-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, E0ClwuxES4dadmrpHIDqr0BLWDc8Ovv445XyFE1yncFTIxDpOgjJ6BYxbxxUBIfv fXqH/zoqe4ZTN8mlxFHupg== 0000950156-95-000252.txt : 19950414 0000950156-95-000252.hdr.sgml : 19950414 ACCESSION NUMBER: 0000950156-95-000252 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19950412 EFFECTIVENESS DATE: 19950412 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE STRATEGIC DEVELOPMENT FUND CENTRAL INDEX KEY: 0000927424 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 046767171 STATE OF INCORPORATION: MA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-82520 FILM NUMBER: 95528432 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08694 FILM NUMBER: 95528333 BUSINESS ADDRESS: STREET 1: KEYSTONE GROUP INC STREET 2: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02116-5034 BUSINESS PHONE: 6173383241 MAIL ADDRESS: STREET 1: KEYSTONE GROUP INC STREET 2: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02116-5034 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE PAN PACIFIC RESOURCES FUND DATE OF NAME CHANGE: 19950328 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE AMERICA NATURAL RESOURCE FUND DATE OF NAME CHANGE: 19940725 485BPOS 1 STRATEGIC DEVELOPMENT FUND As Filed With the Securities and Exchange Commission on April 12, 1995 File Nos. 33-82520 and 811-8694 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. Post-Effective Amendment No. 1 [X] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 2 [X] KEYSTONE STRATEGIC DEVELOPMENT FUND (formerly Keystone Pan Pacific Resources Fund) -------------------------------------------- (Exact Name of Registrant as Specified in Charter) 200 Berkeley Street, Boston, Massachusetts 02116-5034 ----------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (617) 338-3200 Rosemary D. Van Antwerp, Esq., 200 Berkeley Street, Boston, MA 02116-5034 --------------------------------------------------- (Name and Address of Agent for Service) It is proposed that this filing will become effective: [X] immediately upon filing pursuant to paragraph (b) of Rule 485. on (date) pursuant to paragraph (b) of Rule 485. 60 days after filing pursuant to paragraph (a)(i) of Rule 485. on (date) pursuant to paragraph (a)(i) of Rule 485. 75 days after filing pursuant to paragraph (a)(ii) of Rule 485. on (date) pursuant to paragraph (a)(ii) of Rule 485. Registrant has registered an indefinite number or amount of its securities under the Securities Act of 1933 pursuant to Rule 24f-2, and Registrant will file a Rule 24f-2 Notice under the Investment Company Act of 1940 within two months after the close of its fiscal year ended March 31, 1995. KEYSTONE STRATEGIC DEVELOPMENT FUND CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT This Post-Effective Amendment No. 1 to Registration Statement consists of the following pages and documents: The Facing Sheet The Contents Page The Cross-Reference Sheet PART A Prospectus (Filed with Pre-Effective Amendment No. 1 to Registration Statement No. 33-82520/811-8694 and is incorporated by reference herein.) PART B Statement of Additional Information PART C PART C - OTHER INFORMATION - ITEMS 24 (a) and (b) Financial Statements Report of Independent Auditors (Filed with Pre-Effective Amendment No. 1 to Registration Statement No. 33-82520/811-8694 and is incorporated by reference herein.) Exhibit Listing PART C - OTHER INFORMATION - ITEMS 25-32- AND SIGNATURE PAGES Number of Holders of Securities Indemnification Business and Other Connections Principal Underwriter Location of Accounts and Records Undertakings Signatures Exhibits (including Powers of Attorney) KEYSTONE STRATEGIC DEVELOPMENT FUND Cross-Reference Sheet pursuant to Rule 495 under the Securities Act of 1933. Items in Part A of Form N-1A Prospectus Caption - --------- ------------------- (Filed with Pre-Effective Amendment No. 1 to Registration Statement No. 33-82520/811-8694 and is incorporated by reference herein.) 1 Cover Page 2 Fee Table 3 Not Applicable 4 Cover Page The Fund Investment Objective and Strategies Investment Restrictions Risk Factors 5 Fund Management and Expenses 5A Not Applicable 6 The Fund Dividends and Taxes Fund Shares Shareholder Services Pricing Shares 7 How to Buy Shares Alternative Sales Options Distribution Plans Pricing Shares Shareholder Services 8 How to Redeem Shares Contingent Deferred Sales Charge and Waiver of Sales Charge 9 Not Applicable Items in Part B of Form N-1A Statement of Additional Information Caption - --------- -------------------------------------------- 10 Cover Page 11 Table of Contents KEYSTONE STRATEGIC DEVELOPMENT FUND Cross-Reference Sheet continued. Items in Part B of Form N-1A Statement of Additional Information Caption - --------- -------------------------------------------- 12 Not Applicable 13 The Fund Investment Restrictions Appendix 14 Trustees and Officers 15 Additional Information 16 Investment Adviser and SubAdviser Principal Underwriter Distribution Plans Additional Information 17 Brokerage 18 The Fund Declaration of Trust 19 Valuation of Securities Sales Charges 20 Dividends and Taxes 21 Principal Underwriter 22 Standardized Total Return and Yield Quotations 23 Financial Statements (Unaudited) KEYSTONE STRATEGIC DEVELOPMENT FUND PART A PROSPECTUS (Filed with Pre-Effective Amendment No. 1 to Registration Statement No. 33-82520/811-8694 and is incorporated by reference herein.) KEYSTONE STRATEGIC DEVELOPMENT FUND PART B STATEMENT OF ADDITIONAL INFORMATION KEYSTONE STRATEGIC DEVELOPMENT FUND STATEMENT OF ADDITIONAL INFORMATION OCTOBER 7, 1994 SUPPLEMENTED APRIL 12, 1995 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. - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- 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 18 Investment Adviser and SubAdviser 19 Principal Underwriter 21 Declaration of Trust 22 Standardized Total Return and Yield Quotations 24 Additional Information 24 Appendix A-1 Financial Statements (Unaudited) F-1 - -------------------------------------------------------------------------------- THE FUND - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- DISTRIBUTION PLANS - -------------------------------------------------------------------------------- Rule 12b-1 under the 1940 Act permits investment companies, such as the Fund, to use their assets to bear expenses of distributing their shares if they comply with various conditions, including adoption of a distribution plan containing certain provisions set forth in Rule 12b-1. 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. - -------------------------------------------------------------------------------- TRUSTEES AND OFFICERS - -------------------------------------------------------------------------------- Trustees and officers of the Fund, their principal occupations and some of their affiliations over the last five years are as follows: *ALBERT H. ELFNER, III: President, Trustee and Chief Executive Officer of the Fund; Chairman of the Board, President, Director and Chief Executive Officer of Keystone Group, Inc. ("Keystone Group"), President and Trustee or Director of Keystone America Capital Preservation and Income Fund, Keystone America Intermediate Term Bond Fund, Keystone America Strategic Income Fund, Keystone America World Bond Fund, Keystone Tax Free Income Fund, Keystone America Sate Tax Free Fund, Keystone America State Tax Free Fund - Series II, Keystone America Fund For Total Return, Keystone America Global Opportunities Fund, Keystone America Hartwell Emerging Growth Fund, Inc., Keystone America Hartwell Growth Fund, Inc., Keystone America Omega Fund, Inc., Keystone Fund of the Americas - Luxembourg and Keystone Fund For The Americas - U.S., Keystone Strategic Development Fund (collectively, "Keystone America Funds"); Keystone Custodian Funds, Series B- 1, B-2, B-4, K-1, K-2, S-1, S-3, and S-4; Keystone International Fund, Keystone Precious Metals Holdings, Inc., Keystone Tax Free Fund, Keystone Tax Exempt Trust, Keystone Liquid Trust (collectively, "Keystone Custodian Funds"); Keystone Institutional Adjustable Rate Fund and Master Reserves Trust (all such funds, collectively, "Keystone Group Funds"); Director, Chairman of the Board, Chief Executive Officer and Vice Chairman of Keystone Custodian Funds, Inc. ("Keystone"); Chairman of the Board and Director of Keystone Investment Management Corporation ("KIMCO") and Keystone Fixed Income Advisors ("KFIA"); Director, Chairman of the Board, Chief Executive Officer and President of Keystone Man- agement,Inc. ("Keystone Management"), Keystone Software Inc. ("Keystone Software"); Director and President of Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"), Keystone Asset Corporation, Keystone Capital Corporation, and Keystone Trust Company; Director of Keystone Distributors, Inc. ("KDI"), Keystone Investor Resource Center, Inc. ("KIRC"), and Fiduciary Investment Company, Inc. ("FICO"); Director and Vice President of Robert Van Partners, Inc.; Director of Boston Children's Services Association and Trustee of Anatolia College, Middlesex School, and Middlebury College; Member, Board of Governors, New England Medical Center and New World Bank. FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Professor, Finance Department, George Washington University; President, Amling & Company (investment advice); Member, Board of Advisers, Credito Emilano (banking); and former Economics and Financial Consultant, Riggs National Bank. CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Investment Counselor to Appleton Partners, Inc.; former Managing Director, Seaward Management Corporation (investment advice); and former Director, Executive Vice President and Treasurer, State Street Research & Management Company (investment advice). *GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of Keystone Group; Chairman of the Board and Trustee or Director of all other Keystone Group Funds; Director and Chairman of the Board of Hartwell Keystone; Chairman of the Board and Trustee of Anatolia College; Trustee of University Hospital (and Chairman of its Investment Committee); former Chairman of the Board and Chief Executive Officer of Keystone Group; and former Chief Executive Officer of the Fund. EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Executive Director, Coalition of Essential Schools, Brown University 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; Chairman, Environmental Warranty, Inc., and Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of Connecticut Natural Gas Corporation, Trust Company of Connecticut, Hartford Hospital, Old State House Association and Enhanced Financial Services, Inc.; Member, Georgetown College Board of Advisors; Chairman, Board of Trustees, Hartford Graduate Center; Trustee, Kingswood- Oxford School and Greater Hartford YMCA; former Director, Executive Vice President and Vice Chairman of The Travelers Corporation; and former Managing Director of Russell Miller, Inc. ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano, P.C.; President, Nassau County Bar Association; 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, KDI, Keystone Asset Corporation, Keystone Capital Corporation, Keystone Trust Company; Treasurer of KIMCO, Robert Van Partners, Inc., and FICO; Treasurer and Director of Keystone Management, Keystone Software, Inc., and Hartwell Keystone; Vice President and Treasurer of KFIA; and Director of KIRC. JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of all other Keystone Group Funds; and President of Keystone. KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone Group Funds; Vice President of Keystone Group; Assistant Treasurer of FICO and Keystone; and former Vice President and Treasurer of KIRC. ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior Vice President and Secretary of all other Keystone Group Funds; Senior Vice President, General Counsel and Secretary of Keystone; Senior Vice, General Counsel, Secretary and Director of KDI, Keystone Management, and Keystone Software; Senior Vice President and General Counsel of KIMCO; Senior Vice President, General Counsel and Director of FICO and KIRC; Senior Vice President and Secretary of Hartwell Keystone and Robert Van Partners, Inc.; Vice President and Secretary of KFIA; Senior Vice President, General Counsel and Secretary of Keystone Group, Keystone Asset Corporation, Keystone Capital Corporation and Keystone Trust Company. * This Trustee may be considered an "interested person" within the meaning of the 1940 Act. Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their positions as officers and/or Directors of Keystone Group and several of its affiliates, including Keystone, KDI and KIRC. Mr. Elfner and Mr. Bissell both own shares of Keystone Group. Mr. Elfner is Chairman of the Board, Chief Executive Officer and Director of Keystone Group. Mr. Bissell is a Director of Keystone Group. 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. - -------------------------------------------------------------------------------- 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." - -------------------------------------------------------------------------------- INVESTMENT ADVISER AND SUBADVISER - -------------------------------------------------------------------------------- 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, 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION - -------------------------------------------------------------------------------- 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. As of March 31, 1995, Merrill Lynch Pierce Fenner & Shuths, Attn: Book Entry, 4800 Deer Lake Dr. E 3rd FL, Jacksonville, FL 32246-6468 owned of record 15.72% of the Fund's outstanding Class A shares. As of March 31, 1995, Merrill Lynch Pierce Fenner & Shuths, Attn: Book Entry, 4800 Deer Lake Dr. E 3rd FL, Jacksonville, FL 32246-6468 owned of record 49.41% of the Fund's outstanding Class B shares. As of March 31, 1995, the following shareholders owned 5% or more of the outstanding Class C shares of the Fund: Paine Webber FBO, Carolyn P. Dayani TTEE, Carolyn P. Dayani REV TRUST, 5225 E. Dessert Vista Rd., Paradise Valley, AZ 85253-3301 owned 6.45%; Paine Webber for the benefit of Carol T. Miller, 118 West 119th St., Kansas City , MO 64145-1065 owned 5.28%. Except as otherwise stated in its prospectus or required by law, the Fund reserves the right to change the terms of the offer stated in its prospectus without shareholder approval, including the right to impose or change fees for services provided. No dealer, salesman or other person is authorized to give any information or to make any representation not contained in the Fund's prospectus, statement of additional information or in supplemental sales literature issued by the Fund or KDI, and no person is entitled to rely on any information or representation not contained therein. The Fund's prospectus and statement of additional information omit certain information contained in the Fund's Registration Statement filed with the Commission, which may be obtained from the Commission's principal office in Washington, D.C. upon payment of the fee prescribed by the rules and regulations promulgated by the Commission. The Fund is one of 15 different investment companies in the family of Keystone America Funds. The Keystone America Funds offer a range of choices to serve shareholder needs. In addition to the Fund, the Keystone America Fund Family includes the following funds: KEYSTONE AMERICA CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income, consistent with low volatility of principal, by investing in adjustable rate securities issued by the U.S. government, its agencies or instrumentalities. KEYSTONE AMERICA FUND FOR TOTAL RETURN - Seeks 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 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 GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from U.S. government securities. KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital appreciation by investment primarily in small and medium-sized companies in a relatively early stage of development that are principally traded in the over-the-counter market. KEYSTONE AMERICA HARTWELL GROWTH FUND, INC. - Seeks capital appreciation by investment in securities selected for their long- term growth prospects. KEYSTONE AMERICA INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and price appreciation potential from investment grade corporate bonds. KEYSTONE AMERICA GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign and domestic securities. 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). KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long-term capital growth by investing primarily in equity securities. 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. KEYSTONE STRATEGIC DEVELOPMENT FUND SCHEDULE OF INVESTMENTS -- February 28, 1995 (Unaudited) Number Market of Shares Value - -------------------------------------------------------------------------------- COMMON STOCKS (67.8%) ARGENTINA (2.1%) Oil (2.1%) YPF S.A. - CDA 23,920 $ 446,063 - -------------------------------------------------------------------------------- AUSTRALIA (16.3%) Oil (2.4%) Woodside Petroleum 135,800 506,342 - -------------------------------------------------------------------------------- Iron and Steel (4.3%) Broken Hill Proprietary Co. Ltd. 32,474 448,364 CRA Limited 35,400 451,648 - -------------------------------------------------------------------------------- 900,012 - -------------------------------------------------------------------------------- Metals and mining (9.5%) First Resources Development Fund 600,000 283,520 First Resources Development Fund, options 600,000 28,795 MIM Holdings Limited 337,000 517,543 QNI Limited 150,000 208,210 Savage Resources 664,000 397,106 Western Mining Corp. 102,200 547,823 - -------------------------------------------------------------------------------- 1,982,997 - -------------------------------------------------------------------------------- BRAZIL (0.8%) Telecommunications (0.8%) Telecomunicacoes Brasileiras S.A. 5,900 173,313 - -------------------------------------------------------------------------------- CANADA (11.2%) Oil (3.5%) Arakis Energy Corporation 37,200 237,150 Canadian Occidental Petroleum Ltd. 20,950 488,573 - -------------------------------------------------------------------------------- 725,723 - -------------------------------------------------------------------------------- Metals and mining (6.0%) Alcan Aluminum Ltd. 15,200 369,475 Inco Ltd. 17,300 463,969 Potash Corp. of Saskatchewan, Inc. 11,500 414,663 - -------------------------------------------------------------------------------- 1,248,107 - -------------------------------------------------------------------------------- Precious metals (1.7%) TVX Gold Inc. 53,200 348,342 - -------------------------------------------------------------------------------- FRANCE (3.6%) Oil (2.6%) Total S.A. 9,775 540,737 - -------------------------------------------------------------------------------- Oil Service (1.0%) Coflexip 23,920 199,803 - -------------------------------------------------------------------------------- INDONESIA (2.4%) Chemicals (2.4%) Pt. Tri Polyta Indonesia 20,400 489,600 - -------------------------------------------------------------------------------- JAPAN (3.0%) Metals and mining (3.0%) Sumitomo Metal Industries, Ltd. 219,000 628,209 - -------------------------------------------------------------------------------- KEYSTONE STRATEGIC DEVELOPMENT FUND SCHEDULE OF INVESTMENTS - February 28, 1995 (continued) Number Market of Shares Value - -------------------------------------------------------------------------------- KOREA (2.1 %) Utilities (2.1%) Korea Electric Power Corp. 23,100 433,125 - -------------------------------------------------------------------------------- MEXICO (1.7%) Precious metals (0.5%) Industrias Penoles S.A. de C.V. 50,000 99,916 - -------------------------------------------------------------------------------- Telephone Utilities (1.2%) Telefonos De Mexico 8,900 245,863 - -------------------------------------------------------------------------------- NEW ZEALAND (1.3%) Paper and Packaging (1.3%) Fletcher Challenge 4,000 10,012 Fletcher Challenge 108,500 270,236 - -------------------------------------------------------------------------------- 280,248 - -------------------------------------------------------------------------------- SWEDEN (1.4%) Electrical Products (1.4%) Asea AB, Series B 3,996 301,005 - -------------------------------------------------------------------------------- UNITED KINGDOM (4.0%) Iron and Steel (1.0%) British Steel PLC 83,000 209,636 - -------------------------------------------------------------------------------- Metals and mining(3.0%) RTZ Corp. 37,800 430.974 - -------------------------------------------------------------------------------- Oil (1.0%) Lasmo 76,400 185,707 - -------------------------------------------------------------------------------- UNITED STATES (17.9%) Capital Goods (8.1%) AGCO Corp. 21,000 543,375 Caterpillar Inc. 11,400 588,525 CBI Industries Inc. 14,100 341,925 Fluor Corp 4,600 224,250 - -------------------------------------------------------------------------------- 1,698,075 - -------------------------------------------------------------------------------- Metals and mining (1.4%) Phelps Dodge Corp. 5,400 294,300 - -------------------------------------------------------------------------------- Precious metals (3.0%) Homestake Mining Co. 23,000 356,500 Santa Fe Pacific Gold Corp. 24,000 261,000 - -------------------------------------------------------------------------------- 617,500 - -------------------------------------------------------------------------------- Natural Gas (1.8%) Enron Global Power & Pipelines 16,000 374,000 - -------------------------------------------------------------------------------- Oil Services (2.0%) Schlumberger, Ltd. 7,200 409,500 - -------------------------------------------------------------------------------- Paper & Packaging (1.6%) Weyerhaeuser Co. 8,400 342,300 - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost -$12,220,164) 14,111,397 - -------------------------------------------------------------------------------- PREFERRED STOCKS (1.8%) BRAZIL (1.8%) Iron and Steel (1.8%) - -------------------------------------------------------------------------------- Vale do Rio Doce Navegacao S.A. 2,586,000 377,030 - -------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (Cost - $476,972) 377,030 ================================================================================ Maturity Market Value Value - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS (30.4%) REPURCHASE AGREEMENT (30.4.%) Investments in repurchase agreements, in a joint trading account, 6.06%, maturing 3/1/95 6,336,000 6,336,000 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (Cost - $22,467,308) 20,824,427 ================================================================================ FOREIGN CURRENCY HOLDINGS (0.0%) (Cost -- $1,922) 1,937 OTHER ASSETS AND LIABILITIES - NET (0.00%) 4,454 - -------------------------------------------------------------------------------- NET ASSETS (100.0%) $20,830,818 - -------------------------------------------------------------------------------- NOTES TO SCHEDULE OF INVESTMENTS (a) The repurchase agreements are fully collateralized by U.S. government and/or agency obligations based on market prices at the date of the portfolio. KEYSTONE STRATEGIC DEVELOPMENT FUND FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period)
CLASS A SHARES CLASS B SHARES CLASS C SHARES ------------------- ------------------- ------------------ OCTOBER 18, 1994 OCTOBER 18, 1994 OCTOBER 18, 1994 (DATE OF INITIAL (DATE OF INITIAL (DATE OF INITIAL PUBLIC OFFERING) TO PUBLIC OFFERING) TO PUBLIC OFFERING) TO FEBRUARY 28 1995 FEBRUARY 28 1995 FEBRUARY 28, 1995 ------------------- ------------------- -------------------- NET ASSET VALUE: BEGINNING OF YEAR $10.00 $ 10.00 $ 10.00 - --------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Investment income-net (0.010) (0.025) (0.035) Net gains/losses on investment and foreign currency related transactions (1.260) (1.275) (1.265) - --------------------------------------------------------------------------------------------- Total income from investment operations (1.270) (1.300) (1.300) - --------------------------------------------------------------------------------------------- NET ASSET VALUE: END OF YEAR $ 8.73 $ 8.70 $ 8.70 - --------------------------------------------------------------------------------------------- TOTAL RETURN (12.70%) (13.00%) (13.00%) RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Operating and management expenses 2.87% 3.63% 3.72% Investment income-net (0.32%) (1.05%) (1.17%) Portfolio turnover rate 16% 16% 16% NET ASSETS, END OF PERIOD (THOUSANDS) $ 4,768 $14,717 $ 1,345 - --------------------------------------------------------------------------------------------- Excluding applicable sales charges. Annualized Figures are net of expense reimbursement by Keystone in connection with mandatory state expense limitations. Before expense reimbursement the "ratio of operating and management expenses to average net assets" would have been 2.99% for class A, 3.75% for class B and 3.77% for class C (on an annualized basis) for the period October 18, 1994 to February 28, 1995.
See Notes to Financial Statements KEYSTONE STRATEGIC DEVELOPMENT FUND STATEMENT OF ASSETS AND LIABILITIES (Unaudited) FEBRUARY 28, 1995 - -------------------------------------------------------------------------------- ASSETS: Investments at market value (identified cost-- $16,129,386)(Note 1) $ 14,488,427 Repurchase Agreements (identified cost--6,336,000) (Note 1) 6,336,000 Foreign currency holdings (identified cost -- 1,922) (Note 1) 1,937 Cash 724 Receivable for: Foreign currency sold 2,587,233 Dividends and interest 25,380 Fund shares sold 56,781 Miscellaneous 6,674 Deferred organization expense (Note 1) 44,402 Prepaid expenses 29,824 - -------------------------------------------------------------------------------- Total assets 23,577,382 - -------------------------------------------------------------------------------- LIABILITIES: Payable for: Investments purchased 97,259 Currency purchased 2,583,516 Fund shares redeemed 2,000 Foreign taxes withheld 1,508 Other accrued expenses 62,281 Total liabilities 2,746,564 - -------------------------------------------------------------------------------- NET ASSETS $ 20,830,818 - -------------------------------------------------------------------------------- NET ASSETS REPRESENTED BY: Paid-in-capital $ 23,208,094 Accumulated distributions in excess of investment income-net (52,737) Accumulated realized losses on investment and foreign currency related transactions-net (687,101) Net unrealized depreciation on investments and foreign currency related transactions (1,637,438) - -------------------------------------------------------------------------------- Total net assets $ 20,830,818 - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE AND REDEMPTION PRICE PER SHARE (NOTE 2): Class A Shares $8.73 546,511 shares outstanding) $ 4,768,473 Class B Shares $8.70 1,691,340 shares outstanding) 14,717,338 Class C Shares $8.70 154,604 shares outstanding) 1,345,007 - -------------------------------------------------------------------------------- $20,830,818 - -------------------------------------------------------------------------------- OFFERING PRICE PER SHARE: Class A Shares (including sales charges of 5.75%) (Note 2) $9.26 - -------------------------------------------------------------------------------- Class B Shares $8.70 - -------------------------------------------------------------------------------- Class C Shares $8.70 - -------------------------------------------------------------------------------- See Notes to Financial Statements KEYSTONE STRATEGIC DEVELOPMENT FUND STATEMENT OF OPERATIONS (Unaudited) PERIOD FROM OCTOBER 13, 1994 (COMMENCEMENT OF OPERATIONS) TO FEBRUARY 28, 1995 - -------------------------------------------------------------------------------- INVESTMENT INCOME (NOTE 1): Interest $114,312 Dividends (net of foreign withholding taxes of $15,313) 25,693 - -------------------------------------------------------------------------------- Total income 140,005 - -------------------------------------------------------------------------------- EXPENSES (NOTES 1, 2 AND 4): Management fee $57,970 Shareholder services 13,382 Accounting 10,160 Auditing and legal 23,045 Custodian fees 21,668 Printing 14,971 Distribution Plan and Service fee expenses 47,818 Registration fees 6,777 Amortization of organization expense 3,097 Miscellaneous expenses 526 - -------------------------------------------------------------------------------- Total expenses 199,414 Less: Reimbursement from Investment Advisor (Note 4) (6,672) - -------------------------------------------------------------------------------- Net expenses 192,742 Investment income-net (52,737) - -------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN CURRENCY RELATED TRANSACTIONS-NET: Realized loss on: Investments (453,473) Foreign currency related transactions (233,628) - -------------------------------------------------------------------------------- Realized loss on investment and foreign currency related transactions -- net (687,101) - -------------------------------------------------------------------------------- Unrealized appreciation (depreciation) on investments and foreign currency related transactions-net: Beginning of year 0 End of year (1,637,438) - -------------------------------------------------------------------------------- (1,637,438) Net change in unrealized appreciation or depreciation (1,637,438) - -------------------------------------------------------------------------------- Net loss on investment and foreign currency related transactions (2,324,539) - -------------------------------------------------------------------------------- Net decrease in net assets resulting from operations ($2,377,276) - -------------------------------------------------------------------------------- See Notes to Financial Statements KEYSTONE STRATEGIC DEVELOPMENT FUND STATEMENTS OF CHANGES IN NET ASSETS (Unaudited) PERIOD FROM OCTOBER 10, 1994 (COMMENCEMENT OF OPERATIONS) FEBRUARY 28, 1995 - -------------------------------------------------------------------------------- OPERATIONS: Investment income (loss)-net (Note 1) ($52,737) Realized loss on investment and foreign currency related transactions-net (Notes 1 and 3) (687,101) Net change in unrealized appreciation or depreciation on investments and foreign currency related transactions (1,637,438) - -------------------------------------------------------------------------------- Net decrease in net assets resulting from operations (2,377,276) - -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 2): Proceeds from shares sold - Class A Shares 5,657,416 Proceeds from shares sold - Class B Shares 17,080,204 Proceeds from shares sold - Class C Shares 1,567,360 Payments for shares redeemed - Class A Shares (374,862) Payments for shares redeemed - Class B Shares (746,238) Payments for shares redeemed - Class C Shares (75,786) - -------------------------------------------------------------------------------- Net increase in net assets resulting from capital share transactions 23,108,094 - -------------------------------------------------------------------------------- Total increase in net assets 20,730,818 NET ASSETS: Beginning of year 100,000 - -------------------------------------------------------------------------------- End of year $20,830,818 - -------------------------------------------------------------------------------- See Notes to Financial Statements NOTES TO FINANCIAL STATEMENTS (1.) SIGNIFICANT ACCOUNTING POLICIES Keystone Strategic Development Fund (the "Fund") is a Massachusetts business trust for which Keystone Custodian Funds, Inc. ("Keystone") is the investment adviser. The Fund is registered under the Investment Company Act of 1940 as a diversified, open-end investment company. The Fund currently offers Class A, Class B and Class C shares. Class A shares are offered at a public offering price which includes a maximum sales charge of 5.75% payable at the time of purchase. Class B shares are sold subject to a contingent deferred sales charge payable upon redemption which decreases depending on how long the shares have been held. Class C shares are sold subject to a contingent deferred sales charge payable upon redemption within one year of purchase. Class C shares are available only through dealers who have entered into special distribution agreements with Keystone Distributors, Inc. ("KDI"), the Fund's principal underwriter. Equitilink International Management Limited ("EIML"), acts as sub- advisor to the Fund. Subject to the supervision of the Fund's Board of Trustees and Keystone, EIML provides investment supervision and furnishes an investment program for certain assets of the Fund, as well as providing research and advice concerning the purchase and sale of securities by the Fund. Keystone is a wholly-owned subsidiary of Keystone Group, Inc. ("KGI"), a Delaware corporation. KGI is privately owned by an investor group consisting of members of current and former management of Keystone. Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer agent. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles. A. Investments, including American Depository Receipts ("ADRs"), are usually valued at the closing sales price or, in the absence of sales and for over-the-counter securities, the mean of bid and asked quotations. Management values the following securities at prices it deems in good faith to be fair: (a) securities (including restricted securities) for which complete quotations are not readily available and (b) listed securities if, in the opinion of management, the last sales price does not reflect a current value or if no sale occurred. ADRs, which are certificates representing shares of foreign securities deposited in domestic and foreign banks, are traded and valued in United States dollars. Those securities traded in foreign currency amounts are translated into United States dollars as follows: market value of investments, assets, and liabilities at the daily rate of exchange; and purchases and sales of investments, income, and expenses at the rate of exchange prevailing on the respective dates of such transactions. Short-term investments maturing in sixty days or less are valued at amortized cost (original purchase cost as adjusted for amortization of premium or accretion of discount) which, when combined with accrued interest approximates market. Short-term investments maturing in more than sixty days for which market quotations are readily available are valued at current market value. Short-term investments maturing in more than sixty days when purchased which are held on the sixtieth day prior to maturity are valued at amortized cost (market value on the sixtieth day adjusted for amortization of premium or accretion of discount) which, when combined with accrued interest, approximates market. Investments denominated in a foreign currency are adjusted daily to reflect changes in exchange rates. B. The Fund enters into currency and other financial futures contracts as a hedge against changes in interest or currency exchange rates. A futures contract is an agreement between two parties to buy and sell a specific amount of a commodity, security, financial instrument, or, in the case of a stock index, cash at a set price on a future date. Upon entering into a futures contract the Fund is required to deposit with a broker an amount ("initial margin") equal to a certain percentage of the purchase price indicated in the futures contract. Subsequent payments ("variation margin") are made or received by the Fund each day, as the value of the underlying instrument or index fluctuates, and are recorded for book purposes as unrealized gains or losses by the Fund. For federal tax purposes, any futures contracts which remain open at fiscal year-end are marked-to-market and the resultant net gain or loss is included in federal taxable income. In addition to market risk, the Fund is subject to the credit risk that the other party will not complete the obligations of the contract. C. Securities transactions are accounted for on the trade date. Realized gains and losses are recorded on the identified cost basis. Interest income is recorded on the accrual basis and dividend income is recorded on the ex-dividend date. D. The Fund has qualified, and intends to qualify in the future, as a regulated investment company under the Internal Revenue Code of 1986, as amended ("Internal Revenue Code"). Thus, the Fund expects to be relieved of any federal income tax liability by distributing all of its net taxable investment income and net taxable capital gains, if any, to its shareholders. The Fund intends to avoid excise tax liability by making the required distributions under the Internal Revenue Code. E. When the Fund enters into a repurchase agreement (a purchase of securities whereby the seller agrees to repurchase the securities at a mutually agreed upon date and price) the repurchase price of the securities will generally equal the amount paid by the Fund plus a negotiated interest amount. The seller under the repurchase agreement will be required to provide securities ("collateral") to the Fund whose value will be maintained at an amount not less than the repurchase price, and which generally will be maintained at 101% of the repurchase price. The Fund monitors the value of collateral on a daily basis, and if the value of the collateral falls below required levels, the Fund intends to seek additional collateral from the seller or terminate the repurchase agreement. If the seller defaults, the Fund would suffer a loss to the extent that the proceeds from the sale of the underlying securities were less than the repurchase price. Any such loss would be increased by any cost incurred on disposing of such securities. If bankruptcy proceedings are commenced against the seller under the repurchase agreement, the realization on the collateral may be delayed or limited. Repurchase agreements entered into by the Fund will be limited to transactions with dealers or domestic banks believed to present minimal credit risks, and the Fund will take constructive receipt of all securities underlying repurchase agreements until such agreements expire. Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with certain other Keystone funds, may transfer uninvested cash balances into a joint trading account. These balances are invested in one or more repurchase agreements that are collateralized by U.S. Treasury and/or Federal Agency obligations. F. In connection with portfolio purchases and sales of securities denominated in a foreign currency, the Fund may enter into forward foreign currency exchange contracts ("contracts"). Additionally, from time to time the Fund may enter into contracts to hedge certain foreign currency assets. Contracts are recorded at market value and marked-to-market daily. Realized gains and losses arising from such transactions are included in net realized gain (loss) on foreign currency related transactions. In addition to market risk, the Fund is subject to the credit risk that the other party will not complete the obligations of the contract. G. The Fund distributes net investment income and net capital gains, if any, to shareholders annually. Distributions to shareholders are determined in accordance with income tax regulations, and are recorded on the ex-dividend date. Distributions from taxable net investment income and net capital gains can exceed book basis net investment income and net capital gains. (2) CAPITAL SHARE TRANSACTIONS The Trust Agreement authorizes the issuance of an unlimited number of shares of beneficial interest without par value. Transactions in shares of the Fund were as follows: Class A Shares ------------------- October 17, 1994 (Date of Initial Public Offering) to February 28, 1995 ------------------- Shares sold 586,733 Shares redeemed (40,222) Shares issued in reinvestment of distributions from net investment income and in excess of net investment income -0- --------- Net increase (decrease) 546,511 ========= Class B Shares ------------------- October 17, 1994 (Date of Initial Public Offering) to February 28, 1995 ------------------- Shares sold 1,772,194 Shares redeemed (80,854) Shares issued in reinvestment of distributions from net investment income and in excess of net investment income -0- --------- Net increase (decrease) 1,691,340 ========= Class C Shares ------------------- October 17, 1994 (Date of Initial Public Offering) to February 28, 1995 ------------------- Shares sold 163,295 Shares redeemed (8,691) Shares issued in reinvestment of distributions from net investment income and in excess of net investment income -0- --------- Net increase (decrease) 154,604 ========= The Fund bears some of the costs of selling its shares under a Distribution Plan adopted with respect to its Class A, Class B and Class C shares pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act"). The Class A Distribution Plan provides for payments which are currently limited to 0.25% annually of the average daily net asset value of Class A shares to pay expenses of the distribution of Class A shares. Amounts paid by the Fund to KDI under the Class A distribution Plan are currently used to pay others, such as dealers, service fees at an annual rate of up to 0.25% of the average net asset value of shares sold by such and remaining outstanding on the books of the Fund for specified periods. The Class B Distribution Plan provides for payments at an annual rate of up to 1.00% of the average daily net asset value of Class B shares to pay expenses of the distribution of Class B shares. Amounts paid by the Fund under the Class B Distribution Plan are currently used to pay others (dealers) (i) a commission at the time of purchase normally equal to 3.00% of the value of each share sold; and/or (ii) service fees at an annual rate of 0.25% of the average net asset value of shares sold by such others and remaining outstanding on the books of the Fund for specified periods. The Class C Distribution Plan provides for payments at an annual rate of up to 1.00% of the average daily net asset value of Class C shares to pay expenses for the distribution of Class C shares. Amounts paid by the Fund under the Class C Distribution Plan are currently used to pay others (dealers) (i) a payment at the time of purchase of 1.00% of the value of each share sold, such payment to consist of a commission in the amount of 0.75% and the first year's service fee in advance in the amount of 0.25%; and (ii) beginning approximately 15 months after purchase, a commission at an annual rate of 0.75% (subject to applicable limitations imposed by the rules of the National Association of Securities Dealers, Inc.) and service fees at an annual rate of 0.25%, respectively, of the average net asset value of each share sold by such others and remaining outstanding on the books of the Fund for specified periods. Each of the Distribution Plans may be terminated at any time by vote of the Independent Trustees or by vote of a majority of the outstanding voting shares of the respective class. However, after the termination of any Distribution Plan, at the discretion of the Board of Trustees, payments to KDI may continue as compensation for its services which have been earned while the Distribution Plan was in effect. For the period from October 17, 1994 to February 28, 1995, the Fund paid KDI $3,384, $39,897 and $4,537 under its Class A, Class B and Class C Distribution Plans, respectively. Under a Rule of the NASD, the maximum uncollected amounts for which KDI may seek payment from the Fund under its Distribution Plans are $619,476 and $9,573, respectively, for Class B and Class C, as of February 28, 1995. Presently, the Fund's class-specific expenses are limited to Distribution Plan expenses incurred by a class of shares. (3.) SECURITIES TRANSACTIONS For the period ended February 28, 1995, purchases and sales of investment securities were as follows: Cost of Proceeds Purchases from Sales Portfolio securities.......$ 17,720,453 $ 912,871 Short-term investments..... 466,815,000 460,479,000 -------------- -------------- $ 484,535,453 $ 461,391,871 ============== ============== (4.) INVESTMENT MANAGEMENT AND TRANSACTIONS WITH AFFILIATES Under the terms of the Investment Advisory and Management Agreement between KCF and the Fund, dated September 21, 1994, KCF provides investment management and administrative services to the Fund. In return, KCF is paid a management fee at the annual rate of 1.00% of the aggregate net asset value of the Fund. KCF has entered into a Sub-Investment Advisory Agreement with EIML, dated September 21, 1994, under which EIML provides investment research and advice to the Fund in both a non-discretionary and a discretionary capacity. For its services EIML 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) for services rendered in a discretionary capacity, 10% of Keystone's net fee for such month. During the period ended February 28, 1995, the Fund paid or accrued to KCF investment management and administrative service fee of $57,970, which represented 4.11% of the Fund's average net assets on an annualized basis. Keystone paid or accrued a sub-advisory fee of $9,710 to EIML for the period ended February 28, 1995. The Fund is subject to certain state annual expense limits, the most restrictive of which is as follows: 2.5% of the first $30 million of Fund Assets, 2.0% of the next $70 million of Fund assets, and 1.5% of Fund assets over $100 million. Pursuant to such limitations, KCF reimbursed the Fund $6,672 during the period ended February 28, 1995. During the period from October 17, 1994 to February 28, 1995, the Fund paid or accrued to KIRC $10,160 as reimbursement for certain accounting, tax and printing services and $13,382 for transfer agent fees. Certain officers and/or Directors of Keystone are also officers and/or Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no compensation directly from the Fund. Currently, the Independent Trustees of the Fund receive no compensation for their services. (5.) FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS At February 28, 1995, the Fund had entered into the following currency exchange contracts that obligate the Fund to deliver currencies at specified future dates. The unrealized appreciation of $3,543 on these contracts is included in the accompanying financial statements. The terms of the open contracts are as follows: Exchange Currency to U.S. $ value Currency to U.S. $ value date be delivered as of 2/28/95 be received as of 2/28/95 5/10/95 3,361,415 $ 2,486,257 2,489,800 $ 2,489,800 Australian $ U.S. $ (6.) DISTRIBUTIONS TO SHAREHOLDERS The Fund intends to distribute to its shareholders dividends from net investment income and net realized long-term capital gains, if any, annually. Any taxable distribution which is declared in December and paid in the following fiscal year will be taxable to shareholders in the year declared. KEYSTONE STRATEGIC DEVELOPMENT FUND PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits Item 24(a). Financial Statements: All financial statements listed below are included in Registrant's Statement of Additional Information. Statement of Investments* For the period October 13, 1994 (commencement of operations) through February 28, 1995 Financial Highlights For the period October 13, 1994 (commencement of operations) through February 28, 1995 Statement of Assets and For the period October 13, 1994 (commencement Liabilities* of operations) through February 28, 1995 Statement of Operations* For the period October 13, 1994 (commencement of operations) through February 28, 1995 Statement of Change in For the period October 13, 1994 (commencement Net Assets* of operations) through February 28, 1995 Notes to Financial Statements* For the period October 13, 1994 (commencement of operations) through February 28, 1995 SUPPORTING SCHEDULES All other schedules are omitted as the required information is inapplicable. ________________ * Unaudited (24)(b) Exhibits (1) (i) A copy of the Registrant's Declaration of Trust was filed with Registration Statement No. 33-82520/811- 8694 as Exhibit 24(b)(1), and is incorporated by reference herein. (ii) A copy of the Registrant's First Supplemental Declaration of Trust was filed with Pre-Effective Amendment No. 1 to Registration Statement No. 33- 82520/811-8694 as Exhibit 24(b)(1), and is incorporated by reference herein. (2) A copy of the Registrant's current By-Laws was filed with Pre-Effective Amendment No. 1 to Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(2), and is incorporated by reference herein. (3) Not applicable. (4) A copy of the specimen share certificate will be filed by Amendment. (5) (i) A copy of the form of Investment Advisory and Management Agreement between Registrant and Keystone Custodian Funds, Inc. was filed with Pre-Effective Amendment No. 1 to Registration Statement No. 33- 82520/811-8694 as Exhibit 24(b)(5), and is incorporated by reference herein. (ii) A copy of the form of SubInvestment Advisory Agreement between Registrant and EquitiLink International Management Limited was filed with Pre- Effective Amendement No. 1 to Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(5), and is incorporated by reference herein. (6) (i) A copy of the form of Principal Underwriting Agreement between Registrant and Keystone Distributors, Inc. was filed with Pre-Effective Amendment No. 1 to Registration Statement No. 33- 82520/811-8694 as Exhibit 24(b)(6), and is incorporated by reference herein. (ii) A copy of the form of Dealer Agreement used by Keystone Distributors, Inc. was filed with Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(6), and is incorporated by reference herein. (7) Not applicable. (8) A copy of the form of Custody Agreement between Regis- trant and State Street Bank and Trust Company was filed with Pre-Effective Amendment No.1 to Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(8), and is incorporated by reference herein. (24)(b) Exhibits continued. (9) Not applicable. (10) Opinion of counsel on the legality of the shares being registered was filed with Registration Statement No. 33- 82520/811-8694 as Exhibit 24(b)(10), and is incorporated by reference herein. (11) Consent as to use of Report of Registrant's independent auditors was filed with Pre-Effective Amendment No. 1 to Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(11), and is incorporated by reference herein. (12) Not applicable. (13) A copy of the Subscription Agreement between Registrant and Keystone Distributors, Inc. was filed with Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(13), and is incorporated by reference herein. (14) Copies of model plans used in the establishment of retirement plans in connection with which the Registrant will offer its securities were filed with Post-Effective Amendment No. 66 to the Registration Statement of Keystone Custodian Fund, Series K-1 (File No. 2-10527) as Exhibit 1(b)(14), and are incorporated by reference herein. (15) A copy of the form of each of Registrant's Class A, Class B and Class C Distribution Plans was filed with Pre- Effective Amendment No. 1 to Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(15), and is incorporated by reference herein. (16) Not applicable. (17) Not applicable. (18) Powers of Attorney are filed herewith. Item 25. Persons Controlled by or Under Common Control With Registrant Not applicable. Item 26. Number of Holders of Securities Number of Record Title of Class Holders as of March 31, 1995 Shares of Beneficial 541,983.341 Interest-Class A, without par value Shares of Beneficial 1,631,448.784 Interest-Class B, without par value Shares of Beneficial 155,019.712 Interest-Class C, without par value Item 27. Indemnification Provisions for the indemnification of the Registrant's Trustees and officers are contained in Article VIII of Registrant's Declaration of Trust, a copy of the form of which was filed with Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(1) and is incorporated by reference herein. Provisions for the indemnification of Keystone Distributors, Inc., the Registrant's Principal Underwriter, are contained in Section 9 of the Principal Underwriting Agreement between the Registrant and Keystone Distributors, Inc., a copy of the form of which was filed with Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(6) and is incorporated by reference herein. Provisions for the indemnification of Keystone Custodian Funds, Inc., Registrant's investment adviser, are contained in Section 6 of the Investment Advisory and Management Agreement between Registrant and Keystone Custodian Funds, Inc., a copy of the form of which was filed with Registration Statement No. 33- 82520/811-8694 as Exhibit 24(b)(5) and is incorporated by reference herein. Item 28. Businesses and Other Connections of Investment Adviser The following table lists the names of the various officers and directors of Keystone Custodian Funds, Inc., the Registrant's investment adviser, and their respective positions. For each named individual, the table lists, for at least the past two fiscal years, (i) any other organizations (excluding investment advisory clients) with which the officer and/or director has had or has substantial involvement; and (ii) positions held with such organizations. LIST OF OFFICERS AND DIRECTORS OF KEYSTONE CUSTODIAN FUNDS, INC.
Position with Name Keystone Custodian Funds, Inc. Other Business Affiliations - ----- ------------------------------ ---------------------------- Albert H. Elfner, III Chairman of the Board, Chief Chairman of the Board, Chief Executive Officer, Vice Chief Executive Officer, Chairman and Director President and Director: Keystone Group, Inc. Keystone Management, Inc. Keystone Software, Inc. Keystone Asset Corporation Keystone Capital Corp. Chairman of the Board and Director: Keystone Fixed Income Advisers, Inc. Keystone Investment Management Corporation President and Director: Keystone Trust Company Director or Trustee: Fiduciary Investment Company, Inc. Keystone Distributors, Inc. Keystone Investor Resource Center, Inc. Robert Van Partners, Inc. Boston Children's Services Associates Fiduciary Investment Company, Inc. Middlesex School Middlebury College Formerly Trustee: Neworld Bank Philip M. Byrne Director President and Director: Keystone Investment Management Corporation Senior Vice President: Keystone Group, Inc. Herbert L. Bishop, Jr. Senior Vice President None Donald C. Dates Senior Vice President None Gilman Gunn Senior Vice President None Edward F. Godfrey Director, Director, Senior Vice Chief Financial Treasurer: Senior Vice Keystone Group, Inc President, Keystone Distributors, Inc. Treasurer and Treasurer: . Chief Financial Keystone Investment Management Corporation Officer Keystone Management, Inc. Keystone Software, Inc. Fiduciary Investment Company, Inc. Treasurer and Director: Hartwell Keystone Advisers, Inc. James R. McCall Director and President None Ralph J. Spuehler, Jr. Director President and Director: Keystone Distributors,Inc. Senior Vice President and Director: Keystone Group, Inc. Treasurer: Hartwell Emerging Growth Fund, Inc. Hartwell Growth Fund,Inc. Director: Keystone Investor Resource Center, Inc. Keystone Management, Inc. Formerly President: Keystone Management, Inc. Formerly Treasurer: The Kent Funds Keystone Group, Inc. Keystone Custodian Funds, Inc. Rosemary D. Van Antwerp Senior Vice President, General Counsel, Senior Vice President and Secretary: General Counsel Keystone Group, Inc. and Secretary Senior Vice President and General Counsel: Keystone Investment Management Corporation Senior Vice President, General Counsel and Director: Keystone Investor Resource Center, Inc. Fiduciary Investment Company, Inc. Keystone Distributors, Inc. Keystone Management, Inc. Keystone Software, Inc. Senior Vice President and Secretary: Hartwell Keystone Advisers, Inc. Vice President and Secretary: Keystone Fixed Income Advisers, Inc. Formerly Assistant Secretary: The Kent Funds Harry Barr Vice President None Robert K. Baumback Vice President None Betsy A. Blacher Vice President None Francis X. Claro Vice President None Kristine R. Cloyes Vice President None Christopher P. Conkey Vice President None Richard Cryan Vice President None Maureen E. Cullinane Vice President None George E. Dlugos Vice President None Antonio T. Docal Vice President None Christopher R. Ely Vice President None Roland Gillis Vice President None Robert L. Hockett Vice President None Sami J. Karam Vice President None Donald M. Keller Vice President None George J. Kimball Vice President None JoAnn L. Lydon Vice President None John C. Madden, Jr. Vice President None Stephen A. Marks Vice President None Eleanor H. Marsh Vice President None Walter T. McCormick Vice President None Barbara McCue Vice President None Stanley M. Niksa Vice President None Robert E. O'Brien Vice President None Margery C. Parker Vice President None William H. Parsons Vice President None Daniel A. Rabasco Vice President None David L. Smith Vice President None Kathy K. Wang Vice President None Judith A. Warners Vice President None Marcia Waterman Vice President None J. Kevin Kenely Vice President None Joseph J. Decristofaro Vice President None Jean Susan Loewenberg Assistant Secretary Vice President and Counsel: Keystone Group, Inc. Vice President and Secretary: Keystone Trust Company Secretary: Keystone Investor Resource Center, Inc. Assistant Secretary: Keystone Asset Corporation Keystone Capital Corporation Keystone Distributors, Inc. Keystone Fixed Income Advisers, Inc. Keystone Management, Inc. Keystone Software, Inc. Hartwell Keystone Advisers, Inc. Clerk: Keystone Investment Management Corporation Fiduciary Investment Company, Inc. Assistant Secretary: Hartwell Keystone Advisers, Inc. Keystone Distributors, Inc. Colleen L. Mette Assistant Secretary Assistant Secretary: Keystone Distributors, Inc. Keystone Group, Inc. Kevin J. Morrissey Assistant Treasurer Vice President: Keystone Group, Inc. Assistant Treasurer: Fiduciary Investment Company, Inc. Formerly Assistant Treasurer: The Kent Funds
Item 29. Principal Underwriters Keystone Distributors, Inc., which acts as Registrant's principal underwriter, also acts as principal underwriter for the following entities: Keystone America Hartwell Emerging Growth Fund, Inc. Keystone America Hartwell Growth Fund, Inc. Keystone Custodian Fund, Series B-1 Keystone Custodian Fund, Series B-2 Keystone Custodian Fund, Series B-4 Keystone Custodian Fund, Series K-1 Keystone Custodian Fund, Series K-2 Keystone Custodian Fund, Series S-1 Keystone Custodian Fund, Series S-3 Keystone Custodian Fund, Series S-4 Keystone America Capital Preservation and Income Fund Keystone America Global Opportunities Fund Keystone America Government Securities Fund Keystone America Intermediate Term Bond Fund Keystone America Omega Fund, Inc. Keystone America State Tax Free Fund Keystone America Strategic Income Fund Keystone America Tax Free Income Fund Keystone America World Bond Fund Keystone Fund of the Americas Keystone Tax Free Fund Keystone Tax Exempt Trust Keystone Liquid Trust Keystone International Fund Inc. Keystone Precious Metals Holdings, Inc. (b) For information with respect to each officer and director of Registrant's acting principal underwriter, see the following pages: Item 29(b) (continued). Position and Name and Principal Position and Offices with Offices with Business Address Keystone Distributors, Inc. the Fund - ------------------ --------------------------- ------------- Ralph J. Spuehler* Director, President None Edward F. Godfrey* Director, Senior Vice Senior Vice President, Treasurer President and Chief Financial Officer Rosemary D. Van Antwerp Director, Senior Vice Senior Vice President, General Counsel President and Secretary Albert H. Elfner, III* Director President Charles W. Carr* Senior Vice President None Peter M. Delehanty* Senior Vice President None J. Kevin Kenely* Vice President and None Controller Frank O. Gebhardt Divisional Vice None 2626 Hopeton President San Antonio, TX 78230 C. Kenneth Molander Divisional Vice None 8 King Edward Drive President Londenderry, NH 03053 David S. Ashe Regional Manager and None 32415 Beaconsfield Vice President Birmingham, MI 48025 David E. Achzet Regional Vice President None 60 Lawn Avenue - Greenway 27 Stamford, CT 06902 William L. Carey, Jr. Regional Manager and None 4 Treble Lane Vice President Malvern, PA 19355 John W. Crites Regional Manager and None 2769 Oakland Circle W. Vice President Aurora, CO 80014 Richard J. Fish Regional Vice President None 309 West 90th Street New York, NY 10024 Michael E. Gathings Regional Manager and None 245 Wicklawn Way Vice President Roswell, GA 30076 Robert G. Holz, Jr. Regional Manager and None 313 Meadowcrest Drive Vice President Richardson, Texas 75080 Todd L. Kobrin Regional Manager and None 20 Iron Gate Vice President Metuchen, NJ 08840 Ralph H. Johnson Regional Manager and None 345 Masters Court, #2 Vice President Walnut Creek, CA 94598 Paul J. McIntyre Regional Manager and None Vice President Dale M. Pelletier Regional Manager and None 464 Winnetka Ave. Vice President Winnetka, IL 60093 Juliana Perkins Regional Manager and None 2348 West Adrian Street Vice President Newbury Park, CA 91320 Matthew D. Twomey Regional Manager and None 9627 Sparrow Court Vice President Ellicott City, MD 21042 Mitchell I. Weiser Regional Manager and None 7031 Ventura Court Vice President Parkland, FL 33067 Welden L. Evans Regional Banking Officer None 490 Huntcliff Green and Vice President Atlanta, GA 30350 Russell A. Haskell* Vice President None Robert J. Matson* Vice President None John M. McAllister* Vice President None Gregg A. Mahalich Vice President None 14952 Richards Drive W. Minnetonka, MN 55345 Burton Robbins Vice President None 1586 Folkstone Terrace Westlake Village, CA 91361 Thomas E. Ryan, III* Vice President None Peter Willis* Vice President None Raymond P. Ajemian* Manager and Vice President None Joan M. Balchunas* Assistant Vice President None Thomas J. Gainey* Assistant Vice President None Eric S. Jeppson* Assistant Vice President None Julie A. Robinson* Assistant Vice President None Peter M. Sullivan Assistant Vice President None 21445 Southeast 35th Way Issaquah, WA 98027 Jean S. Loewenberg* Assistant Secretary Assistant Secretary Colleen L. Mette* Assistant Secretary Assistant Secretary Dorothy E. Bourassa* Assistant Secretary Assistant Secretary * Located at 200 Berkeley Street, Boston, Massachusetts 02116-5034 Item 29(c). - Not applicable Item 30. Location of Accounts and Records 200 Berkeley Street Boston, Massachusetts 02116-5034 Keystone Investor Resource Center, Inc. 101 Main Street Cambridge, Massachusetts 02142 State Street Bank and Trust Company 1776 Heritage Drive Quincy, Massachusetts 02171 Data Vault Inc. 3431 Sharp Slot Road Swansea, Massachusetts 02777 Item 31. Management Services Not applicable. Item 32. Undertakings Registrant hereby undertakes to furnish each person to whom a copy of Registrant's prospectus is delivered with a copy of Registrant's latest annual report to shareholders upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for the effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) and the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, in The Commonwealth of Massachusetts, on the 12th day of April, 1995. KEYSTONE STRATEGIC DEVELOPMENT FUND By:/s/George S. Bissell ------------------------- George S. Bissell* Chairman of the Board *By:/s/Melina M. T. Murphy ------------------------- Melina M. T. Murphy** Attorney-in-Fact Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registrant's Registration Statement has been signed below by the following persons in the capacities indicated on the ____ day of April, 1995. SIGNATURES TITLE - ---------- ------ /s/George S. Bissell Trustee and Chairman of the Board George S. Bissell* /s/Albert H. Elfner,III Chief Executive Officer, President and Albert H. Elfner, III* Trustee /s/Kevin J. Morrissey Treasurer (Principal Financial Kevin J. Morrissey* and Accounting Officer) *By/s/Melina M. T. Murphy ---------------------- Melina M. T. Murphy** Attorney-in-Fact SIGNATURES TITLE - ---------- ------ /s/Frederick Amling Trustee - ------------------------ Frederick Amling* /s/Charles A. Austin, III Trustee - ------------------------ Charles A. Austin, III* /s/Edwin D. Campbell Trustee - ------------------------ Edwin D. Campbell* /s/Charles F. Chapin Trustee - ------------------------ Charles F. Chapin* /s/K. Dun Gifford Trustee - ------------------------ K. Dun Gifford* /s/Leroy Keith, Jr. Trustee - ------------------------ Leroy Keith, Jr.* /s/F. Ray Keyser, Jr. Trustee - ------------------------ F. Ray Keyser, Jr.* /s/David M. Richardson Trustee - ------------------------ David M. Richardson* /s/Richard J. Shima Trustee - ------------------------ Richard J. Shima* /s/Andrew J. Simons Trustee - ------------------------ Andrew J. Simons* *By:/s/Melina M. T. Murphy ------------------------- Melina M. T. Murphy** Attorney-in-Fact **Melina M. T. Murphy, by signing her name hereto, does hereby sign this document on behalf of each of the above-named individuals pursuant to powers of attorney duly executed by such persons and attached hereto as Exhibit 24(b)(18). INDEX TO EXHIBITS Page Number in Sequential Exhibit Number Exhibit Numbering System - ------------- ------- ---------------- 1 Declaration of Trust1 First Supplemental Declaration of Trust2 2 By-Laws2 5 Investment Advisory and Management Agreement2 SubAdvisory Agreement2 6 Principal Underwriting Agreement2 Dealer Agreement1 8 Custodian, Fund Accounting and Recordkeeping Agreement2 10 Opinion and Consent of Counsel1 11 Independent Auditor's Consent2 13 Subscription Agreement1 15 Distribution Plans2 18 Powers of Attorney _____________________ 1 Incorporated herein by reference to Registration Statement No. 33-82520/811-8694. 2 Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registration Statement No. 33-82520/811-8694. EX-99.24(B)(18) 2 POWER OF ATTORNEY EXHIBIT 99.24(b)(18) POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/George S. Bissell George S. Bissell Director/Trustee, Chairman of the Board Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and/or Chief Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Albert H. Elfner, III Albert H. Elfner, III Director/Trustee, President and Chief Executive Officer POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director, Trustee or officer and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Kevin J. Morrissey Kevin J. Morrissey Treasurer Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Frederick Amling Frederick Amling Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Charles A. Austin III Charles A. Austin III Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Edwin D. Campbell Edwin D. Campbell Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Charles F. Chapin Charles F. Chapin Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ K. Dun Gifford K. Dun Gifford Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Leroy Keith, Jr. Leroy Keith, Jr. Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ F. Ray Keyser,Jr. F. Ray Keyser, Jr. Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ David M. Richardson David M. Richardson Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Richard J. Shima Richard J. Shima Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/Andrew J. Simons Andrew J. Simons Director/Trustee Dated: December 14, 1994 -----END PRIVACY-ENHANCED MESSAGE-----