<PAGE>
KEYSTONE FUND OF THE AMERICAS
PROSPECTUS FEBRUARY 28, 1995
Keystone Fund of the Americas (the "Fund") is a mutual fund whose primary
objective is long term growth of capital through investments in equity and debt
securities in North America (the United States and Canada) and Latin America
(Mexico and countries in South and Central America). As a secondary objective
the Fund seeks current income.
THE FUND MAY INVEST UP TO 100% OF ITS ASSETS IN EITHER OR BOTH OF (I) LOWER
RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS"; AND (II) BOND ISSUED BY FOREIGN
ISSUERS RATED BELOW INVESTMENT GRADE; BOTH OF WHICH ENTAIL GREATER RISKS,
INCLUDING DEFAULT RISKS, UNTIMELY INTEREST AND PRINCIPAL PAYMENTS AND PRICE
VOLATILITY, THAN THOSE FOUND IN HIGHER RATED SECURITIES, AND MAY PRESENT
PROBLEMS OF LIQUIDITY AND VALUATION. INVESTORS SHOULD CAREFULLY CONSIDER THESE
RISKS BEFORE INVESTING. SEE "INVESTMENT OBJECTIVE AND POLICIES," PAGE 4; "RISK
FACTORS," PAGE 6.
The Fund offers three classes of shares. Information on share classes and
their fee and sales charge structures may be found in the Fund's fee table,
"Alternative Sales Options," "Contingent Deferred Sales Charge and Waiver of
Sales Charges," "Distribution Plans," and "Fund Shares."
This prospectus concisely states information about the Fund that you should
know before investing. Please read it and retain it for future reference.
Additional information about the Fund is contained in a statement of
additional information dated February 28, 1995, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, write to the address or call the telephone number
provided on this page.
KEYSTONE FUND OF THE AMERICAS
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
TABLE OF CONTENTS
Page
Fee Table 2
Financial Highlights 3
The Fund 4
Investment Objective and Policies 4
Investment Restrictions 6
Risk Factors 6
Pricing Shares 9
Dividends and Taxes 10
Fund Management and Expenses 11
How to Buy Shares 12
Alternative Sales Options 13
Calculation of Contingent Deferred Sales
Charge and Waiver of Sales Charges 16
Distribution Plans 17
How to Redeem Shares 18
Shareholder Services 20
Performance Data 22
Fund Shares 22
Additional Information 23
Additional Investment Information (i)
Exhibit A A-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FEE TABLE
KEYSTONE FUND OF THE AMERICAS
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and Expenses";
"How to Buy Shares"; "Distribution Plans"; and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION<F1> OPTION<F2>
--------- --------- ---------
<S> <C> <C> <C>
Sales Charge ...................................... 5.75%<F3> None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%<F4> 3.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market declining to 1.00% in year and 0.00%
value of shares redeemed) the fourth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)<F5> ................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES<F6>
(as a percentage of average net assets)
(after expense limitation)
Management Fees ................................... 0.75% 0.75% 0.75%
12b-1 Fees ........................................ 0.25% 1.00%<F7> 1.00%<F7>
Other Expenses .................................... 0.79% 0.79% 0.79%
---- ---- ----
Total Fund Operating Expenses ..................... 1.79% 2.54% 2.54%
---- ---- ----
---- ---- ----
<CAPTION>
EXAMPLES<F8> 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each period:
Class A ................................................................... $75.00 $111.00 $149.00 $256.00
Class B ................................................................... $56.00 $ 99.00 $135.00 $288.00
Class C ................................................................... $36.00 $ 79.00 $135.00 $288.00
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ................................................................... $75.00 $111.00 $149.00 $256.00
Class B ................................................................... $26.00 $ 79.00 $135.00 $288.00
Class C ................................................................... $26.00 $ 79.00 $135.00 $288.00
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<FN>
- ---------------
<F1> Class B shares convert tax free to Class A shares after seven calendar
years.
<F2> Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Distributors, Inc., the
Fund's principal underwriter.
<F3> The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Sales Charges."
<F4> Purchases of Class A shares in the amount of $1,000,000 or more are not
subject to a sales charge but may be subject to a contingent deferred sales
charge of 0.25%. See "Calculation of Contingent Deferred Sales Charge and
Waiver of Sales Charges" for an explanation of the charge.
<F5> There is no fee for exchange orders received by the Fund directly from a
shareholder over the Keystone Automated Response Line ("KARL"). (For a
description of KARL, see "Shareholder Services")
<F6> Expense ratios shown are for the Fund's fiscal year ended October 31, 1994.
<F7> Long term shareholders may pay more than the equivalent of the maximum
front end sales charges permitted by the National Association of Securities
Dealers, Inc. ("NASD").
<F8> The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Fund may be
greater or less than 5%.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE FUND OF THE AMERICAS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the auditors' report, in the Fund's Annual Report. The
Fund's financial statements, related notes, and auditors' report are included in
the statement of additional information. Additional information about the Fund's
performance is contained in its Annual Report, which will be made available upon
request and without charge.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
November 1, 1993 November 1, 1993 November 1, 1993
(Date of Initial (Date of Initial (Date of Initial
Public Offering) to Public Offering) to Public Offering) to
October 31, 1994 October 31, 1994 October 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE: BEGINNING OF YEAR ... $ 10.00 $ 10.00 $ 10.00
------ ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Investment income -- net ........... 0.212 0.144 0.142
Net gains on investment and foreign
currency related transactions .... 0.498 0.494 0.506
------ ------- ------
Total income from investment
operations ..................... 0.710 0.638 0.648
------ ------- ------
LESS DISTRIBUTIONS:
Investment income -- net ........... (0.102) (0.090) (0.090)
In excess of investment income --
net ............................ (0.009) (0.009) (0.009)
Tax basis return of capital ........ (0.049) (0.049) (0.049)
------ ------- ------
Total distributions .............. (0.160) (0.148) (0.148)
------ ------- ------
NET ASSET VALUE: END OF YEAR ......... $ 10.55 $ 10.49 $ 10.50
------ ------- ------
TOTAL RETURN <F1> .................... 7.21% 6.48% 6.58%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Operating and management expenses .. 1.79% 2.54% 2.54%
Investment income -- net ........... 2.45% 1.70% 1.74%
Portfolio turnover rate ............ 104% 104% 104%
NET ASSETS, END OF PERIOD (THOUSANDS) $23,880 $148,769 $17,740
------ ------- ------
<FN>
<F1> Excluding applicable sales charges.
</TABLE>
<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 16, 1993. The Fund is one of 30 funds managed or advised by Keystone
Custodian Funds, Inc. ("Keystone"), the Fund's investment adviser.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's primary objective is long term growth of capital through
investments in equity and fixed income securities of North America (the United
States and Canada) and Latin America (Mexico and countries in South and Central
America.) As a secondary objective, the Fund seeks current income.
PRINCIPAL INVESTMENTS
The Fund will invest in equity and debt securities issued by issuers located
in the United States and Canada, and the following emerging markets countries in
South and Central America: Mexico, Argentina, Brazil, Chile, Colombia, Costa
Rica, Peru, Uruguay and Venezuela. The Fund may from time to time discontinue
investments in any of the above-mentioned countries and/or begin investing in
other countries with emerging markets. For this purpose, countries with emerging
markets are generally those where the per capita income is in the low to middle
ranges, as determined by the International Bank for Reconstruction and
Development ("World Bank"). The Fund will invest in equity and debt securities
denominated in U.S. and foreign currencies. The Fund will invest at least 20% of
its assets in securities of the United States and Canada.
The equity securities in which the Fund may invest are common stock, preferred
stock (convertible or non-convertible), warrants or rights convertible into
common or preferred stock and partly paid stock. Investments in equity
securities in the United States and Canada will be chosen on the basis of their
fundamental investment merits and because of their ability to benefit from
increasing real economic growth in Latin America. Such selections will be made
from among companies which (1) have manufacturing/marketing operations in Latin
America; (2) export to Latin America; (3) manufacture intermediate goods which
are then used in final products which are exported to or sold in Latin America;
(4) have a direct investment in a Latin American company; and/or (5) may benefit
from increasing Latin American standards of living and freer trade as evidenced
by increased tourism to the United States (such as members of the airline, hotel
and entertainment industries).
The Fund may invest some or all of its assets in the following debt securities:
bonds, debentures, notes, loans, commercial paper, certificates of deposit, or
obligations issued or guaranteed by corporations, or the United States or a
foreign government or any of their agencies or instrumentalities, or any of
their political subdivisions as well as warrants, mortgage-backed securities and
debt securities convertible into common stock. The Fund may purchase high
yielding dollar or local currency denominated debt securities issued primarily
by Latin American governments and corporations. The Fund may purchase debt
securities with any rating or may purchase unrated securities. Bonds rated below
investment grade (i.e., BBB or lower by Standard & Poor's Corporation ("S&P") or
Baa or lower by Moody's Investors Service, Inc. ("Moody's")) generally involve
greater volatility of price and risk of principal and income than bonds in the
higher rating categories and are, on balance, considered predominantly
speculative.
The Fund will invest in bonds issued in exchange for restructured sovereign debt
of certain Latin American countries ("Brady Bonds"). These bonds are
collateralized by U.S. Government securities and denominated in U.S. dollars.
The Fund is currently authorized to invest in Brady Bonds of Argentina, Costa
Rica, Mexico, Uruguay and Venezuela; however, as additional Latin American
countries restructure external debt, their Brady Bonds may be considered for
investment by the Fund.
In allocating the Fund's investments among issuers located in different
countries, Keystone will take into consideration such countries' interest rate
environments and general economic conditions. Keystone will also evaluate the
relative values of different currencies on the basis of technical and political
data and such fundamental economic criteria as relative inflation rates and
trends, projected growth rates, balance of payments status and economic
policies. With respect to foreign corporate issuers, Keystone will consider the
financial condition of the issuer and market and economic conditions relevant to
its operations.
The Fund may invest up to 80% of its total assets in equity securities of
companies in Latin America. No more than 30% of the Fund's total assets may be
invested in the equity securities of issuers located in a particular Latin
American country. These equity securities may be traded on securities exchanges
or may have no organized market. The Fund will seek to moderate risk by varying
its investments among the asset classes of equities and bonds, as well as cash.
The Fund will give consideration to liquidity in selecting investments.
The Fund intends to follow policies of the Securities and Exchange Commission as
they are adopted from time to time with respect to illiquid securities,
including, at this time, (1) treating as illiquid securities which 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 total assets.
The Fund may invest in restricted securities, including securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933 (the "1933 Act").
Generally, Rule 144A establishes a safe harbor from the registration
requirements of the 1933 Act for resales by large institutional investors of
securities not publicly traded in the U.S. The Fund may purchase Rule 144A
securities when such securities present an attractive investment opportunity and
otherwise meet the Fund's selection criteria. The Board of Trustees has adopted
guidelines and procedures pursuant to which Keystone determines the liquidity of
the Fund's Rule 144A securities, The Board of Trustees monitors Keystone's
implementation of such guidelines and procedures.
At the present time, the Fund cannot accurately predict exactly how the market
for Rule 144A securities will develop. A Rule 144A security that was readily
marketable upon purchase may subsequently become illiquid. In such an event, the
Board of Trustees will consider what action, if any, is appropriate.
OTHER ELIGIBLE INVESTMENTS
When, in the opinion of Keystone, market conditions warrant, the Fund may
invest up to 100% of its assets for temporary defensive purposes in the
following types of money market instruments: (1) commercial paper, including
master demand notes, which at the date of investment is rated A-1 (the highest
grade given by S&P), Prime-1 (the highest grade by Moody's) or, if not rated by
such services, is issued by a company that at the date of investment has an
outstanding issue rated A or better by S&P or Moody's; (2) obligations,
including certificates of deposit and bankers' acceptances, of banks or savings
and loan associations with at least $1 billion in assets as of the date of their
most recently published financial statements that are members of the Federal
Deposit Insurance Corporation, including U.S. branches of foreign banks and
foreign branches of U.S. banks; (3) corporate obligations that, at the date of
investment, are rated A or better by S&P or Moody's; (4) obligations issued or
guaranteed by the U.S. government or by any agency or instrumentality of the
U.S.; and (5) repurchase agreements and reverse repurchase agreements for such
instruments. When the Fund's assets are being invested for temporary defensive
purposes, the Fund may not be pursuing its investment objective.
The Fund may invest in a variety of short term instruments, including repurchase
agreements, for the purpose of investing cash balances held by the Fund. The
Fund may purchase or sell foreign currency, purchase options on currency and
purchase or sell forward foreign currency exchange contracts to manage currency
exposure. In addition, the Fund may write covered call and put options on any
security in which the Fund may invest. The Fund may, for hedging purposes,
purchase and sell futures contracts and put and call options on futures
contracts. The Fund may purchase securities on a when-issued, partly paid, or
forward commitment basis and may engage in the lending of portfolio securities.
The Fund is authorized to enter into forward currency exchange contracts if, as
a result, no more than 75% of the value of the investing portfolio would be
committed to the consummation of such contracts; provided, however, that the
Fund has satisfied the requirements imposed by the Securities and Exchange
Commission under the 1940 Act.
For further information about the types of investments and investment techniques
available to the Fund, including the risks associated with such investments and
investment techniques, see the section of this prospectus entitled "Additional
Investment Information" and the statement of additional information.
Of course, there can be no assurance that the Fund will achieve its investment
objective since there is uncertainty in every investment.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVE
The Fund's investment objective is fundamental and may not be changed without
the vote of a majority (as defined in the 1940 Act) of the Fund's outstanding
shares.
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 (which means the lesser of (1) 67% of the shares represented
at a meeting at which more than 50% of the outstanding shares are represented or
(2) more than 50% of the outstanding shares). These restrictions and certain
other fundamental restrictions are set forth in the statement of additional
information.
The Fund may not do the following: (1) invest more than 5% of its assets in the
securities of any one issuer, except that 25% of its assets may be invested
without regard to this limit; (2) borrow money, except from a bank for temporary
or emergency purposes (not for leveraging or investment), in an amount not
exceeding one-third of the value of its total assets; and (3) invest more than
25% or more of its total assets in securities of issuers in the same industry.
RISK FACTORS
Investing in the Fund involves the risk inherent in any investment in a
security, i.e., net asset value will fluctuate in response to changes in
economic conditions, interest rates and the market's perception of the
underlying securities of the Fund.
By itself, the Fund does not constitute a balanced investment plan. The Fund
stresses providing long term growth of capital by investing principally in
equity and fixed income securities of issuers located in North, Central and
South America. The yield of the Fund's securities will fluctuate with changing
market conditions. The Fund makes most sense for those investors who can afford
to ride out changes in the stock market.
Investing in the Fund, with its globally varied investments, may involve more
risk than investing in a fund with a portfolio consisting solely of securities
of domestic issuers for the following reasons: (1) there may be less public
information available about foreign companies than is available about U.S.
companies; (2) foreign companies are not generally subject to the uniform
accounting, auditing and financial reporting standards and practices applicable
to U.S. companies; (3) foreign stock markets have less volume than the U.S.
market and the securities of some foreign companies are much less liquid and
much more volatile than the securities of comparable U.S. companies; (4) foreign
securities transactions may involve higher brokerage commissions; (5) there may
be less government regulation of stock markets, brokers, listed companies and
banks in foreign countries than in the U.S.; (6) the Fund may incur fees on
currency exchanges when it changes investments from one country to another; (7)
the Fund's foreign investments could be affected by expropriation, confiscatory
taxation, nationalization, establishment of currency controls, political or
social instability or diplomatic developments; (8) foreign governments may
withhold income on investments; and (9) fluctuations in foreign exchange rates
will affect the value of the Fund's investments, the value of dividends and
interest earned, gains and losses realized on the sale of securities, net
investment income and unrealized appreciation or depreciation of investments.
Investing in securities of issuers in emerging markets countries involves
exposure to economic systems that are generally less mature and political
systems that are generally less stable than those of developed countries. In
addition, investing in companies in emerging markets countries may also involve
exposure to national policies that may restrict investment by foreigners and
undeveloped legal systems governing private and foreign investments and private
property. The typically small size of the markets for securities issued by
companies in emerging markets countries and the possibility of a low or
nonexistent volume of trading in those securities may also result in a lack of
liquidity and in price volatility of those securities.
The Fund seeks to maximize investment return to its shareholders over time from
a combination of many factors, including high current income and capital
appreciation from high yielding, high risk bonds and other similar securities
commonly referred to as "junk bonds." Realizing this objective involves risks
that are greater than the risks of investing in higher quality debt securities
and may result in greater upward and downward movements in the net asset value
per share of the Fund. These risks should be carefully considered by investors.
These risks are discussed in greater detail below and include risks from
interest rate fluctuations; changes in credit status, including weaker overall
credit condition of issuers and risks of default; industry, market and economic
risk; volatility of price resulting from broad and rapid changes in the value of
underlying securities; and greater price variability and credit risks of certain
high yield, high risk securities such as zero coupon bonds and PIKs.
While investment in the Fund provides opportunities to maximize return over
time, investors should be aware of the following risks associated with
noninvestment grade bonds:
(1) Securities rated BB or lower by S&P or BA or lower by Moody's are considered
predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments.
(2) The lower ratings of certain securities held by the Fund reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest rates
may impair the ability of the issuer to make payments of interest and principal,
especially if the issuer is highly leveraged. Such issuer's ability to meet its
debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. Also, an economic
downturn or an increase in interest rates may increase the potential for default
by the issuers of these securities.
(3) The value of certain securities held by the Fund may be more susceptible to
real or perceived adverse economic, company or industry conditions and publicity
than is the case for higher quality securities.
(4) The values of certain securities, like those of other fixed income
securities, fluctuate in response to changes in interest rates. When interest
rates decline, the value of a portfolio invested in bonds can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested in
bonds can be expected to decline. For example, in the case of an investment in a
fixed-income security, if interest rates increase after the security is
purchased, the security, if sold prior to maturity, may return less than its
cost. The prices of noninvestment grade bonds, however, are generally less
sensitive to interest rate changes than the prices of higher-rated bonds;
noninvestment grade bonds are more sensitive to adverse or positive economic
changes or individual corporate developments.
(5) The secondary market for certain securities held by the Fund may be less
liquid at certain times than the secondary market for higher quality debt
securities, which may have an adverse effect on market price and the Fund's
ability to dispose of particular issues and may also make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing its
assets.
(6) Zero coupon bonds and PIKs involve additional special considerations. Zero
coupon bonds do not require the periodic payment of interest. PIK bonds are debt
obligations that provide that the issuer may, at its option, pay interest on
such bonds in cash or in the form of additional debt obligations. Such
investments may experience greater fluctuation in value due to changes in
interest rates than debt obligations that pay interest currently. Even though
these investments do not pay current interest in cash, the Fund is nonetheless
required by tax laws to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate investments in order to fulfill its intention
to distribute substantially all of its net income as dividends.
The generous income sought by the Fund is ordinarily associated with securities
in the lower rating categories of the recognized rating agencies or with
securities that are unrated. Such securities are generally rated BB or lower by
S&P or BA or lower by Moody's. The Fund may invest in securities that are rated
as low as D by S&P and C- by Moody's. It is possible for securities rated D or
C-, respectively, to have defaulted on payments of principal and/or interest at
the time of investment. The section of this prospectus entitled "Additional
Investment Information" describes these rating categories. The Fund intends to
invest in D rated debt only in cases when, in Keystone's judgment, there is a
distinct prospect of improvement in the issuer's financial position as a result
of the completion of reorganization or otherwise. The Fund may also invest in
unrated securities that, in Keystone's judgment, offer comparable yields and
risks to those of securities that are rated, as well as in non-investment
quality zero coupon bonds or PIKs.
Keystone considers the ratings of Moody's and S&P assigned to various
securities, but does not rely solely on such ratings because (1) Moody's and S&P
assigned ratings are based largely on historical financial data and may not
accurately reflect the current financial outlook of companies, and (2) there can
be large differences among the current financial conditions of issuers within
the same rating category.
The following table shows the weighted average percentages of the Fund's assets
invested at the end of each month from November 1, 1993 (commencement of
operations) until fiscal year ended October 31, 1994 in securities assigned to
the various rating categories by S&P and in unrated securities determined by
Keystone to be of comparable quality. Since the percentages in this table are
based on month-end averages throughout the Fund's fiscal year, they do not
reflect the Fund's holdings at any one point in time. The percentages in each
category may be higher or lower on any day than those shown in the table.
*UNRATED SECURITIES
OF COMPARABLE
RATED SECURITIES QUALITY AS
AS PERCENTAGE OF PERCENTAGE OF
RATING FUND'S ASSETS FUND'S ASSETS
- ---- ---------------- -------------------
AAA 0% 0.9%
AA 0.93% 0%
A 0% 1.09%
BBB 0% 1.16%
BB 1.21% 2.28%
B 4.61% 1.24%
CCC 0% 0%
CC 0% 0%
C 0% 0%
CA 0% 0%
Unrated* 6.56%
U.S. governments, cash, equities
and others 86.9%
-------
TOTAL 100.00%
-------
Since the Fund takes an aggressive approach to investing, Keystone tries to
maximize the return by controlling risk through diversification, credit
analysis, review of sector and industry trends, interest rate forecasts and
economic analysis. Keystone's analysis of securities focuses on values based on
factors such as interest or dividend coverage, asset values, earnings prospects
and the quality of management of the company. In making investment
recommendations, Keystone also considers current income, potential for capital
appreciation, maturity structure, quality guidelines, coupon structure, average
yield, percentage of zeros and PIKs, percentage of non-accruing items and yield
to maturity.
Income and yields on high yield, high risk securities, as on all securities,
will fluctuate over time.
Past performance should not be considered representative of results for any
future period of time. Moreover, should many shareholders change from this Fund
to some other investment at about the same time, the Fund might have to sell
portfolio securities at a time when it would be disadvantageous to do so and at
a lower price than if such securities were held to maturity or until an
investment decision is made to dispose of them.
For additional information regarding the Fund's investments in Rule 144A
securities, see "Investment Objective and Policies". For further information
about the types of investments and investment techniques available to the Fund,
including the associated risks, see "Additional Investment Information" and the
statement of additional information.
PRICING SHARES
The net asset value of a share of the Fund is computed each day on which the
New York Stock Exchange (the "Exchange") is open as of the close of trading on
the Exchange (currently 4:00 p.m. Eastern Standard time for the purpose of
pricing Fund shares) except on days when changes in the value of the Fund's
securities do not affect the current net asset value of its shares. The Exchange
currently is closed on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the 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.
Current values for the Fund's North American securities are determined as
follows:
1. securities that are traded on a national securities exchange or on the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the
time of the valuation, provided that a sale has occurred and that this price
reflects current market value according to procedures established by the Board
of Trustees;
2. securities traded in the over-the-counter market, other than NMS, for
which market quotations are readily available, are valued at the mean of the
bid and asked prices at the time of valuation;
3. instruments having maturities of more than sixty days for which market
quotations are readily available are valued at current market value; where
market quotations are not available, such instruments are valued at fair value
as determined by the Board of Trustees;
4. instruments which are purchased with maturities of sixty days or less
(including all master demand notes) are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount) which, when combined with accrued interest, approximates market;
instruments maturing in more than sixty days when purchased which are held on
the sixtieth day prior to maturity are valued at amortized cost (market value
on the sixtieth day adjusted for amortization of premium or accretion of
discount) which, when combined with accrued interest, approximates market; and
which in either case reflects fair value as determined by the Fund's Board of
Trustees; and
5. the following are valued at prices deemed in good faith to be fair under
procedures established by the Board of Trustees: (1) securities, including
restricted securities, for which complete quotations are not readily
available, (2) listed securities or those on NMS if, in the Fund's opinion,
the last sales price does not reflect a current market value or if no sale
occurred, and (3) other assets.
Each Latin American country in whose equity securities the Fund invests has at
least one stock exchange. Many of the equity securities in which the Fund
invests are traded on these exchanges and have readily available market
quotations. The Fund may participate in direct purchases from a Latin American
government of equity securities resulting from the privatization of government
owned entities. In such purchases, the government accepts the highest bid from a
group of purchasers (including the Fund) for the entire interest in the entity.
The initial value of the Fund's investment is its pro rata share of the
successful bid; thereafter market quotations may not be readily available.
Foreign securities for which market quotations are not readily available are
valued on the basis of valuations provided by a pricing service, approved by the
Fund's Board of Trustees, which uses information with respect to transactions in
such securities, quotations from broker-dealers, market transactions in
comparable securities and various relationships between securities and yield to
maturity in determining value.
DIVIDENDS AND TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code (the "Code"). The Fund
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for its fiscal year. The Fund also intends to
make timely distributions, if necessary, sufficient in amount to avoid the
nondeductible 4% excise tax imposed on a regulated investment company to the
extent that it fails to distribute, with respect to each calendar year, at least
98% of its ordinary income for such calendar year and 98% of its net capital
gains for the one-year period ending on October 31 of such calendar year. Any
taxable distributions would be (1) declared in October, November or December to
shareholders of record in such a month, (2) paid by the following January 31,
and (3) includable in the taxable income of the shareholder for the year in
which the distributions were declared. If the Fund qualifies and if it
distributes substantially all of its net investment income and net capital
gains, if any, to shareholders, it will be relieved of any federal income tax
liability. The Fund will make distributions from its net investment income
quarterly, and net capital gains, if any, annually. Because Class A shares bear
most of the costs of distribution of such shares through payment of a front end
sales charge while Class B and Class C shares bear such expenses through a
higher annual distribution fee, expenses attributable to Class B shares and
Class C shares will generally be higher, and income distributions paid by the
Fund with respect to Class A shares will generally be greater than those paid
with respect to Class B and Class C shares.
Distributions are payable in shares of the Fund or, at a shareholder's option
(which must be exercised before the record date for the distribution), in cash.
Distributions are reinvested at net asset value without any sales charge. Income
dividends and net short-term gains distributions are taxable as ordinary income
and net long-term gains distributions are taxable as capital gains regardless of
how long Fund shares have been held. However, if Fund shares held for less than
six months are sold at a loss, such loss will be treated for tax purposes as a
long-term capital loss to the extent of any long-term capital gains dividends
received. Dividends and distributions may also be subject to state and local
taxes. The Fund advises Fund shareholders annually as to the federal tax status
of all distributions made during the year.
If more than 50% of the value of the Fund's total assets at the end of a fiscal
year is represented by securities of foreign corporations and the Fund elects to
make foreign tax credits available to its shareholders, a shareholder will be
required to include in his gross income both actual dividends and the amount the
Fund advises him is his pro rata portion of income taxes withheld by foreign
governments from interest and dividends paid on the Fund's investments. The
shareholder will be entitled, however, to take the amount of his share of such
foreign taxes withheld as a credit against his United States income tax, or to
treat his share of the foreign tax withheld as an itemized deduction from his
gross income, if that should be to his advantage. In substance, this policy
enables the shareholder to benefit from the same foreign tax credit or deduction
that he would have received if he had been the individual owner of foreign
securities and had paid foreign income tax on the income therefrom. As in the
case of individuals receiving income directly from foreign sources, the above
described tax credit and deductions are subject to certain limitations.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the Fund's Board of Trustees, Keystone, the Fund's
investment adviser, provides investment advice, management and administrative
services to the Fund.
INVESTMENT ADVISER
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
has provided investment advisory and management services to investment companies
and private accounts since it was organized in 1932. Keystone is a wholly-owned
subsidiary of Keystone Group, Inc. ("Keystone Group"), located at 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
Keystone Group, Inc. is a corporation privately owned by current and former
members of management and certain employees of Keystone and its affiliates. The
shares of Keystone Group common stock beneficially owned by management are held
in a number of voting trusts, the Trustees of which are George S. Bissell,
Albert H. Elfner, III, Roger T. Wickers, Edward F. Godfrey and Ralph J.
Spuehler, Jr. Keystone provides accounting, bookkeeping, legal, personnel and
general corporate services to Keystone, its affiliates and the Keystone Group of
Mutual Funds.
Pursuant to its Investment Advisory and Management Agreement (the "Agreement")
with the Fund, Keystone manages the investment and reinvestment of the Fund's
assets, supervises the operation of the Fund, provides all necessary office
space, facilities, equipment and personnel and arranges, at the request of the
Fund, for its employees to serve as officers or agents of the Fund.
The Fund pays Keystone a fee for its services at the annual rates set forth
below:
Aggregate Net Asset
Management Value of the Shares
Fee of the Fund
- ------------------------------------------------------------------------------
0.75% of the first $200,000,000, plus
0.65% of the next $200,000,000, plus
0.55% of the next $200,000,000, plus
0.45% of amounts over $600,000,000
Keystone's fee is computed as of the close of business on each business day and
payable daily.
For the year ended October 31, 1994, the Fund paid or accrued to Keystone
investment management and administrative services fees of $1,141,378, which
represented 0.75% of the Fund's average net assets on an annualized basis.
A management fee of 0.75% is higher than that paid by most other investment
companies. However, the Fund's fee structure is comparable to that of other
global and international funds subject to the higher costs involved in managing
a portfolio of predominantly international securities.
The Agreement continues in effect from year to year only so long as such
continuance is specifically approved at least annually by the Fund's Board of
Trustees or by vote of a majority of the outstanding shares of the Fund. In
either case, the terms of the Agreement and continuance thereof must be approved
by the vote of a majority of Independent Trustees in person at a meeting called
for the purpose of voting on such approval. The Agreement may be terminated,
without penalty, on 60 days' written notice by the Fund or Keystone. The
Agreement will terminate automatically upon its assignment.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and management fees discussed herein, the principal expenses the Fund is
expected to pay include, but are not limited to, its pro rata portion of certain
Trustees' fees; the Fund's transfer, dividend disbursing and shareholder
servicing agent expenses; the Fund's custodian expenses; fees of the Fund's
accountants, as well as legal counsel to the Fund's Trustees; fees payable to
government agencies, including registration and qualification fees attributable
to the Fund and its shares under federal and state securities laws; and certain
extraordinary expenses. In addition, each class will pay all of the expenses
attributable to it. Such expenses are currently limited to Distribution Plan
expenses. The Fund also pays its brokerage commissions, interest charges and
taxes.
For the fiscal year ended October 31, 1994, the Fund's Class A, Class B and
Class C Shares paid 1.79%, 2.54% and 2.54% of their respective average class net
assets in expenses.
During the fiscal year ended October 31, 1994, the Fund paid or accrued to
Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and
dividend disbursing agent, and Keystone Group, $11,874 for certain accounting
services and $703,114 for transfer agent services. KIRC is a wholly-owned
subsidiary of Keystone.
PORTFOLIO MANAGER
Gilman C. Gunn is the Fund's Portfolio Manager. He has been Senior Vice
President, Senior Portfolio Manager for Keystone and head of Keystone's
International Group for four years. Prior to that he headed a global investment
department at Citibank in London.
SECURITIES TRANSACTIONS
Under policies established by the Fund's Board of Trustees, the Fund's
advisers select broker-dealers to execute transactions subject to the receipt of
best execution. When selecting broker-dealers to execute portfolio transactions,
the Fund's advisers may consider as a factor the number of shares of the Fund
sold by such broker-dealer. In addition, broker-dealers executing portfolio
transactions may, from time to time, be affiliated with the Fund, Keystone, the
Fund's principal underwriter or their affiliates.
The Fund may pay higher commissions to broker-dealers 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 each of the Fund's Class A, Class B
and Class C shares for the fiscal year ended October 31, 1994 were 104%. High
portfolio turnover may involve correspondingly greater brokerage commissions and
other transaction costs, which would be borne directly by the Fund, as well as
additional gains and/or losses to shareholders. For further information about
brokerage and distributions, see the statement of additional information.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with Keystone Distributors, Inc. ("KDI"), the Fund's principal
underwriter. KDI, a wholly-owned subsidiary of Keystone, is located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of the Fund by
mailing to the Fund c/o KIRC, P.O. Box 2121, Boston, Massachusetts 02106-2121, a
completed account application and a check payable to the Fund, or you may
telephone 1-800-343-2898 to obtain the number of an account to which you can
wire or electronically transfer funds, and then send in a completed account
application. Subsequent investments in any amount may be made by check, by
wiring Federal funds or by an electronic funds transfer ("EFT").
Orders for the purchase of shares of the Fund will be confirmed at an offering
price equal to the net asset value per share next determined after receipt of
the order in proper form by KDI (generally as of the close of the Exchange on
that day) plus, in the case of Class A shares, the sales charge. Orders received
by dealers or other firms prior to the close of the Exchange and received by KDI
prior to the close of its business day will be confirmed at the offering price
effective as of the close of the Exchange on that day. The Fund reserves the
right to determine the net asset value more frequently than once a day if deemed
desirable. Dealers and other financial services firms are obligated to transmit
orders promptly.
Orders for shares received by broker-dealers prior to that day's close of
trading on the Exchange and transmitted to the Fund prior to its close of
business that day (4:00 p.m.) will receive the offering price equal to the net
asset value per share next determined plus, in the case of Class A shares, the
sales charge. Orders received by broker-dealers after that day's close of
trading on the Exchange and transmitted to the Fund prior to the close of
business on the next business day will receive the next business day's offering
price.
Orders for shares received directly by the Fund from you will receive the
offering price which is the net asset value per share next computed after the
Fund receives the purchase order plus, in the case of Class A shares, the sales
charge.
The initial purchase must be at least $1,000 for Class A, Class B and Class C
shares. There is no minimum amount for subsequent purchases.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free 1-800-
343-2898 or writing to KIRC or to the firm from which this prospectus was
received.
ALTERNATIVE SALES OPTIONS
The Fund offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class A
shares are not subject to a sales charge when they are redeemed (except that
shares sold in a single purchase in excess of $1,000,000 without a front end
sales charge will be subject to a contingent deferred sales charge for one
year).
CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed during the calendar
year of purchase or within three calendar years after the calendar year of
purchase. Class B shares will automatically convert to Class A shares at the end
of seven calendar years after the year of purchase.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with KDI.
Each class of shares, pursuant to its Distribution Plan, pays an annual service
fee of 0.25% of the Fund's average daily net assets attributable to that class.
In addition to the 0.25% service fee, the Class B and C Distribution Plans
provide for the payment of an annual distribution fee of up to 0.75% of the
average net assets attributable to their respective classes. As a result, income
distributions paid by the Fund with respect to Class B and Class C shares will
generally be less than those paid with respect to Class A shares.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spreading such cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares, in which
case 100% of the purchase price is invested immediately, depending on the
amount of the purchase and the intended length of investment. The Fund will
not normally accept any purchase of Class B shares in the amount of $250,000
or more, and will not normally accept any purchase of Class C shares in the
amount of $1,000,000 or more.
-------------------------------------
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge as
follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED<F1> AMOUNT INVESTED
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 ................................... 5.75% 6.10% 5.25%
$50,000 but less than 100,000 ....................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000 ..................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ..................... 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 ................... 1.50% 1.52% 1.50%
$1,000,000 and over<F2> ............................. 0% 0% 0.25%
<FN>
- ---------
<F1> Rounded to the nearest one-hundredth percent.
<F2> Purchases of $1,000,000 or more may be subject to a contingent deferred
sales charge of 0.25%. See "Calculation of Contingent Deferred Sales Charge
and Waiver of Sales Charges".
</TABLE>
-------------------------------------
The sales charge is paid to KDI which in turn normally reallows a portion to
your broker-dealer. In addition, your broker-dealer currently will be paid
periodic service fees at an annual rate of up to 0.25% of the average daily net
asset value of outstanding shares of Class A sold by your dealer.
Upon written notice to dealers with whom it has dealer agreements, KDI may
reallow up to the full applicable sales charge.
Initial sales charges may also be eliminated for persons purchasing Class A
shares to be included in a managed fee based program ("wrap account") through
broker dealers who have entered into special agreements with KDI. Initial sales
charges may be reduced or eliminated for persons or organizations purchasing
Class A shares of the Fund alone or in combination with Class A shares of other
Keystone America Funds. See Exhibit A to this prospectus.
Upon prior notification to KDI, Class A shares may be purchased at net asset
value by clients of registered representatives within six months after a change
in the registered representative's employment, where the amount invested
represents redemption proceeds from a registered open-end management investment
company not distributed or managed by Keystone or its affiliates; and the
shareholder either (i) paid a front end sales charge, or (ii) was at some time
subject to, but did not actually pay, a contingent deferred sales charge with
respect to the redemption proceeds.
In addition, since January 1, 1995 and through June 30, 1995 ("offering period")
and upon prior notification to KDI, Class A shares may be purchased at net asset
value by clients of registered representatives within six months after the
redemption of shares of any registered open-end investment company not
distributed or managed by Keystone or its affiliates, where the amount invested
represents redemption proceeds from such unrelated registered open-end
investment company, and the shareholder either (i) paid a front end sales
charge, or (ii) was at some time subject to, but did not actually pay, a
contingent deferred sales charge with respect to the redemption proceeds.
With certain exceptions, purchases of Class A shares in the amount of $1,000,000
or more on which no sales charge has been paid will be subject to a contingent
deferred sales charge of 0.25% upon redemption during the one year period
commencing on the date the shares were originally purchased. The contingent
deferred sales charge is retained by KDI. See "Calculation of Contingent
Deferred Sales Charges and Waiver of Sales Charges" below.
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
("Class A Distribution Plan"), which provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares, in connection with the distribution of Class A shares. Payments under
the Class A Distribution Plan are currently made to KDI (which may reallow all
or part to others, such as dealers) as service fees at an annual rate of up to
0.25% of the average daily net asset value of Class A shares maintained by the
recipients outstanding on the books of the Fund for specific periods.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With certain exceptions, the Fund may impose a deferred sales charge of
3.00% on shares redeemed during the calendar year of purchase and the first
calendar year after the year of purchase; 2.00% on shares redeemed during the
second calendar year after the year of purchase; and 1.00% on shares redeemed
during the third calendar year after the year of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by KDI. Amounts received by KDI under the
Class B Distribution Plan are reduced by deferred sales charges retained by KDI.
See "Calculation of Contingent Deferred Sales Charges and Waiver of Sales
Charges" below.
Class B shares which have been outstanding during seven calendar years will
automatically convert to Class A shares which are subject to a lower
Distribution Plan charge, without imposition of a front end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificates to KIRC.) The Class B shares
so converted will no longer be subject to the higher expenses borne by Class B
shares. Because the net asset value per share of the Class A shares may be
higher or lower than that of the Class B shares at the time of conversion,
although the dollar value will be the same, a shareholder may receive more or
less Class A shares than the number of Class B shares converted. Under current
law, it is the Fund's opinion that such a conversion will not constitute a
taxable event under federal income tax law. In the event that this ceases to be
the case, the Board of Trustees will consider what action, if any, is
appropriate and in the best interests of the Class B shareholders.
CLASS B DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class B shares
("Class B Distribution Plan"), which provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class B shares, to pay
expenses of the distribution of Class B shares. Payments under the Class B
Distribution Plan are currently made to KDI (which may reallow all or part to
others, such as dealers) (1) as commissions for Class B shares sold and (2) as
shareholder service fees. Amounts paid or accrued to KDI under (1) and (2) in
the aggregate may not exceed the annual limitation referred to above. KDI
generally reallows to brokers or others a commission equal to 3% of the price
paid for each Class B share sold and the shareholder service fee, which is paid
at the rate of 0.25% per annum of the net asset value of shares maintained by
the recipients outstanding on the books of the Fund for specified periods. See
"Distribution Plans" below.
CLASS C SHARES
Class C shares are available only through dealers who have entered into
special distribution agreements with KDI. Class C shares are offered at net
asset value, without an initial sales charge. With certain exceptions, the Fund
may impose a deferred sales charge of 1.00% on shares redeemed within one year
after the date of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter. If imposed, the deferred sales charge is deducted from the
redemption proceeds otherwise payable to you. The deferred sales charge is
retained by KDI. See "Calculation of Contingent Deferred Sales Charges and
Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class C shares
("Class C Distribution Plan"), which provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares, to pay
expenses of the distribution of Class C shares. Payments under the Class C
Distribution Plan are currently made to KDI (which may reallow all or part to
others, such as dealers) (1) as commissions for Class C shares sold and (2) as
shareholder service fees. Amounts paid or accrued to KDI under (1) and (2) in
the aggregate may not exceed the annual limitation referred to above. KDI
generally reallows to brokers or others a commission in the amount of 0.75% of
the price paid for each Class C share sold, plus the first year's service fee in
advance in the amount of 0.25% of the price paid for each Class C share sold,
and, beginning approximately fifteen months after purchase, a commission at an
annual rate of 0.75% (subject to the NASD rule -- see "Distribution Plans") plus
service fees which are paid at the annual rate of 0.25%, respectively, of the
average daily net asset value of each share maintained by the recipients
outstanding on the books of the Fund for specified periods. See "Distribution
Plans" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class A,
Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net cost of such shares. No contingent
deferred sales charge is imposed when you redeem amounts derived from (1)
increases in the value of your account above the net cost of such shares due to
increases in the net asset value per share of the Fund; (2) certain shares with
respect to which the Fund did not pay a commission on issuance, including shares
acquired through reinvestment of dividend income and capital gains
distributions; (3) Class C shares and certain Class A shares held for more than
one year from the date of purchase; or (4) Class B shares held during more than
four consecutive calendar years. Upon request for redemption, shares not subject
to the contingent deferred sales charge will be redeemed first. Thereafter,
shares held the longest will be the first to be redeemed.
The Fund also may sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a contingent deferred sales charge to
certain Directors, Trustees, officers and employees of the Fund and Keystone and
certain of their affiliates, to registered representatives of firms with dealer
agreements with KDI and to a bank or trust company acting as a trustee for a
single account.
In addition, no contingent deferred sales charge is imposed on a redemption of
shares of the Fund in the event of (1) death or disability of the shareholder,
(2) a lump-sum distribution from a 401(k) plan or other benefit plan qualified
under the Employee Retirement Income Security Act of 1974 ("ERISA"), (3)
automatic withdrawals from ERISA plans if the shareholder is at least 59 1/2
years old, (4) involuntary redemptions of accounts having an aggregate net asset
value of less than $1,000 or (5) automatic withdrawals under an automatic
withdrawal plan of up to 1 1/2% per month of the shareholder's initial account
balance.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
KDI may, from time to time, provide promotional incentives, including
reallowance of up to the entire sales charge, to certain dealers whose
representatives have sold or are expected to sell significant amounts of the
Fund. In addition, dealers may from time to time receive additional cash
payments. KDI may also provide written information to dealers with whom it has
dealer agreements that relates to sales incentive campaigns conducted by such
dealers for their representatives as well as financial assistance in connection
with pre-approved seminars, conferences and advertising. No such programs or
additional compensation will be offered to the extent they are prohibited by the
laws of any state or any self-regulatory agency such as the NASD. Dealers to
whom substantially the entire sales charge on Class A shares is reallowed may be
deemed to be underwriters as that term is defined under the Securities Act of
1933.
KDI may, at its own expense, pay concessions in addition to those described
above to dealers which satisfy certain criteria established from time to time by
KDI. These conditions relate to increasing sales of shares of the Keystone funds
over specified periods and certain other factors. Such payments may, depending
on the dealer's satisfaction of the required conditions, be up to .25% of the
value of shares sold by such dealer.
KDI also may pay banks and other financial services firms that facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the payments made allowable to dealers for the sale of such shares as
described above.
The Glass-Steagall Act currently limits the ability of a depository institution
(such as a commercial bank or a savings and loan association) to become an
underwriter or distributor of securities. In the event the Glass- Steagall Act
is deemed to prohibit depository institutions from accepting payments under the
arrangement described above, or should Congress relax current restrictions on
depository institutions, the Board of Trustees will consider what action, if
any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares pursuant
to Rule 12b-1 under the 1940 Act. Payments under the Class A Distribution Plan
are currently limited to up to 0.25% annually of the average daily net asset
value of Class A shares and are used to pay shareholder service fees. The Class
B Distribution Plan and the Class C Distribution Plan provide for the payment at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares and Class C shares, respectively.
The NASD rule limits the amount that a Fund may pay annually in distribution
costs for the sale of its shares and shareholder service fees. The rule 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 rule also limits the aggregate
amount which 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% per annum on such amounts (less any contingent deferred
sales charges paid by shareholders to KDI), remaining unpaid from time to time.
KDI intends, but is not obligated, to continue to pay or accrue distribution
charges incurred in connection with the Class B Distribution Plan which exceed
current annual payments permitted to be received by KDI from the Fund. KDI
intends to seek full payment of such charges from the Fund (together with annual
interest thereon at the prime rate plus one percent) at such time in the future
as, and to the extent that, payment thereof by the Fund would be within the
permitted limits.
If the Fund is unable to pay KDI a commission on a new sale of Class C shares
because the annual maximum (0.75% of average daily net assets) has been reached,
KDI intends, but is not obligated, to continue to accept new orders for the
purchase of Fund shares and to pay or accrue commissions and service fees to
dealers in excess of the amount it currently receives from the Fund. While the
Fund is under no obligation to pay KDI such amounts which exceed the Class C
Distribution Plan limitation, KDI intends to seek full payment of such charges
(together with interest at the rate of prime plus one percent) at such time in
the future as, and to the extent that, payment thereof by the Fund be within
permitted limits.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of the Class B
Distribution Plan, KDI would be entitled to receive payment, at the annual rate
of 1.00% of the average daily net asset value of Class B shares, as compensation
for its services which had been earned at any time during which the Class B
Distribution Plan was in effect. Unpaid distribution costs at October 31, 1994
for Class B and Class C shares were $9,330,224 (6.27% of Class B net assets) and
$1,166,537 (6.58% of Class C net assets), respectively.
For the year ended October 31, 1994, the Fund paid KDI $48,948, $1,183,510 and
$136,483 pursuant to the Fund's Class A, B and C Distribution Plans,
respectively. The Fund makes no payments in connection with the sale of its
shares other than the fee paid to its Principal Underwriter.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell. Payments pursuant to a Distribution Plan are
included in the operating expenses of the class.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net asset value upon written order
to the Fund c/o KIRC, and presentation to the Fund of a properly endorsed share
certificate (if certificates have been issued). Your signature(s) on the written
order and certificates must be guaranteed as described below. The redemption
value is the net asset value and may be more or less than your cost depending
upon changes in the value of the Fund's securities between purchase and
redemption. In order to redeem by telephone, you must have completed the
authorization in your account application.
The redemption value equals net asset value per share and may be more or less
than your cost depending upon changes in the value of the Fund's securities
between purchase and redemption.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. In such a case, the Fund will mail the redemption
proceeds upon clearance of the purchase check, which may take 15 days. Any delay
may be avoided by purchasing shares either with a certified check or by Federal
Reserve or bank wire of funds or EFT. Although the mailing of a redemption
check, wiring or EFT of redemption proceeds may be delayed, the redemption value
will be determined and the redemption processed in the ordinary course of
business upon receipt of proper documentation. In such a case, after the
redemption and prior to the release of the proceeds, no appreciation or
depreciation will occur in the value of the redeemed shares, and no interest
will be paid on the redemption proceeds. If the payment of a redemption has been
delayed, the check will be mailed or the proceeds wired or sent EFT promptly
after good payment has been collected.
The Fund computes the amount due you at the close of the Exchange at the end of
the day on which it has received all proper documentation from you. Payment of
the amount due on redemption, less any applicable deferred sales charge, will be
made within seven days thereafter except as discussed herein.
You may also redeem your shares through broker-dealers. KDI, acting as agent for
the Fund, stands ready to repurchase Fund shares upon orders from dealers and
will calculate the net asset value on the same terms as those orders for the
purchase of shares received from broker-dealers and described under "How to Buy
Shares." If KDI has received proper documentation, it will pay the redemption
proceeds, less any applicable deferred sales charge, to the broker-dealer
placing the order within seven days thereafter. KDI charges no fees for this
service. However, your broker-dealer may charge a service fee.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund or KIRC may waive this
requirement but may also require additional documents in certain cases.
Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less when the account address of record has been the
same for a minimum period of 90 days. The Fund and KIRC reserve the right to
withdraw this waiver at any time.
If the Fund receives a redemption order, but you have not clearly indicated the
amount of money or number of shares involved, the Fund cannot execute the order.
In such cases, the Fund will request the missing information from you and
process the order on the day such information is received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. You must complete the
Telephone Redemptions section of the application to enjoy telephone redemption
privileges.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by check.
If they are $2,500 or more, they will be mailed, wired or sent by EFT to your
previously designated bank account as you direct. If you do not specify how you
wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the Fund by telephone, you should follow the procedures for
redeeming by mail or through a broker as set forth herein.
GENERAL
The Fund reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor KDI assumes responsibility
for the authenticity of any instructions received by any of them from a
shareholder in writing, over the Keystone Automated Response Line ("KARL") or by
telephone. KIRC will employ reasonable procedures to confirm that instructions
received over KARL or by telephone are genuine. Neither the Fund, KIRC nor KDI
will be liable when following instructions received over KARL or by telephone
that KIRC reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No deferred
sales charges are applied to such redemptions.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay for all
redemptions in cash, the Fund may authorize payment for shares to be made in
portfolio securities or other property. However, the Fund has obligated itself
under the 1940 Act to redeem for cash all Fund shares presented for redemption
by any one shareholder up to the lesser of $250,000 or 1% of the Fund's net
assets in any 90-day period. Securities delivered in payment of redemptions
would be valued at the same value assigned to them in computing the net asset
value per share and would, to the extent permitted by law, be readily
marketable. Shareholders receiving such securities would incur brokerage costs
when these securities are sold.
REDEMPTIONS OF CERTAIN CLASS A SHARES
Certain purchases of Class A shares in the amount of $1,000,000 or more, on
which no initial sales charge has been paid, are subject to a contingent
deferred sales charge of 0.25%. See the section entitled "Class A Shares".
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers shareholders specific fund account information and price and yield
quotations as well as the ability to effect account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a week.
EXCHANGES
A shareholder who has obtained the appropriate prospectus, you may exchange
shares of the Fund for shares of certain other Keystone America Funds and
Keystone Liquid Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone America
Funds and Class A shares of KLT;
Class B shares may be exchanged for Class B shares of other Keystone America
Funds and Class B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone America
Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are:
(i) Class A shares where the original purchase was for $1,000,000 or more and
no sales charge was paid,
(ii) Class B shares which have been held for less than four years, or
(iii) Class C shares which have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares for another Keystone fund for a $10 fee by calling or
writing to Keystone. The exchange fee is waived for individual investors who
make an exchange using KARL. Shares purchased by check are eligible for exchange
after 15 days. If the shares being tendered for exchange are still subject to a
deferred sales charge, such charge will carry over to the shares being acquired
in the exchange transaction. The Fund reserves the right, after providing the
required notice to shareholders, to terminate this exchange offer or to change
its terms, including the right to change the fee for each exchange.
Orders to exchange shares of the Fund for shares of KLT will be executed by
redeeming the shares of the Fund and purchasing shares of KLT at the net asset
value of such shares next determined after the proceeds from such redemption
become available, which may be up to seven days after such redemption. In all
other cases, orders for exchanges received by the Fund prior to 4:00 p.m. on any
day the Fund is open for business will be executed at the respective net asset
values determined as of the close of business that day. Orders for exchanges
received after 4:00 p.m. on any business day will be executed at the respective
net asset values determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund. Therefore,
the Fund, in addition to its right to reject any exchange, reserves the right to
terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the funds in a year or three in a calendar quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase shares in any amount and to redeem up to $50,000 worth of
shares. You can use Keystone America Money Line like an "electronic check" to
move money between your bank account and your account in the Fund with one
telephone call. You must allow two business days after the call for the transfer
to take place. For money recently invested, you must allow normal check clearing
time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in your
Keystone America account. Once proper authorization is given, your bank account
will be debited to purchase shares in the Fund. You will receive confirmation
from KDI for every transaction.
To change the amount of a Keystone America Money Line service or to terminate
such service (which could take up to 30 days), you must write KIRC, P.O. Box
2121, Boston, Massachusetts 02106-2121.
RETIREMENT PLANS
The Fund has various pension and profit-sharing plans available to investors,
including Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified
Employee Pension Plans ("SEPs"); Tax Sheltered Annuity Plans ("TSAs"), 401(k)
Plans; Keogh Plans; Corporate Profit-Sharing Pension Plans and Target Benefit
Plans; Money Purchase Pension Plans; and Salary-Reduction Plans. For details,
including fees and application forms, call toll free 1-800-247-4075 or write to
KIRC.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the Portfolio shares
in your account when the Automatic Withdrawal Plan is opened. Fixed withdrawal
payments are not subject to a deferred sales charge. Excessive withdrawals may
decrease or deplete the value of your account. Moreover, because of the effect
of the applicable sales charge, a Class A investor should not make continuous
purchases of the Fund's shares while participating in an Automatic Withdrawal
Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America Fund. This results in more shares being
purchased when the selected fund's net asset value is relatively low and fewer
shares being purchased when the fund's net asset value is relatively high, which
may cause a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must have established an
account in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and the fund in
which the investment is made. Thereafter, on the first day of the designated
month, an amount equal to the specified monthly or quarterly investment will
automatically be redeemed from your initial account and invested in shares of
the designated fund. If you are a Class A investor and paid a sales charge on
your initial purchase, the shares purchased will be eligible for Rights of
Accumulation and the sales charge applicable to the purchase will be determined
accordingly. In addition, the value of shares purchased will be included in the
total amount required to fulfill a Letter of Intent. If a sales charge was not
paid on the initial purchase, a sales charge will be imposed at the time of
subsequent purchases and the value of shares purchased will become eligible for
Rights of Accumulation and Letters of Intent.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any of your
Keystone America Funds automatically invested to purchase Class A shares of any
other Keystone America Fund. You may select this service on your application and
indicate the Keystone America Fund(s) into which distributions are to be
invested. The value of shares purchased will be ineligible for Rights of
Accumulation and Letters of Intent.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account at current net asset value.
PERFORMANCE DATA
From time to time the Fund may advertise "total return" and "current yield.
ALL DATA IS BASED ON HISTORICAL EARNINGS AND IS NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. Total return and 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 the maximum sales charge or applicable contingent
deferred sales charge and all recurring charges, if any, applicable to all
shareholder accounts. The exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated 30-
day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
The Fund may also include comparative performance data for each class of shares
in advertising or marketing the Fund's shares, such as data from Lipper
Analytical Services, Inc., Morningstar, Inc. Ibbotson Associates, Standard &
Poor's Corporation or other industry publications, including global indexes.
FUND SHARES
The Fund currently issues three classes of shares which participate
proportionately based on their relative net asset values in dividends and
distributions and have equal voting, liquidation and other rights except that
(1) expenses related to the distribution of each class of shares or other
expenses that the Board of Trustees may designate as class expenses from time to
time, are borne solely by each class; (2) each class of shares has exclusive
voting rights with respect to its Distribution Plan, (3) each class has
different exchange privileges and (4) each class has a different designation.
When issued and paid for, the shares will be fully paid and nonassessable by the
Fund. Shares may be exchanged as explained under "Shareholder Services" but will
have no other preference, conversion, exchange or preemptive rights. Shares are
redeemable, transferable and freely assignable as collateral. The Fund is
authorized to issue additional series or classes of shares.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of the Fund vote together except when
required by law to vote separately by class. The Fund does not have annual
meetings. The Fund will have special meetings from time to time as required
under its Declaration of Trust and under the 1940 Act. As provided in the
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 10% of the outstanding shares
request a meeting for the purpose of removing a Trustee. As prescribed by
Section 16(c) of the 1940 Act, 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. However, the Fund's Declaration of
Trust provides that shareholders shall not be subject to any personal liability
for the Fund's obligations and provides indemnification from Fund assets for any
shareholder held personally liable for the Fund's obligations. Disclaimers of
such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone and serves as the Fund's transfer agent and
dividend disbursing agent.
When the Fund determines from its records that more than one account in the Fund
is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
CORPORATE BOND RATINGS
Higher yields are usually available on securities that are lower rated or that
are unrated. Bonds rated Baa by Moody's are considered as medium grade
obligations which are neither highly protected nor poorly secured. Debt rated
BBB by S&P is regarded as having an adequate capacity to pay interest and repay
principal, although adverse economic conditions are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. Lower rated securities are usually defined as
Baa or lower by Moody's or BBB or lower by S&P. The Fund may purchase unrated
securities, which are not necessarily of lower quality than rated securities but
may not be attractive to as many buyers. Debt rated BB, B, CCC, CC and C by S&P
is regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposure to adverse
conditions. Debt rated C1 by S&P is debt (income bonds) on which no interest is
being paid. Debt rated D by S&P is in default and payment of interest and/or
repayment of principal is in arrears. The Fund intends to invest in D-rated debt
only in cases where in Keystone's judgment there is a distinct prospect of
improvement in the issuer's financial position as a result of the completion of
reorganization or otherwise. Bonds which are rated Caa by Moody's are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds which are rated Ca by
Moody's represent obligations which are speculative in a high degree. Such
issues are often in default or have other market shortcomings. Bonds which are
rated C by Moody's are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S., and the Fund may be subject to the risks associated with the
holding of such property overseas. Examples of governmental actions would be the
imposition of currency controls, interest limitations, withholding taxes,
seizure of assets or the declaration of a moratorium. Various provisions of
federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer, as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. The Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes purchased by the Fund permit the Fund to demand
payment of principal and accrued interest at any time (on not more than seven
days notice) and to resell the note at any time to a third party. Notes acquired
by the Fund may have maturities of more than one year, provided that (1) the
Fund is entitled to payment of principal and accrued interest upon not more than
seven days notice, and (2) the rate of interest on such notes is adjusted
automatically at periodic intervals, which normally will not exceed 31 days, but
may extend up to one year. The notes are deemed to have a maturity equal to the
longer of the period remaining to the next interest rate adjustment or the
demand notice period. Because these types of notes are direct lending
arrangements between the lender and borrower, such instruments are not normally
traded and there is no secondary market for these notes, although they are
redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with master demand note arrangements, Keystone considers, under
standards established by the Board of Trustees, earning power, cash flow and
other liquidity ratios of the borrower and will monitor the ability of the
borrower to pay principal and interest on demand. These notes are not typically
rated by credit rating agencies. Unless rated, the Fund will invest in them only
if at the time of an investment the issuer meets the criteria established for
commercial paper.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements; i.e., the Fund purchases a
security subject to the Fund's obligation to resell and the seller's obligation
to repurchase that security at an agreed upon price and date, such date usually
being not more than seven days from the date of purchase. The resale price is
based on the purchase price plus an agreed upon current market rate of interest
that (for purposes of the transaction) is generally unrelated to the coupon rate
or maturity of the purchased security. A repurchase agreement imposes an
obligation on the seller to pay the agreed upon price, which obligation is in
effect secured by the value of the underlying security. The value of the
underlying security is at least equal to the amount of the agreed upon resale
price and marked to market daily to cover such amount. The Fund may enter into
such agreements only with respect to U.S. government and foreign government
securities, which may be denominated in U.S. or foreign currencies. The Fund may
enter into such repurchase agreements with foreign banks and securities dealers
approved in advance by the Fund's Trustees. Whether a repurchase agreement is
the purchase and sale of a security or a collateralized loan has not been
definitively established. This might become an issue in the event of the
bankruptcy of the other party to the transaction. It does not presently appear
possible to eliminate all risks involved in repurchase agreements. These risks
include the possibility of an increase in the market value of the underlying
securities or inability of the repurchaser to perform its obligation to
repurchase coupled with an uncovered decline in the market value of the
collateral, including the underlying securities, as well as delay and costs to
the Fund in connection with enforcement or bankruptcy proceedings. Therefore, it
is the policy of the Fund to enter into repurchase agreements only with large,
well-capitalized banks that are members of the Federal Reserve System and with
primary dealers in U.S. government securities (as designated by the Federal
Reserve Board) whose creditworthiness has been reviewed and found satisfactory
by the Fund's advisers.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. The Fund intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions. At
the time the Fund enters into a reverse repurchase agreement, it will establish
a segregated account with the Fund's custodian containing liquid assets having a
value not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
that the Fund is obligated to repurchase may decline below the repurchase price.
Borrowing and reverse repurchase agreements magnify the potential for gain or
loss on the portfolio securities of the Fund and, therefore, increase the
possibility of fluctuation in the Fund's net asset value. Such practices may
constitute leveraging. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities and the Fund's use of
the proceeds of the reverse repurchase agreement may effectively be restricted
pending such determination. The staff of the Securities and Exchange Commission
has taken the position that the reverse repurchase agreements are subject to the
percentage limit on borrowings imposed under the 1940 Act.
FOREIGN SECURITIES
The Fund may invest in securities principally traded in securities markets
outside the U.S. While investment in foreign securities is intended to reduce
risk by providing further diversification, such investments involve sovereign
risk in addition to the credit and market risks normally associated with
domestic securities. Foreign investments may be affected favorably or
unfavorably by changes in currency rates and exchange control regulations. There
may be less publicly available information about a foreign company, particularly
emerging market country companies, than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign brokerage commissions and custodian
fees are generally higher than in the U.S. Investments in foreign securities may
also be subject to other risks different from those affecting U.S. investments,
including local political or economic developments, expropriation or
nationalization of assets, imposition of withholding taxes on dividend or
interest payments and currency blockage (which would prevent cash from being
brought back to the U.S.).
ZERO COUPON BONDS
A zero coupon (interest) "stripped" bond represents ownership in serially
maturing interest or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. These bonds mature on the payment
dates of the interest or principal which they represent. Each zero coupon bond
entitles the holder to receive a single payment at maturity. There are no
periodic interest payments on a zero coupon bond. Zero coupon bonds are offered
at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the rights and
privileges of owners of the underlying coupon obligations or principal
obligations. Owners of zero coupon bonds have the right upon default on the
underlying coupon obligations or principal obligations to proceed directly and
individally against the issuer and are not required to act in concert with other
holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon bonds
(either initially or in the secondary market) is treated as if the buyer had
purchased a corporate obligation issued on the purchase date with an original
issue discount equal to the excess of the amount payable at maturity over the
purchase price. The purchaser is required to take into income each year as
ordinary income an allocaable portion of such discounts determined on a
"constant yield" method. Any such income increases the holder's tax basis for
the zero coupon bond, and any gain or loss on a sale of the zero coupon bonds
relative to the holder's basis, as so adjusted, is a capital gain or loss. If
the holder owns zero coupon bonds representing separate interests in the coupon
(interest) payments and the principal payments from the same underlying issue of
securities, a special basis allocation rule (requiring the aggregate basis to be
allocated among the items sold and retained based on their relative fair market
values at the time of sale) may apply to determine the gain or loss on a sale of
any such zero coupon bonds.
SHORT SALES
The Fund may make short sales of securities "against the box." A short sale
involves the borrowing of a security, which must eventually be returned to the
lender. A short sale is "against the box" if, at all times when the short
position is open, the Fund owns the securities sold short or owns an equal
amount of securities convertible into, or exchangeable without further
consideration for, securities identical to the securities sold short. Short
sales against the box are used to defer recognition of gains or losses or in
order to receive a portion of the interest earned by the executing broker from
the proceeds of such sale. The proceeds of a short sale are held by the broker
until the settlement date when the Fund delivers the convertible security to
close out its short position. Although prior to such delivery the Fund will have
to pay an amount equal to any dividends paid on the securities sold short, the
Fund will receive the dividends from the securities convertible into the
securities sold short, plus a portion of the interest earned from the proceeds
of the short sale. The Fund will not make short sales of securities subject to
outstanding call options written by it. The Fund will segregate the securities
sold short or appropriate convertible securities in a special account with the
Fund's custodian in connection with its short sales "against the box."
PAYMENT-IN-KIND SECURITIES
Payment-in-kind securities pay interest in either cash or additional
securities, at the issuer's option, for a specified period. The issuer's option
to pay in additional securities typically ranges from one to six years compared
to an average maturity for all PIK securities of eleven years. Call protection
and sinking fund features are comparable to those offered on traditional debt
issues.
PIKs, like zero coupon bonds, are designed to give the issuer flexibility in
managing cash flow. Several PIKs are senior debt. In other cases, where PIKs are
subordinated, most senior lenders view them as equity equivalents.
An advantage of PIKs for the issuer -- as with zero coupon securities -- is that
interest payments are automatically compounded (reinvested) at the stated coupon
rate, which is not the case with cash-paying securities. However, PIKs are
gaining popularity over zeros since interest payments in additional securities
can be monetized and are more tangible than accretion of a discount.
As a group, PIK bonds trade flat (i.e., without accrued interest). Their price
is expected to reflect an amount representing accreted interest since the last
payment. PIKs generally trade at higher yields than comparable cash-paying
securities of the same issuer. Their premium yield is the result of the lesser
desirability of non-cash interest, the more limited audience for non-cash paying
securities, and the fact that many PIKs have been issued to equity investors who
do not normally own or hold such securities.
Calculating the true yield on a PIK security requires a discounted cash flow
analysis if the security (ex interest) is trading at a premium or a discount
because the realizable value of additional payments is equal to the current
market value of the underlying security, not par.
Regardless of whether PIK securities are senior or deeply subordinated, issuers
are highly motivated to retire them because they are usually their most costly
form of capital.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. These securities, which include
bonds, debentures, corporate notes, preferred stocks and other securities, are
securities which the holder can convert into common stock. Convertible
securities rank senior to common stock in a corporation's capital structure and,
therefore, entail less risk than that corporation's common stock. The value of a
convertible security is a function of its investment value (its market worth
without a conversion privilege) and its conversion value (its market worth if
exchanged). If a convertible security's investment value is greater than its
conversion value, its price primarily will reflect its investment value and will
tend to vary inversely with interest rates. (The issuer's creditworthiness and
other factors also may affect its value.) If a convertible security's conversion
value is greater than its investment value, its price will tend to be higher
than its conversion value, and it will tend to fluctuate directly with the price
of the underlying equity security.
LOANS OF SECURITIES
The Fund may lend its securities to broker-dealers or other institutional
borrowers for use in connection with such borrowers" short sales, arbitrages or
other securities transactions. Such loan transactions afford the Fund an
opportunity to continue to earn income on the securities loaned and at the same
time to earn income on the collateral held by it to secure the loan. Loans of
portfolio securities will be made (if at all) in strict conformity with
applicable federal and state rules and regulations. There may be delays in
recovery of loaned securities or even a loss of rights in collateral should the
borrower fail financially. Therefore, loans will be made only to firms deemed by
the Fund's advisers to be of good standing and will not be made unless, in the
judgment of the advisers, the consideration to be earned from such loans
justifies the risk. The Fund understands that it is the current view of the
staff of the SEC that the Fund is permitted to engage in loan transactions only
if it meets the following conditions: (1) the Fund must receive 100% collateral
in the form of cash or cash equivalents, e.g., U.S. Treasury bills or notes,
from the borrower; (2) the borrower must increase the collateral whenever the
market value of the securities (determined on a daily basis) exceeds the value
of the collateral; (3) the Fund must be able to terminate the loan, after
notice, at any time; (4) the Fund must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any dividends,
interest or other distributions on the securities loaned and any increase in the
securities' market values; (5) the Fund may pay only reasonable custodian fees
in connection with the loan; and (6) voting rights on the securities loaned may
pass to the borrower; however, if a material event affecting the securities
occurs, the Fund must be able to terminate the loan and vote proxies or enter
into an alternative arrangement with the borrower to enable the Fund to vote
proxies. Excluding items (1) and (2), these procedures may be amended from time
to time, as regulatory policies may permit, by the Fund's Board of Trustees
without shareholder approval. Such loans may not exceed 25% of the Fund's total
assets.
DERIVATIVES
The Fund may use derivatives in furtherance of its investment objective.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices. Derivatives can be used
to earn income or protect against risk, or both. For example, one party with
unwanted risk may agree to pass that risk to another party who is willing to
accept the risk, the second party being motivated, for example by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Fund to earn income and enhance
returns, to hedge or adjust the risk profile of the portfolio, and either in
place of more traditional direct investments or to obtain exposure to otherwise
inaccessible markets. The Fund is permitted to use derivatives for one or more
of these purposes, although the Fund generally uses derivatives primarily as
direct investments in order to enhance yields and broaden portfolio
diversification. Each of these uses entails greater risk than if derivatives
were used solely for hedging purposes. The Fund uses futures contracts and
related options for hedging purposes. Derivatives are a valuable tool which,
when used properly, can provide significant benefit to Fund shareholders.
Keystone is not an aggressive user of derivatives with respect to the Fund.
However, the Fund may take positions in those derivatives that are within its
investment policies if, in Keystone's judgement, this represents an effective
response to current or anticipated market conditions. Keystone's use of
derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options, futures,
forwards and swaps -- from which virtually any type of derivative transaction
can be created. Further information regarding options and futures is provided
later in this section and is provided in the Fund's statement of additional
information. The Fund does not presently engage in the use of swaps.
While the judicious use of derivatives by experienced investment managers such
as Keystone can be beneficial, derivatives also involve risks different from,
and, in certain cases, greater than, the risks presented by more traditional
investments.
Following is a general discussion of important risk factors and issues
concerning the use of derivatives that investors should understand before
investing in the Fund.
* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to the Fund's interest.
* Management Risk -- Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to the Fund's portfolio and the ability to forecast price,
interest rate or currency exchange rate movements correctly.
* Credit Risk -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to as
a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
* Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risk -- Other risks in using derivatives include the risk of mispricing
or improper valuation and the inability of derivatives to correlate perfectly
with underlying assets, rates and indices. Many derivatives; in particular,
privately negotiated derivatives, are complex and often valued subjectively.
Improper valuations can result in increased cash payment requirements to
counterparties or a loss of value to a Fund. Derivatives do not always
perfectly or even highly correlate or track the value of the assets, rates or
indices they are designed to closely track. Consequently, the Fund's use of
derivatives may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Fund's investment objective.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and put
options. No more than 25% of the Fund's net assets will be subject to covered
options. By writing a call option, the Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, the Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised.
The Fund may only write "covered" options. This means that so long as the Fund
is obligated as the writer of a call option it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
the Fund has written options against all of its securities which are eligible
for writing options, the Fund may be unable to write additional options unless
it sells a portion of its portfolio holdings to obtain new securities against
which it can write options. If this were to occur, higher portfolio turnover
and, correspondingly, greater brokerage commissions and other transaction costs
may result. The Fund does not expect, however, that this will occur.
The Fund will be considered "covered" with respect to a put option it writes if,
so long as it is obligated as the writer of the put option, it deposits and
maintains liquid assets having a value equal to or greater than the exercise
price of the option with the Fund's custodian in a segregated account.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call or
put option which it retains whether or not the option is exercised. By writing a
call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS. The Fund may purchase call or put options for the purpose
of offsetting previously written put or call options of the same series.
The Fund would normally purchase call options to hedge against an increase in
the market value of the Fund's securities. The purchase of a call option would
entitle the Fund, in return for the premium paid, to purchase specified
securities at a specified price, upon exercise of the option, during the option
period. The Fund would ordinarily realize a gain if, during the option period,
the value of such securities exceeds the sum of the exercise price, the premium
paid and transaction costs; otherwise the Fund would realize a loss on the
purchase of the call option.
The Fund may purchase put or call options; including purchasing put or call
options for the purpose of offsetting previously written put or call options of
the same series. If the Fund is unable to effect a closing purchase transaction
with respect to covered options it has written, the Fund will not be able to
sell the underlying securities until the options expire or are exercised.
The Fund would normally purchase put options to hedge against a decline in the
market value of securities in its portfolio (protective puts). The Fund will not
engage in such transactions for speculation. The purchase of a put option would
entitle the Fund, in exchange for the premium paid, to sell specified securities
at a specified price, upon exercise of the option, during the option period.
Gains and losses on the purchase of protective put options would tend to be
offset by countervailing changes in the value of underlying portfolio
securities. The Fund would ordinarily realize a gain if, during the option
period, the value of the underlying securities declined below the exercise price
sufficiently to cover the premium and transaction costs; otherwise the Fund
would realize a loss on the purchase of the put option.
The Fund may purchase put and call options on securities indices for the same
purposes as the purchase of options on securities. Currently, only options on
stock indices are traded and only on national exchanges. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security. The
Fund's purchases of securities index options is subject to the risk that the
value of its portfolio securities may not change as much as an index because the
Fund's investments generally cannot match exactly the composition of an index.
An option position may be closed out only in a secondary market for an option of
the same series. Although the Fund will generally write only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market will exist for any particular option at any particular
time, and for some options no secondary market may exist. In such event it might
not be possible to effect a closing transaction in a particular option.
Options on some securities are relatively new, and it is impossible to predict
the amount of trading interest that will exist in such options. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair the Fund's ability to
use such options to achieve its investment objective.
OPTIONS TRADING MARKETS
Options in which the Fund will trade are generally listed on national
securities exchanges. Exchanges on which such options currently are traded
include the Chicago Board Options Exchange and the New York, American, Pacific
and Philadelphia Stock Exchanges. Options on some securities may not be listed
on any Exchange but traded in the over-the-counter market. Options traded in the
over-the-counter market involve the additional risk that securities dealers
participating in such transactions could fail to meet their obligations to the
Fund. The use of options traded in the over-the-counter market may be subject to
limitations imposed by certain state securities authorities.
The staff of the Securities and Exchange Commission is of the view that the
premiums which the Fund pays for the purchase of unlisted options and the value
of securities used to cover unlisted options written by the Fund are considered
to be invested in illiquid securities or assets for the purpose of calculating
whether the Fund is in compliance with its fundamental investment restriction
prohibiting it from investing more than 10% of its total assets in any
combination of illiquid assets and securities. The Fund currently complies with
the position taken by the Securities and Exchange Commission staff that the
premiums which the Fund pays for the purchase of unlisted options and the value
of securities used to cover unlisted options written by the Fund are considered
to be invested in illiquid securities or assets.
FUTURES TRANSACTIONS
The Fund may enter into futures contracts for the purchase or sale of
securities or currencies or futures contracts based on securities indices and
may write options on such contracts. The Fund intends to enter into such
contracts and related options for hedging purposes. The Fund may enter into
other types of futures contracts that may become available and relate to the
securities held by the Fund. A futures contract is an agreement to buy or sell
securities or currencies at a specified price during a designated month. The
Fund does not make payment or deliver securities upon entering into a futures
contract. Instead, it puts down a margin deposit, which is adjusted to reflect
changes in the value of the contract and which continues until the contract is
terminated.
The Fund may sell or purchase futures contracts. When a futures contract is sold
by the Fund, the value of the contract will tend to rise when the value of the
underlying securities or currencies declines and to fall when the value of such
securities or currencies increases. Thus, the Fund would sell futures contracts
in order to offset a possible decline in the value of its securities or
currencies. If a futures contract were purchased by the Fund, the value of the
contract would tend to rise when the value of the underlying securities or
currencies increased and to fall when the value of such securities or currencies
declined. The Fund intends to purchase futures contracts in order to fix what is
believed by its advisers to be a favorable price and rate of return for
securities or favorable exchange rate for currencies the Fund intends to
purchase.
The Fund also may purchase put and call options on securities and currency
futures contracts for hedging purposes. A put option purchased by the Fund would
give it the right to assume a position as the seller of a futures contract. A
call option purchased by the Fund would give it the right to assume a position
as the purchaser of a futures contract. The purchase of an option on a futures
contract requires the Fund to pay a premium. In exchange for the premium, the
Fund becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
In addition, the Fund may write (sell) put and call options on futures contracts
for hedging purposes. The writing of a put option on a futures contract
generates a premium, which may partially offset an increase in the price of
securities that the Fund intends to purchase. However, the Fund becomes
obligated to purchase a futures contract, which may have a value lower than the
exercise price. Conversely, the writing of a call option on a futures contract
generates a premium which may partially offset a decline in the value of the
Fund's assets. By writing a call option, the Fund becomes obligated, in exchange
for the premium, to sell a futures contract, which may have a value higher than
the exercise price.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. The Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that the Fund will be able to enter into an offsetting transaction
with respect to a particular contract at a particular time. If the Fund is not
able to enter into an offsetting transaction, the Fund will continue to be
required to maintain the margin deposits on the contract and to complete the
contract according to its terms, in which case it would continue to bear market
risk on the transaction.
Although futures and options transactions are intended to enable the Fund to
manage market, interest rate or exchange rate risk, unanticipated changes in
interest rates, exchange rates or market prices could result in poorer
performance than if it had not entered into these transactions. Even if the
Fund's advisers correctly predict interest or exchange rate movements, a hedge
could be unsuccessful if changes in the value of the Fund's futures position did
not correspond to changes in the value of its investments. This lack of
correlation between the Fund's futures and securities or currencies positions
may be caused by differences between the futures and securities or currencies
markets or by differences between the securities or currencies underlying the
Fund's futures position and the securities or currencies held by or to be
purchased for the Fund. In addition, futures contracts transactions involve the
remote risk that a party participating in a transaction will not be able to
fulfill its obligations and the amount of the obligation will exceed the ability
of the clearing broker to satisfy. The advisers will attempt to minimize these
risks through careful selection and monitoring of the Fund's futures and options
positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The Fund may not purchase or sell futures contracts or options on
futures, except for closing purchase or sale transactions, if immediately
thereafter the sum of margin deposits on the Fund's outstanding futures and
options positions and premiums paid for outstanding options on futures would
exceed 5% of the market value of the Fund's total assets. The Fund will not
change these policies without supplementing the information contained in its
prospectus and statement of additional information.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund invests in
foreign securities they usually will be denominated in foreign currencies, and
the Fund temporarily may hold funds in foreign currencies. Thus, the value of
Fund shares will be affected by changes in exchange rates.
As one way of managing exchange rate risk, in addition to entering into currency
futures contracts, the Fund may enter into forward currency exchange contracts
(agreements to purchase or sell currencies at a specified price and date). The
exchange rate for the transaction (the amount of currency the Fund will deliver
and receive when the contract is completed) is fixed when the Fund enters into
the contract. The Fund usually will enter into these contracts to stabilize the
U.S. dollar value of a security it has agreed to buy or sell. The Fund intends
to use these contracts to hedge the U.S. dollar value of a security it already
owns, particularly if the Fund expects a decrease in the value of the currency
in which the foreign security is denominated. Although the Fund will attempt to
benefit from using forward contracts, the success of its hedging strategy will
depend on its advisers' abilities to predict accurately the future exchange
rates between foreign currencies and the U.S. dollar. The value of the Fund's
investments denominated in foreign currencies will depend on the relative
strength of those currencies and the U.S. dollar, and the Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by the Fund. The
Fund may also purchase and sell options related to foreign currencies in
connection with hedging strategies.
"WHEN ISSUED" AND "FORWARD COMMITMENT" TRANSACTIONS
The Fund may purchase newly issued securities on a when issued and delayed
delivery basis and may purchase or sell securities on a forward commitment
basis. When issued or delayed delivery transactions arise when securities are
purchased by the Fund with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to the
Fund at the time of entering into the transaction. A forward commitment
transaction is an agreement by the Fund to purchase or sell securities at a
specified future date. When the Fund engages in these transactions, the Fund
relies on the buyer or seller, as the case may be, to consummate the sale.
Failure to do so may result in the Fund missing the opportunity to obtain a
price or yield considered to be advantageous. When issued and delayed delivery
transactions and forward commitment transactions may be expected to occur a
month or more before delivery is due. However, no payment or delivery is made by
the Fund until it receives payment or delivery from the other party to the
transaction. A separate account of liquid assets equal to the value of purchase
commitments will be maintained until payment is made.
<PAGE>
EXHIBIT A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of other Keystone America Funds.
For purposes of qualifying for reduced sales charges on purchases made pursuant
to Rights of Accumulation or Letters of Intent, the term "Purchaser" includes
the following persons: an individual; an individual, his or her spouse and
children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may combine
concurrent direct purchases of Class A shares of two or more of the "Eligible
Funds," as defined below. For example, if a Purchaser concurrently invested
$75,000 in one of the other "Eligible Funds" and $75,000 in the Fund, the sales
charge would be that applicable to a $150,000 purchase, i.e., 3.75% of the
offering price, as indicated in the Sales Charge Schedule in the Prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of the Fund's
Class A shares, a Purchaser is entitled to accumulate current purchases with the
current value of previously purchased Class A shares of the Fund and Class A
shares of certain other eligible funds that are still held in (or exchanged for
shares of and are still held in) the same or another eligible fund ("Eligible
Fund(s)"). The Eligible Funds are the Keystone America Funds and Keystone Liquid
Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 4.75% of the offering price as indicated in the Sales
Charge schedule. KIRC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor the Fund to sell, the amount
indicated.
After the Letter of Intent is received by KIRC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary) 5% of the dollar amount specified on the application will be held
in escrow by KIRC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to KDI any difference
between the sales charge on the amount specified and on the amount actually
attained. If the Purchaser does not within 20 days after written request by KDI
or his dealer pay such difference in sales charge, KIRC will redeem an
appropriate number of the escrowed shares in order to realize such difference.
Shares remaining after any such redemption will be released by KIRC. Any
redemptions made by the Purchaser during the thirteen-month period will be
subtracted from the amount of the purchases for purposes of determining whether
the Letter of Intent has been completed. In the event of a total redemption of
the account prior to completion of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption and the balance
will be forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and appoints
KIRC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform KDI or KIRC that a Letter of Intent is
in effect each time a purchase is made.
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund Inc.
Hartwell Growth Fund Inc.
Omega Fund Inc.
Fund of the Americas
Strategic Development Fund
[LOGO] KEYSTONE
Distributors, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
K E Y S T O N E
FUND OF THE
AMERICAS
[LOGO]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE FUND OF THE AMERICAS
STATEMENT OF ADDITIONAL INFORMATION
February 28, 1995
This statement of additional information is not a prospectus but
relates to, and should be read in conjunction with, the prospectus of Keystone
Fund of the Americas (the "Fund") dated February 28, 1995. A copy of the
prospectus may be obtained from Keystone Distributors, Inc. ("KDI"), the Fund's
principal underwriter ("Principal Underwriter"), 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
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TABLE OF CONTENTS
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Page
The Fund 2
Investment Restrictions 2
Distributions and Taxes 6
Valuation of Securities 7
Brokerage 8
Sales Charges 10
Distribution Plans 12
Trustees and Officers 15
Fund Expenses 19
Investment Adviser 20
Principal Underwriter 22
Declaration of Trust 24
Standardized Total Return and Yield Quotations 25
Additional Information 26
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-17
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THE FUND
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The Fund is an open-end management investment company commonly known as
a mutual fund. The Fund's primary objective is long term growth of capital
through investments in equity and fixed income securities of North America (the
United States and Canada) and Latin America (Mexico and countries in South and
Central America). As a secondary objective, the Fund seeks current income.
The Fund was formed as a Massachusetts business trust on June 16, 1993.
The Fund is managed and advised by Keystone Custodian Funds, Inc. ("Keystone").
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
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INVESTMENT RESTRICTIONS
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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. Unless otherwise stated, all references to Fund assets are
in terms of current market value.
The Fund may not do the following:
(1) issue senior securities, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to Investment
Restriction (2) and except for shares of any additional series or portfolios
which may be established by the Trustees;
(2) borrow money, except from a bank for temporary or emergency
purposes (not for leveraging or investment) and may not borrow money in an
amount exceeding one-third of the value of its total assets (less liabilities
other than borrowings); any borrowings that come to exceed one-third of the
Fund's total assets by reason of a decline in net assets will be reduced within
three days to the extent necessary to comply with the one-third limitation; the
Fund will not purchase securities while borrowings in excess of 5% of its total
assets are outstanding;
(3) underwrite securities issued by others, except to the extent that
it may be deemed an underwriter in connection with the disposition of restricted
securities;
(4) invest in real estate or mortgages (but may invest in real estate
investment trusts or companies whose business involves the purchase or sale of
real estate or mortgages except real estate limited partnerships) or commodities
or commodity contracts, except futures contracts and options on futures
contracts, including but not limited to contracts for the future delivery of
securities or currency, contracts based on securities indices and forward
foreign currency exchange contracts;
(5) invest 25% or more of its total assets (taken at market value) in
securities of issuers in a particular industry or group of related industries,
including a foreign government, except United States ("U.S.") government
securities;
(6) make loans, except (a) through the purchase of a portion of an
issue of publicly distributed debt securities in accordance with its investment
objectives, policies and restrictions, and (b) by entering into (1) loan
transactions and (2) repurchase agreements with respect to its securities if, as
a result thereof, not more than 25% of the Fund's total assets (taken at current
value) would be subject to loan transactions;
(7) pledge, mortgage or hypothecate its assets, except that the Fund
may pledge not more than one-third of its total assets (taken at current value)
to secure borrowings made in accordance with Investment Restriction (2) above,
and provided that the Fund may make initial and variation margin payments in
connection with purchases or sales of futures contracts or of options on futures
contracts;
(8) purchase securities of any one issuer if as a result more than 10%
of the outstanding voting securities of such issuer would be held by the Fund,
or invest more than 5% of the Fund's total assets (taken at market value) in the
securities of any one issuer, except securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities, provided that the Fund
may invest up to 25% of its total assets in securities issued or guaranteed by
any single foreign government and up to 10% of its total assets in securities
issued or guaranteed by any single multinational agency limited in the aggregate
to 25% of its total assets; and
The Fund has adopted the nonfundamental policies set forth in (1)
through (9) below, in order to permit the sale of shares in certain states, and
has also adopted the nonfundamental policies set forth in (11) through (15), all
of which may be changed without shareholder approval or notification.
The Fund may not do the following:
(1) pledge, mortgage or hypothecate its assets in excess of an amount
equal to 10% of its net assets, except to secure borrowings made in accordance
with Investment Restriction (3) above, and provided that the Fund may make
initial and variation margin payments in connection with purchases or sales of
futures contracts or of options on futures contracts;
(2) purchase any option on securities or a securities index if, as a
result, the aggregate premiums paid for all options it owns would exceed 5% of
its net assets at the time of such purchase;
(3) purchase warrants, valued at the lower of cost or market,in excess
of 5% of the value of the portfolio's net assets; included within that amount,
but not to exceed 2% of the value of the Fund's net assets, may be warrants
which are not listed on the New York or American Stock Exchanges; warrants
acquired by the Fund at any time in units or attached to securities are not
subject to this restriction;
(4) purchase the securities of any issuer if, as a result, more than 5%
of the Fund's total assets (taken at current value) would be invested in the
securities of companies which, including predecessors, have a record of less
than three years' continuous operation, except obligations issued or guaranteed
by the U.S. government or a foreign government or their respective agencies and
instrumentalities and except securities of closed-end investment companies;
(5) enter into futures contracts if, as a result, the aggregate value
of initial margin deposits made by the Fund in connection with such contracts
and premiums paid for options on futures would exceed 5% of the value of the
portfolio's total assets;
(6) write covered options, unless the securities underlying such
options are listed on a national securities exchange and the options are issued
by the Options Clearing Corporation, provided, however, that the securities
underlying such options may be traded on the automated quotation system
("NASDAQ") of the National Association of Securities Dealers, Inc. ("NASD"), if,
and to the extent permitted by applicable state regulations;
(7) write or sell covered call or put options with respect to more than
25% of the Fund's net assets at the time such options are written, purchase
protective puts with a value in excess of 25% of the Fund's net assets or
purchase calls and puts, other than protective puts, with a value in excess of
5% of the Fund's net assets;
(8) simultaneously purchase and sell the same or an equivalent security
in order to profit from price discrepancies; and
(9) invest in oil, gas and other mineral leases.
(10) sell securities short (except by selling futures contracts or
covered options), unless it owns, or by virtue of ownership of other securities
has the right to obtain without additional consideration, securities identical
in kind and amount to the securities sold, or (b) purchase securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions, and provided that a portfolio may make initial and variation
margin payments in connection with purchases or sales of futures contracts or of
options on futures contracts;
(11) invest in companies for the purpose of exercising control or
management, provided, however, that this limitation shall not preclude a
portfolio from exercising its rights as a security holder to participate in or
influence decisions to be made by the security holders or management of such
companies with respect to matters affecting the value of such companies'
securities or the interests of the portfolio;
(12) invest in oil, gas or other mineral exploration or development
programs (although a portfolio may invest in companies which own or invest in
such interests);
(13) purchase or retain the securities of any issuer, if, to the Fund's
knowledge, those Trustees or directors and officers of the Fund or its
investment manager or advisers, who individually own beneficially more than 1/2
of 1% of the outstanding securities of such issuer, together own beneficially
more than 5% of such outstanding securities;
(14) purchase any security that is subject to a legal or contractual
restriction on resale in its principal trading market, repurchase agreements
maturing in more than seven days and securities which are not readily
marketable, as well as illiquid securities, if, as a result, more than 10% of
the value of the Fund's net assets (valued at market) would be invested in such
securities.
In addition, the Fund has no current intention to invest in real estate
investment trusts or companies whose business involves the purchase of real
estate or mortgages.
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DISTRIBUTIONS AND TAXES
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The Fund intends to distribute dividends from its net investment income
quarterly and all net realized long-term capital gains, if any, annually in
shares or, at the option of the shareholder, in cash. Shareholders who have not
opted, prior to the record date for any distribution, to receive cash will have
the number of such shares determined on the basis of net asset value per share
computed at the end of the day on the record date after adjustment for the
distribution. Net asset value is used in computing the number of shares in both
gains and income distribution reinvestments. Account statements and/or checks as
appropriate will be mailed to shareholders within seven days after the Fund pays
the distribution. Unless the Fund receives instructions to the contrary from a
shareholder before the record date, it will assume that the shareholder wishes
to receive that distribution and future gains and income distributions in
shares. Instructions continue in effect until changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder whether received in cash or in additional Fund shares and regardless
of the period of time Fund shares have been held by the shareholder. However, if
such shares are held less than six months and redeemed at a loss, the
shareholder will recognize a long term capital loss on such shares to the extent
of the long term capital gain distribution received in connection with such
shares. If the net asset value of the Fund's shares is reduced below a
shareholder's cost by a capital gains distribution, such distribution, to the
extent of the reduction, would be a return of investment, though taxable as
stated above. Since distributions of capital gains depend upon profits actually
realized from the sale of securities by the Fund, they may or may not occur. The
foregoing comments relating to the taxation of dividends and distributions paid
on the Fund's shares relate solely to federal income taxation. Such dividends
and distributions may also be subject to state and local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been pre-determined to the best
of the Fund's ability to be taxable as ordinary income. Shareholders of the Fund
will be advised annually of the federal income tax status of distributions.
If more than 50% of the value of the Fund's total assets at the end of
a fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to the Fund's shareholders, a
shareholder will be required to include in his gross income both cash dividends
and the amount the Fund advises him is his pro rata portion of income taxes
withheld by foreign governments from interest and dividends paid on the Fund's
investments. The shareholder will be entitled, however, to take the amount of
his share of such foreign taxes withheld as a credit against his United States
income tax, or to treat his share of the foreign tax withheld as an itemized
deduction from his gross income, if that should be to his advantage. In
substance, this policy enables the shareholder to benefit from the same foreign
tax credit or deduction that he would have received if he had been the
individual owner of foreign securities and had paid foreign income tax on the
income therefrom. As in the case of individuals receiving income directly from
foreign sources, the above described tax credit and deductions are subject to
certain limitations.
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VALUATION OF SECURITIES
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Current values for the Fund's securities are determined as follows:
(1) securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the time
of the valuation, provided that a sale has occurred and that this price reflects
current market value according to procedures established by the Board of
Trustees;
(2) securities traded in the over-the-counter market, other than on
NMS, for which market quotations are readily available, are valued at the mean
of the bid and asked prices at the time of valuation;
(3) Short-term instruments which are purchased with maturities of sixty
days or less are valued at amortized cost (original purchase cost as adjusted
for amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market; short-term instruments maturing in more
than sixty days when purchased which are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day adjusted
for amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market; and which in either case reflects fair
value as determined by the Board of Trustees;
(4) short-term money market instruments having maturities of more than
sixty day for which market quotations are readily available, are valued at
current market value; where market quotations are not available, such
instruments are valued at fair value as determined by the Board of Trustees; and
(5) the following are valued at prices deemed in good faith to be fair
under procedures established by the Board of Trustees: (a) securities, including
restricted securities, for which complete quotations are not readily available,
(b) listed securities or those on NMS if, in the Fund's opinion, the last sales
price does not reflect a current market value or if no sale occurred, and (c)
other assets.
Foreign securities are valued on the basis of valuations provided by a
pricing service, approved by the Fund's Board of Trustees, which uses
information with respect to transactions in such securities, quotations from
broker-dealers, market transactions in comparable securities and various
relationships between securities and yield to maturity in determining value.
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BROKERAGE
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It is the policy of the Fund, in effecting transactions in securities
for the Fund, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations
including, without limitation, the overall direct net economic result to the
Fund (involving both price paid or received and any commissions and other costs
paid), the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Such
considerations are weighed by management in determining the overall
reasonableness of brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends as well as other statistical
and factual information (including related computer services and equipment). Any
such research and other statistical and factual information provided by brokers
to the Fund or Keystone are considered to be in addition to and not in lieu of
services required to be performed by Keystone under its Investment Advisory and
Management Agreement with the Fund. The cost, value and specific application of
such information are indeterminable and cannot be practically allocated among
the Fund and other clients of Keystone who may indirectly benefit from the
availability of such information. Similarly, the Fund may indirectly benefit
from information made available as a result of transactions effected for such
other clients. Under its Investment Advisory and Management Agreement with the
Fund, Keystone is permitted to pay higher brokerage commissions for brokerage
and research services in accordance with Section 28(e) of the Securities
Exchange Act of 1934. In the event Keystone does follow such a practice, it will
do so on a basis that is fair and equitable to the Fund.
The Fund expects that purchases and sales of securities for the Fund
usually will be principal transactions. Such securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. There usually will be no brokerage commissions paid by the Fund for
such purchases. Purchases from underwriters will include the underwriting
commission or concession, and purchases from dealers serving as market makers
will include a dealer's mark up or reflect a dealer's mark down. Where
transactions are made in the over-the-counter market, the Fund will deal with
primary market makers unless more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities, thereby taking
advantage of the lower purchase price available to such a group.
Neither Keystone nor the Fund has any intention of placing the Fund's
securities transactions with any particular broker-dealer or group thereof. The
Fund's Board of Trustees has determined, however, that the Fund may follow a
policy of considering sales of shares of the Fund as a factor in the selection
of broker-dealers to execute portfolio transactions, subject to the requirements
of best execution, described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently from those of
the other funds and investment accounts managed by Keystone. It may frequently
develop, however, that the same investment decision is made for more than one
fund. Simultaneous transactions are inevitable when the same security is
suitable for the investment objective of more than one account. When two or more
funds or accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula which is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund. It is the opinion of the Fund's Board of Trustees that
the desirability of retaining Keystone as investment adviser to the Fund
outweighs any disadvantages that may result from exposure to simultaneous
transactions.
During the fiscal year ended October 31, 1994, the Fund paid
approximately $1,037,477 in brokerage commissions.
In no instance are portfolio securities purchased from or sold to
Keystone, KDI or any of their affiliated persons, as defined in the Investment
Company Act of 1940 (the "1940 Act") and rules and regulations issued
thereunder.
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SALES CHARGES
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GENERAL
The Fund offers three classes of shares. Class A shares are offered
with a sales charge of 5.75% payable at the time of purchase of Fund shares
("Front End Load Option"). Class B shares are sold subject to a contingent
deferred sales charge payable upon redemption within three calendar years after
purchase ("Back End Load Option"). Class B shares which have been outstanding
during seven calendar years will automatically convert to Class A shares,
without imposition of a front end sales charge. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to Keystone Investor Resource Center, Inc. ("KIRC").) Class C
shares are sold subject to a contingent deferred sales charge payable upon
redemption within one year after purchase ("Level Load Option"). Class C shares
are available only through dealers who have entered into special distribution
agreements with KDI, the Fund's principal underwriter. The Prospectus contains a
general description of how investors may buy shares of the Fund, as well as a
table of applicable sales charges for Class A shares, a discussion of reduced
sales charges which may apply to subsequent purchases and a description of
applicable contingent deferred sales charges.
CONTINGENT DEFERRED SALES CHARGES
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (See "Distribution Plan"), a contingent deferred sales charge
may be imposed at the time of redemption of certain Fund shares, as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares in the amount of
$1,000,000 on which no sales charge has been paid will be subject to a
contingent deferred sales charge of 0.25% upon redemption during the one year
period commencing on the date the shares were originally purchased. The
contingent deferred sales charge will be retained by KDI. See "Calculation of
Contingent Deferred Sales Charge" below.
CLASS B SHARES
With certain exceptions, the Fund may impose a deferred sales charge of
3.00% on shares redeemed during the calendar year of purchase and during the
first calendar year after the year of purchase; 2.00% on shares redeemed during
the second calendar year after the year of purchase; and 1.00% on shares
redeemed during the third calendar year after the year of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by KDI. See "Calculation of Contingent
Deferred Sales Charge" below.
CLASS C SHARES
With certain exceptions, the Fund may impose a deferred sales charge of
1.00% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by KDI. See "Calculation of Contingent
Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge imposed upon the redemption of
Class A, Class B or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net cost of such shares. No
contingent deferred sales charge is imposed when you redeem amounts derived from
(1) increases in the value of your account above the net cost of such shares due
to increases in the net asset value per share of the Fund; (2) certain shares
with respect to which the Fund did not pay a commission on issuance, including
shares acquired through reinvestment of dividend income and capital gains
distributions; (3) Class C shares and certain Class A shares held during more
than one year; or (4) Class B shares held during more than four consecutive
calendar years. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares held
the longest will be the first to be redeemed. There is no contingent deferred
sales charge when the shares of a class are exchanged for the shares of the same
class of another Keystone America Fund. Moreover, when shares of one such class
of a fund have been exchanged for shares of another such class of a fund, the
calendar year of the purchase of the shares of the fund exchanged into is
assumed to be the year shares tendered for exchange were originally purchased.
WAIVER OF SALES CHARGES
Shares of the Fund may also be sold, to the extent permitted by
applicable law, regulations, interpretations or exemptions, at net asset value
without the imposition of an initial sales charge to (1) an eligible officer,
Director, Trustee, full-time employee or sales representative of the Fund,
Keystone, Keystone Group, Inc. ("Keystone Group"), one of their subsidiaries or
KDI who has been such for not less than ninety days; (2) a pension and
profit-sharing plan established by such companies, their subsidiaries and
affiliates for the benefit of their officers, Directors, Trustees, full-time
employees and sales representatives; or (3) a registered representative of a
firm with a dealer agreement with KDI, provided all such sales are made upon
written assurance that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No initial sales charge is imposed on purchases of shares of the Fund
by a bank or trust company in a single account in the name of such bank or trust
company as trustee if the initial investment in shares of the Fund or any
Keystone Group Fund, purchased pursuant to this waiver, is at least $500,000 and
any commission paid at the time of such purchase is not more than 1% of the
amount invested. In addition, no deferred sales charge is imposed on redemptions
of such shares.
In addition, no contingent deferred sales charge is imposed on a
redemption of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a benefit plan qualified under the
Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of accounts having an aggregate net asset value of
less than $1,000; or (5) automatic withdrawals under an automatic withdrawal
plan of up to 1.5% per month of the shareholder's initial account balance.
REDEMPTION OF SHARES
The Fund has obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption by any one shareholder up to the lesser of
$250,000 or 1% of the Fund's net assets in any 90-day period.
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DISTRIBUTION PLANS
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Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1.
DISTRIBUTION PLANS IN GENERAL
A rule adopted by the NASD limits the amount that the Fund may pay
annually in distribution costs for sale of its shares and shareholder service
fees. The rule 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 rule also limits the aggregate amount which the Fund may pay for such
distribution costs to 6.25% of gross share sales since the inception of the
12b-1 Plan, plus interest at the prime rate plus 1% on such amounts (less any
contingent deferred sales charges paid by shareholders to KDI).
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the Fund
may expend daily amounts at an annual rate which is currently limited to up to
0.25% of the Fund's average daily net asset value attributable to Class A shares
to finance any activity which is primarily intended to result in the sale of its
shares, including without limitation, expenditures consisting of payments to the
Principal Underwriter of the Fund (currently KDI) to enable the Principal
Underwriter to pay or to have paid to others who sell Class A shares a service
or other fee, at such intervals as the Principal Underwriter may determine, in
respect of Class A shares maintained by any such recipients outstanding on the
books of the Fund for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as dealers, service fees at an annual rate of
up to 0.25% of the average net asset value of Class A shares sold by such others
and remaining outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the Fund
may expend daily amounts at an annual rate of up to 1.00% of the Fund's average
daily net asset value attributable to Class B shares to finance any activity
which is primarily intended to result in the sale of its shares, including,
without limitation, expenditures consisting of payments to the Principal
Underwriter of the Fund (currently KDI) to enable the Principal Underwriter to
pay to others (dealers) commissions in respect of Class B shares since inception
of the Distribution Plan; and (2) to enable the Principal Underwriter to pay or
to have paid to others a service fee, at such intervals as the Principal
Underwriter may determine, in respect of Class B shares maintained by any such
recipients outstanding on the books of the Fund for specified periods.
Amounts paid by the Fund under the Class B Distribution Plan are
currently used to pay others (dealers) (1) a commission normally equal to 3.00%
for each share sold; and/or (2) service fees at an annual rate of 0.25% of the
average net asset value of shares sold by such others and remaining outstanding
on the books of the Fund for specified periods.
KDI intends, but is not obligated, to continue to pay or accrue
distribution charges incurred in connection with the Class B Distribution Plan
that exceed current annual payments permitted to be received by KDI from the
Fund. KDI intends to seek full payment of such charges from the Fund (together
with annual interest thereon at the prime rate plus one percent) at such time in
the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the Fund
may expend daily amounts at an annual rate of up to 1.00% of the Fund's average
daily net asset value attributable to Class C shares to finance any activity
which is primarily intended to result in the sale of its shares, including,
without limitation, expenditures consisting of payments to the Principal
Underwriter of the Fund (currently KDI) to enable the Principal Underwriter to
pay to others (dealers) commissions in respect of Class C shares of the Fund
sold since inception of the Distribution Plan; and (2) to enable the Principal
Underwriter to pay or to have paid to others a service fee, at such intervals as
the Principal Underwriter may determine, in respect of Class C shares maintained
by any such recipients outstanding on the books of the Fund for specified
periods.
Amounts paid by the Fund under the Class C Distribution Plan are
currently used to pay others (dealers) (1) a commission normally equal to 1.00%
for each share sold; and (2) a commission at an annual rate of 0.75% (subject to
applicable NASD limitations) and service fees at an annual rate of 0.25%,
respectively, of the average daily net asset value of each share sold by such
others and remaining outstanding on the books of the Fund for specified periods.
DISTRIBUTION PLANS - GENERAL
Whether any expenditure under a Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
Each of the Distribution Plans may be terminated at any time by vote of
the Fund's Rule 12b-1 Trustees, or by vote of a majority of the outstanding
voting shares of the respective class of Fund shares. However, after the
termination of the Class B Distribution Plan, KDI would be entitled to receive
payment, at the annual rate of 1.00% of the average daily net asset value of
Class B shares, as compensation for its services which had been earned at any
time during which the Class B Distribution Plan was in effect.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by the
Trustees, including the Fund's Rule 12b-1 Trustees. Unpaid distribution costs at
October 31, 1994 for Class B and Class C shares were $9,330,224 (6.27% of net
class assets) and $1,166,537 (6.58% of net class assets), respectively.
While Distribution Plans are in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the Rule
12b-1 Trustees quarterly. The Rule 12b-1 Trustees may require or approve changes
in the implementation or operation of a Distribution Plan and may also require
that total expenditures by the Fund under a Distribution Plan be kept within
limits lower than the maximum amount permitted by a Distribution Plan as stated
above.
For the fiscal year ended October 31, 1994, the Fund paid KDI $48,948,
$1,183,510, and $136,483 pursuant to its Class A, Class B and Class C
Distribution Plans, respectively. This amount was used to pay commissions and
service fees.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans are
expected to benefit the Fund.
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TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
Trustees and Officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Trustee and Chief Executive Officer of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Group, Inc. ("Keystone Group"), President and
Trustee or Director of Keystone America Capital Preservation and Income
Fund, Keystone America Intermediate Term Bond Fund, Keystone America
Strategic Income Fund, Keystone America World Bond Fund, Keystone Tax
Free Income Fund, Keystone America State Tax Free Fund, Keystone
America State Tax Free Fund - Series II, Keystone America Fund for
Total Return, Keystone America Global Opportunities Fund, Keystone
America Hartwell Emerging Growth Fund, Inc., Keystone America Hartwell
Growth Fund, Inc., Keystone America Omega Fund, Inc., Keystone Fund of
the Americas-Luxembourg and Keystone Fund of the Americas - U.S.,
Keystone Strategic Development Fund (collectively, "Keystone America
Funds"); Keystone Custodian Funds, Series B-1, B-2, B-4, K-1, K-2, S-1,
S-3, and S-4; Keystone International Fund, Keystone Precious Metals
Holdings, Inc., Keystone Tax Free Fund, Keystone Tax Exempt Trust,
Keystone Liquid Trust (collectively, "Keystone Custodian Funds");
Keystone Institutional Adjustable Rate Fund and Master Reserves Trust
(all such funds, collectively, "Keystone Group Funds"); Director and
Chairman of the Board, Chief Executive Officer and Vice Chairman of
Keystone Custodian Funds, Inc. ("Keystone"); Chairman of the Board and
Director of Keystone Investment Management Corporation ("KIMCO") and
Keystone Fixed Income Advisors ("KFIA"); Director, Chairman of the
Board, Chief Executive Officer and President of Keystone Management,
Inc. ("Keystone Management"), Keystone Software Inc. ("Keystone
Software"); Director and President of Hartwell Keystone Advisers, Inc.
("Hartwell Keystone"), Keystone Asset Corporation, Keystone Capital
Corporation, and Keystone Trust Company; Director of Keystone
Distributors, Inc. ("KDI"), Keystone Investor Resource Center, Inc.
("KIRC"), and Fiduciary Investment Company, Inc. ("FICO"); Director and
Vice President of Robert Van Partners, Inc.; Director of Boston
Children's Services Association; Trustee of Anatolia College, Middlesex
School, and Middlebury College; Member, Board of Governors, New England
Medical Center and former Trustee of Neworld Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Group Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member,
Board of Advisers, Credito Emilano (banking); and former Economics and
Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Investment Counselor to Appleton Partners, Inc.;
former Managing Director, Seaward Management Corporation (investment
advice) and former Director, Executive Vice President and Treasurer,
State Street Research & Management Company (investment advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Group; Chairman of the Board and Trustee or Director of all
other Keystone Group Funds,; Director and Chairman of the Board of
Hartwell Keystone; Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and Chairman of its Investment
Committee); former Chairman of the Board and Chief Executive Officer of
Keystone Group; and former Chief Executive Officer of the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Executive Director, Coalition of Essential
Schools, Brown University; Director and former Executive Vice
President, National Alliance of Business; former Vice President,
Educational Testing Services; and former Dean, School of Business,
Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; former Group Vice President, Textron Corp.; and
former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio
Fund and The Phoenix Big Edge Series Fund; and former President,
Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other Keystone
Group Funds; Chairman of the Board, Director and Executive Vice
President, The London Harness Company; Managing Partner, Roscommon
Capital Corp.; Trustee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine; Chief Executive Officer,
Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher & Associates
(environmental consulting); President, Oldways Preservation and
Exchange Trust (education); and former Director, Keystone Group and
Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Of Counsel, Keyser, Crowley & Meub, P.C.; Member,
Governor's (VT) Council of Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation and Hitchcock
Clinic; Director, Vermont Yankee Nuclear Power Corporation, Vermont
Electric Power Company, Inc., Grand Trunk Corporation, Central Vermont
Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual Fire
Insurance Company, New England Guaranty Insurance Company, Inc. and the
Investment Company Institute; former Governor of Vermont; former
Director and President, Associated Industries of Vermont; former
Chairman and President, Vermont Marble Company; former Director of
Keystone; and former Director and Chairman of the Board, Green Mountain
Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Executive Vice President, DHR International, Inc.
(executive recruitment); former Senior Vice President, Boyden
International Inc. (executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411 International, Inc. and J & M
Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director
of Connecticut Natural Gas Corporation, Trust Company of Connecticut,
Hartford Hospital, Old State House Association and Enhanced Financial
Services, Inc.; Member, Georgetown College Board of Advisors; Chairman,
Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-Oxford
School and Greater Hartford YMCA; former Director, Executive Vice
President and Vice Chairman of The Travelers Corporation; and former
Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; President, Nassau County Bar Association;
former Associate Dean and Professor of Law, St. John's University
School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Group Funds; Director, Senior Vice President, Chief
Financial Officer and Treasurer of Keystone Group, KDI, Keystone Asset
Corporation, Keystone Capital Corporation, Keystone Trust Company;
Treasurer of KIMCO, Robert Van Partners, Inc., and FICO; Treasurer and
Director of Keystone Management, Keystone Software, Inc., and Hartwell
Keystone; Vice President and Treasurer of KFIA; and Director of KIRC.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Group Funds; and President of Keystone.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Group Funds; Vice President of Keystone Group; Assistant Treasurer of
FICO and Keystone; and former Vice President and Treasurer of KIRC.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Group Funds; Senior
Vice President, General Counsel and Secretary of Keystone; Senior Vice
President, General Counsel, Secretary and Director of KDI, Keystone
Management and Keystone Software, Senior Vice President and General
Counsel of KIMCO; Senior Vice President, General Counsel and Director
of FICO and KIRC; Senior Vice President and Secretary of Hartwell
Keystone and Robert Van Partners, Inc.; Vice President and Secretary of
KFIA; Senior Vice President, General Counsel and Secretary of Keystone
Group, Keystone Asset Corporation, Keystone Capital Corporation and
Keystone Trust Company.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Group and several of its
affiliates including Keystone, KDI and KIRC. Mr. Elfner and Mr. Bissell own
shares of Keystone Group. Mr. Elfner is Chairman of the Board, Chief Executive
Officer and Director of Keystone Group. Mr. Bissell is a Director of Keystone
Group.
During the fiscal year ended October 31, 1994, no Trustee affiliated
with Keystone or any officer received any direct remuneration from the Fund. The
unaffiliated Trustees of the Fund, as a group, received $2,309 for expenses
incurred. Annual retainers and meeting fees paid by all Keystone Group funds
(which included over 30 mutual funds) for the fiscal year ended October 31,
1994, totalled $585,960. As of January 31, 1995, the Trustees and officers
beneficially owned less than 1.0% of the Fund's then outstanding Class A, Class
B or Class C shares.
The address of all the Fund's Trustees and officers and the address of
the Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
In addition to its investment advisory and management fee, the Fund
assumes and pays its direct expenses and all other expenses, including, without
limitation, the following: (1) all charges and expenses of any custodian or
depository appointed by the Fund for the safekeeping of the Fund's cash,
securities and other property; (2) all charges and expenses for bookkeeping and
auditors; (3) all charges and expenses of any transfer agents and registrars
appointed by the Fund; (4) all fees of all Trustees of the Fund who are not
affiliated with Keystone or any of its affiliates; (5) 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; (6) all costs and expenses of distribution of its shares
incurred pursuant to a Distribution Plan adopted under Rule 12b-1 issued under
the 1940 Act; (7) all taxes and corporate fees payable by the Fund to federal,
state or other governmental agencies; (8) all costs of certificates representing
shares of the Fund; (9) all fees and expenses involved in registering and
maintaining registrations of the Fund and of its shares with the Securities and
Exchange Commission (the "SEC" or "Commission") and registering or qualifying
its shares under state or other securities laws, including the preparation and
printing of prospectuses for filing with the Commission and other authorities;
(10) expenses of preparing, printing and mailing prospectuses to shareholders of
the Fund; (11) all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing notices, reports and proxy materials to
shareholders of the Fund; (12) all charges and expenses of legal counsel for the
Fund and for Trustees of the Fund in connection with 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, issues of securities, expenses which the Fund has
assumed, whether customary or not, and extraordinary matters; (13) all charges
and expenses of filing annual and other reports with the Commission; and (14)
all extraordinary expenses and charges of the Fund. In the event Keystone
provides any of these services or pays any of these expenses, the Fund will
promptly reimburse Keystone therefor.
The Fund is also subject to certain state annual expense limitations,
the most restrictive of which is currently as follows:
2.5% of the first $30 million of Fund average net assets; 2.0% of the
next $70 million of Fund average net assets; and 1.5% of Fund average
net assets over $100 million.
Capital charges and certain expenses, including a portion of the Fund's
distribution plan fees, are not included in the calculation of the state expense
limitation. This limitation may be modified or eliminated in the future.
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INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to the Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone Group, 200
Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Group is a corporation privately owned by current and former
members of management and certain employees of Keystone and its affiliates. The
shares of Keystone Group common stock beneficially owned by management are held
in a number of voting trusts, the trustees of which are George S. Bissell,
Albert H. Elfner, III, Roger T. Wickers, Edward F. Godfrey, and Ralph J.
Spuehler, Jr. Keystone Group provides accounting, bookkeeping, legal, personnel
and general corporate services to Keystone, its affiliates and the Keystone
Group of Mutual Funds.
Except as otherwise noted below, pursuant to an Investment Advisory and
Management Agreement with the Fund (the "Advisory Agreement") and subject to the
supervision of the Fund's Board of Trustees, Keystone manages and administers
the Fund's operation and manages the investment and reinvestment of the Fund's
assets in conformity with the Fund's investment objective and restrictions. The
Advisory Agreement stipulates that Keystone shall provide office space, all
necessary office facilities, equipment and personnel in connection with its
services under the Advisory Agreement and pay or reimburse the Fund for the
compensation of officers and trustees of the Fund who are affiliated with the
investment adviser as well as pay all expenses of Keystone incurred in
connection with the provision of its services. All charges and expenses other
than those specifically referred to as being borne by Keystone will be paid by
the Fund, including, but not limited to, custodian charges and expenses;
bookkeeping and auditors' charges and expenses; transfer agent charges and
expenses; fees of Independent Trustees; brokerage commissions; brokers' fees and
expenses; issue and transfer taxes; costs and expenses under the Distribution
Plans; taxes and trust fees payable to governmental agencies; the cost of share
certificates; fees and expenses of the registration and qualification of the
Fund and its shares with the Securities and Exchange Commission (sometimes
referred herein as the "SEC" or the "Commission") or under state or other
securities laws, expenses of preparing, printing and mailing prospectuses,
statements of additional information, notices, reports and proxy materials to
shareholders of the Fund; expenses of shareholders' and Trustees' meetings;
charges and expenses of legal counsel for the Fund and for the Trustees of the
Fund on matters relating to the Fund; charges and expenses of filing annual and
other reports with the SEC and other authorities; and all extraordinary charges
and expenses of the Fund.
As compensation for its services to the Fund, Keystone is entitled to a
fee at the annual rate set forth below:
Aggregate Net Asset Value
Management of the Shares
Fee of the Fund
- --------------------------------------------------------------------------------
0.75% of the first $200,000,000, plus
0.65% of the next $200,000,000, plus
0.55% of the next $200,000,000, plus
0.45% of amounts over $600,000,000
- --------------------------------------------------------------------------------
computed as of the close of business on each business day and paid daily.
During the fiscal year ended October 31, 1994, the Fund paid or accrued
investment management and administrative services fees of $1,141,378, which
represented 0.75% of the Fund's average net assets.
As a continuing condition of registration of shares in a state,
Keystone has agreed to reimburse the Fund annually for certain operating
expenses incurred by the Fund in excess of certain percentages of the Fund's
average daily net assets. However, Keystone is not required to make such
reimbursements to an extent which would result in the Fund's inability to
qualify as a regulated investment company under provisions of the Internal
Revenue Code. This condition may be modified or eliminated in the future.
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 only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
outstanding shares, and such renewal has been approved by the vote of a majority
of the Independent Trustees cast in person at a meeting called for the purpose
of voting on such approval. The Advisory Agreement may be terminated, without
penalty on 60 days' written notice by the Fund's Board of Trustees or by a vote
of a majority of outstanding shares. The Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement") with KDI, a wholly-owned subsidiary of Keystone. KDI,
located at 200 Berkeley Street, Boston, Massachusetts, 02116-5034, is a Delaware
Corporation. KDI, as agent, currently has the right to obtain subscriptions for
and to sell shares of the Fund to the public. In so doing, KDI may retain and
employ representatives to promote distribution of the shares and may obtain
orders from brokers, dealers or others, acting as principals, for sales of
shares. No such representative, dealer or broker has any authority to act as
agent for the Fund. KDI has not undertaken to buy or to find purchasers for any
specific number of shares. KDI may receive payments from the Fund pursuant to
the Fund's Distribution Plans.
All subscriptions and sales of shares by KDI are at the offering price
of the shares, such price being in accordance with the provisions of the Fund's
Declaration of Trust, By-Laws, the current prospectus and statement of
additional information. All orders are subject to acceptance by the Fund, and
the Fund reserves the right, in its sole discretion, to reject any order
received. Under the Underwriting Agreement, the Fund is not liable to anyone for
failure to accept any order.
The Fund has agreed under the Underwriting Agreement to pay all
expenses in connection with registration of its shares with the Commission as
well as auditing and filing fees in connection with registration of its shares
under the various state "blue-sky" laws.
From time to time, if in KDI's judgment it could benefit the sales of
Fund shares, KDI may use its discretion in providing to selected dealers
promotional materials and selling aids, including, but not limited to, personal
computers, related software and Fund data files.
KDI has agreed that it will, in all respects, duly conform with all
state and federal laws applicable to the sale of the shares and will indemnify
and hold harmless the Fund, and each person who has been, is or may be a Trustee
or officer of the Fund, against expenses reasonably incurred by any of them in
connection with any claim or in connection with any action, suit or proceeding
to which any of them may be a party, that arises out of or is alleged to arise
out of any misrepresentation or omission to state a material fact, on the part
of KDI or any other person for whose acts KDI is responsible or is alleged to be
responsible, unless such misrepresentation or omission was made in reliance upon
written information furnished by the Fund.
The Underwriting Agreement will remain in effect as long as its terms
and continuance are approved by a majority of the Fund's Independent Trustees at
least annually at a meeting called for that purpose and if its continuance is
approved annually by vote of a majority of Trustees or by vote of a majority of
the outstanding shares.
The Underwriting 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 Principal Underwriting Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
<PAGE>
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DECLARATION OF TRUST
- --------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated June 16, 1993. The Fund is similar in most respects
to a business corporation. The principal distinction between the Fund and a
corporation relates to the shareholder liability described below. A copy of the
Declaration of Trust (the "Declaration of Trust") is filed as an exhibit to the
Registration Statement of which this statement of additional information is a
part. This summary is qualified in its entirety by reference to the Declaration
of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares, each of which represents
an equal proportionate interest in the Fund with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund is
authorized to issue additional classes or series of shares. The Fund currently
issues three classes of shares, but may issue additional classes or series of
shares.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. Even if, however, the Fund were held to be a partnership, the possibility
of the shareholders' incurring financial loss for that reason appears remote
because (1) the Fund's Declaration of Trust contains an express disclaimer of
shareholder liability for obligations of the Fund and requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees; and (2) the Declaration of Trust
provides for indemnification out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. The Declaration of Trust also
provides that the Fund will, upon request, assume the defense of any claim made
against any shareholder of the Fund for any act or obligation of the Fund and
satisfy any judgment thereon from the assets of the Fund.
<PAGE>
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. However, at meetings called for the initial election of
trustees or to consider other matters, shares are entitled to one vote per
share. Classes of shares of the Fund have equal voting rights except that each
class of shares has exclusive voting rights with respect to its respective
Distribution Plan. No amendment may be made to the Declaration of Trust 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 as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, or unless 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 the election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares. Any
Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
- --------------------------------------------------------------------------------
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 the maximum sales
charge and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the
relevant periods.
The average annual total return figures of Class A, Class B, and Class
C shares for the fiscal year ended October 31, 1994 were 1.04% (including
applicable contingent deferred sales charges), 3.48% and 5.58%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund presently does not
intend to advertise current yield.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
To the best of the Fund's knowledge, as of January 31, 1995, the
following were the only shareholders of record who owned 8% or more of the
Fund's outstanding shares:
Percent
Class of Fund
----- -------
Merrill Lynch Pierce Fenner & Smith A 45%
Attn: Book Entry B 51%
4800 deer Lake Drive East, 3rd Floor C 65%
Jacksonville, Florida 32246-6484
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian ("Custodian") of all securities and cash
of the Fund. The Custodian performs no investment management functions for the
Fund, but, in addition to its custodial services, is responsible for accounting
and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, One Boston Place, Boston, Massachusetts 02108,
Certified Public Accountants, are the independent auditors for the Fund.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142, is a
wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the Fund.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or KDI, and no person is entitled to rely on any
information or representation not contained therein.
The Fund's prospectus and statement of additional information omit
certain information contained in the Fund's Registration Statement filed with
the Commission, which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the rules and regulations
promulgated by the Commission.
The Fund is one of 15 different investment companies in the family of
Keystone America Funds. The Keystone America Funds offer a range of choices to
serve shareholder needs. The other Keystone America Funds consist of the funds
having the various investment objectives described below:
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE AMERICA HARTWELL GROWTH FUND, INC. - Seeks capital appreciation by
investment in securities selected for their long-term growth prospects.
KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND - Seeks high current
income, consistent with low volatility of principal, by investing in adjustable
rate securities issued by the U.S. government, its agencies or
instrumentalities.
KEYSTONE AMERICA FUND FOR TOTAL RETURN - Seeks total return from a combination
of capital growth and income from dividend paying common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 50%).
KEYSTONE AMERICA GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from
foreign and domestic securities.
KEYSTONE AMERICA GOVERNMENT SECURITIES FUND - Seeks income and capital
preservation from U.S. government securities.
KEYSTONE AMERICA INTERMEDIATE TERM BOND FUND - Seeks income, capital
preservation and price appreciation potential from investment grade corporate
bonds.
KEYSTONE AMERICA OMEGA FUND, INC. - Seeks maximum capital growth from common
stocks and securities convertible into common stocks.
KEYSTONE AMERICA STATE TAX FREE FUND - A mutual fund consisting of five separate
series of shares investing in different portfolio securities which seeks the
highest possible current income, exempt from federal income taxes and applicable
state taxes.
KEYSTONE AMERICA STATE TAX FREE FUND - Series II - A mutual fund consisting of
two separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE AMERICA STRATEGIC INCOME FUND - Seeks high yield and capital
appreciation potential from corporate bonds, discount bonds, convertible bonds,
preferred stock and foreign bonds (up to 25%).
KEYSTONE AMERICA TAX FREE INCOME FUND - Seeks income exempt from federal income
taxes and capital preservation from the four highest grades of municipal bonds.
KEYSTONE AMERICA WORLD BOND FUND - Seeks total return from interest income,
capital gains and losses and currency exchange gains and losses from investment
in debt securities denominated in U.S. and foreign currencies.
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and countries in South and Central
America).
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long-term capital growth by
investing primarily in equity securities.
<PAGE>
APPENDIX
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of one
year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes), and obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
some of which may be subject to repurchase agreements.
COMMERCIAL PAPER
Commercial paper, including commercial paper of foreign issuers, will
consist of issues rated at the time of purchase A-1 by S&P, or PRIME-1 by
Moody's; or, if not rated, will be issued by companies which have an outstanding
debt issue rated at the time of purchase Aaa, Aa or A by Moody's, or AAA, AA or
A by S&P, or will be determined by Keystone to be of comparable quality.
A. S&P RATINGS
An S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. The top category is as follows:
1. A: Issues assigned this highest rating are regarded as
having the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree of
safety.
a. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
1. The rating PRIME-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated PRIME-1 (or related supporting institutions) are deemed
to have a superior capacity for repayment of short term promissory obligations.
Repayment capacity of PRIME-1 issuers is normally evidenced by the following
characteristics:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate
reliance on debt and ample asset protection;
4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and
5) well established access to a range of financial markets
and assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
U.S. CERTIFICATES OF DEPOSIT
U.S. Certificates of deposit are receipts issued by a U.S. bank in
exchange for the deposit of funds. The issuer agrees to pay the amount deposited
plus interest to the bearer of the receipt on the date specified on the
certificate. The certificate usually can be traded in the secondary market prior
to maturity.
U.S. Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks, including their branches abroad, which are members
of the Federal Reserve System or the Federal Deposit Insurance Corporation, and
of U.S. branches of foreign banks, each of which have total assets at the time
of purchase in excess of $1 billion.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a variety
of Treasury securities that differ only in their interest rates, maturities and
dates of issuance and securities issued by the Government National Mortgage
Association ("GNMA"). Treasury bills have maturities of one year or less.
Treasury notes have maturities of one to ten years and Treasury bonds generally
have maturities of greater than ten years at the date of issuance. GNMA
securities include GNMA mortgage pass-through certificates. Such securities are
supported by the full faith and credit of the U.S.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Maritime
Administration, The Tennessee Valley Authority, District of Columbia Armory
Board and Federal National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, the Fund will invest
in the securities issued by such an instrumentality only when Keystone
determines under standards established by the Board of Trustees that the credit
risk with respect to the instrumentality does not make its securities unsuitable
investments. While the Fund may invest in such instruments, U.S. government
securities 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 Interamerican Development Bank, or
issues insured by the Federal Deposit Insurance Corporation.
CORPORATE BOND RATINGS
S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees. Ratings of foreign obligors
do not take into account currency exchange and related uncertainties. The
ratings are based on current information furnished by the issuer or obtained by
S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC and C - Debt rated BB, B, CCC, CC and C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
B. MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
3. A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
4. Baa - Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
character-istics and in fact have speculative characteristics as well.
5. Ba - Bonds which are rated Ba are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
COMMON AND PREFERRED STOCK RATINGS
S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various
factors, such as product and industry position, corporate resources and
financial policy, with results that make some common stocks more highly esteemed
than others, S&P believes that earnings and dividend performance is the end
result of the interplay of these factors and that, over the long run, the record
of this performance has a considerable bearing on relative quality. S&P
rankings, however, do not reflect all of the factors, tangible or intangible,
that bear on stock quality.
Growth and stability of earnings and dividends are deemed key
elements in establishing S&P earnings and dividend rankings for common stocks,
which capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on per-
share earnings and dividend records of the most recent ten years, a period
deemed long enough to measure a company's performance under varying economic
conditions. S&P measures growth, stability within the trend line and
cyclicality. The ranking system also makes allowances for company size, since
large companies have certain inherent advantages over small ones. From these
scores for earnings and dividends are determined.
The final score for each stock is measured against a scoring
matrix determined by analysis of the scores of a large and representative sample
which is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A Above Average B- Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
MOODY'S COMMON STOCK RANKINGS
Moody's presents a concise statement of the important characteristics of
a company and an evaluation of the grade (quality) of its common stock. Data
presented includes: (a) capsule stock information which reveals short and long
term growth and yield afforded by the indicated dividend, based on a recent
price; (b) a long term price chart which shows patterns of monthly stock price
movements and monthly trading volumes; (c) a breakdown of a company's capital
account which aids in determining the degree of conservatism or financial
leverage in a company's balance sheet; (d) interim earnings for the current year
to date, plus three previous years; (e) dividend information; (f) company
background; (g) recent corporate developments; (h) prospects for a company in
the immediate future and the next few years; and (i) a ten year comparative
statistical analysis.
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings and record of dividend payments. Other
considerations include conservativeness of capitalization, depth and caliber of
management, accounting practices, technological capabilities and industry
position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. aa: An issue which is rated "aa" is considered a high-
grade preferred stock. This rating indicates that there is a reasonable
assurance that earnings and asset protection will remain relatively well
maintained in the foreseeable future.
3. a: An issue which is rated "a" is considered to be an
upper-medium grade preferred stock. While risks are judged to be somewhat
greater then in the "aaa" and "aa" classification, earnings and asset protection
are, nevertheless, expected to be maintained at adequate levels.
4. baa: An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
5. ba: An issue which is rated "ba" is considered to have
speculative elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks in this
class.
6. b: An issue which is rated "b" generally lacks the characteristics of
a desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
7. caa: An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
8. ca: An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
9. c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS
The Fund writes only covered options. Options written by the Fund will
normally have expiraton dates of not more than nine months from the date
written. The exercise price of the options may be below, equal to, or above the
current market values of the underlying securities at the times the options are
written.
Unless the option has been exercised, the Fund may close out an option
it has written by effecting a closing purchase transaction, whereby it purchases
an option covering the same underlying security and having the same exercise
price and expiration date ("of the same series") as the one it has written. If
the Fund desires to sell a particular security on which it has written a call
option, it will effect a closing purchase transaction prior to or concurrently
with the sale of the security. If the Fund is able to enter into a closing
purchase transaction, the Fund will realize a profit (or loss) from such
transaction if the cost of such transaction is less (or more) than the premium
received from the writing of the option.
An option position may be closed out only in a secondary market for an
option of the same series. Although the Fund will generally write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any particular time, and for some options no secondary market may exist. In
such event it might not be possible to effect a closing transaction in a
particular option. If the Fund as a covered call option writer is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying securities until the option expires or it delivers the underlying
securities upon exercise.
Because the Fund intends to qualify as a regulated investment company
under the Internal Revenue Code, the extent to which the Fund may write covered
call options and enter into so-called "straddle" transactions involving put and
call options may be limited.
Many options are traded on registered securities exchanges. Options
traded on such exchanges are issued by the Options Clearing Corporation ("OCC"),
a clearing corporation which assumes responsibility for the completion of
options transactions.
OPTION WRITING AND RELATED RISKS
The Fund may write covered call and put options with respect to up to
25% of its net assets. A call option gives the purchaser of the option the right
to buy, and the writer the obligation to sell, the underlying security at the
exercise price during the option period. Conversely, a put option gives the
purchaser the right to sell, and the writer the obligation to buy, the
underlying security at the exercise price during the option period.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time as the writer effects a closing purchase
transaction by purchasing an option of the same series as the one previously
sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. For options traded on national securities exchanges
("Exchanges"), to secure the obligation to deliver the underlying security in
the case of a call option, the writer of the option is required to deposit in
escrow the underlying security or other assets in accordance with the rules of
the OCC, an institution created to interpose itself between buyers and sellers
of options. Technically, the OCC assumes the order side of every purchase and
sale transaction on an Exchange and, by doing so, gives its guarantee to the
transaction.
The principal reason for writing options on a securities portfolio is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone. In return for the premium,
the covered call option writer has given up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
the option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of a premium, so long as the price of the underlying security remains above the
exercise price, but assumes an obligation to purchase the underlying security
from the buyer of the put option at the exercise price, even though the price of
the security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security. In addition, the premium paid for the put effectively increases the
cost of the underlying security, thus reducing the yield otherwise available
from such securities.
Because the Fund can write only covered options, it may at times be
unable to write additional options unless it sells a portion of its portfolio
holdings to obtain new securities against which it can write options. This may
result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
To the extent that a secondary market is available the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, on a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase, plus transaction costs, is greater than the premium received upon
writing the original option, the writer will incur a loss in the transaction.
PURCHASING PUT AND CALL OPTIONS
The Fund can close out a put option it has purchased by effecting a
closing sale transaction; for example, the Fund may close out a put option it
has purchased by selling a put option. If, however, a secondary market does not
exist at a time the Fund wishes to effect a closing sale transaction, the Fund
will have to exercise the option to realize any profit. In addition, in a
transaction in which the Fund does not own the security underlying a put option
it has purchased, the Fund would be required, in the absence of a secondary
market, to purchase the underlying security before it could exercise the option.
In each such instance, the Fund would incur additional transaction costs. The
Fund may also purchase call options for the purpose of offsetting previously
written call options of the same series.
The Fund would normally purchase call options in anticipation of an
increase in the market value of securities of the type in which the Fund may
invest. The purchase of a call option would entitle the Fund, in return for the
premium paid, to purchase specified securities at a specified price during the
option period. The Fund would ordinarily realize a gain if, during the option
period, the value of such securities exceeded the sum of the exercise price, the
premium paid and transaction costs; otherwise the Fund would realize a loss on
the purchase of the call option.
The Fund would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Fund, in exchange for the premium paid, to sell
specified securities at a specified price during the option period. The purchase
of protective puts is designed merely to offset or hedge against a decline in
the market value of the Fund's securities. Gains and losses on the purchase of
protective put options would tend to be offset by countervailing changes in the
value of underlying portfolio securities. Put options may also be purchased by
the Fund for the purpose of affirmatively benefitting from a decline in the
price of securities which the Fund does not own. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize a loss on the purchase
of the put option.
The Fund may purchase put and call options on securities indices for
the same purposes as the purchase of options on securities. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not involve
the actual purchase or sale of securities. In addition, securities index options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
OPTIONS TRADING MARKETS
Options in which the Fund will trade are generally listed on Exchanges.
Exchanges on which such options currently are traded include the Chicago Board
Options Exchange and the New York, American, Pacific, and Philadelphia Stock
Exchanges. Options on some securities may not be listed on any Exchange but
traded in the over-the-counter market. Options traded in the over-the-counter
market involve the additional risk that securities dealers participating in such
transactions would fail to meet their obligations to the Fund. The use of
options traded in the over-the-counter market may be subject to limitations
imposed by certain state securities authorities. In addition to the limits on
its use of options discussed herein, the Fund is subject to the investment
restrictions described in the prospectus and the statement of additional
information.
The staff of the Commission currently is of the view that the premiums
which the Fund pays for the purchase of unlisted options, and the value of
securities used to cover unlisted options written by the Fund are considered to
be invested in illiquid securities or assets for the purpose of calculating
whether the Fund is in compliance with its fundamental investment restriction
prohibiting it from investing more than 10% of its total assets (taken at
current value) in any combination of illiquid assets and securities. The Fund
intends to request that the Commission staff reconsider its current view. It is
the intention of the Fund to comply with the staff's current position and the
outcome of such reconsideration.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in U.S. Treasury
bonds and notes tends to center on the most recently auctioned issues, new
series of options with expirations to replace expiring options on particular
issues will not be introduced indefinitely. Instead, the expirations introduced
at the commencement of options trading on a particular issue will be allowed to
run their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each series of bonds
or notes will thus be phased out as new options are listed on the more recent
issues, and a full range of expiration dates will not ordinarily be available
for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable U.S. Treasury bill changes
from week to week, writers of U.S. Treasury bill call options cannot provide in
advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Fund holds a long position in
U.S. Treasury bills with a principal amount corrresponding to the option
contract size, the Fund may be hedged from a risk standpoint. In addition, the
Fund will maintain in a segregated account with the Fund's Custodian liquid
assets maturing no later than those which would be deliverable in the event of
an assignment of an exercise notice to ensure that it can meet its open option
obligations.
ON GNMA CERTIFICATES. Options on GNMA certificates are not currently
traded on any Exchange. However, the Fund may purchase and write such options in
the over the counter market or, should they commence trading, on any Exchange.
Since the remaining principal balance of GNMA certificates declines
each month as a result of mortgage payments, the Fund, as a writer of a covered
GNMA call holding GNMA certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA certificates from the same pool (if
obtainable) or replacement GNMA certificates in the cash market in order to
remain covered.
A GNMA certificate held by the Fund to cover an option position in any
but the nearest expiration month may cease to present cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are originated
under the Federal Housing Administration/Veterans Administration ("FHA/VA") loan
ceiling in effect at any given time. Should this occur, the Fund will no longer
be covered, and the Fund will either enter into a closing purchase transaction
or replace the GNMA certificate with a certificate which represents cover. When
the Fund closes its position or replaces the GNMA certificate, it may realize an
unanticipated loss and incur transaction costs.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be
closed out only in a secondary market for an option of the same series. Although
the Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular option at any particular time,
and for some options no secondary market may exist. In such event, it might not
be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize any
profit and might incur transaction costs in connection therewith. If the Fund as
a covered call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market include the
following: (i) insufficient trading interest in certain options; (ii)
restrictions imposed on transactions (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an Exchange
or by a broker; (v) inadequacy of the facilities of an Exchange, the OCC or a
broker to handle current trading volume; or (vi) a decision by one or more
Exchanges or a broker to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market in that class
or series of options would cease to exist, although outstanding options that had
been issued as a result of trades would generally continue to be exercisable in
accordance with their terms.
The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
The Fund intends to engage in options transactions which are related to
currency and other financial futures contracts for hedging purposes and in
connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the U.S. are The Board of Trade of
the City of Chicago, the Chicago Mercantile Exchange, the International Monetary
Market (a division of the Chicago Mercantile Exchange), the New York Futures
Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance undercontract provisions through a clearing corporation, a nonprofit
organization managed by the exchange membership, which is also responsible for
handling daily accounting of deposits or withdrawals of margin. A futures
commission merchant ("Broker") effects each transaction in connection with
futures contracts for a commission. Futures exchanges and trading are regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission
("CFTC") and National Futures Association ("NFA").
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options. Options on currency and other
financial futures contracts are similar to options on stocks except that an
option on a currency or other financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) rather than to purchase or sell stock, currency or other
financial instruments at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account. This amount represents the amount by which the market price of
the futures contract at exercise exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised the last trading day prior to the expiration
date of the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and value of the futures
contract.
The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on financial futures contracts
is analagous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of stocks or debt instruments or a position in the futures contract upon which
the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of call options on currency and other financial futures
contracts represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, the purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on currency or other financial futures
contracts may be purchased to hedge against an interest rate increase or a
market advance when the Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and
other financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund will not enter into a futures contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin deposits on such
futures contracts and premiums on options futures contracts.
The Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that the Fund owns or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
The Fund does not intend to enter into futures contracts for speculation.
In instances involving the purchase or sale of futures contracts by the
Fund, an amount of cash and cash equivalents or securities equal to the market
value of the futures contracts will be deposited in a segregated account with
the Fund's custodian. In addition, in the case of a purchase, the Fund may be
required to make a deposit to a margin account with a Broker to collateralize
the position, and in the case of a sale, the Fund may be required to make daily
deposits to the buyer's margin account. The Fund would make such deposits in
order to insure that that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, the Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
RISKS OF FUTURES CONTRACTS
Currency and other financial futures contracts prices are volatile and
are influenced, among other things, by changes in stock prices, market
conditions, prevailing interest rates and anticipation of future stock prices,
market movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of fu-
tures contracts and of the securities being hedged can be only approximate. The
degree of imperfection of correlation depends upon circumstances, such as
variations in speculative market demand for futures contracts and for
securities, including technical influences in futures contracts trading;
differences between the securities being hedged and the financial instruments
and indexes underlying the standard futures contracts available for trading, in
such respects as interest rate levels, maturities and creditworthiness of
issuers, or identities of securities comprising the index and those in the
Fund's portfolio. A decision of whether, when and how to hedge involves the
exercise of skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
will establish a segregated account in connection with its futures contracts
which will hold cash or cash equivalents equal in value to the current value of
the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for currency and other
financial futures contracts, there are several special risks relating to options
on futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular option or at any particular time. The Fund will not purchase options
on any futures contract unless and until it believes that the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund
invests in foreign securities they usually will be denominated in foreign
currencies and the Fund temporarily may hold funds in foreign currencies.
Thus, the Fund's share value will be affected by changes in exchange rates.
FORWARD CURRENCY CONTRACTS
As one way of managing exchange rate risk, the Fund may engage in
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell. The Fund also may use these contracts to
hedge the U.S. dollar value of a security it already owns, particularly if the
Fund expects a decrease in the value of the currency in which the foreign
security is denominated. Although the Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on Keystone's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rates or exchange control regulations between foreign
currencies and the dollar. Changes in foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund.
CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two
parties agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the U.S. is regulated under the Commodity Exchange Act by the CFTC
and NFA. Currently the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to only engage in currency futures contracts for
hedging purposes, and not for speculation. The Fund may engage in currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.
Currently currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark, Swiss and French Francs,
C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and 1,000,000 for
the Peso. In contrast to Forward Currency Exchange Contracts which can be traded
at any time, only four value dates per year are available, the third Wednesday
of March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a variety
of currencies in both the U.S. and Europe. On the Philadelphia Stock Exchange,
for example, contracts for half the size of the corresponding futures contracts
on the Chicago Board Options Exchange are traded with up to nine months maturity
in marks, sterling, yen, Swiss francs and Canadian dollars. Options can be
exercised at any time during the contract life and require a deposit subject to
normal margin requirements. Since a futures contract must be exercised, the Fund
must continually make up the margin balance. As a result, a wrong price move
could result in the Fund losing more than the original investment as it cannot
walk away from the futures contract as it can an option contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in
connection with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is
analagous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of foreign stocks or foreign debt instruments or a position in the foreign
currency upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a
means of obtaining temporary exposure to market appreciation at limited risk. It
is analogous to the purchase of a call option on an individual stock which can
be used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments, the
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Fund would purchase a call option on a
foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Fund is not fully invested.
The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
which may be developed from time to time and which are consistent with the
Fund's investment objective. The Fund believes that no additional techniques
have been identified for employment by the Fund in the foreseeable future other
than those described above.
CURRENCY TRADING RISKS
Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.
EXCHANGE RATE RISK
Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the Fund
buys or sells a foreign currency, an exponsure called an open position is
created. Until the time that position can be "covered" by selling or buying an
equivalent amount of the same currency, the Fund is exposed to the risk that the
exchange rate might move against it. Since exchange rate changes can readily
move in one direction, a position carried overnight or over a number of days
involves greater risk than one carried a few minutes or hours. Techniques such
as foreign currency forward and futures contracts and options on foreign
currency are intended to be used by the Fund to reduce exchange rate risk.
MATURITY GAPS AND INTEREST RATE RISK
Interest rate risk arises whenever there are mismatches or
gaps in the maturity structure of the Fund's foreign exchange currency holdings,
which is the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short term and
lending longer term to benefit from the normal tendency of interest rates to be
higher for longer maturities. However in foreign exchange trading, while the
maturity pattern of interest rates for one currency is important, it is the
differential between interest rates for two currencies that is decisive.
CREDIT RISK
Whenever the Fund enters into a foreign exchange contract, it faces a
risk, however small, that the counterparty will not perform under the contract.
As a result there is a credit risk, although no extension of "credit" is
intended. To limit credit risk, the Fund intends to evaluate the
creditworth-iness of each other party.
Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts which are advantageous to the company but disclaim those contracts
which are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone differences
between the U.S. and foreign nations. If the Fund sells sterling it generally
must pay pounds to a counterparty earlier in the day than it will be credited
with dollars in New York. In the intervening hours, the buyer can go into
bankruptcy or can be declared insolvent. Thus, the dollars may never be credited
to the Fund.
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents or limits on inflows of investment funds from abroad. Governments take
such measures for example to improve control over the domestic banking system or
to influence the pattern of receipts and payments between residents and
foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payment interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules which interfere
with the normal payments mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Fund might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Fund.
Other changes in official regulations influence international investment
transactions. If one of the factors affecting the buying or selling of a
currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain) or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and controls on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the
Fund may be dealing with a foreign trader whose home country is facing a
payments problem. Even though the foreign trader intends to perform on its
foreign exchange contracts, the contracts are tied to other external liabilities
the country has incurred. As a result performance may be delayed, and can result
in unanticipated cost to the Fund. This aspect of country risk is a major
element in the Fund's credit judgment as to with whom it will deal and in what
amounts.
<PAGE>
EXHIBIT A
GLOSSARY OF TERMS
CLASS OF OPTIONS. Options covering the same underlying security.
CLEARING CORPORATION. The Options Clearing Corporation, Trans Canada
Options, Inc., The European Options Clearing Corporation B.V., or the London
Options Clearing House.
CLOSING PURCHASE TRANSACTION. A transaction in which an investor who is
obligated as a writer of an option or seller of a futures contract terminates
his obligation by purchasing on an Exchange an option of the same series as the
option previously written or futures contract identical to the futures contract
previously sold, as the case may be. (Such a purchase does not result in the
ownership of an option or futures contract.)
CLOSING SALE TRANSACTION. A transaction in which an investor who is the
holder or buyer of an outstanding option or futures contract liquidates his
position as a holder or seller by selling an option of the same series as the
option previously purchased or futures contract identical to the futures
contract previously purchased. (Such sale does not result in the investor
assuming the obligations of a writer or seller.)
COVERED CALL OPTION WRITER. A writer of a call option who, so long as
he remains obligated as a writer, owns the shares of the underlying security or
holds on a share for share basis a ncall on the same security where the exercise
price of the call held is equal to or less than the exercise price of the call
written, or, if greater than the exercise price of the call written, the
difference is maintained by the writer in cash, U.S. Treasury bills or other
high grade, short term obligations in a segregated account with the writer's
broker or custodian.
COVERED PUT OPTION WRITER. A writer of a put option who, so long as he
remains obligated as a writer, has deposited Treasury bills with a value equal
to or greater than the exercise price with a securities depository and has
pledged them to the Options Clearing Corporation for the account of the
broker-dealer carrying the writer's position or holds on a share for share basis
a put on the same security as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written, or,
if less than the exercise price of the put written, the difference is maintained
by the writer in cash, U.S. Treasury bills or other high grade, short term
obligations in a segregated account with the writer's broker or custodian.
SECURITIES EXCHANGE. A securities exchange on which call and put options
are traded. The U.S. Exchanges are as follows The Chicago Board Options
Exchange; American Stock Exchange; New York Stock Exchange; Philadephia Stock
Exchange; and Pacific Stock Exchange. The foreign securities exchanges in Canada
are the Toronto Stock Exchange and the Montreal Stock Exchange; in the
Netherlands, the European Options Exchange; and in the United Kingdom, the Stock
Exchange (London).
Those issuers whose common stocks have been approved by the Exchanges as
underlying securities for options transactions are published in various
financial publications.
COMMODITIES EXCHANGE. A commodities exchange on which futures contracts
are traded which is regulated by exchange rules that have been approved by the
Commodity Futures Trading Commission. The U.S. exchanges are as follows: The
Chicago Board of Trade of the City of Chicago, Chicago Mercantile Exchange,
International Monetary Market, (a division of the Chicago Mercantile Exchange),
the Kansas City Board of Trade and the New York Futures Exchange.
EXERCISE PRICE. The price per unit at which the holder of a call option
may purchase the underlyng security upon exercise or the holder of a put option
may sell the underlying security upon exercise.
EXPIRATION DATE. The latest date when an option may be exercised or a
futures contract must be completed according to its terms.
HEDGING. An action taken by an investor to neutralize an investment risk
by taking an investment position which will move in the opposite direction as
the risk being hedged so that a loss (or gain) on one will tend to be offset by
a gain (or loss) on the other.
OPTION. Unless the context otherwise requires, the term "option" means
either a call or put option issued by a Clearing Corporation, as defined above.
A call option gives a holder the right to buy from such Clearing Corporation the
number of shares of the underlying security covered by the option at the stated
exercise price by the filing of an exercise notice prior to the expiration time
of the option. A put option gives a holder the right to sell to a Clearing
Corporation the number of shares of the underlying security covered by the put
at the stated exercise price by the filing of an exercise notice prior to the
expiration time of the option. The Fund will sell ("write") and purchase puts
only on U.S. Exchanges.
OPTION PERIOD. The time during which an option may be exercised,
generally from the date the option is written through its expiration date.
PREMIUM. The price of an option agreed upon between the buyer and writer
or their agents in a transaction on the floor of an Exchange.
SERIES OF OPTIONS. Options covering the same underlying
security and having the same exercise price and expiration date.
STOCK INDEX. A stock index assigns relative values to the
common stocks included in the index, and the index fluctuates with chanqes in
the market values of the common stocks so included.
UNDERLYING SECURITY. The security subject to being purchased upon the
exercise of a call option or subject to being sold upon the exercise of a put
option.
<PAGE>
SCHEDULE OF INVESTMENTS-October 31, 1994
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
COMMON STOCKS (42.8%)
+ ARGENTINA (4.8%)
Automotive (0.4%)
Compania Interamericana de Automovile 49,815 $ 695,063
Banking (0.6%)
Banco del Sud S.A. 14,200 198,840
Banco Frances del Rio de la Plata S.A. 110,000 935,187
1,134,027
Beverages (0.2%)
Quilmes Industrial S.A. 12,000 315,000
Conglomerates (1.1%)
Compania Naviera Perez Companc 400,000 2,160,432
Foods (0.5%)
Ledesma Sociedad Anonima Agricola Industrial 232,000 440,888
Molinos Rio de la Plata S.A. 53,996 471,479
912,367
Metals & Mining (0.3%)
Acindar Industria Argentina de Aceros S.A. 483,000 526,575
Oil (1.0%)
Yacimientos Petroliferos Fiscales S.A. (YPF) 80,000 1,930,000
Telecommunications (0.6%)
Telecom Argentina S.A. 171,000 1,039,888
Telefonica de Argentina 35,804 220,955
1,260,843
Utilities (0.1%)
Capex S.A. 24,500 237,698
+ TOTAL ARGENTINA 9,172,005
+ BRAZIL (1.5%)
Industrials (0.4%)
Randon 366,000,000 $ 822,768
Metals (1.1%)
Compania Acos Especiais Itabira 12,169,120 1,045,534
Compania Siderurgica Nacional S.A. 21,000,000 964,257
2,009,791
+ TOTAL BRAZIL 2,832,559
+ CANADA (7.3%)
Advertising & Publishing (0.3%)
Quebecor, Inc. 50,500 616,036
Banking (0.5%)
Bank of Montreal 27,000 501,534
National Bank of Canada 68,500 481,110
982,644
Capital Goods (0.4%)
Bombardier, Inc. 48,000 798,462
Diversified Companies (1.5%)
Canadian Pacific Ltd. 89,100 1,424,506
Imasco Ltd. 18,000 530,645
Power Corp. of Canada 66,500 921,836
2,876,987
Foods (0.2%)
Canada Malting Ltd. 38,300 396,422
Metals & Mining (0.9%)
Cameco Corp. 3,200 69,200
Metall Mining Corp. 28,500 273,917
Potash Corp. of Saskatchewan, Inc. 37,850 1,339,693
1,682,810
<PAGE>
Oil (0.8%)
Canadian Occidental Petroleum Ltd. 49,750 $ 1,209,176
Chauvco Resources Ltd. 19,967 250,953
1,460,129
Keystone Fund of the Americas
Paper & Packaging (1.3%)
MacMillan Bloedel Ltd. 126,100 1,771,329
Noranda Forest, Inc. 76,600 658,343
2,429,672
Retail (1.4%)
Canadian Tire Corp. Ltd. 60,000 493,494
Hudson's Bay Co. 104,500 2,085,982
2,579,476
+ TOTAL CANADA 13,822,638
+ CHILE (1.2%)
Advertising & Publishing (0.6%)
Compania Manufactuers de Papeles Y Cartones S.A. 91,254 1,243,817
Banking (0.2%)
Banco Credito Invers 73,690 349,752
Diversified Companies (0.1%)
Empresa Electra de Antofagasta 335,990 115,308
Financial Services (0.3%)
A.F.P. Habitat S.A. 1,900 302,909
A.F.P. Provida S.A. 14,690 314,681
617,590
+ TOTAL CHILE 2,326,467
+ COLUMBIA (0.5%)
Banking (0.1%)
Banco de Bogota 32,800 195,704
Financial Services (0.1%)
Suramericana de Sequros S.A. 10,550 $ 237,942
Textiles & Apparel (0.3%)
Coltejer S.A. 1,901,420 272,280
Fabricato S.A. 819,656 215,183
487,463
+ TOTAL COLUMBIA 921,109
+ MEXICO (7.2%)
Banking (0.6%)
Grupo Financiero Banamex Accival 111,500 765,610
Grupo Financiero Bancomer 343,000 397,189
1,162,799
Building Materials (1.7%)
Cementos de Mexico S.A. de C.V. 256,177 2,291,953
International de Ceramica 72,500 379,691
Tolmex S.A. de C.V. 45,000 654,641
3,326,285
Business Services (0.5%)
Grupo Televisa S.A. de C.V. 13,850 306,255
Grupo Televisa S.A. de C.V. 13,300 590,188
896,443
Construction & Housing (1.2%)
Bufete Industrial 23,024 308,148
Empresas ICA Sociedad Control 24,000 711,000
Grupo Tribasa S.A. de C.V. 38,000 1,192,250
2,211,398
Diversified Companies (0.4%)
Grupo Carso 71,000 755,033
<PAGE>
+ MEXICO (cont'd)
Foods (0.7%)
Grupo Industria Maseca S.A. de C.V. 148,000 $ 241,141
Sigma Alimentos 14,225 244,188
Vitro S.A. de C.V. 117,954 825,369
1,310,698
Metals & Mining (0.5%)
Industrias Penoles S.A. de C.V. 290,000 1,012,511
Retail (0.4%)
Cifra S.A. de C.V. 170,000 458,016
Grupo Casa Autrey S.A. de C.V. 38,500 296,843
754,859
Telecommunications (1.2%)
Grupo Iusacell S.A. de C.V. 7,140 219,555
Telefonos de Mexico 38,700 2,133,337
2,352,892
+ TOTAL MEXICO 13,782,918
+ PERU (7.6%)
Banking (1.2%)
Banco de Credito del Peru 972,867 2,305,537
Building Materials (0.1%)
Cementos Lima S.A. 569 231,760
Foods & Beverages (0.7%)
Backus & Johnston Corp. 511,825 1,258,887
Metals & Mining (2.9%)
Minsur S.A. 100,651 1,185,857
Southern Peru Copper Corp. 701,932 4,316,188
5,502,045
Telecommunications (2.7%)
Compania Peruana de Telefonos 3,734,867 5,179,865
Telecommunications (cont'd)
Tele 2000 2,886 $ 7,902
5,187,767
+ TOTAL PERU 14,485,996
+ UNITED STATES (10.4%)
Banking (1.0%)
Bank of Boston Corp. 66,300 1,906,125
Chemicals (2.3%)
Dow Chemical Co. 28,500 2,094,750
Union Carbide Corp. 70,500 2,335,312
4,430,062
Electronics Products (2.7%)
EMC Corp. 104,000 2,236,000
GTECH Hldgs. Corp. 23,700 468,075
Motorola, Inc. 40,000 2,355,000
5,059,075
Energy Services (0.7%)
CBI Industries, Inc. 55,000 1,271,875
Industrials (0.9%)
Eaton Corp. 33,000 1,728,375
Machinery (1.0%)
Caterpillar, Inc. 32,000 1,912,000
Oil (0.9%)
Noble Drilling Corp. 246,000 1,798,875
Retail (0.9%)
Wal-Mart Stores, Inc. 70,800 1,663,800
+ TOTAL UNITED STATES 19,770,187
+ VENEZUELA (2.3%)
Banking (0.0%)
Banco Mercantil 41,602 95,513
Building Materials (0.1%)
Vencemos 100,000 165,421
<PAGE>
Diversified Companies (0.1%)
H L Boulton & Co. 2,920,841 $ 171,944
Metals & Mining (0.3%)
Sidurgica Venezolana Sivensa 1,771,174 499,956
Venprecar 2,146 13,413
513,369
Paper & Packaging (0.3%)
Venezolana de Papeles 714,437 529,929
Utilities (1.5%)
La Electricidad de Caracas C.A. 1,464,577 2,862,420
+ TOTAL VENEZUELA 4,338,596
TOTAL COMMON STOCKS
(Cost $74,659,637) 81,452,475
PREFERRED STOCKS (12.9%)
+ BRAZIL (12.9%)
Beverages (0.7%)
Companhia Cervejaria Brahma S.A. 3,939,000 1,384,476
Chemicals (0.1%)
Companhia Petroleo Brasiliero S.A. 917,500 141,154
Electrical Products (0.6%)
Refrigeracao Parana S.A. 377,827,704 1,139,906
Energy Services (0.5%)
Petro Ipiranga S.A. 55,000,000 989,340
Financial Services (1.7%)
Banco Bradesco S.A. 116,403,408 1,088,255
Banco Itau S.A. 3,665,000 1,175,402
Banco Nacional S.A. 37,620,000 1,023,076
3,286,733
Foods & Beverages (1.7%)
Ceval Alimentos S.A. 112,200,000 $ 1,792,507
Sadia Concordia S.A. Industrial de Comercio 900,000 1,368,639
3,161,146
Metals & Mining (4.2%)
Mangels Industrial S.A. 99,600,000 412,543
Sider Tubarao 1,274,850 1,154,154
Usinas Siderurgicas de Minas Gerais S.A. - Usiminas 858,004,750 1,410,560
Vale do Rio Doce Navegacao S.A. 23,162,500 5,016,256
7,993,513
Paper & Packaging (1.3%)
Klabin Fab Papel S.A. 1,007,975 1,765,447
Papel Simao 13,950,000 701,615
2,467,062
Retail (0.9%)
Casa Anglo Bras S.A. 6,828,723 1,777,892
Textiles & Apparel (0.7%)
Coteminas S.A. 2,512,000 1,070,170
Teka Tecel Kuehnr 92,500,000 247,345
1,317,515
Utilities (0.5%)
Electrobras S.A. 2,195,192 839,108
+ TOTAL BRAZIL 24,497,845
TOTAL PREFERRED STOCKS
(Cost $18,318,776) 24,497,845
</TABLE>
<PAGE>
SCHEDULE OF INVESTMENTS-October 31, 1994
<TABLE>
<CAPTION>
INTEREST MATURITY PAR MARKET
RATE DATE VALUE VALUE
<S> <C> <C> <C> <C>
FIXED INCOME (37.9%)
+ ARGENTINA (9.3%)
Foreign Government (3.1%)
Republic of Argentina 8.375% 2003 $7,500,000 $ 5,934,375
Oil (2.5%)
Yacimientos Petroliferos Fiscales S.A. (YPF) 8.000 2004 6,000,000 4,770,000
Telecommunications (3.7%)
Telecom Argentina 8.375 2000 3,000,000 2,602,500
Telecom Argentina 8.375 2000 2,000,000 1,735,000
Telefonica de Argentina 8.375 2000 2,950,000 2,573,875
6,911,375
+ TOTAL ARGENTINA 17,615,750
+ BRAZIL (15.3%)
Banking (1.0%)
Unibanco Uniao de 8.500 1996 2,000,000 1,950,000
Beverages (0.1%)
Mesbla S.A. 13.250 1996 200,000 282,973
Chemicals (1.0%)
Companhia Brasiliera de Petroleo Ipiranga 8.625 2002 2,000,000 1,890,000
Diversified Companies (4.0%)
Celulose Nipo Brazil 9.375 2003 8,120,000 7,541,450
Metals (1.0%)
Metalurgica Gerdau 10.250 2001 2,000,000 1,900,000
Paper & Packaging (2.4%)
Klabin Fabricadora 10.000 2001 5,000,000 4,668,750
Telecommunications (5.8%)
Telecom Brasil 10.000 1997 2,955,000 2,955,000
Telecomunicacoes Brasileiras S.A.-Telebras 10.000 1997 2,500,000 2,518,750
Telecomunicacoes Brasileiras S.A.-Telebras 10.375 1997 3,500,000 3,517,500
Telecomunicacoes Brasileiras S.A.-Telebras<F1> 10.000 1997 2,000,000 2,005,000
10,996,250
+ TOTAL BRAZIL 29,229,423
<PAGE>
+ CANADA (1.2%)
Foreign Denominated Debt (1.2%)
Keystone Fund of the Americas
Conglomerates (1.2%)
Brascan Ltd. 7.000% 2002 $ 2,750,000 $ 2,195,771
Canadian Dollar
+ GUATEMALA (0.5%)
Foods (0.5%)
Asociacion Nacional Del Cafe 11.000 1998 1,000,000 1,021,250
+ MEXICO (1.5%)
Building Materials (0.5%)
Cementos de Mexico S.A. de C.V. 8.875 1998 1,000,000 980,000
Foreign Government (1.0%)
Mexico (United Mexican States) 6.250 2019 3,000,000 1,901,250
+ TOTAL MEXICO 2,881,250
+ UNITED STATES (6.2%)
United States Government Issues (6.2%)
U.S. Treasury Notes 6.000 1996 12,000,000 11,878,080
+ VENEZUELA (3.9%)
Building Materials (0.3%)
Vencemos 9.250 1996 650,000 607,750
Foreign Government (3.6%)
Republic of Venezuela 6.750 2020 14,250,000 6,768,750
+ TOTAL VENEZUELA 7,376,500
TOTAL FIXED INCOME (Cost $79,094,379) 72,198,024
MATURITY
VALUE
SHORT-TERM INVESTMENTS (3.8%)
Repurchase Agreements (3.8%)
HSBC Securities, Inc., purchased 10/31/94,
(Collateralized by $7,150,000 U.S. Treasury
Notes, 8.625%, due 10/15/95) 4.700 11/01/94 7,172,936 7,172,000
TOTAL SHORT-TERM INVESTMENTS (Cost $7,172,000) 7,172,000
</TABLE>
<PAGE>
SCHEDULE OF INVESTMENTS-October 31, 1994
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
WARRANTS/RIGHTS (0.0%)
+ MEXICO (0.0%)
Mexico Oil Value Recovery, rts (United Mexican States)<F3> 3,000,000 $ 3,000
+ VENEZUELA (0.0%)
Republic of Venezuela, wts.<F3> 71,250 71
TOTAL WARRANTS/RIGHTS (Cost $0) 3,071
TOTAL INVESTMENTS (Cost $179,244,792) <F2> 185,323,415
FOREIGN CURRENCY HOLDINGS (Cost $42,929) (0.0%) 43,446
OTHER ASSETS AND LIABILITIES--NET (2.6%) 5,022,666
NET ASSETS (100%) $190,389,527
NOTES TO SCHEDULE OF INVESTMENTS
<FN>
<F1> Securities that may be resold to "qualified institutional buyers" under
rule 144A or securities offered pursuant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
<F2> The cost of investments for federal income tax purposes is $180,975,320.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost at October 31, 1994 are as follows:
Gross unrealized appreciation $ 18,325,808
Gross unrealized depreciation (13,977,713)
Net unrealized appreciation $ 4,348,095
<F3> Non-income producing.
</TABLE>
<PAGE>
Keystone Fund of the Americas
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period.)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
November 1, 1993 November 1, 1993 November 1, 1993
(Date of Initial (Date of Initial (Date of Initial
Public Offering) to Public Offering) to Public Offering) to
October 31, 1994 October 31, 1994 October 31, 1994
<S> <C> <C> <C>
Net asset value: Beginning of year $ 10.00 $ 10.00 $ 10.00
Income from investment operations:
Investment income--net 0.212 0.144 0.142
Net gains on investment and foreign
currency related transactions 0.498 0.494 0.506
Total income from investment operations 0.710 0.638 0.648
Less distributions:
Investment income--net (0.102) (0.090) (0.090)
In excess of investment income--net (0.009) (0.009) (0.009)
Tax basis return of capital (0.049) (0.049) (0.049)
Total distributions (0.160) (0.148) (0.148)
Net asset value: End of year $ 10.55 $ 10.49 $ 10.50
Total return (a) 7.21% 6.48% 6.58%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses 1.79% 2.54% 2.54%
Investment income--net 2.45% 1.70% 1.74%
Portfolio turnover rate 104% 104% 104%
Net assets, end of period (thousands) $23,880 $148,769 $17,740
</TABLE>
(a) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
October 31, 1994
Assets:
Investments at market value
(identified cost--$179,244,792) (Note 1) $185,323,415
Foreign currency holdings
(identified cost--$42,929) (Note 1) 43,446
Cash 687
Receivable for:
Investments sold 3,507,551
Dividends and interest 1,696,450
Fund shares sold 361,067
Deferred organization expense (Note 1) 39,051
Prepaid expenses 2,697
Total assets 190,974,364
Liabilities:
Payable for:
Income distributions 156,674
Fund shares redeemed 317,042
Foreign taxes withheld 42,716
Other accrued expenses 68,405
Total liabilities 584,837
Net assets $190,389,527
Net assets represented by:
Paid-in-capital $192,240,580
Accumulated distributions in excess of investment
income|L-|L-net (156,674)
Accumulated realized (losses) on investment and
foreign currency related transactions--net (7,762,344)
Net unrealized appreciation on investments and
foreign currency related transactions 6,067,965
Total net assets $190,389,527
Net asset value per share and redemption price per
share (Note 2):
Class A Shares ($10.55 on 2,264,260 shares
outstanding) $ 23,880,462
Class B Shares ($10.49 on 14,185,955 shares
outstanding) 148,768,566
Class C Shares ($10.50 on 1,690,373 shares
outstanding) 17,740,499
$190,389,527
Offering price per share:
Class A Shares (including sales charges of 5.75%)
(Note 2) $11.19
Class B Shares $10.49
Class C Shares $10.50
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended October 31, 1994
<TABLE>
<S> <C> <C>
Investment income (Note 1):
Interest (net of foreign withholding taxes
of $367,875) $ 5,176,756
Dividends 1,277,509
Total income 6,454,265
Expenses (Notes 1, 2 and 4):
Management fee $1,141,378
Shareholder services 703,114
Accounting 11,874
Auditing and legal 13,270
Custodian fees 340,844
Printing 14,667
Trustees' fees and expenses 2,309
Distribution Plan and Service fee expenses 1,368,941
Registration fees 107,549
Amortization of organization expense 7,248
Miscellaneous expenses 3,962
Total expenses 3,715,156
Investment income--net 2,739,109
Realized and unrealized gain (loss) on
investment and foreign currency related
transactions--net (Notes 1 and 3):
Realized (loss) on investments sold:
Proceeds from sales 4,137,779,248
Cost of investments sold 4,146,268,912
Realized (loss) on investment (8,489,664)
transactions--net
Realized (loss) on foreign currency related (377,273)
transactions
Realized (loss) on investment and foreign
currency related transactions--net (8,866,937)
Unrealized appreciation (depreciation) on
investments and foreign currency related
transactions--net:
Beginning of year 0
End of year 6,067,965
Net change in unrealized appreciation or
depreciation 6,067,965
Net loss on investment and foreign currency
related transactions (2,798,972)
Net decrease in net assets resulting from
operations ($59,863)
</TABLE>
<PAGE>
Keystone Fund of the Americas
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended
October 31, 1994
<S> <C>
Operations:
Investment income--net (Note 1) $ 2,739,109
Realized loss on investment and foreign currency related
transactions--net
(Notes 1 and 3) (8,866,937)
Net change in unrealized appreciation or depreciation on investments
and foreign currency related transactions 6,067,965
Net decrease in net assets resulting from operations (59,863)
Distributions to shareholders (Notes 1 and 5):
Investment income--net--Class A Shares (204,016)
In excess of investment income--net--Class A Shares (19,556)
Tax basis return of capital--Class A Shares (111,783)
Investment income--net--Class B Shares (1,278,193)
In excess of investment income--net--Class B Shares (122,519)
Tax basis return of capital--Class B Shares (700,337)
Investment income--net--Class C Shares (152,307)
In excess of investment income--net--Class C Shares (14,599)
Tax basis return of capital--Class C Shares (83,451)
Total distributions to shareholders (2,686,761)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 30,689,628
Proceeds from shares sold--Class B Shares 174,008,374
Proceeds from shares sold--Class C Shares 22,336,759
Payments for shares redeemed--Class A Shares (6,875,181)
Payments for shares redeemed--Class B Shares (24,959,994)
Payments for shares redeemed--Class C Shares (4,440,296)
Net asset value of shares issued in reinvestment of distributions
from investment income--net, distributions in excess of investment
income--net and tax basis return of capital for:
Class A shares 324,833
Class B shares 1,830,031
Class C shares 221,997
Net increase in net assets resulting from capital share transactions 193,136,151
Total increase in net assets 190,389,527
Net assets:
Beginning of year 0
End of year [including accumulated distributions in excess of
investment income--net of ($156,674)] $190,389,527
</TABLE>
See Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Fund of the Americas (the "Fund") is a Massachusetts business trust
for which Keystone Custodian Funds, Inc. ("Keystone") is the investment
adviser. The Fund was formed on June 16, 1993 and Keystone became the Fund's
adviser on that date. It is registered under the Investment Company Act of
1940 as a diversified, open-end investment company.
The Fund currently offers three classes of shares. Class A shares are offered
at a public offering price which includes a maximum sales charge of 5.75%
payable at the time of purchase. Class B shares are sold subject to a
contingent deferred sales charge payable upon redemption which decreases
depending on how long the shares have been held. Class C shares are sold
subject to a contingent deferred sales charge payable upon redemption within
one year of purchase. Class C shares are available only through dealers who
have entered into special distribution agreements with Keystone Distributors,
Inc. ("KDI"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Group, Inc. ("KGI"), a
Delaware corporation. KGI is privately owned by an investor group consisting
of members of current management of Keystone and its affiliates. Keystone
Investor Resource Center, Inc., ("KIRC"), a wholly-owned subsidiary of
Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Investments are usually valued at the closing sales price, or in the
absence of sales and for over-the- counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith, by or under the direction of the Board of Trustees, to
be fair: (a) securities (including restricted securities) for which complete
quotations are not readily available and (b) listed securities if, in the
opinion of management, the last sales price does not reflect a current value,
or if no sale occurred. Foreign currency amounts are translated into United
States dollars as follows: market value of investments, assets and
liabilities at the daily rate of exchange; purchases and sales of
investments, income and expenses at the rate of exchange prevailing on the
dates of such transactions. Net unrealized foreign exchange gains/losses are
a component of unrealized appreciation/depreciation on foreign currency
related transactions.
Short-term investments, if purchased with maturities of sixty days or less,
are valued at amortized cost (original purchase price as adjusted for
amortization of premium or accretion of discount which when combined with
accrued interest approximates market). Short-term investments maturing in
more than sixty days for which market quotations are readily available are
valued at current market value. Short-term investments maturing in more than
sixty days, which are held on the sixtieth day prior to maturity, are valued
at amortized cost (market value on the sixtieth day adjusted for amortization
of premium or accretion of discount which when combined with accrued interest
approximates market). All other securities and other assets and liabilities
are valued at fair value as determined in good faith using methods prescribed
by the Board of Trustees.
Investments denominated in foreign currencies are adjusted daily to reflect
changes in exchange rates. Market quotations are not considered to be readily
available for long-term corporate bonds and notes; such investments are
stated at fair value on the basis of valuations furnished by a pricing
service, approved by the Board of Trustees, which determines valuations
<PAGE>
for normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities which are generally recognized by
institutional traders.
Keystone Fund of the Americas
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security, financial instrument, or, in the
case of a stock index, cash at a set price on a future date. Upon entering
into a futures contract the Fund is required to deposit with a broker an
amount ("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at the fiscal year end are marked-to-market and
the resultant net gain or loss is included in federal taxable income.
B. Securities transactions are accounted for on the trade date. Realized
gains and losses are computed on the identified cost basis. Gains and losses
on foreign currency related transactions are treated as ordinary income for
federal income tax purposes. Interest income is recorded on the accrual basis
and dividend income is recorded on the ex-dividend date. Distributions to the
shareholders are recorded by the Fund at the close of business on the record
date.
C. The Fund intends to qualify in the future as a regulated investment
company under the Internal Revenue Code of 1986, as amended ("Internal
Revenue Code"). Thus, the Fund will be relieved of any federal income or
excise tax liability by distributing all of its net taxable investment income
and net taxable capital gains, if any, to its shareholders. The Fund intends
to avoid excise tax liability by making the required distributions under the
Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price), the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of the collateral falls below required levels,
the Fund intends to seek additional collateral from the seller or terminate
the repurchase agreement. If the seller defaults, the Fund would suffer a
loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. Any such loss would be
increased by any cost incurred on disposing of such securities. If bankruptcy
proceedings are commenced against the seller under the repurchase agreement,
the realization on the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
E. In connection with portfolio purchases and sales of securities denominated
in foreign currency, the Fund may from time to time enter into forward
foreign currency exchange contracts ("contracts") to hedge certain foreign
currency assets. Contracts are recorded at market value. Realized gains and
losses arising from such transactions are included in net realized gain
(loss) on foreign currency related transactions. The Fund is subject to the
credit risk that the other party will not complete the obligations of the
contract.
<PAGE>
F. Organization expenses are being amortized to operations over a five-year
period on a straight-line basis. In the event any of the initial shares are
redeemed by any holder thereof during the five-year amortization period,
redemption proceeds will be reduced by any unamortized organization expenses
in the same proportion as the number of initial shares being redeemed bears
to the number of initial shares outstanding at the time of redemption.
G. The Fund distributes net investment income and net capital gains, if any,
annually. Distributions are determined in accordance with income tax
regulations. Distributions from taxable net investment income and net capital
gains can exceed book basis net investment income and net capital gains.
The significant difference between financial statement amounts available for
distribution and distributions made in accordance with income tax regulations
is due to differences in the treatment of wash sales.
(2.) Capital Share Transactions
The Trust Agreement authorizes the issuance of an unlimited number of shares
of beneficial interest without par value. Transactions in shares of the Fund
were as follows:
Class A Shares
November 1, 1993
(Date of Initial Public
Offering) to
October 31, 1994
Shares sold 2,887,081
Shares redeemed (655,592)
Shares issued in
reinvestment of
distributions from
investment income--net,
distributions in excess
of investment income--net
and tax basis return of
capital 32,771
Net increase 2,264,260
Class B Shares Class C Shares
November 1, 1993 (Date of Initial
Public Offering) to
October 31, 1994
Shares sold 16,411,620 2,093,070
Share redeemed (2,411,035) (425,174)
Shares issued in reinvestment of
distributions from investment
income--net, distributions in
excess of investment income--net
and tax basis return of capital 185,370 22,477
Net increase 14,185,955 1,690,373
The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted with respect to its Class A, Class B and Class C shares pursuant
to Rule 12(b)-1 under the Investment Company Act of 1940 ("1940 Act").
The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KDI under the Class A distribution Plan are currently used to pay
others, such as dealers, service fees at an annual rate of up to 0.25% of the
average net asset value of shares sold by such others and remaining
outstanding on the books of the Fund for specified periods.
The Class B Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class B shares to pay
expenses of the distribution of Class B shares. Amounts paid by the Fund
under the Class B Distribution Plan are currently used to pay others
(dealers) (i) a commission at the time of purchase normally equal to 3.00% of
the value of each share sold; and/or (ii) service fees at an annual rate of
0.25% of the average net asset value of shares sold by such others and
remaining outstanding on the books of the Fund for specified periods.
<PAGE>
The Class C Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class C shares to pay
expenses of the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) (i) a payment at the time of purchase of 1.00% of the value of each
share sold, such payment to consist of a commission in the amount of 0.75%
and the first year's service fee in advance in the amount of 0.25%; and (ii)
beginning approximately 15 months after purchase, a commission at an annual
rate of 0.75% (subject to applicable limitations imposed by the rules of the
National Association of Securities Dealers, Inc.) and service fees at an
annual rate of 0.25%, respectively, of the average net asset value of each
share sold by such others and remaining outstanding on the books of the Fund
for specified periods.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of the Class B
Distribution Plan, KDI would be entitled to receive payment, at the annual
rate of 1.00% of the average daily net value of Class B shares, as
compensation for its services which had been earned at any time during which
the Class B Distribution Plan was in effect. Unreimbursed distribution
expenses at October 31, 1994 were $5,102,412 and $63,552 for Class B and C
Distribution Plans, respectively.
For the year ended October 31, 1994, the Fund paid KDI $48,948, $1,183,510
and $136,483 pursuant to the Fund's Class A, B and C Distribution Plans,
respectively.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
(3.) Securities Transactions
As of October 31, 1994 the Fund had a capital loss carryover of approximately
$6,032,000 which expires in 2002.
Purchases and sales of investment securities (including proceeds received at
maturity) for the year ended October 31, 1994 were as follows:
Cost of Proceeds
Purchases From Sales
Portfolio securities $ 311,587,639 $ 131,696,691
Short-term investments 4,013,723,646 4,006,082,557
$4,325,311,285 $4,137,779,248
(4.) Investment Management and Transactions with Affiliates
Under the terms of an Investment Advisory and Management Agreement between
Keystone and the Fund, Keystone provides investment management and
administrative services to the Fund. In return, Keystone receives a fee,
computed and charged to the net assets of the Fund daily, which start at
0.75% and decline, as net assets increase, to 0.45% per annum, to the net
asset value of the Fund. The Fund paid or accrued a management fee of
$1,141,378 to Keystone for the year ended October 31, 1994 which represented
0.75% of average net assets on an annualized basis.
During the year ended October 31, 1994, the Fund paid or accrued to KIRC
$11,874 as reimbursement for certain accounting, tax and printing services
and $703,114 for shareholder services.
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Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund. Currently, the Independent Trustees of
the Fund receive no compensation for their services.
(5.) Distributions to Shareholders
The Fund intends to distribute to its shareholders dividends from net
investment income quarterly and all net realized long-term capital gains, if
any, annually. Any taxable distribution which is declared in December and
paid in the following fiscal year will be taxable to shareholders in the year
declared.
FEDERAL TAX STATUS--FISCAL 1994 DISTRIBUTIONS (Unaudited)
The per-share distributions paid to you for fiscal 1994, whether taken in
shares or cash, are as follows:
Class A Shares
Income Return of
Dividends Capital
$0.111 $0.049
Class B Shares
Income Return of
Dividends Capital
$0.099 $0.049
Class C Shares
Income Return of
Dividends Capital
$0.099 $0.049
In January of 1995, complete information on the calendar year 1994
distributions will be forwarded to you to assist you in completing your 1994
federal income tax return.
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Keystone's Services for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL) -- Receive up-to-date account
information on your balance, last transaction and recent Fund distribution. You
may also process transactions such as investments, redemptions and exchanges
using a touch-tone telephone as well as receive quotes on price, yield, and
total return of your Keystone Fund. Call toll-free, 1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors should
call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account
at any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net asset
value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same
Keystone family quickly and easily for a nominal service fee. KARL gives you the
added ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your changing
investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to move
money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than your
original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined
contribution plans. For more information, please call Retirement Plan
Services, toll-free at 1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
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Keystone Fund of the Americas
INDEPENDENT AUDITORS' REPORT The Trustees and Shareholders
Keystone Fund of the Americas
We have audited the accompanying statement of assets and liabilities of
Keystone Fund of the Americas, including the schedule of investments, as of
October 31, 1994, the related statements of operations and changes in net
assets and the financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 1994 by correspondence with the custodian.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Fund of the Americas as of October 31, 1994, the results of its
operations, the changes in its net assets and the financial highlights for
the year then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
December 2, 1994
