<PAGE>
KEYSTONE STRATEGIC DEVELOPMENT FUND
PROSPECTUS OCTOBER 7, 1994
Keystone Strategic Development Fund (the "Fund") is a mutual fund that seeks
long term capital growth by investing primarily in equity securities.
The Fund offers three classes of shares. Information on share classes and
their fee and sales charge structures may be found in the Fund's fee table,
"Alternative Sales Options," "Contingent Deferred Sales Charge and Waiver of
Sales Charges," "Distribution Plans," and "Fund Shares."
This prospectus contains 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 ("SAI") dated October 7, 1994. The SAI 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 listed below.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
KEYSTONE STRATEGIC DEVELOPMENT FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
TABLE OF CONTENTS
Page
Fee Table 2
The Fund 3
Investment Objective and Strategies 3
Investment Restrictions 5
Risk Factors 5
Pricing Shares 7
Dividends and Taxes 8
Fund Management and Expenses 9
How to Buy Shares 10
Alternative Sales Options 11
Contingent Deferred Sales Charge and
Waiver of Sales Charges 14
Distribution Plans 15
How to Redeem Shares 16
Shareholder Services 18
Performance Data 20
Fund Shares 20
Additional Information 21
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.
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FEE TABLE
KEYSTONE STRATEGIC DEVELOPMENT FUND
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.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION OPTION
-------------- -------------- --------------
<S> <C> <C> <C>
Sales Charge 5.75%<F1> None None
(as a percentage of offering price)
Contingent Deferred Sales Charge 0.00%<F2> 3.00% in the 1.00% in the
(as a percentage of the lesser of cost or first year first year and
market value of shares redeemed) declining to 0.00%
1.00% in the thereafter
fourth year and
0.00% thereafter
Exchange Fee (per exchange)<F3> $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES<F4>
(as a percentage of average net assets)
Management Fee 1.00% 1.00% 1.00%
12b-1 Fees 0.25% 1.00%<F5> 1.00%<F5>
Other Expenses 0.52% 0.52% 0.52%
----- ----- -----
Total Fund Operating Expenses 1.77% 2.52% 2.52%
----- ----- -----
----- ----- -----
EXAMPLES<F6> 1 Year 3 Years
------ -------
You would pay the following expenses on a $1,000 investment, assuming <F1> 5%
annual return and <F2> redemption at the end of each period:
Class A .................................................................... $ 74 $110
Class B .................................................................... $ 56 $ 98
Class C .................................................................... $ 36 $ 78
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A .................................................................... $ 74 $110
Class B .................................................................... $ 26 $ 78
Class C .................................................................... $ 26 $ 78
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<FN>
- ---------------
<F1> The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Alternative Sales Options."
<F2> Purchases of Class A shares in the amount of $1,000,000 or more are not
subject to a sales charge, but may be subject to a contingent deferred
sales charge of 0.25%. See "Contingent Deferred Sales Charge and Waiver of
Sales Charges" for an explanation of the charge.
<F3> There is no exchange fee for individual investors making exchanges over
the Keystone Automated Response Line ("KARL"). (For a description of KARL,
see "Shareholder Services".)
<F4> Expense ratios shown above are estimated for the Fund's fiscal year ending
March 31, 1995 and are on an annualized basis.
<F5> Long term shareholders may pay more than the economic equivalent of the
maximum front end sales charges otherwise permitted by the National
Association of Securities Dealers, Inc. ("NASD").
<F6> The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Fund may be
greater or less than 5%.
</TABLE>
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THE FUND
The Fund is an open-end, diversified management investment company commonly
known as a mutual fund. The Fund was formed as a Massachusetts business trust on
July 27, 1994. The Fund is one of thirty-one funds managed or advised by
Keystone Custodian Funds, Inc. ("Keystone"), the Fund's investment adviser.
INVESTMENT OBJECTIVE AND STRATEGIES
INVESTMENT OBJECTIVE
The Fund seeks long term capital growth by investing primarily in equity
securities. The Fund's investment objective is fundamental and may not be
changed without the vote of a majority (as defined in the Investment Company Act
of 1940 ("1940 Act")) of the Fund's outstanding shares.
There is no assurance that the Fund will achieve its investment objective
since there is uncertainty in every investment.
INVESTMENT STRATEGIES
The Fund seeks long term capital growth through the following principal
investment strategies:
* Under ordinary conditions, the Fund will invest at least 65% of its total
assets in securities of companies that are expected to benefit from
development in the Pacific Rim/Pacific Basin and Latin America regions,
including companies that are expected to benefit from (i) infrastructure
development and industrialization in these regions or (ii) changes in the
demand for or prices of industrial materials.
For example, the Fund will invest in one or more of the following: mining,
construction, or transportation companies or any other company that owns,
extracts, develops, processes, produces, distributes, transports, exports, or
uses energy sources (such as oil, gas, coal, and uranium), forest products,
real estate, nonferrous metals, diversified resources, precious metals, or
other industrial materials.
* Under ordinary conditions, the Fund will invest at least 35% of its total
assets in securities of asset rich companies that own, extract, develop,
process, or produce industrial raw materials.
* Under ordinary conditions, the Fund will invest at least 65% of its total
assets in securities of issuers located in the following countries: (1)
Pacific Rim/Pacific Basin countries: Australia, Hong Kong, India, Indonesia,
Japan, Korea, Malaysia, New Zealand, Papua New Guinea, the People's Republic
of China, the Philippines, Russia, Singapore, Taiwan, and Thailand; (2) Latin
American countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico,
Peru, Uruguay, and Venezuela; and (3) the United States ("U.S.") and Canada.
In addition, the Fund may invest up to 35% of its total assets in countries
outside of these regions. The Fund does not currently intend to invest in the
People's Republic of China. If the Fund should invest in China, it presently
intends to invest less than 5% of its assets in that country.
PRINCIPAL INVESTMENTS AND OTHER POLICIES
Under ordinary conditions, the Fund will invest at least 65% of its total
assets in equity securities. The securities in which the Fund invests will be
denominated in either U.S. or foreign currencies.
EQUITY SECURITIES. The Fund may invest in the following types of equity
securities: common stock, preferred stock (convertible or non-convertible),
warrants or rights convertible into common or preferred stock, partly paid
stock, and structured equity based securities. The Fund deems debt securities
convertible into equity securities to be equity securities.
FOREIGN SECURITIES -- IMPORTANT INVESTMENT POLICIES.
Keystone follows a number of significant policies when investing in foreign
countries. When allocating the Fund's investments among issuers located in
different countries, Keystone considers such countries' interest rate
environments and general economic conditions. Keystone evaluates the relative
values of different currencies on a basis of technical and political data and
such fundamental economic criteria as relative inflation rates and trends,
projected growth rates, balance of payments status, and economic policies. With
respect to foreign corporate issuers, Keystone considers the financial condition
of the issuer and market and economic conditions relevant to its operations. In
addition, Keystone considers liquidity when selecting foreign investments.
OTHER ELIGIBLE INVESTMENTS
The Fund may invest up to 35% of its total assets under normal market
conditions and up to 100% of its assets for temporary defensive purposes (when
Keystone determines that market conditions so warrant) in the following types of
U.S. dollar or foreign currency denominated debt obligations:
(1) Variable and fixed rate debt obligations (including zero coupon and
payment-in-kind ("PIKs") securities), such as bonds, debentures, notes, loans,
commercial paper, certificates of deposit, warrants, mortgage-backed
securities, debt securities convertible into common stock, and structured
notes. Such debt obligations may be issued or guaranteed by U.S. or foreign
issuers, including U.S. or foreign corporations or partnerships, U.S. or
foreign governments or any of their political subdivisions, agencies or
instrumentalities.
(2) Money market instruments, such as:
(a) short term debt obligations issued by foreign issuers, including
foreign corporations, partnerships, governments or any of their political
subdivisions, agencies or instrumentalities;
(b) commercial paper of U.S. issuers, including master demand notes, that
at the date of investment is rated A-1 (the highest grade given by Standard
& Poor's Corporation ("S&P")), Prime-1 (the highest grade given by Moody's
Investors Service, Inc. ("Moody's")) or, if not rated by such services, is
issued by a company that at the date of investment has an outstanding issue
rated A or better by S&P or Moody's;
(c) obligations, including certificates of deposit and bankers'
acceptances, of banks or savings and loan associations with at least $1
billion in assets as of the date of their most recently published financial
statements that are members of the Federal Deposit Insurance Corporation,
including U.S. branches of foreign banks and foreign branches of U.S. banks;
(d) corporate obligations of U.S. issuers that at the date of investment
are rated A or better by S&P or Moody's;
(e) obligations issued or guaranteed by the U.S. government or by any
agency or instrumentality of the U.S. government; and
(f) repurchase agreements and reverse repurchase agreements for
instruments described in (b), (c), (d), and (e).
The Fund has the authority to invest up to 25% of its total assets in debt
obligations with a rating below investment grade (i.e., BBB or lower by S&P or
Baa or lower by Moody's) or which, if unrated, are, in Keystone's judgment,
determined to be below investment grade; provided, however, that the Fund does
not currently intend to invest more than 5% of its assets in such debt
obligations.
The Fund will invest its assets in debt obligations for non-defensive
purposes when Keystone determines that such investment is consistent with the
Fund's investment objective of long term capital growth. For example, the Fund
might invest in certain debt securities when an anticipated decline in interest
rates would be expected to lead to an appreciation in value of such securities.
Alternatively, the Fund might invest in debt obligations issued in exchange for
restructured debt of certain countries or other issuers that it expects to
appreciate in value.
In addition to the securities described above, when it deems it appropriate,
the Fund may invest up to 10% of its total assets in the securities of other
investment companies. The Fund would invest in another investment company
primarily to obtain immediate access to a diversified portfolio of foreign
securities. See "Investment Restrictions" in the Fund's SAI.
When the Fund invests its assets for temporary defensive purposes, it may
not be pursuing its investment objective.
INVESTMENT TECHNIQUES
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. (Options and futures contracts are considered "derivative
instruments.") The Fund may purchase securities on a when-issued, partly paid,
or forward commitment basis and may engage in the lending of portfolio
securities.
For further information about the types of investments and investment
techniques available to the Fund, including the associated risks, see
"Additional Investment Information" at the back of the prospectus and the SAI.
INVESTMENT RESTRICTIONS
The Fund has adopted various investment restrictions, which prohibit the
Fund from taking certain actions. These restrictions are fundamental investment
policies required to be addressed under the 1940 Act and may not be changed
without the vote of a majority (as defined in the 1940 Act) of the Fund's
outstanding shares. These fundamental policies pertain to diversification,
concentration, borrowing money, issuing senior securities, investing in real
estate or commodities, and making loans. The ultimate purpose of these
restrictions is to promote diversification and/or limit the Fund's exposure to
various risks.
For example, the Fund generally may not (1) with respect to 75% of its total
assets, invest more than 5% of its total assets in the securities of any one
issuer or purchase more than 10% of the outstanding voting securities of any one
issuer (excepting U.S. government securities); or (2) invest more than 25% of
its total assets in securities of issuers in the same industry.
In addition to its fundamental investment objective and investment
restrictions, the Fund has adopted certain other fundamental policies, which
require a favorable vote of a 1940 Act majority of the Fund's outstanding shares
for any change, as well as various non-fundamental investment restrictions and
policies.
The foregoing is only a summary of the Fund's fundamental and non-
fundamental investment restrictions and policies. See the SAI for details and
the full text of the Fund's investment restrictions and related policies.
RISK FACTORS
Investing in the Fund involves the risk inherent in any investment in a
security, i.e., net asset value will fluctuate in response to changes in
economic conditions, interest rates and the market's perception of the
underlying securities of the Fund.
FOREIGN RISK IN GENERAL. Investing in the Fund, with its globally varied
investments, involves greater risk than investing in a fund with a portfolio
consisting solely of securities of domestic issuers. For example,
* there may be less public information available about foreign companies than
is available about U.S. companies;
* foreign companies are not generally subject to the uniform accounting,
auditing and financial reporting standards and practices applicable to U.S.
companies;
* foreign securities markets have less volume than the U.S. market, and the
securities of some foreign companies are less liquid and more volatile than
the securities of comparable U.S. companies;
* foreign securities transactions may involve higher brokerage commissions;
* there may be less government regulation of stock exchanges, brokers, listed
companies and banks in foreign countries than in the U.S.;
* the Fund may incur fees on currency exchanges when it changes investments
from one country to another;
* the Fund's foreign investments could be affected by expropriation,
confiscatory taxation, nationalization, establishment of exchange controls,
political or social instability or diplomatic developments;
* foreign governments may withhold income on investments; and
* 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.
LATIN AMERICA. The risks of investing in emerging countries or countries with
limited or developing capital markets are heightened for investments in Latin
America. The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than those of more
developed countries. In particular, countries in Latin America may have
relatively unstable governments, presenting the risks of expropriation,
confiscation, nationalization or the imposition of restrictions on foreign
ownership and on repatriation of assets. The economies of Latin American
countries may be predominantly based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates. The limited size of many
Latin American securities markets and limited trading volume in issuers could
result in more abrupt or erratic price movements and limited marketability of
securities traded. Certain Latin American countries are among the largest
debtors to commercial banks and foreign governments. Some of these countries
have previously defaulted on their sovereign debt.
Although there have been significant improvements in some Latin American
economies in recent years, others continue to experience economic problems,
including high inflation rates and high interest rates. The emergence of the
Latin American economies and securities market will require continued economic
and fiscal discipline, as well as stable political and social conditions.
Recovery may also be influenced by international economic conditions,
particularly those in the U.S., and by world prices for oil and other
commodities, and international trade agreements, such as the North American Free
Trade Agreement.
PACIFIC RIM/PACIFIC BASIN. Countries in the Pacific Rim/Pacific Basin are in
various stages of economic development, some are considered emerging markets.
Investment in each has various risks. For instance, most countries in the
Pacific Rim/Pacific Basin are heavily dependent on international trade. Some
have prosperous economies, but are sensitive to world commodity prices. Others
are especially vulnerable to recession in other countries. Some countries in the
Pacific Rim/Pacific Basin have experienced rapid growth, although many suffer
with obsolete financial systems, economic problems, or archaic legal systems. In
addition, many have experienced political and social uncertainties. Japan's
economy recently went into recession, and its stock market declined. The return
of Hong Kong to Chinese dominion will affect the entire region.
LONG TERM NATURE OF THE FUND. The Fund is designed for long-term investors who
can accept the risks entailed in seeking long-term growth of capital through
investment primarily in common stocks. The Fund is not meant to provide a
vehicle for playing short-term swings in the stock market. Although the Fund
seeks to reduce risk by investing in a diversified portfolio, such
diversification does not eliminate all risks. The value of the Fund's securities
will fluctuate based on market conditions. Consistent with a long-term
investment approach, investors in the Fund should be prepared and able to
maintain or add to their investment during periods of adverse market conditions
and should not rely on an investment in the Fund for their short-term financial
needs.
BELOW-INVESTMENT GRADE BONDS. The Fund may invest up to 25% of its assets in
below investment grade bonds. The Fund currently intends, however, to invest no
more than 5% of its total assets in below investment grade bonds. See "Other
Eligible Investments."
Lower rated debt securities (sometimes called "junk bonds") are often
considered to be speculative. Investment in such bonds involves risks that are
greater than the risks of investing in higher quality debt securities. These
risks 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 these securities; and greater price variability
and credit risks of certain high yield securities, such as zero coupon bonds and
PIKs. For further discussion of below investment grade bonds, see the SAI.
RULE 144A SECURITIES. 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.
PRICING SHARES
The net asset value of a share of the Fund is computed each day on which the
New York Stock Exchange (the "Exchange") is open as of the close of trading on
the Exchange (currently 4:00 p.m. Eastern time for the purpose of pricing Fund
shares) except on days when changes in the value of the Fund's securities do not
affect the current net asset value of its shares. The Exchange currently is
closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share of the Fund is arrived at by determining the value of the Fund's
assets, subtracting its liabilities and dividing the result by the number of its
shares outstanding.
Current values for the Fund's securities are generally 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 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 that are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market; and which, in either
case, reflects fair value as determined by the Fund's Board of Trustees; and
(5) the following securities are valued at prices deemed in good faith to be
fair under procedures established by the Board of Trustees: (a) securities,
including restricted securities, for which 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 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 intends to qualify as a regulated investment company under the
Internal Revenue Code. The Fund qualifies if, among other things, it distributes
to its shareholders at least 90% of its net investment income for its fiscal
year. The Fund also intends to make timely distributions, if necessary,
sufficient in amount to avoid the nondeductible 4% excise tax imposed on a
regulated investment company to the extent that it fails to distribute, with
respect to each calendar year, at least 98% of its ordinary income for such
calendar year and 98% of its net capital gains for the one-year period ending on
October 31 of such calendar year. If the Fund qualifies 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.
Any taxable distributions would be declared by December 31 to shareholders
of record in December and paid by the following January 31. Such distributions
would be taxable income to the shareholder for the year in which the
distributions were declared. The Fund declares and distributes dividends from
the Fund's net investment income, if any, annually. Distributions of short-term
and long-term capital gains, if any, will be made at least annually.
Because Class A shares bear most of the costs of distribution of such shares
through payment of a front end sales charge while Class B and Class C shares
bear such expenses through a higher annual distribution fee, expenses
attributable to Class B shares and Class C shares will generally be higher, and
any income distributions paid by the Fund with respect to Class A shares will
generally be greater, than the respective expenses and distributions relating to
Class B and Class C shares.
Distributions are payable in shares of the Fund or, at the shareholder's
option, in cash. Dividends and distributions are reinvested at net asset value
without any sales charge. Income dividends and net short-term gains
distributions are taxable as ordinary income and net long-term gains are taxable
as capital gains regardless of how long Fund shares have been 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. The Fund advises Fund shareholders
annually as to the federal tax status of all distributions made during the year.
If more than 50% of the value of the Fund's total assets at the end of a
fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to its shareholders, a shareholder
will be required to include in his gross income both cash dividends and the
amount the Fund advises him is his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on the Fund's investments.
The shareholder will be entitled, however, to take the amount of such foreign
taxes withheld as a credit against his U.S. income tax or to treat the foreign
tax withheld as an itemized deduction from his gross income if that should be to
his advantage. In substance, this policy enables the shareholder to benefit from
the same foreign tax credit or deduction that he would have received if he had
been the individual owner of foreign securities and had paid foreign income tax
on the income therefrom. As in the case of individuals receiving income directly
from foreign sources, the above described tax credit and deductions are subject
to certain limitations.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the Fund's Board of Trustees, Keystone, the Fund's
investment adviser, provides investment advice, management and administrative
services to the Fund.
INVESTMENT ADVISER
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
has provided investment advisory and management services to investment companies
and private accounts since it was organized in 1932. Keystone is a wholly-owned
subsidiary of Keystone Group, Inc. ("Keystone Group"), located at 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
Keystone Group is a corporation privately owned by current and former
members of management of Keystone and its affiliates. The shares of Keystone
Group common stock beneficially owned by management are held in a number of
voting trusts, the trustees of which are George S. Bissell, Albert H. Elfner,
III, Roger T. Wickers, Edward F. Godfrey and Ralph J. Spuehler, Jr.
Keystone Group provides accounting, bookkeeping, legal, personnel and
general corporate services to Keystone, its affiliates and the Keystone Group of
Mutual Funds.
Under its Investment Advisory and Management Agreement (the "Advisory
Agreement") with the Fund, Keystone manages the investment and reinvestment of
the Fund's assets, supervises the operation of the Fund, provides all necessary
office space, facilities, equipment and personnel and arranges, at the request
of the Fund, for its employees to serve as officers or agents of the Fund.
The Fund pays Keystone a fee for its services at the annual rate of 1.00% of
the Fund's average daily aggregate net asset value.
A management fee of 1.00% is higher than that paid by most other investment
companies. The Fund's fee structure is comparable, however, 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 until 1996, 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 a majority of the
outstanding shares of the Fund. In either case, the terms of the Advisory
Agreement and continuance thereof must be approved by the vote of a majority of
disinterested Trustees as defined in the 1940 Act (the "Independent Trustees")
in person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated, without penalty, on 60 days' written
notice by the Fund or Keystone. The Advisory Agreement will terminate
automatically upon its assignment.
SUBADVISER
Keystone has entered into a SubInvestment Advisory Agreement with EquitiLink
International Management Limited ("EquitiLink"), having its principal place of
business at Union House, Union Street, St. Helier, Jersey, Channel Islands.
EquitiLink and its affiliates have provided advisory services to various clients
since 1981. Under the terms of the SubInvestment Advisory Agreement, EquitiLink
provides Keystone with investment research and advice. In addition, subject to
the supervision of the Fund's Board of Trustees and Keystone, EquitiLink may
provide investment supervision and furnish an investment program for such assets
of the Fund as Keystone may designate from time to time.
In addition to continuance in the same manner as provided in the Advisory
Agreement, the Sub Investment Advisory Agreement may be terminated without
penalty upon similar notice by the Fund, Keystone, or EquitiLink.
EquitiLink receives a monthly fee equal to (1) for services rendered in a
non-discretionary capacity, 20% of Keystone's net fee for such month, plus (2)
10% of Keystone's net fee for such month on that portion of the Fund's assets
for which EquitiLink provided services in a discretionary capacity.
PORTFOLIO MANAGER
John Madden is primarily responsible for the management of the Fund's
portfolio. Mr. Madden is a Keystone Vice President and Senior Portfolio Manager
and has over 27 years of investment experience.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment
advisory and management fees discussed herein, the principal expenses the Fund
is expected to pay include its pro rata portion of certain Trustees' fees; the
Fund's transfer, dividend disbursing and shareholder servicing agent expenses;
the Fund's custodian expenses; fees of the Fund's auditors, as well as legal
counsel to the Fund's Trustees; fees payable to government agencies, including
registration and qualification fees attributable to the Fund and its shares
under federal and state securities laws; and certain extraordinary expenses. In
addition, each class will pay all of the expenses attributable to it. Such
expenses are currently limited to Distribution Plan expenses. The Fund also pays
its brokerage commissions, interest charges and taxes.
SECURITIES TRANSACTIONS
Under policies established by the Fund's Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions, Keystone may
consider as a factor the number of shares of the Fund sold by such
broker-dealer. In addition, broker-dealers executing portfolio transactions may,
from time to time, be affiliated with the Fund, Keystone, the Fund's principal
underwriter or their affiliates.
The Fund may pay higher commissions to broker-dealers that provide research
services. Keystone may use these services in advising the Fund as well as in
advising its other clients.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate for the fiscal year ended March 31, 1995
is expected to be 100% on an annualized basis. High portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund as well as additional gains and/or losses.
The Fund pays brokerage commissions in connection with the writing of options
and effecting the closing purchase or sale transactions, as well as for some
purchases and sales of portfolio securities.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a
selling agreement with Keystone Distributors, Inc. ("KDI"), the Fund's principal
underwriter. KDI, a wholly-owned subsidiary of Keystone, is located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of the Fund
by mailing to the Fund c/o Keystone Investor Resource Center, Inc., ("KIRC")
P.O. Box 2121, Boston, Massachusetts 02106-2121, a completed account application
and a check, payable to the Fund. You may also open an account by telephoning
1-800-343-2898 to obtain the number of an account to which you can wire or
electronically transfer funds and then sending in a completed account
application. Subsequent investments in Fund shares in any amount may be made by
check, by wiring federal funds or by an electronic funds transfer ("EFT").
Orders for the purchase of shares of the Fund will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by KDI (generally as of the close of the
Exchange (4:00 p.m.) on that day) plus, in the case of Class A shares, the sales
charge. Orders received by dealers or other applicable firms prior to the close
of the Exchange and received by KDI prior to the close of its business day will
be confirmed at the offering price effective as of the close of the Exchange on
that day.
Orders for shares received other than as stated above will receive the
offering price equal to the net asset value per share next determined (generally
the next business day's offering price) plus, in the case of Class A shares, the
applicable sales charge.
Your initial purchase must be at least $1,000. There is no minimum amount
for subsequent purchases.
The Fund reserves the right to determine the net asset value more frequently
than once a day if deemed desirable. Dealers and other financial services firms
are obligated to transmit orders promptly.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free
1-800-343-2898 or writing to KIRC or to the firm from which this prospectus was
received.
ALTERNATIVE SALES OPTIONS
The Fund offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class A
shares are not subject to a sales charge when they are redeemed (except that
shares sold in a single purchase in excess of $1,000,000 without a front end
sales charge will be subject to a contingent deferred sales charge for one
year).
CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed during the calendar
year of purchase or within three calendar years after the calendar year of
purchase. Class B shares will automatically convert to Class A shares at the end
of seven calendar years after the year of purchase.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with KDI.
GENERAL
Each class of shares, pursuant to its Distribution Plan, pays an annual
service fee of 0.25% of the Fund's average daily net assets attributable to that
class. In addition to the 0.25% service fee, the Class B and C Distribution
Plans provide for the payment of an annual distribution fee of up to 0.75% of
the average net assets attributable to their respective classes. It is
anticipated that only Class B and C shares will incur distribution expenses in
addition to service fees. As a result, income distributions paid by the Fund
with respect to Class B and Class C shares will generally be less than those
paid with respect to Class A shares.
Investors who would rather pay the entire cost of distribution at the time
of investment, rather than spreading such cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares, in which case,
100% of the purchase price is invested immediately, depending on the amount of
the purchase and the intended length of investment. The Fund will not normally
accept any purchase of Class B shares in the amount of $250,000 or more and will
not normally accept any purchase of Class C shares in the amount of $1,000,000
or more.
-------------------------
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge
as follows:
<TABLE>
<CAPTION>
As a % of Concession to
As a % of Net Amount Dealers as a % of
Amount of Purchase Offering Price Invested<F1> Offering Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 ...................................... 5.75% 6.10% 5.25%
$50,000 but less than $100,000 ......................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000 ........................ 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ........................ 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 ...................... 1.50% 1.52% 1.50%
$1,000,000 and over<F2> ................................ 0% 0% 0.25%
<FN>
- ------------
<F1> Rounded to the nearest one-hundredth percent.
<F2> Purchases of $1,000,000 or more may be subject to a contingent deferred
sales charge of 0.25%. See "Contingent Deferred Sales Charge and Waiver of
Sales Charges".
</TABLE>
-------------------------
The sales charge is paid to KDI, which in turn normally reallows a portion
to your broker-dealer. In addition, KDI or your broker-dealer currently will be
paid periodic service fees at an annual rate of up to 0.25% of the average daily
net asset value of outstanding Class A shares maintained by such recipients and
outstanding on the books of the Fund for specified periods.
Upon written notice to dealers with whom it has dealer agreements, KDI may
reallow up to the full applicable sales charge.
Initial sales charges may be 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. Initial sales charges may also be eliminated for persons purchasing
Class A shares to be included in a managed fee based program (wrap account)
through broker dealers who have entered into special agreements with KDI.
With certain exceptions, purchases of Class A shares in the amount of
$1,000,000 or more on which no sales charge has been paid will be subject to a
contingent deferred sales charge of 0.25% upon redemption during the one year
period commencing on the date the shares were originally purchased. The
contingent deferred sales charge is retained by KDI. See "Contingent Deferred
Sales Charge and Waiver of Sales Charges".
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
("Class A Distribution Plan") that provides for expenditures up to 0.35%
(currently limited to 0.25%) annually of the average daily net asset value of
Class A shares to pay expenses associated with the distribution of Class A
shares. Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay KDI and others, such as dealers, service fees at an annual
rate of up to 0.25% of the average daily net asset value of Class A shares
maintained by such recipients and outstanding on the books of the Fund for
specified periods.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With certain exceptions, the Fund may impose a deferred sales charge of
3.00% on shares redeemed during the calendar year of purchase and the first
calendar year after the year of purchase; 2.00% on shares redeemed during the
second calendar year after the year of purchase; and 1.00% on shares redeemed
during the third calendar year after the year of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by KDI. Amounts received by KDI under the
Class B Distribution Plan are reduced by deferred sales charges retained by KDI.
See "Contingent Deferred Sales Charge and Waiver of Sales Charges" below.
Class B shares that have been outstanding during seven calendar years will
automatically convert to Class A shares, which are subject to a lower
Distribution Plan charge, without imposition of a front end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificates to KIRC.) The Class B shares
so converted will no longer be subject to the higher expenses borne by Class B
shares. Because the net asset value per share of the Class A shares may be
higher or lower than that of the Class B shares at the time of conversion,
although the dollar value will be the same, a shareholder may receive more or
less Class A shares than the number of Class B shares converted. Under current
law, it is the Fund's opinion that such a conversion will not constitute a
taxable event under federal income tax law. In the event that this ceases to be
the case, the Board of Trustees will consider what action, if any, is
appropriate and in the best interests of the Class B shareholders.
CLASS B DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class B shares
("Class B Distribution Plan") that provides for expenditures at an annual rate
of up to 1.00% of the average daily net asset value of Class B shares to pay for
the distribution of Class B shares. Amounts paid by the Fund under the Class B
Distribution Plan are used to pay KDI and others (dealers) a commission at the
time of purchase normally equal to 3.00% of the value of each share sold and/or
to pay KDI and others service fees at an annual rate of 0.25% of the average
daily net asset value of shares maintained by such recipients and outstanding on
the books of the Fund for specified periods. See "Distribution Plans" below.
CLASS C SHARES
Class C shares are offered only through dealers who have special
distribution agreements with KDI. Class C shares are offered at net asset value,
without an initial sales charge. With certain exceptions, the Fund may impose a
deferred sales charge of 1.00% on shares redeemed within one year after the date
of purchase. No deferred sales charge is imposed on amounts redeemed thereafter.
If imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to you. The deferred sales charge is retained by KDI. See
"Contingent Deferred Sales Charge and Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class C shares
("Class C Distribution Plan") that provides for expenditures at an annual rate
of up to 1.00% of the average daily net asset value of Class C shares to pay for
the distribution of Class C shares. Amounts paid by the Fund under the Class C
Distribution Plan are used (1) to pay KDI or others (dealers) a payment at the
time of purchase normally equal to 1.00% of the value of each share sold, such
payment to consist of a commission in the amount of 0.75% of such value plus the
first year's service fee in advance in the amount of 0.25% of such value; and
(2) beginning approximately fifteen months after purchase, to pay KDI or others
a commission at an annual rate of 0.75% (subject to NASD rules -- see
"Distribution Plans") plus service fees paid to KDI or others at an annual rate
of 0.25%, respectively, of the average daily net asset value of each share
maintained by such recipients and outstanding on the books of the Fund for
specified periods. See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class A,
Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net cost of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of the Fund; (2)
certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) Class C shares and certain Class A shares held
for more than one year from the date of purchase; or (4) Class B shares held
during more than four consecutive calendar years. Upon request for redemption,
shares not subject to the contingent deferred sales charge will be redeemed
first. Thereafter, shares held the longest will be the first to be redeemed.
In addition, no contingent deferred sales charge is imposed on a redemption
of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security Act of 1974
("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at
least 59-1/2 years old; (4) involuntary redemptions of accounts having an
aggregate net asset value of less than $1,000; or (5) automatic withdrawals
under an automatic withdrawal plan of up to 1-1/2% per month of the
shareholder's initial account balance.
The Fund also may sell Class A, B or C shares at net asset value without any
initial sales charge or a contingent deferred sales charge to certain Directors,
Trustees, officers and employees of the Fund and Keystone and certain of their
affiliates; registered representatives of firms with dealer agreements with KDI;
and a bank or trust company acting as a trustee for a single account.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
From time to time, KDI may provide promotional incentives, including
reallowance of up to the entire sales charge, to certain dealers whose
representatives have sold or are expected to sell significant amounts of the
Fund. In addition, dealers may from time to time receive additional cash
payments. KDI may also provide written information to dealers with whom it has
dealer agreements that relates to sales incentive campaigns conducted by such
dealers for their representatives as well as financial assistance in connection
with pre-approved seminars, conferences and advertising. No such programs or
additional compensation will be offered to the extent they are prohibited by the
laws of any state or any self-regulatory agency such as the NASD. Dealers to
whom substantially the entire sales charge is reallowed may be deemed to be
underwriters as that term is defined under the 1933 Act.
On sales of the Fund's Class A shares occurring during the period commencing
October 17, 1994 through December 31, 1994, KDI will reallow to all selling
broker/dealers the full applicable sales charge.
On sales of the Fund's Class B shares during the period commencing October
17, 1994 through December 31, 1994, KDI will pay to all selling broker/dealers,
in addition to the usual commission of 3.0% of the value of each Class B share
sold, an extra 1.0% of the value of each Class B share sold.
On combined sales of the Fund's Class A, B, and C shares occurring during
the period commencing October 31, 1994 through November 25, 1994, KDI will make
additional payments to all selling broker/dealers and others in accordance with
the schedule below:
KDI Will Pay
the Following Amount
If Aggregate Sales of as a % of
Class A, B, and C Shares Aggregate Sales
During the Period Equal: During the Period:
- --------------------------------------------------------------------------------
$10,000,000-$24,999,999 .................................. 0.10%
or $25,000,000-$49,999,999 ............................... 0.25%
or $50,000,000 and over .................................. 0.50%
The foregoing amount will be calculated and paid after November 25, 1994.
KDI also may pay banks and other financial services firms that facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the payments made allowable to dealers for the sale of such shares as
described above. The Glass-Steagall Act currently limits the ability of a
depository institution (such as a commercial bank or a savings and loan
association) to become an underwriter or distributor of securities. In the event
the Glass-Steagall Act is deemed to prohibit depository institutions from
accepting payments under the arrangement described above, or should Congress
relax current restrictions on depository institutions, the Board of Trustees
will consider what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares pursuant
to Rule 12b-1 under the 1940 Act. Payments under the Class A Distribution Plan
are currently limited to 0.25% annually of the average daily net asset value of
Class A shares. The Class B Distribution Plan and the Class C Distribution Plan
provide for the payment at an annual rate of up to 1.00% of the average daily
net asset value of Class B shares and Class C shares, respectively.
The NASD currently limits the amount that a Fund may pay annually in
distribution costs for the sale of its shares and shareholder service fees. The
NASD limits such annual expenditures to 1% of the aggregate average daily net
asset value of the Fund's shares, of which 0.75% may be used to pay distribution
costs and 0.25% may be used to pay shareholder service fees. The NASD also
limits the aggregate amount that the Fund may pay for such distribution costs to
6.25% of gross share sales since the inception of the 12b-1 Distribution Plan,
plus interest at the prime rate plus 1% on such amounts (less any contingent
deferred sales charges paid by shareholders to KDI).
KDI intends, but is not obligated, to continue to pay or accrue distribution
charges incurred in connection with the Class B Distribution Plan that exceed
current annual payments permitted to be received by KDI from the Fund. KDI
intends to seek full payment of such charges from the Fund (together with annual
interest thereon at the prime rate plus one percent) at such time in the future
as, and to the extent that, payment thereof by the Fund would be within the
permitted limits.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. After the termination of the Class B Distribution Plan,
however, KDI would be entitled to receive payment, at the annual rate of 1.00%
of the average daily net asset value of Class B shares, as compensation for its
services that had been earned at any time during which the Class B Distribution
Plan was in effect.
If the Fund is unable to pay KDI a commission on a new sale of Class C
shares because the annual maximum (0.75% of average daily net assets) has been
reached, KDI intends, but is not obligated, to continue to accept new orders for
the purchase of Class C shares and to pay or accrue commissions and service fees
to dealers in excess of the amount it currently receives from the Fund. While
the Fund is under no obligation to pay KDI such amounts that exceed the Class C
Distribution Plan limitation, KDI intends to seek full payment of such charges
(together with interest at the rate of prime plus one percent) at such time in
the future as, and to the extent that, payment thereof by the Fund would be
within permitted limits.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell. Payments pursuant to a Distribution Plan are
included in the operating expenses of the class.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net asset value upon written
order to the Fund c/o KIRC, and presentation to the Fund of a properly endorsed
share certificate (if certificates have been issued). Your signature (s) on the
written order and certificates must be guaranteed as described below. In order
to redeem by telephone, you must have completed the authorization in your
account application. Proceeds for shares redeemed on telephonic order will be
deposited by wire or EFT only to the bank account designated in your account
application.
The redemption value equals net asset value per share and may be more or less
than your cost depending upon changes in the value of the Fund's securities
between purchase and redemption.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. In such a case, the Fund will mail the
redemption proceeds upon clearance of the purchase check, which may take up to
15 days or more. Any delay may be avoided by purchasing shares either with a
certified check or by Federal Reserve or bank wire of funds or EFT. Although the
mailing of a redemption check, wiring or EFT of redemption proceeds may be
delayed, the redemption value will be determined and the redemption processed in
the ordinary course of business upon receipt of proper documentation. In such a
case, after the redemption and prior to the release of the proceeds, no
appreciation or depreciation will occur in the value of the redeemed shares, and
no interest will be paid on the redemption proceeds. If the payment of a
redemption has been delayed, the check will be mailed or the proceeds wired or
sent EFT promptly after good payment has been collected.
The Fund computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption, less any applicable deferred sales charge, will
be made within seven days thereafter except as discussed herein.
You may also redeem your shares through broker-dealers. KDI, acting as agent
for the Fund, stands ready to repurchase Fund shares upon orders from dealers
and will calculate the net asset value on the same terms as those orders for the
purchase of shares received from broker-dealers and described under "How to Buy
Shares." If KDI has received proper documentation, it will pay the redemption
proceeds, less any applicable deferred sales charge, to the broker-dealer
placing the order within seven days thereafter. KDI charges no fees for this
service. Your broker-dealer, however, may charge a service fee.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL
WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE
MEMBER, A U.S. COMMERCIAL BANK OR TRUST COMPANY OR OTHER PERSONS ELIGIBLE TO
GUARANTEE SIGNATURES UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S
POLICIES. The Fund or KIRC may waive this requirement, but may also require
additional documents in certain cases. Currently, the requirement for a
signature guarantee has been waived on redemptions of $50,000 or less when the
account address of record has been the same for a minimum period of 30 days. The
Fund and KIRC reserve the right to withdraw this waiver at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money ornumber of shares involved, the Fund cannot execute the
order. In such cases, the Fund will request the missing information from you and
process the order on the day such information is received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by
check. If they are $2,500 or more, they will be mailed, wired or sent by EFT to
your previously designated bank account as you direct. If you do not specify how
you wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth above.
GENERAL
The Fund reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor KDI assumes
responsibility for the authenticity of any instructions received by any of them
from a shareholder in writing, over the Keystone Automated Response Line
("KARL") or by telephone. KIRC will employ reasonable procedures to confirm that
instructions received over KARL or by telephone are genuine. Neither the Fund,
KIRC nor KDI will be liable when following instructions received over KARL or by
telephone that KIRC reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves
the right to redeem your account if its value has fallen below $1,000, the
current minimum investment level, as a result of your redemptions (but not as a
result of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No deferred
sales charges are applied to such redemptions.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay for
all redemptions in cash, the Fund may authorize payment for shares to be made in
portfolio securities or other property. The Fund has obligated itself under the
1940 Act, however, to redeem for cash all Fund shares presented for redemption
by any one shareholder in any 90-day period up to the lesser of $250,000 or 1%
of the Fund's net assets at the beginning of such period. Securities delivered
in payment of redemptions would be valued at the same value assigned to them in
computing the net asset value per share and would, to the extent permitted by
law, be readily marketable. Shareholders receiving such securities would incur
brokerage costs when these securities are sold.
REDEMPTIONS OF CERTAIN CLASS A SHARES
Certain purchases of Class A shares in the amount of $1,000,000 or more, on
which no initial sales charge has been paid, are subject to a contingent
deferred sales charge of 0.25%. See "Class A Shares."
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or
by calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers 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 Class B shares of other Keystone
America Funds and Class B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone
America Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are
(1) Class A shares where the original purchase was for $1,000,000 or more
and no sales charge was paid,
(2) Class B shares that have been held for less than four years, or
(3) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares by calling toll free 1-800-343-2898, by writing KIRC
or by calling KARL. Shares purchased by check are eligible for exchange after 15
days. There is a $10.00 fee for each exchange. There is no fee for individual
investors making exchanges over KARL. If the shares being tendered for exchange
are still subject to a deferred sales charge, such charge will carry over to the
shares being acquired in the exchange transaction. The Fund reserves the right,
after providing the required notice to shareholders, to terminate this exchange
offer or to change its terms, including the right to change the fee for each
exchange.
Orders to exchange shares of the Fund for shares of KLT will be executed by
redeeming the shares of the Fund and purchasing shares of KLT at the net asset
value of such shares next determined after the proceeds from such redemption
become available, which may be up to seven days after such redemption. In all
other cases, orders for exchanges received by the Fund prior to 4:00 p.m. on any
day the Fund is open for business will be executed at the respective net asset
values determined as of the close of business that day. Orders for exchanges
received after 4:00 p.m. on any business day will be executed at the respective
net asset values determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares in a year or three in a calendar quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase shares in any amount and to redeem up to $50,000 worth of
shares. You can use Keystone America Money Line like an "electronic check" to
move money between your bank account and your account in the Fund with one
telephone call. You must allow two business days after the call for the transfer
to take place. For money recently invested, you must allow normal check clearing
time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in your
Keystone America account. Once proper authorization is given, your bank account
will be debited to purchase shares in the Fund. You will receive confirmation
from KDI for every transaction.
To change the amount of a Keystone America Money Line service or to
terminate such service (which could take up to 30 days), you must write KIRC,
P.O. Box 2121, Boston, Massachusetts 02106-2121.
RETIREMENT PLANS
The Fund has various pension and profit-sharing plans available to you,
including Individual Retirement Accounts ("IRAs"); Rollover IRAs; Keogh Plans;
Corporate Profit-Sharing Pension and Target Benefit Plans; and Salary-Reduction
Plans. For details, including fees and application forms, call toll free
1-800-247-4075 or write to KIRC.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the shares in your
account when the Automatic Withdrawal Plan is opened. Fixed withdrawal payments
are not subject to a deferred sales charge. Excessive withdrawals may decrease
or deplete the value of your account. Moreover, because of the effect of the
applicable sales charge, a Class A investor should not make continuous purchases
of the Fund's shares while participating in an Automatic Withdrawal Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging, you can invest a fixed dollar amount each
month or each quarter in any Keystone America Fund. This results in more shares
being purchased when the selected fund's net asset value is relatively low and
fewer shares being purchased when the fund's net asset value is relatively high,
which may cause a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must have established
an account in a Keystone America Fund or a money market fund managed or advised
by Keystone. You should designate on the application the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and the fund in
which the investment is to be made. Thereafter, on the first day of the
designated month, an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and invested
in shares of the designated fund. If you are a Class A investor and paid a sales
charge on your initial purchase, the shares purchased will be eligible for
Rights of Accumulation and the sales charge applicable to the purchase will be
determined accordingly. In addition, the value of shares purchased will be
included in the total amount required to fulfill a Letter of Intent. If a sales
charge was not paid on the initial purchase, a sales charge will be imposed at
the time of subsequent purchases and the value of shares purchased will become
eligible for Rights of Accumulation and Letters of Intent. See "Exhibit A --
Reduced Sales Charges" at the back of the prospectus.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any of
your Keystone America Funds automatically invested to purchase Class A shares of
any other Keystone America Fund. You may select this service on your application
and indicate the Keystone America Fund(s) into which distributions are to be
invested. The value of shares purchased will be ineligible for Rights of
Accumulation and Letters of Intent. See "Exhibit A -- Reduced Sales Charges" at
the back of the prospectus.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account at current net asset value.
PERFORMANCE DATA
From time to time the Fund may advertise "total return" and "current yield".
ALL DATA IS BASED ON HISTORICAL EARNINGS AND IS NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. Total return and yield are computed separately for each class of
shares of the Fund. Total return refers to the Fund's average annual compounded
rates of return over specified periods determined by comparing the initial
amount invested in a particular class to the ending redeemable value of that
amount. The resulting equation assumes reinvestment of all dividends and
distributions and deduction of the maximum sales charge or applicable contingent
deferred sales charge and all recurring charges, if any, applicable to all
shareholder accounts. The exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
The Fund may also include comparative performance data for each class of
shares in advertising or marketing the Fund's shares, such as data from Lipper
Analytical Services, Inc. or other industry publications.
FUND SHARES
The Fund currently issues three classes of shares, which participate in
dividends and distributions and have equal voting, liquidation and other rights
except that (1) expenses related to the distribution of each class of shares or
other expenses that the Board of Trustees may designate as class expenses, from
time to time, are borne solely by each class; (2) each class of shares has
exclusive voting rights with respect to its Distribution Plan; (3) each class
has different exchange privileges; and (4) each class has a different
designation. When issued and paid for, the shares will be fully paid and
nonassessable by the Fund. Shares may be exchanged as explained under
"Shareholder Services," but will have no other preference, conversion, exchange
or preemptive rights. Shares are redeemable, transferable and freely assignable
as collateral. The Fund is authorized to issue additional series or classes of
shares.
Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares. Shares of the Fund vote together except
when required by law to vote separately by class. The Fund does not have annual
meetings. The Fund will have special meetings from time to time as required
under its Declaration of Trust and under the 1940 Act. As provided in the
Declaration of Trust of the Fund, shareholders have the right to remove Trustees
by an affirmative vote of two-thirds of the outstanding shares. A special
meeting of the shareholders will be held when 10% of the outstanding shares
request a meeting for the purpose of removing a Trustee. As prescribed by
Section 16(c) of the 1940 Act, shareholders may be eligible for shareholder
communication assistance in connection with the special meeting.
The Fund's Declaration of Trust provides that shareholders shall not be
subject to any personal liability for the Fund's obligations and provides
indemnification from Fund assets for any shareholder held personally liable for
the Fund's obligations. Disclaimers of such liability are included in each Fund
agreement. Under Massachusetts law it is possible, however, that a Fund
shareholder might be held personally liable for certain of the Fund's
obligations.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone and serves as the Fund's transfer agent and
dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND
INVESTMENT TECHNIQUES AVAILABLE TO THE FUND
Unless otherwise specified in the prospectus or SAI, the Fund's use of the
following investments and investment techniques is not limited to a specified
percentage of Fund assets. The options and futures transactions described in
this section are known as derivative instruments.
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 that 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 that 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 that are rated Ca by Moody's
represent obligations that are speculative in a high degree. Such issues are
often in default or have other market shortcomings. Bonds that 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.
ZERO COUPON BONDS
A zero coupon "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. Coupon zero coupon bonds of any series
mature periodically from the date of issue of such series through the maturity
date of the securities related to such series. Principal zero coupon bonds
mature on the date specified therein, which is the final maturity date of the
related securities. 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
individually 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
or coupon 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 allocable 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 both principal zero coupon bonds and coupon zero
bonds representing interest in 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 value at
the time of sale) may apply to determine the gain or loss on a sale of any such
zero coupon bonds.
PAYMENT-IN-KIND SECURITIES
PIK 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. PIKs are gaining
popularity over zeros, however, 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.
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 market rate of interest that is
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. 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 a decline in the market value of the underlying
securities, as well as delay and costs to the Fund in connection with 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. The Securities and Exchange
Commission deems a repurchase agreement to be, in effect, a loan by the Fund.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. These securities, which
include bonds, debentures, corporate notes, preferred stocks and other
securities, are securities that 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.
"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. No payment or delivery is made by the
Fund, however, until it receives payment or delivery from the other party to the
transaction. A separate account of liquid assets equal to the value of purchase
commitments will be maintained until payment is made.
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."
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and
put options for hedging purposes. 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.
Such securities will be maintained in a segregated account with the Fund's
custodian. 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 and put options. 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 Securities and Exchange Commission 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 investment policies pertaining to illiquid securities.
The Fund currently complies with the position taken by the Securities and
Exchange Commission 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.
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 put and call options thereon 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 will "cover" its futures contract obligations
by maintaining in a segregated account with its custodian the securities or
currencies underlying the contract or liquid assets, such as cash, U.S.
Government securities or other appropriate high grade debt obligations,
sufficient in amount to satisfy the Fund's contract obligations.
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 portfolio manager 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 Keystone
correctly predicts 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. Keystone 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.
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 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. The
Fund may also purchase and sell options related to foreign currencies in
connection with hedging strategies.
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 and go into default. Therefore, loans will be made
only to firms deemed by the Fund to be of good standing and will not be made
unless, in the judgment of the Fund, the consideration to be earned from such
loans justifies the risk.
The Fund understands that it is the current view of the Securities and
Exchange Commission that the Fund is permitted to engage in loan transactions
only if it satisfies 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, which could result from the return of loaned
securities; (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. The Fund does not presently intend to lend its securities
if, as a result, the aggregate of all outstanding securities loans exceeds 15%
of the value of the Fund's total assets taken at their current value.
<PAGE>
EXHIBIT A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of other Keystone America Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501(c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may
combine concurrent direct purchases of Class A shares of two or more eligible
funds. 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
irrespective of class. The eligible funds consist of the Keystone America Funds
and Keystone Liquid Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 4.75% of the offering price as indicated in the Sales
Charge Schedule. KIRC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other eligible funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor the Fund to sell, the amount
indicated.
After the Letter of Intent is received by KIRC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the eligible funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary) 5% of the dollar amount specified on the application will be held
in escrow by KIRC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to KDI any difference
between the sales charge on the amount specified and on the amount actually
attained. If the Purchaser does not within 20 days after written request by KDI
or his dealer pay such difference in sales charge, KIRC will redeem an
appropriate number of the escrowed shares in order to realize such difference.
Shares remaining after any such redemption will be released by KIRC. Any
redemptions made by the Purchaser during the thirteen-month period will be
subtracted from the amount of the purchases for purposes of determining whether
the Letter of Intent has been completed. In the event of a total redemption of
the account prior to completion of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption and the balance
will be forwarded to the Pur-chaser.
By signing the application, the Purchaser irrevocably constitutes and
appoints KIRC his attorney to surrender for redemption any or all escrowed
shares with full power of substitution.
The Purchaser or his dealer must inform KDI or KIRC that a Letter of Intent
is in effect each time a purchase is made.
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund, Inc.
Omega Fund, Inc.
Fund of the Americas
Strategic Development Fund
KEYSTONE
Distributors, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
KASDF-P 10/94
150M
KEYSTONE
AMERICA
STRATEGIC
DEVELOMENT FUND
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE STRATEGIC DEVELOPMENT FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 7, 1994
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Strategic Development Fund (the "Fund") dated October 7, 1994. A copy of the
prospectus may be obtained from Keystone Distributors, Inc. ("KDI"), the Fund's
principal underwriter ("Principal Underwriter"), 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
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TABLE OF CONTENTS
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Page
The Fund .................................................................. 2
Investment Restrictions ................................................... 2
Dividends and Taxes ....................................................... 5
Valuation of Securities ................................................... 6
Brokerage ................................................................. 7
Sales Charges ............................................................. 9
Distribution Plans ........................................................ 11
Trustees and Officers ..................................................... 14
Fund Expenses ............................................................. 20
Investment Adviser and SubAdviser ......................................... 21
Principal Underwriter ..................................................... 23
Declaration of Trust ...................................................... 24
Standardized Total Return and Yield Quotations ............................ 26
Additional Information .................................................... 26
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 seeks long term capital growth by
investing primarily in equity securities.
The Fund was formed as a Massachusetts business trust on July 27, 1994.
The Fund is managed and advised by Keystone Custodian Funds, Inc. ("Keystone").
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund has adopted various fundamental and non-fundamental investment
restrictions and policies. These restrictions and policies are described below.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions,
which may not be changed without the vote of a majority (as defined in the
Investment Company Act of 1940 ("1940 Act")) of the Fund's outstanding Class A,
B, and C shares. Unless otherwise stated, all references to Fund assets are in
terms of current market value.
The Fund may not do the following:
(1) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets, determined at market or other fair value at the time
of purchase, in the securities of any one issuer, or invest in more than 10% of
the outstanding voting securities of any one issuer, all as determined
immediately after such investment; provided that these limitations do not apply
to investments in securities issued or guaranteed by the United States ("U.S.")
government or its agencies or instrumentalities;
(2) invest more than 25% of the value of its total assets in the
securities of issuers in any one industry other than securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities;
(3) borrow money, except that the Fund may (a) borrow from any bank,
provided that, immediately after any such borrowing there is asset coverage of
at least 300% for all borrowings; (b) borrow for temporary purposes only and in
an amount not exceeding 5% of the value of the Fund's total assets, computed at
the time of borrowing; or (c) enter into reverse repurchase agreements, provided
that, immediately after entering into any such agreements, there is asset
coverage of at least 300% of all bank borrowings and reverse repurchase
agreements;
(4) issue senior securities, except that the Fund may (a) make
permitted borrowings of money; (b) enter into firm commitment agreements and
collateral arrangements with respect to the writing of options on securities and
engage in permitted transactions in futures and options thereon and forward
contracts; and (c) issue shares of any additional permitted classes or series;
(5) invest in real estate or commodities, except that the Fund may (a)
invest in securities directly or indirectly secured by real estate and interests
therein and securities of companies that invest in real estate and interests
therein, including mortgages and other liens; and (b) enter into financial
futures contracts and options thereon for hedging purposes and enter into
forward contracts; or
(6) make loans, except that the Fund may make, purchase, or hold
publicly and nonpublicly offered debt securities (including convertible
securities) and other debt investments, including loans, consistent with its
investment objective; (b) lend its portfolio securities to broker-dealers; and
(c) enter into repurchase agreements.
OTHER FUNDAMENTAL POLICIES
Notwithstanding any other investment policy or restriction, the Fund
may invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment
objectives, policies and restrictions as the Fund.
NONFUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund may not do the following:
(1) borrow money except for temporary or emergency purposes (not for
leveraging or investment), and it will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding;
(2) (a) sell securities short (except by selling futures contracts or
writing 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 short; or (b) purchase
securities on margin, except for such short-term credits as are necessary for
the clearance of transactions, and provided that the Fund may make initial and
variation so-called "margin" payments in connection with purchases or sales of
futures contracts or of options on futures contracts or forwards or other
similar instruments;
(3) 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 its investment restrictions on
borrowings, 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 or forwards or other similar instruments;
(4) purchase the securities of any other investment company, except by
purchase in the open market subject only to customary broker's commissions and
provided that any such purchase will not result in duplication of sales charges
or management fees, and except in connection with any merger, consolidation, or
reorganization;
(5) invest in oil, gas, or other mineral leases or development programs
(except the Fund may invest in companies that own or invest in such interests);
or
(6) invest in real estate limited partnerships.
NONFUNDAMENTAL RESTRICTIONS ON OPTIONS AND WARRANTS
The Fund may not do the following:
(1) write covered options, unless the securities underlying such
options are listed on a national securities exchange and the options are issued
by the Options Clearing Corporation; provided, however, that the securities
underlying such options may be traded on an automated quotations system
("NASDAQ") of the National Association of Securities Dealers, Inc. ("NASD") if
and to the extent permitted by applicable state regulations; or
(2) purchase warrants, valued at the lower of cost or market, in excess
of 5% of the value of the Fund's net assets; included within that amount, but
not to exceed 2% of the value of the Fund's net assets, may be warrants that are
not listed on the New York or American Stock Exchanges; warrants acquired by the
Fund at any time in units or attached to securities are not subject to this
restriction.
OTHER NONFUNDAMENTAL POLICIES
The Fund intends to follow the policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including (1) treating as illiquid securities that may not be
disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued the investment on its
books; and (2) limiting its holdings of such securities to 15% of its net
assets. The purchase of restricted securities is not to be deemed engaging in
underwriting.
In order to permit the sale of Fund shares in certain states or foreign
countries, the Fund may make commitments more restrictive than the investment
restrictions described above. Should the Fund determine that any such commitment
is no longer in the best interests of the Fund, it may revoke the commitment by
terminating sales of its shares in the state or country involved.
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DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund intends to distribute annually dividends from its net
investment income, if any, on an annual basis. The Fund will, at least annually,
distribute all net realized long-term capital gains, if any. The Fund will make
distributions in shares or, at the option of the shareholder, in cash.
Shareholders who have not opted, prior to the record date for any distribution,
to receive cash will have the number of such shares determined on the basis of
net asset value per share computed at the end of the day on the record date
after adjustment for the distribution. Net asset value is used in computing the
number of shares in both gains and income distribution reinvestments. Account
statements and/or checks as appropriate will be mailed to shareholders within
seven days after the Fund pays the distribution. Unless the Fund receives
instructions to the contrary from a shareholder before the record date, it will
assume that the shareholder wishes to receive that distribution and future gains
and income distributions in shares. Instructions continue in effect until
changed in writing.
Distributed long-term capital gains are taxable as such to the
shareholder whether received in cash or in additional Fund shares and regardless
of the period of time Fund shares have been held by the shareholder. However, if
such shares are held less than six months and redeemed at a loss, the
shareholder will recognize a long term capital loss on such shares to the extent
of the 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 reducing the shareholder's federal tax basis for such
shares, though taxable as stated above. Since distributions of capital gains
depend upon profits actually realized from the sale of securities by the Fund,
they may or may not occur. The foregoing comments relating to the taxation of
dividends and distributions paid on the Fund's shares relate solely to federal
income taxation; such dividends and distributions may also be subject to state
and local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been pre-determined to the best
of the Fund's ability to be taxable as ordinary income. Therefore, net
investment income distributions will not be made on the basis of distributable
income as computed on the books of the Fund, but will be made on a federal
income tax basis. Shareholders of the Fund will be advised annually of the
federal income tax status of distributions.
If more than 50% of the value of the Fund's total assets at the end of
a fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to the Fund's shareholders, a
shareholder will be required to include in his gross income both cash dividends
and the amount the Fund advises him is his pro rata portion of income taxes
withheld by foreign governments from interest and dividends paid on the Fund's
investments. The shareholder will be entitled, however, to take the amount of
such foreign taxes withheld as a credit against his U.S. income tax, or to treat
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 generally 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) 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;
(4) instruments 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 that are held on the sixtieth
day prior to maturity are valued at amortized cost (market value on the sixtieth
day adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market; and which, in either case,
reflects fair value as determined by the Board of Trustees; and
(5) the following securities are valued at prices deemed in good faith
to be fair under procedures established by the Board of Trustees: (a)
securities, including restricted securities, for which 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 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.
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BROKERAGE
- --------------------------------------------------------------------------------
In effecting transactions in securities for the Fund, the Fund seeks
best execution of orders at the most favorable prices. The determination of what
may constitute best execution and price in the execution of a securities
transaction by a broker involves a number of considerations, including, without
limitation, the overall direct net economic result to the Fund (involving both
price paid or received and any commissions and other costs paid), the efficiency
with which the transaction is effected, the ability to effect the transaction at
all where a large block is involved, the availability of the broker to stand
ready to execute potentially difficult transactions in the future and the
financial strength and stability of the broker. Such considerations are weighed
by management in determining the overall reasonableness of brokerage commissions
paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends as well as other statistical
and factual information (including related computer services and equipment). Any
such research and other statistical and factual information provided by brokers
to the Fund or Keystone are considered to be in addition to and not in lieu of
services required to be performed by Keystone under its Investment Advisory and
Management Agreement with the Fund. The cost, value and specific application of
such information are indeterminable and cannot be practically allocated among
the Fund and other clients of Keystone who may indirectly benefit from the
availability of such information. Similarly, the Fund may indirectly benefit
from information made available as a result of transactions effected for such
other clients. Under its Investment Advisory and Management Agreement with the
Fund, Keystone is permitted to pay higher brokerage commissions for brokerage
and research services in accordance with Section 28(e) of the Securities
Exchange Act of 1934. In the event Keystone does follow such a practice, it will
do so on a basis that is fair and equitable to the Fund.
The Fund expects that its purchases and sales of equity securities
usually will be effected through brokerage transactions for which commissions
are payable. Purchases and sales of debt securities 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. When the Fund trades in the over-the-counter
market, it will deal with primary market makers unless more favorable prices are
otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities, thereby taking
advantage of the lower purchase price available to such a group.
Neither Keystone nor the Fund has any intention of placing the Fund's
securities transactions with any particular broker-dealer or group thereof. The
Fund's Board of Trustees has determined, however, that the Fund may follow a
policy of considering sales of shares of the Fund as a factor in the selection
of broker-dealers to execute portfolio transactions, subject to the requirements
of best execution, described above.
In addition, securities for the Fund will not be purchased from or sold
to Keystone, KDI, or any of their affiliated persons except in accordance with
the 1940 Act and rules and regulations issued thereunder.
Investment decisions for the Fund are made independently from those of
the other funds and investment accounts managed by Keystone. It may frequently
develop, however, that the same investment decision is made for more than one
fund. Simultaneous transactions are inevitable when the same security is
suitable for the investment objective of more than one account. When two or more
funds or accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula that is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund. It is the opinion of the Fund's Board of Trustees that
the desirability of retaining Keystone as the Fund's investment adviser
outweighs any disadvantages that may result from exposure to simultaneous
transactions.
The Fund's policy with respect to brokerage is and will be reviewed by
the Fund's Board of Trustees from time to time. Because of the possibility of
further regulatory developments affecting the securities exchanges and brokerage
practices generally, the foregoing practices may be changed, modified or
eliminated.
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SALES CHARGES
- --------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares. Class A shares are offered
with a maximum sales charge of 5.75% payable at the time of purchase ("Front End
Load Option"). Class B shares are sold subject to a contingent deferred sales
charge payable upon redemption within three calendar years after the year of
purchase ("Back End Load Option"). Class B shares that have been outstanding
during seven calendar years will automatically convert to Class A shares,
without imposition of a front end sales charge. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to Keystone Investor Resource Center, Inc., the Fund's transfer and
dividend disbursing agent ("KIRC").) Class C shares are sold subject to a
contingent deferred sales charge payable upon redemption within one year after
the date of purchase ("Level Load Option"). Class C shares are available only
through dealers who have entered into special distribution agreements with KDI,
the Fund's Principal Underwriter. The prospectus contains a general description
of how investors may buy shares of the Fund, including a table of applicable
sales charges for Class A shares, a discussion of reduced sales charges that may
apply to subsequent purchases, and a description of applicable contingent
deferred sales charges.
CONTINGENT DEFERRED SALES CHARGES
In order to pay KDI for the sale of its shares (see "Distribution
Plans"), a contingent deferred sales charge may be imposed at the time of
redemption of certain Fund shares, as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares in the amount of
$1,000,000 on which no sales charge has been paid will be subject to a
contingent deferred sales charge of 0.25% upon redemption during the one year
period commencing on the date the shares were originally purchased. KDI retains
the contingent deferred sales charge. See "Calculation of Contingent Deferred
Sales Charge" below.
CLASS B SHARES
With certain exceptions, the Fund may impose a deferred sales charge of
3.00% on shares redeemed during the calendar year of purchase and during the
first calendar year after the year of purchase; 2.00% on shares redeemed during
the second calendar year after the year of purchase; and 1.00% on shares
redeemed during the third calendar year after the year of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
KDI retains the deferred sales charge. See "Calculation of Contingent Deferred
Sales Charge" below.
CLASS C SHARES
With certain exceptions, the Fund may impose a deferred sales charge of
1.00% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
KDI retains the deferred sales charge. See "Calculation of Contingent Deferred
Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge imposed upon the redemption of
Class A, B, or C shares is a percentage of the lesser of (1) the net asset value
of the shares redeemed or (2) the net cost of such shares. No contingent
deferred sales charge is imposed when you redeem amounts derived from (1)
increases in the value of your account above the net cost of such shares due to
increases in the net asset value per share of the Fund; (2) certain shares with
respect to which the Fund did not pay a commission on issuance, including shares
acquired through reinvestment of dividend income and capital gains
distributions; (3) Class C shares and certain Class A shares held during more
than one year; or (4) Class B shares held during more than four consecutive
calendar years. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares held
the longest will be the first to be redeemed. There is no contingent deferred
sales charge when the shares of a class are exchanged for the shares of the same
class of another Keystone America Fund. Moreover, when shares of one such class
of a fund have been exchanged for shares of another such class of a fund, the
calendar year of the purchase of the shares of the fund exchanged into is
assumed to be the year shares tendered for exchange were originally purchased.
REDEMPTION OF SHARES
The Fund has obligated itself to redeem for cash all shares presented
for redemption by any one shareholder in any 90-day period up to the lesser of
$250,000 or 1% of the Fund's net assets.
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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. On July 17, 1994, 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 ("Independent
Trustees") and a majority of the Trustees who have no direct or indirect
financial interest in the Fund's Class A, B, and C Distribution Plans or any
agreement related thereto (the "Rule 12b-1 Trustees," who are the same as the
Independent Trustees) approved the Fund's Class A, B, and C Distribution Plans.
The NASD currently limits the amount that a Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits annual expenditures to 1% of the aggregate average daily net asset value
of the Fund's shares, of which 0.75% may be used to pay such distribution costs
and 0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the 12b-1 Plan, plus interest at the
prime rate plus 1% on such amounts (less any contingent deferred sales charges
paid by shareholders to KDI).
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the Fund
may expend daily amounts at a maximum annual rate of 0.35% (currently limited to
0.25%) of the Fund's average daily net asset value attributable to Class A
shares to finance any activity that is primarily intended to result in the sale
of Class A shares, including, without limitation, expenditures consisting of
payments to a Principal Underwriter (currently KDI) to enable the Principal
Underwriter to retain or pay to others who sell Class A shares a service or
other fee, at such intervals as the Principal Underwriter may determine, in
respect of Class A shares maintained by such recipients that remain outstanding
during the period in respect of which such fee is or has been paid.
Amounts paid by the Fund under the Class A Distribution Plan are used
to pay KDI and others, such as dealers, service fees at an annual rate of up to
0.25% of the average net asset value of Class A shares maintained by such
recipients that remain outstanding on the books of the Fund for specified
periods.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the Fund
may expend daily amounts at a maximum 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 a
Principal Underwriter (currently KDI) to enable the Principal Underwriter (1) to
retain or pay to others (dealers) commissions in respect of Class B shares sold
since the inception of the Distribution Plan; and (2) to retain or pay or to
have paid to others (dealers) a service fee, at such intervals as the Principal
Underwriter may determine, in respect of Class B shares maintained by such
recipients and outstanding on the books of the Fund during the period in respect
of which such fee is or has been paid.
Amounts paid by the Fund under the Class B Distribution Plan are
generally used (1) to retain or pay KDI and others (dealers) a commission
normally equal to 3.00% of the value of KDI and each Class B share sold; and/or
(2) to pay KDI or others (dealers) service fees at an annual rate of 0.25% of
the average net asset value of Class B shares maintained by such recipients and
outstanding on the books of the Fund for specified periods.
KDI intends, but is not obligated, to continue to pay or accrue
distribution charges incurred in connection with the Class B Distribution Plan
that exceed current annual payments permitted to be received by KDI from the
Fund. KDI intends to seek full payment of such charges from the Fund (together
with annual interest thereon at the prime rate plus one percent) at such time in
the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the Fund
may expend daily amounts at a maximum 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 a
Principal Underwriter of the Fund (currently KDI) to enable the Principal
Underwriter to pay to others (dealers) commissions in respect of Class C shares
of the Fund sold since the inception of the Distribution Plan; and (2) to enable
the Principal Underwriter to pay or to have paid to others a service fee, at
such intervals as the Principal Underwriter may determine, in respect of Class C
shares maintained by such recipients and outstanding on the books of the Fund
for specified periods.
Amounts paid by the Fund under the Class C Distribution Plan are
currently used to pay KDI or others (dealers) (1) a commission normally equal to
1.00% of the value each share sold, such payment to consist of a commission in
the amount of 0.75% of such value plus the first year's service fee in advance
in the amount of 0.25% of such value; and (2) beginning approximately 15 months
after purchase, a commission at an annual rate of 0.75% (subject to applicable
NASD limitations) plus service fees at an annual rate of 0.25%, respectively, of
the average daily net asset value of each Class C share maintained by such
recipients and outstanding on the books of the Fund for specified periods.
GENERAL INFORMATION
Whether any expenditure under a Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
A Distribution Plan may be terminated at any time by a vote of a
majority of the Fund's Rule 12b-1 Trustees or by vote of a majority of the
outstanding voting shares of the respective class of Fund shares. After the
termination of the Class B Distribution Plan, however, KDI would be entitled to
receive payment, at the annual rate of 1.00% of the average daily net asset
value of Class B shares, as compensation for its services that had been earned
at any time during which the Class B Distribution Plan was in effect. Any change
in a Distribution Plan that would materially increase the distribution expenses
of the Fund provided for in a Distribution Plan requires shareholder approval.
Otherwise, a Distribution Plan may be amended by the Trustees, including the
Fund's Rule 12b-1 Trustees.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the Rule
12b-1 Trustees quarterly. The Rule 12b-1 Trustees may require or approve changes
in the implementation or operation of a Distribution Plan and may also require
that total expenditures by the Fund under a Distribution Plan be kept within
limits lower than the maximum amount permitted by a Distribution Plan as stated
above.
The Fund's Independent Trustees have determined that the sales of the
Fund's shares resulting from payments under the Distribution Plans are expected
to benefit the Fund.
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TRUSTEES AND OFFICERS
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Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
*GEORGE S. BISSELL: Chairman of the Board, Trustee and Chief Executive Officer
of the Fund; Chairman of the Board, Director and Chief Executive
Officer of Keystone Group, Inc. ("Keystone Group), Keystone, Keystone
Management, Inc. ("Keystone Management") Keystone Software Inc.,
("Keystone Software"), Keystone Fixed Income Advisers, Inc. ("KFIA")
and KIRC; Chairman of the Board, Chief Executive Officer and Trustee or
Director of Keystone America Capital Preservation and Income Fund,
Keystone America Capital Preservation and Income Fund II, Keystone
America Fund for Total Return, Keystone America Global Opportunities
Fund, Keystone America Government Securities Fund, Keystone America
Hartwell Emerging Growth Fund, Inc.; Keystone America Hartwell Growth
Fund, Inc., Keystone America Intermediate Term Bond Fund, Keystone
America State Tax Free Fund, Keystone America State Tax Free Fund -
Series II, Keystone America Strategic Income Fund, Keystone America Tax
Free Income Fund, Keystone America World Bond Fund, Keystone Fund of
the Americas (U.S.), Keystone Fund of the Americas (Luxembourg);
Keystone Custodian Funds, Series B-1, B-2, B-4, K-1, K-2, S-1, S-3 and
S-4; Keystone Institutional Adjustable Rate Fund, Keystone
International Fund Inc., Keystone Liquid Trust, Keystone Precious
Metals Holdings, Inc., Keystone Tax Exempt Trust, Keystone Tax Free
Fund, and Master Reserves Trust (all such funds, collectively,
"Keystone Group Funds"); Chairman of the Board, Hartwell Keystone
Advisers, Inc. ("Hartwell Keystone"); Director of Keystone Investment
Management Corporation ("KIMCO"); Chairman of the Board and Trustee of
Anatolia College; and Trustee of University Hospital (and Chairman of
its Investment Committee).
*ALBERT H. ELFNER, III: President and Trustee of the Fund; President and
Trustee or Director of all other Keystone Group Funds; Director and
Vice Chairman of Keystone; Chief Operating Officer, President and
Director of Keystone Group; Chairman of the Board and Director of KIMCO
and KFIA; President and Director of Keystone Management, Hartwell
Keystone and Keystone Software; Director of KDI, KIRC, Fiduciary
Investment Company, Inc. ("FICO") and Robert Van Partners, Inc.;
Director of Boston Children's Services Association and Trustee of
Anatolia College, Middlesex School, Middlebury College and Citizens
Bank; Member, Board of Governors, New England Medical Center; and
former President of Keystone.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Group Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member,
Board of Advisers, Credito Emilano (banking); and former Economics and
Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Managing Director, Seaward Management Corporation
(investment advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment
advice).
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Executive Director, Coalition of Essential
Schools, Brown University; Director and former Executive Vice
President, National Alliance of Business; former Vice President,
Educational Testing Services; and former Dean, School of Business,
Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; former Group Vice President, Textron Corp.; and
former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio
Fund and The Phoenix Big Edge Series Fund; and former President,
Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other Keystone
Group Funds; Chairman of the Board, Director and Executive Vice
President, The London Harness Company; Managing Partner, Roscommon
Capital Corp.; Trustee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine; Chief Executive Officer,
Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher & Associates
(environmental consulting); President, Oldways Preservation and
Exchange Trust (education); and former Director, Keystone Group and
Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Of Counsel, Keyser, Crowley & Meub, P.C.; Member,
Governor's (VT) Council of Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation and Hitchcock
Clinic; Director, Vermont Yankee Nuclear Power Corporation, Vermont
Electric Power Company, Inc., Grand Trunk Corporation, Central Vermont
Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual Fire
Insurance Company, New England Guaranty Insurance Company, Inc. and the
Investment Company Institute; former Governor of Vermont; former
Director and President, Associated Industries of Vermont; former
Chairman and President, Vermont Marble Company; former Director of
Keystone; and former Director and Chairman of the Board, Green Mountain
Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Executive Vice President, DHR International, Inc.
(executive recruitment); former Senior Vice President, Boyden
International Inc. (executive recruit- ment); and Director, Commerce
and Industry Association of New Jersey, 411 International, Inc. and J &
M Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Consultant, Russell Miller, Inc. (investment
bankers) and Consultant, Drake Beam Morin, Inc. (executive
outplacement); Director of Connecticut Natural Gas Corporation, Trust
Company of Connecticut, Hartford Hospital, Old State House Association
and Enhanced Financial Services, Inc.; Member, Georgetown College Board
of Advisors; Chairman, Board of Trustees, Hartford Graduate Center;
Trustee, Kingswood-Oxford School and Greater Hartford YMCA; former
Director, Executive Vice President and Vice Chairman of The Travelers
Corporation; and former Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other
Keystone Group Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; President, Nassau County Bar Association;
and former Associate Dean and Professor of Law, St. John's University
School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Group Funds; Senior Vice President, Chief Financial
Officer and Treasurer of Keystone Group and KDI; Director, Senior Vice
President, Chief Financial Officer and Treasurer of Keystone; Treasurer
of KIMCO, Keystone Management, Keystone Software and FICO; and
Treasurer and Director of Hartwell Keystone.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Group Funds; and President of Keystone.
ROGER T. WICKERS: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Group Funds; Director, Senior Vice President,
General Counsel and Secretary, Keystone Group and KDI; Director and
Secretary, Keystone; and Vice President, Assistant Secretary and
Director, Keystone Management.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Group Funds; Vice President of Keystone Group; and former Vice
President and Treasurer of KIRC.
ROSEMARY D. VAN ANTWERP: Vice President and Secretary of the Fund; Vice
President and Secretary of all other Keystone Group Funds; Senior Vice
President and General Counsel of Keystone, Keystone Management, Hartwell
Keystone, KIRC, KFIA, Keystone Nevada, Inc., Keystone Software, Inc. and
KIMCO; Vice President, Assistant Secretary and Associate General Counsel
of Keystone Group; Senior Vice President, General Counsel, Director and
Assistant Clerk, FICO; Assistant Secretary of KDI; and former Vice
President of Harbor Keystone Advisers, Inc.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Bissell and Mr. Elfner are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Group and several of its
affiliates, including Keystone, Keystone Management, KDI and KIRC. Mr. Bissell
and Mr. Elfner both own shares of Keystone Group. Mr. Bissell is Chairman of the
Board, Chief Executive Officer and Director of Keystone Group. Mr. Elfner is
President and Chief Operating Officer of Keystone Group.
The Board of Trustees of the Fund has established an Advisory Board.
The members of the Advisory Board are James R. Dempsey, Knight Edwards, Donald
T. Ellis, John M. Haffenreffer, Philip B. Harley, Everett P. Pope, John W.
Sharp, Spencer R. Stuart, Russel R. Taylor and Charles M. Williams. The Advisory
Board advises the Board of Trustees and Keystone with respect to the management
and operation of the Fund. The recommendations of the Advisory Board will be
considered by the Board of Trustees and Keystone, but will not be binding on
them.
The principal occupations and affiliations of the members of the
Advisory Board over the past five years are set forth below:
JAMES R. DEMPSEY: a private investor; Director or Trustee, Convest Energy
Corporation, Superior Electric Co., Phoenix Total Return Fund, Phoenix
Multi-Portfolio Fund, Phoenix Series Fund, The Phoenix Big Edge Series
Fund; former Chairman of the Board, Transatlantic Investment Capital
Corporation, Transatlantic Capital Corporation; and former Trustee or
Director of 7 Keystone Group Funds.
KNIGHT EDWARDS: Of Counsel, Edwards & Angell; Member of the Board of Managers
of 4 Travelers Funds for variable annuity or life insurance products;
and former Trustee or Director of 7 Keystone Group Funds.
DONALD T. ELLIS: President, D.T. Ellis Associates; Associate, Michael Saunders
& Co., real estate broker; former Senior Vice President, Goldman
Financial Services, Inc.; former President, Chief Executive Officer and
Treasurer, Scott Seaboard Corporation; and former Trustee or Director
of 7 Keystone Group Funds.
JOHN M. HAFFENREFFER: Vice President, Director and Treasurer of Haffenreffer &
Co., Inc.; Member of the Corporation of Haffenreffer Benevolent Corp.;
Director and Member of the Executive Committee of Liberty Bank and
Trust Company; Director of the Massachusetts Council of Churches;
former Director of E.C. Schirmer Co. (music publishing), John Hinckley
& Sons (lumber dealer) and Keystone; and former Trustee or Director of
all Keystone Custodian Funds and Keystone America Funds.
PHILIP B. HARLEY: Director of General Host Corporation, Stamford, Connecticut;
a Private Investor; and former Trustee or Director of all Keystone
Custodian Funds and Keystone America Funds.
EVERETT P. POPE: Trustee Emeritus, Bowdoin College; Director of New England
Educational Loan Marketing Association; former Chairman of the Board
and President of Workingmens Cooperative Bank and Massachusetts Higher
Education Assistance Corporation (guarantor of student loans); former
Director and President of Mortgage and Realty Investors, Inc.; and
former Trustee or Director of all Keystone Custodian Funds and Keystone
America Funds.
JOHN W. SHARP: Governor of Montreal General Hospital, Canada (past President);
Honorary Vice Chairman and former National President of Boy Scouts of
Canada; Honorary Colonel, The Black Watch Royal Highland Regiment of
Canada; former Director of Keystone, Unimed, Inc.; and former Trustee
or Director of all Keystone Custodian Funds and Keystone America Funds.
SPENCER R. STUART: Chairman of the Advisory Board of InveQuest Incorporated;
Director of U.S. Tobacco Company, Allegheny International, Inc., Asset
Guaranty Reinsurance Co., International Finance Group and Enhance
Financial Services Inc.; former Director of Western Airlines, Inc.;
Founder/ Chairman of Spencer Stuart & Associates; and former Trustee or
Director of all Keystone Custodian Funds and Keystone America Funds.
RUSSEL R. TAYLOR: Assistant Professor and Chairman of the Business Department at
the Business College of New Rochelle; Trustee of Gintel Fund, Gintel
Capital Appreciation Fund and Gintel ERISA Fund, Greenwich,
Connecticut; Director, H.W. Taylor Institute for Entrepreneurial
Studies, College of New Rochelle; former Director of Annis Furs, Inc.,
Minnetonka, Inc.; and former Trustee or Director of all Keystone
Custodian Funds and Keystone America Funds.
CHARLES M. WILLIAMS: Director of Fort Dearborn Income Securities, Inc., 4
Merrill Lynch Funds, National Life Insurance Company of Vermont and
Institute for Financial Management, Inc.; President of Charles M.
Williams Associates, Inc.; George Gund Professor of Commercial Banking,
Emeritus, at Harvard University Graduate School of Business
Administration; former Director of Keystone, Hammermill Paper Co.,
Sonat, Inc., United States Leasing International, Inc.; and former
Trustee or Director of all Keystone Custodian Funds and Keystone America
Funds.
The address of all Trustees, officers and Advisory Board members of the
Fund and the address of the Fund is 200 Berkeley Street, Boston, Massachusetts
02116-5034.
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FUND EXPENSES
- --------------------------------------------------------------------------------
In addition to its investment advisory and management fee, the Fund
assumes and pays its direct expenses and all other expenses, including, without
limitation, the following: (1) all charges and expenses of any custodian or
depository appointed by the Fund for the safekeeping of the Fund's cash,
securities and other property; (2) all charges and expenses for bookkeeping and
auditors; (3) all charges and expenses of any transfer agents and registrars
appointed by the Fund; (4) all fees of all Trustees of the Fund who are not
affiliated with Keystone or any of its affiliates; (5) all brokers' fees,
expenses and commissions and issue and transfer taxes chargeable to the Fund in
connection with transactions involving securities and other property to which
the Fund is a party; (6) all costs and expenses of distribution of its shares
incurred pursuant to a Distribution Plan or Plans adopted under Rule 12b-1
issued under the 1940 Act; (7) all taxes and corporate fees payable by the Fund
to federal, state or other governmental agencies; (8) all costs of certificates
representing shares of the Fund; (9) all fees and expenses involved in
registering and maintaining registrations of the Fund and of its shares with the
Securities and Exchange Commission (the "SEC" or "Commission") and registering
or qualifying its shares under state or other securities laws, including the
preparation and printing of prospectuses for filing with the Commission and
other authorities; (10) expenses of preparing, printing and mailing prospectuses
to shareholders of the Fund; (11) all expenses of shareholders' and Trustees'
meetings and of preparing, printing and mailing notices, reports and proxy
materials to shareholders of the Fund; (12) all charges and expenses of legal
counsel for the Fund and for Trustees of the Fund in connection with legal
matters relating to the Fund including, without limitation, legal services
rendered in connection with the Fund's existence, business trust and financial
structure and relations with its shareholders, registrations and qualifications
of securities under federal, state and other laws, issues of securities,
expenses which the Fund has assumed, whether customary or not, and extraordinary
matters; (13) all charges and expenses of filing annual and other reports with
the Commission; and (14) all extraordinary expenses and charges of the Fund. In
the event Keystone provides any of these services or pays any of these expenses,
the Fund will promptly reimburse Keystone therefor.
The Fund is subject to certain state annual expense limitations, the
most restrictive of which is set forth below:
2.5% of the first $30 million of Fund average net assets; 2.0% of the
next $70 million of Fund average net assets; and 1.5% of Fund average
net assets over $100 million.
Capital charges and certain expenses, including a portion of the Fund's
distribution plan fees, are not included in the calculation of the state expense
limitation. This limitation may be modified or eliminated in the future. See
"Distribution Plans - General Information."
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INVESTMENT ADVISER AND SUBADVISER
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INVESTMENT ADVISER
Keystone, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, and organized in 1932, has been retained by the Fund under an
Investment Advisory and Management Agreement (the "Advisory Agreement") dated
September 21, 1994, to provide investment advice and, in general, to manage the
investment and reinvestment of the assets of the Fund.
Keystone is a wholly-owned subsidiary of Keystone Group, which is
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034. Keystone
Group is a corporation privately owned by current and former members of
management and employees of Keystone and its affiliates. The shares of Keystone
Group common stock beneficially owned by management and Keystone employees are
held in a number of voting trusts, the trustees of which are George S. Bissell,
Albert H. Elfner, III, Roger T. Wickers, Edward F. Godfrey, and Ralph J.
Spuehler, Jr.
Keystone Group provides accounting, bookkeeping, legal, personnel and
general corporate services to Keystone, its affiliates and the Keystone Group of
Mutual Funds.
The overall supervision and management of the Fund rests with its Board
of Trustees. Pursuant to the Advisory Agreement, Keystone furnishes to the Fund
investment advisory, management and administrative services, office facilities,
equipment and personnel in connection with its services for managing the
investment and reinvestment of the Fund's assets, and pays (or causes to be
paid) the compensation of all officers and employees of the Fund.
As compensation for its services to the Fund, Keystone is entitled to a
fee at the annual rate of 1.00% of the aggregate net asset value of shares of
the Fund computed as of the close of business on each business day.
All expenses (other than those specifically referred to as being borne
by Keystone) incurred in the operation of the Fund, and any public offering of
its shares, are borne by the Fund. To the extent that Keystone provides certain
of such services, the Fund promptly reimburses Keystone therefor. The fee
charged to the Fund is higher than that charged to most other investment
companies with different investment objectives and policies. The Fund's fee
structure is comparable, however, to that of other global and international
funds that are subject to the higher costs involved in managing a fund of
predominantly international securities.
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 until September 21, 1996, 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 a
majority of the outstanding shares. In either case, the terms of the Advisory
Agreement and continuance thereof must be approved by the vote of a majority of
Independent Trustees in person at a meeting called for the purpose of voting on
such approval. The 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
the Fund's shareholders. The Advisory Agreement will terminate automatically
upon its assignment.
SUBADVISER
Keystone has entered into a SubInvestment Advisory Agreement with
EquitiLink International Management Limited ("EquitiLink"), located at Union
House, Union Street, St. Helier, Jersey, Channel Islands. Under the terms of the
SubInvestment Advisory Agreement, EquitiLink provides Keystone with investment
research and advice. In addition, subject to the supervision of the Board of
Trustees and Keystone, EquitiLink may provide investment supervision and furnish
an investment program for such assets of the Fund as Keystone may designate from
time to time.
EquitiLink receives a monthly fee equal to (1) for services rendered in
a non-discretionary capacity, 20% of Keystone's net fee for such month; plus (2)
10% of Keystone's net fee for such month on that portion of the Fund's assets
for which EquitiLink provided services in a discretionary capacity.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into a Principal Underwriting Agreement dated
September 21, 1994 (the "Underwriting Agreement") with KDI, a wholly-owned
subsidiary of Keystone.
KDI, as agent, currently has the right to obtain subscriptions for and
to sell shares of the Fund to the public. In so doing, KDI may retain and employ
representatives to promote distribution of the shares and may obtain orders from
brokers, dealers or others, acting as principals, for sales of shares. No such
representative, dealer or broker has any authority to act as agent for the Fund.
KDI has not undertaken to buy or to find purchasers for any specific number of
shares. KDI may receive payments from the Fund pursuant to the Fund's
Distribution Plans.
All subscriptions and sales of shares by KDI are at the offering price
of the shares, such price being in accordance with the provisions of the Fund's
Declaration of Trust, By-Laws, the current prospectus and statement of
additional information. All orders are subject to acceptance by the Fund, and
the Fund reserves the right, in its sole discretion, to reject any order
received. Under the Underwriting Agreement, the Fund is not liable to anyone for
failure to accept any order.
The Fund has agreed under the Underwriting Agreement to pay all expenses
in connection with registration of its shares with the SEC as well as auditing
and filing fees in connection with registration of its shares under the various
state "blue-sky" laws. KDI assumes the cost of sales literature and preparation
of prospectuses used by it and certain other expenses.
From time to time, if in KDI's judgment it could benefit the sales of
Fund shares, KDI may use its discretion in providing to selected dealers
promotional materials and selling aids, including, but not limited to, personal
computers, related software and Fund data files.
KDI has agreed that it will, in all respects, duly conform with all
state and federal laws applicable to the sale of the shares and will indemnify
and hold harmless the Fund, and each person who has been, is or may be a Trustee
or officer of the Fund, against expenses reasonably incurred by any of them in
connection with any claim or in connection with any action, suit or proceeding
to which any of them may be a party, that arises out of or is alleged to arise
out of any misrepresentation or omission to state a material fact, on the part
of KDI or any other person for whose acts KDI is responsible or is alleged to be
responsible, unless such misrepresentation or omission was made in reliance upon
written information furnished by the Fund.
The Underwriting Agreement will remain in effect until September 21,
1996, and thereafter so long as its terms and continuance are approved by a
majority of the Fund's Independent Trustees at least annually at a meeting
called for that purpose and if its continuance is approved annually by vote of a
majority of Trustees or by vote of a majority of the outstanding shares.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Fund's Board of Trustees or by a vote of a majority
of outstanding shares. The Underwriting Agreement will terminate automatically
upon its "assignment" as that term is defined in the 1940 Act.
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DECLARATION OF TRUST
- --------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated July 27, 1994. 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 Agreement authorizes the issuance of an
unlimited number of shares of beneficial interest as classes of shares, each of
which represents an equal proportionate interest in the Fund with each other
share of that class. Upon liquidation, shares are entitled to a pro rata share
of the Fund based on the relative net assets of each class. Shareholders have no
preemptive or conversion rights. Shares are redeemable and transferable. The
Fund is authorized to issue additional classes or series of shares. The Fund
currently issues three classes of shares, but may issue additional classes or
series of shares.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for certain obligations of the trust.
The possibility of the shareholders being held liable appears remote because the
Fund's Declaration of Trust contains an express disclaimer of shareholder
liability for obligations of the Fund and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees. Accordingly, shareholders will not be
liable for obligations thereunder if this procedure is followed leaving only the
unlikely possibility of shareholder liability for tort liability incurred by the
Fund. In addition, the Declaration of Trust provides for indemnification out of
the Fund's property for any shareholder held personally liable for the
obligations of the Fund. The Declaration of Trust also provides that the Fund
will, upon request, assume the defense of any claim made against any shareholder
of the Fund for any act or obligation of the Fund and satisfy any judgment
thereon from the assets of the Fund.
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 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.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The Fund presently does not
intend to advertise current yield.
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ADDITIONAL INFORMATION
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State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian (the "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, Certified Public Accountants, are the independent
auditors for the Fund.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142, is a
wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the Fund.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, statement of additional information or in supplemental sales
literature issued by the Fund or KDI, and no person is entitled to rely on any
information or representation not contained therein.
The Fund's prospectus and statement of additional information omit
certain information contained in the Fund's Registration Statement filed with
the Commission, which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the rules and regulations
promulgated by the Commission.
The Fund is one of 16 different investment companies in the family of
Keystone America Funds. The Keystone America Funds offer a range of choices to
serve shareholder needs. In addition to the Fund, the Keystone America Fund
Family includes the following funds:
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE AMERICA HARTWELL GROWTH FUND, INC. - Seeks capital appreciation by
investment in securities selected for their long-term growth prospects.
KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND - Seeks high current
income, consistent with low volatility of principal, by investing in adjustable
rate securities issued by the U.S. government, its agencies or
instrumentalities.
KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND - II - Seeks high level of
current income, consistent with low volatility of principal, by investing under
ordinary circumstances at least 65% in adjustable rate securities issued by the
U.S. government, its agencies or instrumentalities.
KEYSTONE AMERICA FUND FOR TOTAL RETURN - Seeks above-average income, dividend
growth and capital appreciation potential from quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 25%).
KEYSTONE AMERICA GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from
foreign and domestic securities.
KEYSTONE AMERICA GOVERNMENT SECURITIES FUND - Seeks income and capital
preservation from U.S. government securities.
KEYSTONE AMERICA INTERMEDIATE TERM BOND FUND - Seeks income, capital
preservation and price appreciation potential from investment grade corporate
bonds.
KEYSTONE AMERICA OMEGA FUND, INC. - Seeks maximum capital growth from common
stocks and securities convertible into common stocks.
KEYSTONE AMERICA STATE TAX FREE FUND - A mutual fund consisting of five separate
series of shares investing in different portfolio securities which seeks the
highest possible current income, exempt from federal income taxes and applicable
state taxes.
KEYSTONE AMERICA STATE TAX FREE FUND - SERIES II - A mutual fund consisting of
two separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE AMERICA STRATEGIC INCOME FUND - Seeks high yield and capital
appreciation potential from corporate bonds, discount bonds, convertible bonds,
preferred stock and foreign bonds (up to 25%).
KEYSTONE AMERICA TAX FREE INCOME FUND - Seeks income exempt from federal income
taxes and capital preservation from the four highest grades of municipal bonds.
KEYSTONE AMERICA WORLD BOND FUND - Seeks current income by investing primarily
in a non-diversified portfolio consisting of debt securities denominated in U.S.
and foreign currencies. The Portfolio seeks capital appreciation as a secondary
objective.
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and countries in South and Central
America).
<PAGE>
APPENDIX
This Appendix provides additional information about the various
securities in which the Fund may invest and investment techniques that the Fund
may employ. Specifically, the Appendix provides a more detailed explanation of
(i) stock and corporate bond ratings, (ii) high yield, high risk bonds, (iii)
money market instruments, and (iv) derivative instruments.
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: (i) capsule stock information which reveals short and long
term growth and yield afforded by the indicated dividend, based on a recent
price; (ii) a long term price chart which shows patterns of monthly stock price
movements and monthly trading volumes; (iii) 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; (iv) interim earnings for the current
year to date, plus three previous years; (v) dividend information; (vi) company
background; (vii) recent corporate developments; (viii) prospects for a company
in the immediate future and the next few years; and (ix) 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.
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:
1. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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
which 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.
Keystone considers the ratings of Moody's and S&P assigned to various
securities, but does not rely solely on ratings assigned by Moody's and S&P
because (i) 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 (ii) there can be large differences among the current financial
conditions of issuers within the same rating category.
BELOW INVESTMENT GRADE BONDS
Prior to the 1980's, corporate bonds were primarily issued to finance
growth and development. Below investment grade bonds were predominantly bonds
that often traded at discounts from par because the company's credit ratings had
been downgraded. The rapid growth of the noninvestment grade sector of the bond
market during the 1980s was largely attributable to the issuance of such bonds
to finance corporate reorganizations. This growth paralleled a long economic
expansion. An economic downturn could severely disrupt the market for high
yield, high risk bonds and adversely affect the value of outstanding bonds and
the ability of issuers to repay principal and interest.
In addition, investors should be aware of the following risks relating
to high yield, high risk debt securities:
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, or 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. However, the prices of these bonds are
generally less sensitive to interest rate changes than higher-rated bonds, but
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. For example, 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.
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.
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.
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:
(a) leading market positions in well-established
industries;
(b) high rates of return on funds employed;
(c) conservative capitalization structures with moderate
reliance on debt and ample asset protection;
(d) broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and
(e) well established access to a range of financial
markets and assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
U.S. CERTIFICATES OF DEPOSIT
U.S. Certificates of deposit are receipts issued by a U.S. bank in
exchange for the deposit of funds. The issuer agrees to pay the amount deposited
plus interest to the bearer of the receipt on the date specified on the
certificate. The certificate usually can be traded in the secondary market prior
to maturity.
U.S. Certificates of deposit will be limited to U.S. dollar denominated
certificates of U.S. banks, including their branches abroad, which are members
of the Federal Reserve System or the Federal Deposit Insurance Corporation, and
of U.S. branches of foreign banks, each of which have total assets at the time
of purchase in excess of $1 billion.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance and securities issued by the Government
National Mortgage Association ("GNMA"). Treasury bills have maturities of one
year or less. Treasury notes have maturities of one to ten years and Treasury
bonds generally have maturities of greater than ten years at the date of
issuance. GNMA securities include GNMA mortgage pass-through certificates. Such
securities are supported by the full faith and credit of the U.S.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Maritime
Administration, The Tennessee Valley Authority, District of Columbia Armory
Board and Federal National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, the Fund will invest
in the securities issued by such an instrumentality only when Keystone
determines under standards established by the Board of Trustees that the credit
risk with respect to the instrumentality does not make its securities unsuitable
investments. While the Fund may invest in such instruments, U.S. government
securities do not include international agencies or instrumentalities in which
the U.S. government, its agencies or instrumentalities participate, such as the
World Bank, Asian Development Bank or the Interamerican Development Bank, or
issues insured by the Federal Deposit Insurance Corporation.
DERIVATIVE INSTRUMENTS
Derivatives have been variously defined to include forwards, futures,
options, mortgage-backed securities, other asset-backed securities and
structured securities, such as interest rate swaps, equity swaps, index swaps,
currency swaps and caps and floors. These basic vehicles can also be combined to
create more complex products, called hybrid derivatives. The following
discussion addresses options, futures, foreign currency transactions,
mortgage-backed and other asset-backed securities, structured securities, swaps,
caps, and floors.
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. A call option gives
the purchaser of the option the right to buy, and the writer the obligation to
sell, the underlying security at the exercise price during the option period.
Conversely, a put option gives the purchaser the right to sell, and the writer
the obligation to buy, the underlying security at the exercise price during the
option period.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time as the writer effects a closing purchase
transaction by purchasing an option of the same series as the one previously
sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. For options traded on national securities exchanges
("Exchanges"), to secure the obligation to deliver the underlying security in
the case of a call option, the writer of the option is required to deposit in
escrow the underlying security or other assets in accordance with the rules of
the OCC, an institution created to interpose itself between buyers and sellers
of options. Technically, the OCC assumes the order side of every purchase and
sale transaction on an Exchange and, by doing so, gives its guarantee to the
transaction.
The principal reason for writing options on a securities portfolio is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone. In return for the premium,
the covered call option writer has given up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
the option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of a premium, so long as the price of the underlying security remains above the
exercise price, but assumes an obligation to purchase the underlying security
from the buyer of the put option at the exercise price, even though the price of
the security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security. In addition, the premium paid for the put effectively increases the
cost of the underlying security, thus reducing the yield otherwise available
from such securities.
Because the Fund can write only covered options, it may at times be
unable to write additional options unless it sells a portion of its portfolio
holdings to obtain new securities against which it can write options. This may
result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
To the extent that a secondary market is available the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, on a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase, plus transaction costs, is greater than the premium received upon
writing the original option, the writer will incur a loss in the transaction.
PURCHASING PUT AND CALL OPTIONS
The Fund can close out a put option it has purchased by effecting a
closing sale transaction; for example, the Fund may close out a put option it
has purchased by selling a put option. If, however, a secondary market does not
exist at a time the Fund wishes to effect a closing sale transaction, the Fund
will have to exercise the option to realize any profit. In addition, in a
transaction in which the Fund does not own the security underlying a put option
it has purchased, the Fund would be required, in the absence of a secondary
market, to purchase the underlying security before it could exercise the option.
In each such instance, the Fund would incur additional transaction costs. The
Fund may also purchase call options for the purpose of offsetting previously
written call options of the same series.
The Fund would normally purchase call options in anticipation of an
increase in the market value of securities of the type in which the Fund may
invest. The purchase of a call option would entitle the Fund, in return for the
premium paid, to purchase specified securities at a specified price during the
option period. The Fund would ordinarily realize a gain if, during the option
period, the value of such securities exceeded the sum of the exercise price, the
premium paid and transaction costs; otherwise the Fund would realize a loss on
the purchase of the call option.
The Fund would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio (protective puts) or
securities of the type in which it is permitted to invest. The purchase of a put
option would entitle the Fund, in exchange for the premium paid, to sell
specified securities at a specified price during the option period. The purchase
of protective puts is designed merely to offset or hedge against a decline in
the market value of the Fund's securities. Gains and losses on the purchase of
protective put options would tend to be offset by countervailing changes in the
value of underlying portfolio securities. Put options may also be purchased by
the Fund for the purpose of affirmatively benefitting from a decline in the
price of securities which the Fund does not own. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize a loss on the purchase
of the put option.
The Fund may purchase put and call options on securities indices for
the same purposes as the purchase of options on securities. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not involve
the actual purchase or sale of securities. In addition, securities index options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
OPTIONS TRADING MARKETS
Options in which the Fund will trade are generally listed on Exchanges.
Exchanges on which such options currently are traded include the Chicago Board
Options Exchange and the New York, American, Pacific, and Philadelphia Stock
Exchanges. Options on some securities may not be listed on any Exchange, but
traded in the over-the-counter market. Options traded in the over-the-counter
market involve the additional risk that securities dealers participating in such
transactions would fail to meet their obligations to the Fund. The use of
options traded in the over-the-counter market may be subject to limitations
imposed by certain state securities authorities. In addition to the limits on
its use of options discussed herein, the Fund is subject to the investment
restrictions described in the prospectus and the statement of additional
information.
The staff of the Commission currently is of the view that the premiums
which the Fund pays for the purchase of unlisted options, and the value of
securities used to cover unlisted options written by the Fund are considered to
be invested in illiquid securities or assets for the purpose of the Fund's
compliance with its policies pertaining to illiquid securities.
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 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 that 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 enter into such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the U.S. are The Board of Trade of
the City of Chicago, the Chicago Mercantile Exchange, the International Monetary
Market (a division of the Chicago Mercantile Exchange), the New York Futures
Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
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 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 Internal Revenue Code
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 normally
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. 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
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 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.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Fund, if permitted by its investment policies, may also invest in fixed rate
and adjustable rate collateralized mortgage obligations ("CMOs"), including CMOs
with rates that move inversely to market rates that are issued by and guaranteed
as to principal and interest by the U.S. government, its agencies or
instrumentalities. The principal governmental issuer of CMOs is FNMA. In
addition, FHLMC issues a significant number of CMOs. The Fund, if permitted to
invest in CMOs, will not invest in CMOs that are issued by private issuers. CMOs
are debt obligations collateralized by Mortgage Securities in which the payment
of the principal and interest is supported by the credit of, or guaranteed by,
the U.S. government or an agency or instrumentality of the U.S. government. The
secondary market for CMOs is actively traded.
CMOs are structured by redirecting the total payment of principal and interest
on the underlying Mortgage Securities used as collateral to create classes with
different interest rates, maturities and payment schedules. Instead of interest
and principal payments on the underlying Mortgage Securities being passed
through or paid pro rata to each holder (e.g., the Fund), each class of a CMO is
paid from and secured by a separate priority payment of the cash flow generated
by the pledged Mortgage Securities.
Most CMO issues have at least four classes. Classes with an earlier maturity
receive priority on payments to assure the early maturity. After the first class
is redeemed, excess cash flow not necessary to pay interest on the remaining
classes is directed to the repayment of the next maturing class until that class
is fully redeemed. This process continues until all classes of the CMO issue
have been paid in full. Among the CMO classes available are floating
(adjustable) rate classes, which have characteristics similar to ARMS, and
inverse floating rate classes whose coupons vary inversely with the rate of some
market index. The Fund, if allowed to purchase CMOs, may purchase any class of
CMO other than the residual (final) class.
INTEREST-RATE SWAP CONTRACTS
Interest rate swaps are OTC agreements between parties and
counterparties to make periodic payments to each other for a stated time,
generally entered into for the purpose of changing the nature or amount of
interest being received on debt securities held by one or both parties. The
calculation of these payments is based on an agreed-upon amount called the
"notional amount." The notional amount is not typically exchanged in swaps
(except in currency swaps). The periodic payments may be fixed or floating.
Floating payments change (positively or inversely) with fluctuations in interest
or currency rates or equity or commodity prices, depending on the swap
contract's terms. Swaps may be used to hedge against adverse changes in interest
rates, for instance. Thus, if permitted by its investment policies, the Fund may
have a portfolio of debt instruments (ARM's, for instance) the floating interest
rates of which adjust frequently because they are tied positively to changes in
market interest rates. The Fund would then be exposed to interest rate risk
because a decline in interest rates would reduce the interest receipts on its
portfolio. If the investment adviser believed interest rates would decline, the
Fund, if permitted by its investment policies, could enter into an interest rate
swap with another financial institution to hedge the interest rate risk. In the
swap contract, the Fund would agree to make payments based on a floating
interest rate in exchange for receiving payments based on a fixed interest rate.
Thereafter, if interest rates declined, the Fund's fixed rate receipts on the
swap would offset the reduction in its portfolio receipts. If interest rates
rose, the higher rates the Fund could obtain from new portfolio investments
(assuming sale of existing investments) would offset the higher rates it paid
under the swap agreement.
EQUITY SWAP CONTRACTS
The counterparty to an equity swap contract would typically be a bank,
investment banking firm or broker/dealer. For example, the counterparty would
generally agree to pay the Fund the amount, if any, by which the notional amount
of the equity swap contract would have increased in value if such notional
amount had been invested in the stocks comprising the S&P 500 Index in
proportion to the composition of the Index, plus the dividends that would have
been received on those stocks. The Fund would agree to pay to the counterparty a
floating rate of interest (typically the London Inter Bank Offered Rate) on the
notional amount of the equity swap contract plus the amount, if any, by which
that notional amount would have decreased in value had it been invested in such
index stocks. Therefore, the return to the Fund on any equity swap contract
should be the gain or loss on the notional amount plus dividends on the stocks
comprising the S&P 500 Index less the interest paid by the Fund on the notional
amount. If permitted by its investment policies, the Fund will only enter into
equity swap contracts on a net basis, i.e., the two parties' obligations are
netted out, with the Fund paying or receiving, as the case may be, only the net
amount of any payments. Payments under equity swap contracts may be made at the
conclusion of the contract or periodically during its term.
If permitted by its investment policies, the Fund may also from time to
time enter into the opposite side of equity swap contracts (i.e., where the Fund
is obligated to pay the increase (net of interest) or received the decrease
(plus interest) on the contract) to reduce the amount of the Fund's equity
market exposure consistent with the Fund's investment objective(s) and policies.
These positions are sometimes referred to as "reverse equity swap contracts."
Equity swap contracts will not be used to leverage the Fund. Since the
Commission considers equity swap contracts and reverse equity swap contracts to
be illiquid securities, the Fund will not invest in equity swap contracts or
reverse equity swap contracts if the total value of such investments together
with that of all other illiquid securities that the Fund owns would exceed the
Fund's limitations on investments in illiquid securities.
The Fund does not believe that its obligations under equity swap
contracts or reverse equity swap contracts are senior securities and,
accordingly, the Fund will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of the Fund's
obligations over its respective entitlement with respect to each equity swap
contract and each reverse equity swap contract will be accrued on a daily basis
and an amount of cash, U. S. Government Securities or other liquid high quality
debt securities having an aggregate market value at lease equal to the accrued
excess will be maintained in a segregated account by the Fund's Custodian.
CURRENCY SWAPS, INDEX SWAPS AND CAPS AND FLOORS
A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them. An index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of reference indices. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds an
agree-upon interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser to receive payments of interest on
a notional principal amount from the party selling such interest rate floor. If
permitted by the Fund's investment policies, the investment adviser expects to
enter into these types of transactions on behalf of the Fund primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date rather than for speculative purposes.
Accordingly, if permitted by the Fund's investment policies, the Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors unless it owns securities or other instruments
providing the income stream the Fund may be obligated to pay. Caps and floors
require segregation of assets with a value equal to the Fund's net obligation,
if any.
SPECIAL RISKS OF SWAPS, CAPS AND FLOORS
As with futures, options, forward contracts, and mortgage backed and
other asset-backed securities, the use of swap, cap and floor contracts exposes
the Fund to additional investment risk and transaction costs. These risks
include operational risk, market risk and credit risk.
Operational risk includes, among others, the risks that the investment
adviser will incorrectly analyze market conditions or will not employ
appropriate strategies and monitoring with respect to these instruments or will
be forced to defer closing out certain hedged positions to avoid adverse tax
consequences.
Market risk includes, among others, the risks of imperfect correlations
between the expected values of the contracts, or their underlying bases, and
movements in the prices of the securities or currencies being hedged, and the
possible absence of a liquid secondary market for any particular instrument at
any time. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively more illiquid. Nevertheless, a secondary market for swaps
is never assured, and caps and floors, which are more recent innovations for
which standardized documentation has not yet been fully developed, are much less
liquid than swaps.
Credit risk is primarily the risk that counterparties may be
financially unable to fulfill their contracts on a timely basis, if at all. If
there is a default by the counterparty to any such contract, the Fund will be
limited to contractual remedies pursuant to the agreements related to the
transaction. There is no assurance that contract counterparties will be able to
meet contract obligations or that, in the event of default, the Fund will
succeed in pursuing contractual remedies. The Fund thus assumes the risk that it
may be delayed in or prevented from obtaining payments owed to it pursuant to
such contracts. The Fund will closely monitor the credit of swap counterparties
in order to minimize this risk. The Fund will not enter into any equity swap
contract or reverse equity swap contract unless, at the time of entering into
such transaction, the unsecured senior debt of the counterparty is rated at
least A by Moody's or S&P.
<PAGE>
KEYSTONE STRATEGIC DEVELOPMENT FUND
STATEMENT OF NET ASSETS
September 15, 1994
Assets:
Cash (Note 1) ............................................. $ 100,000
Organizational expenses (Note 2) .......................... 47,500
---------
Total Assets .............................................. $ 147,500
Liabilities:
Accrued expenses .......................................... 47,500
Net Assets ................................................ $ 100,000
=========
Net assets represented by:
Class A: Net assets equivalent to $10.00
per share for 3,000 shares ................................ 30,000
Class B: Net assets equivalent to $10.00
per share for 3,000 shares ................................ 30,000
Class C: Net assets equivalent to $10.00
per share for 4,000 shares ................................ 40,000
---------
Total net assets .......................................... $ 100,000
=========
Net asset value and redemption price per share (Note 3):
Class A Shares ............................................ $10.00
=========
Class B Shares ............................................ $10.00
=========
Class C Shares ............................................ $10.00
=========
Offering Price per share (Note 4):
Class A Shares (including sales
charge of 5.75%) .......................................... $10.61
=========
Class B Shares ............................................ $10.00
=========
Class C Shares ............................................ $10.00
=========
<PAGE>
Notes:
1. Keystone Strategic Development Fund ("Fund") was organized on July 28,
1994 and had no operations prior to July 28, 1994 other than organization
matters and activities in connection with the purchase of 10,000 shares by
Keystone Distributors, Inc. ("KDI").
KDI is a wholly-owned subsidiary of Keystone Custodian Funds, Inc., which
is wholly-owned by Keystone Group, Inc. ("Keystone"), a corporation
privately owned by members of management of Keystone and its affiliates.
2. 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 organizational expenses in the same
proportion as the number of initial shares of the Fund being redeemed bears
to the number of initial shares of the Fund outstanding at the time of
redemption.
3. The Fund is authorized to issue an unlimited number of shares of
beneficial interest, without par value.
4. For information on the Investment Advisory and Management Agreement and
the Principal Underwriting Agreement and the Distribution Plan see "FUND
Management and Expenses", "Distribution Plan", "Investment Adviser" and
"Principal Underwriter" in the Fund's prospectus and/or statement of
additional information.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholder
Keystone Strategic Development Fund
We have audited the accompanying statement of net assets of Keystone Strategic
Development Fund as of September 15, 1994. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Keystone Strategic Development
Fund as of September 15, 1994 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
September 20, 1994
