<PAGE>
KEYSTONE FUND OF THE AMERICAS
PROSPECTUS FEBRUARY 27, 1996
AS SUPPLEMENTED JANUARY 1, 1997
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.
Under normal circumstances, the Fund invests at least 65% of its assets in
securities of issuers in Latin America. The Fund normally intends to invest a
majority of its total assets in equity securities. While the Fund focuses on
equity securities, the Fund may invest a portion of its assets in debt
securities issued by Latin American or North American public or private issuers
with any rating or that are unrated.
The Fund offers Class A, B, and C shares. Information on share classes and
their fee and sales charge structures may be found in the Fee Table,
"Alternative Sales Options," "Contingent Deferred Sales Charge and Waiver of
Sales Charges," "Distribution Plans and Agreements" 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 27, 1996, as supplemented, which has been
filed with the Securities and Exchange Commission and is incorporated by
reference into this prospectus. For a free copy, 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 INSURED OR OTHERWISE PROTECTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
TABLE OF CONTENTS Page
Expense Information 2
Financial Highlights 3
The Fund 6
Investment Objective and Policies 6
Investment Restrictions 7
Risk Factors 8
Pricing Shares 11
Dividends and Taxes 12
Fund Management and Expenses 13
Distribution Plans and Agreements 15
How to Buy Shares 18
Alternative Sales Options 19
Contingent Deferred Sales Charge and Waiver of Sales Charges 22
How to Redeem Shares 22
Shareholder Services 24
Performance Data 26
Fund Shares 26
Additional Information 27
Additional Investment Information (i)
Exhibit A A-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
EXPENSE INFORMATION
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 Agreements"; and "Shareholder
Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION(1) OPTION(2)
--------- --------- ---------
<S> <C> <C> <C>
Sales Charge ...................................... 4.75%(3) None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%(4) 5.00% 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 sixth year and thereafter
0.00% thereafter
Exchange Fee ...................................... None None None
ANNUAL FUND OPERATING EXPENSES(5)
(as a percentage of average net assets)
Management Fees ................................... 0.75% 0.75% 0.75%
12b-1 Fees ........................................ 0.25% 1.00%(6) 1.00%(6)
Other Expenses .................................... 0.86% 0.86% 0.86%
---- ---- ----
Total Fund Operating Expenses ..................... 1.86% 2.61% 2.61%
==== ==== ====
<CAPTION>
EXAMPLES(7) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A .................................................................. $65 $103 $143 $255
Class B .................................................................. $76 $111 $159 $268
Class C .................................................................. $36 $ 81 $139 $294
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A .................................................................. $65 $103 $143 $255
Class B .................................................................. $26 $ 81 $139 $268
Class C .................................................................. $26 $ 81 $139 $294
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
<FN>
- ----------
(1) Class B shares purchased after January 1, 1997, convert tax free to Class A shares after seven years. See "Class B Shares"
for more information.
(2) Class C shares are available only through broker-dealers who have entered into special distribution agreements with Evergreen
Keystone Distributor, Inc., the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares made after January 1, 1997 in the amount of $1,000,000 or more are not subject to a sales charge
at the time of purchase, but may be subject to a contingent deferred sales charge. See "Class A Shares" and "Contingent
Deferred Sales Charge and Waiver of Sales Charges" for an explanation of the charge.
(5) Expense ratios are for the Fund's fiscal year ended October 31, 1995. Total Fund Operating Expenses include indirectly paid
expenses.
(6) 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").
(7) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual return
for the Fund may be greater or less than 5%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE FUND OF THE AMERICAS
CLASS A SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are 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.
YEAR ENDED OCTOBER 31,
-----------------------
1995 1994
-------- --------
NET ASSET VALUE, BEGINNING OF YEAR ................ $ 10.550 $ 10.000
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................. 0.443 0.212
Net realized and unrealized gains (losses) on
investment and foreign currency related
transactions .................................... (0.813) 0.498
-------- --------
Total income from investment operations ....... (0.370) 0.710
-------- --------
LESS DISTRIBUTIONS:
Net investment income ............................. (0.299) (0.102)
In excess of net investment income ................ 0.000 (0.009)
Tax basis return of capital ....................... (0.021) (0.049)
-------- --------
Total distributions ........................... (0.320) (0.160)
-------- --------
NET ASSET VALUE, END OF YEAR ...................... $ 9.860 $ 10.550
======== ========
TOTAL RETURN (a) .................................. (3.35%) 7.21%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses .................................. 1.86%(b) 1.79%
Net investment income ........................... 4.02% 2.45%
Portfolio turnover rate ........................... 57% 104%
NET ASSETS, END OF YEAR (THOUSANDS) ............... $14,333 $23,880
(a) Excluding applicable sales charges.
(b) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 1.84% for the year then ended.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE FUND OF THE AMERICAS
CLASS B SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are 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.
YEAR ENDED OCTOBER 31,
------------------------
1995 1994
-------- ---------
NET ASSET VALUE, BEGINNING OF YEAR ............... $ 10.490 $ 10.000
-------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................ 0.319 0.144
Net realized and unrealized gains (losses) on
investment and foreign currency related
transactions ................................... (0.753) 0.494
-------- ---------
Total income from investment operations ...... (0.434) 0.638
-------- ---------
LESS DISTRIBUTIONS:
Net investment income ............................ (0.275) (0.090)
In excess of net investment income ............... 0.000 (0.009)
Tax basis return of capital ...................... (0.021) (0.049)
-------- ---------
Total distributions .......................... (0.296) (0.148)
-------- ---------
NET ASSET VALUE, END OF YEAR ..................... $ 9.760 $ 10.490
======== =========
TOTAL RETURN (a) ................................. (4.00%) 6.48%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ................................. 2.61%(b) 2.54%
Net investment income .......................... 3.27% 1.70%
Portfolio turnover rate .......................... 57% 104%
NET ASSETS, END OF YEAR (THOUSANDS) .............. $97,165 $148,769
(a) Excluding applicable sales charges.
(b) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 2.59% for the year then ended.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE FUND OF THE AMERICAS
CLASS C SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are 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.
YEAR ENDED OCTOBER 31,
-----------------------
1995 1994
-------- --------
NET ASSET VALUE, BEGINNING OF YEAR ................ $ 10.500 $ 10.000
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................. 0.316 0.142
Net realized and unrealized gains (losses) on
investment and foreign currency related
transactions .................................... (0.750) 0.506
-------- --------
Total income from investment operations ....... (0.434) 0.648
-------- --------
LESS DISTRIBUTIONS:
Net investment income ............................. (0.275) (0.090)
In excess of net investment income ................ 0.000 (0.009)
Tax basis return of capital ....................... (0.021) (0.049)
-------- --------
Total distributions ........................... (0.296) (0.148)
-------- --------
NET ASSET VALUE, END OF YEAR ...................... $ 9.770 $ 10.500
======== ========
TOTAL RETURN (a) .................................. (4.00%) 6.58%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses .................................. 2.61%(b) 2.54%
Net investment income ........................... 3.27% 1.74%
Portfolio turnover rate ........................... 57% 104%
NET ASSETS, END OF YEAR (THOUSANDS) ............... $11,242 $17,740
(a) Excluding applicable sales charges.
(b) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 2.59% for the year then ended.
<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 more than thirty funds advised and managed by
Keystone Investment Management Company ("Keystone"), the Fund's
investment adviser.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund'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's investment objective is fundamental and may not be changed without
the vote of a majority of the Fund's outstanding shares (as defined in the
Investment Company Act of 1940 ("1940 Act")), which means the lesser of (1) 67%
of the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (2) more than 50% of the outstanding shares (a "1940
Act Majority").
Of course, there can be no assurance that the Fund will achieve its investment
objective since there is uncertainty in every investment.
PRINCIPAL INVESTMENTS
Under normal circumstances, the Fund invests at least 65% of its assets in
securities of issuers in Latin America. The Fund normally intends to invest a
majority of its total assets in equity securities. The Fund ordinarily maintains
investments in at least three Latin American countries. For this purpose, an
issuer is deemed to be in Latin America if it is organized under the laws of a
country within that region; its principal securities trading market is in that
region; it derives at least 50% of its revenues or profits from goods produced
or sold, investments made, or services performed in that region; or it has at
least 50% of its assets located in the region. Latin America includes Argentina,
Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador,
Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and
Venezuela.
Under normal circumstances, the Fund invests at least 20% of its assets in
securities of issuers in the United States ("U.S.") and Canada. Such investments
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 that (1) have
manufacturing/marketing operations in Latin America; (2) export to Latin
America; (3) manufacture intermediate goods that are then used in final products
that 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
U.S. (such as members of the airline, hotel and entertainment industries).
The equity securities in which the Fund may invest include common stock,
preferred stock (convertible or non-convertible), warrants or rights convertible
into common or preferred stock and partly paid stock.
While the Fund focuses on equity securities, the Fund may invest a portion of
its assets in debt securities issued by Latin American or North American public
or private issuers with any rating or that are unrated. The Fund has authority
to invest up to 49% of its total assets in below investment grade debt
securities, i.e., BBB or lower by S&P or Baa or lower by Moody's. The Fund may
also purchase Brady Bonds, which are bonds issued in exchange for restructured
sovereign debt of certain Latin American countries and collateralized by U.S.
government securities and denominated in U.S.
dollars.
OTHER ELIGIBLE INVESTMENTS
When market conditions warrant, the Fund may adopt a defensive position by
investing, without limit, in securities of foreign and domestic public or
private issuers in any industry or money market instruments issued by foreign or
domestic public or private issuers. Such money market instruments, which must
mature within one year of their purchase, consist of short-term debt obligations
issued by foreign corporations, partnerships, or governments or any of their
political subdivisions, agencies or instrumentalities; U.S. government
securities; instruments, including certificates of deposit, demand and time
deposits and bankers' acceptances, of banks that are members of the Federal
Deposit Insurance Corporation and have at least $1 billion in assets as of the
date of their most recently published financial statements, including U.S.
branches of foreign banks and foreign branches of U.S. banks; and prime
commercial paper, including master demand notes.
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.
The Fund intends to follow policies of the Securities and Exchange Commission
as they are adopted from time to time with respect to illiquid securities,
including, at this time, (1) treating as illiquid securities that may not be
sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued such securities on its
books and (2) limiting its holdings of such securities to 15% of 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.
For further information about the types of investments and investment
techniques available to the Fund, including the associated risks, see the
sections of this prospectus entitled "Risk Factors" and "Additional Investment
Information" and the statement of additional information.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions summarized below,
which may not be changed without the vote of a 1940 Act Majority of the Fund's
outstanding shares. These restrictions and certain other fundamental and
nonfundamental restrictions are set forth in detail in the statement of
additional information.
Generally, the Fund may not do the following: (1) invest more than 5% of its
total assets in the securities of any one issuer (other than U.S. government
securities), provided that up to 25% of its total assets may be invested 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; (2)
borrow money except from banks for temporary or emergency purposes in aggregate
amounts up to one-third of the value of its total assets; and (3) concentrate
its investments in any particular industry.
RISK FACTORS
Like any investment, your investment in the Fund involves an element of risk.
Before you invest in the Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses. YOU CAN LOSE MONEY BY
INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN THE
VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE VALUE
OF YOUR INVESTMENT.
Certain risks related to the Fund are discussed below. To the extent not
discussed in this section, specific risks attendant to individual securities or
investment practices are discussed in "Additional Investment Information" and in
the statement of additional information.
Investing in common stocks, particularly those having growth characteristics,
frequently involves greater risks (and possibly greater rewards) than investing
in other types of securities. Common stock prices tend to be more volatile and
companies having growth characteristics may sometimes be unproven.
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 debt securities of issuers located in North and Latin 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.
FOREIGN RISK IN GENERAL. Investing in securities of foreign issuers generally
involves more risk than investing in 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.
EMERGING MARKETS. 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.
BELOW INVESTMENT GRADE BONDS. 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 investing in 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 below
investment 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 below investment grade bonds, however, are generally less
sensitive to interest rate changes than the prices of higher-rated bonds; below
investment 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. For a description of these
rating categories see "Additional Investment Information." 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 which, 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 PIK securities.
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 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. 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.
Income and yields on high yield, high risk securities, as on all securities,
will fluctuate over time.
The following table shows the weighted average percentages of the Fund's
assets invested at the end of each month from November 1, 1994 until fiscal year
ended October 31, 1995 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
RATED OF COMPARABLE
SECURITIES QUALITY AS
AS PERCENTAGE OF PERCENTAGE OF
RATING FUND'S ASSETS FUND'S ASSETS
- ---- ----------------- -------------------
AAA 0% 0%
AA 0% 0%
A 0% 0%
BBB 0% 0%
BB 14.95% 3.54%
B 0% 16.46%
CCC 0% 0%
CC 0% 0%
C 0% 0%
CA 0% 0%
Unrated* 20.00%
U.S. governments,
cash, equities
and others 65.05%
-------
TOTAL 100.00%
-------
GENERAL. 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.
PRICING SHARES
The Fund computes its net asset value as of the close of trading (currently
4:00 p.m. eastern time) on each day that the New York Stock Exchange (the
"Exchange") is open. However, the Fund does not compute its net asset value on
days when changes in the value of the Fund's 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 that 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 that 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: (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.
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 (a "RIC") 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 RIC 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 October 31 of such calendar year.
If the Fund qualifies as a RIC and if it distributes all of its net investment
income and net capital gains, if any, to shareholders, it will be relieved of
any federal income tax liability.
The Fund 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 than
those attributable to Class A shares, and income distributions paid by the Fund
with respect to Class A shares will generally be greater than those paid with
respect to Class B and Class C shares.
Shareholders receive Fund distributions in the form of additional shares of
that class of shares upon which the distribution is based or, at the
shareholder's option, in cash. Fund distributions in the form of additional
shares are made at net asset value without the imposition of a sales charge.
Dividends and distributions are taxable whether they are received in cash or
in shares. Income dividends and net short-term gains dividends are taxable as
ordinary income, and net long-term gains dividends are taxable as capital gains
regardless of how long the Fund's shares are held. If Fund shares held for less
than six months are sold at a loss, however, 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. Any taxable dividend declared in October, November or
December to shareholders of record in such month and paid by the following
January 31 will be includable in the taxable income of the shareholder as if
paid on December 31 of the year in which the dividend was declared.
The Fund advises its 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
provides investment advice, management and administrative services to the
Fund.
INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone is a wholly-owned
subsidiary of Keystone Investments, Inc. ("Keystone Investments"). Keystone
Investments provides accounting, bookkeeping, legal, personnel and general
corporate services to Keystone, its affiliates, and the Keystone Investments
Families of Funds. Both Keystone and Keystone Investments are located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, Keystone Investments succeeded to the business of a
corporation with the same name, but under different ownership. Keystone
Investments is a wholly-owned subsidiary of First Union National Bank of North
Carolina ("FUNB"). FUNB is a subsidiary of First Union Corporation ("First
Union"), the sixth largest bank holding company in the U.S. based on total
assets as of September 30, 1996.
First Union is headquartered in Charlotte, North Carolina, and had $133.9
billion in consolidated assets as of September 30, 1996. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the U.S. The Capital Management Group of FUNB ("CMG"),
together with Lieber & Company and Evergreen Asset Management Corp.
("Evergreen Asset"), wholly-owned subsidiaries of FUNB, manage or otherwise
oversee the investment of over $50 billion in assets belonging to a wide range
of clients, including the Evergreen Family of Funds.
Pursuant to its Investment Advisory and Management Agreement with the Fund
(the "Advisory Agreement"), Keystone manages the investment and reinvestment of
the Fund's assets, supervises the operation of the Fund and provides all
necessary office space, facilities and equipment.
The Fund pays Keystone a fee for its services at the annual rate set forth
below:
Aggregate Net Asset
Management Value of the Shares
Fee of the Fund
- ------------------------------------------------------------------------------
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.
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 Advisory Agreement continues in effect for two years from its effective
date and, thereafter, from year to year only so long as such continuance is
specifically approved at least annually by the Fund's Board of Trustees or by
vote of shareholders of the Fund. In either case, the terms of the Advisory
Agreement and continuance thereof must be approved by the vote of a majority of
Independent Trustees (Trustees who are not "interested persons" of the Fund, as
defined in the 1940 Act, and who have no direct or indirect financial interest
in the Fund's Distribution Plans or any agreement related thereto), cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated, without penalty, on 60 days' written
notice by the Fund or Keystone or may be terminated by a vote of shareholders of
the Fund. The Advisory Agreement will terminate automatically upon its
assignment.
PRINCIPAL UNDERWRITER
Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of Furman Selz LLC ("Furman Selz"),
which is not affiliated with First Union, is now the Fund's principal
underwriter (the "Principal Underwriter"). EKD replaces Evergreen Keystone
Investment Services, Inc. (formerly Keystone Investment Distributors Company)
("EKIS") as the Fund's principal underwriter. EKIS may no longer act as
principal underwriter of the Fund due to regulatory restrictions imposed by the
Glass-Steagall Act upon national banks such as FUNB and their affiliates, that
prohibit such entities from acting as the underwriters or distributors of mutual
fund shares. While EKIS may no longer act as principal underwriter of the Fund
as discussed above, EKIS may continue to receive compensation from the Fund or
the Principal Underwriter in respect of underwriting and distribution services
performed prior to the termination of EKIS as principal underwriter. In
addition, EKIS may also be compensated by the Principal Underwriter for the
provision of certain marketing support services to the Principal Underwriter at
an annual rate of up to .75% of the average daily net assets of the Fund,
subject to certain restrictions. Both EKD and Furman Selz are located at 230
Park Avenue, New York, New York 10169.
SUB-ADMINISTRATOR
Furman Selz provides officers and certain administrative services to the Fund
pursuant to a sub-administration agreement. For its services under that
agreement, Furman Selz receives a fee from Keystone at the maximum annual rate
of .01% of the average daily net assets of the Fund.
It is expected that on or about January 2, 1997, Furman Selz will transfer
EKD, and its related mutual fund distribution and administration business, to
BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
PORTFOLIO MANAGER
Gilman C. Gunn is the Fund's portfolio manager. Mr. Gunn is a Keystone
Senior Vice President and Senior Portfolio Manager and head of Keystone's
International Group. He has more than 23 years of investment experience.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and distribution plan fees discussed in this prospectus, the principal expenses
that the Fund is expected to pay include, but are not limited to, expenses of
its Independent Trustees; transfer, dividend disbursing, and shareholder
servicing agent expenses; custodian expenses; fees of its independent auditors;
fees of legal counsel to the Fund and its Independent Trustees; fees payable to
government agencies, including registration and qualification fees attributable
to the Fund and its shares under federal and state securities laws; and certain
extraordinary expenses. In addition, each class will pay all of the expenses
attributable to it. Such expenses are currently limited to Distribution Plan
expenses. The Fund also pays its brokerage commissions, interest charges, and
taxes.
For the fiscal year ended October 31, 1995, the Fund paid or accrued to
Keystone investment management and administrative services fees of $1,099,920
(0.75% of the Fund's average daily net asset value on an annualized basis).
For the fiscal year ended October 31, 1995, the Fund paid or accrued $656,071
to Evergreen Keystone Service Company (formerly Keystone Investor Resource
Center, Inc.) ("EKSC") for services rendered as the Fund's transfer agent and
dividend disbursing agent and $19,208 to Keystone Investments for certain
accounting services. EKSC, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, is a wholly-owned subsidiary of Keystone.
For the fiscal year ended October 31, 1995, the Fund's Class A, Class B and
Class C shares paid 1.86%, 2.61% and 2.61%, respectively, of their respective
average class net assets in expenses (including indirectly paid expenses).
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 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 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 rate for the fiscal years ended October 31, 1994
and 1995 were 104% and 57%, respectively. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs, which
would be borne directly by the Fund, as well as additional gains and/or losses
to shareholders. For further information about brokerage and distributions, see
the statement of additional information.
CODE OF ETHICS
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
DISTRIBUTION PLANS AND AGREEMENTS
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures by the Fund
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under the Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as broker-dealers),
as service fees at an annual rate of up to 0.25% of the average daily net asset
value of Class A shares maintained by the recipient and outstanding on the books
of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans with respect to its Class B shares
(the "Class B Distribution Plans") that provide for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares to pay expenses of the distribution of Class B shares. Payments under the
Class B Distribution Plans are currently made to the Principal Underwriter
(which may reallow all or part to others, such as broker-dealers) and to EKIS,
the predecessor to the Fund's Principal Underwriter, (1) as commissions for
Class B shares sold, (2) as shareholder service fees and (3) as interest.
Amounts paid or accrued to the Principal Underwriter or EKIS in the aggregate
may not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold. The
broker-dealer or other party will also receive service fees at an annual rate of
0.25% of the value of Class B shares maintained by the recipient and outstanding
on the books of the Fund for specified periods. See "Distribution Plans
Generally" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to Class C shares (the
"Class C Distribution Plan") that provides for expenditures by the Fund at an
annual rate of up to 1.00% of the average daily net asset value of Class C
shares to pay expenses of the Distribution of Class C shares. Payments under the
Class C Distribution Plan are currently made to the Principal Underwriter (which
may reallow all or part to others, such as dealers) and to EKIS, the predecessor
to the Fund's Principal Underwriter, (1) as commissions for Class C shares sold,
(2) as shareholder service fees, and (3) as interest. Amounts paid or accrued to
the Principal Underwriter or EKIS in the aggregate may not exceed the annual
limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold,
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold, and, beginning approximately fifteen months
after purchase, a commission at an annual rate of 0.75% (subject to NASD rules
- -- see "Distribution Plans Generally") plus service fees which are paid at the
annual rate of 0.25%, respectively, of the value of Class C shares maintained by
the recipient and outstanding on the books of the Fund for specified periods.
See "Distribution Plans Generally" below.
DISTRIBUTION PLANS GENERALLY
As discussed above, the Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and Class
C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD limits the amount that the Fund may pay annually in distribution
costs for the sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1% of the aggregate average daily net asset value of its
shares, of which 0.75% may be used to pay distribution costs and 0.25% may be
used to pay shareholder service fees. The NASD also limits the aggregate amount
that the Fund may pay for such distribution costs to 6.25% of gross share sales
since the inception of the 12b-1 Distribution Plan, plus interest at the prime
rate plus 1% on such amounts (less any contingent deferred sales charges
("CDSCs") paid by shareholders to the Principal Underwriter) remaining unpaid
from time to time.
In connection with financing its distribution costs, including commission
advances to broker-dealers and others, EKIS, the predecessor to the Principal
Underwriter, sold to a financial institution substantially all of its 12b-1 fee
collection rights and CDSC collection rights in respect of Class B shares sold
during the period beginning approximately June 1, 1995 through November 30,
1996. The Fund has agreed not to reduce the rate of payment of 12b-1 fees in
respect of such Class B shares, unless it terminates such shares' Distribution
Plan completely. If it terminates such Distribution Plan, the Fund may be
subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to compensate
broker-dealers or other persons for distributing shares of the Fund will be
provided by FUNB or its affiliates.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. If a Distribution Plan is terminated, the Principal
Underwriter and EKIS will ask the Independent Trustees to take whatever action
they deem appropriate under the circumstances with respect to payment of
Advances (as defined below).
Unpaid distribution costs at October 31, 1995 were: $7,784,681 for Class B
shares purchased prior to June 1, 1995 (8.15% of net class assets for such Class
B shares); $102,704 for Class B shares purchased on or after June 1, 1995 (6.30%
of net class assets for such Class B shares); and $1,135,932 for Class C shares
(10.10% of net class assets).
Broker-dealers or others may receive different levels of compensation
depending on which class of shares they sell. Payments pursuant to a
Distribution Plan are included in the operating expenses of the class.
DISTRIBUTION AGREEMENTS
The Fund has entered into principal underwriting agreements with the Principal
Underwriter (each a "Distribution Agreement") with respect to each class.
Pursuant to the Distribution Agreements, the Fund will compensate the Principal
Underwriter for its services as distributor at an annual rate that may not
exceed .25 of 1% of the Fund's average daily net assets attributable to Class A
shares, .75 of 1% of the Fund's average daily net assets attributable to the
Class B shares, subject to certain restrictions, and .75 of 1% of the Fund's
average daily net assets attributable to the Class C shares.
The Fund may also make payments under its Distribution Plans, in amounts of up
to .25 of 1% of its average daily net assets on an annual basis, attributable to
Class A, B and C shares, respectively, to compensate organizations, which may
include, among others, the Principal Underwriter and Keystone or their
respective affiliates, for services rendered to shareholders and/or the
maintenance of shareholder accounts.
The Fund may not pay any distribution or servicing fees during any fiscal
period in excess of NASD limits. Since the Principal Underwriter's compensation
under the Distribution Agreements is not directly tied to the expenses incurred
by the Principal Underwriter, the amount of compensation received by it under
the Distribution Agreements during any year may, subject to certain conditions,
be more than its actual expenses and may result in a profit to the Principal
Underwriter. Distribution expenses incurred by the Principal Underwriter in one
fiscal year that exceed the level of compensation paid to the Principal
Underwriter for that year may be paid from distribution fees received from a
Fund in subsequent fiscal years.
The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plans that exceed current annual payments permitted to be received by the
Principal Underwriter from the Fund ("Advances"). The Principal Underwriter
intends to seek full reimbursement for Advances from the Fund (together with
annual interest thereon at the prime rate plus one percent) at such time in the
future as, and to the extent that, payment thereof by the Fund would be within
the permitted limits. If the Fund's Independent Trustees authorize such
payments, the effect would be to extend the period of time during which the Fund
incurs the maximum amount of costs allowed by a Distribution Plan.
In states where the Principal Underwriter is not registered as a
broker-dealer, shares of the Fund will only be sold through other broker-dealers
or other financial institutions that are registered.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of Fund shares. In addition, broker-dealers may, from time
to time, receive additional cash payments. The Principal Underwriter may also
provide written information to those broker-dealers with whom it has dealer
agreements that relates to sales incentive campaigns conducted by such
broker-dealers for their representatives as well as financial assistance in
connection with pre-approved seminars, conferences and advertising. No such
programs or additional compensation will be offered to the extent they are
prohibited by the laws of any state or any self-regulatory agency such as the
NASD. Broker-dealers to whom substantially the entire sales charge on Class A
shares is reallowed may be deemed to be underwriters as that term is defined
under the 1933 Act.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to broker-dealers including, from time to time, to
First Union Brokerage Services, Inc., an affiliate of Keystone, that satisfy
certain criteria established from time to time by the Principal Underwriter.
These conditions relate to increasing sales of shares of the Keystone funds over
specified periods and certain other factors. Such payments may, depending on the
broker-dealer's satisfaction of the required conditions, be periodic and may be
up to 1.00% of the value of shares sold by such broker-dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to dealers for the sale of shares, as described above) to banks
and other financial services firms that facilitate transactions in shares of the
Fund for their clients.
State securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as broker-dealers pursuant to state laws.
EFFECTS OF BANKING LAWS
The Glass-Steagall Act currently limits the ability of depository institutions
(such as a commercial bank or a savings and loan association) to become an
underwriter or distributor of securities. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from accepting payments under the
arrangement described above, or should Congress relax current restrictions on
depository institutions, the Board of Trustees will consider what action, if
any, is appropriate.
The Glass-Steagall Act and other banking laws and regulations also presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Fund. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer. Keystone
and its affiliates, since they are direct or indirect subsidiaries of FUNB, are
subject to and in compliance with the aforementioned laws and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could prevent Keystone Investments or its affiliates
from performing the services required under the investment advisory contract or
from acting as agent in connection with the purchase of shares of a fund by its
customers. In such event, it is expected that the Trustees would identify, and
call upon each Fund's shareholders to approve, a new investment adviser. If this
were to occur, it is not anticipated that the shareholders of any Fund would
suffer any adverse financial consequences.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with the Principal Underwriter. In addition, you may purchase shares
of the Fund by mailing to the Fund, c/o Evergreen Keystone Service Company, P.O.
Box 2121, Boston, Massachusetts 02106-2121, a completed account application and
a check payable to the Fund. You may also telephone 1-800-343-2898 to obtain the
number of an account to which you can wire or electronically transfer funds and
then send in a completed account application. Subsequent investments in any
amount may be made by check, by wiring Federal funds, by direct deposit or by an
electronic funds transfer ("EFT").
Orders for the purchase of shares of the Fund will be confirmed at the public
offering price, which is equal to the net asset value per share next determined
after receipt of the order in proper form by the Principal Underwriter
(generally as of the close of the Exchange on that day) plus, in the case of
Class A shares, the applicable sales charge. Orders received by broker-dealers
or other firms prior to the close of the Exchange and received by the Principal
Underwriter prior to the close of its business day will be confirmed at the
offering price effective as of the close of the Exchange on that day.
Broker-dealers and other financial services firms are obligated to transmit
orders promptly.
Orders for shares received other than as stated above will receive the public
offering price, which is equal to the net asset value per share next determined
(generally, the next business day's offering price) plus, in the case of Class A
shares, the applicable sales charge.
The Fund reserves the right to determine the net asset value more frequently
than once a day if deemed desirable.
The initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to EKSC by calling toll free
1-800-343-2898 or writing to EKSC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
This prospectus provides information regarding the Class A, B, and C shares
offered by the Fund:
CLASS A SHARES -- FRONT-END LOAD OPTION
With certain exceptions Class A shares are sold with a sales charge at the
time of purchase. Class A shares are not subject to a CDSC when they are
redeemed except as follows: Class A shares purchased after January 1, 1997, in
an amount equal to or exceeding $1 million, without a front-end sales charge,
will be subject to a CDSC during the month of purchase and the 12-month period
following the month of purchase.
CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are, with certain exceptions, subject to a
CDSC if redeemed during the month of purchase and the 72-month period following
the month of purchase. Class B shares purchased after January 1, 1997, that have
been outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without the imposition of a front-end sales charge or
exchange fee.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are subject to a CDSC if they are redeemed
during the month of purchase and the 12-month period following the month of
purchase. Class C shares are available only through dealers who have entered
into special distribution agreements with the Principal Underwriter.
Each class of shares, pursuant to its Distribution Plan, pays an annual
service fee of 0.25% of the Fund's average daily net assets attributable to that
class. In addition to the 0.25% service fee, the Class B and C Distribution
Plans provide for the payment of an annual distribution fee of up to 0.75% of
the average daily net assets attributable to their respective classes. As a
result, income distributions paid by the Fund with respect to Class B and Class
C shares will generally be less than those paid with respect to Class A shares.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spreading such cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares (in which case,
100% of the purchase price is invested immediately), depending on the amount of
the purchase and the intended length of investment.
The Fund will not normally accept any purchase of Class B shares in the amount
of $250,000 or more and will not normally accept any purchase of Class C shares
in the amount of $500,000 or more.
----------------------------------------------
CLASS A SHARES
Class A shares are currently offered at the public offering price, which is
equal to net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 ............................... 4.75% 4.99% 4.25%
$50,000 but less than $100,000 .................. 4.50% 4.71% 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% 2.00%
$500,000 but less than $1,000,000 ............... 2.00% 2.04% 1.75%
<FN>
- ----------
* Rounded to the nearest one-hundredth percent.
</TABLE>
----------------------------------------------
Purchases of the Fund's Class A shares made after January 1, 1997, (i) in the
amount of $1 million or more; (ii) by a corporate or certain other qualified
retirement plan or a non-qualified deferred compensation plan or a Title I tax
sheltered annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan"), or a TSA plan sponsored by a public
educational entity having 5,000 or more eligible employees (an "Educational TSA
Plan"); or (iii) by (a) institutional investors, which may include bank trust
departments and registered investment advisers; (b) investment advisers,
consultants or financial planners who place trades for their own accounts or the
accounts of their clients and who charge such clients a management, consulting,
advisory or other fee; (c) clients of investment advisers or financial planners
who place trades for their own accounts if the accounts are linked to the master
account of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased; (d) institutional clients of
broker-dealers, including retirement and deferred compensation plans and the
trusts used to fund these plans, which place trades through an omnibus account
maintained with the Fund by the broker-dealer; and (e) employees of FUNB and its
affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.
With respect to purchases of the Fund's Class A shares made after January 1,
1997, in the amount of $1 million or more, the Principal Underwriter will pay
broker-dealers or others concessions at the following rate: 1.00% of the
investment amount up to $2,999,999; plus 0.50% of the investment amount between
$3,000,000 and $4,999,999; plus 0.25% of the investment amount over $4,999,999.
With respect to purchases of the Fund's Class A shares made after January 1,
1997, by Qualifying Plans and Educational TSA Plans, the Principal Underwriter
will pay broker-dealers and others concessions at the rate of 0.50% of the net
asset value of the shares purchased. These payments are subject to reclaim in
the event the shares are redeemed within twelve months after purchase.
Purchases of the Fund's Class A shares made after January 1, 1997, in the
amount of $1 million or more, are subject to a CDSC of 1.00% upon redemption
during the month of purchase and the 12-month period following the month of
purchase.
The sales charge is paid to the Principal Underwriter, which in turn normally
reallows a portion to your broker-dealer. In addition, your broker-dealer
currently will be paid periodic service fees at an annual rate of up to 0.25% of
the value of Class A shares maintained by such recipient and outstanding on the
books of the Fund for specified periods.
Upon written notice to broker-dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A shares
that are offered in connection with certain fee based programs, such as wrap
accounts sponsored or managed by broker-dealers, investment advisers, or others
who have entered into special agreements with the Principal Underwriter. Initial
sales charges may be reduced or eliminated for persons or organizations
purchasing Class A shares of the Fund alone or in combination with Class A
shares of other Keystone America Funds. See Exhibit A to this prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within 30
days after a change in the registered representative's employment when the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front-end sales charge, or (2)
was at some time subject to, but did not actually pay, a CDSC with respect to
the redemption proceeds.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within 30
days after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates when the amount
invested represents redemption proceeds from such unrelated registered open-end
investment company, and the shareholder either (1) paid a front-end sales
charge, or (2) was at some time subject to, but did not actually pay, a CDSC
with respect to the redemption proceeds. This special net asset value purchase
is currently being offered on a calendar month-by-month basis and may be
modified or terminated in the future.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With respect to shares purchased after January 1, 1997, the Fund, with
certain exceptions, imposes a CDSC on Class B shares redeemed as follows:
<PAGE>
CDSC
REDEMPTION TIMING IMPOSED
Month of purchase and the first twelve-month period following the
month of purchase ............................................. 5.00%
Second twelve-month period following the month of purchase ...... 4.00%
Third twelve-month period following the month of purchase ....... 3.00%
Fourth twelve-month period following the month of purchase ...... 3.00%
Fifth twelve-month period following the month of purchase ....... 2.00%
Sixth twelve-month period following the month of purchase ....... 1.00%
No CDSC is imposed on amounts redeemed thereafter.
When imposed, the CDSC is deducted from the redemption proceeds otherwise
payable to you. The CDSC is retained by the Principal Underwriter or its
predecessor. Amounts received by the Principal Underwriter or its predecessor
under the Class B Distribution Plans are reduced by CDSCs retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.
Class B shares purchased after January 1, 1997, that have been outstanding for
seven years after the month of purchase, will automatically convert to Class A
shares (which are subject to a lower Distribution Plan charge) without
imposition of a front-end sales charge or exchange fee. (Conversion of Class B
shares represented by stock certificates will require the return of the stock
certificates to EKSC.) The Class B shares so converted will no longer be subject
to the higher distribution expenses and other expenses, if any, borne by Class B
shares. Because the net asset value per share of Class A shares may be higher or
lower than that of the Class B shares at the time of conversion, although the
dollar value will be the same, a shareholder may receive more or fewer Class A
shares than the number of Class B shares converted. Under current law, it is the
Fund's opinion that such a conversion will not constitute a taxable event under
federal income tax law. In the event that this ceases to be the case, the Board
of Trustees will consider what action, if any, is appropriate and in the best
interest of such Class B shareholders.
CLASS C SHARES
Class C shares are offered only through broker-dealers who have special
distribution agreements with the Principal Underwriter. Class C shares are
offered at net asset value, without an initial sales charge. With certain
exceptions, the Fund imposes a CDSC of 1.00% on shares redeemed during the month
of purchase and the 12-month period following the month of purchase. No CDSC is
imposed on amounts redeemed thereafter. If imposed, the CDSC is deducted from
the redemption proceeds otherwise payable to you. The CDSC is retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any CDSC imposed upon the redemption of Class A, Class B, or Class C shares is
a percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net asset value at the time of purchase of such shares.
With respect to shares purchased after January 1, 1997, no CDSC is imposed
when you redeem amounts derived from (1) increases in the value of shares
redeemed above the net cost of such shares; (2) certain shares with respect to
which the Fund did not pay a commission on issuance, including shares acquired
through reinvestment of dividend income and capital gains distributions; (3)
certain Class A shares held for more than 12 months after the month of purchase;
(4) Class B shares held for more than 72 months after the month of purchase; or
(5) Class C shares held for more than one year after the month of purchase. Upon
request for redemption, shares not subject to the CDSC will be redeemed first.
Thereafter, shares held the longest will be the first to be redeemed.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC will be
imposed on any redemptions made specifically by an individual participant in the
Qualifying Plan. This waiver is not available in the event a Qualifying Plan (as
a whole) redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of the Fund in the
event of (1) death or disability of the shareholder; (2) a lump-sum distribution
from a 401(k) plan or other benefit plan qualified under the Employee Retirement
Income Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA
plans if the shareholder is at least 59 1/2 years old; (4) involuntary
redemptions of accounts having an aggregate net asset value of less than $1,000;
(5) automatic withdrawals under the Systematic Income Plan of up to 1.0% per
month of the shareholder's initial account balance; (6) withdrawals consisting
of loan proceeds to a retirement plan participant; (7) financial hardship
withdrawals made by a retirement plan participant; or (8) withdrawals consisting
of returns of excess contributions or excess deferral amounts made to a
retirement plan participant.
The Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a CDSC to certain Directors, Trustees,
officers and employees of the Fund, Keystone, the Principal Underwriter and
certain of their affiliates, and to members of the immediate families of such
persons; to registered representatives of firms with dealer agreements with the
Principal Underwriter; and to a bank or trust company acting as a trustee for a
single account. See the statement of additional information.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net redemption value by writing
to the Fund, c/o EKSC, and presenting a properly endorsed share certificate (if
certificates have been issued) to the Fund. Your signature(s) on the written
order and certificates must be guaranteed as described below. In order to redeem
by telephone or to engage in telephone transactions generally, you must complete
the authorization in your account application. Proceeds for shares redeemed on
telephone order will be deposited by wire or EFT only to the bank account
designated in your account application.
You may also redeem your shares through your broker-dealer. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from broker-dealers and will calculate the net asset value on
the same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable CDSC, to the broker-dealer placing the order
within seven days thereafter. The Principal Underwriter charges no fee for this
service. Your broker-dealer, however, may charge a service fee.
The redemption value equals the net asset value per share adjusted for
fractions of a cent and may be more or less than your cost depending upon
changes in the value of the Fund's portfolio securities between purchase and
redemption. A CDSC may be imposed by the Fund at the time of redemption of
certain shares as explained in "How to Buy Shares." If imposed, the CDSC is
deducted from the redemption proceeds otherwise payable to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. In such a case, the Fund will mail the redemption
proceeds upon clearance of the purchase check, which may take 15 days or more.
Any delay may be avoided by purchasing shares either with a certified check, by
Federal Reserve or bank wire of funds, by direct deposit or by EFT. Although the
mailing of a redemption check or the wiring or EFT of redemption proceeds may be
delayed, the redemption value will be determined and the redemption processed in
the ordinary course of business upon receipt of proper documentation. In such a
case, after the redemption and prior to the release of the proceeds, no
appreciation or depreciation will occur in the value of the redeemed shares, and
no interest will be paid on the redemption proceeds. If the payment of a
redemption has been delayed, the check will be mailed or the proceeds wired or
sent EFT promptly after good payment has been collected.
The Fund computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption, less any applicable CDSC (as described above),
will be made within seven days thereafter except as discussed herein.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND EKSC'S POLICIES. The Fund or EKSC may waive this
requirement or may require additional documents in certain cases. Currently, the
requirement for a signature guarantee has been waived on redemptions of $50,000
or less when the account address of record has been the same for a minimum
period of 30 days. The Fund and EKSC reserve the right to withdraw this waiver
at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute the
order. In such cases, the Fund will request the missing information from you and
process the order on the day such information is received.
TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. As mentioned above, to engage
in telephone transactions generally, you must complete the appropriate sections
of the Fund's application.
In order to insure that instructions received by EKSC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker-dealer as set forth herein.
SMALL ACCOUNTS
Due to the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No CDSCs are
applied to such redemptions.
GENERAL
The Fund reserves the right at any time to terminate, suspend, or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, EKSC, nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL"), or by telephone. EKSC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, EKSC, nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that EKSC
reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from EKSC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price and yield
quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a week.
EXCHANGES
If you have obtained the appropriate prospectus, you may exchange shares of
the Fund for shares of certain other Keystone America Funds and Keystone Liquid
Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone America
Funds and Class A shares of KLT;
Class B shares may be exchanged for the same type of Class B shares of other
Keystone America Funds and the same type of Class B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone America
Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
CDSC. However, if the shares being tendered for exchange are
(1) Class A shares acquired without a front-end sales charge,
(2) Class B shares that have been held for less than 72 months, or
(3) Class C shares that have been held for less than one year,
and are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction.
You may exchange shares for another Keystone fund by calling or writing to
EKSC or by using KARL. As noted above, if the shares being tendered for exchange
are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction. The Fund reserves the right to terminate
this exchange offer or to change its terms, including the right to charge for
exchanges.
Orders to exchange a certain class of shares of the Fund for the corresponding
class of shares of KLT will be executed by redeeming the shares of the Fund and
purchasing the corresponding class of shares of KLT at the net asset value of
such shares next determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. In all other
cases, orders for exchanges received by the Fund prior to 4:00 p.m. eastern time
on any day the Fund is open for business will be executed at the respective net
asset values determined as of the close of business that day. Orders for
exchanges received after 4:00 p.m. eastern time on any business day will be
executed at the respective net asset values determined at the close of the next
business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. An exchange constitutes a sale for federal income tax purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
AUTOMATIC INVESTMENT PLAN
With a Keystone Automatic Investment Plan, you can automatically transfer as
little as $25 per month or $75 per quarter from your bank account or KLT to the
Keystone fund of your choice. Your bank account will be debited for each
transfer. You will receive confirmation with your next account statement.
To establish or terminate an Automatic Investment Plan or to change the amount
or schedule of your automatic investments, you may write to or call EKSC. Please
include your account numbers. Termination may take up to 30 days.
RETIREMENT PLANS
The Fund has various retirement plans available to you, including Individual
Retirement Accounts (IRAs); Rollover IRAs; Simplified Employee Pension Plans
(SEPs); Salary Reduction Plans (SARSEPs); Tax Sheltered Annuity Plans; 403(b)
(7) Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money
Purchase Plans. For details, including fees and application forms, call toll
free 1-800-247-4075 or write to EKSC.
SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $75 and may be as much as 1.0% per month
or 3.0% per quarter of the total net asset value of the Fund shares in your
account when the Systematic Income Plan was opened. Fixed withdrawal payments
are not subject to a CDSC. Excessive withdrawals may decrease or deplete the
value of your account. Moreover, because of the effect of the applicable sales
charge, a Class A investor should not make continuous purchases of the Fund's
shares while participating in a Systematic Income Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America Fund. This results in more shares being
purchased when the selected fund's net asset value is relatively low and fewer
shares being purchased when the fund's net asset value is relatively high and
may result in a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must establish an account
in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application (1) the dollar amount of each
monthly or quarterly investment you wish to make and (2) the fund in which the
investment is to be made. Thereafter, on the first day of the designated month,
an amount equal to the specified monthly or quarterly investment will
automatically be redeemed from your initial account and invested in shares of
the designated fund.
If you are a Class A investor and paid a sales charge on your initial
purchase, the shares purchased will be eligible for Rights of Accumulation and
the sales charge applicable to the purchase will be determined accordingly. In
addition, the value of shares purchased will be included in the total amount
required to fulfill a Letter of Intent. If a sales charge was not paid on the
initial purchase, a sales charge will be imposed at the time of subsequent
purchases, and the value of shares purchased will become eligible for Rights of
Accumulation and Letters of Intent. See Exhibit A -- "Reduced Sales Charges" at
the back of the prospectus.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class of
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on your application and indicate the Keystone America Fund(s) into which
distributions are to be invested. The value of shares purchased will be
ineligible for Rights of Accumulation and Letters of Intent. See Exhibit A --
"Reduced Sales Charges" at the back of the prospectus.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at current
net asset value.
PERFORMANCE DATA
From time to time the Fund may advertise "total return" and "current yield."
ALL DATA IS BASED ON HISTORICAL 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 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., Standard & Poor's Corporation,
Ibbotson Associates or other industry publications.
FUND SHARES
The Fund issues Class A, B, and C 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 series or class of shares or other expenses that the
Board of Trustees may designate as series or class expenses from time to time,
are borne solely by each series or class; (2) each series or class of shares has
exclusive voting rights with respect to its Distribution Plan; (3) each series
or class has different exchange privileges and; (4) each series or 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 series or class. The Fund does not have
annual meetings. The Fund will have special meetings from time to time as
required under its Declaration of Trust and under the 1940 Act. As provided in
the Declaration of Trust of the Fund, shareholders have the right to remove
Trustees by an affirmative vote of two-thirds of the outstanding shares. A
special meeting of the shareholders will be held when 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. The Fund's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
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 a full secured or collateralized reverse repurchase
is not subject to the percentage limit on borrowings imposed under Section 18 of
the 1940 Act.
FOREIGN SECURITIES
The Fund may invest in securities principally traded in securities markets
outside the United States. 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 United States. 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 United States).
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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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. Only Class A shares subject to an
initial or deferred sales charge are eligible for inclusion in reduced sales
charge programs.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may combine
concurrent direct purchases of Class A shares of two or more of the "Eligible
Funds," as defined below. For example, if a Purchaser concurrently invested
$75,000 in one of the other "Eligible Funds" and $75,000 in the Fund, the sales
charge would be that applicable to a $150,000 purchase, i.e., 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 3.75% of the offering price as indicated in the Sales
Charge schedule. EKSC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor the Fund to sell, the amount
indicated.
After the Letter of Intent is received by EKSC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary) 5% of the dollar amount specified on the application will be held
in escrow by EKSC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to the Principal
Underwriter any difference between the sales charge on the amount specified and
on the amount actually attained. If the Purchaser does not within 20 days after
written request by the Principal Underwriter or his dealer pay such difference
in sales charge, EKSC will redeem an appropriate number of the escrowed shares
in order to realize such difference. Shares remaining after any such redemption
will be released by EKSC. Any redemptions made by the Purchaser during the
thirteen-month period will be subtracted from the amount of the purchases for
purposes of determining whether the Letter of Intent has been completed. In the
event of a total redemption of the account prior to completion of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption and the balance will be forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and
appoints EKSC his attorney to surrender for redemption any or all escrowed
shares with full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or EKSC that
a Letter of Intent is in effect each time a purchase is made.
<PAGE>
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KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
- ----------------------------------------------------------------------------
- -----------------------
Evergreen Keystone
- ----------------------
[logo] FUNDS [logo
- ----------------------
Evergreen Keystone Distributor, Inc.
230 Park Avenue
New York, New York 10169
FOA-P Sup. 1/97
9.5M
540105
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KEYSTONE
[graphic omitted]
FUND OF THE
AMERICAS
- -----------------------------------------------------------------------------
-----------------------
Evergreen Keystone
----------------------
[logo] FUNDS [logo
----------------------
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE FUND OF THE AMERICAS
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 27, 1996
AS SUPPLEMENTED JANUARY 1, 1997
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Fund of the Americas (the "Fund") dated February 27, 1996, as supplemented. You
may obtain a copy of the prospectus from the Fund's principal underwriter,
Evergreen Keystone Distributor, Inc., or your broker-dealer. Evergreen Keystone
Distributor, Inc. Is located at 230 Park Avenue, New York, New York 10169.
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TABLE OF CONTENTS
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Page
The Fund ................................................................ 2
Investment Restrictions ................................................. 2
Distributions and Taxes ................................................. 4
Valuation of Securities ................................................. 5
Brokerage ............................................................... 6
Sales Charges ........................................................... 7
Distribution Plans ...................................................... 10
Trustees and Officers ................................................... 13
Investment Adviser ...................................................... 16
Principal Underwriter ................................................... 18
Sub-administrator ....................................................... 19
Declaration of Trust .................................................... 19
Standardized Total Return and Yield Quotations .......................... 21
Additional Information .................................................. 21
Appendix ................................................................ A-1
Financial Statements .................................................... F-1
<PAGE>
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THE FUND
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The Fund is an open-end, diversified management investment company
commonly known as a mutual fund. The Fund's primary investment 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 investment objective,
the Fund seeks current income.
Keystone Investment Management Company ("Keystone") is the Fund's
investment adviser. Evergreen Keystone Distributor, Inc. (formerly Evergreen
Funds Distributor, Inc.) ("EKD" or the "Principal Underwriter") is the Fund's
principal underwriter. Evergreen Keystone Investment Services, Inc. (formerly
Keystone Investment Distributors Company) ("EKIS") is the predecessor to the
Principal Underwriter. See "Investment Adviser" and "Principal Underwriter"
below.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
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INVESTMENT RESTRICTIONS
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FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). 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; loan
transactions and; 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; and
(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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the non-fundamental policies set forth in below
(some or all of which were adopted in order to permit the sale of shares in
certain states), all of which may be changed without shareholder approval or
notification.
The Fund may not do the following:
(1) 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;
(2) simultaneously purchase and sell the same or an equivalent security
in order to profit from price discrepancies;
(3) (a) 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; and
(4) 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.
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 distributes to its shareholders dividends from net investment
income and net realized capital gains 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 receive a number of distributed
shares determined on the basis of the amount of the distribution and the Fund's
net asset value per share computed at the end of the day on the record date
after adjustment for the distribution. Net asset value is used in computing the
number of shares in both gains and income distribution reinvestments. Account
statements and/or checks as appropriate will be mailed to shareholders within
seven days after the Fund pays the distribution. Unless the Fund receives
instructions to the contrary 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 regardless of how long the shareholder has held the Fund shares. If
such shares are held less than six months and redeemed at a loss, however, 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 predetermined 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 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.
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VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
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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SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large
block is involved;
4. the broker's readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors and
trends and other statistical and factual information.
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should the Fund or Keystone receive research and other statistical and
factual information from a broker, the Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone is required to perform
under the Advisory Agreement (as defined below). Keystone believes that the
cost, value and specific application of such information are indeterminable and
cannot be practically allocated between the Fund and its other clients who may
indirectly benefit from the availability of such information. Similarly, the
Fund may indirectly benefit from information made available as a result of
transactions effected for Keystone's other clients. Under the Advisory
Agreement, Keystone is permitted to pay higher brokerage commissions for
brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event Keystone follows such a practice,
it will do so on a basis that is fair and equitable to the Fund.
Neither the Fund nor Keystone intends on placing securities
transactions with any particular broker. The Fund's Board of Trustees has
determined, however, that the Fund may consider sales of Fund shares as a factor
in the selection of brokers to execute portfolio transactions, subject to the
requirements of best execution described above.
BROKERAGE COMMISSIONS
The Fund expects that its purchases and sales of equity securities
usually will effected through brokerage transactions for which commissions are
payable. The Fund expects that purchases and sales of debt securities for the
Fund usually will be principal transactions. Such debt 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.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, the Principal Underwriter, or any of their affiliated
persons, as defined in the 1940 Act.
The Board of Trustees will, from time to time, review the Fund's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the Board
of Trustees may change, modify or eliminate any of the foregoing practices.
During the fiscal years ended October 31, 1994 and 1995, the Fund paid
approximately $1,037,477 and $531,521, respectively, in brokerage commissions.
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SALES CHARGES
- --------------------------------------------------------------------------------
The Fund offers three classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, the Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. The Fund charges a CDSC
as reimbursement for certain expenses, such as commissions or shareholder
servicing fees, that it has incurred in connection with the sale of its shares
(see "Distribution Plans"). If imposed, the Fund deducts CDSCs from the
redemption proceeds you would otherwise receive. CDSCs attributable to your
shares are, to the extent permitted by the National Association of Securities
Dealers, Inc. ("NASD"), paid to the Principal Underwriter or its predecessor.
See the prospectus for additional information on a particular class.
CLASS DISTINCTIONS
Class A Shares
With certain exceptions, when you purchase Class A shares after January
1, 1997, you will pay a maximum sales charge of 4.75%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
Class B Shares
The Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares purchased after January 1, 1997,
the Fund charges a CDSC on shares redeemed as follows:
Redemption Timing CDSC Rate
----------------- ---------
Month of purchase and the first twelve-month
period following the month of purchase .............. 5.00%
Second twelve-month
period following the month of purchase .............. 4.00%
Third twelve-month
period following the month of purchase .............. 3.00%
Fourth twelve-month
period following the month of purchase .............. 3.00%
Fifth twelve-month
period following the month of purchase .............. 2.00%
Sixth twelve-month
period following the month of purchase .............. 1.00%
Thereafter ............................................... 0.00%
Class B shares purchased after January 1, 1997, that have been
outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificate to Evergreen Keystone Service
Company (formerly Keystone Investor Resource Center, Inc.) ("EKSC") the Fund's
transfer and dividend disbursing agent.)
Class C Shares
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. The Fund
offers Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Fund will charge a CDSC of 1.00%, if you redeem
shares purchased after January 1, 1997, during the month of your purchase and
the 12-month period following the month of your purchase. See "Calculation of
Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net cost of such shares. Upon request for redemption, the
Fund will redeem shares not subject to the CDSC first. Thereafter, the Fund will
redeem shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
Exchanges
The Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Keystone America Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, the Fund will compute any
future CDSC based upon the date you originally purchased the shares you tendered
for exchange.
Waiver of Sales Charges
Purchases of the Fund's Class A shares made after January 1, 1997, (i)
in the amount of $1 million or more; (ii) by a corporate or certain other
qualified retirement plan or a non-qualified deferred compensation plan or a
Title 1 tax sheltered annuity or TSA plan sponsored by an organization having
100 or more eligible employees (a "Qualifying Plan") or a TSA plan sponsored by
a public educational entity having 5,000 or more eligible employees (an
"Educational TSA Plan"); or (iii) by (a) institutional investors, which may
include bank trust departments and registered investment advisers; (b)
investment advisers, consultants or financial planners who place trades for
their own accounts or the accounts of their clients and who charge such clients
a management, consulting, advisory or other fee; (c) clients of investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment advisers or
financial planners on the books of the broker-dealer through whom shares are
purchased; (d) institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with the Fund by the broker-dealer;
and (e) employees of First Union National Bank of North Carolina ("FUNB") and
its affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.
Shares of the Fund may also be sold, to the extent permitted by
applicable law, regulations, interpretations, or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees or sales representatives of the Fund,
Keystone, the Principal Underwriter, and certain of their affiliates who have
been such for not less than ninety days, and to members of the immediate
families of such persons; (2) a pension and profit-sharing plan established by
such companies, their subsidiaries and affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees, and sales representatives;
or (3) a registered representative of a firm with a dealer agreement with the
Principal Underwriter; provided, however, that all such sales are made upon the
written assurance that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Fund.
No initial sales charge or CDSC is imposed on purchases or redemptions
of shares of the Fund by a bank or trust company in a single account in the name
of such bank or trust company as trustee, if the initial investment in shares of
the Fund or any fund in the Keystone Investments Family of Funds, purchased
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1.00% of the amount invested.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC
will be imposed on any redemptions made specifically by an individual
participant in the Qualifying Plan. This waiver is not available in the event a
Qualifying Plan, as a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of the Fund
in the event of (1) death or disability of the shareholder; (2) a lump-sum
distribution from a benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if
the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of an
account having an aggregate net asset value of less than $1,000; (5) automatic
withdrawals under a Systematic Income Plan of up to 1.0% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.
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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 (a "Distribution Plan").
The Fund's Class A, B, and C Distribution Plans have been approved by
the Fund's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Fund, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees").
The NASD limits the amount that the Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits annual expenditures to 1.00% of the aggregate average daily net asset
value of its shares, of which 0.75% may be used to pay such distribution costs
and 0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the Distribution Plan, plus interest at
the prime rate plus 1% on such amounts (less any CDSCs paid by shareholders to
the Principal Underwriter) remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which is currently limited to 0.25% of the Fund's
average daily net asset value attributable to Class A shares, to finance any
activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to the
Principal Underwriter of the Fund to enable the Principal Underwriter to pay or
to have paid to others who sell Class A shares a service or other fee, at any
such intervals as the Principal Underwriter may determine, in respect of Class A
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.25% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Class B Distribution Plans provide that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class B shares to finance any activity that is primarily
intended to result in the sale of Class B shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class B shares sold since inception of a Distribution Plan; (2) to enable the
Principal Underwriter to pay or to have paid to others a service fee, at such
intervals as the Principal Underwriter may determine, in respect of Class B
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission equal to 4.00% of the price paid for each Class B share
sold. The broker-dealer or other party may also receive service fees at an
annual rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient and outstanding on the books of the Fund for
specified periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with the Class B
Distribution Plans that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund ("Advances"). The Principal
Underwriter intends to seek full reimbursement of such Advances from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the Fund's Independent Trustees authorize such
reimbursements of Advances, the effect would be to extend the period of time
during which the Fund incurs the maximum amount of costs allowed by the Class B
Distribution Plans.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, EKIS, the predecessor to the
Principal Underwriter sold to a financial institution substantially all of its
12b-1 fee collection rights and CDSC collection rights in respect of Class B
shares sold during the period beginning approximately June 1, 1995 through
November 30, 1996. The Fund has agreed not to reduce the rate of payment of
12b-1 fees in respect of such Class B shares unless it terminates such shares'
Distribution Plan completely. If it terminates such Distribution Plans, the Fund
may be subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to
compensate broker-dealers or other persons for distributing shares of the Fund
will be provided by FUNB or its affiliates.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to the Principal Underwriter and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class C shares sold since inception of the Distribution Plan; (2) to enable
the Principal Underwriter to pay or to have paid to others a service fee, at
such intervals as the Principal Underwriter may determine, in respect of Class C
shares maintained by any such recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission in the amount of 0.75% of the price paid for each Class C
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class C share sold. Beginning approximately fifteen
months after purchase, broker-dealers or others receive a commission at an
annual rate of 0.75% (subject to NASD rules) plus service fees at the annual
rate of 0.25%, respectively, of the average daily net asset value of each Class
C share maintained by the recipient and outstanding on the books of the Fund for
specified periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, the Principal Underwriter and EKIS will ask the Independent
Trustees to take whatever action they deem appropriate under the circumstances
with respect to payment of such Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by votes of
the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
For the fiscal year ended October 31, 1995, the Fund paid EKIS $44,881,
$1,151,149 ($1,147,012 with respect to Class B shares sold prior to June 1, 1995
and $4,137 with respect to Class B shares sold on or after June 1, 1995) and
$136,477 pursuant to its Class A, Class B and Class C Distribution Plans,
respectively. These amounts were used to pay commissions and service fees.
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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:
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Professor, Finance Department, George Washington
University; President, Amling & Company (investment
advice); and former Member, Board of Advisers,
Credito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of all the Evergreen funds other than
Evergreen Investment Trust; real estate developer and
construction consultant; and President of Centrum
Equities and Centrum Properties, Inc.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Investment Counselor to Appleton Partners, Inc.; and
former Managing Director, Seaward Management
Corporation (investment advice).
FOSTER BAM: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of all the Evergreen funds other than
Evergreen Investment Trust; Partner in the law firm
of Cummings & Lockwood; Director, Symmetrix, Inc.
(sulphur company) and Pet Practice, Inc. (veterinary
services); and former Director, Chartwell Group Ltd.
(Manufacturer of office furnishings and accessories),
Waste Disposal Equipment Acquisition Corporation and
Rehabilitation Corporation of America (rehabilitation
hospitals).
*GEORGE S. BISSELL: Chairman of the Board, Chief Executive Officer and
Trustee of the Fund; Chairman of the Board, Chief
Executive Officer and Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and Chairman
of its Investment Committee); former Director and
Chairman of the Board of Hartwell Keystone; and
former Chairman of the Board, Director and Chief
Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Principal, Padanaram Associates, Inc.; and former
Executive Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
and former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine;
Chairman and President, Oldways Preservation and
Exchange Trust (education); former Chairman of the
Board, Director, and Executive Vice President, The
London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Associates
(environmental consulting); and former Director,
Keystone Investments and Keystone.
JAMES S. HOWELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman and Trustee of the Evergreen funds; former
Chairman of the Distribution Foundation for the
Carolinas; and former Vice President of Lance Inc.
(food manufacturing).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman of the Board and Chief Executive Officer,
Carson Products Company; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix
Series Fund, Phoenix Multi-Portfolio Fund, and The
Phoenix Big Edge Series Fund; and former President,
Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman and Of Counsel, Keyser, Crowley & Meub,
P.C.; Member, Governor's (VT) Council of Economic
Advisers; Chairman of the Board and Director, Central
Vermont Public Service Corporation and Lahey
Hitchcock Clinic; Director, Vermont Yankee Nuclear
Power Corporation, Grand Trunk Corporation, Grand
Trunk Western Railroad, Union Mutual Fire Insurance
Company, New England Guaranty Insurance Company,
Inc., and the Investment Company Institute; former
Director and President, Associated Industries of
Vermont; former Director of Keystone, Central Vermont
Railway, Inc., S.K.I. Ltd., and Arrow Financial
Corp.; and former Director and Chairman of the Board,
Proctor Bank and Green Mountain Bank.
GERALD M. MCDONELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; and Sales
Representative with Nucor-Yamoto, Inc. (Steel
producer).
THOMAS L. MCVERRY: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; former Vice President
and Director of Rexham Corporation; and former
Director of Carolina Cooperative Federal Credit
Union.
*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; and Partner in the
law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Vice Chair and former Executive Vice President, DHR
International, Inc. (executive recruitment); former
Senior Vice President, Boyden International Inc.
(executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
RUSSELL A. SALTON, III MD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; Medical Director,
U.S. Health Care/Aetna Health Services; and former
Managed Health Care Consultant; former President,
Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; and Attorney, Law
Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman, Environmental Warranty, Inc. (Insurance
agency); Executive Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of Connecticut
Natural Gas Corporation, Hartford Hospital, Old State
House Association, Middlesex Mutual Assurance
Company, and Enhance Financial Services, Inc.;
Chairman, Board of Trustees, Hartford Graduate
Center; Trustee, Greater Hartford YMCA; former
Director, Vice Chairman and Chief Investment Officer,
The Travelers Corporation; former Trustee,
Kingswood-Oxford School; and former Managing Director
and Consultant, Russell Miller, Inc.
*ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky
& Armentano, P.C.; Adjunct Professor of Law and
former Associate Dean, St. John's University School
of Law; Adjunct Professor of Law, Touro College
School of Law; and former President, Nassau County
Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Investments Families of Funds; President and
Treasurer of the Evergreen funds; Senior Managing
Director, Furman Selz LLC since 1992; Managing
Director from 1984 to 1992; 230 Park Avenue, Suite
910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds
in the Keystone Investments Families of Funds; Senior
Vice President and Director of Administration and
Regulatory Services, BISYS Fund Services; 3435
Stelzer Road, Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
Mr. Bissell is deemed an "interested person" of the Fund by virtue of
his ownership of stock of First Union Corporation ("First Union"), of which
Keystone is an indirect wholly-owned subsidiary. See "Investment Adviser." Mr.
Pettit and Mr. Simons may each be deemed an "interested person" as a result of
certain legal services rendered to a subsidiary of First Union by their
respective law firms, Holcomb and Pettit, P.A. and Farrell, Fritz, Caemmerer,
Cleary, Barnosky & Armentano, P.C. As of the date hereof, Mr. Pettit and Mr.
Simons are each applying for an exemption from the SEC which would allow them to
retain their status as an Independent Trustee.
After the transfer of EKD and its related mutual fund distribution and
administration business to BISYS, it is expected that all of the officers of the
Fund will be officers and/or employees of BISYS. See "Sub-administrator."
During the fiscal year ended October 31, 1995, no Trustee affiliated
with Keystone or any officer received any direct remuneration from the Fund.
During the same period, the unaffiliated Trustees, as a group, received $12,419
for expenses incurred. Annual retainers and meeting fees paid by all funds in
the Keystone Investments Families of Funds (which includes more than thirty
mutual funds) for the calendar year ended December 31, 1995 totaled
approximately $450,716. As of November 30, 1995, the Trustees and officers
beneficially owned less than .01% of the Fund's then outstanding Class A, Class
B and Class C shares, respectively.
Except as set forth above, the address of all of the Fund's Trustees
and officers and the address of the Fund is 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
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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
Investments, 200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, the predecessor corporation to Keystone
Investments and indirectly each subsidiary of Keystone Investments, including
Keystone, were acquired (the "Acquisition") by FUNB, a wholly-owned subsidiary
of First Union Corporation ("First Union"). The predecessor corporation to
Keystone Investments was acquired by FUNB by merger into a wholly-owned
subsidiary of FUNB, which entity then succeeded to the business of the
predecessor corporation. Contemporaneously with the Acquisition, the Fund
entered into a new investment advisory agreement with Keystone and into a
principal underwriting agreement with EKD, a wholly-owned subsidiary of Furman
Selz LLC ("Furman Selz"). The new investment advisory agreement (the "Advisory
Agreement") was approved by the shareholders of the Fund on December 9, 1996,
and became effective on December 11, 1996.
Keystone Investments and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $133.9 billion in consolidated assets as of
September 30, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, together with Lieber & Company and
Evergreen Asset Management Corp., wholly-owned subsidiaries of FUNB, manage or
otherwise oversee the investment of over $50 billion in assets belonging to a
wide range of clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to, (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees of Independent
Trustees; (5) brokerage commissions, brokers' fees and expenses; (6) issue and
transfer taxes; (7) costs and expenses under the Distribution Plan; (8) taxes
and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
the Fund and its shares with the SEC or under state or other securities laws;
(11) expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges
and expenses of legal counsel for the Fund and for the Independent Trustees of
the Fund on matters relating to the Fund; (14) charges and expenses of filing
annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
The Fund pays Keystone a fee for its services at the annual rate of:
Management Aggregate Net Asset Value
Fee of the Shares 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 each business day and
payable daily.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
During the fiscal year ended October 31, 1995, the Fund paid or accrued
to Keystone investment management and administrative services fees of $1,099,920
(0.75% of the Fund's average daily net asset value). During the fiscal year
ended October 31, 1994, the Fund paid or accrued to Keystone investment
management and administrative services fees of $1,141,378.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements
(each an "Underwriting Agreement") with EKD with respect to each class. EKD,
which is not affiliated with First Union, replaces EKIS as the Fund's principal
underwriter. EKIS may no longer act as principal underwriter of the Fund due to
regulatory restrictions imposed by the Glass-Steagall Act upon national banks
such as FUNB and their affiliates, that prohibit such entities from acting as
the underwriters of mutual fund shares. While EKIS may no longer act as
principal underwriter of the Fund as discussed above, EKIS may continue to
receive compensation from the Fund or the Principal Underwriter in respect of
underwriting and distribution services performed prior to the termination of
EKIS as principal underwriter. In addition, EKIS may also be compensated by the
Principal Underwriter for the provision of certain marketing support services to
the Principal Underwriter at an annual rate of up to .75% of the average daily
net assets of the Fund, subject to certain restrictions.
The Principal Underwriter, as agent, has agreed to use its best efforts
to find purchasers for the shares. The Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from broker-dealers, and others, acting as principals, for sales of
shares to them. The Underwriting Agreements provide that the Principal
Underwriter will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. The Principal
Underwriter or EKIS, its predecessor, may receive payments from the Fund
pursuant to the Fund's Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the public offering price of the shares, which is determined in accordance
with the provisions of the Fund's Declaration of Trust, By-Laws, current
prospectuses and statement of additional information. All orders are subject to
acceptance by the Fund and the Fund reserves the right, in its sole discretion,
to reject any order received. Under the Underwriting Agreements, the Fund is not
liable to anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
The Principal Underwriter has agreed that it will, in all respects,
duly conform with all state and federal laws applicable to the sale of the
shares. The Principal Underwriter has also agreed that it will indemnify and
hold harmless the Fund and each person who has been, is, or may be a Trustee or
officer of the Fund against expenses reasonably incurred by any of them in
connection with any claim, action, suit, or proceeding to which any of them may
be a party that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
Each Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (I) by a vote of a
majority of the Fund's Independent Trustees, and (ii) by vote of a majority of
the Fund's Trustees, in each case, cast in person at a meeting called for that
purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Principal Underwriter's judgment, it
could benefit the sales of Fund shares, the Principal Underwriter may provide to
selected broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software, and Fund data files.
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SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
Furman Selz provides officers and certain administrative services to
the Fund pursuant to a sub-administration agreement. For its services under that
agreement Furman Selz will receive from Keystone an annual fee at the maximum
annual rate of .01% of the average daily net assets of the Fund. Furman Selz is
located at 230 Park Avenue, New York, New York 10169.
It is expected that on or about January 2, 1997, Furman Selz will
transfer EKD, and its related mutual fund distribution and administration
business, to BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
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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 share of the Fund
represents an equal proportionate interest with each other share of that class.
Upon liquidation, shares are entitled to a pro rata share of the Fund based on
the relative net assets of each class. Shareholders have no preemptive or
conversion rights. Shares are redeemable and transferable. The Fund is
authorized to issue additional classes or series of shares. Generally, the Fund
currently issues three classes of shares, but may issue additional classes or
series of shares.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the 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. If the Fund were held to be a partnership, the possibility of the
shareholders' incurring financial loss for that reason appears remote because
the Fund's Declaration of Trust (1) contains an express disclaimer of
shareholder liability for obligations of the Fund; (2) requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees; and (3) provides for
indemnification out of the Fund's property for any shareholder held personally
liable for the obligations of the Fund.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. At meetings called for the initial election of trustees or to
consider other matters, shares are entitled to one vote per share. 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.
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment, all dividends and distributions are added and 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, 1995 were (8.91)%, (7.72)% and
(4.00)%, respectively (including applicable contingent deferred sales charges).
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.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets
in any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
GENERAL
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is 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, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the independent auditors for the Fund.
EKSC, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
is a wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the Fund.
To the best of the Fund's knowledge, as of November 30, 1995, the
following were the only shareholders of record who owned 5% or more of the
Fund's outstanding shares:
Percent
Class of Fund
----- -------
Merrill Lynch Pierce Fenner & Smith A 43.330%
Attn: Book Entry B 49.269%
4800 Deer Lake Drive East, 3rd Floor C 60.016%
Jacksonville, Florida 32246-6484
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
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 16 different investment companies in the Keystone
America Fund Family, which offers a range of choices to serve shareholder needs.
In addition to the Fund, the Keystone America Fund Family consists of the
following funds having the various investment objectives described below:
KEYSTONE 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 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 GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND - Seeks long-term capital growth
by investing primarily in equity securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
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 INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE OMEGA FUND - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long term growth of capital,
primarily through investments in equity securities of companies with small
market capitalization.
KEYSTONE 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 STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
<PAGE>
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APPENDIX
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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, that 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 a 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 that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long term risks appear somewhat larger than in Aaa securities.
3. A - Bonds that 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 that 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
characteristics and in fact have speculative characteristics as well.
5. Ba - Bonds that 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 that 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 that 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 that 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 that 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 that 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 that 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 that 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 that 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 that 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 expiration 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
that 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 corresponding 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 that 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 analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of stocks or debt instruments or a position in the futures contract upon which
the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of call options on 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 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 futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and 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 exposure 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
creditworthiness 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>
SCHEDULE OF INVESTMENTS--October 31, 1995
Market
Shares Value
===============================================================================
COMMON STOCKS (40.8%)
[bullet] ARGENTINA (2.7%)
Beverages & Tobacco (1.0%)
Embotelladora Baesa 145 $ 165,284
Quilmes (ADR) 11,000 193,600
Nobleza Piccardo 209,143 805,120
- -------------------------------------------------------------------------------
1,164,004
- -------------------------------------------------------------------------------
Energy Sources (1.0%)
Perez Companc 105,000 463,004
CAPSA 95,000 140,586
Yacimientos Petroliferos Fiscales S.A. (YPF)
(ADR) 38,900 666,163
- -------------------------------------------------------------------------------
1,269,753
- -------------------------------------------------------------------------------
Utilities (0.7%)
Capex S.A. 18,100 116,733
Central Costanera 91,800 254,261
Transportadora de Gas (ADR) 46,000 471,500
- -------------------------------------------------------------------------------
842,494
- -------------------------------------------------------------------------------
[bullet] TOTAL ARGENTINA 3,276,251
===============================================================================
[bullet] BOLIVIA (0.1%)
Utilities (0.1%)
Compania Bolivia de Energia (ADR) 5,600 163,100
- -------------------------------------------------------------------------------
[bullet] BRAZIL (2.3%)
Automotive (0.2%)
CAPCO Automotive Parts Co. (ADR) 25,200 192,150
- -------------------------------------------------------------------------------
Chemicals (0.1%)
White Martins 110,000,000 106,363
- -------------------------------------------------------------------------------
Food, Beverages & Tobacco (0.2%)
Souza Cruz 33,000 236,057
- -------------------------------------------------------------------------------
Telecommunications (1.3%)
Telecommunicacaos Brasilieras (ADR) 38,400 1,536,000
- -------------------------------------------------------------------------------
Utilities (0.5%)
Eletrobras 2,260,000 641,485
- -------------------------------------------------------------------------------
[bullet] TOTAL BRAZIL 2,712,055
===============================================================================
[bullet] CANADA (4.7%)
Advertising & Publishing (0.9%)
Quebecor, Inc. 71,500 $1,087,336
- -------------------------------------------------------------------------------
Beverages & Tobacco (0.5%)
Canada Malting Ltd. 38,300 578,874
- -------------------------------------------------------------------------------
Conglomerates (0.7%)
Canadian Pacific Ltd. 44,100 703,566
Imasco Ltd. 10,500 188,088
Power Corp. of Canada 12,500 190,094
- -------------------------------------------------------------------------------
1,081,748
- -------------------------------------------------------------------------------
Energy Sources (0.1%)
Canadian Occidental Petroleum Ltd. 3,000 88,446
- -------------------------------------------------------------------------------
Fertilizer (1.8%)
Potash Corp. of Saskatchewan, Inc. 30,650 2,150,396
- -------------------------------------------------------------------------------
Merchandising (0.7%)
Canadian Tire Corp. Ltd. 19,000 214,491
Hudson's Bay Co. 32,000 600,090
- -------------------------------------------------------------------------------
814,581
- -------------------------------------------------------------------------------
[bullet] TOTAL CANADA 5,801,381
===============================================================================
[bullet] CHILE (3.3%)
Banking (0.5%)
Banco de Credito Invers 73,690 599,662
- -------------------------------------------------------------------------------
Conglomerates (0.1%)
Empresa Electra de Antofagasta 245,750 124,767
- -------------------------------------------------------------------------------
Financial Services (0.3%)
A.F.P. Habitat S.A. 1,900 347,427
- -------------------------------------------------------------------------------
Forest Products (1.1%)
Compania Manufacturera de Papeles y Cartones S.A. 91,254 1,328,409
- -------------------------------------------------------------------------------
Metals (0.2%)
Madeco 118,600 292,505
- -------------------------------------------------------------------------------
Paper & Packaging (0.3%)
Maderas Y Sinteticos S.A. (ADR) 20,200 361,075
- -------------------------------------------------------------------------------
Utilities (0.8%)
Enersis S.A. (ADR) 37,350 938,419
- -------------------------------------------------------------------------------
[bullet] TOTAL CHILE 3,992,264
===============================================================================
See Notes to Schedule of Investments. (continued on next page)
9
<PAGE>
Keystone Fund of the Americas
SCHEDULE OF INVESTMENTS--October 31, 1995
Market
Shares Value
===============================================================================
[bullet] COLOMBIA (0.4%)
Banking (0.1%)
Banco de Bogota 35,130 $ 162,760
- -------------------------------------------------------------------------------
Financial Services (0.2%)
Suramericana de Seguros S.A. 10,550 186,206
- -------------------------------------------------------------------------------
Textiles & Apparel (0.1%)
Coltejer S.A. (a) 1,963,276 110,255
Fabricato S.A. (a) 1,422 114
- -------------------------------------------------------------------------------
110,369
- -------------------------------------------------------------------------------
[bullet] TOTAL COLOMBIA 459,335
===============================================================================
[bullet] MEXICO (1.8%)
Building Materials (0.8%)
Apasco 116,000 424,926
Grupo Cementos Chihuahua 860,000 603,509
- -------------------------------------------------------------------------------
1,028,435
- -------------------------------------------------------------------------------
Beverages & Tobacco (0.1%)
Empresas La Moderna 25,000 87,719
FEMSA B 40,000 82,863
- -------------------------------------------------------------------------------
170,582
- -------------------------------------------------------------------------------
Conglomerate (0.2%)
Grupo Carso (a) 46,000 240,814
- -------------------------------------------------------------------------------
Metals & Mining (0.7%)
Hylsamex (ADR) (a) 13,000 219,375
Hylsamex (a) 31,000 87,887
Industrias Penoles S.A. de C.V. 145,000 545,404
- -------------------------------------------------------------------------------
852,666
- -------------------------------------------------------------------------------
[bullet] TOTAL MEXICO 2,292,497
===============================================================================
[bullet] PERU (6.0%)
Banking (1.6%)
Credicorp (ADR) (a) 122,600 2,022,900
- -------------------------------------------------------------------------------
Beverages & Tobacco (1.3%)
Backus & Johnston Corp. 916,192 1,640,097
- -------------------------------------------------------------------------------
Metals & Mining (1.0%)
Minas Buenaventura 69,730 382,777
Southern Peru Copper Corp. (a) 230,006 810,620
- -------------------------------------------------------------------------------
1,193,397
- -------------------------------------------------------------------------------
Telecommunications (2.1%)
Compania Telefonica Del Peru 1,459,369 2,606,016
- -------------------------------------------------------------------------------
[bullet] TOTAL PERU $ 7,462,410
===============================================================================
[bullet] UNITED STATES (16.1%)
Banking (2.2%)
Bank of Boston 60,000 2,670,000
- -------------------------------------------------------------------------------
Chemicals (2.9%)
Dow Chemical Co. 28,500 1,955,813
Eli Lilly & Co. 16,596 1,603,589
- -------------------------------------------------------------------------------
3,559,402
- -------------------------------------------------------------------------------
Conglomerate (1.8%)
General Electric Co. 35,000 2,213,750
- -------------------------------------------------------------------------------
Electronics Products (2.1%)
Motorola, Inc. 40,000 2,625,000
- -------------------------------------------------------------------------------
Health & Personal Care (4.2%)
Gillette Co. 48,000 2,322,000
Guidant Corp. 89,329 2,858,528
- -------------------------------------------------------------------------------
5,180,528
- -------------------------------------------------------------------------------
Industrials (1.4%)
Eaton Corp. 33,000 1,691,250
- -------------------------------------------------------------------------------
Machinery (1.5%)
Caterpillar, Inc. 32,000 1,796,000
- -------------------------------------------------------------------------------
[bullet] TOTAL UNITED STATES 19,735,930
===============================================================================
[bullet] VENEZUELA (3.4%)
Building Materials (0.2%)
VENCEMOS 104,000 198,463
- -------------------------------------------------------------------------------
Conglomerate (0.0%)
H L Boulton & Co. 2,087,763 50,416
- -------------------------------------------------------------------------------
Forest Products (0.5%)
VENEPAL 714,437 610,355
- -------------------------------------------------------------------------------
Metals & Mining (0.9%)
Venprecar (GDS) 2,146 11,588
Sider Venezolana 1,961,174 1,126,215
- -------------------------------------------------------------------------------
1,137,803
- -------------------------------------------------------------------------------
Utilities (1.8%)
Electricidad de Caracas 1,898,049 2,168,752
- -------------------------------------------------------------------------------
[bullet] TOTAL VENEZUELA (b) 4,165,789
===============================================================================
TOTAL COMMON STOCKS
(Cost--$44,799,553) 50,061,012
===============================================================================
See Notes to Schedule of Investments.
10
<PAGE>
SCHEDULE OF INVESTMENTS--October 31, 1995
Market
Shares Value
===============================================================================
PREFERRED STOCKS (12.7%)
[bullet] BRAZIL (12.7%)
Beverages & Tobacco (3.2%)
Companhia Cervejaria Brahma S.A. 10,235,235 $ 3,905,522
- -------------------------------------------------------------------------------
Chemicals (0.6%)
Companhia Petroleo Brasiliero S.A. 7,907,800 682,498
- -------------------------------------------------------------------------------
Consumer Goods (0.2%)
Multibras Eletrodo 253,000 223,591
- -------------------------------------------------------------------------------
Electrical/Electronics (2.4%)
Banco Bradesco S.A. 320,705,510 2,934,299
- -------------------------------------------------------------------------------
Food/Household Products (1.6%)
Ceval Alimentos S.A. 103,200,000 1,341,235
Sadia Concordia S.A. Industrial de Comercio 721,500 570,119
- -------------------------------------------------------------------------------
1,911,354
- -------------------------------------------------------------------------------
Forest Products (0.5%)
Klabin Fab Papel S.A. 385,918 361,121
Votorantim Papel Simao (New) 1,199,702 38,044
Votorantim Papel Simao 6,975,000 210,309
- -------------------------------------------------------------------------------
609,474
- -------------------------------------------------------------------------------
Metals & Mining (3.0%)
Acesita 4,361,500 $ 36,278
Mangels Industrial S.A. 101,950,000 244,858
Vale do Rio Doce Navegacao S.A. (CVRD) 21,312,500 3,434,635
- -------------------------------------------------------------------------------
3,715,771
- -------------------------------------------------------------------------------
Telecommunications (0.1%)
Telemig S.A. 3,100,000 172,437
- -------------------------------------------------------------------------------
Textiles & Apparel (0.4%)
Coteminas S.A. 1,512,000 471,616
- -------------------------------------------------------------------------------
Transportation (0.3%)
Marco Polo S.A. 1,200,000 209,744
Varig S.A. (a) 54,000 184,155
- -------------------------------------------------------------------------------
393,899
- -------------------------------------------------------------------------------
Utilities (0.4%)
Cemig Cia Energ MG 23,800,000 509,753
- -------------------------------------------------------------------------------
[bullet] TOTAL BRAZIL 15,530,214
===============================================================================
TOTAL PREFERRED STOCKS (Cost--$15,157,069) $15,530,214
===============================================================================
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
===================================================================================================
<S> <C> <C> <C> <C>
FIXED INCOME (35.0%)
U.S. DOLLAR DENOMINATED FIXED INCOME (34.8%)
[bullet] ARGENTINA (16.7%)
Foreign Government (4.0%)
Republic of Argentina 8.375% 12/20/2003 $ 6,850,000 $ 4,957,688
- ---------------------------------------------------------------------------------------------------
Oil (3.3%)
Yacimientos Petroliferos Fiscales S.A. (YPF) 8.000 02/15/2004 4,700,000 4,012,625
- ---------------------------------------------------------------------------------------------------
Telecommunications (9.4%)
Telecom Argentina 8.375 10/18/2000 3,000,000 2,602,500
Telecom Argentina Stet France 8.375 10/18/2000 2,000,000 1,740,000
Telefonica de Argentina 8.375 10/01/2000 2,950,000 2,573,875
Telefonica de Argentina 11.875 11/01/2000 44,750,000 4,631,250
- ---------------------------------------------------------------------------------------------------
11,547,625
- ---------------------------------------------------------------------------------------------------
[bullet] TOTAL ARGENTINA $20,517,938
===================================================================================================
</TABLE>
(continued on next page)
11
<PAGE>
Keystone Fund of the Americas
SCHEDULE OF INVESTMENTS--October 31, 1995
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
===================================================================================================
<S> <C> <C> <C> <C>
[bullet] BRAZIL (16.8%)
Chemicals (1.6%)
Companhia Brasiliera de Petroleo Ipiranga 8.625% 02/25/2002 $ 2,000,000 $ 1,930,000
- ---------------------------------------------------------------------------------------------------
Conglomerate (8.1%)
CVRD Cenibra 9.375 12/23/2003 10,370,000 9,955,200
- ---------------------------------------------------------------------------------------------------
Foreign Government (1.7%)
Republic of Brazil 4.250 04/15/2024 4,400,000 2,128,500
- ---------------------------------------------------------------------------------------------------
Forest Products (3.9%)
Klabin Fabricadora Papel 10.000 12/20/2001 5,000,000 4,756,250
- ---------------------------------------------------------------------------------------------------
Metals (1.5%)
Metalurgica Gerdau, S.A. 10.250 11/23/2001 2,000,000 1,892,500
- ---------------------------------------------------------------------------------------------------
[bullet] TOTAL BRAZIL 20,662,450
===================================================================================================
[bullet] GUATEMALA (0.8%)
Beverages & Tobacco (0.8%)
Asociacion Nacional Del Cafe 11.000 08/31/1998 1,000,000 1,007,500
- ---------------------------------------------------------------------------------------------------
[bullet] VENEZUELA (0.5%)
Building Materials (0.5%)
Vencemos 9.250 11/22/1996 650,000 627,250
- ---------------------------------------------------------------------------------------------------
TOTAL U.S. DOLLAR DENOMINATED FIXED INCOME 42,815,138
===================================================================================================
FOREIGN DENOMINATED FIXED INCOME (0.2%)
BRAZILIAN REAL
Merchandising (0.2%)
Mesbla S.A. 13.250 11/01/1996 200,000 287,191
- ---------------------------------------------------------------------------------------------------
TOTAL FOREIGN DENOMINATED FIXED INCOME 287,191
- ---------------------------------------------------------------------------------------------------
TOTAL FIXED INCOME (Cost--$45,237,048) 43,102,329
===================================================================================================
SHORT-TERM INVESTMENTS (8.3%) Maturity
Keystone Joint Repurchase Agreement Value
(Investments in repurchase agreements, in a
joint trading account, purchased 10/31/95)
(Cost--$10,166,000) (d) 5.870 11/01/1995 $10,169,270 10,166,000
- ---------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost--$10,166,000) 10,166,000
===================================================================================================
TOTAL INVESTMENTS (Cost $115,359,670) (c) 118,859,555
FOREIGN CURRENCY HOLDINGS (Cost $69,789) (0.1%) (b) 69,000
OTHER ASSETS AND LIABILITIES--NET (3.1%) 3,811,434
- ---------------------------------------------------------------------------------------------------
NET ASSETS (100%) $122,739,989
===================================================================================================
</TABLE>
See Notes to Schedule of Investments.
12
<PAGE>
SCHEDULE OF INVESTMENTS--October 31, 1995
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income-producing securities.
(b) Investments denominated in the local currency and/or foreign currency
holdings of certain countries are considered illiquid due to foreign
exchange restrictions of these markets.
(c) The cost of investments for federal income tax purposes is $115,819,131.
Gross unrealized appreciation and depreciation of investments based on
identified tax cost, at October 31, 1995 are as follows:
Gross unrealized appreciation $ 9,362,820
Gross unrealized depreciation (6,323,396)
-----------
$ 3,039,424
===========
(d) The repurchase agreements are fully collateralized by U.S. Government
and/or agency obligations based on market prices at October 31, 1995
See Notes to Financial Statements.
13
<PAGE>
Keystone Fund of the Americas
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the year)
Year Ended October 31,
------------------------
1995 1994
==========================================================================
Net asset value beginning of year $10.550 $10.000
- --------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.443 0.212
Net realized and unrealized gains (losses) on
investment and foreign currency related
transactions (0.813) 0.498
- --------------------------------------------------------------------------
Total income from investment operations (0.370) 0.710
- --------------------------------------------------------------------------
Less distributions:
Net investment income (0.299) (0.102)
In excess of net investment income 0.000 (0.009)
Tax basis return of capital (0.021) (0.049)
- --------------------------------------------------------------------------
Total distributions (0.320) (0.160)
- --------------------------------------------------------------------------
Net asset value end of year $9.860 $10.550
==========================================================================
Total return (a) (3.35%) 7.21%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.86%(b) 1.79%
Net investment income 4.02% 2.45%
Portfolio turnover rate 57% 104%
- --------------------------------------------------------------------------
Net assets end of year (thousands) $14,333 $23,880
==========================================================================
(a) Excluding applicable sales charges.
(b) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 1.84% for the year then ended.
See Notes to Financial Statements.
14
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the year)
Year Ended October 31,
------------------------
1995 1994
==========================================================================
Net asset value beginning of year $10.490 $ 10.000
- --------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.319 0.144
Net realized and unrealized gains (losses) on
investment and foreign currency related
transactions (0.753) 0.494
- --------------------------------------------------------------------------
Total income from investment operations (0.434) 0.638
- --------------------------------------------------------------------------
Less distributions:
Net investment income (0.275) (0.090)
In excess of net investment income 0.000 (0.009)
Tax basis return of capital (0.021) (0.049)
- --------------------------------------------------------------------------
Total distributions (0.296) (0.148)
- --------------------------------------------------------------------------
Net asset value end of year $ 9.760 $ 10.490
==========================================================================
Total return (a) (4.00%) 6.48%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.61%(b) 2.54%
Net investment income 3.27% 1.70%
Portfolio turnover rate 57% 104%
- --------------------------------------------------------------------------
Net assets end of year (thousands) $97,165 $148,769
==========================================================================
(a) Excluding applicable sales charges.
(b) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 2.59% for the year then ended.
See Notes to Financial Statements.
15
<PAGE>
Keystone Fund of the Americas
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the year)
Year Ended October 31,
------------------------
1995 1994
==========================================================================
Net asset value beginning of year $10.500 $10.000
- --------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.316 0.142
Net realized and unrealized gains (losses) on
investment and foreign currency related
transactions (0.750) 0.506
- --------------------------------------------------------------------------
Total income from investment operations (0.434) 0.648
- --------------------------------------------------------------------------
Less distributions:
Net investment income (0.275) (0.090)
In excess of net investment income 0.000 (0.009)
Tax basis return of capital (0.021) (0.049)
- --------------------------------------------------------------------------
Total distributions (0.296) (0.148)
- --------------------------------------------------------------------------
Net asset value end of year $9.770 $10.500
==========================================================================
Total return (a) (4.00%) 6.58%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 2.61%(b) 2.54%
Net investment income 3.27% 1.74%
Portfolio turnover rate 57% 104%
- --------------------------------------------------------------------------
Net assets end of year (thousands) $11,242 $17,740
==========================================================================
(a) Excluding applicable sales charges.
(b) The expense ratio includes indirectly paid expenses for the year ended
October 31, 1995. Excluding indirectly paid expenses, the expense ratio
would have been 2.59% for the year then ended.
See Notes to Financial Statements.
16
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
==========================================================================
Assets:
Investments at market value
(identified cost--$115,359,670) (Note 1) $118,859,555
Foreign currency holdings
(identified cost--$69,789) (Note 1) 69,000
- --------------------------------------------------------------------------
Total investments and foreign currency holdings 118,928,555
- --------------------------------------------------------------------------
Cash 294
Receivable for:
Investments sold 7,078,605
Dividends and interest 1,414,829
Fund shares sold 20,571
Unrealized appreciation on open currency contracts 4,204
Deferred organization expense (Note 1) 30,291
Prepaid expenses 1,673
- --------------------------------------------------------------------------
Total assets 127,479,022
- --------------------------------------------------------------------------
Liabilities:
Payable for:
Investments purchased 3,826,711
Fund shares redeemed 627,162
Unrealized depreciation on open currency contracts 127,346
Foreign taxes withheld 36,982
Other accrued expenses 120,832
- --------------------------------------------------------------------------
Total liabilities 4,739,033
- --------------------------------------------------------------------------
Net assets $122,739,989
==========================================================================
Net assets represented by:
Paid-in-capital $139,176,995
Undistributed net investment income 127,346
Accumulated net realized losses on investment and
foreign currency related transactions (19,933,262)
Net unrealized appreciation on investment holdings and
other assets and liabilities 3,492,052
Net unrealized depreciation on open currency contacts (123,142)
- --------------------------------------------------------------------------
Total net assets $122,739,989
==========================================================================
Net asset value per share and redemption price per share: (Note 2)
Class A Shares ($9.86 on 1,454,089 shares outstanding) $ 14,332,877
Class B Shares ($9.76 on 9,951,630 shares outstanding) 97,165,268
Class C Shares ($9.77 on 1,150,891 shares outstanding) 11,241,844
- --------------------------------------------------------------------------
$122,739,989
==========================================================================
Offering price per share:
Class A Shares (including sales shares of 5.75%)
(Note 2) $10.46
==========================================================================
Class B Shares $9.76
==========================================================================
Class C Shares $9.77
==========================================================================
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Year Ended October 31, 1995
==========================================================================
Investment income: (Note 1)
Interest (net of foreign withholding
taxes of $175,411) $ 6,894,586
Dividends (net of foreign withholding
taxes of $142,069) 1,723,356
- --------------------------------------------------------------------------
Total income 8,617,942
- --------------------------------------------------------------------------
Expenses: (Notes 1, 2 and 4)
Management fee $1,099,920
Shareholder services 656,071
Accounting 19,207
Auditing and legal 39,013
Custodian fees 341,342
Printing 48,759
Trustees' fees and expenses 12,419
Distribution Plan and Service fee
expenses 1,332,507
Registration fees 116,775
Amortization of organization expense 8,760
Miscellaneous expenses 10,923
- --------------------------------------------------------------------------
Total expenses 3,685,696
- --------------------------------------------------------------------------
Less: Expenses paid indirectly (Note 4) (23,240)
- --------------------------------------------------------------------------
Net expenses 3,662,456
- --------------------------------------------------------------------------
Net investment income 4,955,486
- --------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment and foreign currency
related transactions: (Notes 1 and 3)
Net realized loss on investment and
foreign currency related transactions (12,645,021)
- --------------------------------------------------------------------------
Net change in unrealized appreciation
or depreciation on investments and
foreign currency related
transactions: (2,699,055)
- --------------------------------------------------------------------------
Net loss on investment and foreign
currency related transactions (15,344,076)
- --------------------------------------------------------------------------
Net decrease in net assets resulting
from operations ($ 10,388,590)
==========================================================================
17
<PAGE>
Keystone Fund of the Americas
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended October 31,
1995 1994
==============================================================================================================
<S> <C> <C>
Operations:
Net investment income: (Note 1) $ 4,955,486 $ 2,739,109
Net realized loss on investment and foreign currency related transactions:
(Notes 1 and 3) (12,645,021) (8,866,937)
Net change in unrealized appreciation or depreciation on investment and
foreign currency related transactions (2,699,055) 6,067,965
- --------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (10,388,590) (59,863)
- --------------------------------------------------------------------------------------------------------------
Distributions to shareholders: (Notes 1 and 5)
Net investment income:
Class A Shares (539,452) (204,016)
Class B Shares (3,268,145) (1,278,193)
Class C Shares (389,267) (152,307)
In excess of net investment income:
Class A Shares 0 (19,556)
Class B Shares 0 (122,519)
Class C Shares 0 (14,599)
Tax basis return of capital:
Class A Shares (36,708) (111,783)
Class B Shares (225,106) (700,337)
Class C Shares (26,989) (83,451)
Total distributions to shareholders (4,485,667) (2,686,761)
- --------------------------------------------------------------------------------------------------------------
Capital share transactions: (Note 2)
Proceeds from shares sold:
Class A Shares 2,223,085 30,689,628
Class B Shares 6,934,330 174,008,374
Class C Shares 1,057,154 22,336,759
Payments for shares redeemed:
Class A Shares (10,485,266) (6,875,181)
Class B Shares (49,897,788) (24,959,994)
Class C Shares (6,568,724) (4,440,296)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 522,497 324,833
Class B Shares 3,066,527 1,830,031
Class C Shares 372,904 221,997
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share
transactions (52,775,281) 193,136,151
- --------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (67,649,538) 190,389,527
- --------------------------------------------------------------------------------------------------------------
Net assets:
Beginning of year 190,389,527 0
- --------------------------------------------------------------------------------------------------------------
End of year [including undistributed net investment income of $127,346 at
October 31, 1995 and accumulated distributions in excess of net investment
income of ($156,674) at October 31, 1994] (Note 1) $122,739,989 $190,389,527
==============================================================================================================
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
Keystone Fund of the Americas
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Fund of the Americas (the "Fund") is a Massachusetts business trust
for which Keystone Investment Management Company (formerly Keystone Custodian
Funds, Inc.) ("Keystone") is the investment adviser. The Fund was formed on
June 16, 1993 and had no operations prior to November 1, 1993 other than
those relating to the initial registration of its shares. 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 varies
depending on when shares were purchased and how long they 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 Investment Distributors Company (formerly Keystone
Distributors, Inc.) ("KIDC"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of current and former members
of 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, including American Depository Receipts ("ADRs") and Global
Depository Receipts ("GDRs") 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. ADRs, which are certificates
representing shares of foreign securities deposited in domestic and foreign
banks, are traded and valued in United States dollars. 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
investment holdings and other assets and liabilities.
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
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Keystone Fund of the Americas
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 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.
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 no later than the day after
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 has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, the Fund 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 any 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
20
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credit risks, and the Fund will take constructive receipt of all securities
underlying repurchase agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury and/or Federal Agency obligations.
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"). 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.
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 quarterly 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 the treatment of foreign currency gains and losses.
(2.) Capital Share Transactions
The Trust Agreement authorizes the issuance of an unlimited number of shares
of beneficial interest without par value. Transactions in shares of the Fund
were as follows:
Class A Shares
------------------------
Year Ended October 31,
1995 1994
- --------------------------------------------------------------
Shares sold 228,352 2,887,081
Shares redeemed (1,093,787) (655,592)
Shares issued in reinvestment of
dividends and distributions 55,264 32,771
- --------------------------------------------------------------
Net increase (decrease) (810,171) 2,264,260
==============================================================
Class B Shares
--------------------------
Year Ended October 31,
1995 1994
- --------------------------------------------------------------
Shares sold 722,537 16,411,620
Shares redeemed (5,283,163) (2,411,035)
Shares issued in reinvestment of
dividends and distributions 326,301 185,370
- --------------------------------------------------------------
Net increase (decrease) (4,234,325) 14,185,955
==============================================================
Class C Shares
----------------------
Year Ended October 31,
1995 1994
- --------------------------------------------------------------
Shares sold 108,457 2,093,070
Shares redeemed (687,611) (425,174)
Shares issued in reinvestment of
dividends and distributions 39,672 22,477
- --------------------------------------------------------------
Net increase (decrease) (539,482) 1,690,373
==============================================================
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Keystone Fund of the Americas
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 KIDC under the Class A Distribution Plan are currently used to
pay others, such as dealers, service fees at an annual rate of up to 0.25% of
the average net asset value of Class A shares maintained by the recipient
outstanding on the Fund's books 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); a commission at the time of purchase normally equal to 4.00% of
the price paid for each Class B share sold plus the first year's service fee
in advance in the amount of 0.25% of the price paid for each Class B share
sold. Beginning approximately 12 months after the purchase of a Class B
share, the broker or other party will receive service fees at an annual rate
of 0.25% of the average daily net asset value of such Class B shares
maintained by such others and remaining outstanding on the Fund's books for
specified periods. A contingent deferred sales charge will be imposed, if
applicable, on Class B shares purchased after June 1, 1995 at rates
decreasing from a maximum of 5.00% of amounts redeemed during the first 12
months following the date of purchase to 1.00% of amounts redeemed during the
sixth twelve month period following the date of purchase. Class B shares
purchased on or after June 1, 1995 that have been outstanding for eight years
following the month of purchase will automatically convert to Class A shares
without a front end sales charge or exchange fee. Class B shares purchased
prior to June 1, 1995 will retain their existing conversion rights.
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) a commission at the time of purchase 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.
Beginning approximately 15 months after purchase, the other party will
receive 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.) ("NASD Rule") and service fees at the annual rate of 0.25%,
respectively, of the average net asset value of each Class C share maintained
by such others and remaining outstanding on the Fund's books 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 any
Distribution Plan payments to KIDC may, at the discretion of the Board of
Trustees, continue as compensation for its services which had been earned at
any time the Distribution Plan was in effect.
For the year ended October 31, 1995, the Fund paid KIDC $44,881 pursuant
to the Fund's Class A Distribution Plan. The Fund paid KIDC $1,147,012 for
Class B shares sold prior to June 1, 1995, and
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<PAGE>
$4,137 for Class B shares sold on or after June 1, 1995 under the Class B
Distribution Plan. The Fund paid KIDC $136,477 under its Class C Distribution
Plan.
Under the NASD Rule, the maximum uncollected amounts for which KIDC may
seek payment from the fund under its Distribution Plans were $7,781,573 for
Class B shares purchased prior to June 1, 1995 and $102,704 for Class B
shares purchased on or after June 1, 1995. The maximum uncollected amount for
which KIDC may seek payment from the Fund under its Class C Distribution Plan
was $1,135,932 as of October 31, 1995.
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, 1995 the Fund had a capital loss carryover for federal
income tax purposes of approximately $19,474,000 which expires as follows:
$6,032,000-2001 and $13,442,000-2002. Purchases and sales of investment
securities (including proceeds received at maturity) for the year ended
October 31, 1995 were as follows:
Cost of Proceeds
Purchases from Sales
------------------------------------------------------------
Portfolio securities $ 79,001,795 $ 133,710,000
Short-term investments 2,263,187,000 2,260,193,000
------------------------------------------------------------
$2,342,188,795 $2,393,903,000
============================================================
(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
$1,099,920 to Keystone for the year ended October 31, 1995 which represented
0.75% of average net assets.
During the year ended October 31, 1995, the Fund paid or accrued to KII
$19,208 as reimbursement for certain accounting, tax and printing services
and $656,071 to KIRC for shareholder services.
The Fund has entered into an expense offset arrangement with its
custodian. For the year ended October 31, 1995, the Fund paid custody fees in
the amount of $318,102 and received a credit of $23,240 pursuant to the
expense offset arrangement, resulting in a total expense of $341,342. The
assets deposited with the custodian under the expense offset arrangement
could have been invested in an income-producing asset.
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.
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Keystone Fund of the Americas
(5.) Foreign Currency Exchange Contracts
At October 31, 1995 the Fund had entered into the following currency exchange
contracts that obligate the Fund to deliver currencies at specified future
dates. The net unrealized depreciation of $123,142 on those contracts is
included in the accompanying financial statements. The terms of the open
contracts are as follows:
U.S. $ Currency
value to U.S. $ value
Exchange Currency to as of be as of
date be delivered 10/31/95 received 10/31/95
==============================================================================
11/01/95 1,959,579 $2,037,408 2,038,468 $2,038,468
Brazilian Real U.S. $
11/03/95 114,419 118,963 119,049 119,049
Brazilian Real U.S. $
11/01/95 4,910,400 4,924 4,933 4,933
Colombian Peso U.S. $
11/01/95 4,285,614 1,889,600 1,892,649 1,892,649
Peruvian Nouveau Sol U.S. $
01/25/96 5,405,106 4,032,346 3,905,000 3,905,000
Canadian Dollar U.S. $
----------- -----------
$8,083,241 $7,960,099
=========== ===========
- ------------------------------------------------------------------------------
<PAGE>
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, 1995, and the related statement of operations for the year then
ended and the statements of changes in net assets and financial highlights
for each of the years in the two-year period 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 1995 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Fund of the Americas as of October 31, 1995, the results of its
operations for the year then ended and the changes in its net assets and
financial highlights for each of the years in the two-year period then ended
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
December 8, 1995
25
