<PAGE>
File Nos. 33-42864
and 811-6412
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. _10_ _X_
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. _10_ _X_
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
(Exact name of Registrant as specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices) (Zip Code11)
Registrant's Telephone Number, including Area Code:
(617) 210-3200
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street,
Boston, MA 02116-5034
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
- --- immediately upon filing pursuant to paragraph (b)
- -X- on June 30, 1997 pursuant to paragraph (b)
- --- 60 days after filing pursuant to paragraph (a)(1)
- --- on (date) pursuant to paragraph (a)(1)
- --- 75 days after filing pursuant to paragraph (a)(2)
- --- on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
- --- This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has elected to register an indefinite number of shares under the
Securities Act of 1933. A Rule 24f-2 Notice for Registrant's fiscal year ended
February 28, 1997 was filed on April 28, 1997.
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Offering Registration
Registered Registered Per Unit Price* Fee
- --------------------------------------------------------------------------------
Shares of
beneficial
interest
without Par
Value 940,781 $9.71 $9,134,983 $0
- --------------------------------------------------------------------------------
* The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940. 2,850,673 shares of the
Fund were redeemed during its fiscal period ended February 28, 1997. Of such
shares, 1,909,892 were used for a reduction prusuant to Ruel 24f-2 during the
current year. The remaining 940,781 shares are being used for a reduction in
this filing.
<PAGE>
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
CONTENTS OF
POST-EFFECTIVE AMENDMENT No. 10
to
REGISTRATION STATEMENT
This Post-Effective Amendment No. 10 to Registration Statement No. 33-42864
consists of the following pages, items of information, and documents:
The Facing Sheet
The Contents Page
The Cross-Reference Sheet
PART A
Prospectus
PART B
Statement of Additional Information
PART C
PART C - OTHER INFORMATION - ITEMS 24(a) and 24(b)
Financial Statements
Independent Auditors' Report
Listing of Exhibits
PART C - OTHER INFORMATION - ITEMS 25-32 - and SIGNATURE PAGES
Number of Holders of Securities
Indemnification
Business and Other Connections of Investment Adviser
Principal Underwriter
Management Services
Undertakings
Location of Accounts and Records
Signatures
Exhibits (including Powers of Attorney)
<PAGE>
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
Cross-Reference Sheet pursuant to Rules 481(a) under the Securities of 1933.
Items in
Part A of
Form N-1A Prospectus Caption
- --------- ------------------
1 Cover Page
2 Expense Information
3 Financial Highlights
Performance Data
4 Cover Page
The Fund
Investment Objective and Policies
Risk Factors
Investment Restrictions
Additional Investment Information
5 Fund Management and Expenses
Additional Information
5A Not applicable
6 The Fund
Dividends and Taxes
How to Buy Shares
Alternative Sales Options
Fund Shares
Shareholder Services
7 Pricing Shares
Fund Management and Expenses
How to Buy Shares
Alternative Sales Options
Distribution Plan
Shareholder Services
8 How to Redeem Shares
9 Not applicable
Items in
Part B of
Form N-1A Statement of Additional Infomation Caption
- --------- ------------------------------------------
10 Cover Page
11 Table of Contents
12 Not applicable
13 Investment Restrictions
Appendix
14 Trustees and Officers
15 Additional Information
16 Investment Adviser
Distributor
Distribution Plan
Additional Information
17 Brokerage
18 Declaration of Trust
19 Valuation of Securities
Distribution Plan
20 Distributions and Taxes
21 Distributor
22 Standardized Total Return and Yield Quotations
23 Financial Statements
<PAGE>
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
PART A
PROSPECTUS
<PAGE>
PROSPECTUS July 1, 1997
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
INSTITUTIONAL SERVICE SHARES
INSTITUTIONAL SHARES
Keystone Institutional Adjustable Rate Fund (the "Fund") seeks to
provide 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. Such securities include adjustable
rate mortgage securities that are issued or guaranteed by the United States
("U.S.") government, its agencies or instrumentalities. 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 is designed for institutional investors and seeks to
provide a relatively stable net asset value while providing high current
income relative to high-quality, short-term investment alternatives.
The Fund offers Institutional Service (formerly Class Y) and
Institutional (formerly Class Z) shares. Information on share classes and
their fee and sales charge structures may be found in the "Expense
Information," "Distribution Plan," "How to Buy Shares," "Alternative Sales
Options" 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 July 1, 1997, 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, write to The
Fund at 200 Berkeley Street, Boston, Massachusetts 02116 or the address or
call (800) 633-5034.
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.
KEEP THIS PROSPECTUS FOR FUTURE REFERENCE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
EXPENSE INFORMATION 2
FINANCIAL HIGHLIGHTS 3
THE FUND 4
INVESTMENT OBJECTIVE AND POLICIES 4
INVESTMENT RESTRICTIONS 6
RISK FACTORS 6
PRICING SHARES 8
DIVIDENDS AND TAXES 8
FUND MANAGEMENT AND EXPENSES 9
DISTRIBUTION PLAN 11
HOW TO BUY SHARES 11
ALTERNATIVE SALES OPTIONS 12
HOW TO REDEEM SHARES 13
SHAREHOLDER SERVICES 14
PERFORMANCE DATA 15
FUND SHARES 15
ADDITIONAL INFORMATION 15
ADDITIONAL INVESTMENT INFORMATION (i)
</TABLE>
EXPENSE INFORMATION
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 a more complete description of the various
costs and expenses, see the "Fund Management and Expenses" and "Distribution
Plan" sections of this prospectus.
The following table shows for the Fund the estimated annual operating
expenses (as a percentage of average net assets) attributable to each Class of
Shares, together with examples of the cumulative effect of such expenses on a
hypothetical $1,000 investment in each Class for the periods specified assuming
(i) a 5% annual return, and (ii) redemption at the end of each period.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(1)
Institutional
Service Institutional
Shares Shares(2)
<S> <C> <C>
Management Fees 0.30% 0.30%
12b-1 Fees 0.25% 0.00%
Other Expenses None None
Total Fund Operating Expenses 0.55% 0.30%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES (3)
Institutional
Service Institutional
Shares Shares(2)
<S> <C> <C>
After 1 Year $ 6 $ 3
After 3 Years $18 $10
After 5 Years $31 $17
After 10 Years $69 $38
</TABLE>
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(1) Expense ratios are for the Fund's fiscal period ended February 28, 1997.
(2) Institutional shares are available only to certain investors. See
"Alternative Sales Options -- Institutional Shares."
(3) 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%.
2
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FINANCIAL HIGHLIGHTS
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.
(For a share outstanding throughout each period)
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND -- INSTITUTIONAL SERVICE SHARES
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEAR ENDED MAY 23, 1994 (DATE OF
FEBRUARY 28, SEPTEMBER 30, INITIAL PUBLIC OFFERING)
1997(a) 1996(b) 1995 TO SEPTEMBER 30, 1994
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD.......................... $9.68 $9.65 $9.61 $9.73
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................ 0.28 0.65 0.64 0.17
Net realized and unrealized gain (loss) on investments....... 0.00 (0.03) (0.02) (0.13)
Total from investment operations............................. 0.28 0.62 0.62 0.04
LESS DISTRIBUTIONS FROM:
Net investment income........................................ (0.22) (0.58) (0.53) (0.16)
In excess of net investment income........................... (0.02) (0.01) (0.05) 0
Total distributions.......................................... (0.24) (0.59) (0.58) (0.16)
NET ASSET VALUE END OF PERIOD................................ $9.72 $9.68 $9.65 $9.61
TOTAL RETURN................................................. 2.97% 6.60% 6.60% 0.35%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................. 0.55%(c) 0.55% 0.55% 0.43%(c)
Net investment income...................................... 6.39%(c) 6.64% 6.70% 5.03%(c)
Portfolio turnover rate...................................... 44% 85% 56% 63%
NET ASSETS END OF PERIOD (THOUSANDS)......................... $3,564 $14,361 $2,871 $1
</TABLE>
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND -- INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
FEBRUARY 28, YEAR ENDED SEPTEMBER 30,
1997(a) 1996(b) 1995 1994 1993(b) 1992
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD................... $9.68 $9.65 $9.61 $9.93 $9.88 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................. 0.28 0.64 0.63 0.63 0.54 0.67
Net realized and unrealized gain (loss) on
investments......................................... 0.00 0.00 0.01 (0.49) (0.01) (0.15)
Total from investment operations...................... 0.28 0.64 0.64 0.14 0.53 0.52
LESS DISTRIBUTIONS FROM:
Net investment income................................. (0.23) (0.60) (0.55) (0.44) (0.48) (0.64)
In excess of net investment income.................... (0.02) (0.01) (0.05) (0.02) 0 0
Total distributions................................... (0.25) (0.61) (0.60) (0.46) (0.48) (0.64)
NET ASSET VALUE END OF PERIOD......................... $9.71 $9.68 $9.65 $9.61 $9.93 $9.88
TOTAL RETURN.......................................... 2.97% 6.86% 6.87% 1.43% 5.53% 5.46%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................................... 0.30%(c) 0.30% 0.30% 0.30% 0.30% 0.30%
Net investment income............................... 6.79%(c) 6.84% 6.61% 5.15% 5.46% 6.83%
Portfolio turnover rate............................... 44% 85% 56% 63% 81% 88%
NET ASSETS END OF PERIOD (THOUSANDS).................. $70,264 $65,974 $23,616 $25,200 $60,035 $51,625
</TABLE>
(a) The Fund changed its fiscal year from September 30 to the last day in
February during the current period.
(b) Per share calculations based on weighted average shares outstanding.
(c) Annualized.
3
<PAGE>
THE FUND
The Fund is an open-end, diversified management company, commonly known
as a mutual fund. The Fund was formed as a Massachusetts business trust on June
19, 1991. 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 vote of the holders of a majority of the Fund's outstanding
shares as defined in the Investment Company Act of 1940 ("1940 Act"), which
means the lesser of (1) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (2) more than 50% of the
outstanding shares (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 invests at least 65% of its assets
in mortgage securities or other securities collateralized by or representing an
interest in a pool of mortgages (collectively, "Mortgage Securities"), which
securities 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 follows 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
with adjustable rates of interest, 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 that pay a fixed rate of interest.
Unlike fixed rate mortgages and loans that generally decline in value
during periods of rising interest rates, adjustable rate Mortgage Securities
("ARMS") 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, if any, is intended
to increase the Fund's total return from changes in market rates while not
materially increasing the volatility of the net asset value per share.
PERMITTED INVESTMENTS
The Fund invests in Mortgage Securities that are issued or guaranteed by
the U.S. government, one of its agencies or instrumentalities, such as the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
4
<PAGE>
Securities issued by GNMA, but not those issued by FNMA or FHLMC, are backed by
the full faith and credit of the U.S. government.
The Fund invests in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
U.S. governmental lenders and guaranteed, to the extent provided in such
securities, by the U.S. government, its agencies or instrumentalities. Such
securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semiannually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which the Fund invests
include those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA certificates
are direct obligations of the U.S. government and, as such, are backed by the
full faith and credit of the U.S. government. FNMA is a federally chartered,
privately owned corporation. FHLMC is a corporate instrumentality of the U.S.
government. FNMA and FHLMC certificates 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, which have the right to borrow to meet their obligations from an existing
line of credit with the U.S. Treasury. 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.
Certificates for Mortgage Securities evidence an interest in a specific
pool of mortgages. These certificates are, in most cases, "modified
pass-through" instruments, wherein the issuing agency guarantees the payment of
principal and interest on mortgages underlying the certificates, whether or not
such amounts are collected by the issuer on the underlying mortgages.
Adjustable rate mortgages are an 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" or "floors" on the maximum and minimum
interest rate that is charged to the mortgagor during the life of the mortgage
or to maximum and minimum changes in 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 for seeking to accomplish the Fund's objective. For
further information, see "Prepayments" in the section on "Risk Factors."
OTHER PERMITTED INVESTMENTS
The Fund may invest in collateralized mortgage obligations ("CMOs")
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
The Fund intends to invest only in CMOs that, in Keystone's opinion, are
suitable in light of the Fund's investment objective and policies. For further
information, see "Additional Investment Information."
In addition, the Fund may enter into repurchase agreements and reverse
repurchase agreements for eligible securities and U.S. government obligations.
For further information, see "Additional Investment Information."
The Fund may also invest up to 35% of its assets under ordinary
circumstances and up to 100% of its assets for temporary defensive purposes in
obligations of the U.S. government, its agencies or instrumentalities, such as
the Federal Home Loan Banks, FNMA, GNMA, FHLMC or the Federal Farm Credit Banks.
5
<PAGE>
The Fund may assume a temporary defensive position, for example, upon
Keystone's determination that market conditions so warrant. The Fund may not be
pursuing its investment objective when it assumes a temporary defensive
position.
The Fund will not invest in derivative Mortgage Securities other than the
CMOs described in "Additional Investment Information."
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
non-fundamental restrictions are set forth in detail in the statement of
additional information. Unless otherwise stated, all references to the Fund's
assets are in terms of current market value.
Generally the Fund may not do the following: (1) with respect to 75% of
its total assets, invest more than 5% of 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; and (2) borrow money or enter into reverse repurchase
agreements, except that the Fund may (a) enter into reverse repurchase
agreements or (b) borrow money from banks for temporary or emergency purposes in
aggregate amounts of up to one-third of the value of the Fund's net assets;
provided that, while borrowings exceed 5% of the Fund's net assets, any such
borrowings will be repaid before additional investments are made.
The Fund intends to follow the 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.
Investors should take into account their investment objectives as well as other
investments when considering the purchase of shares of any investment company.
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
the Fund might have to sell portfolio securities at a time when it would be
disadvantageous to do so.
INTEREST RATE RISK
The values of fixed-rate securities fluctuate in response to changes in
interest rates; generally rising when interest rates decline, and falling, when
interest rates rise. As a result, if interest rates increase after a security is
purchased, the security, if sold prior to maturity, may return less than its
cost. The corresponding increase or decrease in the value of fixed-rate
securities generally becomes more significant for instruments with longer
remaining maturities or longer expected remaining lives. Moreover, investment
yields on relatively short-term investments are subject to substantial and rapid
fluctuation.
PREPAYMENTS
The Mortgage Securities 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
6
<PAGE>
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 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.
There are three main categories of indices: (1) those based on 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 and 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.
The Fund's net asset value per share could vary to the extent that
current interest rates on Mortgage Securities are different than 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 that 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 fluctuations in interest rates, the Fund's net asset value per
share will fluctuate as well.
CAPS AND FLOORS
The Fund invests in ARMS and 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 the
cap rates 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 rates on underlying adjustable rate mortgages are reduced.
ADDITIONAL FACTORS
In an environment where interest rates on short-term fixed-rate debt
securities are rising faster than interest rates on 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 user risk
described above, the Fund's investments may not perform as expected.
ARMS are less effective as a means of "locking in" long-term interest
rates than fixed-rate debt securities, since their market values will generally
vary inversely with changes in market interest rates, (I.E., declining when
interest rates rise and rising when interest rates decline). However, the market
value of ARMS is less likely to decline than fixed-rate debt securities of
comparable maturities during periods of rapidly rising rates. In addition, ARMS
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 as interest rates decline.
If ARMS are purchased at a premium, 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 are
purchased at a discount, both a scheduled payment of principal and an
unscheduled
7
<PAGE>
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 Fund may invest in securities that 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 the section of this prospectus
entitled "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 currently is
closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share of the Fund is arrived at by determining the value of the Fund's
assets, subtracting its liabilities and dividing the result by the number of its
shares outstanding.
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 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, 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) securities with initial and remaining maturities of sixty days or
less at amortized cost (original purchase cost as adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market;
(2) securities with remaining maturities of more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market;
(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 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 all of its net
investment income and net capital gains, if any, to shareholders, it will be
relieved of any federal income tax liability.
The Fund intends to declare dividends from net investment income daily
and distribute to its shareholders such dividends monthly and declare and
distribute all net realized capital gains, if any, at least 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.
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Because Institutional Service shares bear most of the costs of
distribution of such shares through an annual distribution fee, expenses
attributable to Institutional Service shares will generally be higher than those
of Institutional shares, and income distributions paid by the Fund with respect
to Institutional shares will generally be greater than those paid with respect
to Institutional Service shares.
Dividends and distributions other than capital gains dividends are
taxable as ordinary income to shareholders who are subject to federal income
taxes and may also be subject to state and local taxes. The Fund advises its
shareholders annually as to the federal tax status of all distributions made
during the year.
Any taxable distribution declared in October, November or December to
shareholders of record in such month and paid by the following January 31 would
be includable in the taxable income of shareholders as if paid on December 31 of
the year in which the distribution was declared.
The Fund intends to distribute its net capital gains as capital gain
dividends. Shareholders should treat such dividends as long-term capital gains.
Such distributions will be designated as long-term capital gain dividends by a
written notice mailed to each shareholder no later than 60 days after the close
of the Fund's taxable year. If a shareholder receives a capital gain dividend
and holds his shares for six months or less, then any allowable loss on
disposition of Fund shares will be treated as a long-term capital loss to the
extent of such capital gain dividend.
Since none of the Fund's income will consist of corporate dividends, no
distributions will qualify for the corporate dividends received deduction.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the 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 located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone is an indirect wholly-owned subsidiary of First Union National
Bank ("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
March 31, 1997.
First Union is headquartered in Charlotte, North Carolina, and had $137
billion in consolidated assets as of March 31, 1997. 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 and
Evergreen Asset Management Corp., a wholly-owned subsidiary of FUNB, manage or
otherwise oversee the investment of over $62 billion in assets as of March 31,
1997 belonging to a wide range of clients, including the Evergreen Keystone
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 pays Keystone a fee for its services at the annual rate of 0.30%
of the average daily net asset value of shares of the Fund. A pro-rata portion
of the fee is payable in arrears at the end of each day or calender month as
Keystone may, from time to time, specify to the Fund.
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 Board of Trustees
or by the vote of shareholders of the Fund. In addition, the terms and annual
continuance of the Advisory Agreement must be approved by the vote of a majority
of the Independent Trustees (Trustees who are not interested persons of the
Fund, as defined in the 1940 Act) 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
9
<PAGE>
Keystone or may be terminated by a vote of shareholders of the Fund. The
Advisory Agreement will terminate automatically upon its "assignment," as
defined in the 1940 Act.
PRINCIPAL UNDERWRITER
Evergreen Keystone Distributor, Inc. ("EKD"), a subsidiary of The BISYS
Group, Inc., which is not affiliated with First Union, is now the Fund's
principal underwriter. EKD replaced Fiduciary Investment Company ("FICO") as the
Fund's principal underwriter. FICO 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. EKD is
located at 125 W. 55th Street, New York, New York 10019.
SUB-ADMINISTRATOR
BISYS Fund Services ("BISYS"), an affiliate of EKD, distributor for the
Fund, serves as sub-administrator to the Fund. For its services, BISYS is
entitled to receive a fee from Keystone calculated on the aggregate average
daily net assets of the Fund at a rate based on the total assets of all mutual
funds for which FUNB affiliates serve as investment adviser. The
sub-administrator fee is calculated in accordance with the following schedule:
<TABLE>
<CAPTION>
AGGREGATE AVERAGE DAILY NET ASSETS OF FUNDS
WHICH ANY AFFILIATE OF FUNB SERVES
SUB-ADMINISTRATOR AS INVESTMENT ADVISER AND FOR WHICH BISYS
FEE SERVES AS SUB-ADMINISTRATOR
<S> <C>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
</TABLE>
The total assets of the mutual funds for which FUNB affiliates also serve
as investment advisers were approximately $29.2 billion as of February 28, 1997.
PORTFOLIO MANAGER
Christopher P. Conkey and Gary E. Pzegeo are co-portfolio managers of the
Fund. Mr. Conkey has been the Fund's portfolio manager since 1991. He is a
Keystone Senior Vice President and Chief Investment Officer for Fixed Income. He
is also Group Leader for the high grade fixed income area. Mr. Conkey joined
Keystone as a fixed income portfolio manager in 1988. Gary E. Pzegeo has been a
Keystone Vice President and Portfolio Manager since 1997 and has been
co-portfolio manager of the Fund since April, 1997. Mr. Pzegeo has been an
investment professional at Keystone since 1990.
FUND EXPENSES
Pursuant to the Advisory Agreement, Keystone has agreed to pay certain of
the Fund's expenses, including expenses of the Fund's transfer agent, custodian
and independent auditors; fees payable to government agencies, including
registration and qualification fees of the Fund and its shares under federal and
state securities laws; expenses of preparing, printing and mailing Fund
prospectuses, notices, reports and proxy material; and expenses of shareholders'
and Trustees' meetings. In addition to the investment advisory and management
fee discussed above, the principal expenses that the Fund is expected to pay
include expenses of its Independent Trustees; brokerage commissions, interest
charges and taxes; legal fees and certain extraordinary expenses. Each class
will pay all of the expenses attributable to it. Such expenses are currently
limited to Distribution Plan expenses.
During the fiscal period ended February 28, 1997, Keystone voluntarily
limited the expenses of the Fund's Institutional Service and Institutional
shares to .55% and .30%, respectively, of average net class assets annually.
Keystone reserves the right at any time, however, to make a redetermination of
whether to continue these expense limits and, if so, at what rates. For the
fiscal period ended February 28, 1997, the Fund paid or accrued to Keystone
investment management and advisory services fees of $101,412 (0.30% of the
Fund's average net assets).
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<PAGE>
For the fiscal period ended February 28, 1997, the Fund paid 0.55% and
0.30% of the average annual net assets of the Institutional Service and
Institutional shares, respectively, in expenses.
SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for the Fund,
Keystone may consider the number of shares of the Fund sold by the
broker-dealer. In addition, broker-dealers executing portfolio transactions,
from time to time, may be affiliated with the Fund, Keystone, EKD 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 period ended February
28, 1997 and for the fiscal year ended September 30, 1996 were 44% and 85%,
respectively.
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 PLAN
The Fund bears some of the costs of selling its Institutional Service
shares under a Distribution Plan adopted with respect to its Institutional
Service shares ("Institutional Service shares Distribution Plan") pursuant to
Rule 12b-1 under the 1940 Act. Payments under the Institutional Service shares
Distribution Plan are limited to up to 0.35% annually of the average daily net
asset value of Institutional Service shares.
The National Association of Securities Dealers, Inc. (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 currently limits annual
expenditures to 1% of the aggregate average daily net asset value of its shares,
of which 0.75% may be used to pay such distribution costs and 0.25% may be used
to pay shareholder service fees. The NASD also limits the aggregate amount that
the Fund may pay for such distribution costs to 6.25% of gross share sales since
the inception of the 12b-1 Distribution Plan, plus interest at the prime rate
plus 1% on such amounts remaining unpaid from time to time.
The Institutional Service shares Distribution Plan may be terminated at
any time by vote of the Independent Trustees or by vote of a majority of the
outstanding Institutional Service shares.
Payments pursuant to the Institutional Service shares Distribution Plan
are included in the operating expenses of that class.
HOW TO BUY SHARES
Shares of the Fund are sold through EKD. Shares are sold without a sales
charge at the public offering price, which equals the net asset value per share
next computed after the Fund receives the purchase order on each day on which
the Exchange is open for business.
Shares are held in "open accounts," I.E., they are credited to the
shareholder's account on the Fund's books. No certificates are issued. All
orders for the purchase of shares are subject to acceptance by the Fund, which
has the right to reject any order.
Shares become entitled to income distributions declared on the first
business day following receipt by the Fund's transfer agent of payment for the
shares.
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<PAGE>
OPENING AN ACCOUNT
First, telephone Evergreen Keystone Service Company (formerly Keystone
Investor Resource Center, Inc.) ("EKSC"), the Fund's transfer agent and dividend
disbursing agent, toll free at 1-800-633-2700 to open an account and obtain an
account or wire identification number. EKSC, a wholly-owned subsidiary of
Keystone, is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Second, arrange with your bank to wire federal funds to EKSC's agent at
the following address (please include your account number)
State Street Bank and Trust Company
Boston, Massachusetts
ABA 011000028 Attn: Mutual Fund Division
For incoming wire A/C 0127-654-2
For credit to KIARF
Client Name and/or Account Number:
Third, complete and sign the Account Application and mail it to:
Evergreen Keystone Service Company
P.O. Box 2121
Boston, Massachusetts 02106-2121
If appropriate, EKSC may require additional documentation or verification
of authority.
Information on how to wire federal funds is available at any national
bank or any state bank that is a member of the Federal Reserve System. The bank
may charge for these services. Presently, there is no fee for receipt by EKSC of
federal funds wired, but the right to charge for this service is reserved.
ALTERNATIVE SALES OPTIONS
The Fund offers two classes of shares.
INSTITUTIONAL SERVICE SHARES
Institutional Service shares are sold without a sales charge at the time
of purchase and are not subject to a sales charge when they are redeemed.
Institutional Service shares are available to any investor making a minimum
initial purchase aggregating $1,000,000 or more which may be waived in certain
situations. There is no minimum amount required for subsequent purchases.
The Fund has adopted the Institutional Service shares Distribution Plan,
which provides for payments at an annual rate of up to 0.35% of the average
daily net asset value of Institutional Service shares, to pay expenses of the
distribution of Institutional Service shares. Payments are expected to be made
at a rate of 0.25% of the average daily net assets of Institutional Service
shares. Amounts paid by the Fund under the Institutional Service shares
Distribution Plan are generally used to pay the Principal Underwriter and
others' service fees. The Fund may also make payments to the Principal
Underwriter, broker-dealers and others for activities that are primarily
intended to result in sales of Institutional Service shares, including, but not
limited to, mail promotions and advertising, including the use of member name
and address lists of affinity groups, professional associations, trade groups,
industry associations or other associations (E.G., credit union trade groups),
for which use royalty payments may be made. As a result, income distributions
paid by the Fund with respect to Institutional Service shares will generally be
less than those paid with respect to Institutional shares. See "Distribution
Plan" above.
INSTITUTIONAL SHARES
Institutional shares are sold without a sales charge at the time of
purchase and are not subject to a sales charge when they are redeemed.
Institutional shares are available to the following investors making a minimum
initial purchase aggregating $1,000,000 or more, which may be waived in certain
situations: officers, directors or trustees, and employees of the Fund,
Keystone, EKD, or any of their affiliates, and members of the immediate
12
<PAGE>
families of such persons, or any trust, pension, profit-sharing, or other
retirement or benefit plan for the benefit of such persons; present shareholders
of Institutional shares of the Fund; and existing investment advisory clients of
Keystone, EKD, or any of their affiliates. There is no minimum amount required
for subsequent purchases.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
From time to time, EKD may provide promotional incentives to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of the Fund. In addition, from time to time, broker-dealers
may receive additional cash payments. EKD may provide written information to
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.
EKD may, at its own expense, pay concessions in addition to those
described above to broker-dealers including, from time to time, First Union
Brokerage Services, Inc., an affiliate of Keystone, that satisfy certain
criteria established from time to time by EKD. These conditions relate to
increasing sales of shares of the Evergreen 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.
EKD may also pay a transaction fee (up to the level of the payments
allowed to broker-dealers for the sale of such shares, as described above) to
banks and other financial services firms that facilitate transactions in shares
of the Fund.
The Glass-Steagall Act and other banking laws and regulations 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.
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. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from accepting certain payments from
the Fund, or should Congress relax current restrictions on depository
institutions, the Board of Trustees will consider what action, if any, is
appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein, and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
HOW TO REDEEM SHARES
You may redeem shares of the Fund at net asset value by mail or by using
the telephone or telecommunication redemption privilege.
MAIL REDEMPTIONS
Shares may be redeemed on each day on which the Exchange is open by
mailing a written request to EKSC at the following address:
Evergreen Keystone Service Company
P.O. Box 2121
Boston, Massachusetts 02106-2121
The signatures on the written request must be PROPERLY 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 when
the circumstances of such redemptions indicate that guaranteed signatures are
appropriate, in the judgment of the Fund or EKSC, for the protection of the
Fund, its shareholders and EKSC. The Fund and EKSC may waive this requirement or
may require additional documentation in certain cases.
13
<PAGE>
TELEPHONE OR TELECOMMUNICATION REDEMPTIONS
Under ordinary circumstances, you may redeem shares on each day on which
the Exchange is open for business by telephone (toll free 1-800-633-2700),
mailgram, fax or other request not bearing a signature and a signature guarantee
to EKSC.
Shareholders must complete and sign the Account Application, including
the Redemption Authorization Section.
Redemption proceeds will be wired in federal funds only to the commercial
bank (and account number) designated by the shareholder on the Account
Application. If EKSC deems it appropriate, additional documentation may be
required. Although at present EKSC pays the wire costs involved, it reserves the
right at any time to require the shareholder to pay such costs.
Except as otherwise noted, neither the Fund, EKSC nor EKD assumes
responsibility for the authenticity of any instructions received by any of them
from a shareholder by telephone. EKSC will employ reasonable procedures to
confirm that instructions received over the telephone are genuine. Neither the
Fund, EKSC nor EKD will be liable when following instructions received by
telephone that EKSC reasonably believes to be genuine.
Any change in the bank account designated to receive redemption proceeds
must be made in another Account Application signed by the shareholder (WITH
SIGNATURES PROPERLY GUARANTEED IN THE MANNER DESCRIBED ABOVE) and delivered to
EKSC at the address above.
If a shareholder redeems all the shares in an account, the shareholder
will receive, in addition to the value thereof, all declared but unpaid
distributions thereon.
REDEMPTION OF SHARES IN 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.
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 will be made within seven days after a properly completed redemption
request is received.
The Fund may temporarily suspend the right to redeem its shares or may
extend the date for payment 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 ob- tained from EKSC by
calling toll free 1-800-633-2700 or from EKD by writing to the Evergreen
Keystone Distributor, Inc., 125 W. 55th Street, New York, New York 10019.
SUBACCOUNTS
Special processing has been arranged with EKSC for banks and other
institutions that wish to open multiple accounts (a master account and
subaccounts). An investor wishing to avail himself or herself of EKSC's
subaccounting facilities will be required to enter into a separate agreement,
with the charges to be determined on the basis of the level of services to be
rendered. Subaccounts may be opened with the initial investment or at a later
date and may be established by an investor with registration either by name or
by number.
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<PAGE>
PERFORMANCE DATA
From time to time, the Fund may advertise "total return" and "current
yield." ALL DATA IS BASED ON HISTORICAL RESULTS. PAST PERFORMANCE SHOULD NOT BE
CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. Total return
and current yield are computed separately for each class of shares of the Fund.
Total return refers to the Fund's 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 all recurring charges, if any, applicable to all shareholder accounts.
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.
FUND SHARES
The Fund currently issues Institutional Service and Institutional shares,
which participate in dividends and distributions and have equal voting,
liquidation and other rights except that (1) expenses related to the
distribution of each class of shares or other expenses that the Board of
Trustees may designate as class expenses, from time to time, are borne solely by
each class; (2) each class of shares has exclusive voting rights with respect to
its Distribution Plan, if any; and (3) each class has a different designation.
When issued and paid for, the shares will be fully paid and nonassessable by the
Fund. Shares will have no preference, conversion, exchange or preemptive rights.
Shares are transferable, redeemable and freely assignable as collateral. There
are no sinking fund provisions. The Fund is authorized to issue additional
classes or series of shares.
Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares on all matters subject to Fund vote.
Shares of the Fund vote together except when required by law to vote separately
by series or class. The Fund does not have annual meetings. The Fund will have
special meetings, from time to time, as required under its Declaration of Trust
and under the 1940 Act. As provided in the Declaration of Trust of the Fund,
shareholders have the right to remove Trustees by an affirmative vote of
two-thirds of the outstanding shares. A special meeting of the shareholders will
be held when holders of 10% of the outstanding shares request a meeting. As
prescribed by Section 16(c) of the 1940 Act, shareholders may be eligible for
shareholder communication assistance in connection with the special meeting.
Under Massachusetts law, it is possible that a Fund shareholder may be
held personally liable for the Fund's obligations. 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
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.
15
<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 upon
entering into the contract to repurchase the security at a mutually agreed upon
date and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations during
such period. Under a repurchase agreement, the seller must maintain the value of
the securities subject to the agreement at not less than the repurchase price,
such value being determined on a daily basis by marking the underlying
securities to their market value. Although the securities subject to the
repurchase agreement might bear maturities exceeding a year, the Fund only
intends to enter into repurchase agreements that provide for settlement within a
year and usually within seven days. Securities subject to repurchase agreements
will be held by the Fund's custodian or in the Federal Reserve book entry
system. The Fund does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under its repurchase obligation.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
securities and losses including (1) possible declines in the value of the
underlying securities during the period while the Fund seeks to enforce its
rights thereto; (2) possible subnormal levels of income and lack of access to
income during this period; and (3) expenses of enforcing its rights. The Board
of Trustees 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 such as U.S. government securities or other high grade debt securities
having a value not less than the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities the Fund is obligated to repurchase may decline below the repurchase
price.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Fund will invest only in CMOs issued or guaranteed by the U.S.
government, its agencies or instrumentalities. The Fund intends to invest only
in CMOs that, in Keystone's opinion, are suitable in light of the Fund's
investment objective and policies. The Fund may purchase any class of CMO other
than the residual (final) class or a class whose average life would extend or is
shortened by more than 6 years under modeling scenarios where mortgage
commitment rates immediately rise or fall 300 basis points. CMOs are debt
obligations collateralized by Mortgage Securities and may be issued by and
guaranteed as to principal and interest by the U.S. government, its agencies or
instrumentalities or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. The
principal governmental issuer of CMOs is FNMA. In addition, FHLMC issues a
significant number of CMOs. The secondary market for CMOs is actively traded.
CMOs are structured by redirecting the total payment of principal and
interest on the underlying Mortgage Securities used as collateral to create
classes with different interest rates, maturities and payment schedules.
i
<PAGE>
Instead of interest and principal payments on the underlying Mortgage Securities
being passed through or paid pro-rata to all holders of interests in the
underlying Mortgage Securities, 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 earlier
maturities 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.
ii
<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 upon
entering into the contract to repurchase the security at a mutually agreed upon
date and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations during
such period. Under a repurchase agreement, the seller must maintain the value of
the securities subject to the agreement at not less than the repurchase price,
such value being determined on a daily basis by marking the underlying
securities to their market value. Although the securities subject to the
repurchase agreement might bear maturities exceeding a year, the Fund only
intends to enter into repurchase agreements that provide for settlement within a
year and usually within seven days. Securities subject to repurchase agreements
will be held by the Fund's custodian or in the Federal Reserve book entry
system. The Fund does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under its repurchase obligation.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
securities and losses including (1) possible declines in the value of the
underlying securities during the period while the Fund seeks to enforce its
rights thereto; (2) possible subnormal levels of income and lack of access to
income during this period; and (3) expenses of enforcing its rights. The Board
of Trustees 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 such as U.S. government securities or other high grade debt securities
having a value not less than the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities the Fund is obligated to repurchase may decline below the repurchase
price.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Fund will invest only in CMOs issued or guaranteed by the U.S.
government, its agencies or instrumentalities. The Fund intends to invest only
in CMOs that, in Keystone's opinion, are suitable in light of the Fund's
investment objective and policies. The Fund may purchase any class of CMO other
than the residual (final) class or a class whose average life would extend or is
shortened by more than 6 years under modeling scenarios where mortgage
commitment rates immediately rise or fall 300 basis points. CMOs are debt
obligations collateralized by Mortgage Securities and may be issued by and
guaranteed as to principal and interest by the U.S. government, its agencies or
instrumentalities or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. The
principal governmental issuer of CMOs is FNMA. In addition, FHLMC issues a
significant number of CMOs. The secondary market for CMOs is actively traded.
CMOs are structured by redirecting the total payment of principal and
interest on the underlying Mortgage Securities used as collateral to create
classes with different interest rates, maturities and payment schedules.
i
<PAGE>
Instead of interest and principal payments on the underlying Mortgage Securities
being passed through or paid pro-rata to all holders of interests in the
underlying Mortgage Securities, 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 earlier
maturities 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.
ii
<PAGE>
APPLICATION
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND (KIARF)
A. SHAREHOLDER REGISTRATION
Shareholder Name
Attention of Tax ID Number
Street Address
City State Zip
Telephone Number Fax Number
B. DISTRIBUTIONS. CHOOSE ONE. (If no choice is indicated, distributions will be
reinvested.)
h Reinvest all income dividends and capital gains distributions in additional
shares.
h Pay all income dividends and capital gains distributions in cash.
C. ADDITIONAL CONFIRMATION STATEMENTS (OPTIONAL):
Name
Address
Telephone Number
<PAGE>
KIARF APPLICATION (2)
Name
Address
Telephone Number
D. PURCHASES AND REDEMPTIONS -- PERSONNEL AUTHORIZED TO PURCHASE OR REDEEM
NameSHARES OF THE FUND: Telephone Number
Title
Name Telephone Number
Title
Please furnish a resolution of the Board of Directors/Trustees certified by the
Secretary identifying personnel authorized to purchase or redeem shares of the
Fund. Please also furnish original signatures of the authorized persons.
E. FUND PURCHASES
Shares of the Fund may be purchased by check or by wiring federal funds.
BY CHECK:
Mail a check made payable to the Fund at the address below:
Evergreen Keystone Service Company
P.O. Box 2121
Boston, MA 02106-2121
BY WIRE:
Federal Reserve wiring instructions to Keystone's custodian bank are provided
below:
State Street Bank & Company
Boston, MA
ABA # 011000028
Attn: Mutual Fund Division
For Incoming Wire A/C 0127-654-2
For credit to KISCGF
Client Name
Account Number (if known)
<PAGE>
KIARF APPLICATION (3)
F. FUND REDEMPTIONS
Fund shares may be redeemed and proceeds sent via the Federal Reserve wire
system to the shareholder's bank and account number using the wire instructions
provided below:
Bank Name
Account Number
Wiring Instructions
REDEMPTION AUTHORIZATION
The undersigned hereby authorizes Evergreen Keystone Service Company ("EKSC") an
affiliate of First Union Keystone, Inc., ("First Union Keystone") acting as the
undersigned's attorney-in-fact, to surrender for redemption any or all shares of
Keystone Institutional Small Capitalization Growth Fund ("KISCGF") held for the
undersigned's account pursuant to any telephone, mailgram, fax, or other request
not bearing a signature and a signature guarantee, whether from this undersigned
or from any other authorized person requesting redemption. The proceeds of any
redemption will be sent only to the client's bank, using the wire instructions
specified above.
The undersigned and the undersigned's assigns and successors release EKSC, First
Union Keystone, and their affiliates, and their respective directors/trustees,
officers and employees from any and all claims, expenses or liabilities for
acting under this Authorization.
The undersigned also agrees that this Authorization will remain in effect until
Keystone receives notice of termination or notice of change hereof on an
authorization form supplied by EKSC or First Union Keystone, such notice in
either case signed by the undersigned and with such signature guaranteed by a
commercial bank or trust company or a member firm of a major stock exchange. It
is also agreed that EKSC may cease to act as such attorney-in-fact upon ten (10)
days' written notice to the undersigned at the address contained herein or at
any subsequent address shown on EKSC records.
Signature Date
Signature Date
<PAGE>
KIARF APPLICATION (4)
G. INSTITUTIONAL STATUS
The undersigned represent that the investor is an "institution" for purposes of
the Blue Sky Laws of the state of its residence and place of business.
The undersigned represent that they have been duly authorized to sign this
application, acknowledge having received and read KISCGF's current prospectus
and agree to the terms of such prospectus.
Account Name Date
By Title
RETURN THIS APPLICATION TO:
EVERGREEN KEYSTONE SERVICE COMPANY
P.O. BOX 2121
BOSTON, MA 02106-2121
H. ADDITIONAL INFORMATION
Sales Information Contacts:
<TABLE>
<S> <C>
Toll-free Number
1-888-216-2180 (Charlotte)
1-800-633-4200 (Boston)
Paul E. Berg, ext. 3621
Sales Assistance, ext. 3612
</TABLE>
EVERGREEN KEYSTONE SERVICE COMPANY -- Transfer Agent and Client Services:
<TABLE>
<S> <C>
Toll-free Number
1-800-633-2700
EKSC Mailing Address EKSC Street Address
P.O. Box 2121 200 Berkeley Street
Boston, MA 02106-2121 Boston, MA 02116-5034
</TABLE>
<PAGE>
INVESTMENT ADVISER
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116-5034
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827
TRANSFER AGENT
Evergreen Keystone Service Company, P.O. Box 2121, Boston, Massachusetts
02106-2121
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C.
20036
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110
DISTRIBUTOR
Evergreen Keystone Distributor, Inc., 120 Clove Road, Little Falls, New Jersey
49156
<PAGE>
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
STATEMENT OF ADDITIONAL INFORMATION
July 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
Institutional Adjustable Rate Fund (the "Fund") dated July 1, 1997. A copy of
the prospectus may be obtained from the Fund's principal underwriter, Evergreen
Keystone Distributor, Inc. See "Service Providers" below.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
The Fund ...........................................................2
Service Providers. . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Restrictions.............................................4
Distributions and Taxes.............................................5
Valuation of Securities.............................................6
Brokerage...........................................................6
Distribution Plan...................................................8
Trustees and Officers...............................................9
Investment Adviser.................................................12
Principal Underwriter..............................................14
Sub-administrator..................................................15
Declaration of Trust...............................................16
Expenses...........................................................18
Financial Statements...............................................18
Standardized Total Return and Yield Quotations.....................19
Additional Information.............................................20
Appendix...........................................................A-1
1
<PAGE>
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company,
commonly known as a mutual fund. The Fund was formed as a Massachusetts business
trust on June 19, 1991.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund.
SERVICE PROVIDERS
<TABLE>
<S> <C>
Service Provider
- ----------------------------------------- ------------------------------------------------------
Investment adviser (referred to Keystone Investment Management Company, 200 Berkeley
in this SAI as "Keystone") Street, Boston, Massachusetts 02116. (Keystone is a
wholly-owned subsidiary of First Union Keystone, Inc.,
(formerly Keystone Investments, Inc.) ("First Union
Keystone") also located at 200 Berkeley Street, Boston,
Massachusetts 02116.)
Principal underwriter ( referred Evergreen Keystone Distributor, Inc., 125 W. 55th Street,
to in this SAI as "EKD") New York, New York 10019.
Marketing services agent and Evergreen Keystone Investment Services, Inc. (formerly
predecessor to EKD (referred to Keystone Investment Distributors Company), 200 Berkeley
in this SAI as "EKIS") Street, Boston, Massachusetts 02116.
Sub-administrator (referred to in BISYS Fund Services, Inc., 125 W. 55th Street, New York,
this SAI as "BISYS") New York 10019.
Transfer and dividend Evergreen Keystone Service Company, (formerly Keystone Investor
disbursing agent (referred to in Resource Center, Inc.) 200 Berkeley Street, Boston,
this SAI as "EKSC") Massachusetts 02116. (EKSC is a wholly-owned subsidiary
of Keystone.)
Independent auditors KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110, Certified Public Accountants.
Custodian State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
</TABLE>
2
- --------------------------------------------------------------------------------
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 (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 (a "1940 Act Majority"). Unless otherwise stated, all
references to the assets of the Fund are in terms of current market value.
The Fund may not do the following:
(1) 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 operations;
(3) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a when issued basis is 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 brokers, dealers and
financial institutions, 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 is 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 more than 3% of the total outstanding voting securities of
any one investment company, invest more than 5% of its total assets in any one
investment company or invest more than 10% of its total assets in investment
companies in general, 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.
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
of a security or a decrease in Fund assets is not a violation of the limit.
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund intends to declare dividends from its net investment income
daily and its net capital gains, if any, at least annually. You will receive
distributions in shares, unless you elect, before the payable date for income
dividends or the record date for capital gains distributions, 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 its net asset value per share as computed at
the close of business on the ex-dividend date after adjustment for 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, even though they are taxable as described below. 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 how long you have held the 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 does not expect its
dividends to qualify for the corporate dividends received deduction.
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.
- --------------------------------------------------------------------------------
VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for the Fund's portfolio securities are determined in
the following manner:
(1) securities for which market quotations are readily available are
valued at market value, which is deemed to be the mean of the bid and asked
prices at the time of valuation;
(2) (a) short-term investments that are purchased with maturities of
sixty days or less when purchased are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of discount),
which, when combined with accrued interest, approximates market;
(b) short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market;
(c) short-term investments having maturities of more than sixty days,
for which market quotations are readily available, are valued at current market
value; and
(3) securities, including restricted securities, for which market
quotations are not readily available, and other assets are valued at prices
deemed in good faith to be fair under procedures established by the Fund's Board
of Trustees.
The Fund believes that reliable market quotations are generally not
readily available for purposes of valuing certain securities. As a result,
depending on the particular 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 that have been approved by the Board of Trustees.
The Board of Trustees has authorized the use of a pricing service to determine
the fair value of the Fund's fixed rate mortgage securities.
- --------------------------------------------------------------------------------
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;
5
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.
The Fund considers the receipt of research services by the Fund or
Keystone to be in addition to, and not in lieu of, the services Keystone is
required to perform under the Advisory Agreement (as defined below). Keystone
believes that it cannot determine or practically allocate the cost, value or
specific application of such research services between the Fund and its other
clients who may indirectly benefit from the availability of such information
made available as a result of transactions effected for Keystone's other
clients. The Advisory Agreement also permits Keystone 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. 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 brokers to execute portfolio transactions, subject to the
requirements of best execution described above.
Brokerage Commissions
The Fund expects to purchase and sell its securities and temporary
instruments through principal transactions. Bonds and money market 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, EKD, or any of their affiliated persons, as defined in
the 1940 Act.
6
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.
- --------------------------------------------------------------------------------
DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
General
The Fund offers Institutional Service and Institutional shares.
Institutional Service shares are offered without an initial sales charge and are
not subject to a sales charge when they are redeemed. Institutional Service
shares make payments under a distribution plan pursuant to Rule 12b-1 under the
1940 Act (the "Institutional Service Distribution Plan").
Institutional shares are also offered without a sales charge at the
time of purchase and are not subject to a sales charge when they are redeemed.
There is no distribution plan with respect to Institutional shares.
Institutional shares are available only to certain investors. The prospectus
contains a general description of how investors may buy shares of the Fund.
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. The Fund's Institutional
Service Distribution Plan has been approved by the Fund's Board of Trustees,
including a majority of the Independent Trustees (Trustees who are not
interested persons of the Fund, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Fund's Distribution Plan or any
agreement related thereto).
The National Association of Securities Dealers, Inc. ("NASD") limits
the amount that the Fund may pay annually in distribution costs for sale of its
shares and shareholder service fees. The NASD limits annual expenditures to
1.00% 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 Institutional Service Distribution Plan, plus interest at the
prime rate plus 1.00% on such amounts remaining unpaid from time to time.
Institutional Service Distribution Plan. The Institutional Service Distribution
Plan provides that the Fund may expend daily amounts at an annual rate up to
0.35% of the Fund's average daily net asset value attributable to Institutional
Service shares to finance any activity that is primarily intended to result in
the sale of Institutional Service shares, including without limitation,
expenditures consisting of the payment of service fees to the Principal
Underwriter or others. Such payments are expected to be at a rate of 0.25% of
the average daily net assets of Institutional Service shares.
Amounts paid by the Fund under the Institutional Service Distribution
Plan are currently used to pay the Principal Underwriter and others, such as
broker-dealers, service fees at an annual rate of up to 0.25% of the average
daily net asset value of Institutional Service shares maintained by the
Principal Underwriter and such others and outstanding on the books of the Fund
for specified periods. The Fund may also make payments to the Principal
Underwriter, broker-dealers and others for activities that are primarily
intended to result in sales of the Fund's Institutional Service shares,
including, but not limited to, mail promotions and advertising, including the
use of member name and address lists of affinity groups, professional
associations, trade groups, industry associations, or other associations, for
which use royalty payments may be made.
The Institutional Service Distribution Plan 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 Fund's Institutional Service shares. Any change
in the Institutional Service Distribution Plan that would materially increase
the distribution expenses of the Fund's Institutional Service shares provided
for in the Institutional Service Distribution Plan requires shareholder
approval. Otherwise, the Institutional Service Distribution Plan may be amended
by the Trustees, including the Independent Trustees.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Institutional Service Distribution Plan limit specified
above, and the amounts and purposes of expenditures under the Institutional
Service Distribution Plan must be reported to the Independent Trustees
quarterly. The Independent Trustees may require or approve changes in the
implementation or operation of the Institutional Service Distribution Plan and
may also require that total expenditures by the Fund under the Institutional
Service Distribution Plan be kept within limits lower than the maximum amount
permitted by the Distribution Plan as stated above.
While the Institutional Service 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 Institutional Service shares resulting from payments under the
Institutional Service Distribution Plan have benefit the Fund.
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
Trustees and officers of the Trust, their principal occupations and
some of their affiliations over the last five years are as follows:
<TABLE>
<S> <C>
FREDERICK AMLING: Trustee of the Trust; Trustee or
Director of 29 other Evergreen Keystone
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 Trust; Trustee or Director of all Evergreen Keystone
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 Trust; Trustee or Director of 29 other Evergreen Keystone
funds; Investment Counselor to Appleton Partners, Inc.; and former
Managing Director, Seaward Management Corporation (investment ad
vice).
FOSTER BAM: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
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: Chief Executive Officer of the Trust and of 29 other Evergreen Keystone
funds; Chairman of the Board and Trustee of the Trust; Chairman of the
Board and Trustee or Director of all Evergreen Keystone 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
Advisers, Inc.; and former Chairman of the Board, Director and Chief
Executive Officer of Keystone Investments, Inc.
EDWIN D. CAMPBELL: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
funds; Principal, Padanaram Associates, Inc.; and former Executive Di
rector, Coalition of Essential Schools, Brown University.
CHARLES F. CHAPIN: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
funds; and former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
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 Trust; Trustee or Director of all other Evergreen Keystone
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 Trust; Trustee or
Director of 29 other Evergreen Keystone
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 Trust; Trustee or Director of 29 other Evergreen Keystone
funds; Chairman and Of Counsel, Keyser, Crowley & Meub, P.C.; Mem
ber, 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. MCDONNELL: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
funds; Trustee or Director of all of the funds in the Evergreen Family of
Funds; and Sales Representative with Nucor-Yamoto, Inc. (Steel
producer).
THOMAS L. MCVERRY: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
funds; former Vice President and Director of Rexham Corporation; and
former Director of Carolina Cooperative Federal Credit Union.
*WILLIAM WALT PETTIT: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
funds; and Partner in the law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
funds; Vice Chair and former Executive Vice President, DHR Interna
tional, Inc. (executive recruitment); former Senior Vice President,
Boyden International Inc. (executive recruitment); and Director,
Commerce and Industry Association of New Jersey, 411 International,
Inc., and J&M Cumming Paper Co.
RUSSELL A.
SALTON, III MD: Trustee of the Trust; Trustee or Director of all other Evergreen Keystone
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 Trust; Trustee or Director of all other Evergreen Keystone
funds; and Attorney, Law Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Trust; Trustee or Director of 29 other Evergreen Keystone
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 Trust; Trustee or Director of 29 other Evergreen Keystone
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 Trust; President and Treasurer of all
other Evergreen Keystone funds; Senior Managing Director, Furman
Selz LLC since 1992; Managing Director from 1984 to 1992; Consultant
to BISYS Fund Services since 1996; 230 Park Avenue, Suite 910, New
York, NY.
GEORGE O. MARTINEZ: Secretary of the Trust; Secretary of all other Evergreen Keystone funds;
Senior Vice President and Director of Administration and Regulatory
Services, BISYS Fund Services; Vice President/Assistant General
Counsel, Alliance Capital Management from
1988 to 1995; 3435 Stelzer Road, Columbus,
Ohio.
</TABLE>
During the fiscal period ended February 28, 1997, no Trustee or officer
received any direct remuneration from the Fund. For the year ended February 28,
1997, aggregate compensation received by the Independent Trustees on a fund
complex wide basis (which includes over 60 mutual funds) was $461,816. On May
31, 1997, the Fund's Trustees and officers as a group did not beneficially own
any of the Fund's outstanding shares.
Set forth below for each of the Trustees receiving in excess of $60,000
for the period of March 1, 1996 through February 28, 1997 is the aggregate
compensation paid to such Trustee by the EvergreenKeystone Funds:
Aggregate Total Compensation
Compensation From Registrant
from and Fund Complex
Name Registrant Pd. To Trustee
James S. Howell $0 $66,000
Russell A Salton, III M.D. $0 $61,000
Michael S. Scofield $0 $61,000
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone provides investment advice, management and administrative services to
the Fund.
On December 11, 1996, the predecessor corporation to First Union
Keystone, Keystone Investments, Inc. ("Keystone Investments") and indirectly
each subsidiary of Keystone Investments, including Keystone, were acquired (the
"Acquisition") by First Union National Bank of North Carolina ("FUNB"), a
wholly-owned subsidiary of First Union Corporation ("First Union"). Keystone
Investments was acquired by FUNB by merger into a wholly-owned subsidiary of
FUNB, which entity then assumed the name "First Union Keystone, Inc." and
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 BISYS. 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.
First Union Keystone and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $140 billion in consolidated assets as of
December 31, 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 and Evergreen Asset Management Corp.,
wholly-owned subsidiaries of FUNB, manage or otherwise oversee the investment of
over $60 billion in assets as of December 31, 1996 belonging to a wide range of
clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement, Keystone manages and administers
the Fund's operation and manages the investment and reinvestment of the Fund's
assets in conformity with the Fund's investment objective and restrictions.
The Advisory Agreement stipulates that Keystone shall (i) provide
office space and all necessary office facilities, equipment and personnel in
connection with its services under the Advisory Agreement; (ii) pay or reimburse
the Fund for the compensation of officers and Trustees of the Fund who are
affiliated with Keystone and (iii) pay all expenses of Keystone incurred in
connection with the provision of its services. In addition, Keystone also
assumes and pays or reimburses the Fund for (i) all charges and expenses of any
custodian or depository appointed by the Fund for the safekeeping of its cash,
securities and other property; (ii) all charges and expenses for bookkeeping and
independent auditors; (iii) all charges and expenses of any transfer agents and
registrars appointed by the Fund; (iv) all costs of certificates representing
shares of the Fund; (v) all fees and expenses involved in registering and
maintaining registrations of the Fund and of its shares with the Securities and
Exchange Commission (the "Commission") and registering or qualifying its shares
under state or other securities laws, including, without limitation, the
preparation and printing of registration statements, prospectuses and statements
of additional information for filing with the Commission and other authorities;
(vi) expenses of preparing, printing and mailing prospectuses and statements of
additional information to shareholders of the Fund; (vii) all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
notices, reports and proxy materials to shareholders of the Fund; and (viii) all
charges and expenses of filing annual and other reports with the Commission and
other authorities.
The Fund assumes and pays all other expenses of the Fund, including,
without limitation, (i) fees and expenses of the Fund's Independent Trustees;
(ii) all brokers' fees, expenses and commissions and issue and transfer taxes
chargeable to the Fund in connection with transactions involving securities and
other property to which the Fund is a party; (iii) all costs and expenses of
distribution of its Institutional Services shares incurred pursuant to its
Institutional Services Distribution Plan adopted pursuant to Rule 12b-1 under
the 1940 Act; (iv) all charges and expenses of legal counsel for the Fund and
for the Fund's Independent Trustees on routine legal matters relating to the
Fund, including, without limitation, legal services rendered in connection with
the Fund's existence, business trust and financial structure and relations with
its shareholders, registrations and qualifications of securities under federal,
state and other laws, and issues of securities; (v) all taxes and business trust
fees payable by the Fund to federal, state or other governmental agencies; (vi)
all interest costs of the Fund; and (vii) all extraordinary expenses and charges
of the Fund, including all charges and expenses of legal counsel to the Fund in
connection with extraordinary matters, including, without limitation, any
litigation involving the Fund, its Trustees, officers, employees or agents. In
the event Keystone provides any of these services or pays any of these expenses,
the Fund will promptly reimburse Keystone therefor.
The Fund pays Keystone a fee for its services to the Fund at the annual
rate of 0.30% of the average daily net asset value of the shares of the Fund. A
pro rata portion of the fee is payable in arrears at the end of each day or
calendar month as Keystone may, from time to time, specify to the Fund.
Currently, Keystone has voluntarily limited the annual expenses of the
Fund's Institutional Service shares to no more than 0.55% and 0.30% of the
Institutional shares average daily net assets, respectively. Keystone intends to
continue the foregoing expense limitations on a calendar month-bymonth basis.
Keystone will periodically evaluate the foregoing expense limitations and may
modify or terminate them in the future. 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 Internal Revenue Code of 1986, as
amended (the "Code").
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 1940 Act Majority. 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.
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
EKD, as agent, has agreed to use its best efforts to find purchasers
for the shares. EKD 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
Agreement provides that EKD will bear the expense of preparing, printing, and
distributing advertising and sales literature and prospectuses used by it. In
its capacity as principal underwriter, EKD may receive payments from the Fund
pursuant to the Fund's Distribution Plan.
The 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.
The 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. The Underwriting Agreement will terminate automatically upon
its "assignment," as that term is defined in the 1940 Act.
From time to time, if, in EKD's judgment, it could benefit the sales of
Fund shares, EKD may provide to selected broker-dealers promotional materials
and selling aids, including, but not limited to, personal computers, related
software, and Fund data files.
All subscriptions and sales of shares by EKD are at the public offering
price of the shares, as determined in accordance with the provisions of the
Fund's Declaration of Trust, By-Laws, current prospectus and statement of
additional information. All orders are subject to acceptance by the Fund, and
the Fund reserves the right in its sole discretion to reject any order received.
Under the Distribution Agreement, the Fund is not liable to anyone for failure
to accept any order.
EKD has agreed that it will, in all respects, duly conform with all
state and federal laws applicable to the sale of the shares. EKD 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
EKD or any other person for whose acts EKD is responsible or is alleged to be
responsible, unless such misrepresentation or omission was made in reliance upon
written information furnished by the Fund.
- --------------------------------------------------------------------------------
SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
BISYS provides personel to serve as officers of the Fund, and provides
certain administrative services to the Fund pursuant to a sub-administrator
agreement. For its services under that agreement, BISYS receives from Keystone a
fee based on the aggregate average daily net assets of the Fund at a rate based
on the total assets of all mutual funds for which FUNB affiliates also serve as
investment adviser and BISYS serves as sub-administrator. The sub-administrator
fee is calculated in accordance with the following schedule:
<TABLE>
<S> <C>
Aggregate Average Daily Net Assets Of Mutual Funds
For Which Any Affiliate Of FUNB Serves As
Sub-Administrator Investment Adviser Adviser and BISYS
Fee Serves as Sub-Administrator
- --------------------------------------------------------------------------------------------
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
</TABLE>
The total assets of the mutual funds for which FUNB affiliates also
serve as investment advisers were approximately $29.2 billion as of February 28,
1997.
- --------------------------------------------------------------------------------
DECLARATION OF TRUST
- --------------------------------------------------------------------------------
Massachusetts Business Trust
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated June 19, 1991, as amended (the "Declaration of
Trust"). 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 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 of classes of shares. Each share of the Fund
represents an equal proportionate interest with each other share of the series
or class. Upon liquidation, shares are entitled to a pro rata share in the net
assets of the portfolio of securities underlying the series or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable. The Fund offers Institutional Service and Institutional 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 Fund. 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. 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 electing Trustees, no further meetings of
shareholders for the purpose of electing Trustees will be held unless required
by law or unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the 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.
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
Investment Advisory Fees
For the fiscal period ended February 28, 1997 and 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. The table
below also shows the percentage of the Fund's average net assets represented by
Keystone's fees. For more information, see "INVESTMENT ADVISER."
<TABLE>
<S> <C> <C>
Percentage of Fund's Average Net
Fee Paid to Keystone under Assets Represented by Keystone's
the Advisory Agreement Fee
--------------------------------------- -----------------------------------------
Fiscal Period Ended
February 28, 1997 $101,412 0.30%
Fiscal Year Ended
September 30,
1996 $121,105 0.30%
1995 $79,819 0.30%
1994 $123,050 0.30%
</TABLE>
Distribution Plan Expenses
During the fiscal period ended February 28, 1997 and the year ended September
30, 1996, the Fund paid $9,161 and $23,210, respectively, to FICO or EKD, as the
case may be under its Institutional Service Distribution Plan. For more
information, see "Distribution Plan."
Brokerage Commissions
The Fund paid no brokerage commissions for the fiscal period of October 1, 1996
to February 28, 1997 and the fiscal years ending September 30, 1996, 1995 and
1994.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Fund's financial statements for the fiscal period ended February
28, 1997, and the report thereon of KPMG Peat Marwick LLP, are incorporated by
reference herein from the Fund's Annual Report, as filed with the Commission
pursuant to Section 30(d) of the 1940 Act and Rule 30d-1 thereunder.
You may obtain a copy of the Fund's Annual Report without charge by
writing to EKSC, P.O. Box 2121, Boston, Massachusetts 02106-2121, or by calling
EKSC toll free at 1-800-343-2898.
- --------------------------------------------------------------------------------
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 total return for Institutional Service shares for the fiscal period
ended February 28, 1997 and the fiscal year ended September 30, 1996, was 2.97%
and 6.60%, respectively. Average annual total return for Institutional Services
shares for the period May 23, 1994 (commencement of operations), through
February 28, 1997 was 5.99%.
The total return for Institional shares for the fiscal period ended
February 28, 1997 and the fiscal year ended September 30, 1996, was 2.97% and
6.86%, respectively. The average annual total return for Institutional shares
for the five year period ended February 28, 1997, was 5.32% and, since
inception, October 1, 1991 (commencement of operations), through February 28,
1997, was 5.35%.
Current yield quotations as they may appear, from time to time, in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The current yields for
Institutional Service and Institutional shares for the 30-day period ended
February 28, 1997 were 6.08% and 6.34%, 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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Small Accounts
The Fund reserves the right to redeem shares in any account in which
the value of shares is less than $1,000. The redemption proceeds will be
promptly paid to the shareholder. Shareholders will be notified if their
accounts are less than such amount and given 60 days to bring the account up to
such amount before the redemption is made.
Redemptions in Kind
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorize payment to be made in
portfolio securities or other property. The Fund has obligated itself under the
1940 Act, however, to redeem for cash all shares presented for redemption by any
one shareholder in any 90-day period up to the lesser of $250,000 or 1% of the
Fund's net assets. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs when these
securities are sold.
Other Information
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or FICO, and no person is entitled to rely on any
information or representation not contained therein.
As of May 31, 1997, the following accounts owned of record 5% or more
of the Fund's Institutional Service shares:
PERCENTAGE
RECORD OWNER OF CLASS
OWNED
William H. Morgan Jr. 32.68%
906 Weightman
Greenwood, MS 38930-2438
Skyline Telephone Membership Corp 28.35%
Attn: Hobart G. Davis
P.O. Box 759
Jefferson, NC 28694-0759
M & M Farms 15.54%
906 Weightman
Greenwood, MS 38930-2438
As of November 21, 1996, the following accounts owned of record 5% or
more of the outstanding shares of the Fund's Class Z shares:
PERCENTAGE
RECORD OWNER OF CLASS
OWNED
Bank of New York Trustee 28.47%
FBO Saatchi & Saatchi Cash Bal.
Retirement Plan Trust
Attn: Ms. Amy Nellissen
375 Hudson St
New York, NY 10014-3658
Ampex Retirement Master Trust 41.47%
P.O. Box 1992
Boston, MA 02105-1992
Keystone Investments 24.61%
Defined Benefit Pension Trusts
ATTN: Operations
200 Berkeley Street 25th Floor
Boston, MA 02116-5022
Buffalo Color Corp. Master Trust 5.18%
PO Box 1991
Boston, MA 02105-1992
The Fund's prospectus and statement of additional information omit
certain information contained in its 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.
- --------------------------------------------------------------------------------
APPENDIX
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance. Treasury bills have maturities of one year or
less. Treasury notes have maturities of one to ten years and Treasury bonds
generally have maturities of greater than ten years at the date of issuance.
Government National Mortgage Association ("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, Federal Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration,
The Tennessee Valley Authority, District of Columbia Armory Board and Federal
National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. 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.
CORPORATE BOND RATINGS
S&P Ratings
A Standard & Poor's Ratings Group ("S&P") corporate bond rating is a
current assessment of the creditworthiness of an obligor, including obligors
outside the United States, with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees. Ratings of foreign obligors do not take into account currency exchange
and related uncertainties. The ratings are based on current information
furnished by the issuer or obtained by S&P from other sources it considers
reliable.
The ratings are based, in varying degrees, on the following
considerations:
1. likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
2. nature of and provisions of the obligation; and
3. protection afforded by and relative position of the obligation
in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from AA to A may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
Eligible bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
2. AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues
only in small degree.
Moody's Ratings
Eligible ratings of Moody's Investors Service, Inc. ("Moody's") are as
follows:
1. Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair fundamentally strong position of such issues.
2. Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
ADJUSTABLE RATE SECURITIES RATINGS
S&P Ratings
An S&P rating of an issue secured by a pool of mortgages is a measure
of the likelihood that cash flow from the mortgages is sufficient for timely
payment of interest and principal on the rated security. Each rating category
generally defines an adverse economic climate that is likely to impact the
performance of the mortgages in the pool over time. The rating process for
commercial mortgages, like all asset-backed financings, involves a credit, legal
structure and cash flow analysis.
The credit analysis involves an analysis of the originator and an
evaluation of the credit quality of the loans and their risk characteristics,
such as property types, geographic locations, loan maturity dates, loan-to-value
ratios, lien status and loan seasoning.
The legal structure analysis involves a review of legal documents to
determine the documents accurately reflect the specifics of the financing and a
review of flow of funds and investment restrictions of any reserve fund or
credit enhancement.
The cash flow analysis involves identification of the type of security
created out of the cash flow from the pool of commercial mortgages and the
payment terms of the security. Once these items are identified, the individual
loan and pool analysis are applied to determine cash flow scenarios for the
pool.
Eligible ratings are as follows:
1. AAA - Securities rated AAA have the highest rating assigned by S&P
and reflect certainty that the issuer at all times will have pledged collateral
such that scheduled cash flow and assumed reinvestment income thereon will be
sufficient to pay annual interest on the securities and redeem principal at
maturity.
2. AA - Securities rated AA reflect certainty that amounts available
from distributions on the mortgage loans and from reserves will be sufficient to
pay monthly interest and return principal.
Moody's Ratings
Moody's rating provides a system of gradation by which the relative
credit risks of investments in adjustable rate securities can be judged. Moody's
factors into its ratings the frequency, severity and timing of defaults in order
to provide an assessment of the appropriate risk premium for taking on credit
risk. In rating adjustable rate securities, Moody's uses the same letter system
as that for corporate bonds. In assessing risk, on average, the risks associated
with Aaa and Aa rated Moody's corporate bonds would apply to adjustable
securities rated Aaa or Aa by Moody's. See the description of Moody's corporate
bond ratings set forth above.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including master demand notes) and obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, some of
which may be subject to repurchase agreements.
Commercial Paper
Commercial paper will consist of issues rated at the time of purchase
A-1 by S&P, Prime-1 by Moody's, or F-1 by Fitch Investors Service, L.P.
("Fitch's"); or, if not rated, will be issued by companies that have an
outstanding debt issue rated at the time of purchase Aaa, Aa or A by Moody's, or
AAA, AA or A by S&P, or will be determined by Keystone to be of comparable
quality.
S&P Ratings
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1. A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
2. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
Moody's Ratings
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are deemed
to have a superior capacity for repayment of short term promissory obligations.
Repayment capacity of Prime-1 issuers is normally evidenced by the following
characteristics:
1. leading market positions in well-established industries;
2. high rates of return on funds employed;
3. conservative capitalization structures with moderate reliance on
debt and ample asset protection;
4. broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and
5. well established access to a range of financial markets and
assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
Certificates of Deposit
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar denominated
certificates of U.S. banks, including their branches abroad, and of U.S.
branches of foreign banks, that are members of the Federal Reserve System or the
Federal Deposit Insurance Corporation and have at least $1 billion in assets as
of the date of their most recently published financial statements, or of savings
and loan associations that are members of the Federal Savings and Loan Insurance
Corporation, and have at least $1 billion in assets as of the date of their most
recently published financial statements.
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Fund does not
intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
Bankers' Acceptances
Bankers' acceptances typically arise from short term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total assets at the time of purchase in excess of $1 billion and must be payable
in U.S. dollars.
<PAGE>
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Item 24 (a). Financial Statements
All financial statements listed below are incorporated by reference from
Registrant's Annual Report, as filed with the Securiteis and Exchange
Commission.
Schedule of Investments February 28, 1997
Financial Highlights:
Institutional Service Shares For the five months ended February
28, 1997, each of the years in
the two-year period ended
September 30, 1996, and the period
from May 23, 1994 (Date of Initial
Public Offering) to
September 30, 1994
Institutional Shares For the five months ended February
28, 1997, and each of the years in
the five-year period ended
September 30, 1996
Statement of Assets and Liabilities February 28, 1997
Statement of Operations For the five months ended
February 28, 1997
Statements of Changes in Net Assets For the five months ended
February 28, 1997 and the year ended
September 30, 1996
Notes to Financial Statements
Independent Auditors' Report March 31, 1997
<PAGE>
(24)(b) Exhibits
(1) Registrant's Declaration of Trust, as amended
(the "Declaration of Trust")(1)
(2) Registrant's By-Laws (the "By-Laws")(1)
Amendment to By-Laws, Article 4, Section 4.1(2)
(3) Not applicable
(4)(a) Articles III, V, VI and VIII to the Declaration of Trust(1)
(b) Article 2, Section 2.5 to the By-Laws(1)
(5) Investment Advisory and Management Agreement between Registrant
and Keystone Investment Management Company (the "Advisory
Agreement")(3)
(6) Distribution Agreement between Registrant and Evergreen Keystone
Distributor, Inc. (the "Distribution Agreement")(3)
(7) Not applicable
(8) Form of Custodian, Fund Accounting and Recordkeeping Agreement
between Registrant and State Street Bank and Trust Company(4)
(9) Form of Sub-Administrator Agreement between Keystone Investment
Management Company and BISYS Fund Services, Inc.(3)
(10) Opinion of Counsel(5)
(11) Consent as to use of Independent Auditors' Report(3)
(12) Not applicable
(13) Subscription Agreement between Registrant and Keystone
Investment Management Company(6)
(14) Not applicable
(15) Class Y Distribution Plan(7)
(16) Schedules for the computation of total return and current yield
quotations(3)
(17) Financial Data Schedules(3)
(18) Not applicable
(19) Powers of Attorney(2)
- ------------------------------
(1) Filed with Post-Effective Amendment No. 7 ("Post-Effective
Amendment No. 7") to Registration Statement No. 33-42864/811-6412
(the "Registration Statement") and incorporated by reference herein.
(2) Filed with Post-Effective Amendment No. 9 ("Post-Effective
Amendment No. 9") to the Registration Statement and incorporated by
reference herein.
(3) Filed herewith.
(4) Filed with Post-Effective Amendment No. 3 ("Post-Effective Amendment
No.3") to the Registration Statement and is incorporated by
reference herein.
(5) Filed with Registrant's Rule 24f-2 Notice (the "24f-2 Notice") for
the fiscal year ended February 28, 1997 and incorporated by
reference herein.
(6) Filed with the Registration Statement and incorporated by
reference herein.
(7) Filed with Post-Effective Amendment No. 4 ("Post-Effective Amendment
No. 4") to the Registration Statement and is incorporated by
reference herein.
Item 25. Persons Controlled by or Under Common Control With Registrant
Not applicable.
<PAGE>
Item 26. Number of Holders of Securities
Number of Record
Title of Class Holders as of May 31, 1997
- -------------- ----------------------------
Shares of Beneficial
Interest,without par value:
Institutional Service Shares 81
Shares of Beneficial
Interest, without par value:
Institutional Shares 8
Item 27. Indemnification
Provisions for the indemnification of Registrant's Trustees and
officers are contained in Article VIII of the Declaration of Trust, a copy of
which was filed with Post-Effective Amendment No. 7 and is incorporated by
reference herein.
Provisions for the indemnification of Evergreen Keystone Distributor,
Inc., Registrant's principal underwriter, are contained in Section 7 of the
Distribution Agreement, a copy of which is filed herewith.
Provisions for the indemnification of Keystone Investment Management
Company, Registrant's investment adviser, are contained in Section 5 of the
Advisory Agreement, a copy of which was filed with Post-Effective Amendment No.
7 and incorporated by reference herein.
Item 28. Businesses and Other Connections of Investment Adviser
The following table lists the names of the various officers and
directors of Keystone Investment Management Company, Registrant's investment
adviser, and their respective positions. For each named individual, the table
lists, for at least the past two fiscal years, (i) any other organizations
(excluding investment advisory clients) with which the officer and/or director
has had or has substantial involvement; and (ii) positions held with such
organizations.
LIST OF OFFICERS AND DIRECTORS OF
KEYSTONE INVESTMENT MANAGEMENT COMPANY
<TABLE>
<CAPTION>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
<S> <C> <C>
Albert H. Chairman of Senior Vice President
Elfner, III* the Board, First Union Keystone, Inc.
Chief Executive Keystone Asset Corporation
Officer President and Director:
Keystone Trust Company
Director or Trustee:
Evergreen Keystone Investment Services, Inc
Evergreen Keystone Service Company
Boston Children's Services Associates
Middlesex School
Middlebury College
Formerly:
Chairman of the Board,
Chief Executive Officer,
President and Director:
Keystone Management, Inc.
Keystone Software, Inc.
Keystone Capital Corporation
Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.
Fiduciary Investment Company, Inc.
Formerly Chairman of the Board and Director:
Keystone Fixed Income Advisers, Inc.
Keystone Institutional Company, Inc.
Herbert L. Senior Vice None
Bishop, Jr.* President
Donald C. Dates* Senior Vice None
President
Gilman Gunn* Senior Vice None
President,
Chief Investment
Officer
Edward F. Senior Vice Formerly Senior Vice President,
Godfrey* President, Chief Financial Officer and Treasurer:
Chief Operating First Union Keystone, Inc.
Officer Evergreen Keystone Investment Services, Inc.
Formerly:
Treasurer:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Treasurer and Director:
Hartwell Keystone Advisers, Inc.
Rosemary D. Senior Vice Senior Vice President:
Van Antwerp* President, Evergreen Keystone Service Company
Secretary Senior Vice President and Secretary:
Evergreen Keystone Investment Services, Inc.
Formerly:
Senior Vice President, General Counsel and Secretary:
Keystone Investments, Inc.
Senior Vice President and General Counsel:
Keystone Institutional Company, Inc.
Senior Vice President, General Counsel and Director:
Fiduciary Investment Company, Inc.
Senior Vice President, General Counsel, Director and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Senior Vice President and Secretary:
Hartwell Keystone Advisers, Inc.
Vice President and Secretary:
Keystone Fixed Income Advisers, Inc.
J. Kevin Kenely* Vice President Vice President:
Evergreen Keystone Investment Services, Inc.
Formerly:
Controller
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Vice President:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Keystone Investments, Inc.
John D. Rogol* Vice President Vice President and
Controller:
Evergreen Keystone Investment Services, Inc.
Treasurer and Vice President:
Evergreen Keystone Service Company
Controller:
Keystone Asset Corporation
Formerly:
Controller:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Formerly Vice President and Controller:
Keystone Investments, Inc.
Christopher P. Senior Vice None
Conkey* President, Chief
Investment Officer
J. Gary Craven* Senior Vice None
President
Richard Cryan* Senior Vice None
President
Maureen E. Senior Vice None
Cullinane* President
Betsy Hutchings* Senior Vice None
President
Walter T. Senior Vice None
McCormick* President
James F. Angelos** Vice President, None
Chief Compliance
Officer
John Addeo* Vice President None
Andrew Baldassarre* Vice President None
David Benhaim* Vice President None
Donald Bisson* Vice President None
Francis X. Claro* Vice President None
Kristine R. Vice President None
Cloyes*
Patrick T. Bannigan** Vice President None
Liu-Er Chen* Vice President None
George E. Dlugos* Vice President None
Antonio T. Docal* Vice President None
Dana E. Erikson* Vice President None
Gordon M. Forrester* Vice President None
Thomas L. Holman* Vice President None
George J. Kimball* Vice President None
JoAnn L. Lyndon* Vice President None
Craig Lewis* Vice President None
John C. Vice President None
Madden, Jr.*
Eleanor H. Marsh* Vice President None
James D. Medvedeff* Vice President None
Stanley M. Niksa* Vice President None
Jonathan A. Noonan* Vice President None
Robert E. O'Brien* Vice President None
Margery C. Parker* Vice President None
William H. Parsons* Vice President None
Joyce W. Petkovich* Vice President None
Gary E. Pzegeo* Vice President None
Harlen R. Sanderling* Vice President None
Thomas W. Trickett* Vice President None
Kathy K. Wang* Vice President None
Judith A. Warners* Vice President None
Peter Willis* Vice President None
Walter Zagrobski* Vice President None
</TABLE>
*Located at Keystone Investment Management Company, 200 Berkeley Street,
Boston, Massachusetts 02116.
**Located at First Union National Bank, 301 South College Street,
Charlotte, North Carolina 28288
Item 29. Principal Underwriter (continued).
(c) Not applicable.
Item 30. Location of Accounts and Records
First Union Keystone, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, Massachusetts 02171
Iron Mountain
3431 Sharpslot Road
Swansea, Massachusetts 02277
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Upon request and without charge, Registrant hereby undertakes to
furnish a copy of its latest annual report to shareholders to each
person to whom a copy of Registrant's prospectus is delivered.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this amendment to its registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this amendment to its registration statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Boston, and in The
Commonwealth of Massachusetts, on the 24th day of June, 1997.
KEYSTONE INSTITUTIONAL
ADJUSTABLE RATE FUND
By:/s/ George S. Bissell
---------------------------
George S. Bissell
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities indicated on the 24th day of June, 1997.
<TABLE>
<S> <C> <C>
/s/ George S. Bissell /s/ Charles F. Chapin
- ------------------------ ------------------------- -------------------------
George S. Bissell Charles F. Chapin* William Walt Pettit
Chairman of the Board of Trustees Trustee Trustee
and Chief Executive Officer
/s/ John J. Pileggi /s/ K. Dun Gifford /s/ David M. Richardson
- ------------------------- ------------------------- -------------------------
John J. Pileggi K. Dun Gifford* David M. Richardson*
President amd Treasurer (Principal Trustee Trustee
Financial and Accounting Officer)
/s/ Frederick Amling
- ------------------------- ------------------------- -------------------------
Frederick Amling* James S. Howell Russell A. Salton, III MD
Trustee Trustee Trustee
/s/ Laurence B. Ashkin /s/ Leroy Keith, Jr.
- ------------------------- ------------------------- -------------------------
Laurence B. Ashkin Leroy Keith, Jr.* Michael S. Scofield
Trustee Trustee Trustee
/s/ Charles A. Austin, III /s/ F. Ray Keyser, Jr. /s/ Richard J. Shima
- ------------------------- ------------------------- -------------------------
Charles A. Austin, III* F. Ray Keyser, Jr.* Richard J. Shima*
Trustee Trustee Trustee
/s/ Andrew J. Simons
- ------------------------- ------------------------- -------------------------
Foster Bam Gerald M. McDonnell Andrew J. Simons*
Trustee Trustee Trustee
/s/ Edwin D. Campbell
- ------------------------- -------------------------
Edwin D. Campbell* Thomas L. McVerry
Trustee Trustee
</TABLE>
*By:/s/ Rosemary D. Van Antwerp
- --------------------------------
Rosemary D. Van Antwerp**
Attorney-in-Fact
**Rosemary D. Van Antwerp, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and attached hereto as Exhibit 24(b)(19).
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
- -------------- -------
1 Declaration of Trust(1)
2 By-Laws(1)
Amendment to By-Laws(2)
5 Advisory Agreement(3)
6 Distribution Agreement(4)
8 Custodian, Fund Accounting and
Recordkeeping Agreement(5)
9 Form of Sub-Administrator Agreement(3)
10 Opinion of Counsel(5)
11 Independent Auditors' Consent(3)
13 Subscription Agreement(5)
15 Class Y Distribution Plan(6)
16 Total Return and Current Yield
Schedules(3)
17 Financial Data Schedules(filed as Exhibit 27)(3)
19 Powers of Attorney(2)
- -----------------------
(1) Incorporated by reference herein to Post-Effective Amendment No. 7 to
the Registration Statement.
(2) Incorporated by reference herein to Post-Effective Amendment No. 9 to the
Registration Statement.
(3) Filed herewith.
(4) Incorporated by reference herein to Post-Effective Amendment No. 3 to
the Registration Statement.
(5) Incorporated by reference herein to the Registration Statement.
(6) Incorporated by reference herein to Post-Effective Amendment No. 4 to
the Registration Statement.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
Agreement made the 11th day of December, 1996, by and between KEYSTONE
INSTITUTIONAL ADJUSTABLE RATE FUND, a Massachusetts business trust (the
"Fund"), and KEYSTONE INVESTMENT MANAGEMENT COMPANY, a Delaware corporation
(the "Adviser").
WHEREAS, the Fund and the Adviser wish to enter into an agreement setting
forth the terms on which the Adviser will perform certain services for the
Fund.
THEREFORE, in consideration of the promises and the mutual agreements
hereinafter contained, the Fund and the Adviser agree as follows:
1. The Fund hereby employs the Adviser to manage and administer the
operation of the Fund, to supervise the provision of services to the Fund by
others and to manage the investment and reinvestment of the assets of the Fund
in conformity with the Fund's investment objectives and restrictions as may be
set forth from time to time in the Fund's then current prospectus and
statement of additional information, if any, and other governing documents,
all subject to the supervision of the Board of Trustees of the Fund, for the
period and on the terms set forth in this Agreement. The Adviser hereby
accepts such employment and agrees during such period, at its own expense, to
render the services and to assume the obligations set forth herein for the
compensation provided herein. The Adviser shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Fund in
any way or otherwise be deemed an agent of the Fund.
2. The Adviser shall place all orders for the purchase and sale of
portfolio securities for the account of the Fund with broker-dealers selected
by the Adviser. In executing portfolio transactions and in selecting broker-
dealers, the Adviser will use its best efforts to seek best execution on
behalf of the Fund. In assessing the best execution available for any
transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker-
dealer, and the reasonableness of the commission, if any (all for the specific
transaction and on a continuing basis). In evaluating the best execution
available, and in selecting the broker-dealer to execute a particular
transaction, the Adviser may also consider the brokerage and research services
(as those terms are used in Section 28(e) of the Securities Exchange Act of
1934 (the "1934 Act")) provided to the Fund and/or other accounts over which
the Adviser or an affiliate of the Adviser exercises investment discretion.
The Adviser is authorized to pay a broker-dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for
the Fund which is in excess of the amount of commission another broker-dealer
would have charged for effecting that transaction if, but only if, the Adviser
determines in good faith that such commission was reasonable in relation to
the value of the brokerage and research services provided by such broker-
dealer viewed in terms of that particular transaction or in terms of all of
the accounts over which investment descretion is so exercised.
3. The Adviser, at its own expense, shall furnish to the Fund office space
in the offices of the Adviser or in such other place as may be agreed upon by
the parties from time to time, all necessary office facilities, equipment and
personnel in connection with its services hereunder, and shall arrange, if
desired by the Fund, for members of the Adviser's organization to serve
without salaries from the Fund as officers or, as may be agreed from time to
time, as agents of the Fund. The Adviser assumes and shall pay or reimburse
the Fund for: (1) the compensation (if any) of the Trustees of the Fund who
are affiliated with the Adviser or with its affiliates, or with any adviser
retained by the Adviser, and of all officers of the Fund as such; (2) all
expenses of the Adviser incurred in connection with its services hereunder;
(3) all charges and expenses of any custodian or depository appointed by the
Fund for the safekeeping of its cash, securities and other property; (4) all
charges and expenses for bookkeeping and auditors; (5) all charges and
expenses of any transfer agents and registrars appointed by the Fund; (6) all
costs of certificates representing shares of the Fund; (7) all fees and
expenses involved in registering and maintaining registrations of the Fund and
of its shares with the Securities and Exchange Commission ("Commission") and
registering or qualifying its shares under state or other securities laws,
including, without limitation, the preparation and printing of registration
statements, prospectuses and statements of additional information for filing
with the Commission and other authorities; (8) expenses of preparing, printing
and mailing prospectuses and statements of additional information to
shareholders of the Fund; (9) all expenses of shareholders' and Trustees'
meetings and of preparing, printing and mailing notices, reports and proxy
materials to shareholders of the Fund; and (10) all charges and expenses of
filing annual and other reports with the Commission and other authorities. The
Fund assumes and shall pay all other expenses of the Fund, including, without
limitation; (1) all fees of all Trustees of the Fund who are not affiliated
with the Adviser or any of its affiliates, or with any adviser retained by the
Adviser; (2) all brokers' fees, expenses and commissions and issue and
transfer taxes chargeable to the Fund in connection with transactions
involving securities and other property to which the Fund is a party; (3) all
taxes and business trust fees payable by the Fund to federal, state or other
governmental agencies; (4) all interest costs of the Fund; (5) all charges and
expenses of legal counsel to the Fund and to the Trustees of the Fund in
connection with routine legal matters relating to the Fund, including, without
limitation, legal services rendered in connection with the Fund's existence,
business trust and financial structure and relations with its shareholders,
registrations and qualifications of securities under federal, state and other
laws and issues of securities, including all charges and expenses of legal
counsel to the Fund in connection with extraordinary matters, including,
without limitation, any litigation involving the Fund, its Trustees, officers,
employees of agents; and (6) all extraordinary expenses and charges of the
Fund. In the event the Adviser provides any of these services or pays any of
these expenses, the Fund will promptly reimburse the Adviser therefor.
The services of the Adviser to the Fund hereunder are not to be deemed
exclusive, and the Adviser shall be free to render similar services to others.
4. As compensation for the Adviser's services to the Fund during the
period of this Agreement, the Fund will pay to the Adviser a fee at the annual
rate of 0.30% of the average daily net asset value of the shares of the Fund.
A pro rata portion of the fee shall be payable in arrears at the end of
each day or calendar month as the Adviser may from time to time specify to the
Fund. If and when this Agreement terminates, any compensation payable
hereunder for the period ending with the date of such termination shall be
payable upon such termination. Amounts payable hereunder shall be promptly
paid when due.
5. The Adviser shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the performance of
this Agreement, except a loss resulting from the Adviser's willful
misfeasance, bad faith, gross negligence or from reckless disregard by it of
its obligations and duties under this Agreement. Any person, even though also
an officer, director, partner, employee, or agent of the Adviser who may be or
become an officer, trustee, employee or agent of the Fund, shall be deemed,
when rendering services to the Fund or acting on any business of the Fund
(other than services or business in connection with the Adviser's duties
hereunder), to be rendering such services to or acting solely for the Fund and
not as an officer, director, partner, employee, or agent or one under the
control or direction of the Adviser even though paid by it. The Fund agrees to
indemnify and hold the Adviser harmless from all taxes, charges, expenses,
assessments, claims and liabilities (including, without limitation,
liabilities arising under the Securities Act of 1933, the 1934 Act, the
Investment Company Act of 1940 (the "1940 Act" ) and any state and foreign
securities and blue sky laws, as amended from time to time) and expenses,
including (without limitation) attorneys' fees and disbursements, arising
directly or indirectly from any action or thing which the Adviser takes or
does or omits to take or do hereunder provided that the Adviser shall not be
indemnified against any liability to the Fund or to its shareholders (or any
expenses incident to such liability) arising out of breach of fiduciary duty
with respect to the receipt of compensation for services, willful misfeasance,
bad faith, or gross negligence on the part of the Adviser in the performance
of its duties, or from reckless disregard by it of its obligations and duties
under the Agreement.
6. The Fund shall cause its books and accounts to be audited at least once
each year by a reputable independent public accountant or organization of
public accountants who shall render a report to the Fund.
7. Subject to and in accordance with the Declaration of Trust of the Fund,
the Articles of Incorporation of the Adviser and the governing documents of
any adviser, it is understood that trustees, directors, officers, agents and
shareholders of the Fund or any Adviser are or may be interested in the
Adviser (or any successor thereof) as directors and officers of the Adviser or
its affiliates, as stockholders of Keystone Investments, Inc. or otherwise;
that directors, officers and agents of the Adviser and its affiliates or
stockholders of Keystone Investments, Inc. are or may be interested in the
Fund or any Adviser as trustees, directors, officers, shareholders or
otherwise; that the Adviser (or any such successor) is or may be interested in
the Fund or any such Adviser as shareholder, or otherwise; and that the effect
or any such adverse interests shall be governed by said Declaration of Trust
of the Fund, Articles of Incorporation of the Adviser and governing documents
of any such adviser.
8. This Agreement shall continue in effect after December 10, 1998, only
so long as (1) such continuance is specifically approved at least annually by
the Board of Trustees of the Fund or by a vote of a majority of the
outstanding voting securities of the Fund, and (2) such renewal has been
approved by the vote of a majority of Trustees of the Fund who are not
interested pesons, as that term is defined in the 1940 Act, of the Adviser or
of the Fund, cast in person at a meeting called for the purpose of voting on
such approval.
9. On sixty days' written notice to the Adviser, this Agreement may be
terminated without the payment of any penalty at any time by the Board of
Trustees of the Fund or by vote of the holders of a majority of the
outstanding voting securities of the Fund; and on sixty days' written notice
to the Fund, this Agreement may be terminated without the payment of any
penalty at any time by the Adviser. This Agreement shall automatically
terminate upon its assignment (as that term is defined in the 1940 Act). Any
notice under this Agreement shall be given in writing, addressed and
delivered, or mailed postage prepaid, to the other party at the main office of
such party.
10. This Agreement may be amended at any time by an instrument in writing
executed by both parties hereto or their respective successors, provided that
with regard to amendments of substance such execution by the Fund shall have
been first approved by the vote of the holders of a majority of the
outstanding voting securities of the Fund and by the vote of a majority of
Trustees of the Fund who are not interested persons (as that term is defined
in the 1940 Act) of the Adviser, any predecessor of the Adviser or of the
Fund, cast in person at a meeting called for the purpose of voting on such
approval. A "majority of the outstanding voting securities of the Fund" shall
have, for all purposes of this Agreement, the meaning provided therefor in the
1940 Act.
11. Any compensation payable to the Adviser hereunder for any period other
than a full year shall be proportionately adjusted.
12. The provisions of the Agreement shall be governed, construed and
enforced in accordance with the laws of The Commonwealth of Massachusetts.
13. A copy of the Declaration of Trust of the Fund is on file with the
Secretary of the Commonwealth of Massachusetts. This instrument is executed on
behalf of the Trustees of the Fund as trustees and not individually, and the
obligations of this instrument are not binding upon the Trustees or holders of
shares of the Fund individually but are binding only upon the assets and
property of the Fund.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
on the day and year first above written.
KEYSTONE INSTITUTIONAL ADJUSTABLE
RATE FUND
By: /s/ George S. Bissell
--------------------------------------
Name: GEORGE S. BISSELL
Title: Chairman of the Board
KEYSTONE INVESTMENT MANAGEMENT
COMPANY
By: /s/ Rosemary D. Van Antwerp
--------------------------------------
Name: ROSEMARY D. VAN ANTWERP
Title: Senior Vice President
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND
DISTRIBUTION AGREEMENT
AGREEMENT made as of this 11th day of December, 1996 by and between
KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND, a Massachusetts business trust
("Fund"), and Evergreen Keystone Distributor, Inc., a Delaware corporation ("
Distributor").
WHEREAS, the Fund wishes to arrange for the sale of shares of
beneficial interest of the Fund ("Shares"); and
The Distributor wishes to act as a principal underwriter of the Shares:
NOW, THEREFORE, in consideration of the mutual promises and
undertakings herein provided for, the Fund and the Distributor hereby agree as
follows:
1. The Fund appoints the Distributor to act as principal un derwriter
of the Shares as an independent contractor in such states as the Fund may from
time to time designate and on the terms and conditions herein contained. Except
as the Fund may from time to time agree, the Distributor will act as agent for
the Fund and not as principal.
2. The Distributor will have the right to obtain subscrip tions for and
to sell Shares as agent of the Fund and in so doing may retain and employ
representatives to promote distribution of the Shares and may obtain orders from
brokers or dealers or others for sales of Shares to them. No such
representative, dealer or broker shall have any authority to act as agent for
the Fund. The Distributor does not undertake hereby to buy or to find purchasers
for any specific number of Shares.
3. All subscriptions and sales of Shares by the Distributor hereunder
shall be at the net asset value of the Shares in accord ance with the provisions
of the Declaration of Trust, By-laws and the current prospectus and statement of
additional information of the Fund. All orders shall be subject to acceptance by
the Fund, and the Fund reserves the right in its sole discretion to reject any
order received. The Fund shall not be liable to anyone for failure to accept any
order.
4. Payment for Shares shall be in cash, check, money order or Federal
Funds received by the Distributor within seven (7) days after notice of
acceptance of the purchase order and notice of the amount of the applicable
public offering price has been given to the purchaser. If such payment is not
received within such seven- day period, the Fund reserves the right, without
further notice, forth-with to cancel its acceptance of any such order. The Fund
shall pay such issue taxes as may be required by law in connection with the
issue of the Shares.
5. Nothing herein shall prevent the Fund from issuing, or issuing and
selling, or transferring Shares to holders of Shares as dividends or as
distributions of realized capital gains through one or more other principal
underwriters or otherwise for not less than net asset value.
6. The Distributor shall not make, or permit any representa tive,
broker or dealer to make, in connection with any sale or solicitation of a sale
of the Shares, any representations concerning the Shares except those contained
in the then current prospectus and statement of additional information covering
the Shares and in printed information approved by the Fund as information
supplemental to such prospectus and statement of additional information. Copies
of the then effective prospectus and statement of additional information and any
such printed supplemental information will be supplied by the Fund to the
Distributor in reasonable quantities upon request.
7. The Distributor covenants and agrees that it will in all respects
duly conform with all state and federal laws applicable to the sale of the
Shares and will indemnify and hold harmless the Fund, and each person who has
been, is or may hereafter be a Trust ee or officer of the Fund against expenses
reasonably incurred by any of them in connection with any claim or in connection
with any action, suit or proceeding to which any of them may be a party, which
arises out of or is alleged to arise out of any misrepresentation or omission to
state a material fact, on the part of the Distributor or any other person for
whose acts the Distributor is responsible or is alleged to be responsible,
unless such misrepresentation or omission was made in reliance upon written
information furnished by the Fund. The term "expenses" includes amounts paid in
satisfaction of judgments or in settlement. The foregoing right of
indemnification shall be in addition to any other rights to which the Fund or
any such Trustee or officer may be entitled as a matter of law.
8. The Fund agrees to execute such papers and to do such acts and
things as shall from time to time be reasonably requested by the Distributor for
the purpose of qualifying the Shares for sale under the so-called "blue sky"
laws of any state or for registering and maintaining the registration of the
Fund and of the Shares under the Securities Act of 1933 and the Investment
Company Act of 1940. The Distributor shall bear the expenses of preparing,
printing and distributing advertising and sales literature and prospectuses used
by it (apart from expenses of registering Shares under the Securities Act and
Investment Company Act, qualifying Shares for sale under the so-called "blue
sky" laws of any state and the preparation and printing of prospectuses and
statements of additional information and reports required to be filed with the
Securities and Exchange Commission by such Acts and the direct expenses of the
issuance of Shares).
9. This Agreement shall continue in effect for two years from the date
set forth above and from year to year thereafter if its terms and its
continuance are approved annually by a vote of a majority of the Trustees who
are not parties to this Agreement or "interested persons" of any such party cast
in person at a meeting called for the purpose of voting on such approval and if
such con tinuance is also approved annually by the Board of Trustees of the Fund
or by a vote of a majority of the outstanding voting Shares of the Fund;
provided, however, that (1) this Agreement may at any time be terminated without
the payment of any penalty by the Fund on 60 days' written notice to the
Distributor, (2) this Agreement shall immediately terminate in the event of its
assignment (within the meaning of the Investment Company Act of 1940) and (3)
this Agreement may be terminated by the Distributor on 90 days' written notice
to the Fund. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office of
such party. This Agreement may be amended at any time by mutual consent of the
parties.
10. This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts.
11. A copy of the Declaration of Trust of the Fund is on file with the
Secretary of The Commonwealth of Massachusetts and notice is hereby given that
this instrument is executed on behalf of the Trustees of the Fund as Trustees
and not individually and that the obligations of this instrument are not binding
upon the Trustees or holders of shares of the Fund individually but are binding
only upon the assets and property of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE INSTITUTIONAL ADJUSTABLE
RATE FUND
By: /s/ George S. Bissell
-------------------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC.
By: /s/ J. David Huber
-------------------------------
FORM OF SUB-ADMINISTRATOR AGREEMENT
This Sub-Administrator Agreement is made as of this 1st day of
January, 1997 between Keystone Investment Management Company, a Delaware
corporation (herein called "KIMCO"), and BISYS Fund Service Limited Partnership
DBA as BISYS Fund Services, an Ohio Limited Partnership Corporation (herein
called "BISYS").
WHEREAS, KIMCO has been appointed as investment adviser to
certain open-end management investment companies, or to one or more separate
investment series thereof, listed on Schedule A, as the same may be amended from
time to time to reflect additions or deletions of such companies or series,
which are registered under the Investment Company Act of 1940 (the "Funds");
WHEREAS, in its capacity as investment adviser to the Funds,
KIMCO has the obligation to provide, or engage others to provide, certain
administrative services to the Funds; and
WHEREAS, KIMCO desires to retain BISYS as Sub-Administrator to
the Funds for the purpose of providing the Funds with personnel to act as
officers of the Funds and to provide certain administrative services in addition
to those provided by KIMCO ("Sub-Administrative Services"), and BISYS is willing
to render such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants set forth herein, the parties hereto agree as follows:
1. Appointment of Sub-Administrator. KIMCO hereby appoints BISYS as
Sub-Administrator for the Funds on the terms and conditions set forth in this
Agreement and BISYS hereby accepts such appointment and agrees to perform the
services and duties set forth in Section 2 of this Agreement in consideration of
the compensation provided for in Section 4 hereof.
2. Services and Duties. As Sub-Administrator, and subject to the supervision and
control of KIMCO and the Trustees or Directors of the Funds, BISYS will
hereafter provide facilities, equipment and personnel to carry out the following
Sub-Administrative services to assist in the operation of the business and
affairs of the Funds:
(a) provide individuals reasonably acceptable to the Funds for
nomination, appointment or election as officers of the Funds and who
will be responsible for the management of certain of each Fund's
affairs as determined from time to time by the Trustees or Directors of
the Funds;
(b) review filings with the Securities and Exchange Commission and
state securities authorities that have been prepared on behalf of the
Funds by the administrator and take such actions as may be reasonably
requested by the administrator to effect such filings;
(c) verify, authorize and transmit to the custodian, transfer agent and
dividend disbursing agent of each Fund all necessary instructions for
the disbursement of cash, issuance of
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
1
<PAGE>
shares, tender and receipt of portfolio securities, payment of expenses
and payment of dividends; and
(d) advise the Trustees or Directors of the Funds on matters
concerning the Funds and their affairs.
BISYS may, in addition, agree in writing to perform additional
Sub-Administrative Services for the Funds. Sub-Administrative Services shall not
include investment advisory services or any duties, functions, or services to be
performed for the Funds by their distributor, custodian or transfer agent
pursuant to their agreements with the Funds.
3. Expenses. BISYS shall be responsible for expenses incurred in providing
office space, equipment and personnel as may be necessary or convenient to
provide the Sub-Administrative Services to the Funds. KIMCO and/or the Funds
shall be responsible for all other expenses incurred by BISYS on behalf of the
Funds pursuant to this Agreement at the direction of KIMCO, including without
limitation postage and courier expenses, printing expenses, registration fees,
filing fees, fees of outside counsel and independent auditors, insurance
premiums, fees payable to Trustees or Directors who are not Furman Selz
employees, and trade association dues.
4. Compensation. For the Sub-Administrative Services provided, KIMCO hereby
agrees to pay and BISYS hereby agrees to accept as full compensation for
its services rendered hereunder a sub-administrative fee,calculated daily and
payable monthly at an annual rate based on the aggregate average daily net
assets of the Funds, or separate series thereof, set forth on Schedule A and
determined in accordance with the table below.
Aggregate Daily Net Assets of Funds For
Which KIMCO, Evergreen Asset Management
Sub-Administrative Corp., First Union National Bank of North
Fee as a % of Carolina or any Affiliates Thereof Serve as
Average Annual Investment Adviser or Administrator And For
Daily Net Assets Which BISYS Serves as Sub-Administrator
.0100% on the first $7 billion
.0075% on the next $3 billion
.0050% on the next $15 billion
.0040% on assets in excess of $25 billion
5. Indemnification and Limitation of Liability of BISYS. The duties of BISYS
shall be limited to those expressly set forth herein or later agreed to in
writing by Furman Selz, and no implied duties are assumed by or may be asserted
against BISYS hereunder. BISYS shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any act or omission in carrying
out its duties hereunder, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder, except as may otherwise be
provided under provisions of applicable law which cannot be waived or
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
2
<PAGE>
modified hereby. (As used in this Section, the term "BISYS" shall include
partners, officers, employees and other agents of BISYS as well as Furman Selz
itself)
So long as BISYS Selz acts in good faith and with due diligence and
without negligence, KIMCO shall indemnify BISYS and hold it harmless from any
and all actions, suits and claims, and from any and all losses, damages, costs,
charges, reasonable counsel fees and disbursements, payments, expenses and
liabilities (including reasonable investigation expenses) arising directly or
indirectly out of BISYS' actions taken or nonactions with respect to the
performance of services hereunder. The indemnity and defense provisions set
forth herein shall survive the termination of this Agreement for a period of
three years.
The rights hereunder shall include the right to reasonable advances of
defense expenses in the event of any pending or threatened litigation with
respect to which indemnification hereunder may ultimately be merited. In order
that the indemnification provision contained herein shall apply, however, it is
understood that if in any case KIMCO may be asked to indemnify or hold Furman
Selz harmless, KIMCO shall be fully and promptly advised of all pertinent facts
concerning the situation in question, and it is further understood that Furman
Selz will use all reasonable care to identify and notify KIMCO promptly
concerning any situation which presents or appears likely to present the
probability of such a claim for indemnification against KIMCO.
KIMCO shall be entitled to participate at its own expense or, if it so
elects, to assume the defense of any suit brought to enforce any claims subject
to this indemnity provision. If KIMCO elects to assume the defense of any such
claim, the defense shall be conducted by counsel chosen by KIMCO and
satisfactory to BISYS, whose approval shall not be unreasonably withheld. In the
event that KIMCO elects to assume the defense of any suit and retain counsel,
BISYS shall bear the fees and expenses of any additional counsel retained by it.
If KIMCO does not elect to assume the defense of a suit, it will reimburse
Furman Selz for the reasonable fees and expenses of any counsel retained by
BISYS.
BISYS may apply to KIMCO at any time for instructions and may consult
counsel for KIMCO or its own counsel and with accountants and other experts with
respect to any matter arising in connection with BISYS' duties, and BISYS shall
not be liable or accountable for any action taken or omitted by it in good faith
in accordance with such instruction or with the opinion of such counsel,
accountants or other experts.
Any person, even though also an officer, director, partner, employee or
agent of BISYSs, who may be or become an officer, trustee, employee or agent of
the Funds, shall be deemed, when rendering services to a Fund or acting on any
business of a Fund (other than services or business in connection with the
duties of BISYS hereunder) to be rendering such services to or acting solely for
the Fund and not as an officer, director, partner, employee or agent or one
under the control or direction of BISYS even though paid by BISYS.
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
3
<PAGE>
6. Duration and Termination.
(a) The initial term of this Agreement (the "Initial Term") shall
commence on the date this Agreement is executed by both parties, shall continue
until April 30, 1998, and shall continue in effect for a Fund from year to year
thereafter, provided it is approved, at least annually, by a vote of a majority
of Directors/Trustees of the Funds, including a majority of the disinterested
Directors/Trustees. Notwithstanding the foregoing, this Agreement shall only
become effective if (i) Keystone Investments, the parent of KIMCO, has
previously been acquired by First Union National Bank of North Carolina, and
(ii) the Funds have appointed Evergreen Funds Distributor, Inc. as their
Principal Underwriter. In the event of any breach of this Agreement by either
party, the non-breaching party shall notify the breaching party in writing of
such breach and upon receipt of such notice, the breaching party shall have 45
days to remedy the breach except in the case of a breach resulting from fraud or
other acts which materially and adversely affects the operations or financial
position of the Funds. In the event any material breach is not remedied within
such time period, the nonbreaching party may immediately terminate this
Agreement.
Notwithstanding the foregoing, after such termination for so long as
BISYS, with the written consent of KIMCO, in fact continues to perform any
one or more of the services contemplated by this Agreement or any schedule or
exhibit hereto, the provisions of this Agreement, including without limitation
the provisions dealing with indemnification, shall continue in full force and
effect. Compensation due BISYS and unpaid by KIMCO upon such termination
shall be immediately due and payable upon and notwithstanding such termination.
Furman Selz shall be entitled to collect from KIMCO, in addition to the
compensation described herein, all costs reasonably incurred in connection with
Furman Selz's activities in effecting such termination, including without
limitation, the delivery to the Funds and/or their designees of each Fund's
property, records, instruments and documents, or any copies thereof. To the
extent that Furman Selz may retain in its possession copies of any Fund
documents or records subsequent to such termination which copies had not been
requested by or on behalf of a Fund in connection with the termination process
described above, BISYS will provide such Fund with reasonable access to
such copies; provided, however, that, in exchange therefor, KIMCO shall
reimburse BISYS for all costs reasonably incurred in connection therewith.
(b) Subject to (c) below, this Agreement may be terminated at any time,
without payment of any penalty, on sixty (60) day's prior written notice by
KIMCO, or by BISYS and, with respect to one or more of the Funds a vote of
a majority of such Fund's or Funds' Directors/Trustees.
(c) If, during the first six months this Agreement is in effect it is
terminated for a Fund or Funds in accordance with (b) above, for any reason
other than a material breach of this Agreement, the merger of a Fund or Funds
for which KIMCO, Evergreen Asset Management Corp., First Union National Bank of
North Carolina or any affiliates thereof act as investment adviser, or any other
event that leads to the termination of the existence of a Fund or Funds, and
BISYS is replaced as sub-administrator, then KIMCO shall make a one-time
cash payment to BISYS equal to the unpaid balance due BISYS for the
first six-months this Agreement in effect, assuming for
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
4
<PAGE>
purposes of calculation of the payment that the asset level of each Fund on the
date BISYS is replaced will remain constant for the balance of such term. Once
this Agreement has been in effect for more than six months from the commencement
date, this paragraph (c) shall be null, void and of no further effect.
7. Amendment. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which an enforcement of the change, waiver, discharge or termination is
sought.
8. Notices. Notices of any kind to be given to KIMCO hereunder by BISYS shall be
in writing and shall be duly given if delivered to KIMCO at the following
address: Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116 ATT: General Counsel. Notices of any kind to be given to
Furman Selz hereunder by EAMC or the Funds shall be in writing and shall be duly
given if delivered to BISYS at 3435 Stelzer Road, Columbus, Ohio 43219
Attention: George O. Martinez, Senior Vice President.
9. Limitation of Liability. BISYS is hereby expressly put on notice of the
limitations of liability as set forth in the Declarations of Trust of the Funds
that are Massachusetts business trusts or series thereof and agrees that the
obligations pursuant to this Agreement of a particular Fund be limited solely to
the assets of that particular Fund, and BISYS shall not seek satisfaction of any
such obligation from the assets of any other Fund, the shareholders of any Fund,
the Trustees, officers, employees or agents of any Fund, or any of them.
10. Miscellaneous. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court or regulatory agency
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. Subject to the provisions of Section 5 hereof, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and shall be governed by New York law;
provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or regulation
promulgated by the Securities and Exchange Commission thereunder.
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
KEYSTONE INVESTMENT MANAGEMENT COMPANY
By______________________________________
its:____________________________________
Attest:________________________
BISYS FUND SERVICES, INC.
By______________________________________
its_____________________________________
Attest:________________________
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
6
<PAGE>
SCHEDULE A
SUB-ADMINISTRATOR AGREEMENT
Keystone America Hartwell Emerging Growth Fund ("Emerging Growth")
Keystone Balanced Fund II ("Balanced Fund")
Keystone Capital Preservation and
Income Fund ("Capital Preservation and Income")
Keystone Emerging Markets Fund ("Emerging Markets")
Keystone Fund For Total Return ("Total Return")
Keystone Fund of the Americas ("Fund of the Americas")
Keystone Global Opportunities Fund ("GlobalOpportunities")
Keystone Global Resources and Development Fund ("GlobalResources")
Keystone Government Securities Fund ("Government Securities")
Keystone Intermediate Term Bond Fund ("Intermediate Term")
Keystone Liquid Trust("Liquid Trust") Keystone Omega Fund ("Omega")
Keystone Small Company Growth Fund II ("Small Company Growth")
Keystone State Tax Free Fund ("State Tax Free")
- Florida Tax Free Fund ("Florida Tax Free")
- Massachusetts Tax Free Fund ("Massachusetts Tax Free")
- Pennsylvania Tax Free Fund ("Pennsylvania Tax Free")
- New York Insured Tax Free Fund ("New York Insured")
Keystone State Tax Free Fund-Series II ("State Tax Free II")
- California Insured Tax Free Fund ("California Insured")
- Missouri Tax Free Fund ("Missouri Tax Free")
Keystone Strategic Income Fund ("Strategic Income")
Keystone Tax Free Income Fund ("Tax Free Income")
Keystone Quality Bond Fund (B-1) ("B-1") Keystone
Diversified Bond Fund (B-2) ("B-2")
Keystone High Income Bond Fund (B-4) ("B-4")
Keystone Balanced Fund (K-1) ("K-1")
Keystone Strategic Growth Fund (K-2)("K-2")
Keystone Growth and Income Fund (S-1) ("S-1")
Keystone Mid-Cap Growth Fund (S-3) ("S-3")
Keystone Small Company Growth Fund (S-4) ("S-4")
Keystone Institutional Adjustable Rate Fund ("Adjustable Rate")
Keystone Institutional Trust ("Institutional")
Keystone International Fund Inc. ("International")
Keystone Precious Metals Holdings, Inc. ("Precious Metals")
Keystone Tax Free Fund ("Tax Free")
D:\JPW\LIEBER\AGREMENT\SUBADMIN\SUBADM1.KEY
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Keystone Institutional Adjustable Rate Fund
We consent to the use of our report dated March 31, 1997 incorporated
by reference herein and to the references to our firm under the caption
"FINANCIAL HIGHLIGHTS" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
June 24, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
KIARF-Y MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR
28-Feb-97 TOTAL RETURN COMPOUNDED TOTAL RETURN
with cdsc N/A N/A N/A N/A N/A N/A
W/O CDSC 0.50% 1.11% 6.77% 17.49% 5.99% 17.49%
Beg dates 31-Jan-97 31-Dec-96 29-Feb-96 23-May-94 23-May-94 23-May-94
Beg Value (no load) 11,690 11,620 11,004 10,000 10,000 10,000
End Value (W/O CDSC) 11,749 11,749 11,749 11,749 11,749 11,749
End Value (with cdsc) 11,400 11,419 11,649 11,649 11,749
beg nav 9.72 9.71 9.67 9.73 9.73 9.73
end nav 9.72 9.72 9.72 9.72 9.72 9.72
shares originally purhased 1,202.69 1,196.66 1,137.99 1,027.75 1,027.75 1,027.75
TIME 2.77
<C> <C> <C>
FIVE YEAR TEN YEAR TEN YEAR
COMPOUNDED TOTAL RETURN COMPOUNDED
N/A N/A N/A
5.99% 17.49% 5.99%
23-May-94 23-May-94 23-May-94
10,000 10,000 10,000
11,749 11,749 11,749
11,749 11,749 11,749
9.73 9.73 9.73
9.72 9.72 9.72
1,027.75 1,027.75 1,027.75
2.77 2.77
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
KIARF-Z MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR
28-Feb-97 TOTAL RETURN COMPOUNDED TOTAL RETURN
*** n/a till 10/1***
with cdsc N/A N/A N/A N/A N/A N/A
W/O CDSC 0.53% 1.05% 6.92% 17.79% 5.61% 29.61%
Beg dates 31-Jan-97 31-Dec-96 29-Feb-96 28-Feb-94 28-Feb-94 28-Feb-92
Beg Value (no load) 13,196 13,127 12,406 11,262 11,262 10,234
End Value (W/O CDSC) 13,265 13,265 13,265 13,265 13,265 13,265
End Value (with cdsc) 12,871 12,893 13,154 13,154 13,265
beg nav 9.71 9.71 9.67 9.87 9.87 9.93
end nav 9.71 9.71 9.71 9.71 9.71 9.71
shares originally purhased 1,358.98 1,351.88 1,282.95 1,141.01 1,141.01 1,030.66
TIME 3
<C> <C> <C>
FIVE YEAR TEN YEAR TEN YEAR
COMPOUNDED TOTAL RETURN COMPOUNDED
n/a till 10/1*** n/a till 10/1*** n/a till 10/1
N/A N/A N/A
5.32% 32.65% 5.35%
28-Feb-92 01-Oct-91 01-Oct-91
10,234 10,000 10,000
13,265 13,265 13,265
13264.9296389 13,265 13264.9296389
9.93 10.00 10
9.71 9.71 9.71
1,030.66 1,000.00 1,000.00
5 5.4166666667
</TABLE>
<TABLE>
<CAPTION>
A
PRICING DATE 02/28/97
--------
30 DAY YTM 6.33794%
--------
- -------------------------------------------------------------------------------------
PRICE ST VARIABLE LONG TERM GAIN/LOSS TOTAL DIV
DATE INCOME INCOME INCOME FACTOR
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
1 01/30/97 15,868.23 15,868.23 87.429
2 01/31/97 15,868.23 15,868.23 95.160
3 02/01/97 15,169.76 15,169.76 95.160
4 02/02/97 15,169.76 15,169.76 95.160
5 02/03/97 14,552.34 14,552.34 95.133
6 02/04/97 14,557.12 14,557.12 95.132
7 02/05/97 14,556.50 14,556.50 95.132
8 02/06/97 14,556.88 14,556.88 95.132
9 02/07/97 14,556.27 14,556.27 95.132
10 02/08/97 14,556.27 14,556.27 95.132
11 02/09/97 14,556.27 14,556.27 95.132
12 02/10/97 14,552.21 14,552.21 95.132
13 02/11/97 14,555.79 14,555.79 95.132
14 02/12/97 14,279.40 14,279.40 95.132
15 02/13/97 14,532.55 14,532.55 95.132
16 02/14/97 14,135.45 14,135.45 95.132
17 02/15/97 14,135.45 14,135.45 95.132
18 02/16/97 14,135.45 14,135.45 95.132
19 02/17/97 14,135.45 14,135.45 95.132
20 02/18/97 14,441.30 14,441.30 95.132
21 02/19/97 14,541.80 14,541.80 95.132
22 02/20/97 14,540.60 14,540.60 95.132
23 02/21/97 14,538.65 14,538.65 95.132
24 02/22/97 14,538.65 14,538.65 95.132
25 02/23/97 14,538.65 14,538.65 95.132
26 02/24/97 14,359.94 14,359.94 95.145
27 02/25/97 14,552.17 14,552.17 95.145
28 02/26/97 12,463.25 12,463.25 95.145
29 02/27/97 14,369.61 14,369.61 95.145
30 02/28/97 14,294.87 -33,156.29 -18,861.42 95.14-
0.00 0.00 435,608.87 0.00 -33,156.29 0.00 402,452.58 2,846.43032932
</TABLE>
TOTAL INCOME FOR PERIOD 381,659.77
TOTAL EXPENSES FOR PERIOD 17,408.96
AVERAGE SHARES OUTSTANDING 7,195,768.33
LAST PRICE DURING PERIOD 9.71
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
1 13,873.51 574.48 7,196,082.060 9.71 13,873.51 574.48 7,196,082.060
2 15,100.24 616.00 7,196,082.060 9.71 28,973.75 1,190.48 14,392,164.120
3 14,435.58 616.00 7,196,082.060 9.71 43,409.33 1,806.49 21,588,246.180
4 14,435.58 616.00 7,196,082.060 9.71 57,844.91 2,422.49 28,784,328.240
5 13,844.09 574.43 7,195,720.062 9.72 71,689.00 2,996.92 35,980,048.302
6 13,848.62 574.93 7,195,720.062 9.72 85,537.62 3,571.85 43,175,768.364
7 13,848.03 575.11 7,195,720.062 9.72 99,385.65 4,146.96 50,371,488.426
8 13,848.39 575.11 7,195,720.062 9.73 113,234.04 4,722.07 57,567,208.488
9 13,847.80 575.39 7,195,720.062 9.73 127,081.84 5,297.46 64,762,928.550
10 13,847.80 575.39 7,195,720.062 9.73 140,929.64 5,872.86 71,958,648.612
11 13,847.80 575.39 7,195,720.062 9.73 154,777.44 6,448.25 79,154,368.674
12 13,843.94 575.51 7,195,720.062 9.73 168,621.38 7,023.76 86,350,088.736
13 13,847.35 575.55 7,195,720.062 9.73 182,468.73 7,599.31 93,545,808.798
14 13,584.41 575.54 7,195,720.062 9.73 196,053.14 8,174.85 100,741,528.860
15 13,825.24 575.47 7,195,720.062 9.73 209,878.38 8,750.32 107,937,248.922
16 13,447.47 575.56 7,195,720.062 9.73 223,325.85 9,325.88 115,132,968.984
17 13,447.47 575.56 7,195,720.062 9.73 236,773.32 9,901.43 122,328,689.046
18 13,447.47 575.56 7,195,720.062 9.73 250,220.79 10,476.99 129,524,409.108
19 13,447.47 575.56 7,195,720.062 9.73 263,668.26 11,052.54 136,720,129.170
20 13,738.43 575.66 7,195,720.062 9.73 277,406.69 11,628.20 143,915,849.232
21 13,834.04 575.69 7,195,720.062 9.73 291,240.73 12,203.89 151,111,569.294
22 13,832.89 603.18 7,195,720.062 9.73 305,073.62 12,807.07 158,307,289.356
23 13,831.04 575.58 7,195,720.062 9.73 318,904.66 13,382.65 165,503,009.418
24 13,831.04 575.58 7,195,720.062 9.73 332,735.70 13,958.24 172,698,729.480
25 13,831.04 575.58 7,195,720.062 9.73 346,566.74 14,533.82 179,894,449.542
26 13,662.86 575.59 7,195,720.062 9.73 360,229.60 15,109.41 187,090,169.604
27 13,845.76 575.27 7,195,720.062 9.73 374,075.36 15,684.68 194,285,889.666
28 11,858.24 575.20 7,195,720.062 9.72 385,933.60 16,259.88 201,481,609.728
29 13,672.06 574.63 7,195,720.062 9.71 399,605.66 16,834.51 208,677,329.790
30 17,945.89 574.45 7,195,720.062 9.71 381,659.77 17,408.96 215,873,049.852
381,659.77 17,408.96 7,195,768.328
</TABLE>
<TABLE>
<CAPTION>
B
PRICING DATE 02/28/97
--------
30 DAY YTM 6.07529%
--------
- -------------------------------------------------------------------------------------------
PRICE ST VARIABLE LONG TERM TOTAL DIV
DATE INCOME INCOME INCOME FACTOR
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
1 01/30/97 0.00 15,868.23 0.00 0.00 15,868.23 12.57051160
2 01/31/97 0.00 15,868.23 0.00 0.00 15,868.23 4.83977030
3 02/01/97 0.00 15,169.76 0.00 0.00 15,169.76 4.83977030
4 02/02/97 0.00 15,169.76 0.00 0.00 15,169.76 4.83977030
5 02/03/97 0.00 14,552.34 0.00 0.00 14,552.34 4.86693700
6 02/04/97 0.00 14,557.12 0.00 0.00 14,557.12 4.86704843
7 02/05/97 0.00 14,556.50 0.00 0.00 14,556.50 4.86704704
8 02/06/97 0.00 14,556.88 0.00 0.00 14,556.88 4.86705183
9 02/07/97 0.00 14,556.27 0.00 0.00 14,556.27 4.86705921
10 02/08/97 0.00 14,556.27 0.00 0.00 14,556.27 4.86705921
11 02/09/97 0.00 14,556.27 0.00 0.00 14,556.27 4.86705921
12 02/10/97 0.00 14,552.21 0.00 0.00 14,552.21 4.86706308
13 02/11/97 0.00 14,555.79 0.00 0.00 14,555.79 4.86706746
14 02/12/97 0.00 14,279.40 0.00 0.00 14,279.40 4.86707235
15 02/13/97 0.00 14,532.55 0.00 0.00 14,532.55 4.86707760
16 02/14/97 0.00 14,135.45 0.00 0.00 14,135.45 4.86708175
17 02/15/97 0.00 14,135.45 0.00 0.00 14,135.45 4.86708175
18 02/16/97 0.00 14,135.45 0.00 0.00 14,135.45 4.86708175
19 02/17/97 0.00 14,135.45 0.00 0.00 14,135.45 4.86708175
20 02/18/97 0.00 14,441.30 0.00 0.00 14,441.30 4.86709521
21 02/19/97 0.00 14,541.80 0.00 0.00 14,541.80 4.86709975
22 02/20/97 0.00 14,540.60 0.00 0.00 14,540.60 4.86710000
23 02/21/97 0.00 14,538.65 0.00 0.00 14,538.65 4.86711010
24 02/22/97 0.00 14,538.65 0.00 0.00 14,538.65 4.86711010
25 02/23/97 0.00 14,538.65 0.00 0.00 14,538.65 4.86711010
26 02/24/97 0.00 14,359.94 0.00 0.00 14,359.94 4.85434387
27 02/25/97 0.00 14,552.17 0.00 0.00 14,552.17 4.85434101
28 02/26/97 0.00 12,463.25 0.00 0.00 12,463.25 4.85434626
29 02/27/97 0.00 14,369.61 0.00 0.00 14,369.61 4.85435069
30 02/28/97 0.00 14,294.87 -33,156.29 0.00 -18,861.42 4.85397197
0.00 0.00 435,608.87 -33,156.29 0.00 402,452.58 153.5696710
</TABLE>
<PAGE>
TOTAL INCOME FOR PERIOD 20,792.78
TOTAL EXPENSES FOR PERIOD 1,855.63
AVERAGE SHARES OUTSTANDING 389,666.59
LAST PRICE DURING PERIOD 9.72
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
1 1,994.72 151.43 1,034,598.630 9.71 1,994.72 151.43 1,034,598.630
2 767.99 100.65 365,970.934 9.72 2,762.71 252.08 1,400,569.564
3 734.18 100.65 365,970.934 9.72 3,496.89 352.72 1,766,540.498
4 734.18 100.65 365,970.934 9.72 4,231.07 453.37 2,132,511.432
5 708.25 53.76 367,790.756 9.73 4,939.32 507.13 2,500,302.188
6 708.50 53.92 367,790.756 9.73 5,647.82 561.05 2,868,092.944
7 708.47 53.94 367,790.756 9.73 6,356.29 614.99 3,235,883.700
8 708.49 53.94 367,790.756 9.74 7,064.78 668.93 3,603,674.456
9 708.46 53.97 367,790.756 9.74 7,773.24 722.90 3,971,465.212
10 708.46 53.97 367,790.756 9.74 8,481.70 776.86 4,339,255.968
11 708.46 53.97 367,790.756 9.74 9,190.16 830.83 4,707,046.724
12 708.27 53.98 367,790.756 9.74 9,898.43 884.81 5,074,837.480
13 708.44 53.99 367,790.756 9.74 10,606.87 938.80 5,442,628.236
14 694.99 53.98 367,790.756 9.74 11,301.86 992.78 5,810,418.992
15 707.31 53.97 367,790.756 9.74 12,009.17 1,046.75 6,178,209.748
16 687.98 53.99 367,790.756 9.74 12,697.15 1,100.74 6,546,000.504
17 687.98 53.99 367,790.756 9.74 13,385.13 1,154.72 6,913,791.260
18 687.98 53.99 367,790.756 9.74 14,073.11 1,208.71 7,281,582.016
19 687.98 53.99 367,790.756 9.74 14,761.09 1,262.69 7,649,372.772
20 702.87 53.99 367,790.756 9.74 15,463.96 1,316.68 8,017,163.528
21 707.76 53.99 367,790.756 9.74 16,171.72 1,370.67 8,384,954.284
22 707.71 53.99 367,790.756 9.74 16,879.43 1,424.66 8,752,745.040
23 707.61 53.99 367,790.756 9.74 17,587.04 1,478.65 9,120,535.796
24 707.61 53.99 367,790.756 9.74 18,294.65 1,532.63 9,488,326.552
25 707.61 53.99 367,790.756 9.74 19,002.26 1,586.62 9,856,117.308
26 697.08 53.91 366,776.050 9.74 19,699.34 1,640.53 10,222,893.358
27 706.41 53.81 366,776.050 9.74 20,405.75 1,694.34 10,589,669.408
28 605.01 53.81 366,776.050 9.73 21,010.76 1,748.15 10,956,445.458
29 697.55 53.75 366,776.050 9.72 21,708.31 1,801.90 11,323,221.508
30 -915.53 53.73 366,776.050 9.72 20,792.78 1,855.63 11,689,997.558
20,792.78 1,855.63 389,666.585
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND - IS SHARES
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 73,687,935
<INVESTMENTS-AT-VALUE> 73,844,025
<RECEIVABLES> 1,053,548
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 74,897,573
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,069,888
<TOTAL-LIABILITIES> 1,069,888
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,482,617
<SHARES-COMMON-STOCK> 366,534
<SHARES-COMMON-PRIOR> 1,482,857
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 10,989
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 3,165
<ACCUM-APPREC-OR-DEPREC> 66,769
<NET-ASSETS> 3,563,540
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 254,531
<OTHER-INCOME> 0
<EXPENSES-NET> (19,982)
<NET-INVESTMENT-INCOME> 234,549
<REALIZED-GAINS-CURRENT> (3,761)
<APPREC-INCREASE-CURRENT> 11,604
<NET-CHANGE-FROM-OPS> 242,392
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (214,330)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 879,121
<NUMBER-OF-SHARES-REDEEMED> (2,020,244)
<SHARES-REINVESTED> 24,800
<NET-CHANGE-IN-ASSETS> (10,796,912)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (7,976)
<OVERDIST-NET-GAINS-PRIOR> (11,718)
<GROSS-ADVISORY-FEES> 10,821
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (19,982)
<AVERAGE-NET-ASSETS> 8,756,987
<PER-SHARE-NAV-BEGIN> 9.68
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.24)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.72
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 102
<NAME> KEYSTONE INSTITUTIONAL ADJUSTABLE RATE FUND S SHARES
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 73,687,935
<INVESTMENTS-AT-VALUE> 73,844,025
<RECEIVABLES> 1,053,548
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 74,897,573
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,069,888
<TOTAL-LIABILITIES> 1,069,888
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 71,144,660
<SHARES-COMMON-STOCK> 7,233,498
<SHARES-COMMON-PRIOR> 6,812,767
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (11,239)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (958,597)
<ACCUM-APPREC-OR-DEPREC> 89,321
<NET-ASSETS> 70,264,145
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,139,447
<OTHER-INCOME> 0
<EXPENSES-NET> (90,591)
<NET-INVESTMENT-INCOME> 2,048,856
<REALIZED-GAINS-CURRENT> 30,940
<APPREC-INCREASE-CURRENT> 27,285
<NET-CHANGE-FROM-OPS> 2,107,081
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,889,020)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,030,429
<NUMBER-OF-SHARES-REDEEMED> (830,759)
<SHARES-REINVESTED> 221,061
<NET-CHANGE-IN-ASSETS> 4,290,305
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (160,757)
<OVERDIST-NET-GAINS-PRIOR> (1,142,881)
<GROSS-ADVISORY-FEES> 90,591
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (90,591)
<AVERAGE-NET-ASSETS> 72,023,562
<PER-SHARE-NAV-BEGIN> 9.68
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.25)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.71
<EXPENSE-RATIO> 0.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
