Short-term investments maturing in 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.
(3) All other investments are valued at market value or, where market
quotations are not readily available, 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 has qualified and intends to continue to qualify as a regulated
investment company (a "RIC") 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 RIC when it fails
to distribute, with respect to each calendar year, at least 98% of its ordinary
income for such calendar year and 98% of its net capital gains for the one-year
period ending on October 31 of such calendar year.
If the Fund qualifies as a RIC, 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 will make distributions from net investment income monthly and net
realized capital gains, if any, annually. Shareholders receive Fund
distributions in the form of additional shares of that class of shares upon
which the distribution is based or, at the shareholder's option, in cash. Fund
distributions in the form of additional shares are made at net asset value
without the imposition of a sales charge.
Because Class A shares bear most of the costs of distribution of such shares
through payment of a front end sales charge, while Class B and Class C shares
bear such expenses through a higher annual distribution fee, expenses
attributable to Class B and Class C shares will generally be higher than those
of Class A shares and income distributions paid by the Fund with respect to
Class A shares will generally be greater than those paid with respect to Class B
and Class C shares.
Since none of the Fund's income will consist of corporate dividends, no
distributions will qualify for the corporate dividends received deduction.
Dividends and distributions are taxable whether received in cash or in shares.
Income dividends and net short-term gains distributions are taxable as ordinary
income. Net long-term capital gains are taxable as capital gains regardless of
how long the Fund's shares are held. If Fund shares are held for less than six
months, however, and are sold at a loss, such loss will be treated as a
long-term capital loss for tax purposes to the extent of any long-term capital
gains dividends received. Any distribution declared in October, November or
December to shareholders of record in such a month, and paid by the following
January 31, will be includable in the taxable income of the shareholders as of
December 31 of the year in which such distribution was declared.
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 general supervision of the Fund's Board of Trustees, Keystone
provides investment advice, management, and administrative services to the Fund.
INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone is a wholly-owned
subsidiary of Keystone Investments, Inc. ("Keystone Investments"). Keystone
Investments provides accounting, bookkeeping, legal, personnel and general
corporate services to Keystone, its affiliates, and the Keystone Investments
Families of Funds. Both Keystone and Keystone Investments are located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, Keystone Investments succeeded to the business of a
corporation with the same name, but under different ownership. Keystone
Investments is a wholly-owned subsidiary of First Union National Bank of North
Carolina ("FUNB"). FUNB is a subsidiary of First Union Corporation ("First
Union"), the sixth largest bank holding company in the U.S. based on total
assets as of September 30, 1996.
First Union is headquartered in Charlotte, North Carolina, and had $133.9
billion in consolidated assets as of September 30, 1996. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the U.S. The Capital Management Group of FUNB ("CMG"),
together with Lieber & Company and Evergreen Asset Management Corp. ("Evergreen
Asset"), wholly-owned subsidiaries of FUNB, manage or otherwise oversee the
investment of over $50 billion in assets belonging to a wide range of clients,
including the Evergreen Family of Funds.
Pursuant to its Investment Advisory and Management Agreement with the Fund
(the "Advisory Agreement"), Keystone manages the investment and reinvestment of
the Fund's assets, supervises the operation of the Fund and provides all
necessary office space, facilities and equipment.
The Fund currently 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.
Keystone's fee is computed as of the close of business each business day and
payable daily.
The Advisory Agreement continues in effect for two years from its effective
date and, thereafter, from year to year only so long as such continuance is
specifically approved at least annually by the Fund's Board of Trustees or by
vote of shareholders 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
the Fund's Independent Trustees (Trustees who are not "interested persons" of
the Fund, as defined in the 1940 Act, and who have no direct or indirect
financial interest in the Fund's Distribution Plans or any agreement related
thereto), 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 or Keystone or may be terminated by a vote of
shareholders of the Fund. The Advisory Agreement will terminate automatically
upon its assignment.
PRINCIPAL UNDERWRITER
Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of Furman Selz LLC ("Furman Selz"),
which is not affiliated with First Union, is now the Fund's principal
underwriter (the "Principal Underwriter"). EKD replaces Evergreen Keystone
Investment Services, Inc. (formerly Keystone Investment Distributors Company)
("EKIS") as the Fund's principal underwriter. EKIS may no longer act as
principal underwriter of the Fund due to regulatory restrictions imposed by the
Glass-Steagall Act upon national banks such as FUNB and their affiliates, that
prohibit such entities from acting as the underwriters or distributors of mutual
fund shares. While EKIS may no longer act as principal underwriter of the Fund
as discussed above, EKIS may continue to receive compensation from the Fund or
the Principal Underwriter in respect of underwriting and distribution services
performed prior to the termination of EKIS as principal underwriter. In
addition, EKIS may also be compensated by the Principal Underwriter for the
provision of certain marketing support services to the Principal Underwriter at
an annual rate of up to .75% of the average daily net assets of the Fund,
subject to certain restrictions. Both EKD and Furman Selz are located at 230
Park Avenue, New York, New York 10169.
SUB-ADMINISTRATOR
Furman Selz provides officers and certain administrative services to the Fund
pursuant to a sub-administration agreement. For its services under that
agreement, Furman Selz receives a fee from Keystone at the maximum annual rate
of .01% of the average daily net assets of the Fund.
It is expected that on or about January 2, 1997, Furman Selz will transfer
EKD, and its related mutual fund distribution and administration business, to
BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as sub-
administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
PORTFOLIO MANAGER
Christopher P. Conkey has been the Fund's portfolio manager since 1991. Mr.
Conkey is a Keystone Senior Vice President and Group Leader for the high grade
fixed income area. Mr. Conkey joined Keystone as a fixed income portfolio
manager in 1988.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and distribution plan fees discussed in this prospectus, the principal expenses
that the Fund is expected to pay include, but are not limited to, expenses of
its Independent Trustees; transfer, dividend disbursing, and shareholder
servicing agent expenses; custodian expenses; fees of its independent auditors;
fees of legal counsel to the Fund and its Independent Trustees; fees payable to
government agencies, including registration and qualification fees attributable
to the Fund and its shares under federal and state securities laws; and certain
extraordinary expenses. In addition, each class will pay all of the expenses
attributable to it. Such expenses are currently limited to Distribution Plan
expenses. The Fund also pays its brokerage commissions, interest charges, and
taxes.
For the fiscal year ended September 30, 1996, the Fund paid or accrued to
Keystone investment management and administrative services fees of $493,147
(0.64% of the Fund's average daily net asset value on an annualized basis).
In connection with the expense limits in effect for the fiscal year ended
September 30, 1996, Keystone reimbursed the Fund $82,098, $244,938, and $13,980
for Class A, Class B and Class C shares, respectively. Keystone has voluntarily
limited annual expenses of each of the Fund's Class A, B and C shares to 0.90%,
1.65% and 1.65%, respectively, of average daily net assets. Keystone currently
intends to continue the foregoing expense limitations on a calendar
month-by-month basis. 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, 1996, the Fund paid or accrued
$139,248 to Evergreen Keystone Service Company (formerly Keystone Investor
Resource Center, Inc.) ("EKSC") for services rendered as the Fund's transfer
agent and dividend disbursing agent and $24,176 to Keystone for certain
accounting services. EKSC, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, is a wholly-owned subsidiary of Keystone.
For the fiscal year ended September 30, 1996, after expense reimbursements but
including indirect expenses, the Fund's Class A, Class B and Class C shares each
paid 0.91%, 1.63% and 1.64%, respectively, of its average net assets in
expenses.
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 consider the number of shares of the Fund sold by the
broker-dealer. In addition, broker-dealers executing portfolio transactions may,
from time to time, be affiliated with the Fund, Keystone, the Principal
Underwriter or their affiliates. The Fund may pay higher commissions to
broker-dealers that provide research services. Keystone may use these services
in advising the Fund as well as in advising its other clients.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rates for the fiscal years ended September 30,
1996 and 1995 were 74% and 67%, respectively. For further information about
brokerage and distributions, see the statement of additional information.
CODE OF ETHICS
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
DISTRIBUTION PLANS AND AGREEMENTS
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures by the Fund
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. For Class
A shares sold after January 1, 1997, payments under the Class A Distribution
Plan are currently made to the Principal Underwriter (which may reallow all or
part to others, such as broker-dealers) as service fees at an annual rate of up
to 0.10% of the average daily net asset value of such Class A shares maintained
by the recipient and outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans with respect to its Class B shares
(the "Class B Distribution Plans") that provides for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares to pay expenses of the distribution of Class B shares. Payments under the
Class B Distribution Plans are currently made to the Principal Underwriter
(which may reallow all or part to others, such as broker-dealers) and to EKIS,
the predecessor to the Fund's Principal Underwriter, (1) as commissions for
Class B shares sold, (2) as shareholder service fees and (3) as interest.
Amounts paid or accrued to the Principal Underwriter or EKIS in the aggregate
may not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold. The
broker-dealers or other party will also receive service fees at an annual rate
of 0.25% of the value of Class B shares maintained by the recipient and
outstanding on the books of the Fund for specified periods. See "Distribution
Plans Generally" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to Class C shares (the
"Class C Distribution Plan") that provides for expenditures by the Fund at an
annual rate of up to 1.00% of the average daily net asset value of Class C
shares to pay expenses of the Distribution of Class C shares. Payments under the
Class C Distribution Plan are currently made to the Principal Underwriter (which
may reallow all or part to others, such as dealers) and to EKIS, the predecessor
to the Fund's Principal Underwriter, (1) as commissions for Class C shares sold,
(2) as shareholder service fees, and (3) as interest. Amounts paid or accrued to
the Principal Underwriter or EKIS in the aggregate may not exceed the annual
limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold,
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold, and, beginning approximately fifteen months
after purchase, a commission at an annual rate of 0.75% (subject to NASD rules
- -- see "Distribution Plans Generally") plus service fees which are paid at the
annual rate of 0.25%, respectively, of the value of Class C shares maintained by
the recipient and outstanding on the books of the Fund for specified periods.
See "Distribution Plans Generally" below.
DISTRIBUTION PLANS GENERALLY
As discussed above, the Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and Class
C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD limits the amount that the Fund may pay annually in distribution
costs for the sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1% of the aggregate average daily net asset value of 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
("CDSCs") paid by shareholders to the Principal Underwriter) remaining unpaid
from time to time.
In connection with financing its distribution costs, including commission
advances to broker-dealers and others, EKIS, the predecessor to the Principal
Underwriter, sold to a financial institution substantially all of its 12b-1 fee
collection rights and CDSC collection rights in respect of Class B shares sold
during the period beginning approximately June 1, 1995 through November 30,
1996. The Fund has agreed not to reduce the rate of payment of 12b-1 fees in
respect of such Class B shares, unless it terminates such shares' Distribution
Plan completely. If it terminates such Distribution Plan, the Fund may be
subject to possible adverse distribution consequences.
The financing of payments made by the Principal Underwriter to compensate
broker-dealers or other persons for distributing shares of the Fund will be
provided by FUNB or its affiliates.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. If a Distribution Plan is terminated, the Principal
Underwriter and EKIS will ask the Independent Trustees to take whatever action
they deem appropriate under the circumstances with respect to payment of
Advances (as defined below).
Unpaid distribution costs at September 30, 1996 were; $8,838,066 for Class B
shares purchased prior to June 1, 1995 (20.82% of net class assets of such Class
B shares); $93,772 for Class B shares purchased on or after June 1, 1995 (5.71%
of net class assets of such Class B shares); and $520,103 for Class C shares
(12.53% of net class assets).
Broker-dealers or others may receive different levels of compensation
depending on which class of shares they sell. Payments pursuant to a
Distribution Plan are included in the operating expenses of the class.
DISTRIBUTION AGREEMENTS
The Fund has entered into principal underwriting agreements with the Principal
Underwriter (each a "Distribution Agreement") with respect to each class.
Pursuant to its Distribution Agreements, the Fund will compensate the Principal
Underwriter for its services as distributor at an annual rate that may not
exceed .25 of 1% of the Fund's average daily net assets attributable to Class A
shares, .75 of 1% of the Fund's average daily net assets attributable to the
Class B shares, subject to certain restrictions, and .75 of 1% of the Fund's
average daily net assets attributable to the Class C shares.
The Fund may also make payments under its Distribution Plans, in amounts of up
to .25 of 1% of its average daily net assets on an annual basis, attributable to
Class A, B and C shares, respectively, to compensate organizations, which may
include, among others, the Principal Underwriter and Keystone or their
respective affiliates, for services rendered to shareholders and/or the
maintenance of shareholder accounts.
The Fund may not pay any distribution or servicing fees during any fiscal
period in excess of NASD limits. Since the Principal Underwriter's compensation
under the Distribution Agreements is not directly tied to the expenses incurred
by the Principal Underwriter, the amount of compensation received by it under
the Distribution Agreements during any year may, subject to certain conditions,
be more than its actual expenses and may result in a profit to the Principal
Underwriter. Distribution expenses incurred by the Principal Underwriter in one
fiscal year that exceed the level of compensation paid to the Principal
Underwriter for that year may be paid from distribution fees received from a
Fund in subsequent fiscal years.
The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plans that exceed current annual payments permitted to be received by the
Principal Underwriter from the Fund ("Advances"). The Principal Underwriter
intends to seek full reimbursement for such charges from the Fund (together with
annual interest thereon at the prime rate plus one percent) at such time in the
future as, and to the extent that, payment thereof by the Fund would be within
the permitted limits. If the Fund's Independent Trustees authorize such
payments, the effect would be to extend the period of time during which the Fund
incurs the maximum amount of costs allowed by a Distribution Plan.
In states where the Principal Underwriter is not registered as a
broker-dealer, shares of the Fund will only be sold through other broker-dealers
or other financial institutions that are registered.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of Fund shares. In addition, broker-dealers may, from time
to time, receive additional cash payments. The Principal Underwriter may also
provide written information to those broker-dealers with whom it has dealer
agreements that relates to sales incentive campaigns conducted by such
broker-dealers for their representatives as well as financial assistance in
connection with pre-approved seminars, conferences and advertising. No such
programs or additional compensation will be offered to the extent they are
prohibited by the laws of any state or any self-regulatory agency such as the
NASD. Broker-dealers to whom substantially the entire sales charge on Class A
shares is reallowed may be deemed to be underwriters as that term is defined
under the 1933 Act.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to broker-dealers including, from time to time, to
First Union Brokerage Services, Inc., an affiliate of Keystone, that satisfy
certain criteria established from time to time by the Principal Underwriter.
These conditions relate to increasing sales of shares of the Keystone funds over
specified periods and certain other factors. Such payments may, depending on the
broker-dealer's satisfaction of the required conditions, be periodic and may be
up to 1.00% of the value of shares sold by such broker-dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to dealers for the sale of shares, as described above) to banks
and other financial services firms that facilitate transactions in shares of the
Fund for their clients.
State securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as broker-dealers pursuant to state laws.
EFFECTS OF BANKING LAWS
The Glass-Steagall Act currently limits the ability of depository institutions
(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.
The Glass-Steagall Act and other banking laws and regulations also presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Fund. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer. Keystone
and its affiliates, since they are direct or indirect subsidiaries of FUNB, are
subject to and in compliance with the aforementioned laws and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could prevent Keystone Investments or its affiliates
from performing the services required under the investment advisory contract or
from acting as agent in connection with the purchase of shares of a fund by its
customers. In such event, it is expected that the Trustees would identify, and
call upon each Fund's shareholders to approve, a new investment adviser. If this
were to occur, it is not anticipated that the shareholders of any Fund would
suffer any adverse financial consequences.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with the Principal Underwriter. In addition, you may purchase shares
of the Fund by mailing to the Fund, c/o Evergreen Keystone Service Company, P.O.
Box 2121, Boston, Massachusetts 02106-2121, a completed account application and
a check payable to the Fund. You may also telephone 1-800-343-2898 to obtain the
number of an account to which you can wire or electronically transfer funds and
then send in a completed account application. Subsequent investments in any
amount may be made by check, by wiring Federal funds, by direct deposit or by an
electronic funds transfer ("EFT").
Orders for the purchase of shares of the Fund will be confirmed at the public
offering price, which is equal to the net asset value per share next determined
after receipt of the order in proper form by the Principal Underwriter
(generally as of the close of the Exchange on that day) plus, in the case of
Class A shares, the applicable sales charge. Orders received by broker-dealers
or other firms prior to the close of the Exchange and received by the Principal
Underwriter prior to the close of its business day will be confirmed at the
offering price effective as of the close of the Exchange on that day.
Broker-dealers and other financial services firms are obligated to transmit
orders promptly.
Orders for shares received other than as stated above will receive the public
offering price, which is equal to the net asset value per share next determined
(generally, the next business day's offering price) plus, in the case of Class A
shares, the applicable sales charge.
The Fund reserves the right to determine the net asset value more frequently
than once a day if deemed desirable.
The initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to EKSC by calling toll free
1-800-343-2898 or writing to EKSC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
This prospectus provides information regarding the Class A, B, and C shares
offered by the Fund:
CLASS A SHARES -- FRONT-END LOAD OPTION
With certain exceptions, Class A shares are sold with a sales charge at the
time of purchase. Class A shares are not subject to a CDSC when they are
redeemed except as follows: Class A shares purchased after January 1, 1997, in
an amount equal to or exceeding $1 million, without a front-end sales charge,
will be subject to a CDSC during the month of purchase and the 12-month period
following the month of purchase.
CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares purchased after January 1, 1997 are sold without a sales charge
at the time of purchase, but are, with certain exceptions, subject to a CDSC if
redeemed during the month of purchase and the 72-month period following the
month of purchase. Class B shares purchased after January 1, 1997 that have been
outstanding for seven years after the month of purchase will automatically
convert to Class A shares without the imposition of a front-end sales charge or
exchange fee.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares purchased after January 1, 1997 are sold without a sales charge
at the time of purchase, but are subject to a CDSC if they are redeemed during
the month of purchase and the 12-month period following the month of purchase.
Class C shares are available only through broker-dealers who have entered into
special distribution agreements with the Principal Underwriter.
Class A shares, pursuant to its Distribution Plan, pays an annual service fee
of 0.10% of the Fund's average daily net assets attributable to Class A shares
purchased after January 1, 1997. In addition to the 0.25% service fee, the Class
B and C Distribution Plans provide for the payment of an annual distribution fee
of up to 0.75% of the average daily net assets attributable to their respective
classes. As a result, income distributions paid by the Fund with respect to
Class B and Class C shares will generally be less than those paid with respect
to Class A shares.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spreading such cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares (in which case,
100% of the purchase price is invested immediately), depending on the amount of
the purchase and the intended length of investment.
The Fund will not normally accept any purchase of Class B shares in the amount
of $250,000 or more and will not normally accept any purchase of Class C shares
in the amount of $500,000 or more.
----------------------------------------------
CLASS A SHARES
Class A shares are currently offered at the public offering price, which is
equal to net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 ................... 3.25% 3.36% 2.75%
$50,000 but less than $100,000 ...... 3.00% 3.09% 2.75%
$100,000 but less than $250,000 ..... 2.50% 2.56% 2.25%
$250,000 but less than $500,000 ..... 2.00% 2.04% 1.75%
$500,000 but less than $1,000,000 ... 1.50% 1.52% 1.25%
- ----------
*Rounded to the nearest one-hundredth percent.
</TABLE>
----------------------------------------------
Purchases of the Fund's Class A shares made after January 1, 1997, (i) in the
amount of $1 million or more; (ii) by a corporate or certain other qualified
retirement plan or a non-qualified deferred compensation plan or a Title I tax
sheltered annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan") or a TSA plan sponsored by a public
educational entity having 5,000 or more eligible employees (an "Educational TSA
Plan"); or (iii) by (a) institutional investors, which may include bank trust
departments and registered investment advisers; (b) investment advisers,
consultants or financial planners who place trades for their own accounts or the
accounts of their clients and who charge such clients a management, consulting,
advisory or other fee; (c) clients of investment advisers or financial planners
who place trades for their own accounts if the accounts are linked to the master
account of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased; (d) institutional clients of
broker-dealers, including retirement and deferred compensation plans and the
trusts used to fund these plans, which place trades through an omnibus account
maintained with the Fund by the broker-dealer; and (e) employees of FUNB and its
affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.
With respect to purchases of the Fund's Class A shares made after January 1,
1997, in the amount of $1 million or more, the Principal Underwriter will pay
broker-dealers or others concessions at the following rate: 1.00% of the
investment amount up to $2,999,999; plus 0.50% of the investment amount between
$3,000,000 and $4,999,999; plus 0.25% of the investment amount over $4,999,999.
With respect to purchases of the Fund's Class A shares made after January 1,
1997, by Qualifying Plans and Educational TSA Plans, the Principal Underwriter
will pay broker-dealers and others concessions at the rate of 0.50% of the net
asset value of the shares purchased. These payments are subject to reclaim in
the event the shares are redeemed within twelve months after purchase.
Purchases of the Fund's Class A shares made after January 1, 1997, in the
amount of $1 million or more, are subject to a CDSC of 1.00% upon redemption
during the month of purchase and the 12-month period following the month of
purchase.
The sales charge is paid to the Principal Underwriter, which in turn normally
reallows a portion to your broker-dealer. In addition, for Class A shares sold
after January 1, 1997, your broker-dealer currently will be paid periodic
service fees at an annual rate of up to 0.10% of the value of such Class A
shares maintained by such recipient and outstanding on the books of the Fund for
specified periods.
Upon written notice to broker-dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A shares
that are offered in connection with certain fee based programs, such as wrap
accounts sponsored or managed by broker-dealers, investment advisers, or others
who have entered into special agreements with the Principal Underwriter. Initial
sales charges may be reduced or eliminated for persons or organizations
purchasing Class A shares of the Fund alone or in combination with Class A
shares of other Keystone America Funds. See Exhibit A to this prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within 30
days after a change in the registered representative's employment when the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front-end sales charge, or (2)
was at some time subject to, but did not actually pay, a CDSC with respect to
the redemption proceeds.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within 30
days after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates when the amount
invested represents redemption proceeds from such unrelated registered open-end
investment company, and the shareholder either (1) paid a front-end sales
charge, or (2) was at some time subject to, but did not actually pay, a CDSC
with respect to the redemption proceeds. This special net asset value purchase
is currently being offered on a calendar month-by-month basis and may be
modified or terminated in the future.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With respect to shares purchased after January 1, 1997, the Fund, with
certain exceptions, imposes a CDSC on Class B shares redeemed as follows:
CDSC
REDEMPTION TIMING IMPOSED
- ----------------- -------
Month of purchase and the first twelve-month period following the
month of purchase ............................................... 5.00%
Second twelve-month period following the month of purchase ........ 4.00%
Third twelve-month period following the month of purchase ......... 3.00%
Fourth twelve-month period following the month of purchase ........ 3.00%
Fifth twelve-month period following the month of purchase ......... 2.00%
Sixth twelve-month period following the month of purchase ......... 1.00%
No CDSC is imposed on amounts redeemed thereafter.
When imposed, the CDSC is deducted from the redemption proceeds otherwise
payable to you. The CDSC is retained by the Principal Underwriter or its
predecessor. Amounts received by the Principal Underwriter or its predecessor
under the Class B Distribution Plans are reduced by CDSCs retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.
Class B shares purchased after January 1, 1997, that have been outstanding for
seven years after the month of purchase, will automatically convert to Class A
shares (which are subject to a lower Distribution Plan charge) without
imposition of a front-end sales charge or exchange fee. (Conversion of Class B
shares represented by stock certificates will require the return of the stock
certificates to EKSC.) The Class B shares so converted will no longer be subject
to the higher distribution expenses and other expenses, if any, borne by Class B
shares. Because the net asset value per share of Class A shares may be higher or
lower than that of the Class B shares at the time of conversion, although the
dollar value will be the same, a shareholder may receive more or fewer Class A
shares than the number of Class B shares converted. Under current law, it is the
Fund's opinion that such a conversion will not constitute a taxable event under
federal income tax law. In the event that this ceases to be the case, the Board
of Trustees will consider what action, if any, is appropriate and in the best
interest of such Class B shareholders.
CLASS C SHARES
Class C shares are offered only through broker-dealers who have special
distribution agreements with the Principal Underwriter. Class C shares are
offered at net asset value, without an initial sales charge. With certain
exceptions, the Fund imposes a CDSC of 1.00% on shares redeemed during the month
of purchase and the 12 month period following the month of purchase. No CDSC is
imposed on amounts redeemed thereafter. If imposed, the CDSC is deducted from
the redemption proceeds otherwise payable to you. The CDSC is retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any CDSC imposed upon the redemption of Class A, Class B, or Class C shares
is a percentage of the lesser of (1) the net asset value of the shares redeemed
or (2) the net asset value at the time of purchase of such shares.
With respect to shares purchased after January 1, 1997, no CDSC is imposed
when you redeem amounts derived from (1) increases in the value of shares
redeemed above the net cost of such shares; (2) certain shares with respect to
which the Fund did not pay a commission on issuance, including shares acquired
through reinvestment of dividend income and capital gains distributions; (3)
certain Class A shares held for more than 12 months after the month of purchase;
(4) Class B shares held for more than 72 months after the month of purchase; or
(5) Class C shares held for more than one year after the month of purchase. Upon
request for redemption, shares not subject to the CDSC will be redeemed first.
Thereafter, shares held the longest will be the first to be redeemed.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC will be
imposed on any redemptions made specifically by an individual participant in the
Qualifying Plan. This waiver is not available in the event a Qualifying Plan (as
a whole) redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of the Fund in the
event of (1) death or disability of the shareholder; (2) a lump-sum distribution
from a 401(k) plan or other benefit plan qualified under the Employee Retirement
Income Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA
plans if the shareholder is at least 59 1/2 years old; (4) involuntary
redemptions of accounts having an aggregate net asset value of less than $1,000;
(5) automatic withdrawals under the Systematic Income Plan of up to 1.0% per
month of the shareholder's initial account balance; (6) withdrawals consisting
of loan proceeds to a retirement plan participant; (7) financial hardship
withdrawals made by a retirement plan participant; or (8) withdrawals consisting
of returns of excess contributions or excess deferral amounts made to a
retirement plan participant.
The Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a CDSC to certain Directors, Trustees,
officers and employees of the Fund, Keystone, the Principal Underwriter, and
certain of their affiliates, and to members of the immediate families of such
persons; to registered representatives of firms with dealer agreements with the
Principal Underwriter; and to a bank or trust company acting as a trustee for a
single account. See the statement of additional information.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net redemption value by writing
to the Fund, c/o EKSC, and presenting a properly endorsed share certificate (if
certificates have been issued) to the Fund. Your signature(s) on the written
order and certificates must be guaranteed as described below. In order to redeem
by telephone or to engage in telephone transactions generally, you must complete
the authorization in your account application. Proceeds for shares redeemed on
telephone order will be deposited by wire or EFT only to the bank account
designated in your account application.
You may also redeem your shares through your broker-dealer. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from broker-dealers and will calculate the net asset value on
the same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable CDSC, to the broker-dealer placing the order
within seven days thereafter. The Principal Underwriter charges no fee for this
service. Your broker-dealer, however, may charge a service fee.
The redemption value equals the net asset value per share adjusted for
fractions of a cent and may be more or less than your cost depending upon
changes in the value of the Fund's portfolio securities between purchase and
redemption. A CDSC may be imposed by the Fund at the time of redemption of
certain shares as explained in "How to Buy Shares." If imposed, the CDSC is
deducted from the redemption proceeds otherwise payable to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. In such a case, the Fund will mail the redemption
proceeds upon clearance of the purchase check, which may take 15 days or more.
Any delay may be avoided by purchasing shares either with a certified check, by
Federal Reserve or bank wire of funds, by direct deposit or by EFT. Although the
mailing of a redemption check or the wiring or EFT of redemption proceeds may be
delayed, the redemption value will be determined and the redemption processed in
the ordinary course of business upon receipt of proper documentation. In such a
case, after the redemption and prior to the release of the proceeds, no
appreciation or depreciation will occur in the value of the redeemed shares, and
no interest will be paid on the redemption proceeds. If the payment of a
redemption has been delayed, the check will be mailed or the proceeds wired or
sent EFT promptly after good payment has been collected.
The Fund computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption, less any applicable CDSC (as described above),
will be made within seven days thereafter except as discussed herein.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND EKSC'S POLICIES. The Fund or EKSC may waive this
requirement or may require additional documents in certain cases. Currently, the
requirement for a signature guarantee has been waived on redemptions of $50,000
or less when the account address of record has been the same for a minimum
period of 30 days. The Fund and EKSC reserve the right to withdraw this waiver
at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute the
order. In such cases, the Fund will request the missing information from you and
process the order on the day such information is received.
TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. As mentioned above, to engage
in telephone transactions generally, you must complete the appropriate sections
of the Fund's application.
In order to insure that instructions received by EKSC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker-dealer as set forth herein.
SMALL ACCOUNTS
Due to the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No CDSCs are
applied to such redemptions.
GENERAL
The Fund reserves the right at any time to terminate, suspend, or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, EKSC, nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL"), or by telephone. EKSC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, EKSC, nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that EKSC
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 EKSC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price and yield
quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a week.
EXCHANGES
If you have obtained the appropriate prospectus, you may exchange shares of
the Fund for shares of certain other Keystone America Funds and Keystone Liquid
Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone America
Funds and Class A shares of KLT;
Class B shares may be exchanged for the same type of Class B shares of other
Keystone America Funds and the same type of Class B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone America
Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
CDSC. However, if the shares being tendered for exchange are
(1) Class A shares acquired without a front-end sales charge,
(2) Class B shares that have been held for less than 72 months, or
(3) Class C shares that have been held for less than one year,
and are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction.
You may exchange shares for another Keystone fund by calling or writing to
EKSC or by using KARL. As noted above, if the shares being tendered for exchange
are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction. The Fund reserves the right to terminate
this exchange offer or to change its terms, including the right to charge for
exchanges.
Orders to exchange a certain class of shares of the Fund for the corresponding
class of shares of KLT will be executed by redeeming the shares of the Fund and
purchasing the corresponding class of shares of KLT at the net asset value of
such shares next determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. In all other
cases, orders for exchanges received by the Fund prior to 4:00 p.m. eastern time
on any day the Fund is open for business will be executed at the respective net
asset values determined as of the close of business that day. Orders for
exchanges received after 4:00 p.m. eastern time on any business day will be
executed at the respective net asset values determined at the close of the next
business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. An exchange constitutes a sale for federal income tax purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
AUTOMATIC INVESTMENT PLAN
With a Keystone Automatic Investment Plan, you can automatically transfer as
little as $25 per month or $75 per quarter from your bank account or KLT to the
Keystone fund of your choice. Your bank account will be debited for each
transfer. You will receive confirmation with your next account statement.
To establish or terminate an Automatic Investment Plan or to change the amount
or schedule of your automatic investments, you may write to or call EKSC. Please
include your account numbers. Termination may take up to 30 days.
RETIREMENT PLANS
The Fund has various retirement plans available to you, including Individual
Retirement Accounts (IRAs); Rollover IRAs; Simplified Employee Pension Plans
(SEPs); Salary Reduction Plans (SARSEPs); Tax Sheltered Annuity Plans; 403(b)
(7) Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money
Purchase Plans. For details, including fees and application forms, call toll
free 1-800-247-4075 or write to EKSC.
SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $75 and may be as much as 1.0% per month
or 3.0% per quarter of the total net asset value of the Fund shares in your
account when the Systematic Income Plan was opened. Fixed withdrawal payments
are not subject to a CDSC. Excessive withdrawals may decrease or deplete the
value of your account. Moreover, because of the effect of the applicable sales
charge, a Class A investor should not make continuous purchases of the Fund's
shares while participating in a Systematic Income Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America Fund. This results in more shares being
purchased when the selected fund's net asset value is relatively low and fewer
shares being purchased when the fund's net asset value is relatively high and
may result in a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must establish an account
in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application (1) the dollar amount of each
monthly or quarterly investment you wish to make and (2) the fund in which the
investment is to be made. Thereafter, on the first day of the designated month,
an amount equal to the specified monthly or quarterly investment will
automatically be redeemed from your initial account and invested in shares of
the designated fund.
If you are a Class A investor and paid a sales charge on your initial
purchase, the shares purchased will be eligible for Rights of Accumulation and
the sales charge applicable to the purchase will be determined accordingly. In
addition, the value of shares purchased will be included in the total amount
required to fulfill a Letter of Intent. If a sales charge was not paid on the
initial purchase, a sales charge will be imposed at the time of subsequent
purchases, and the value of shares purchased will become eligible for Rights of
Accumulation and Letters of Intent. See Exhibit A -- "Reduced Sales Charges" at
the back of the prospectus.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class of
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on your application and indicate the Keystone America Fund(s) into which
distributions are to be invested. The value of shares purchased will be
ineligible for Rights of Accumulation and Letters of Intent. See Exhibit A --
"Reduced Sales Charges" at the back of the prospectus.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at current
net asset value.
PERFORMANCE DATA
From time to time, the Fund may advertise "total return" and "current yield."
ALL DATA IS BASED ON HISTORICAL RESULTS. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. Total return
and 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 CDSC and all recurring charges, if
any, applicable to all shareholder accounts. The exchange fee is not included in
the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
The Fund may also include comparative performance data for each class of
shares when advertising or marketing the Fund's shares, such as data from Lipper
Analytical Services, Inc., Morningstar, Inc. Standard & Poor's Corporation,
Ibbotson Associates, or other industry publications.
FUND SHARES
The Fund issues Class A, B and C shares that 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 Fund's Board of Trustees may designate as class expenses from
time to time are borne solely by each class; (2) each class of shares has
exclusive voting rights with respect to its Distribution Plan; (3) each class
has different exchange privileges; and (4) each class generally has a different
designation. When issued and paid for, the shares will be fully paid and
nonassessable by the Fund. Shares may be exchanged as explained under
"Shareholder Services," but will have no other preference, conversion, exchange
or preemptive rights. Shares are transferable, redeemable and freely assignable
as collateral. The Fund is authorized to issue additional series or classes of
shares.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of the Fund vote together except when
required by law to vote separately by 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 holders of 10% of the outstanding shares
request a meeting. Shareholders may be eligible for shareholder communication
assistance in connection with the special meeting.
Under Massachusetts law, it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. The Fund's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the Federal
Reserve System having at least $1 billion in assets, primary dealers in U.S.
government securities or other financial institutions believed by Keystone to be
creditworthy. Such persons must be registered as U.S. government securities
dealers with an appropriate regulatory organization. Under such agreements, the
bank, primary dealer or other financial institution agrees to repurchase the
security at a mutually agreed upon date and price, thereby determining the yield
during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. Under a repurchase
agreement, the seller must maintain the value of the securities subject to the
agreement at not less than the repurchase price, such value will be determined
on a daily basis by marking the underlying securities to their market value.
Although the securities subject to the repurchase agreement might bear
maturities exceeding a year, the Fund only intends to enter into repurchase
agreements that provide for settlement within a year and usually within seven
days. Securities subject to repurchase agreements will be held by the Fund's
custodian or in the Federal Reserve book entry system. The Fund does not bear
the risk of a decline in the value of the underlying security unless the seller
defaults under its repurchase obligation. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses including (1)
possible declines in the value of the underlying securities during the period
while the Fund seeks to enforce its rights thereto; (2) possible subnormal
levels of income and lack of access to income during this period; and (3)
expenses of enforcing its rights. The Board of Trustees of the Fund has
established procedures to evaluate the creditworthiness of each party with whom
the Fund enters into repurchase agreements by setting guidelines and standards
of review for Keystone and monitoring Keystone's actions with regard to
repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. The Fund intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions. At
the time the Fund enters into a reverse repurchase agreement, it will establish
a segregated account with the Fund's custodian containing liquid assets having a
value not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
that the Fund is obligated to repurchase may decline below the repurchase price.
"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 in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. When the Fund engages in when issued 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. A separate account of liquid assets equal to the value of such
purchase commitments will 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 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 broker-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. Only Class A shares subject to
an initial or deferred sales charge are eligible for inclusion in reduced sales
charge programs.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may combine
concurrent direct purchases of Class A shares of two or more of the "Eligible
Funds," as defined below. For example, if a Purchaser concurrently invested
$75,000 in one of the other "Eligible Funds" and $75,000 in the Fund, the sales
charge would be that applicable to a $150,000 purchase, i.e., 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, 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. EKSC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor the Fund to sell, the amount
indicated.
After the Letter of Intent is received by EKSC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary) 5% of the dollar amount specified on the application will be held
in escrow by EKSC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to the Principal
Underwriter any difference between the sales charge on the amount specified and
on the amount actually attained. If the Purchaser does not within 20 days after
written request by the Principal Underwriter or his dealer pay such difference
in sales charge, EKSC 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 EKSC. 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
EKSC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or EKSC that
a Letter of Intent is in effect each time a purchase is made.
<PAGE>
---------------------------------------
KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
---------------------------------------
- ---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
- ---------------------------------
Evergreen Keystone Distributor, Inc.
230 Park Avenue
New York, New York 10169
CPI-P Sup. 1/97
36.5M
540090 [recycle logo]
---------------------------------------
KEYSTONE
[graphic omitted]
CAPITAL
PRESERVATION AND
INCOME FUND
---------------------------------------
---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
---------------------------------
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER 10, 1996
AS SUPPLEMENTED JANUARY 1, 1997
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Capital Preservation and Income Fund (the "Fund") dated December 10, 1996, as
supplemented. You may obtain a copy of the prospectus from the Fund's principal
underwriter, Evergreen Keystone Distributor, Inc., or your broker-dealer.
Evergreen Keystone Distributor, Inc. is located at 230 Park Avenue, New York,
New York 10169.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
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Page
The Fund ........................................................... 2
Investment Policies ................................................ 2
Investment Restrictions ............................................ 3
Distributions and Taxes ............................................ 4
Brokerage .......................................................... 5
Valuation of Securities ............................................ 6
Sales Charges ...................................................... 7
Distribution Plans ................................................. 10
Trustees and Officers .............................................. 12
Investment Adviser ................................................. 16
Expenses ........................................................... 18
Principal Underwriter .............................................. 19
Sub-administrator .................................................. 20
Declaration of Trust ............................................... 21
Standardized Total Return and Yield Quotations ..................... 22
Additional Information ............................................. 23
Financial Statements ............................................... 25
Appendix ........................................................... A-1
<PAGE>
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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.
Keystone Investment Management Company ("Keystone") is the Fund's
investment adviser. Evergreen Keystone Distributor, Inc. (formerly Evergreen
Funds Distributor, Inc.) ("EKD" or the "Principal Underwriter") is the Fund's
principal underwriter. Evergreen Keystone Investment Services, Inc. (formerly
Keystone Investment Distributors Company) ("EKIS") is the predecessor to the
Principal Underwriter. See "Investment Adviser" and "Principal Underwriter"
below.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund.
- --------------------------------------------------------------------------------
INVESTMENT 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 Fund invests in loan pool securities, ARMs and collateralized
mortgage obligations ("CMOs") whose interest rates are generally readjusted at
intervals of three years or less to an increment over some predetermined
interest rate index. There are various categories of indices, including (1)
those based on United States ("U.S.") Treasury securities; (2) those derived
from a calculated measure, such as a cost of funds index; or (3) a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year constant maturity Treasury rates; the three-month
Treasury Bill rate; the 180-day Treasury Bill rate; rates on longer-term
Treasury securities; the 11th District Federal Home Loan Bank Cost of Funds; the
National Median Cost of Funds; the one-month, three-month, six-month or one year
London Interbank Offered Rate ("LIBOR"); the prime rate of a specific bank; or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury rate, closely mirror changes in market interest rate levels. Others,
such as the 11th District Home Loan Bank Cost of Funds Index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile.
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares (as defined in the Investment Company Act of 1940, as amended
(the "1940 Act") as the lesser of (1) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented or (2) more
than 50% of the outstanding shares). Unless otherwise stated, all references to
the assets of the Fund are in terms of current market value.
The Fund may not do 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.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund intends to distribute its net investment income monthly and
its net realized capital gains, if any, annually. You will receive distributions
as shares, unless you elect before the record date to receive them as cash.
Unless the Fund receives instructions to the contrary, it will assume that you
wish to receive that distribution and future gains and income distributions in
shares. Your instructions continue in effect until changed in writing. If you
have not opted to receive cash, the Fund will determine the number of shares
that you should receive based on the amount of the distribution and the Fund's
net asset value per share as computed at the close of business on the
ex-dividend date after adjustment for the distribution. The Fund will mail your
account statement and/or check to you within seven days after it pays the
distribution.
Capital gains distributions that reduce the net asset value of your
shares below your cost are, to the extent of the reduction, a return of your
investment. Since distributions of capital gains depend upon profits realized
from the sale of the Fund's portfolio securities, they may or may not occur.
Distributions are taxable whether you receive them in cash or
additional shares. Long-term capital gains distributions are taxable as such
regardless of (1) how long you have held the shares or (2) whether you receive
them in cash or in additional shares. If, however, you hold the Fund's shares
for less than six months and redeem them at a loss, you will recognize a
long-term capital loss to the extent of the long-term capital gain distribution
received in connection with such shares.
The Fund intends to distribute only such net capital gains and income
as it has predetermined, to the best of its ability, to be taxable as ordinary
income. The Fund distributes its net investment income on a federal income tax
basis, not based on distributable income as computed on our books.
The Fund will advise you annually as to the federal income tax status
of your distributions. These comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Your dividends and distributions may also be subject to state and
local taxes.
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BROKERAGE
- --------------------------------------------------------------------------------
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund,
2. the efficiency with which the transaction is effected,
3. the broker's ability to effect the transaction where a large
block is involved,
4. the broker's readiness to execute potentially difficult
transactions in the future,
5. the financial strength and stability of the broker, and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors and
trends and other statistical and factual information.
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should the Fund or Keystone receive research and other statistical and
factual information from a broker, the Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone is required to perform
under the Advisory Agreement. Keystone believes that the cost, value and
specific application of such information are indeterminable and cannot be
practically allocated between the Fund and its other clients 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 Keystone's 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 follows such a practice, it will do so on a basis
that is fair and equitable to the Fund.
Neither the Fund nor Keystone intends on placing securities
transactions with any particular broker-dealer. The Fund's Board of Trustees has
determined, however, that the Fund may consider sales of Fund shares as a factor
in the selection of broker-dealers to execute portfolio transactions, subject to
the requirements of best execution described above.
BROKERAGE COMMISSIONS
The Fund expects to purchase and sell its Mortgage Securities and
short-term instruments through principal transactions. The Fund's Mortgage
Securities and short-term instruments are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. In general,
the Fund will not pay brokerage commissions 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.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, the Principal Underwriter, or any of their affiliated
persons, as defined in the 1940 Act.
The Board of Trustees will, from time to time, review the Fund's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the Board
of Trustees may change, modify or eliminate any of the foregoing practices.
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VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined in
the following manner:
(1) short-term investments with remaining 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;
(2) all other 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;
(3) securities, including restricted securities and other assets, for
which market quotations are not readily available are valued at prices deemed in
good faith to be fair under procedures established by the Board of Trustees.
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 Fund's
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.
- --------------------------------------------------------------------------------
SALES CHARGES
- --------------------------------------------------------------------------------
The Fund offers three classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, the Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. The Fund charges a CDSC
as reimbursement for certain expenses, such as commissions or shareholder
servicing fees, that it has incurred in connection with the sale of its shares
(see "Distribution Plans"). If imposed, the Fund deducts CDSCs from the
redemption proceeds you would otherwise receive. CDSCs attributable to your
shares are, to the extent permitted by the National Association of Securities
Dealers, Inc. ("NASD"), paid to the Principal Underwriter or its predecessor.
See the prospectus for additional information on a particular class.
CLASS DISTINCTIONS
Class A Shares
With certain exceptions, when you purchase Class A shares after January
1, 1997, you will pay a maximum sales charge of 3.25%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
Class B Shares
The Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares purchased after January 1, 1997,
the Fund charges a CDSC on shares redeemed as follows:
Redemption Timing CDSC Rate
----------------- ---------
Month of purchase and the first twelve-month
period following the month of purchase .............. 5.00%
Second twelve-month
period following the month of purchase .............. 4.00%
Third twelve-month
period following the month of purchase .............. 3.00%
Fourth twelve-month
period following the month of purchase .............. 3.00%
Fifth twelve-month
period following the month of purchase .............. 2.00%
Sixth twelve-month
period following the month of purchase .............. 1.00%
Thereafter ............................................... 0.00%
Class B shares purchased after January 1, 1997, that have been
outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificate to Evergreen Keystone Service
Company (formerly Keystone Investor Resource Center, Inc.) ("EKSC") the Fund's
transfer and dividend disbursing agent.)
Class C Shares
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. The Fund
offers Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Fund will charge a CDSC of 1.00%, if you redeem
shares purchased after January 1, 1997, during the month of your purchase and
the 12-month period following the month of your purchase. See "Calculation of
Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net cost of such shares. Upon request for redemption, the
Fund will redeem shares not subject to the CDSC first. Thereafter, the Fund will
redeem shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
Exchanges
The Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Keystone America Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, the Fund will compute any
future CDSC based upon the date you originally purchased the shares you tendered
for exchange.
Waiver of Sales Charges
Purchases of the Fund's Class A shares made after January 1, 1997, (i)
in the amount of $1 million or more; (ii) by a corporate or certain other
qualified retirement plan or a non-qualified deferred compensation plan or a
Title 1 tax sheltered annuity or TSA plan sponsored by an organization having
100 or more eligible employees (a "Qualifying Plan") or a TSA plan sponsored by
a public educational entity having 5,000 or more eligible employees (an
"Educational TSA Plan"); or (iii) by (a) institutional investors, which may
include bank trust departments and registered investment advisers; (b)
investment advisers, consultants or financial planners who place trades for
their own accounts or the accounts of their clients and who charge such clients
a management, consulting, advisory or other fee; (c) clients of investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment advisers or
financial planners on the books of the broker-dealer through whom shares are
purchased; (d) institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with the Fund by the broker-dealer;
and (e) employees of First Union National Bank of North Carolina ("FUNB") and
its affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.
Shares of the Fund may also be sold, to the extent permitted by
applicable law, regulations, interpretations, or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees or sales representatives of the Fund,
Keystone, the Principal Underwriter, and certain of their affiliates who have
been such for not less than ninety days, and to members of the immediate
families of such persons; (2) a pension and profit-sharing plan established by
such companies, their subsidiaries and affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees, and sales representatives;
or (3) a registered representative of a firm with a dealer agreement with the
Principal Underwriter; provided, however, that all such sales are made upon the
written assurance that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No initial sales charge or CDSC is imposed on purchases or redemptions
of shares of the Fund by a bank or trust company in a single account in the name
of such bank or trust company as trustee, if the initial investment in shares of
the Fund or any fund in the Keystone Investments Family of Funds, purchased
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1.00% of the amount invested.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC
will be imposed on any redemptions made specifically by an individual
participant in the Qualifying Plan. This waiver is not available in the event a
Qualifying Plan, as a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of the Fund
in the event of (1) death or disability of the shareholder; (2) a lump-sum
distribution from a benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if
the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of an
account having an aggregate net asset value of less than $1,000; (5) automatic
withdrawals under a Systematic Income Plan of up to 1.0% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.
- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").
The Fund's Class A, B, and C Distribution Plans have been approved by
the Fund's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Fund, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees").
The NASD limits the amount that the Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits annual expenditures to 1.00% of the aggregate average daily net asset
value of its shares, of which 0.75% may be used to pay such distribution costs
and 0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the Distribution Plan, plus interest at
the prime rate plus 1% on such amounts (less any CDSCs paid by shareholders to
the Principal Underwriter) remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which is currently limited to 0.25% of the Fund's
average daily net asset value attributable to Class A shares, to finance any
activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to the
Principal Underwriter of the Fund to enable the Principal Underwriter to pay or
to have paid to others who sell Class A shares a service or other fee, at any
such intervals as the Principal Underwriter may determine, in respect of Class A
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.10% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLAN
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, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class B shares sold since inception of a Distribution Plan; (2) to enable the
Principal Underwriter to pay or to have paid to others a service fee, at such
intervals as the Principal Underwriter may determine, in respect of Class B
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission equal to 4.00% of the price paid for each Class B share
sold. The broker-dealer or other party may also receive service fees at an
annual rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient and outstanding on the books of the Fund for
specified periods.
The Principal Underwriter 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 the Principal Underwriter from the Fund ("Advances"). The Principal
Underwriter intends to seek full reimbursement of such Advances from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the Fund's Independent Trustees authorize such
reimbursements of Advances, the effect would be to extend the period of time
during which the Fund incurs the maximum amount of costs allowed by the Class B
Distribution Plan.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, EKIS, the predecessor to the
Principal Underwriter sold to a financial institution substantially all of its
12b-1 fee collection rights and CDSC collection rights in respect of Class B
shares sold during the period beginning approximately June 1, 1995 through
November 30, 1996. The Fund has agreed not to reduce the rate of payment of
12b-1 fees in respect of such Class B shares unless it terminates such shares'
Distribution Plan completely. If it terminates such Distribution Plans, the Fund
may be subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to
compensate broker-dealers or other persons for distributing shares of the Fund
will be provided by FUNB or its affiliates.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class C shares sold since inception of the Distribution Plan; (2) to enable
the Principal Underwriter to pay or to have paid to others a service fee, at
such intervals as the Principal Underwriter may determine, in respect of Class C
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission in the amount of 0.75% of the price paid for each Class C
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class C share sold. Beginning approximately fifteen
months after purchase, broker-dealers or others receive a commission at an
annual rate of 0.75% (subject to NASD rules) plus service fees at the annual
rate of 0.25%, respectively, of the average daily net asset value of each Class
C share maintained by the recipient and outstanding on the books of the Fund for
specified periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, the Principal Underwriter and EKIS will ask the Independent
Trustees to take whatever action they deem appropriate under the circumstances
with respect to payment of such Advances.
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 votes of
the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
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 Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
- --------------------------------------------------------------------------------
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:
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Professor, Finance Department, George Washington
University; President, Amling & Company (investment
advice); and former Member, Board of Advisers,
Credito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of all the Evergreen funds other than
Evergreen Investment Trust; real estate developer and
construction consultant; and President of Centrum
Equities and Centrum Properties, Inc.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Investment Counselor to Appleton Partners, Inc.; and
former Managing Director, Seaward Management
Corporation (investment advice).
FOSTER BAM: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of all the Evergreen funds other than
Evergreen Investment Trust; Partner in the law firm
of Cummings & Lockwood; Director, Symmetrix, Inc.
(sulphur company) and Pet Practice, Inc. (veterinary
services); and former Director, Chartwell Group Ltd.
(Manufacturer of office furnishings and accessories),
Waste Disposal Equipment Acquisition Corporation and
Rehabilitation Corporation of America (rehabilitation
hospitals).
*GEORGE S. BISSELL: Chairman of the Board, Chief Executive Officer and
Trustee of the Fund; Chairman of the Board, Chief
Executive Officer and Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and Chairman
of its Investment Committee); former Director and
Chairman of the Board of Hartwell Keystone; and
former Chairman of the Board, Director and Chief
Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Principal, Padanaram Associates, Inc.; and former
Executive Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
and former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine;
Chairman and President, Oldways Preservation and
Exchange Trust (education); former Chairman of the
Board, Director, and Executive Vice President, The
London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Associates
(environmental consulting); and former Director,
Keystone Investments and Keystone.
JAMES S. HOWELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman and Trustee of the Evergreen funds; former
Chairman of the Distribution Foundation for the
Carolinas; and former Vice President of Lance Inc.
(food manufacturing).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman of the Board and Chief Executive Officer,
Carson Products Company; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix
Series Fund, Phoenix Multi-Portfolio Fund, and The
Phoenix Big Edge Series Fund; and former President,
Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman and 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 Lahey
Hitchcock Clinic; Director, Vermont Yankee Nuclear
Power Corporation, Grand Trunk Corporation, Grand
Trunk Western Railroad, Union Mutual Fire Insurance
Company, New England Guaranty Insurance Company,
Inc., and the Investment Company Institute; former
Director and President, Associated Industries of
Vermont; former Director of Keystone, Central Vermont
Railway, Inc., S.K.I. Ltd., and Arrow Financial
Corp.; and former Director and Chairman of the Board,
Proctor Bank and Green Mountain Bank.
GERALD M. MCDONELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; and Sales
Representative with Nucor-Yamoto, Inc. (Steel
producer).
THOMAS L. MCVERRY: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; former Vice President
and Director of Rexham Corporation; and former
Director of Carolina Cooperative Federal Credit
Union.
*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; and Partner in the
law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Vice Chair and former 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.
RUSSELL A. SALTON, III MD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; Medical Director,
U.S. Health Care/Aetna Health Services; and former
Managed Health Care Consultant; former President,
Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; and Attorney, Law
Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman, Environmental Warranty, Inc. (Insurance
agency); Executive Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of Connecticut
Natural Gas Corporation, Hartford Hospital, Old State
House Association, Middlesex Mutual Assurance
Company, and Enhance Financial Services, Inc.;
Chairman, Board of Trustees, Hartford Graduate
Center; Trustee, Greater Hartford YMCA; former
Director, Vice Chairman and Chief Investment Officer,
The Travelers Corporation; former Trustee,
Kingswood-Oxford School; and former Managing Director
and Consultant, Russell Miller, Inc.
*ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky
& Armentano, P.C.; Adjunct Professor of Law and
former Associate Dean, St. John's University School
of Law; Adjunct Professor of Law, Touro College
School of Law; and former President, Nassau County
Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Investments Families of Funds; President and
Treasurer of the Evergreen funds; Senior Managing
Director, Furman Selz LLC since 1992; Managing
Director from 1984 to 1992; 230 Park Avenue, Suite
910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds
in the Keystone Investments Families of Funds; Senior
Vice President and Director of Administration and
Regulatory Services, BISYS Fund Services; 3435
Stelzer Road, Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
Mr. Bissell is deemed an "interested person" of the Fund by virtue of
his ownership of stock of First Union Corporation ("First Union"), of which
Keystone is an indirect wholly-owned subsidiary. See "Investment Adviser." Mr.
Pettit and Mr. Simons may each be deemed an "interested person" as a result of
certain legal services rendered to a subsidiary of First Union by their
respective law firms, Holcomb and Pettit, P.A. and Farrell, Fritz, Caemmerer,
Cleary, Barnosky & Armentano, P.C. As of the date hereof, Mr. Pettit and Mr.
Simons are each applying for an exemption from the SEC which would allow them to
retain their status as an Independent Trustee.
After the transfer of EKD and its related mutual fund distribution and
administration business to BISYS, it is expected that all of the officers of the
Fund will be officers and/or employees of BISYS. See "Sub-administrator."
During the fiscal year ended September 30, 1996, no Trustee or any
officer received any direct remuneration from the Fund. Annual retainers and
meeting fees paid by all funds in the Keystone Investments Families of Funds
(which includes more than thirty mutual funds) for the calendar year ended
December 31, 1995 totaled approximately $450,716. As of November 21, 1996, the
Trustees and officers beneficially owned less than 1% of the Fund's then
outstanding Class A, Class B and Class C shares, respectively.
Except as set forth above, the address of all of the Fund's Trustees
and officers and the address of the Fund is 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to the Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments, 200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, the predecessor corporation to Keystone
Investments and indirectly each subsidiary of Keystone Investments, including
Keystone, were acquired (the "Acquisition") by FUNB, a wholly-owned subsidiary
of First Union Corporation ("First Union"). The predecessor corporation to
Keystone Investments was acquired by FUNB by merger into a wholly-owned
subsidiary of FUNB, which entity then succeeded to the business of the
predecessor corporation. Contemporaneously with the Acquisition, the Fund
entered into a new investment advisory agreement with Keystone and into a
principal underwriting agreement with EKD, a wholly-owned subsidiary of Furman
Selz LLC ("Furman Selz"). The new investment advisory agreement (the "Advisory
Agreement") was approved by the shareholders of the Fund on December 9, 1996,
and became effective on December 11, 1996.
Keystone Investments and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $133.9 billion in consolidated assets as of
September 30, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, together with Lieber & Company and
Evergreen Asset Management Corp., wholly-owned subsidiaries of FUNB, manage or
otherwise oversee the investment of over $50 billion in assets belonging to a
wide range of clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to, (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees of Independent
Trustees; (5) brokerage commissions, brokers' fees and expenses; (6) issue and
transfer taxes; (7) costs and expenses under the Distribution Plan; (8) taxes
and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
the Fund and its shares with the SEC or under state or other securities laws;
(11) expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges
and expenses of legal counsel for the Fund and for the Independent Trustees of
the Fund on matters relating to the Fund; (14) 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 at the annual rate of:
Annual Aggregate Net Asset
Management Value of the Shares
Fee of the Fund
- ------------------------------------------------------------------------------
2.00% 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.
Keystone's fee is computed as of the close of business each business day and
payable daily.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
Currently, Keystone has voluntarily agreed to limit annual expenses of
each of the Fund's Class A, B and C shares to 0.90%, 1.65%, and 1.65% of average
net class assets, respectively. Keystone intends to continue the foregoing
expense limitations on a calendar month-by-month basis. Keystone will
periodically evaluate the foregoing expense limitations and may modify or
terminate them in the future.
In accordance with voluntary expense limitations in place during the
fiscal year ended September 30, 1996, Keystone reimbursed the Fund $82,098,
$244,938, and $13,980 for Class A, B and C shares, respectively. Keystone does
not intend to seek repayment for these amounts. 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.
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY FEES
For each of the Fund's last three fiscal years, the table below lists
the total dollar amounts paid by the Fund to Keystone for services rendered
under the Advisory Agreement. For more information, see "Investment Manager and
Investment Adviser."
<TABLE>
<CAPTION>
Fiscal Year Ended Fee Paid to Keystone for Services Percentage of Fund
September 30, Rendered under the Advisory Agreement Average Net Assets
- -------------------------- --------------------------------------- -----------------------------------
<C> <C> <C>
1996 $493,147 0.64%
1995 $605,247 0.64%
1994 $735,254 0.60%
</TABLE>
DISTRIBUTION PLAN EXPENSES
Listed below are the amounts paid by each class of shares under its
respective Distribution Plan to EKIS for the fiscal year ended September 30,
1996. For more information, see "Distribution Plans."
<TABLE>
<CAPTION>
Class B Shares Sold Prior Class B Shares Sold on or
Class A Shares to June 1, 1995 after June 1, 1995 Class C Shares
- ----------------------- ---------------------------- ----------------------------- --------------------
<C> <C> <C> <C>
$46,809 $520,801 $12,568 $30,755
</TABLE>
UNDERWRITING COMMISSIONS
For each of the Fund's last three fiscal years, the table below lists
the aggregate dollar amounts of underwriting commissions (front-end sales
charges, plus distribution fees, plus CDSCs) paid with respect to the public
distribution of the Fund's shares. The table also indicates the aggregate dollar
amount of underwriting commissions retained by EKIS. For more information, see
"Principal Underwriter" and "Sales Charges."
<TABLE>
<CAPTION>
Aggregate Dollar Amount of
Fiscal Year Ended Aggregate Dollar Amount of Underwriting Commissions Retained by
September 30, Underwriting Commissions the Principal Underwriter
- ------------------------ ---------------------------------------- ----------------------------------------
<C> <C> <C>
1996 $ 490,274 $ 397,085
1995 $ 750,634 $ 629,974
1994 $1,592,678 $1,463,079
</TABLE>
BROKERAGE COMMISSIONS
The Fund paid no brokerage commissions for the fiscal years ended October 31,
1996, 1995 and 1994.
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaces EKIS as the Fund's principal underwriter.
EKIS may no longer act as principal underwriter of the Fund due to regulatory
restrictions imposed by the Glass-Steagall Act upon national banks such as FUNB
and their affiliates, that prohibit such entities from acting as the
underwriters of mutual fund shares. While EKIS may no longer act as principal
underwriter of the Fund as discussed above, EKIS may continue to receive
compensation from the Fund or the Principal Underwriter in respect of
underwriting and distribution services performed prior to the termination of
EKIS as principal underwriter. In addition, EKIS may also be compensated by the
Principal Underwriter for the provision of certain marketing support services to
the Principal Underwriter at an annual rate of up to .75% of the average daily
net assets of the Fund, subject to certain restrictions.
The Principal Underwriter, as agent, has agreed to use its best efforts
to find purchasers for the shares. The Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from broker-dealers, and others, acting as principals, for sales of
shares to them. The Underwriting Agreements provide that the Principal
Underwriter will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. The Principal
Underwriter or EKIS, its predecessor, may receive payments from the Fund
pursuant to the Fund's Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the public offering price of the shares, which is determined in accordance
with the provisions of the Fund's Declaration of Trust, By-Laws, current
prospectuses and statement of additional information. All orders are subject to
acceptance by the Fund and the Fund reserves the right, in its sole discretion,
to reject any order received. Under the Underwriting Agreements, the Fund is not
liable to anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
The Principal Underwriter has agreed that it will, in all respects,
duly conform with all state and federal laws applicable to the sale of the
shares. The Principal Underwriter has also agreed that it will indemnify and
hold harmless the Fund and each person who has been, is, or may be a Trustee or
officer of the Fund against expenses reasonably incurred by any of them in
connection with any claim, action, suit, or proceeding to which any of them may
be a party that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
Each Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Fund's Independent Trustees, and (ii) by vote of a majority of
the Fund's Trustees, in each case, cast in person at a meeting called for that
purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Principal Underwriter's judgment, it
could benefit the sales of Fund shares, the Principal Underwriter may provide to
selected broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software, and Fund data files.
- --------------------------------------------------------------------------------
SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
Furman Selz provides officers and certain administrative services to
the Fund pursuant to a sub-administration agreement. For its services under that
agreement Furman Selz will receive from Keystone an annual fee at the maximum
annual rate of .01% of the average daily net assets of the Fund. Furman Selz is
located at 230 Park Avenue, New York, New York 10169.
It is expected that on or about January 2, 1997, Furman Selz will
transfer EKD, and its related mutual fund distribution and administration
business, to BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
- --------------------------------------------------------------------------------
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") is on file 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 classes of Fund shares. Each share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund offers Class
A, B and C 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 for the obligations of the trust. 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. At meetings called for the initial election of Trustees or to
consider other matters, shares are entitled to one vote per share. Shares
generally vote together as one class on all matters. Classes of shares of the
Fund have equal voting rights except that each 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 Fund's 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 average annual rate of return of Class A for the fiscal year ended
September 30, 1996 was 3.36%. The average annual rate of return for Class A
shares for the period December 30, 1994 (date of initial public offering)
through the fiscal period ended September 30, 1996 was 5.55% (including any
applicable sales charge).
The average annual rates of return for Class B and Class C shares for
the fiscal year ended September 30, 1996 were 2.90% and 5.91%, respectively
(including any applicable sales charge). The average annual rate of return for
Class B shares for the five years ended September 30, 1996 was 4.01%. The
average annual rate of return for Class B shares for the period from July 1,
1991 (commencement of operations) through September 30, 1995 was 4.29%
(including any applicable sales charge). The average annual rate of return for
Class C shares for the period from February 1, 1993 (date of initial public
offering) through September 30, 1996 was 4.24% (including any applicable sales
charge).
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 A, Class B and Class C for the
30-day period ended September 30, 1996 were 5.58%, 5.03% and 4.98%,
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
- --------------------------------------------------------------------------------
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets
in any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
GENERAL
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, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the independent auditors for the Fund.
EKSC, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034
is a wholly-owned subsidiary of Keystone.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
As of November 21, 1996, Smith Barney Inc., 00154924733, 388 Greenwich
Street, New York, NY 10013-2375 owned of record 29.859% of the Fund's
outstanding Class A shares; and MLPF& S for the Sole Benefit of its Customers,
Attn: Fund Administration, 4800 Deer Lake Dr, E 3rd FL, Jacksonville, FL
32246-6484, owned of record 11.166% of the Fund's outstanding Class A shares.
As of November 21, 1996, Merrill Lynch Pierce, Fenner & Smith for Sole
Benefit of its Customers, Attn: Fund Administration, 4800 Deer Lake Dr, E 3rd
FL, Jacksonville, FL 32246-6484, owned of record 13.957% of the Fund's
outstanding Class B shares.
As of November 21, 1996, MLPF& S for the Sole Benefit Of its Customers,
Attn: Fund Administration, 4800 Deer Lake Dr., E 3rd FL, Jacksonville, FL
32246-6486, owned of record 16.460% of the Fund's outstanding Class C shares;
and Smith Barney Inc., 00154925325, 388 Greenwich Street, New York, NY
10013-2375 owned of record 15.479% of the Fund's outstanding Class C shares.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and statement of additional information omit
certain information contained in the registration statement filed with the
Commission, which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the rules and regulations
promulgated by the Commission.
The Fund is one of approximately 16 different investment companies in
the Keystone America Fund Family. The Keystone America Funds offer a range of
choices to serve shareholder needs. The Keystone America Funds consist of the
following funds having the various investment objectives described below:
KEYSTONE BALANCED FUND II - Seeks current income and capital appreciation
consistent with the preservation of capital.
KEYSTONE 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 FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 50%).
KEYSTONE FUND OF THE AMERICAS - Seeks long term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and countries in South and Central
America).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND - (Formerly Keystone Strategic
Development Fund.) Seeks long-term capital growth by investing primarily in
equity securities of foreign and domestic companies involved in the natural
resources and energy industries.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE OMEGA FUND - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
KEYSTONE STATE TAX FREE FUND - A mutual fund 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 SMALL COMPANY GROWTH FUND II - Seeks long-term growth of capital by
investing primarily in equity securities with small market capitalizations.
KEYSTONE STATE TAX FREE FUND-SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds.
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following financial statements of the Fund are incorporated by
reference herein to the Fund's Annual Report, as filed with the Commission:
Schedule of Investments and Statement of Assets and Liabilities as of
September 30, 1996;
Statement of Operations for the year ended September 30, 1996;
Statements of Changes in Net Assets for each of the years in the
two-year period ended September 30, 1996;
Financial Highlights for the year ended September 30, 1996 and the
period from December 30, 1994 (Date of Initial Public Offering) to
September 30, 1995 for Class A shares;
Financial Highlights for each of the years in the five-year period
ended September 30, 1996, and for the period from July 1, 1991
(Commencement of Operations) to September 30, 1991 for Class B shares;
Financial Highlights for each of the years in the three-year period
ended September 30, 1996, and for the period from February 1, 1993
(Date of Initial Public Offering) to September 30, 1993 for Class C
shares;
Notes to Financial Statements; and
Independent Auditors' Report dated November 1, 1996.
A copy of the Fund's Annual Report will be furnished upon request and
without charge. Requests may be made in writing to EKSC, P.O. Box 2121, Boston,
Massachusetts 02106-2121 or by calling EKSC toll free at 1-800-343-2898.
<PAGE>
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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 well conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
will establish a segregated account in connection with its futures contracts
which will hold cash or cash equivalents equal in value to the current value of
the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for 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.
