-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Epj/t+W4hBtDTXH734d91h1Dudvsml/cLhaX6XYrFEfFHADVBrvHxFHx4itmgCay 1d/6XpwPpaFnpF/DiOTrxw== 0000950156-96-000525.txt : 19960531 0000950156-96-000525.hdr.sgml : 19960531 ACCESSION NUMBER: 0000950156-96-000525 CONFORMED SUBMISSION TYPE: 485A24E PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19960530 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: 485A24E SEC ACT: 1933 Act SEC FILE NUMBER: 033-82520 FILM NUMBER: 96574658 FILING VALUES: FORM TYPE: 485A24E SEC ACT: 1940 Act SEC FILE NUMBER: 811-08694 FILM NUMBER: 96574659 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 485A24E 1 KEYSTONE STRATEGIC DEVELOPMENT FUND AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1996 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. 3 X and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ___ Amendment No. 4 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: ___ immediately upon filing pursuant to paragraph (b) ___ on (date) pursuant to paragraph (b) X 60 days after filing pursuant to paragraph (a)(I) ___ on (date) pursuant to paragraph (a)(I) ___ 75 days after filing pursuant to paragraph (a)(ii) ___ on (date) pursuant to paragraph (a)(ii) of Rule 485. The Registrant has filed a Declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940. A Rule 24f-2 Notice for the Registrant's last fiscal year was filed April 29, 1996. CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 - -------------------------------------------------------------------------------- Proposed Proposed Title of Maximum Maximum Securities Amount Offering Aggregate Amount of Being Being Price Per Offering Registration Registered Registered Unit* Price** Fee - -------------------------------------------------------------------------------- Shares of $1.00 Par 314,074 $11.49 $289,996 $100 Value - -------------------------------------------------------------------------------- * Computed under Rule 457(d) on the basis of the offering price per share at the close of business on May 23, 1996. ** The calculation of the maximum aggregate offering price is made pursuant to Rule 24e-2 under the Investment Company Act of 1940. 730,785 shares of the Fund were redeemed during its fiscal year ended March 31, 1996. Of such shares, 441,950 were used for a reduction pursuant to Rule 24f-2 during the current year. The remaining 288,835 shares are being used for a reduction in this filing. The Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940. A Rule 24f-2 Notice for Registrant's most recent fiscal year ended March 31, 1996 was filed on April 29, 1995. KEYSTONE STRATEGIC DEVELOPMENT FUND CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 3 TO REGISTRATION STATEMENT This Post-Effective Amendment No. 3 to Registration Statement consists of the following pages and documents: The Facing Sheet The Contents Page The Cross-Reference Sheet PART A Prospectus PART B Statement of Additional Information PART C PART C - OTHER INFORMATION - ITEMS 24(a) and 24(b) Financial Statements Independent Auditors' Report 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 Required by Rules 404 and 495 under the Securities Act of 1933. Items in Part A of Form N-1A Prospectus Caption - --------- ------------------ 1 Cover Page 2 Fee Table 3 Performance Data Financial Highlights 4 Cover Page The Fund Investment Objective and Strategies Investment Restrictions Risk Factors 5 Fund Management and Expenses Additional Information 5A Not Applicable 6 The Fund Dividends and Taxes Fund Shares Shareholder Services Pricing Shares 7 How to Buy Shares Distribution Plans Shareholder Services 8 How to Redeem Shares 9 Not applicable KEYSTONE STRATEGIC DEVELOPMENT FUND Items in Part B of Form N-1A Statement of Additional Information Caption - --------- ------------------------------------------- 10 Cover Page 11 Table of Contents 12 Not applicable 13 The Fund Investment Policies Investment Restrictions Brokerage Appendix 14 Trustees and Officers 15 Additional Information 16 Investment Adviser and SubAdviser Principal Underwriter Distribution Plans Sales Charges Additional Information 17 Brokerage 18 The Fund Declaration of Trust 19 Valuation of Securities Distribution Plans 20 Dividends and Taxes 21 Principal Underwriter 22 Standardized Total Return and Yield Quotations 23 Financial Statements KEYSTONE STRATEGIC DEVELOPMENT FUND PART A PROSPECTUS KEYSTONE STRATEGIC DEVELOPMENT FUND PROSPECTUS JULY , 1996 Keystone Strategic Development Fund (the "Fund") is a mutual fund that seeks long term capital growth by investing primarily in equity securities. The Fund offers Class A, Class B and Class C shares. Information on share classes and their fee and sales charge structures may be found in the Fund's fee table, "Alternative Sales Options," "Contingent Deferred Sales Charge and Waiver of Sales Charges," "Distribution Plans" and "Fund Shares." This prospectus concisely states information about the Fund that you should know before investing. Please read it and retain it for future reference. Additional information about the Fund is contained in a statement of additional information dated July , 1996, which has been filed with the Securities and Exchange Commission and is incorporated by reference into this prospectus. For a free copy, or for other information about the Fund, write to the address or call the telephone number listed below. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. KEYSTONE STRATEGIC DEVELOPMENT FUND 200 BERKELEY STREET BOSTON, MASSACHUSETTS 02116-5034 CALL TOLL FREE 1-800-343-2898 TABLE OF CONTENTS Page Fee Table 2 Financial Highlights 3 The Fund 6 Investment Objective and Strategies 6 Investment Restrictions 8 Risk Factors 8 Pricing Shares 11 Dividends and Taxes 12 Fund Management and Expenses 12 How to Buy Shares 14 Alternative Sales Options 15 Contingent Deferred Sales Charge and Waiver of Sales Charges 19 Distribution Plans 20 How to Redeem Shares 21 Shareholder Services 23 Performance Data 26 Fund Shares 26 Additional Information 26 Additional Investment Information (i) Exhibit A A-1 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FEE TABLE KEYSTONE STRATEGIC DEVELOPMENT FUND The purpose of this fee table is to assist investors in understanding the costs and expenses that an investor in each class will bear directly or indirectly. For more complete descriptions of the various costs and expenses, see the following sections of this prospectus: "Fund Management and Expenses;" "How to Buy Shares;" "Distribution Plans;" and "Shareholder Services."
CLASS A SHARES CLASS B SHARES CLASS C SHARES FRONT END BACK END LEVEL LOAD SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION(1) OPTION(2) --------- --------- --------- Sales Charge ...................................... 5.75%(3) None None (as a percentage of offering price) Contingent Deferred Sales Charge .................. 0.00%(4) 5.00% in the first year 1.00% in the first (as a percentage of the lesser of cost or market declining to 1.00% in year and 0.00% value of shares redeemed) the sixth year and thereafter 0.00% thereafter Exchange Fee (per exchange)(5) .................... $10.00 $10.00 $10.00 ANNUAL FUND OPERATING EXPENSES(6) (as a percentage of average net assets) Management Fees ................................... 1.00% 1.00% 1.00% 12b-1 Fees ........................................ 0.25% 1.00%(7) 1.00%(7) Other Expenses .................................... 1.13% 1.13% 1.13% ---- ---- ---- Total Fund Operating Expenses ..................... 2.38% 3.13% 3.13% ==== ==== ==== EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return [Note: Example numbers to appropriately reflect changes in CDSC rates.] and (2) redemption at the end of each period: Class A ................................................................. $80 $127 $177 $314 Class B ................................................................. $82 $127 $184 $327 Class C ................................................................. $42 $ 97 $164 $344 You would pay the following expenses on a $1,000 investment, assuming no redemption at the end of each period: Class A ................................................................. $80 $127 $177 $314 Class B ................................................................. $32 $ 97 $164 $327 Class C ................................................................. $32 $ 97 $164 $344 AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. - ---------- (1) Class B shares purchased on or after June 1, 1995 convert tax free to Class A shares after eight years. See "Class B Shares" for more information. (2) Class C shares are available only through dealers who have entered into special distribution agreements with Keystone Investment Distributors Company, the Fund's principal underwriter. (3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares." (4) Purchases of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifying retirement or other plans are not subject to a sales charge, but may be subject to a contingent deferred sales charge. See the "Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges" sections of this prospectus for an explanation of the charge. (5) There is no fee for exchange orders received by the Fund directly from a shareholder over the Keystone Automated Response Line ("KARL"). (For a description of KARL, see "Shareholder Services.") (6) Expense ratios are for the Fund's fiscal year ended March 31, 1996. (7) Long term shareholders may pay more than the equivalent of the maximum front end sales charges permitted by the National Association of Securities Dealers, Inc. ("NASD"). (8) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual return for the Fund may be greater or less than 5%.
FINANCIAL HIGHLIGHTS KEYSTONE STRATEGIC DEVELOPMENT FUND CLASS A SHARES (FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR) The following table contains important financial information relating to the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent auditors. The table appears in the Fund's 1996 Annual Report and should be read in conjunction with the Fund's financial statements and related notes, which also appear, together with the independent auditors' report, in the Fund's Annual Report. The Fund's financial statements, related notes and independent auditors' report are included in the statement of additional information. Additional information about the Fund's performance is contained in its Annual Report which will be made available upon request and without charge.
OCTOBER 7, 1994 (COMMENCEMENT OF YEAR ENDED OPERATIONS) TO MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- NET ASSET VALUE BEGINNING OF YEAR .................. $ 9.02 $10.00 ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) ..................... (0.040) (0.002) Net gain (loss) on investment and foreign currency related transactions ........................... 1.760 (0.978) ------ ------ Total income (loss) from investment operations . 1.720 (0.980) ------ ------ NET ASSET VALUE END OF YEAR ........................ $10.74 $ 9.02 ====== ====== TOTAL RETURN (a) ................................... 19.07% (9.80%) RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Operating and management expenses................. 2.38%(c) 2.77%(b) Net investment loss .............................. (0.41%) (0.07%)(b) Portfolio turnover rate .......................... 40% 13% Average commission rate paid ....................... $0.0025 N/A NET ASSETS END OF YEAR (THOUSANDS) ................. $4,574 $4,890 (a) Excluding applicable sales charges. (b) Annualized. (c) "Ratio of total expenses to average net assets" for the year ended March 31, 1996 includes indirectly paid expenses. Excluding indirectly paid expenses for the year ended March 31, 1996, the expense ratio would have been 2.37%.
FINANCIAL HIGHLIGHTS KEYSTONE STRATEGIC DEVELOPMENT FUND CLASS B SHARES (FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR) The following table contains important financial information relating to the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent auditors. The table appears in the Fund's 1996 Annual Report and should be read in conjunction with the Fund's financial statements and related notes, which also appear, together with the independent auditors' report, in the Fund's Annual Report. The Fund's financial statements, related notes and independent auditors' report are included in the statement of additional information. Additional information about the Fund's performance is contained in its Annual Report which will be made available upon request and without charge.
OCTOBER 7, 1994 (COMMENCEMENT OF YEAR ENDED OPERATIONS) TO MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- NET ASSET VALUE BEGINNING OF YEAR .................. $ 8.99 $10.00 ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) ..................... (0.130) (0.026) Net gain (loss) on investment and foreign currency related transactions ........................... 1.760 (0.984) ------ ------ Total income from investment operations ........ 1.630 (1.010) ------ ------ NET ASSET VALUE END OF YEAR ........................ $10.62 $ 8.99 ====== ====== TOTAL RETURN (a) ................................... 18.13% (10.10%) RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Operating and management expenses ................ 3.13%(c) 3.55%(b) Net investment income (loss) ..................... 1.16% (0.80%)(b) Portfolio turnover rate .......................... 40% 13% Average commission rate paid ....................... $0.0025 N/A NET ASSETS END OF YEAR (THOUSANDS) ................. $15,161 $14,688 (a) Excluding applicable sales charges. (b) Annualized. (c) "Ratio of total expenses to average net assets" for the year ended March 31, 1996 includes indirectly paid expenses. Excluding indirectly paid expenses for the year ended March 31, 1996, the expense ratio would have been 3.12%.
FINANCIAL HIGHLIGHTS KEYSTONE STRATEGIC DEVELOPMENT FUND CLASS C SHARES (FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR) The following table contains important financial information relating to the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent auditors. The table appears in the Fund's 1996 Annual Report and should be read in conjunction with the Fund's financial statements and related notes, which also appear, together with the independent auditors' report, in the Fund's Annual Report. The Fund's financial statements, related notes and independent auditors' report are included in the statement of additional information. Additional information about the Fund's performance is contained in its Annual Report which will be made available upon request and without charge.
OCTOBER 7, 1994 (COMMENCEMENT OF YEAR ENDED OPERATIONS) TO MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- NET ASSET VALUE BEGINNING OF YEAR .................. $ 8.99 $10.00 ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) ..................... (0.100) (0.034) Net gain (loss) on investment and foreign currency related transactions ........................... 1.730 (0.976) ------ ------ Total income from investment operations ........ 1.630 (1.010) ------ ------ NET ASSET VALUE END OF YEAR ........................ $10.62 $ 8.99 ====== ====== TOTAL RETURN (a) ................................... 18.13% (10.10%) RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS: Operating and management expenses ................ 3.13%(c) 3.51%(b) Net investment income (loss) ..................... 1.16% (0.93%)(b) Portfolio turnover rate .......................... 40% 13% Average commission rate paid ....................... $0.0025 N/A NET ASSETS END OF YEAR (THOUSANDS) ................. $2,023 $1,393 (a) Excluding applicable sales charges. (b) Annualized. (c) "Ratio of total expenses to average net assets" for the year ended March 31, 1996 includes indirectly paid expenses. Excluding indirectly paid expenses for the year ended March 31, 1996, the expense ratio would have been 3.12%.
THE FUND The Fund is an open-end, diversified management investment company commonly known as a mutual fund. The Fund was formed as a Massachusetts business trust on July 27, 1994. The Fund is one of more than thirty funds managed or advised by Keystone Investment Management Company (formerly named Keystone Custodian Funds, Inc.) ("Keystone"), the Fund's investment adviser. INVESTMENT OBJECTIVE AND STRATEGIES INVESTMENT OBJECTIVE The Fund seeks long term capital growth by investing primarily in equity securities. INVESTMENT STRATEGIES The Fund seeks long term capital growth through the following principal investment strategies: * Under ordinary conditions, the Fund will invest at least 65% of its total assets in securities of companies that are expected to benefit from development in the Pacific Rim/Pacific Basin and Latin America regions, including companies that are expected to benefit from (i) infrastructure development and industrialization in these regions or (ii) changes in the demand for or prices of industrial materials. For example, the Fund will invest in one or more of the following: mining, construction, or transportation companies or any other company that owns, extracts, develops, processes, produces, distributes, transports, exports, or uses energy sources (such as oil, gas, coal, and uranium), forest products, real estate, nonferrous metals, diversified resources, precious metals, or other industrial materials. * Under ordinary conditions, the Fund will invest at least 35% of its total assets in securities of asset rich companies that own, extract, develop, process, or produce industrial raw materials. * Under ordinary conditions, the Fund will invest at least 65% of its total assets in securities of issuers located in the following countries: (1) Pacific Rim/Pacific Basin countries: Australia, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Papua New Guinea, the People's Republic of China, the Philippines, Russia, Singapore, Taiwan, and Thailand; (2) Latin American countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Uruguay, and Venezuela; and (3) the United States ("U.S.") and Canada. In addition, the Fund may invest up to 35% of its total assets in countries outside of these regions. The Fund does not currently intend to invest in the People's Republic of China. If the Fund should invest in China, it presently intends to invest less than 5% of its assets in that country. PRINCIPAL INVESTMENTS AND OTHER POLICIES Under ordinary conditions, the Fund will invest at least 65% of its total assets in equity securities that are denominated in either U.S. or foreign currencies. EQUITY SECURITIES. The Fund may invest in the following types of equity securities: common stock, preferred stock (convertible or non-convertible), warrants or rights convertible into common or preferred stock, partly paid stock, and structured equity based securities. The Fund deems debt securities convertible into equity securities to be equity securities. FOREIGN SECURITIES -- IMPORTANT INVESTMENT POLICIES. Keystone follows a number of significant policies when investing in foreign countries. When allocating the Fund's investments among issuers located in different countries, Keystone considers such countries' interest rate environments and general economic conditions. Keystone evaluates the relative values of different currencies on a basis of technical and political data and such fundamental economic criteria as relative inflation rates and trends, projected growth rates, balance of payments status, and economic policies. With respect to foreign corporate issuers, Keystone considers the financial condition of the issuer and market and economic conditions relevant to its operations. In addition, Keystone considers liquidity when selecting foreign investments. OTHER ELIGIBLE INVESTMENTS The Fund may invest up to 35% of its total assets under normal market conditions and up to 100% of its assets for temporary defensive purposes (when Keystone determines that market conditions so warrant) in the following types of U.S. dollar or foreign currency denominated debt obligations: (1) Variable and fixed rate debt obligations (including zero coupon and payment-in-kind ("PIKs") securities), such as bonds, debentures, notes, loans, commercial paper, certificates of deposit, warrants, mortgage-backed securities, debt securities convertible into common stock, and structured notes. Such debt obligations may be issued or guaranteed by U.S. or foreign issuers, including U.S. or foreign corporations or partnerships, U.S. or foreign governments or any of their political subdivisions, agencies or instrumentalities. (2) Money market instruments, such as: (a) short term debt obligations issued by foreign issuers, including foreign corporations, partnerships, governments or any of their political subdivisions, agencies or instrumentalities; (b) commercial paper of U.S. issuers, including master demand notes, that at the date of investment is rated A-1 (the highest grade given by Standard & Poor's Corporation ("S&P")), Prime-1 (the highest grade given by Moody's Investors Service ("Moody's")) or, if not rated by such services, is issued by a company that at the date of investment has an outstanding issue rated A or better by S&P or Moody's; (c) obligations, including certificates of deposit and bankers' acceptances, of banks or savings and loan associations with at least $1 billion in assets as of the date of their most recently published financial statements that are members of the Federal Deposit Insurance Corporation, including U.S. branches of foreign banks and foreign branches of U.S. banks; (d) corporate obligations of U.S. issuers that at the date of investment are rated A or better by S&P or Moody's; (e) obligations issued or guaranteed by the U.S. government or by any agency or instrumentality of the U.S. government; and (f) repurchase agreements and reverse repurchase agreements for instruments described in (b), (c), (d), and (e). The Fund has the authority to invest up to 25% of its total assets in debt obligations with a rating below investment grade (i.e., BBB or lower by S&P or Baa or lower by Moody's) or which, if unrated, are, in Keystone's judgment, determined to be below investment grade; provided, however, that the Fund does not currently intend to invest more than 5% of its assets in such debt obligations. The Fund will invest its assets in debt obligations for non-defensive purposes when Keystone determines that such investment is consistent with the Fund's investment objective of long term capital growth. For example, the Fund might invest in certain debt securities when an anticipated decline in interest rates would be expected to lead to an appreciation in value of such securities. Alternatively, the Fund might invest in debt obligations issued in exchange for restructured debt of certain countries or other issuers that it expects to appreciate in value. The Fund intends to follow policies of the Securities and Exchange Commission as they are adopted from time to time with respect to illiquid securities, including, at this time, (1) treating as illiquid securities that may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the Fund has valued such securities on its books and (2) limiting its holdings of such securities to 15% of net assets. The Fund may invest in restricted securities, including securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933 (the "1933 Act"). Generally, Rule 144A establishes a safe harbor from the registration requirements of the 1933 Act for resales by large institutional investors of securities not publicly traded in the U.S. The Fund may purchase Rule 144A securities when such securities present an attractive investment opportunity and otherwise meet the Fund's selection criteria. Keystone determines the liquidity of the Fund's Rule 144A securities in accordance with guidelines adopted by the Board of Trustees. At the present time, the Fund cannot accurately predict exactly how the market for Rule 144A securities will develop. A Rule 144A security that was readily marketable upon purchase may subsequently become illiquid. In such an event, the Board of Trustees will consider what action, if any, is appropriate. In addition to the securities described above, when it deems it appropriate, the Fund may invest up to 10% of its total assets in the securities of other investment companies. The Fund would invest in another investment company primarily to obtain immediate access to a diversified portfolio of foreign securities. See "Investment Restrictions" in the Fund's statement of additional information. When the Fund invests its assets for temporary defensive purposes, it may not be pursuing its investment objective. INVESTMENT TECHNIQUES The Fund may purchase or sell foreign currency, purchase options on currency and purchase or sell forward foreign currency exchange contracts to manage currency exposure. In addition, the Fund may write covered call and put options on any security in which the Fund may invest. The Fund may, for hedging purposes, purchase and sell futures contracts and put and call options on futures contracts. (Options and futures contracts are considered "derivative instruments.") The Fund may purchase securities on a when-issued, partly paid, or forward commitment basis and may engage in the lending of portfolio securities. For further information about the types of investments and investment techniques available to the Fund, including the risks associated therewith, see the section of this prospectus entitled "Additional Investment Information" and the statement of additional information. Of course, there can be no assurance that the Fund will achieve its investment objective since there is uncertainty in every investment. FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVE The Fund's investment objective is fundamental and may not be changed without the vote of a majority of the Fund's outstanding shares (as defined in the Investment Company Act of 1940 ("1940 Act")). INVESTMENT RESTRICTIONS The Fund has adopted the fundamental restrictions summarized below, which may not be changed without the vote of a majority of the Fund's outstanding shares (as defined in the 1940 Act). These restrictions and certain other fundamental and nonfundamental restrictions are set forth in the statement of additional information. The Fund may not: (1) invest more than 5% of its total assets in the securities of any one issuer (other than U.S. government securities), except that up to 25% of its total assets may be invested without regard to this limit; and (2) borrow, except from banks for temporary or emergency purposes in aggregate amounts up to one-third of the value of the Fund's net assets, and the Fund may enter into reverse repurchase agreements. RISK FACTORS Like any investment, your investment in the Fund involves some degree of risk. Before you buy shares of the Fund, you should carefully evaluate your ability to assume the risks your investment in the Fund poses. YOU CAN LOSE MONEY BY INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN THE VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE VALUE OF YOUR INVESTMENT. The Fund seeks long term capital growth by investing primarily in equity securities of companies that are expected to benefit from development in the Pacific Rim/Pacific Basin and Latin America regions. The Fund is best suited for investors who can afford to maintain their investment over a relatively long period of time, and who are seeking a fund which is growth oriented and has the potential for returns. The Fund involves risk and is not an appropriate investment for conservative investors who are seeking preservation of capital and/or income. Certain risks related to the Fund are discussed below. To the extent not discussed in this section, specific risks attendant to individual securities or investment practices are discussed in "Additional Investment Information." FUND RISKS. Investing in equity securities, particularly those having growth characteristics, frequently involves greater risks (and possibly greater rewards) than investment in other types of securities. The prices of equity securities tend to be more volatile and companies having growth characteristics may sometimes be unproven. A need for cash due to large liquidations from the Fund when the prices of equity securities are declining could result in losses to the Fund. Investing in the Fund involves the risk common to investing in any security, that is that the value of the securities held by the Fund will fluctuate in reponse to changes in economic conditions or public expectations about those securities. The net asset value of the Fund's shares will change accordingly. FOREIGN RISKS. Investing in securities of foreign issuers generally involves more risk than investing in securities of domestic issuers for the following reasons: (1) there may be less public information available about foreign companies than is available about U.S. companies; (2) foreign companies are not generally subject to the uniform accounting, auditing and financial reporting standards and practices applicable to U.S. companies; (3) foreign stock markets have less volume than the U.S. market, and the securities of some foreign companies are much less liquid and much more volatile than the securities of comparable U.S. companies; (4) foreign securities transactions may involve higher brokerage commissions; (5) there may be less government regulation of stock markets, brokers, listed companies and banks in foreign countries than in the U.S.; (6) the Fund may incur fees on currency exchanges when it changes investments from one country to another; (7) the Fund's foreign investments could be affected by expropriation, confiscatory taxation, nationalization, establishment of currency exchange controls, political or social instability or diplomatic developments; (8) fluctuations in foreign exchange rates will affect the value of the Fund's investments, the value of dividends and interest earned, gains and losses realized on the sale of securities, net investment income and unrealized appreciation or depreciation of investments; and (9) interest and dividends on foreign securities may be subject to withholding taxes in a foreign country that could result in a reduction of net investment income available for distribution. Investing in securities of issuers in emerging market countries involves exposure to economic systems that are generally less mature and political systems that are generally less stable than those of developed countries. In addition, investing in companies in emerging market countries may also involve exposure to national policies that may restrict investment by foreigners and undeveloped legal systems governing private and foreign investments and private property. For this purpose, countries with emerging markets are generally those where the per capita income is in the low to middle ranges, as determined by the International Bank for Reconstruction and Development. The typically small size of the markets for securities issued by companies in emerging markets countries and the possibility of a low or nonexistent volume of trading in those securities may also result in a lack of liquidity and in price volatility of those securities. Furthermore, investing in securities of companies in the formerly communist countries of Eastern Europe involves additional risks to those associated with investments in companies in non-formerly communist emerging markets countries. Specifically, those countries could convert back to a single economic system, and the claims of property owners prior to the expropriation by the communist regime could be settled in favor of the former property owners, in which case the Fund could lose its entire investment in those countries. These risks are carefully considered by Keystone prior to the purchase of these securities. LATIN AMERICA. The risks of investing in emerging countries or countries with limited or developing capital markets are heightened for investments in Latin America. The securities markets of Latin American countries are substantially smaller, less developed, less liquid and more volatile than those of more developed countries. In particular, countries in Latin America may have relatively unstable governments, presenting the risks of expropriation, confiscation, nationalization or the imposition of restrictions on foreign ownership and on repatriation of assets. The economies of Latin American countries may be predominantly based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates. The limited size of many Latin American securities markets and limited trading volume in issuers could result in more abrupt or erratic price movements and limited marketability of securities traded. Certain Latin American countries are among the largest debtors to commercial banks and foreign governments. Some of these countries have previously defaulted on their sovereign debt. Although there have been significant improvements in some Latin American economies in recent years, others continue to experience economic problems, including high inflation rates and high interest rates. The emergence of the Latin American economies and securities market will require continued economic and fiscal discipline, as well as stable political and social conditions. Recovery may also be influenced by international economic conditions, particularly those in the U.S., and by world prices for oil and other commodities, and international trade agreements, such as the North American Free Trade Agreement. PACIFIC RIM/PACIFIC BASIN. Countries in the Pacific Rim/Pacific Basin are in various stages of economic development, some are considered emerging markets. Investment in each has various risks. For instance, most countries in the Pacific Rim/Pacific Basin are heavily dependent on international trade. Some have prosperous economies, but are sensitive to world commodity prices. Others are especially vulnerable to recession in other countries. Some countries in the Pacific Rim/Pacific Basin have experienced rapid growth, although many suffer with obsolete financial systems, economic problems, or archaic legal systems. In addition, many have experienced political and social uncertainties. Japan's economy recently went into recession, and its stock market declined. The return of Hong Kong to Chinese dominion will affect the entire region. BELOW-INVESTMENT GRADE BONDS. The Fund may invest up to 25% of its assets in below investment grade bonds. The Fund currently intends, however, to invest no more than 5% of its total assets in below investment grade bonds. See "Other Eligible Investments." Lower rated debt securities (sometimes called "junk bonds") are often considered to be speculative. Investment in such bonds involves risks that are greater than the risks of investing in higher quality debt securities. These risks include risks from interest rate fluctuations; changes in credit status, including weaker overall credit condition of issuers and risks of default; industry, market and economic risk; volatility of price resulting from broad and rapid changes in the value of these securities; and greater price variability and credit risks of certain high yield securities, such as zero coupon bonds and PIKs. For further discussion of below investment grade bonds, see the statement of additional information. OTHER CONSIDERATIONS. The Fund, which stresses providing long term capital growth by investing primarily in equity securities, does not, by itself, constitute a balanced investment plan. The Fund may be appropriate as part of an overall investment program. Investors may wish to consult their financial advisers when considering what portion of their total assets to invest in equity securities. PRICING SHARES The net asset value of a Fund share is computed each day on which the New York Stock Exchange (the "Exchange") is open as of the close of trading on the Exchange (currently 4:00 p.m. eastern time for the purpose of pricing Fund shares) except on days when changes in the value of the Fund's portfolio securities do not affect the current net asset value of its shares. The Exchange currently is closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset value per share of the Fund is arrived at by determining the value of the Fund's assets, subtracting its liabilities and dividing the result by the number of its shares outstanding. Current values for the Fund's securities are generally determined in the following manner: 1. securities that are traded on a national securities exchange or on the over-the-counter National Market System ("NMS") are valued on the basis of the last sales price on the exchange where primarily traded or NMS prior to the time of the valuation, provided that a sale has occurred and that this price reflects current market value according to procedures established by the Board of Trustees; 2. securities traded in the over-the-counter market, other than NMS, for which market quotations are readily available, are valued at the mean of the bid and asked prices at the time of valuation; 3. instruments having maturities of more than sixty days for which market quotations are readily available are valued at current market value; where market quotations are not available, such instruments are valued at fair value as determined by the Board of Trustees; 4. instruments that are purchased with maturities of sixty days or less (including all master demand notes) are valued at amortized cost (original purchase cost as adjusted for amortization of premium or accretion of discount) which, when combined with accrued interest, approximates market; instruments maturing in more than sixty days when purchased 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 in any case, reflects fair value as determined by the Fund's Board of Trustees; and 5. the following securities are valued at prices deemed in good faith to be fair under procedures established by the Board of Trustees: (a) securities, including restricted securities, for which complete quotations are not readily available, (b) listed securities or those on NMS if, in the Fund's opinion, the last sales price does not reflect a current market value or if no sale occurred, and (c) other assets. Foreign securities are valued on the basis of valuations provided by a pricing service, approved by the Fund's Board of Trustees, which uses information with respect to transactions in such securities, quotations from broker-dealers, market transactions in comparable securities and various relationships between securities and yield to maturity in determining value. DIVIDENDS AND TAXES The Fund has qualified and intends to qualify in the future as a regulated investment company under the Internal Revenue Code (the "Code"). The Fund qualifies if, among other things, it distributes to its shareholders at least 90% of its net investment income for its fiscal year. The Fund also intends to make timely distributions, if necessary, sufficient in amount to avoid the nondeductible 4% excise tax imposed on a regulated investment company to the extent that it fails to distribute, with respect to each calendar year, at least 98% of its ordinary income for such calendar year and 98% of its net capital gains for the one-year period ending October 31 of such calendar year. Any taxable dividend declared in October, November, or December to shareholders of record in such month and paid by the following January 31 will be includable in the taxable income of the shareholder as if paid on December 31 of the year in which the dividend was declared. If the Fund qualifies and if it distributes all of its net investment income and net capital gains, if any, to shareholders, it will be relieved of any federal income tax liability. The Fund will make distributions from its net investment income annually and net capital gains, if any, at least annually. Because Class A shares bear most of the costs of distribution of such shares through payment of a front end sales charge, while Class B and Class C shares bear such expenses through a higher annual distribution fee, expenses attributable to Class B shares and Class C shares will generally be higher than those of Class A, and income distributions paid by the Fund with respect to Class A shares will generally be greater than those paid with respect to Class B and Class C shares. Shareholders receive Fund distributions in the form of additional shares of that class of shares upon which the distribution is based or, at the shareholder's option, in cash. Fund distributions in the form of additional shares are made at net asset value without the imposition of a sales charge. Dividends and distributions are taxable whether they are received in cash or in shares. Income dividends and net short-term gains dividends are taxable as ordinary income, and net long-term gains dividends are taxable as capital gains regardless of how long the Fund's shares are held. If Fund shares held for less than six months are sold at a loss, however, such loss will be treated for tax purposes as a long-term capital loss to the extent of any long-term capital gains dividends received. The Fund advises its shareholders annually as to the federal tax status of all distributions made during the year. If more than 50% of the value of the Fund's total assets at the end of a fiscal year is represented by securities of foreign corporations and the Fund elects to make foreign tax credits available to its shareholders, a shareholder will be required to include in his gross income both actual dividends and the amount the Fund advises him is his pro rata portion of income taxes withheld by foreign governments from interest and dividends paid on the Fund's investments. The shareholder will be entitled, however, to take the amount of 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 adjusted gross income if that should be to his advantage. In substance, this policy enables the shareholder to benefit from the same foreign tax credit or deduction that he would have received if he had been the individual owner of foreign securities and had paid foreign income tax on the income therefrom. As in the case of individuals receiving income directly from foreign sources, the above described tax credit and deductions are subject to certain limitations. FUND MANAGEMENT AND EXPENSES BOARD OF TRUSTEES Under Massachusetts law, the Fund's Board of Trustees has absolute and exclusive control over the management and disposition of all assets of the Fund. Subject to the authority of the Fund's Board of Trustees, Keystone, the Fund's investment adviser, provides investment advice, management and administrative services to the Fund. INVESTMENT ADVISER Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, has provided investment advisory and management services to investment companies and private accounts since it was organized in 1932. Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. (formerly Keystone Group, Inc.) ("Keystone Investments"), located at 200 Berkeley Street, Boston, Massachusetts 02116-5034. Keystone Investments is a private corporation predominantly owned by current and former members of management of Keystone and its affiliates. The shares of Keystone Investments common stock beneficially owned by management are held in a number of voting trusts, the trustees of which are George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey, Ralph J. Spuehler, Jr. and Rosemary D. Van Antwerp Keystone Investments provides accounting, bookkeeping, legal, personnel and general corporate services to Keystone, its affiliates and the Keystone Investments Family of Funds. Pursuant to its Investment Advisory and Management Agreement with the Fund (the "Advisory Agreement"), Keystone provides investment advisory and management services to the Fund. Keystone manages the investment and reinvestment of the Fund's assets, supervises the operation of the Fund, provides all necessary office space, facilities, equipment and personnel and arranges, at the request of the Fund, for its employees to serve as officers or agents of the Fund. The Fund pays Keystone a fee for its services at the annual rate of 1.00% of the Fund's aggregate net asset value. During the fiscal year ended March 31, 1996, the Fund paid or accrued to Keystone investment management and administrative services fees of $217,332, which represented 1.00% of the Fund's average daily net assets on an annualized basis. Of such amount paid to Keystone, $43,466 was paid or accrued to EquitiLink International Management Limited ("EquitiLink") for its services rendered in respect of the Fund. A management fee of 1.00% is higher than that paid to most other investment companies. The fee is comparable, however, to the fee charged to other global and international funds, which like the Fund, are subject to the higher costs involved in managing a portfolio of predominantly international securities. The Advisory Agreement continues in effect from year to year only so long as such continuance is specifically approved at least annually by the Fund's Board of Trustees or by vote of a majority of the outstanding shares of the Fund. In either case, the terms of the Advisory Agreement and continuance thereof must be approved by the vote of a majority of disinterested Trustees as defined in the 1940 Act (the "Independent Trustees") in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement may be terminated, without penalty, on 60 days' written notice by the Fund or Keystone. The Advisory Agreement will terminate automatically upon its assignment. SUBADVISER Keystone has entered into a SubInvestment Advisory Agreement in respect of the Fund with EquitiLink International Management Limited (the "SubInvestment Advisory Agreement"), having its principal place of business at Union House, Union Street, St. Helier, Jersey, Channel Islands. EquitiLink and its affiliates have provided advisory services to various clients since 1981. Under the terms of the SubInvestment Advisory Agreement, EquitiLink provides Keystone with investment research and advice. In addition, subject to the supervision of the Fund's Board of Trustees and Keystone, EquitiLink may provide investment supervision and furnish an investment program for such assets of the Fund as Keystone may designate from time to time. The continuance of the SubInvestment Advisory Agreement must be approved in the same manner as provided in the Advisory Agreement. The SubInvestment Advisory Agreement may also be terminated without penalty upon similar notice by the Fund, Keystone, or EquitiLink. EquitiLink receives a monthly fee equal to (1) 20% of Keystone's net fee for such month for services rendered in a non-discretionary capacity, 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. The Fund has adopted a Code of Ethics incorporating policies on personal securities trading as recommended by the Investment Company Institute. PORTFOLIO MANAGER John Madden is primarily responsible for the management of the Fund's portfolio. Mr. Madden is a Keystone Vice President and Senior Portfolio Manager of Keystone and has more than 28 years' investment experience. FUND EXPENSES The Fund will pay all of its expenses. In addition to the investment advisory and management fees discussed above, the principal expenses that the Fund is expected to pay include, but are not limited to: expenses of certain of its Trustees; transfer, dividend disbursing and shareholder servicing agent expenses; custodian expenses; fees of its independent auditors and legal counsel to its Independent Trustees; fees payable to government agencies, including registration and qualification fees of the Fund and its shares under federal and state securities laws; and certain extraordinary expenses. In addition, each class will pay all of the expenses attributable to it. Such expenses are currently limited to Distribution Plan expenses. The Fund also pays its brokerage commissions, interest charges and taxes. For the fiscal year ended March 31, 1996, the Fund's Class A, Class B and Class C shares paid 2.38%, 3.13% and 3.13%, respectively, of their respective average daily class net assets in expenses. During the fiscal year ended March 31, 1996, the Fund paid or accrued to Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and dividend disbursing agent, and Keystone Investments $8,622 for certain accounting and printing services and $87,125 for shareholder services. KIRC is a wholly-owned subsidiary of Keystone. SECURITIES TRANSACTIONS Under policies established by the Board of Trustees, Keystone selects broker-dealers to execute transactions subject to the receipt of best execution. When selecting broker-dealers to execute portfolio transactions for the Fund, Keystone may consider as a factor the number of shares of the Fund sold by such broker-dealer. In addition, broker-dealers executing portfolio transactions may, from time to time, be affiliated with the Fund, Keystone, the Fund's principal underwriter or their affiliates. The Fund may pay higher commissions to broker-dealers that provide research services. Keystone may use these services in advising the Fund as well as in advising its other clients. PORTFOLIO TURNOVER The Fund's portfolio turnover rate for the fiscal years ended March 31, 1995 and 1996 were 13% and 40%, respectively. High portfolio turnover may involve correspondingly greater brokerage commissions and other transaction costs, which will be borne directly by the Fund, as well as additional realized gains and/or losses to shareholders. For further information about brokerage and distribution, see the statement of additional information. HOW TO BUY SHARES You may purchase shares of the Fund from any broker-dealer that has a selling agreement with Keystone Investment Distributors Company (formerly named Keystone Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal underwriter. The Principal Underwriter, a wholly-owned subsidiary of Keystone, is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034. In addition, you may open an account for the purchase of shares of the Fund by mailing to the Fund c/o Keystone Investor Resource Center, Inc., P.O. Box 2121, Boston, Massachusetts 02106-2121, a completed account application and a check payable to the Fund. You may also open an account by telephoning 1-800-343-2898 to obtain the number of an account to which you can wire or electronically transfer funds, and then sending in a completed account application. Subsequent investments in any amount may be made by check, by wiring Federal funds or by an electronic funds transfer ("EFT"). Orders for the purchase of shares of the Fund will be confirmed at an offering price equal to the net asset value per share next determined after receipt of the order in proper form by the Principal Underwriter (generally as of the close of the Exchange on that day) plus, in the case of Class A shares, the applicable sales charge. Orders received by broker-dealers or other firms prior to the close of the Exchange and received by the Principal Underwriter prior to the close of its business day will be confirmed at the offering price effective as of the close of the Exchange on that day. Orders for shares received other than as stated above will receive the offering price equal to the net asset value per share next determined (generally, the next business days offering price) plus, in the case of Class A shares, the applicable sales charge. The Fund reserves the right to determine the net asset value more frequently than once a day if deemed desirable. Broker-dealers and other financial services firms are obligated to transmit orders promptly. The initial purchase must be at least $1,000. There is no minimum amount for subsequent purchases. The Fund reserves the right to withdraw all or any part of the offering made by this prospectus and to reject purchase orders. Shareholder inquiries should be directed to KIRC by calling toll free 1-800-343-2898 or writing to KIRC or to the firm from which you received this prospectus. ALTERNATIVE SALES OPTIONS The Fund offers Class A, Class B, and Class C shares: CLASS A SHARES -- FRONT END LOAD OPTION Class A shares are sold with a sales charge at the time of purchase. Class A shares are not subject to a deferred sales charge when they are redeemed except as follows: Class A shares purchased (1) in an amount equal to or exceeding $1,000,000 or (2) by a corporate qualified retirement plan or a non-qualified deferred compensation plan sponsored by a corporation having 100 or more eligible employees (a "Qualifying Plan"), in either case without a front end sales charge, will be subject to a contingent deferred sales charge for the 24 month period following the date of purchase. CLASS B SHARES -- BACK END LOAD OPTION Class B shares are sold without a sales charge at the time of purchase, but are, with certain exceptions, subject to a contingent deferred sales charge if they are redeemed. Class B shares purchased on or after June 1, 1995 are subject to a contingent deferred sales charge if redeemed during the 72 month period commencing with and including the month of purchase. Class B shares purchased prior to June 1, 1995 are subject to a deferred sales charge upon redemption during the four calendar years following purchase. Class B shares purchased on or after June 1, 1995 that have been outstanding for eight years from and including the month of purchase will automatically convert to Class A shares without the imposition of a front-end sales charge or exchange fee. Class B shares purchased prior to June 1, 1995 will retain their existing conversion rights. CLASS C SHARES -- LEVEL LOAD OPTION Class C shares are sold without a sales charge at the time of purchase, but are subject to a deferred sales charge if they are redeemed within one year after the date of purchase. Class C shares are available only through broker-dealers who have entered into special distribution agreements with the Principal Underwriter. Each class of shares, pursuant to its Distribution Plan or other plan, pays an annual service fee of 0.25% of the Fund's average daily net assets attributable to that class. In addition to the 0.25% service fee, the Class B and C Distribution Plans provide for the payment of an annual distribution fee of up to 0.75% of the average net assets attributable to their respective classes. As a result, income distributions paid by the Fund with respect to Class B and Class C shares will generally be less than those paid with respect to Class A shares. Investors who would rather pay the entire cost of distribution at the time of investment, rather than spreading such cost over time, might consider Class A shares. Other investors might consider Class B or Class C shares (in which case 100% of the purchase price is invested immediately) depending on the amount of the purchase and the intended length of investment. The Fund will not normally accept any purchase of Class B shares in the amount of $250,000 or more and will not normally accept any purchase of Class C shares in the amount of $1,000,000 or more. ---------------------------------------------- CLASS A SHARES Class A shares are offered at net asset value plus an initial sales charge as follows:
AS A % OF CONCESSION TO AS A % OF NET AMOUNT DEALERS AS A % OF AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE - --------------------------------------------------------------------------------------------------------------- Less than $50,000 .................................. 5.75% 6.10% 5.25% $50,000 but less than $100,000 ..................... 4.75% 4.99% 4.25% $100,000 but less than $250,000 .................... 3.75% 3.90% 3.25% $250,000 but less than $500,000 .................... 2.50% 2.56% 2.25% $500,000 but less than $1,000,000 .................. 1.50% 1.52% 1.50% - ---------- *Rounded to the nearest one-hundredth percent.
---------------------------------------------- Purchases of the Fund's Class A shares in the amount of $1 million or more and/or purchases of Class A shares made by a Qualifying Plan or a tax sheltered annuity plan sponsored by a public education entity having 5,000 or more eligible employees (a "TSA Plan") will be at net asset value without the imposition of a front-end sales charge (each such purchase, an "NAV Purchase"). With respect to NAV Purchases, the Principal Underwriter will pay broker-dealers or others concessions based on (1) the investor's cumulative purchases during the one-year period beginning with the date of the initial NAV Purchase and (2) the investor's cumulative purchases during each subsequent one-year period beginning with the first NAV Purchase following the end of the prior period. For such purchases, concessions will be paid at the following rate: 1.00% of the investment amount up to $2,999,999; plus 0.50% of the investment amount between $3,000,000 and $4,999,999; plus 0.25% of the investment amount over $4,999,999. With the exception of Class A Shares acquired by a TSA Plan, Class A shares acquired in an NAV Purchase are subject to a contingent deferred sales charge of 1.00% upon redemption during the 24 month period commencing on the date the shares were originally purchased. Class A shares acquired by a TSA Plan in an NAV Purchase are not subject to a contingent deferred sales charge. The sales charge is paid to the Principal Underwriter, which in turn normally reallows a portion to your broker-dealer. In addition, your broker-dealer currently will be paid periodic service fees at an annual rate of up to 0.25% of the average daily net asset value of Class A shares maintained by such recipient and outstanding on the books of the Fund for specified periods. Upon written notice to broker-dealers with whom it has dealer agreements, the Principal Underwriter may reallow up to the full applicable sales charge. Initial sales charges may be eliminated for persons purchasing Class A shares which are included in a broker-dealer or investment adviser managed fee based program (a "wrap account") with broker dealers or investment advisers who have entered into special agreements with the Principal Underwriter. Initial sales charges may be reduced or eliminated for persons or organizations purchasing Class A shares of the Fund alone or in combination with Class A shares of other Keystone America Funds. See Exhibit A to this prospectus. Upon prior notification to the Principal Underwriter, Class A shares may be purchased at net asset value by clients of registered representatives within six months after a change in the registered representative's employment, when the amount invested represents redemption proceeds from a registered open-end management investment company not distributed or managed by Keystone or its affiliates; and the shareholder either (1) paid a front-end sales charge, or (2) was at some time subject to, but did not actually pay, a contingent deferred sales charge with respect to the redemption proceeds. Upon prior notification to the Principal Underwriter, Class A shares may be purchased at net asset value by clients of registered representatives within six months after the redemption of shares of any registered open-end investment company not distributed or managed by Keystone or its affiliates, when the amount invested represents redemption proceeds from such unrelated registered open-end investment company, and the shareholder either (1) paid a front end sales charge, or (2) was at some time subject to, but did not actually pay, a contingent deferred sales charge with respect to the redemption proceeds. This special net asset value purchase is currently being offered on a calendar month by month basis and may be modified or terminated in the future. CLASS A DISTRIBUTION PLAN The Fund has adopted a Distribution Plan with respect to its Class A shares (the "Class A Distribution Plan") that provides for expenditures by the Fund, currently limited to 0.25% annually of the average daily net asset value of Class A shares, in connection with the distribution of Class A shares. Payments under the Class A Distribution Plan are currently made to the Principal Underwriter (which may reallow all or part to others, such as broker-dealers), as service fees at an annual rate of up to 0.25% of the average daily net asset value of Class A shares maintained by the recipients and outstanding on the books of the Fund for specified periods. CLASS B SHARES Class B shares are offered at net asset value, without an initial sales charge. With respect to Class B shares purchased on or after June 1, 1995, the Fund, with certain exceptions, imposes a deferred sales charge in accordance with the following schedule: DEFERRED SALES CHARGE REDEMPTION TIMING IMPOSED - ----------------- ------- First twelve month period ................... 5.00% Second twelve month period ................... 4.00% Third twelve month period ................... 3.00% Fourth twelve month period .................. 3.00% Fifth twelve month period .................... 2.00% Sixth twelve month period .................... 1.00% No deferred sales charge is imposed on amounts redeemed thereafter. With respect to Class B shares sold prior to June 1, 1995, the Fund, with certain exceptions, imposes a deferred sales charge of 3.00% on shares redeemed during the calendar year of purchase and the first calendar year after the year of purchase; 2.00% on shares redeemed during the second calendar year after the year of purchase; and 1.00% on shares redeemed during the third calendar year after the year of purchase. No deferred sales charge is imposed on amounts redeemed thereafter. When imposed, the deferred sales charge is deducted from the redemption proceeds otherwise payable to you. The deferred sales charge is retained by the Principal Underwriter. Amounts received by the Principal Underwriter under the Class B Distribution Plans are reduced by deferred sales charges retained by the Principal Underwriter. See "Contingent Deferred Sales Charge and Waiver of Sales Charges" below. Class B shares purchased on or after June 1, 1995 that have been outstanding for eight years from and including the month of purchase will automatically convert to Class A shares (which are subject to a lower Distribution Plan charge) without imposition of a front-end sales charge or exchange fee. Class B shares purchased prior to June 1, 1995 will similarly convert to Class A shares at the end of seven calendar years after the year of purchase. (Conversion of Class B shares represented by stock certificates will require the return of the stock certificates to KIRC.) The Class B shares so converted will no longer be subject to the higher distribution expenses and other expenses, if any, borne by Class B shares. Because the net asset value per share of the Class A shares may be higher or lower than that of the Class B shares at the time of conversion, although the dollar value will be the same, a shareholder may receive more or fewer Class A shares than the number of Class B shares converted. Under current law, it is the Fund's opinion that such a conversion will not constitute a taxable event under federal income tax law. In the event that this ceases to be the case, the Board of Trustees will consider what action, if any, is appropriate and in the best interests of the Class B shareholders. CLASS B DISTRIBUTION PLANS The Fund has adopted Distribution Plans with respect to its Class B shares (the "Class B Distribution Plans") that provide for expenditures by the Fund at an annual rate of up to 1.00% of the average daily net asset value of Class B shares to pay expenses of the distribution of Class B shares. Payments under the Class B Distribution Plans are currently made to the Principal Underwriter (which may reallow all or part to others, such as broker-dealers) (1) as commissions for Class B shares sold and (2) as shareholder service fees. Amounts paid or accrued to the Principal Underwriter under (1) and (2) in the aggregate may not exceed the annual limitation referred to above. The Principal Underwriter generally reallows to broker-dealers or others a commission equal to 4.00% of the price paid for each Class B share sold plus the first year's service fee in advance in the amount of 0.25% of the price paid for each Class B share sold. Beginning approximately 12 months after the purchase of a Class B share, the broker-dealer or other party will receive service fees at an annual rate of 0.25% of the average daily net asset value of such Class B share maintained by the recipient and outstanding on the books of the Fund for specified periods. See "Distribution Plans" below. CLASS C SHARES Class C shares are offered only through broker-dealers who have special distribution agreements with the Principal Underwriter. Class C shares are offered at net asset value, without an initial sales charge. With certain exceptions, the Fund imposes a deferred sales charge of 1.00% on shares redeemed within one year after the date of purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales charge is deducted from the redemption proceeds otherwise payable to you. The deferred sales charge is retained by the Principal Underwriter. See "Contingent Deferred Sales Charge and Waiver of Sales Charges" below. CLASS C DISTRIBUTION PLAN The Fund has adopted a Distribution Plan with respect to its Class C shares (the "Class C Distribution Plan") that provides for expenditures by the Fund at an annual rate of up to 1.00% of the average daily net asset value of Class C shares to pay expenses of the distribution of Class C shares. Payments under the Class C Distribution Plan are currently made to the Principal Underwriter (which may reallow all or part to others, such as broker-dealers) (1) as commissions for Class C shares sold and (2) as shareholder service fees. Amounts paid or accrued to the Principal Underwriter under (1) and (2) in the aggregate may not exceed the annual limitation referred to above. The Principal Underwriter generally reallows to brokers or others a commission in the amount of 0.75% of the price paid for each Class C share sold, plus the first year's service fee in advance in the amount of 0.25% of the price paid for each Class C share sold, and, beginning approximately 15 months after purchase, a commission at an annual rate of 0.75% (subject to NASD rules -- see "Distribution Plans") plus service fees, which are paid at the annual rate of 0.25%, respectively, of the average daily net asset value of each Class C share maintained by the recipients and outstanding on the books of the Fund for specified periods. See "Distribution Plans" below. CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES Any contingent deferred sales charge imposed upon the redemption of Class A, Class B or Class C shares is a percentage of the lesser of (1) the net asset value of the shares redeemed or (2) the net asset value at the time of purchase 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 such shares; (2) certain shares with respect to which the Fund did not pay a commission on issuance, including shares acquired through reinvestment of dividend income and capital gains distributions; (3) certain Class A shares held for more than two years from the date of purchase; (4) Class B shares held more than four consecutive calendar years or more than 72 months after the month of purchase, as the case may be; or (5) Class C shares held for more than one year from the date of purchase. 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. With respect to Class A shares purchased by a Qualifying Plan at net asset value or Class C shares purchased by a Qualifying Plan, no contingent deferred sales charge will be imposed on any redemptions made specifically by an individual participant in the Qualifying Plan. This waiver is not available in the event a Qualifying Plan (as a whole) redeems substantially all of its assets. In addition, no contingent deferred sales charge is imposed on a redemption of shares of the Fund in the event of (1) death or disability of the shareholder; (2) a lump-sum distribution from a 401(k) plan or other benefit plan qualified under the Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of accounts having an aggregate net asset value of less than $1,000; (5) automatic withdrawals under a systematic income plan of up to 1 1/2% per month of the shareholder's initial account balance; (6) withdrawals consisting of loan proceeds to a retirement plan participant; (7) financial hardship withdrawals made by a retirement plan participant; or (8) withdrawals consisting of returns of excess contributions or excess deferral amounts made to a retirement plan participant. The Fund may also sell Class A, Class B or Class C shares at net asset value without any initial sales charge or a contingent deferred sales charge to certain Directors, Trustees, officers and employees of the Fund and Keystone and certain of their affiliates, to registered representatives of firms with dealer agreements with the Principal Underwriter and to a bank or trust company acting as a trustee for a single account. ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS The Principal Underwriter may, from time to time, provide promotional incentives, including reallowance of up to the entire sales charge, to certain broker-dealers whose representatives have sold or are expected to sell significant amounts of Fund shares. In addition, broker-dealers may, from time to time, receive additional cash payments. The Principal Underwriter may also provide written information to broker-dealers with whom it has dealer agreements that relates to sales incentive campaigns conducted by such broker-dealers for their representatives as well as financial assistance in connection with pre-approved seminars, conferences and advertising. No such programs or additional compensation will be offered to the extent they are prohibited by the laws of any state or any self-regulatory agency such as the NASD. Broker-dealers to whom substantially the entire sales charge on Class A shares is reallowed may be deemed to be underwriters as that term is defined under the 1933 Act. The Principal Underwriter may, at its own expense, pay concessions in addition to those described above to broker-dealers that satisfy certain criteria established from time to time by the Principal Underwriter. These conditions relate to increasing sales of shares of the Keystone funds over specified periods and certain other factors. Such payments may, depending on the broker-dealer's satisfaction of the required conditions, be periodic and may be up to 0.25% of the value of shares sold by such broker-dealer. The Principal Underwriter may also pay a transaction fee (up to the level of payments allowed to dealers for the sale of shares, as described above) to banks and other financial services firms that facilitate transactions in shares of the Fund for their clients. The Glass-Steagall Act currently limits the ability of a depository institution (such as a commercial bank or a savings and loan association) to become an underwriter or distributor of securities. In the event the Glass-Steagall Act is deemed to prohibit depository institutions from accepting payments under the arrangement described above, or should Congress relax current restrictions on depository institutions, the Board of Trustees will consider what action, if any, is appropriate. In addition, state securities laws on this issue may differ from the interpretations of federal law expressed herein and banks and financial institutions may be required to register as dealers pursuant to state law. DISTRIBUTION PLANS As discussed above, the Fund bears some of the costs of selling its shares under Distribution Plans adopted with respect to its Class A, Class B and Class C shares pursuant to Rule 12b-1 under the 1940 Act. The NASD limits the amount that a Fund may pay annually in distribution costs for the sale of its shares and shareholder service fees. The NASD limits annual expenditures to 1% of the aggregate average daily net asset value of its shares, of which 0.75% may be used to pay such distribution costs and 0.25% may be used to pay shareholder service fees. The NASD also limits the aggregate amount that the Fund may pay for such distribution costs to 6.25% of gross share sales since the inception of the 12b-1 Distribution Plan, plus interest at the prime rate plus 1% on such amounts (less any deferred sales charges paid by shareholders to the Principal Underwriter), remaining unpaid from time to time. The Principal Underwriter intends, but is not obligated, to continue to pay or accrue distribution charges incurred in connection with the Class B Distribution Plans that exceed current annual payments permitted to be received by the Principal Underwriter from the Fund. The Principal Underwriter intends to seek full payment of such charges from the Fund (together with annual interest thereon at the prime rate plus 1%) at such time in the future as, and to the extent that, payment thereof by the Fund would be within the permitted limits. If the Fund's Independent Trustees authorize such payments, the effect would be to extend the period of time during which the Fund incurs the maximum amount of costs allowed by a Distribution Plan. If a Distribution Plan is terminated, the Principal Underwriter will ask the Independent Trustees to take whatever action they deem appropriate under the circumstances with respect to payment of such amounts. In connection with financing its distribution costs, including commission advances to dealers and others, the Principal Underwriter has sold to a financial institution substantially all of its 12b-1 fee collection rights and contingent deferred sales charge collection rights in respect of Class B shares sold during the two-year period commencing approximately June 1, 1995. The Fund has agreed not to reduce the rate of payment of 12b-1 fees in respect of such Class B shares unless it terminates such shares' Distribution Plan completely. If it terminates such Distribution Plan, the Fund may be subject to possible adverse distribution consequences. 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. Unpaid distribution costs at March 31, 1996 were: $872,923 for Class B shares purchased prior to June 1, 1995 (5.76% of net class assets) and $95,782 for Class B shares purchased on or after June 1, 1995 (.63% of net class assets); and $119,301 for Class C shares (5.88% of net class assets.) During the year ended March 31, 1996, the Fund paid the Principal Underwriter: $11,886, pursuant to its Class A Distribution Plan; $144,420 for Class B shares sold prior to June 1, 1995 and $7,960 for Class B shares sold on or after June 1, 1995 under its Class B Distribution Plans; and $17,285 under its Class C Distribution Plan. These amounts were used to pay commissions and service fees. The Fund makes no payments in connection with the sale of its shares other than the fee paid to its Principal Underwriter. Broker-dealers or others may receive different levels of compensation depending on which class of shares they sell. Payments pursuant to a Distribution Plan are included in the operating expenses of the class. HOW TO REDEEM SHARES You may redeem Fund shares for cash at their net asset value upon written order to the Fund c/o KIRC, and presentation to the Fund of a properly endorsed share certificate (if certificates have been issued). Your signature (s) on the written order and certificates must be guaranteed as described below. In order to redeem by telephone or to engage in telephone transactions generally, you must complete the authorization in your account application. Proceeds for shares redeemed on telephonic order will be deposited by wire or EFT only to the bank account designated in your account application. The redemption value equals the net asset value per share then determined and may be more or less than your cost depending upon changes in the value of the Fund's portfolio securities between purchase and redemption. If imposed, the deferred sales charge is deducted from the redemption proceeds otherwise payable to you. REDEMPTION OF SHARES IN GENERAL At various times, the Fund may be requested to redeem shares for which it has not yet received good payment. In such a case, the Fund will mail the redemption proceeds upon clearance of the purchase check, which may take up to 15 days or more. Any delay may be avoided by purchasing shares either with a certified check or by Federal Reserve or bank wire of funds or by EFT. Although the mailing of a redemption check or the wiring or EFT of redemption proceeds may be delayed, the redemption value will be determined and the redemption processed in the ordinary course of business upon receipt of proper documentation. In such a case, after the redemption and prior to the release of the proceeds, no appreciation or depreciation will occur in the value of the redeemed shares, and no interest will be paid on the redemption proceeds. If the payment of a redemption has been delayed, the check will be mailed or the proceeds wired or sent EFT promptly after good payment has been collected. The Fund computes the amount due you at the close of the Exchange at the end of the day on which it has received all proper documentation from you. Payment of the amount due on redemption, less any applicable contingent deferred sales charge (as described above), will be made within seven days thereafter except as discussed herein. You may also redeem your shares through broker-dealers. The Principal Underwriter, acting as agent for the Fund, stands ready to repurchase Fund shares upon orders from dealers and will calculate the net asset value on the same terms as those orders for the purchase of shares received from broker-dealers and described under "How to Buy Shares." If the Principal Underwriter has received proper documentation, it will pay the redemption proceeds, less any applicable deferred sales charge, to the broker-dealer placing the order within seven days thereafter. The Principal Underwriter charges no fee for this service. Your broker-dealer, however, may charge a service fee. For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund or KIRC may waive this requirement, but also may require additional documents in certain cases. Currently, the requirement for a signature guarantee has been waived on redemptions of $50,000 or less when the account address of record has been the same for a minimum period of 30 days. The Fund and KIRC reserve the right to withdraw this waiver at any time. If the Fund receives a redemption order, but you have not clearly indicated the amount of money or number of shares involved, the Fund cannot execute the order. In such cases, the Fund will request the missing information from you and process the order on the day such information is received. TELEPHONE REDEMPTIONS Under ordinary circumstances, you may redeem up to $50,000 from your account by telephone by calling toll free 1-800-343-2898. You must complete the Telephone Redemptions section of the application to enjoy telephone redemption privileges. In order to insure that instructions received by KIRC are genuine, when you initiate a telephone transaction, you will be asked to verify certain criteria specific to your account. At the conclusion of the transaction, you will be given a transaction number confirming your request, and written confirmation of your transaction will be mailed the next business day. Your telephone instructions will be recorded. Redemptions by telephone are allowed only if the address and bank account of record have been the same for a minimum period of 30 days. If the redemption proceeds are less than $2,500, they will be mailed by check. If they are $2,500 or more, they will be mailed, wired or sent by EFT to your previously designated bank account as you direct. If you do not specify how you wish your redemption proceeds to be sent, they will be mailed by check. If you cannot reach the Fund by telephone, you should follow the procedures for redeeming by mail or through a broker-dealer as set forth herein. SMALL ACCOUNTS Due to the high cost of maintaining small accounts, the Fund reserves the right to redeem your account if its value has fallen below $1,000, the current minimum investment level, as a result of your redemptions (but not as a result of market action). You will be notified in writing and allowed 60 days to increase the value of your account to the minimum investment level. No deferred sales charges are applied to such redemptions. REDEMPTIONS IN KIND If conditions arise that would make it undesirable for the Fund to pay for all redemptions in cash, the Fund may authorize payment to be made in portfolio securities or other property. The Fund has obligated itself, however, under the 1940 Act to redeem for cash all shares presented for redemption by any one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets in any 90-day period. Securities delivered in payment of redemptions would be valued at the same value assigned to them in computing the net asset value per share and would, to the extent permitted by law, be readily marketable. Shareholders receiving such securities would incur brokerage costs upon the securities' sale. GENERAL The Fund reserves the right at any time to terminate, suspend or change the terms of any redemption method described in this prospectus, except redemption by mail, and to impose fees. Except as otherwise noted, neither the Fund, KIRC nor the Principal Underwriter assumes responsibility for the authenticity of any instructions received by any of them from a shareholder in writing, over the Keystone Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable procedures to confirm that instructions received over KARL or by telephone are genuine. Neither the Fund, KIRC nor the Principal Underwriter will be liable when following instructions received over KARL or by telephone that KIRC reasonably believes to be genuine. The Fund may temporarily suspend the right to redeem its shares when (1) the Exchange is closed, other than customary weekend and holiday closings; (2) trading on the Exchange is restricted; (3) an emergency exists and the Fund cannot dispose of its investments or fairly determine their value; or (4) the Securities and Exchange Commission so orders. SHAREHOLDER SERVICES Details on all shareholder services may be obtained from KIRC by writing or by calling toll free 1-800-343-2898. KEYSTONE AUTOMATED RESPONSE LINE KARL offers you specific fund account information and price and yield quotations as well as the ability to do account transactions, including investments, exchanges and redemptions. You may access KARL by dialing toll free 1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a week. EXCHANGES A shareholder who has obtained the appropriate prospectus may exchange shares of the Fund for shares of certain other Keystone America Funds and Keystone Liquid Trust ("KLT") as follows: Class A shares may be exchanged for Class A shares of other Keystone America Funds and Class A shares of KLT; Class B shares, except as noted below, may be exchanged for the same type of Class B shares of other Keystone America Funds and the same type of Class B shares of KLT; and Class C shares may be exchanged for Class C shares of other Keystone America Funds and Class C shares of KLT. Class B shares purchased on or after June 1, 1995 cannot be exchanged for Class B shares of Keystone Capital Preservation and Income Fund during the 24 month period commencing with and including the month of original purchase. The exchange of Class B shares and Class C shares will not be subject to a contingent deferred sales charge. However, if the shares being tendered for exchange are (i) Class A shares acquired in an NAV Purchase or otherwise without a front end sales charge, (ii) Class B shares that have been held for less than 72 months or four years, as the case may be, or (iii) Class C shares that have been held for less than one year, and are still subject to a deferred sales charge, such charge will carry over to the shares being acquired in the exchange transaction. You may exchange shares for another Keystone fund for a $10 fee by calling or writing to Keystone. The exchange fee is waived for individual investors who make an exchange using KARL. Shares purchased by check are eligible for exchange after 15 days. If the shares being tendered for exchange are still subject to a deferred sales charge, such charge will carry over to the shares being acquired in the exchange transaction. The Fund reserves the right, after providing the required notice to shareholders, to terminate this exchange offer or to change its terms, including the right to change the fee for any exchange. Orders to exchange a certain class of shares of the Fund for the corresponding class of shares of KLT will be executed by redeeming the shares of the Fund and purchasing the corresponding class of shares of KLT at the net asset value of such shares next determined after the proceeds from such redemption become available, which may be up to seven days after such redemption. In all other cases, orders for exchanges received by the Fund prior to 4:00 p.m. eastern time on any day the Fund is open for business will be executed at the respective net asset values determined as of the close of business that day. Orders for exchanges received after 4:00 p.m. eastern time on any business day will be executed at the respective net asset values determined at the close of the next business day. An excessive number of exchanges may be disadvantageous to the Fund. Therefore, the Fund, in addition to its right to reject any exchange, reserves the right to terminate the exchange privilege of any shareholder who makes more than five exchanges of shares of the funds in a year or three in a calendar quarter. An exchange order must comply with the requirements for a redemption or repurchase order and must specify the dollar value or number of shares to be exchanged. Exchanges are subject to the minimum initial purchase requirements of the fund being acquired. An exchange constitutes a sale for federal income tax purposes. The exchange privilege is available only in states where shares of the fund being acquired may legally be sold. KEYSTONE AMERICA MONEY LINE Keystone America Money Line eliminates the delay of mailing a check or the expense of wiring funds. You must request the service on your application. Keystone America Money Line allows you to authorize electronic transfers of money to purchase shares in any amount and to redeem up to $50,000 worth of shares. You can use Keystone America Money Line like an "electronic check" to move money between your bank account and your account in the Fund with one telephone call. You must allow two business days after the call for the transfer to take place. For money recently invested, you must allow normal check clearing time before redemption proceeds are sent to your bank. You may also arrange for systematic monthly or quarterly investments in your Keystone America account. Once proper authorization is given, your bank account will be debited to purchase shares in the Fund. You will receive confirmation from the Principal Underwriter for every transaction. To change the amount of a Keystone America Money Line or to terminate the service (which could take up to 30 days), you must write to KIRC and include account numbers. RETIREMENT PLANS The Fund has various pension and profit-sharing plans available to you, including Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified Employee Pension Plans ("SEPs"), Tax Sheltered Annuity Plans ("TSAs"), 403(b) Plans, 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money Purchase Plans. For details, including fees and application forms, call toll free 1-800-247-4075 or write to KIRC. SYSTEMATIC INCOME PLAN Under a Systematic Income Plan, if your account has a value of at least $10,000, you may arrange for regular monthly or quarterly fixed withdrawal payments. Each payment must be at least $100 and may be as much as 1.5% per month or 4.5% per quarter of the total net asset value of the Fund shares in your account when the Systematic Income Plan is opened. Fixed withdrawal payments are not subject to a deferred sales charge. Excessive withdrawals may decrease or deplete the value of your account. Moreover, because of the effect of the applicable sales charge, a Class A investor should not make continuous purchases of the Fund's shares while participating in the Systematic Income Plan. DOLLAR COST AVERAGING Through dollar cost averaging you can invest a fixed dollar amount each month or each quarter in any Keystone America Fund. This results in more shares being purchased when the selected fund's net asset value is relatively low and fewer shares being purchased when the fund's net asset value is relatively high and may result in a lower average cost per share than a less systematic investment approach. Prior to participating in dollar cost averaging, you must establish an account in a Keystone America Fund or a money market fund managed or advised by Keystone. You should designate on the application (1) the dollar amount of each monthly or quarterly investment (minimum $100) you wish to make and (2) the fund in which the investment is to be made. Thereafter, on the first day of the designated month, an amount equal to the specified monthly or quarterly investment will automatically be redeemed from your initial account and invested in shares of the designated fund. If you are a Class A investor and paid a sales charge on your initial purchase, the shares purchased will be eligible for Rights of Accumulation and the sales charge applicable to the purchase will be determined accordingly. In addition, the value of shares purchased will be included in the total amount required to fulfill a Letter of Intent. If a sales charge was not paid on the initial purchase, a sales charge will be imposed at the time of subsequent purchases, and the value of shares purchased will become eligible for Rights of Accumulation and Letters of Intent. See Exhibit A -- "Reduced Sales Charges" at the back of this prospectus. TWO DIMENSIONAL INVESTING You may elect to have income and capital gains distributions from any class Keystone America Fund shares you may own automatically invested to purchase the same class of shares of any other Keystone America Fund. You may select this service on your application and indicate the Keystone America Fund(s) into which distributions are to be invested. The value of shares purchased will be ineligible for Rights of Accumulation and Letters of Intent. See Exhibit A -- "Reduced Sales Charges" at the back of this prospectus. OTHER SERVICES Under certain circumstances, you may, within 30 days after a redemption, reinstate your account in the same class of shares that you redeemed at current net asset value. PERFORMANCE DATA From time to time the Fund may advertise "total return" and "current yield." ALL DATA IS BASED ON HISTORICAL EARNINGS. PAST PERFORMANCE SHOULD NOT BE CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. Total return and current yield are computed separately for each class of shares of the Fund. Total return refers to average annual compounded rates of return over specified periods determined by comparing the initial amount invested in a particular class to the ending redeemable value of that amount. The resulting equation assumes reinvestment of all dividends and distributions and deduction of the maximum sales charge or applicable contingent deferred sales charge and all recurring charges, if any, applicable to all shareholder accounts. The exchange fee is not included in the calculation. Current yield quotations represent the yield on an investment for a stated 30-day period computed by dividing net investment income earned per share during the base period by the maximum offering price per share on the last day of the base period. The Fund may also include comparative performance data for each class of shares in advertising or marketing the Fund's shares, such as data from Lipper Analytical Services, Inc., Morningstar, Inc., Standard & Poor's Corporation, Ibbotson Associates or other industry publications. FUND SHARES The Fund offers Class A, Class B and Class C shares, which participate proportionately based on their relative net asset values in dividends and distributions and have equal voting, liquidation and other rights except that (1) expenses related to the distribution of each series or class of shares or other expenses that the Board of Trustees may designate as class expenses from time to time, are borne solely by each series or class; (2) each series or class of shares has exclusive voting rights with respect to its Distribution Plan; (3) each series or class has different exchange privileges; and (4) each series or class generally has a different designation. When issued and paid for, the shares will be fully paid and nonassessable by the Fund. Shares may be exchanged as explained under "Shareholder Services," but will have no other preference, conversion, exchange or preemptive rights. Shares are redeemable, transferable and freely assignable as collateral. The Fund is authorized to issue additional series or classes of shares. Shareholders of the Fund are entitled to one vote for each full share owned and fractional votes for fractional shares. Shares of the Fund vote together except when required by law to vote separately by series or class. The Fund does not have annual meetings. The Fund will have special meetings, from time to time, as required under its Declaration of Trust and under the 1940 Act. As provided in the Fund's Declaration of Trust, shareholders have the right to remove Trustees by an affirmative vote of two-thirds of the outstanding shares. A special meeting of the shareholders will be held when holders of 10% of the outstanding shares request a meeting for the purpose of removing a Trustee. The Fund is prepared to assist shareholders in communications with one another for the purpose of convening such a meeting as presecribed by Section 16(c) of the 1940 Act. Under Massachusetts law, it is possible that a Fund shareholder may be held personally liable for the Fund's obligations. The Fund's Declaration of Trust provides, however, that shareholders shall not be subject to any personal liability for the Fund's obligations and provides indemnification from Fund assets for any shareholder held personally liable for the Fund's obligations. Disclaimers of such liability are included in each Fund agreement. ADDITIONAL INFORMATION KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a wholly-owned subsidiary of Keystone and serves as the Fund's transfer agent and dividend disbursing agent. When the Fund determines from its records that more than one account in the Fund is registered in the name of a shareholder or shareholders having the same address, upon notice to those shareholders, the Fund intends, when an annual report or a semi-annual report of the Fund is required to be furnished, to mail one copy of such report to that address. Except as otherwise stated in this prospectus or required by law, the Fund reserves the right to change the terms of the offer stated in this prospectus without shareholder approval, including the right to impose or change fees for services provided. ADDITIONAL INVESTMENT INFORMATION The Fund may engage in the following investment practices to the extent described in the prospectus and the statement of additional information. CORPORATE BOND RATINGS Higher yields are usually available on securities that are lower rated or that are unrated. Bonds rated Baa by Moody's are considered as medium grade obligations that are neither highly protected nor poorly secured. Debt rated BBB by S&P is regarded as having an adequate capacity to pay interest and repay principal, although adverse economic conditions are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Lower rated securities are usually defined as Baa or lower by Moody's or BBB or lower by S&P. The Fund may purchase unrated securities, which are not necessarily of lower quality than rated securities, but may not be attractive to as many buyers. Debt rated BB, B, CCC, CC and C by S&P is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposure to adverse conditions. Debt rated C1 by S&P is debt (income bonds) on which no interest is being paid. Debt rated D by S&P is in default and payment of interest and/or repayment of principal is in arrears. The Fund intends to invest in D-rated debt only in cases where, in Keystone's judgment, there is a distinct prospect of improvement in the issuer's financial position as a result of the completion of reorganization or otherwise. Bonds that are rated Caa by Moody's are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Bonds that are rated Ca by Moody's represent obligations that are speculative in a high degree. Such issues are often in default or have other market shortcomings. Bonds that are rated C by Moody's are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. ZERO COUPON BONDS A zero coupon "stripped" bond represents ownership in serially maturing interest or principal payments on specific underlying notes and bonds, including coupons relating to such notes and bonds. The interest and principal payments are direct obligations of the issuer. Coupon zero coupon bonds of any series mature periodically from the date of issue of such series through the maturity date of the securities related to such series. Principal zero coupon bonds mature on the date specified therein, which is the final maturity date of the related securities. Each zero coupon bond entitles the holder to receive a single payment at maturity. There are no periodic interest payments on a zero coupon bond. Zero coupon bonds are offered at discounts from their face amounts. In general, owners of zero coupon bonds have substantially all the rights and privileges of owners of the underlying coupon obligations or principal obligations. Owners of zero coupon bonds have the right upon default on the underlying coupon obligations or principal obligations to proceed directly and individually against the issuer and are not required to act in concert with other holders of zero coupon bonds. For federal income tax purposes, a purchaser of principal zero coupon bonds or coupon zero coupon bonds (either initially or in the secondary market) is treated as if the buyer had purchased a corporate obligation issued on the purchase date with an original issue discount equal to the excess of the amount payable at maturity over the purchase price. The purchaser is required to take into income each year as ordinary income an allocable portion of such discounts determined on a "constant yield" method. Any such income increases the holder's tax basis for the zero coupon bond, and any gain or loss on a sale of the zero coupon bonds relative to the holder's basis, as so adjusted, is a capital gain or loss. If the holder owns both principal zero coupon bonds and coupon zero bonds representing interest in the same underlying issue of securities, a special basis allocation rule (requiring the aggregate basis to be allocated among the items sold and retained based on their relative fair market value at the time of sale) may apply to determine the gain or loss on a sale of any such zero coupon bonds. PAYMENT-IN-KIND SECURITIES PIK securities pay interest in either cash or additional securities, at the issuer's option, for a specified period. The issuer's option to pay in additional securities typically ranges from one to six years compared to an average maturity for all PIK securities of eleven years. Call protection and sinking fund features are comparable to those offered on traditional debt issues. PIKs, like zero coupon bonds, are designed to give the issuer flexibility in managing cash flow. Several PIKs are senior debt. In other cases, where PIKs are subordinated, most senior lenders view them as equity equivalents. An advantage of PIKs for the issuer -- as with zero coupon securities -- is that interest payments are automatically compounded (reinvested) at the stated coupon rate, which is not the case with cash-paying securities. PIKs are gaining popularity over zeros, however, since interest payments in additional securities can be monetized and are more tangible than accretion of a discount. As a group, PIK bonds trade flat (i.e., without accrued interest). Their price is expected to reflect an amount representing accreted interest since the last payment. PIKs generally trade at higher yields than comparable cash-paying securities of the same issuer. Their premium yield is the result of the lesser desirability of non-cash interest, the more limited audience for non-cash paying securities, and the fact that many PIKs have been issued to equity investors who do not normally own or hold such securities. Calculating the true yield on a PIK security requires a discounted cash flow analysis if the security (ex interest) is trading at a premium or a discount because the realizable value of additional payments is equal to the current market value of the underlying security, not par. Regardless of whether PIK securities are senior or deeply subordinated, issuers are highly motivated to retire them because they are usually their most costly form of capital. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements; i.e., the Fund purchases a security subject to the Fund's obligation to resell and the seller's obligation to repurchase that security at an agreed upon price and date, such date usually being not more than seven days from the date of purchase. The resale price is based on the purchase price plus an agreed upon market rate of interest that is unrelated to the coupon rate or maturity of the purchased security. A repurchase agreement imposes an obligation on the seller to pay the agreed upon price, which obligation is in effect secured by the value of the underlying security. The value of the underlying security is at least equal to the amount of the agreed upon resale price and marked to market daily. The Fund may enter into such agreements only with respect to U.S. government and foreign government securities, which may be denominated in U.S. or foreign currencies. The Fund may enter into such repurchase agreements with foreign banks and securities dealers approved in advance by the Fund's Trustees. Whether a repurchase agreement is the purchase and sale of a security or a collateralized loan has not been definitively established. This might become an issue in the event of the bankruptcy of the other party to the transaction. It does not presently appear possible to eliminate all risks involved in repurchase agreements. These risks include the possibility of a decline in the market value of the underlying securities, as well as delay and costs to the Fund in connection with bankruptcy proceedings. Therefore, it is the policy of the Fund to enter into repurchase agreements only with large, well-capitalized banks that are members of the Federal Reserve System and with primary dealers in U.S. government securities (as designated by the Federal Reserve Board) whose creditworthiness has been reviewed and found satisfactory by the Fund. The Securities and Exchange Commission deems a repurchase agreement to be, in effect, a loan by the Fund. REVERSE REPURCHASE AGREEMENTS Under a reverse repurchase agreement, the Fund would sell securities and agree to repurchase them at a mutually agreed upon date and price. The Fund intends to enter into reverse repurchase agreements to avoid otherwise having to sell securities during unfavorable market conditions in order to meet redemptions. At the time the Fund enters into a reverse repurchase agreement, it will establish a segregated account with the Fund's custodian containing liquid assets such as U.S. government securities or other high grade debt securities having a value not less than the repurchase price (including accrued interest) and will subsequently monitor the account to ensure such value is maintained. Reverse repurchase agreements involve the risk that the market value of the securities that the Fund is obligated to repurchase may decline below the repurchase price. Borrowing and reverse repurchase agreements magnify the potential for gain or loss on the portfolio securities of the Fund and, therefore, increase the possibility of fluctuation in the Fund's net asset value. Such practices may constitute leveraging. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund's obligation to repurchase the securities and the Fund's use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such determination. The staff of the Securities and Exchange has taken the position that a fully secured or colateralized reverse repurchase agreement is not subject to the percentage limitation on borrowings imposed under Section 18 of the 1940 Act. FOREIGN SECURITIES The Fund may invest in securities principally traded in securities markets outside the United States. While investment in foreign securities is intended to reduce risk by providing further diversification, such investments involve sovereign risk in addition to the credit and market risks normally associated with domestic securities. Foreign investments may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. There may be less publicly available information about a foreign company, particularly emerging market country companies, than about a U.S. company, and foreign companies may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those applicable to U.S. companies. Securities of some foreign companies are less liquid or more volatile than securities of U.S. companies, and foreign brokerage commissions and custodian fees are generally higher than in the United States. Investments in foreign securities may also be subject to other risks different from those affecting U.S. investments, including local political or economic developments, particularly with respect to companies in the formerly communist countries of Eastern Europe, expropriation or nationalization of assets, imposition of withholding taxes on dividend or interest payments and currency blockage (which would prevent cash from being brought back to the United States). These risks are carefully considered by Keystone prior to the purchase of these securities. CONVERTIBLE SECURITIES The Fund may invest in convertible securities. These securities, which include bonds, debentures, corporate notes, preferred stocks and other securities, are securities that the holder can convert into common stock. Convertible securities rank senior to common stock in a corporation's capital structure and, therefore, entail less risk than that corporation's common stock. The value of a convertible security is a function of its investment value (its market worth without a conversion privilege) and its conversion value (its market worth if exchanged). If a convertible security's investment value is greater than its conversion value, its price primarily will reflect its investment value and will tend to vary inversely with interest rates. (The issuer's creditworthiness and other factors also may affect its value.) If a convertible security's conversion value is greater than its investment value, its price will tend to be higher than its conversion value, and it will tend to fluctuate directly with the price of the underlying equity security. SHORT SALES The Fund may make short sales of securities "against the box." A short sale involves the borrowing of a security, which must eventually be returned to the lender. A short sale is "against the box" if, at all times when the short position is open, the Fund owns the securities sold short or owns an equal amount of securities convertible into, or exchangeable without further consideration for, securities identical to the securities sold short. Short sales against the box are used to defer recognition of gains or losses or in order to receive a portion of the interest earned by the executing broker from the proceeds of such sale. The proceeds of a short sale are held by the broker until the settlement date when the Fund delivers the convertible security to close out its short position. Although prior to such delivery the Fund will have to pay an amount equal to any dividends paid on the securities sold short, the Fund will receive the dividends from the securities convertible into the securities sold short, plus a portion of the interest earned from the proceeds of the short sale. The Fund will not make short sales of securities subject to outstanding call options written by it. The Fund will segregate the securities sold short or appropriate convertible securities in a special account with the Fund's custodian in connection with its short sales "against the box." DERIVATIVES The Fund may use derivatives in furtherance of its investment objective. Derivatives are financial contracts whose value depends on, or is derived from, the value of an underlying asset, reference rate or index. These assets, rates, and indices may include bonds, stocks, mortgages, commodities, interest rates, currency exchange rates, bond indices and stock indices. Derivatives can be used to earn income or protect against risk, or both. For example, one party with unwanted risk may agree to pass that risk to another party who is willing to accept the risk, the second party being motivated, for example, by the desire either to earn income in the form of a fee or premium from the first party, or to reduce its own unwanted risk by attempting to pass all or part of that risk to the first party. Derivatives can be used by investors such as the Fund to earn income and enhance returns, to hedge or adjust the risk profile of the portfolio, and either in place of more traditional direct investments or to obtain exposure to otherwise inaccessible markets. The Fund is permitted to use derivatives for one or more of these purposes, although the Fund generally uses derivatives primarily as direct investments in order to enhance yields and broaden portfolio diversification. Each of these uses entails greater risk than if derivatives were used solely for hedging purposes. The Fund uses futures contracts and related options for hedging purposes. Derivatives are a valuable tool which, when used properly, can provide significant benefit to Fund shareholders. Keystone is not an aggressive user of derivatives with respect to the Fund. However, the Fund may take positions in those derivatives that are within its investment policies if, in Keystone's judgement, this represents an effective response to current or anticipated market conditions. Keystone's use of derivatives is subject to continuous risk assessment and control from the standpoint of the Fund's investment objectives and policies. Derivatives may be (1) standardized, exchange-traded contracts or (2) customized, privately negotiated contracts. Exchange-traded derivatives tend to be more liquid and subject to less credit risk than those that are privately negotiated. There are four principal types of derivative instruments -- options, futures, forwards and swaps -- from which virtually any type of derivative transaction can be created. Further information regarding options and futures, is provided later in this section and is provided in the Fund's statement of additional information. The Fund does not presently engage in the use of swaps. While the judicious use of derivatives by experienced investment managers such as Keystone can be beneficial, derivatives also involve risks different from, and, in certain cases, greater than, the risks presented by more traditional investments. Following is a general discussion of important risk factors and issues concerning the use of derivatives that investors should understand before investing in the Fund. * Market Risk -- This is the general risk attendant to all investments that the value of a particular investment will decline or otherwise change in a way detrimental to the Fund's interest. * Management Risk -- Derivative products are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks and bonds. The use of a derivative requires an understanding not only of the underlying instrument, but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions. In particular, the use and complexity of derivatives require the maintenance of adequate controls to monitor the transactions entered into, the ability to assess the risk that a derivative adds to the Fund's portfolio and the ability to forecast price, interest rate or currency exchange rate movements correctly. * Credit Risk -- This is the risk that a loss may be sustained by the Fund as a result of the failure of another party to a derivative (usually referred to as a "counterparty") to comply with the terms of the derivative contract. The credit risk for exchange traded derivatives is generally less than for privately negotiated derivatives, since the clearing house, which is the issuer or counterparty to each exchange-traded derivative, provides a guarantee of performance. This guarantee is supported by a daily payment system (i.e., margin requirements) operated by the clearing house in order to reduce overall credit risk. For privately negotiated derivatives, there is no similar clearing agency guarantee. Therefore, the Fund considers the creditworthiness of each counterparty to a privately negotiated derivative in evaluating potential credit risk. * Liquidity Risk -- Liquidity risk exists when a particular instrument is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid (as is the case with many privately negotiated derivatives), it may not be possible to initiate a transaction or liquidate a position at an advantageous price. OPTIONS TRANSACTIONS WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and put options for hedging purposes. By writing a call option, the Fund becomes obligated during the term of the option to deliver the securities underlying the option upon payment of the exercise price. By writing a put option, the Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price if the option is exercised. The Fund may only write "covered" options. This means that so long as the Fund is obligated as the writer of a call option it will own the underlying securities subject to the option or, in the case of call options on U.S. Treasury bills, the Fund might own substantially similar U.S. Treasury bills. Such securities will be maintained in a segregated account with the Fund's custodian. If the Fund has written options against all of its securities which are eligible for writing options, the Fund may be unable to write additional options unless it sells a portion of its portfolio holdings to obtain new securities against which it can write options. If this were to occur, higher portfolio turnover and correspondingly greater brokerage commissions and other transaction costs may result. The Fund does not expect, however, that this will occur. The Fund will be considered "covered" with respect to a put option it writes if, so long as it is obligated as the writer of the put option, it deposits and maintains liquid assets having a value equal to or greater than the exercise price of the option with the Fund's custodian in a segregated account. The principal reason for writing call or put options is to obtain, through a receipt of premiums, a greater current return than would be realized on the underlying securities alone. The Fund receives a premium from writing a call or put option which it retains whether or not the option is exercised. By writing a call option, the Fund might lose the potential for gain on the underlying security while the option is open, and by writing a put option, the Fund might become obligated to purchase the underlying security for more than its current market price upon exercise. PURCHASING OPTIONS. The Fund may purchase call and put options. The Fund would normally purchase call options to hedge against an increase in the market value of the Fund's securities. The purchase of a call option would entitle the Fund, in return for the premium paid, to purchase specified securities at a specified price, upon exercise of the option, during the option period. The Fund would ordinarily realize a gain if, during the option period, the value of such securities exceeds the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize a loss on the purchase of the call option. The Fund may purchase put or call options; including purchasing put or call options for the purpose of offsetting previously written put or call options of the same series. If the Fund is unable to effect a closing purchase transaction with respect to covered options it has written, the Fund will not be able to sell the underlying securities until the options expire or are exercised. The Fund would normally purchase put options to hedge against a decline in the market value of securities in its portfolio (protective puts). The Fund will not engage in such transactions for speculation. The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell specified securities at a specified price, upon exercise of the option, during the option period. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of underlying portfolio securities. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities declined below the exercise price sufficiently to cover the premium and transaction costs; otherwise the Fund would realize a loss on the purchase of the put option. The Fund may purchase put and call options on securities indices for the same purposes as the purchase of options on securities. Currently, only options on stock indices are traded and only on national exchanges. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security. The Fund's purchases of securities index options is subject to the risk that the value of its portfolio securities may not change as much as an index because the Fund's investments generally cannot match exactly the composition of an index. An option position may be closed out only in a secondary market for an option of the same series. Although the Fund will generally write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market will exist for any particular option at any particular time, and for some options no secondary market may exist. In such event it might not be possible to effect a closing transaction in a particular option. Options on some securities are relatively new, and it is impossible to predict the amount of trading interest that will exist in such options. There can be no assurance that viable markets will develop or continue. The failure of such markets to develop or continue could significantly impair the Fund's ability to use such options to achieve its investment objective. OPTIONS TRADING MARKETS. Options in which the Fund will trade are generally listed on national securities exchanges. Exchanges on which such options currently are traded include the Chicago Board Options Exchange and the New York, American, Pacific and Philadelphia Stock Exchanges. Options on some securities may not be listed on any Exchange, but traded in the over-the-counter market. Options traded in the over-the-counter market involve the additional risk that securities dealers participating in such transactions could fail to meet their obligations to the Fund. The use of options traded in the over-the-counter market may be subject to limitations imposed by certain state securities authorities. The Securities and Exchange Commission is of the view that the premiums that the Fund pays for the purchase of unlisted options and the value of securities used to cover unlisted options written by the Fund are considered to be invested in illiquid securities or assets for the purpose of calculating whether the Fund is in compliance with its investment policies pertaining to illiquid securities. The Fund currently complies with the position taken by the Securities and Exchange Commission that the premiums that the Fund pays for the purchase of unlisted options and the value of securities used to cover unlisted options written by the Fund are considered to be invested in illiquid securities or assets. FUTURES TRANSACTIONS The Fund may enter into futures contracts for the purchase or sale of securities or currencies or futures contracts based on securities indices and may write options on such contracts. The Fund intends to enter into such contracts and put and call options thereon for hedging purposes. The Fund may enter into other types of futures contracts that may become available and relate to the securities held by the Fund. A futures contract is an agreement to buy or sell securities or currencies at a specified price during a designated month. The Fund does not make payment or deliver securities upon entering into a futures contract. Instead, it puts down a margin deposit, which is adjusted to reflect changes in the value of the contract and which continues until the contract is terminated. The Fund will "cover" its futures contract obligations by maintaining in a segregated account with its custodian the securities or currencies underlying the contract or liquid assets, such as cash, U.S. Government securities or other appropriate high grade debt obligations, sufficient in amount to satisfy the Fund's contract obligations. The Fund may sell or purchase futures contracts. When a futures contract is sold by the Fund, the value of the contract will tend to rise when the value of the underlying securities or currencies declines and to fall when the value of such securities or currencies increases. Thus, the Fund would sell futures contracts in order to offset a possible decline in the value of its securities or currencies. If a futures contract were purchased by the Fund, the value of the contract would tend to rise when the value of the underlying securities or currencies increased and to fall when the value of such securities or currencies declined. The Fund intends to purchase futures contracts in order to fix what is believed by its portfolio manager to be a favorable price and rate of return for securities or favorable exchange rate for currencies the Fund intends to purchase. The Fund also may purchase put and call options on securities and currency futures contracts for hedging purposes. A put option purchased by the Fund would give it the right to assume a position as the seller of a futures contract. A call option purchased by the Fund would give it the right to assume a position as the purchaser of a futures contract. The purchase of an option on a futures contract requires the Fund to pay a premium. In exchange for the premium, the Fund becomes entitled to exercise the benefits, if any, provided by the futures contract, but is not required to take any action under the contract. If the option cannot be exercised profitably before it expires, the Fund's loss will be limited to the amount of the premium and any transaction costs. The Fund may write (sell) put and call options on futures contracts for hedging purposes. The writing of a put option on a futures contract generates a premium, which may partially offset an increase in the price of securities that the Fund intends to purchase. However, the Fund becomes obligated to purchase a futures contract, which may have a value lower than the exercise price. Conversely, the writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of the Fund's assets. By writing a call option, the Fund becomes obligated, in exchange for the premium, to sell a futures contract, which may have a value higher than the exercise price. The Fund may enter into closing purchase and sale transactions in order to terminate a futures contract and may sell put and call options for the purpose of closing out its options positions. The Fund's ability to enter into closing transactions depends on the development and maintenance of a liquid secondary market. There is no assurance that a liquid secondary market will exist for any particular contract or at any particular time. As a result, there can be no assurance that the Fund will be able to enter into an offsetting transaction with respect to a particular contract at a particular time. If the Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain the margin deposits on the contract and to complete the contract according to its terms, in which case it would continue to bear market risk on the transaction. Although futures and options transactions are intended to enable the Fund to manage market, interest rate or exchange rate risk, unanticipated changes in interest rates, exchange rates or market prices could result in poorer performance than if it had not entered into these transactions. Even if Keystone correctly predicts interest or exchange rate movements, a hedge could be unsuccessful if changes in the value of the Fund's futures position did not correspond to changes in the value of its investments. This lack of correlation between the Fund's futures and securities or currencies positions may be caused by differences between the futures and securities or currencies markets or by differences between the securities or currencies underlying the Fund's futures position and the securities or currencies held by or to be purchased for the Fund. In addition, futures contracts transactions involve the remote risk that a party participating in a transaction will not be able to fulfill its obligations and the amount of the obligation will exceed the ability of the clearing broker to satisfy. Keystone will attempt to minimize these risks through careful selection and monitoring of the Fund's futures and options positions. The Fund does not intend to use futures transactions for speculation or leverage. "WHEN ISSUED" AND "FORWARD COMMITMENT" TRANSACTIONS The Fund may purchase newly issued securities on a when issued and delayed delivery basis and may purchase or sell securities on a forward commitment basis. When issued or delayed delivery transactions arise when securities are purchased by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction. A forward commitment transaction is an agreement by the Fund to purchase or sell securities at a specified future date. When the Fund engages in these transactions, the Fund relies on the buyer or seller, as the case may be, to consummate the sale. Failure to do so may result in the Fund missing the opportunity to obtain a price or yield considered to be advantageous. When issued and delayed delivery transactions and forward commitment transactions may be expected to occur a month or more before delivery is due. No payment or delivery is made by the Fund, however, until it receives payment or delivery from the other party to the transaction. A separate account of liquid assets equal to the value of purchase commitments will be maintained until payment is made. FOREIGN CURRENCY TRANSACTIONS The Fund may invest in securities of foreign issuers. When the Fund invests in foreign securities they usually will be denominated in foreign currencies, and the Fund temporarily may hold funds in foreign currencies. Thus, the value of Fund shares will be affected by changes in exchange rates. As one way of managing exchange rate risk, in addition to entering into currency futures contracts, the Fund may enter into forward currency exchange contracts (agreements to purchase or sell currencies at a specified price and date). The exchange rate for the transaction (the amount of currency the Fund will deliver and receive when the contract is completed) is fixed when the Fund enters into the contract. The Fund usually will enter into these contracts to stabilize the U.S. dollar value of a security it has agreed to buy or sell. The Fund intends to use these contracts to hedge the U.S. dollar value of a security it already owns, particularly if the Fund expects a decrease in the value of the currency in which the foreign security is denominated. Although the Fund will attempt to benefit from using forward contracts, the success of its hedging strategy will depend on Keystone's ability to predict accurately the future exchange rates between foreign currencies and the U.S. dollar. The value of the Fund's investments denominated in foreign currencies will depend on the relative strength of those currencies and the U.S. dollar, and the Fund may be affected favorably or unfavorably by changes in the exchange rates or exchange control regulations between foreign currencies and the dollar. Changes in foreign currency exchange rates also may affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by the Fund. The Fund may also purchase and sell options related to foreign currencies in connection with hedging strategies. LOANS OF SECURITIES The Fund may lend its securities to broker-dealers or other institutional borrowers for use in connection with such borrowers' short sales, arbitrages or other securities transactions. Such loan transactions afford the Fund an opportunity to continue to earn income on the securities loaned and at the same time to earn income on the collateral held by it to secure the loan. Loans of portfolio securities will be made (if at all) in strict conformity with applicable federal and state rules and regulations. There may be delays in recovery of loaned securities or even a loss of rights in collateral should the borrower fail financially and go into default. Therefore, loans will be made only to firms deemed by the Fund to be of good standing and will not be made unless, in the judgment of the Fund, the consideration to be earned from such loans justifies the risk. The Fund understands that it is the current view of the Securities and Exchange Commission that the Fund is permitted to engage in loan transactions only if it satisfies the following conditions: (1) the Fund must receive 100% collateral in the form of cash or cash equivalents, e.g., U.S. Treasury bills or notes, from the borrower; (2) the borrower must increase the collateral whenever the market value of the securities (determined on a daily basis) exceeds the value of the collateral; (3) the Fund must be able to terminate the loan, after notice, at any time; (4) the Fund must receive reasonable interest on the loan or a flat fee from the borrower, as well as amounts equivalent to any dividends, interest or other distributions on the securities loaned and any increase in the securities' market values, which could result from the return of loaned securities; (5) the Fund may pay only reasonable custodian fees in connection with the loan; and (6) voting rights on the securities loaned may pass to the borrower; however, if a material event affecting the securities occurs, the Fund must be able to terminate the loan and vote proxies or enter into an alternative arrangement with the borrower to enable the Fund to vote proxies. Excluding items (1) and (2), these procedures may be amended from time to time, as regulatory policies may permit, by the Fund's Board of Trustees without shareholder approval. The Fund does not presently intend to lend its securities if, as a result, the aggregate of all outstanding securities loans exceeds 15% of the value of the Fund's total assets taken at their current value. EXHIBIT A REDUCED SALES CHARGES Initial sales charges may be reduced or eliminated for persons or organizations purchasing Class A shares of the Fund alone or in combination with Class A shares of other Keystone America Funds. Only Class A shares subject to an initial or deferred sales charge are eligible for inclusion in reduced sales charge programs. For purposes of qualifying for reduced sales charges on purchases made pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser" includes the following persons: an individual; an individual, his or her spouse and children under the age of 21; a trustee or other fiduciary of a single trust estate or single fiduciary account established for their benefit; an organization exempt from federal income tax under Section 501 (c)(3) or (13) of the Internal Revenue Code; a pension, profit-sharing or other employee benefit plan whether or not qualified under Section 401 of the Internal Revenue Code; or other organized groups of persons, whether incorporated or not, provided the organization has been in existence for at least six months and has some purpose other than the purchase of redeemable securities of a registered investment company at a discount. In order to qualify for a lower sales charge, all orders from an organized group will have to be placed through a single investment dealer or other firm and identified as originating from a qualifying purchaser. CONCURRENT PURCHASES For purposes of qualifying for a reduced sales charge, a Purchaser may combine concurrent direct purchases of Class A shares of two or more of the "Eligible Funds" as defined below. For example, if a Purchaser concurrently invested $75,000 in one of the other "Eligible Funds" and $75,000 in the Fund, the sales charge would be that applicable to a $150,000 purchase, i.e., 3.75% of the offering price, as indicated in the Sales Charge Schedule in the prospectus. RIGHT OF ACCUMULATION In calculating the sales charge applicable to current purchases of the Fund's Class A shares, a Purchaser is entitled to accumulate current purchases with the current value of previously purchased Class A shares of the Fund and Class A shares of certain other eligible funds that are still held in (or exchanged for shares of and are still held in) the same or another eligible fund ("Eligible Fund(s)"). The Eligible Funds are the Keystone America Funds and Keystone Liquid Trust. For example, if a Purchaser held shares valued at $99,999 and purchased an additional $5,000, the sales charge for the $5,000 purchase would be at the next lower sales charge of 3.75% of the offering price as indicated in the Sales Charge Schedule. KIRC must be notified at the time of purchase that the Purchaser is entitled to a reduced sales charge, which reduction will be granted subject to confirmation of the Purchaser's holdings. The Right of Accumulation may be modified or discontinued at any time. LETTER OF INTENT A Purchaser may qualify for a reduced sales charge on a purchase of Class A shares of the Fund alone or in combination with purchases of Class A shares of any of the other Eligible Funds by completing the Letter of Intent section of the application. By so doing, the Purchaser agrees to invest within a thirteen-month period a specified amount which, if invested at one time, would qualify for a reduced sales charge. Each purchase will be made at a public offering price applicable to a single transaction of the dollar amount specified on the application, as described in this prospectus. The Letter of Intent does not obligate the Purchaser to purchase, nor the Fund to sell, the amount indicated. After the Letter of Intent is received by KIRC, each investment made will be entitled to the sales charge applicable to the level of investment indicated on the application. The Letter of Intent may be back-dated up to ninety days so that any investments made in any of the Eligible Funds during the preceding ninety-day period, valued at the Purchaser's cost, can be applied toward fulfillment of the Letter of Intent. However, there will be no refund of sales charges already paid during the ninety-day period. No retroactive adjustment will be made if purchases exceed the amount specified in the Letter of Intent. Income and capital gains distributions taken in additional shares will not apply toward completion of the Letter of Intent. If total purchases made pursuant to the Letter of Intent are less than the amount specified, the Purchaser will be required to remit an amount equal to the difference between the sales charge paid and the sales charge applicable to purchases actually made. Out of the initial purchase (or subsequent purchases, if necessary) 5% of the dollar amount specified on the application will be held in escrow by KIRC in the form of shares registered in the Purchaser's name. The escrowed shares will not be available for redemption, transfer or encumbrance by the Purchaser until the Letter of Intent is completed or the higher sales charge paid. All income and capital gains distributions on escrowed shares will be paid to the Purchaser or his order. When the minimum investment specified in the Letter of Intent is completed (either prior to or by the end of the thirteen-month period), the Purchaser will be notified and the escrowed shares will be released. If the intended investment is not completed, the Purchaser will be asked to remit to the Principal Underwriter any difference between the sales charge on the amount specified and on the amount actually attained. If the Purchaser does not within 20 days after written request by the Principal Underwriter or his dealer pay such difference in sales charge, KIRC will redeem an appropriate number of the escrowed shares in order to realize such difference. Shares remaining after any such redemption will be released by KIRC. Any redemptions made by the Purchaser during the thirteen-month period will be subtracted from the amount of the purchases for purposes of determining whether the Letter of Intent has been completed. In the event of a total redemption of the account prior to completion of the Letter of Intent, the additional sales charge due will be deducted from the proceeds of the redemption and the balance will be forwarded to the Purchaser. By signing the application, the Purchaser irre- vocably constitutes and appoints KIRC his attorney to surrender for redemption any or all escrowed shares with full power of substitution. The Purchaser or his dealer must inform the Principal Underwriter or KIRC that a Letter of Intent is in effect each time a purchase is made. - ------------------------------------ KEYSTONE AMERICA FUND FAMILY * Capital Preservation and Income Fund Government Securities Fund Intermediate Term Bond Fund Strategic Income Fund World Bond Fund Tax Free Income Fund California Insured Tax Free Fund Florida Tax Free Fund Massachusetts Tax Free Fund Missouri Tax Free Fund New York Insured Tax Free Fund Pennsylvania Tax Free Fund Fund for Total Return Global Opportunities Fund Hartwell Emerging Growth Fund, Inc. Omega Fund Fund of the Americas Small Company Growth Fund II Strategic Development Fund - ------------------------------------ [Logo] KEYSTONE INVESTMENTS Keystone Investment Distributors Company 200 Berkeley Street Boston, Massachusetts 02116-5034 SDF-P 7/96 [Recycle Logo] 3.5M -------------------------------------------- KEYSTONE STRATEGIC DEVELOPMENT FUND -------------------------------------------- [Logo] PROSPECTUS AND APPLICATION KEYSTONE STRATEGIC DEVELOPMENT FUND PART B STATEMENT OF ADDITIONAL INFORMATION KEYSTONE STRATEGIC DEVELOPMENT FUND STATEMENT OF ADDITIONAL INFORMATION JULY __, 1996 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 July __, 1996. A copy of the prospectus may be obtained from Keystone Investment Distributors Company (formerly named Keystone Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal underwriter, 200 Berkeley Street, Boston, Massachusetts 02116-5034, or your broker-dealer. TABLE OF CONTENTS Page The Fund 2 Investment Restrictions 2 Distributions and Taxes 5 Valuation of Securities 6 Brokerage 7 Sales Charges 9 Distribution Plans 13 Trustees and Officers 16 Investment Adviser and SubAdviser 20 Principal Underwriter 22 Declaration of Trust 23 Standardized Total Return and Yield Quotations 25 Additional Information 25 Appendix A-1 Financial Statements F-1 Independent Auditors' Report F-_ - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- INVESTMENT RESTRICTIONS - ------------------------------------------------------------------------------- FUNDAMENTAL INVESTMENT RESTRICTIONS The Fund has adopted the fundamental investment restrictions set forth below, which may not be changed without the vote of a majority of the Fund's outstanding voting shares (as defined in the Investment Company Act of 1940 ("1940 Act")). Unless otherwise stated, all references to Fund assets are in terms of current market value. The Fund may not do the following: (1) 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. NON-FUNDAMENTAL INVESTMENT RESTRICTIONS The Fund has adopted the non-fundamental policies set forth below, which may be changed without shareholder approval. 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. (7) (a) 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 (b) 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 NON-FUNDAMENTAL 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. - ------------------------------------------------------------------------------- DISTRIBUTIONS AND TAXES - ------------------------------------------------------------------------------- The Fund distributes to its shareholders dividends from net investment income and net realized capital gains annually in shares or, at the option of the shareholder, in cash. (Distributions of ordinary income may be eligible in whole or in part for the corporate 70% dividends received deduction.) Shareholders who have not opted, prior to the record date for any distribution, to receive cash will have the number of distributed shares determined on the basis of the Fund's net asset value per share computed at the end of the day on the record date after adjustment for the distribution. Net asset value is used in computing the number of shares in both gains and income distribution reinvestments. Account statements and/or checks, as appropriate, will be mailed to shareholders within seven days after the Fund pays the distribution. Unless the Fund receives instructions to the contrary from a shareholder before the record date, it will assume that the shareholder wishes to receive that distribution and future gains and income distributions in shares. Instructions continue in effect until changed in writing. Distributed long-term capital gains are taxable as such to the shareholder regardless of 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 loss will be a long-term capital loss to the extent of the long-term capital gain distribution received in connection with such shares. If the net asset value of the Fund's shares is reduced below a shareholder's cost by a capital gains distribution, such distribution, to the extent of the reduction, would be a return of investment though taxable as stated above. Since distributions of capital gains depend upon profits actually realized from the sale of securities by the Fund, they may or may not occur. The foregoing comments relating to the taxation of dividends and distributions paid on the Fund's shares relate solely to federal income taxation. Such dividends and distributions may also be subject to state and local taxes. When the Fund makes a distribution, it intends to distribute only the Fund's net capital gains and such income as has been pre-determined, to the best of the Fund's ability, to be taxable as ordinary income. Shareholders of the Fund will be advised annually of the federal income tax status of distributions. If more than 50% of the value of the Fund's total assets at the end of a fiscal year is represented by securities of foreign corporations and the Fund elects to make foreign tax credits available to its shareholders, a shareholder will be required to include in his gross income both actual dividends and the amount the Fund advises him is his pro rata portion of income taxes withheld by foreign governments from interest and dividends paid on the Fund's investments. The shareholder will be entitled, however, to take the amount of 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 adjusted 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 portfolio securities are determined in the following manner: (1) securities that are traded on a national securities exchange or the over-the-counter National Market System ("NMS") are valued on the basis of the last sales price on the exchange where primarily traded or NMS prior to the time of the valuation, provided that a sale has occurred and that this price reflects current market value according to procedures established by the Board of Trustees; (2) securities traded in the over-the-counter market, other than on NMS, for which market quotations are readily available, are valued at the mean of the bid and asked prices at the time of valuation; (3) short-term instruments which are purchased with maturities of sixty days or less (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; short-term instruments maturing in more than sixty days when purchased which are held on the sixtieth day prior to maturity are valued at amortized cost (market value on the sixtieth day adjusted for amortization of premium or accretion of discount), which, when combined with accrued interest, approximates market; and which, in either case, reflects fair value as determined by the Board of Trustees; (4) short-term instruments having maturities of more than sixty day for which market quotations are readily available, are valued at current market value; where market quotations are not available, such instruments are valued at fair value as determined by the Board of Trustees; and (5) the following 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. The Fund's pricing service 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 - ------------------------------------------------------------------------------- It is the policy of the Fund, in effecting transactions in portfolio securities, is to seek best execution of orders at the most favorable prices. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations, including, without limitation, the overall direct net economic result to the Fund, involving both price paid or received and any commissions and other costs paid; the efficiency with which the transaction is effected; the broker's 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 judgmental and 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 and other statistical and factual information. Any such research and other statistical and factual information provided by brokers to the Fund or Keystone is 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 "Advisory Agreement"). The cost, value and specific application of such information are indeterminable and cannot be practicably 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 the Advisory Agreement, Keystone is permitted to pay higher brokerage commissions for brokerage and research services in accordance with Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone follows such a practice, it will do so on a basis that is fair and equitable to the Fund. The Fund expects that purchases and sales of equity securities usually will be effected through brokerage transactions for which commissions are payable. Purchases from underwriters will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer's mark up or reflect a dealer's mark down. Where transactions are made in the over-the-counter market, the Fund will deal with primary market makers unless more favorable prices are otherwise obtainable. The Fund may participate, if and when practicable, in group bidding for the direct purchase from an issuer of certain securities to take advantage of the lower purchase price available to such a group. Neither Keystone nor the Fund intends to place securities transactions with any particular broker-dealer or group thereof. The Fund's Board of Trustees has determined, however, that the Fund may consider sales of shares as a factor in the selection of broker-dealers to execute portfolio transactions, subject to the requirements of best execution, including best price, described above. The policy of the Fund with respect to brokerage is and will be reviewed by the Fund's Board of Trustees from time to time. Because of the possibility of further regulatory developments affecting the securities exchanges and brokerage practices generally, the foregoing practices may be changed, modified or eliminated. Investment decisions for the Fund are made independently by Keystone 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. In no instance are portfolio securities purchased from or sold to Keystone, EquitiLink, the Principal Underwriter, or any of their affiliated persons, as defined in the 1940 Act and rules and regulations issued thereunder. For the fiscal years ended March 31, 1995 and 1996, the Fund paid $300,142 and $52,549, respectively, in brokerage commissions. - ------------------------------------------------------------------------------- SALES CHARGES - ------------------------------------------------------------------------------- GENERAL The Fund offers Class A, Class B and Class C 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 purchased on or after June 1, 1995 are subject to a contingent deferred sales charge payable upon redemption during the 72 month period following the month of purchase. Class B shares purchased prior to June 1, 1995 are subject to a contingent deferred sales charge upon redemption within four calendar years following the year of purchase ("Back End Load Option"). Class B shares purchased on or after June 1, 1995 that have been outstanding for eight years from and including the month of purchase will automatically convert to Class A shares without imposition of a front-end sales charge or exchange fee. Class B shares purchased prior to June 1, 1995 will similarly convert to Class A shares at the end of seven calendar years after the year of purchase. (Conversion of Class B shares represented by stock certificates will require the return of the stock certificates to Keystone Investor Resource Center, Inc., ("KIRC") the Fund's transfer and dividend disbursing agent.) Class C shares are sold subject to a contingent deferred sales charge payable upon redemption within one year after purchase ("Level Load Option"). Class C shares are available only through dealers who have entered into special distribution agreements with the Principal Underwriter. The prospectus contains a general description of how investors may buy shares of the Fund as well as a table of applicable sales charges for Class A shares; a discussion of reduced sales charges that may apply to subsequent purchases; and a description of applicable contingent deferred sales charges. CONTINGENT DEFERRED SALES CHARGES In order to reimburse the Fund for certain expenses relating to the sale of its shares (See "Distribution 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 (1) in an amount equal to or exceeding $1,000,000, and/or (2) by a corporate qualified retirement plan or a non-qualified deferred compensation plan sponsored by a corporation having 100 or more eligible employees (a "Qualifying Plan"), in either case without a front-end sales charge, will be subject to a contingent deferred sales charge of 1% during the 24 month period following the date of purchase. The contingent deferred sales charge will be retained by the Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge" below. CLASS B SHARES With respect to Class B shares purchased on or after June 1, 1995, the Fund, with certain exceptions, will impose a deferred sales charge as a percentage of net asset value or net cost of such Class B shares redeemed during succeeding twelve-month periods as follows: 5% during the first twelve-month period; 4% during the second twelve-month period; 3% during the third twelve-month period; 3% during the fourth twelve-month period; 2% during the fifth twelve-month period; and 1% during the sixth twelve month-period. No deferred sales charge is imposed on amounts redeemed thereafter. With respect to Class B shares purchased prior to June 1, 1995, the Fund, with certain exceptions, may impose a deferred sales charge of 3% on shares redeemed during the calendar year of purchase and the first calendar year after the year of purchase; 2% on shares redeemed during the second calendar year after the year of purchase; and 1% on shares redeemed during the third calendar year after the year of purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales charge is deducted from the redemption proceeds otherwise payable to you. The deferred sales charge is retained by the Principal Underwriter. Amounts received by the Principal Underwriter under the Class B Distribution Plans are reduced by deferred sales charges retained by the Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge" and "Waiver of Sales Charges" below. CLASS C SHARES With certain exceptions, the Fund will impose a deferred sales charge of 1% on Class C shares redeemed within one year after the date of purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales charge is deducted from the redemption proceeds otherwise payable to you. The deferred sales charge is retained by the Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge" below. CALCULATION OF CONTINGENT DEFERRED SALES CHARGE Any contingent deferred sales charge imposed upon the redemption of Class A, Class B or Class C shares is a percentage of the lesser of (1) the net asset value of the shares redeemed or (2) the net cost of such shares. No contingent deferred sales charge is imposed when you redeem amounts derived from (1) increases in the value of your account above the net cost of such shares due to increases in the net asset value per share of such shares; (2) certain shares with respect to which the Fund did not pay a commission on issuance, including shares acquired through reinvestment of dividend income and capital gains distributions; (3) certain Class A shares held for more than two years from the date of purchase; (4) Class B shares held for more than four consecutive calendar years or more than 72 months after the month of purchase, as the case may be; or (5) Class C shares held for more than one year from the date of purchase. Upon request for redemption, shares not subject to the contingent deferred sales charge will be redeemed first. Thereafter, shares held the longest will be the first to be redeemed. There is no contingent deferred sales charge when the shares of a class are exchanged for the shares of the same class of another Keystone America Fund. Moreover, when shares of one such class of a fund have been exchanged for shares of another such class of a fund, the calendar year of the purchase of the shares of the fund exchanged into is assumed to be the year shares tendered for exchange were originally purchased. WAIVER OF SALES CHARGES Shares of the Fund may also be sold, to the extent permitted by applicable law, regulations, interpretations or exemptions, at net asset value without the imposition of an initial sales charge to (1) certain Directors, Trustees, officers, full-time employees or sales representatives of the Fund, Keystone, Keystone Investments, Inc. (formerly Keystone Group, Inc.) ("Keystone Investments"), their affiliates or the Principal Underwriter and who have been such for not less than ninety days; (2) a pension and profit-sharing plan established by such companies, their subsidiaries and affiliates for the benefit of their Directors, Trustees, officers, full-time employees and sales representatives; or (3) a registered representative of a firm with a dealer agreement with the Principal Underwriter; provided, however, that all such sales are made upon the written assurance that the purchase is made for investment purposes and that the securities will not be resold except through redemption by the Fund. No initial sales charge is imposed on purchases of shares of the Fund by a bank or trust company in a single account in the name of such bank or trust company as trustee if the initial investment in shares of the Fund or any Fund in the Keystone Investments Family of Funds purchased pursuant to this waiver is at least $500,000 and any commission paid at the time of such purchase is not more than 1% of the amount invested. With respect to Class A shares purchased by a Qualifying Plan at net asset value or Class C shares purchased by a Qualifying Plan, no contingent deferred sales charge will be imposed on any redemptions made specifically by an individual participant in the Qualifying Plan. This waiver is not available in the event a Qualifying Plan, as a whole, redeems substantially all of its assets. In addition, no contingent deferred sales charge is imposed on a redemption of shares of the Fund in the event of (1) death or disability of the shareholder; (2) a lump-sum distribution from a benefit plan qualified under the Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of an account having an aggregate net asset value of less than $1,000; (5) automatic withdrawals under a Systematic Income Plan of up to 1 1/2% per month of the shareholder's initial account balance; (6) withdrawals consisting of loan proceeds to a retirement plan participant; (7) financial hardship withdrawals made by a retirement plan participant; or (8) withdrawals consisting of returns of excess contributions or excess deferral amounts made to a retirement plan participant. REDEMPTION OF SHARES The Fund has obligated itself under the 1940 Act to redeem for cash all shares presented for redemption by any one shareholder up to the lesser of $250,000 or 1% of the Fund's assets in any 90 day period. - ------------------------------------------------------------------------------- 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. The Fund's Class A, B and C Distribution Plans have been approved by the Fund's Board of Trustees, including a majority of the Trustees who are not interested persons of the Fund, as defined in the 1940 Act, and who have no direct or indirect financial interest in the Distribution Plans or any agreement related thereto (the "Independent Trustees"). DISTRIBUTION PLANS IN GENERAL The National Association of Securities Dealers (the "NASD") limits the amount that the Fund may pay annually in distribution costs for sale of its shares and shareholder service fees. The NASD limits annual expenditures to 1% of the aggregate average daily net asset value of its shares, of which 0.75% may be used to pay such distribution costs and 0.25% may be used to pay shareholder service fees. The NASD also limits the aggregate amount that the Fund may pay for such distribution costs to 6.25% of gross share sales since the inception of the 12b-1 Plan, plus interest at the prime rate plus 1% on such amounts (less any contingent deferred sales charges paid by shareholders to the Principal Underwriter). CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the Fund may expend daily amounts at an annual rate, which is currently limited to up to 0.25% of the Fund's average daily net asset value attributable to Class A shares, to finance any activity that is primarily intended to result in the sale of Class A shares, including, without limitation, expenditures consisting of payments to the principal underwriter of the Fund (currently the Principal Underwriter) to enable the Principal Underwriter to pay or to have paid to others (dealers) who sell Class A shares a service or other fee, at such intervals as the Principal Underwriter may determine, in respect of Class A shares maintained by any such recipients and outstanding on the books of the Fund for specified periods. Amounts paid by the Fund under the Class A Distribution Plan are currently used to pay others, such as dealers, service fees at an annual rate of up to 0.25% of the average net asset value of Class A shares maintained, by such others and outstanding on the books of the Fund for specified periods. CLASS B DISTRIBUTION PLANS. Each Class B Distribution Plan provides that the Fund may expend daily amounts at an annual rate of up to 1% of the Fund's average daily net asset value attributable to Class B shares to finance any activity that is primarily intended to result in the sale of Class B shares, including, without limitation, expenditures consisting of payments to the principal underwriter of the Fund (currently the Principal Underwriter) (1) to enable the Principal Underwriter to pay to others (dealers) commissions in respect of Class B shares sold since inception of the Distribution Plans; and (2) to enable the Principal Underwriter to pay or to have paid to others a service fee, at such intervals as the Principal Underwriter may determine, in respect of Class B shares maintained by any such recipients and outstanding on the books of the Fund for specified periods. The Principal Underwriter generally reallows to brokers or others a commission equal to 4% of the price paid for each Class B share sold plus the first year's service fee in advance in the amount of 0.25% of the price paid for each Class B share sold. Beginning approximately 12 months after the purchase of a Class B share, the broker or other party receives service fees at an annual rate of 0.25% of the average daily net asset value of such Class B share maintained by the recipient and outstanding on the books of the Fund for specified periods. The Principal Underwriter intends, but is not obligated, to continue to pay or accrue distribution charges incurred in connection with a Class B Distribution Plan that exceed current annual payments permitted to be received by the Principal Underwriter from the Fund. The Principal Underwriter intends to seek full payment of such charges from the Fund (together with annual interest thereon at the prime rate plus 1%) at such time in the future as, and to the extent that, payment thereof by the Fund would be within the permitted limits. If the Fund's Independent Trustees authorize such payments, the effect would be to extend the period of time during which the Fund incurs the maximum amount of costs allowed by a Class B Distribution Plan. If a Class B Distribution Plan is terminated, the Principal Underwriter will ask the Independent Trustees to take whatever action they deem appropriate under the circumstances with respect to payment of such amounts. In connection with financing its distribution costs, including commission advances to dealers and others, the Principal Underwriter has sold to a financial institution substantially all of its 12b-1 fee collection rights and contingent deferred sales charge collection rights in respect of Class B shares sold during the two-year period commencing approximately June 1, 1995. The Fund has agreed not to reduce the rate of payment of 12b-1 fees in respect of such Class B shares unless it terminates such shares' Distribution Plan completely. If it terminates such Distribution Plan, the Fund may be subject to possible adverse distribution consequences. CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the Fund may expend daily amounts at an annual rate of up to 1% of the Fund's average daily net asset value attributable to Class C shares to finance any activity that is primarily intended to result in the sale of Class C shares, including, without limitation, expenditures consisting of payments to the principal underwriter of the Fund (currently the Principal Underwriter) (1) to enable the Principal Underwriter to pay to others (dealers) commissions in respect of Class C shares sold since inception of the Distribution Plan; and (2) to enable the Principal Underwriter to pay or to have paid to others a service fee, at such intervals as the Principal Underwriter may determine, in respect of Class C shares maintained by any such recipients and outstanding on the books of the Fund for specified periods. The Principal Underwriter generally reallows to brokers or others a commission in the amount of 0.75% of the price paid for each Class C share sold plus the first year's service fee in advance in the amount of 0.25% of the price paid for each Class C share sold. Beginning approximately fifteen months after purchase, brokers or others receive a commission at an annual rate of 0.75% (subject to NASD rules) plus service fees at the annual rate of 0.25% of the average daily net asset value of each Class C share maintained by the recipients and outstanding on the books of the Fund for specified periods. DISTRIBUTION PLANS - GENERAL Whether any expenditure under a Distribution Plan is subject to a state expense limit will depend upon the nature of the expenditure and the terms of the state law, regulation or order imposing the limit. A portion of the Fund's Distribution Plan expenses may be includable in the Fund's total operating expenses for purposes of determining compliance with state expense limits. Each of the Distribution Plans may be terminated at any time by a vote of the Fund's Independent Trustees, or by vote of a majority of the outstanding voting shares of the respective class of Fund shares. 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 Independent 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 Independent Trustees quarterly. The Independent Trustees may require or approve changes in the implementation or operation of a Distribution Plan, and may also require that total expenditures by the Fund under a Distribution Plan be kept within limits lower than the maximum amount permitted by a Distribution Plan as stated above. The Independent Trustees of the Fund have determined that the sales of the Fund's shares resulting from payments under the Distribution Plans have benefited the Fund. Unpaid distribution costs at fiscal year end March 31, 1996 were: $872,923 for Class B shares purchased prior to June 1, 1995 (5.76% of such Class B shares); $95,782 for Class B shares purchased on or after June 1, 1995 (.63% of such Class B shares); and $119,301 for Class C shares (5.88% of Class C shares). During the fiscal year ended March 31, 1996, the Fund paid the Principal Underwriter: $11,886, pursuant to its Class A Distribution Plan; $144,420 for Class B shares sold prior to June 1, 1995 and $7,960 for Class B shares sold on or after June 1, 1995 under its Class B Distribution Plans; and $17,285 under its Class C Distribution Plan. - ------------------------------------------------------------------------------- TRUSTEES AND OFFICERS - ------------------------------------------------------------------------------- The 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, Chief Executive Officer and Trustee of the Fund; Chairman of the Board, President and Chief Executive Officer of Keystone Investments, Keystone, Keystone Management and Keystone Software, Inc. ("Keystone Software"); President, Chief Executive Officer and Trustee or Director of all other funds in the Keystone Investments Family of Funds; Chairman of the Board and Director of Keystone Institutional Company, Inc. ("Keystone Institutional") (formerly named Keystone Investment Management Corporation) and Keystone Fixed Income Advisors ("KFIA"); Director and President of Keystone Asset Corporation, Keystone Capital Corporation and Keystone Trust Company; Director of the Principal Underwriter, KIRC and Fiduciary Investment Company, Inc. ("FICO"); Director of Boston Children's Services Association; Trustee of Anatolia College, Middlesex School, and Middlebury College; Member, Board of Governors, New England Medical Center; former Director and President of Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"); former Director and Vice President, Robert Van Partners, Inc. and former Trustee of Neworld Bank. FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of 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 funds in the Keystone Investments Family of 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; Chairman of the Board and Trustee or Director of all other funds in the Keystone Investments Family of Funds; Director of Keystone Investments; Chairman of the Board and Trustee of Anatolia College; Trustee of University Hospital (and Chairman of its Investment Committee); former Director and Chairman of the Board of Hartwell Keystone; former Chairman of the Board and Chief Executive Officer of Keystone Investments; and former Chief Executive Officer of the Fund. EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of Funds; Director and former Executive Vice President, National Alliance of Business; former Vice President, Educational Testing Services; former Dean, School of Business, Adelphi University; and former Executive Director, Coalition of Essential Schools, Brown University. CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of Funds; former Group Vice President, Textron Corp.; and former Director, Peoples Bank (Charlotte, N.C). K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of 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 Investments and Keystone. LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of 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. F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of 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 funds in the Keystone Investments Family of Funds; Executive Vice President, DHR International, Inc. (executive recruitment); former Senior Vice President, Boyden International Inc. (executive recruitment); and Director, Commerce and Industry Association of New Jersey, 411 International, Inc. and J & M Cumming Paper Co. RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of 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 Enhance Financial Services, Inc.; 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; former Managing Director of Russell Miller, Inc.; and former Member, Georgetown College Board of Advisors. ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of Funds; Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano, P.C.; former President, Nassau County Bar Association; former Associate Dean and Professor of Law, St. John's University School of Law. EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of all other funds in the Keystone Investments Family of Funds; Director, Senior Vice President, Chief Financial Officer and Treasurer of Keystone Investments, the Principal Underwriter, Keystone Asset Corporation, Keystone Capital Corporation, Keystone Trust Company; Treasurer of Keystone Institutional and FICO; Treasurer and Director of Keystone Management, Keystone Software; Vice President and Treasurer of KFIA; Director of KIRC; former Treasurer and Director of Hartwell Keystone; former Treasurer of Robert Van Partners, Inc. JAMES R. McCALL: Senior Vice President of the Fund; enior Vice President of all other funds in the Keystone Investments Family of Funds; and President of Keystone. J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other funds in the Keystone Investments Family of Funds; Vice President of Keystone Investments, Keystone, the Principal Underwriter, FICO and Keystone Software; and former Controller of Keystone Investments and certain of its affiliated operating companies. ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior Vice President and Secretary of all other funds in the Keystone Investments Family of Funds; Senior Vice President, General Counsel and Secretary of Keystone; Senior Vice President, General Counsel, Secretary and Director of the Principal Underwriter, Keystone Management and Keystone Software; Senior Vice President and General Counsel of Keystone Institutional; Senior Vice President, General Counsel and Director of FICO and KIRC; Vice President and Secretary of KFIA; Senior Vice President, General Counsel and Secretary of Keystone Investments, Keystone Asset Corporation, Keystone Capital Corporation and Keystone Trust Company; former Senior Vice President and Secretary of Hartwell Keystone and Robert Van Partners, Inc. * 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 Investments and several of its affiliates including Keystone, the Principal Underwriter and KIRC. Mr. Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is Chairman of the Board, Chief Executive Officer and Director of Keystone Investments. Mr. Bissell is a Director of Keystone Investments. During the fiscal year ended March 31, 1996, no Trustee affiliated with Keystone or any officer received any direct remuneration from the Fund. During the same period, the unaffiliated Trustees received no retainers or fees from the Fund. Annual retainers and meeting fees paid by all funds in the Keystone Investments Family of Funds (which includes over 30 mutual funds) for the calendar year ended December 31, 1995, totalled approximately $450,716. As of April 30, 1996, the Trustees and officers beneficially owned 1.21% of the Fund's then outstanding Class A shares. As of April 30, 1996, the Trustees and officers beneficially owned less than 1% of the Fund's then outstanding Class B and Class C shares. The address of all of the Fund's Trustees and officers and the address of the Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034. - ------------------------------------------------------------------------------- INVESTMENT ADVISER AND SUBADVISER - ------------------------------------------------------------------------------- INVESTMENT ADVISER Subject to the general supervision of the Fund's Board of Trustees, Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, serves as investment adviser to the Fund and is responsible for the overall management of the Fund's business and affairs. Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone Investments, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034. Keystone Investments is a private corporation predominantly owned by current and former members of management of Keystone and its affiliates. The shares of Keystone Investments common stock beneficially owned by management are held in a number of voting trusts, the trustees of which are George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey, Ralph J. Spuehler, Jr. and Rosemary D. Van Antwerp. Keystone Investments provides accounting, bookkeeping, legal, personnel and general corporate services to Keystone, its affiliates and the Keystone Investments Family of Funds. Except as otherwise noted below, pursuant to the Advisory Agreement and subject to the supervision of the Fund's Board of Trustees, Keystone furnishes to the Fund investment advisory, management and administrative services, office facilities, 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. STATE EXPENSE LIMITATIONS The Fund is subject to certain annual state expense limitations, the most restrictive of which is as follows: 2.5% of the first $30 million of Fund average daily net assets; 2.0% of the next $70 million of Fund average daily net assets; and 1.5% of Fund average daily 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. As a continuing condition of registration of shares in a state, Keystone has agreed to reimburse the Fund annually for certain operating expenses incurred by the Fund in excess of certain percentages of the Fund's average daily net assets. However, Keystone is not required to reimburse the Fund to the extent that such reimbursement would result in the Fund's inability to qualify as a regulated investment company under the provisions of the Internal Revenue Code. This condition may be modified or eliminated in the future. - ------------------------------------------------------------------------------- PRINCIPAL UNDERWRITER - ------------------------------------------------------------------------------- The Fund has entered into a Principal Underwriting Agreement (the "Underwriting Agreement") with Keystone Investment Distributors Company, a wholly-owned subsidiary of Keystone. The Principal Underwriter, located at 200 Berkeley Street, Boston, Massachusetts, 02116-5034, is a Delaware corporation. The Principal Underwriter, as agent, currently has the right to obtain subscriptions for and to sell shares of the Fund to the public. In so doing, the Principal Underwriter 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. The Principal Underwriter has not undertaken to buy or to find purchasers for any specific number of shares. The Principal Underwriter may receive payments from the Fund pursuant to the Fund's Distribution Plans. All subscriptions and sales of shares by the Principal Underwriter are at the offering price of the shares, such price being in accordance with the provisions of the Fund's Declaration of Trust, By-Laws, current prospectus and statement of additional information. All orders are subject to acceptance by the Fund, and the Fund reserves the right, in its sole discretion, to reject any order received. Under the Underwriting Agreement, the Fund is not liable to anyone for failure to accept any order. The Fund has agreed under the Underwriting Agreement to pay all expenses in connection with registration of its shares with the Commission as well as auditing and filing fees in connection with registration of its shares under the various state "blue-sky" laws. From time to time, if in the Principal Underwriter's judgment it could benefit the sales of Fund shares, the Principal Underwriter may provide to selected dealers promotional materials and selling aids, including, but not limited to, personal computers, related software and Fund data files. The Principal Underwriter has agreed that it will, in all respects, duly conform to all state and federal laws applicable to the sale of the shares. The Principal Underwriter has also agreed that it will indemnify and hold harmless the Fund, and each person who has been, is or may be a Trustee or officer of the Fund, against expenses reasonably incurred by any of them in connection with any claim, action, suit or proceeding to which any of them may be a party that arises out of or is alleged to arise out of any misrepresentation or omission to state a material fact on the part of the Principal Underwriter or any other person for whose acts the Principal Underwriter is responsible or is alleged to be responsible, unless such misrepresentation or omission was made in reliance upon written information furnished by the Fund. The Underwriting Agreement will remain in effect as long as its terms and continuance are approved by a majority of the Fund's Independent Trustees at least annually at a meeting called for that purpose, and if its continuance is approved annually by vote of a majority of Trustees, or by vote of a majority of the outstanding shares. The Underwriting Agreement may be terminated, without penalty, on 60 days' written notice by the Fund's Board of Trustees or by a vote of a majority of outstanding shares. The 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 (the "Declaration of Trust"). The principal distinction between the Fund and a corporation relates to shareholder liability described below. The Fund is similar in most respects to a business corporation. A copy of the Declaration of Trust is filed as an exhibit to the Registration Statement of which this statement of additional information is a part. This summary is qualified in its entirety by reference to the Declaration of Trust. DESCRIPTION OF SHARES The Declaration of Trust authorizes the issuance of an unlimited number of shares of beneficial interest of classes of shares. Each share of the Fund represents an equal proportionate interest with each other share of that class. Upon liquidation, shares are entitled to a pro rata share of the Fund based on the relative net assets of each class. Shareholders have no preemptive or conversion rights. Shares are redeemable and transferable. The Fund is authorized to issue additional classes or series of shares. Generally, the Fund issues three classes of shares, but may issue additional classes or series of shares. SHAREHOLDER LIABILITY Pursuant to certain decisions of the Supreme Judicial Court of Massachusetts, shareholders of a Massachusetts business trust may, under certain circumstances, be held personally liable as partners for the obligations of the trust. If the Fund were held to be a partnership, the possibility of the shareholders' incurring financial loss for that reason appears remote because (1) the Declaration of Trust contains an express disclaimer of shareholder liability for obligations of the Fund and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Fund or the Trustees; and (2) the Declaration of Trust provides for indemnification out of the Fund's property for any shareholder held personally liable for the obligations of the Fund. VOTING RIGHTS Under the Declaration of Trust, the Fund does not hold annual meetings. At meetings called for the initial election of Trustees or to consider other matters, shares are entitled to one vote per share. Shares generally vote together as one class on all matters. 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 which 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 an initial meeting as described above, no further meetings of shareholders for the purpose of electing Trustees will be held, unless required by law, unless and until such time as less than a majority of the Trustees holding office have been elected by shareholders, at which time, the Trustees then in office will call a shareholders' meeting for 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 deducted and all recurring fees charged to all shareholder accounts are deducted. The ending redeemable value assumes a complete redemption at the end of the relevant periods. The cumulative total returns of Class A shares for the period from October 17, 1994 (commencement of operations) to March 31, 1996 was 1.22%. The compounded average annual rates of return for Class A shares for the one year period ended March 31, 1996 and the period from commencement of operations to March 31, 1996 were 12.22%, and 0.84%, respectively. The cumulative total returns for Class B and Class C shares for the period October 17, 1994 (commencement of operations) through fiscal year ended March 31, 1996 were 2.20% (including applicable contingent deferred sales charges), and 6.20%, respectively. The compounded average annual rates of return for Class B and Class C shares for the one year period ended March 31, 1996 were 14.13% (including applicable contingent deferred sales charge) and 18.13%, respectively. The compounded average annual rates of return for Class B and Class C shares for the period beginning October 17, 1994 (commencement of operations) through March 31, 1996 were 1,51% (including applicable contingent deferred sales charges) and 4.22%, respectively. Past performance should not be considered representative of results for any future period of time. 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 does not presently intend to advertise current yield. - ------------------------------------------------------------------------------- ADDITIONAL INFORMATION - ------------------------------------------------------------------------------- State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, is the custodian of all securities and cash of the Fund (the "Custodian"). The Custodian performs no investment management functions for the Fund, but, in addition to its custodial services, is responsible for accounting and related recordkeeping on behalf of the Fund. KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110, Certified Public Accountants, are the Fund's independent auditors. KIRC, 101 Main Street, Cambridge, Massachusetts 02142, a wholly-owned subsidiary of Keystone, acts as transfer agent and dividend disbursing agent for the Fund. As of April 30, 1996, to the best of the Fund's knowledge, no shareholder owned 5% or more of the Fund's Class A shares. As of April 30, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book Entry, 4800 Deer Lake Dr. E 3rd FL, Jacksonville, FL 32246-6468, owned 44.10% of the Fund's outstanding Class B shares. As of April 30, 1996, Gruntal & Co., FBO 544-88017-29, 14 Wall Street, New York, NY 10005, owned 13.78% of the Fund's outstanding Class C shares. Except as otherwise stated in its prospectus or required by law, the Fund reserves the right to change the terms of the offer stated in its prospectus without shareholder approval, including the right to impose or change fees for services provided. No dealer, salesman or other person is authorized to give any information or to make any representation not contained in the Fund's prospectus, statement of additional information or in supplemental sales literature issued by the Fund or the Principal Underwriter, and no person is entitled to rely on any information or representation not contained therein. The Fund's prospectus and statement of additional information omit certain information contained in the Fund's Registration Statement filed with the Commission, which may be obtained from the Commission's principal office in Washington, D.C. upon payment of the fee prescribed by the rules and regulations promulgated by the Commission. The Fund is one of 15 different investment companies in the Keystone America Fund Family, which offers a range of choices to serve shareholder needs. The Keystone America Fund Family consists of the following Funds having the various investment objectives described below: KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income, consistent with low volatility of principal, by investing in adjustable rate securities issued by the U.S. government, its agencies or instrumentalities. KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of capital growth and income from dividend paying common stocks, preferred stocks, convertible bonds, other fixed-income securities and foreign securities (up to 50%). KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign and domestic securities. KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from U.S. government securities. KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital appreciation by investment primarily in small and medium-sized companies in a relatively early stage of development that are principally traded in the over-the-counter market. KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and price appreciation potential from investment grade corporate bonds. KEYSTONE OMEGA FUND - Seeks maximum capital growth from common stocks and securities convertible into common stocks. KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long-term capital growth by investing substantially in equity securities of issuers with small market capitalizations. KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of five separate series of shares investing in different portfolio securities which seeks the highest possible current income, exempt from federal income taxes and applicable state taxes. KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two separate series of shares investing in different portfolio securities which seeks the highest possible current income, exempt from federal income taxes and applicable state taxes. KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation potential from corporate bonds, discount bonds, convertible bonds, preferred stock and foreign bonds (up to 25%). KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes and capital preservation from the four highest grades of municipal bonds. KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital gains and losses and currency exchange gains and losses from investment in debt securities denominated in U.S. and foreign currencies. 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. PAGE 9 Keystone Strategic Development Fund SCHEDULE OF INVESTMENTS--March 31, 1996 NUMBER OF MARKET SHARES VALUE ------------------------------------------------------------- COMMON STOCKS (91.3%) [diamond] ARGENTINA (2.1%) Oil (0.9%) YPF SA 10,100 $ 202,505 ------------------------------------------------------------- Utilities (1.2%) Central Costanera 93,200 270,280 ------------------------------------------------------------- [diamond] TOTAL ARGENTINA 472,785 ============================================================== [diamond] AUSTRALIA (18.3%) Oil (3.4%) Santos Ltd. 75,000 251,426 Woodside Petroleum 86,800 485,651 ------------------------------------------------------------- 737,077 ------------------------------------------------------------- Capital Goods (2.2%) MEMTEC Limited 18,823 485,394 ------------------------------------------------------------- Iron and Steel (5.0%) Broken Hill Proprietary Co. Ltd. 36,267 516,359 CRA Limited 38,055 569,472 ------------------------------------------------------------- 1,085,831 ------------------------------------------------------------- Metals and Mining (7.7%) QNI Limited 150,000 339,923 Savage Resources 664,000 492,928 Western Mining Corp. 128,150 847,190 ------------------------------------------------------------- 1,680,041 ------------------------------------------------------------- [diamond] TOTAL AUSTRALIA 3,988,343 ============================================================== [diamond] BOLIVIA (1.6%) Utilities (1.6%) Compania Bolivia De Energia 9,600 352,800 ------------------------------------------------------------- [diamond] BRAZIL (1.3%) Telecommunications (1.3%) Telecomunicacoes Brasileiras S.A. ADR 5,500 273,625 ------------------------------------------------------------- [diamond] CANADA (15.5%) Oil (2.4%) Arakis Energy Corporation (b) 44,600 $ 183,975 Canadian Occidental Petroleum Ltd. 10,050 339,054 ------------------------------------------------------------- 523,029 ------------------------------------------------------------- Metals and Mining (10.5%) Alcan Aluminum Ltd. 15,200 490,502 Inco Ltd. 17,800 561,349 Potash Corp. of Saskatchewan, Inc. 10,500 661,304 TECK Corp. 26,200 571,654 ------------------------------------------------------------- 2,284,809 ------------------------------------------------------------- Precious Metals (2.6%) TVX Gold, Inc. (b) 63,200 567,803 ------------------------------------------------------------- [diamond] TOTAL CANADA 3,375,641 ============================================================== [diamond] CHILE (4.4%) Forest Products ( 1.2%) Maderas Ysinteticos Sociedad 14,200 252,050 ------------------------------------------------------------- Utilities (3.2%) Enersis S.A. 24,500 692,125 ------------------------------------------------------------- [diamond] TOTAL CHILE 944,175 ============================================================== [diamond] FINLAND (0.9%) Telecommunications (0.9%) Nokia Corp. 5,500 188,375 ------------------------------------------------------------- [diamond] FRANCE (2.2%) Oil (1.4%) Total S.A. 4,525 305,476 ------------------------------------------------------------- Oil Service (0.8%) Coflexip 3,920 167,342 ------------------------------------------------------------- [diamond] TOTAL FRANCE 472,818 ============================================================== (continued on next page) PAGE 10 Keystone Strategic Development Fund SCHEDULE OF INVESTMENTS -- March 31, 1996 NUMBER OF MARKET SHARES VALUE ============================================================== [diamond] HONG KONG (3.2%) Telecommunications (2.1%) Hong Kong Telecommunication 232,800 $ 465,058 - -------------------------------------------------------------- Building (1.1%) Kumagai Gumi HK 260,000 231,963 ------------------------------------------------------------- [diamond] TOTAL HONG KONG 697,021 ============================================================== [diamond] KOREA (2.5%) Utilities (2.4%) Korea Electric Power Corp. 23,100 531,300 ------------------------------------------------------------- Iron and Steel (0.1%) Pohang Iron and Steel 170 12,300 ------------------------------------------------------------- [diamond] TOTAL KOREA 543,600 ============================================================== [diamond] MEXICO (3.2%) Precious Metals (3.2%) Apasco SA 66,000 332,847 Industrias Penoles S.A. de C.V. 85,000 367,751 ------------------------------------------------------------- [diamond] TOTAL MEXICO 700,598 ============================================================== [diamond] PERU (2.3%) Telecommunications (2.3%) CPT Telefonica Del Peru 238,000 490,774 ------------------------------------------------------------- [diamond] SWEDEN (2.6%) Electrical Products (2.6%) Asea AB, Series B 5,521 568,902 ------------------------------------------------------------- [diamond] UNITED KINGDOM (4.6%) Iron and Steel (1.8%) British Steel PLC 134,000 388,584 ------------------------------------------------------------- Metals and Mining (2.8%) RTZ Corp. 41,539 600,566 ------------------------------------------------------------- [diamond] TOTAL UNITED KINGDOM 989,150 ============================================================== [diamond] UNITED STATES (26.6%) Capital Goods (8.1%) AGCO Corp. 30,600 $ 738,225 Caterpillar Inc. 8,400 571,200 Fluor Corp. 6,700 457,275 ------------------------------------------------------------- 1,766,700 ------------------------------------------------------------- Metals and Mining (2.1%) Phelps Dodge Corp. 6,700 459,788 ------------------------------------------------------------- Precious Metals (6.6%) AMAX Gold Inc. 33,000 226,875 Homestake Mining Co. 28,600 554,125 Newmont Mining Corp. 4,800 271,800 Santa Fe Pacific Gold Corp. 24,000 384,000 ------------------------------------------------------------- 1,436,800 ------------------------------------------------------------- Utility (2.6%) Enron Global Power & Pipelines 22,100 569,075 ------------------------------------------------------------- Oil (2.8%) Frontier Oil Exploration Co. (b) 100,000 312,500 Triton Energy Corp. 5,500 306,625 ------------------------------------------------------------- 619,125 ------------------------------------------------------------- Oil Services (3.2%) Schlumberger, Ltd. 8,900 704,213 ------------------------------------------------------------- Paper & Packaging (1.2%) Weyerhaeuser Co. 5,600 258,300 ------------------------------------------------------------- [diamond] TOTAL UNITED STATES 5,814,001 ============================================================== TOTAL COMMON STOCKS (COST--$16,570,229) 19,872,608 ============================================================== PREFERRED STOCKS (4.2%) [diamond] BRAZIL (4.2%) Iron and Steel (1.4%) Vale do Rio Doce Navegacao S.A. 1,236,000 193,927 Marco Polo SA 700,000 118,332 ------------------------------------------------------------- 312,259 ------------------------------------------------------------- PAGE 11 SCHEDULE OF INVESTMENTS -- March 31, 1996 NUMBER OF MARKET SHARES VALUE ============================================================== Oil (1.3%) Petrol Brasilieros 2,330,000 $278,308 ------------------------------------------------------------- Utilities (1.5%) Cemig CIA Energy 7,500,000 210,295 Electrobras 440,000 120,255 ------------------------------------------------------------- 330,550 ------------------------------------------------------------- TOTAL PREFERRED STOCKS (Cost--$880,013) 921,117 ============================================================== MATURITY VALUE ------------------------------------------------------------- REPURCHASE AGREEMENTS (2.3%) Investments in repurchase agreements, in a joint trading account, purchased 3/29/96, 5.557%, maturing 4/1/96 (a) $ 509,079 509,000 ------------------------------------------------------------- TOTAL REPURCHASE AGREEMENTS (Cost--$509,000) 509,000 ============================================================== INVESTMENT COMPANY (1.8%) [diamond] AUSTRALIA (1.8%) First Resources Development Fund (b) 600,000 384,465 ------------------------------------------------------------- MATURITY MARKET VALUE VALUE ============================================================== TOTAL REGULATED INVESTMENT COMPANY (Cost--$464,864) $ 384,465 ============================================================== WARRANTS/RIGHTS (0.2%) Australia (0.2%) First Resources Development Fund, options (b) 600,000 49,230 ============================================================== TOTAL WARRANTS/RIGHTS (Cost--$0) 49,230 ============================================================== TOTAL INVESTMENTS (Cost--$18,424,106) (c) 21,736,420 ============================================================== FOREIGN CURRENCY HOLDINGS (0.1%) (COST--$7,586) 7,455 ============================================================== OTHER ASSETS AND LIABILITIES-- NET (0.1%) 13,580 ============================================================== NET ASSETS (100.0%) $21,757,455 ============================================================== (a) The repurchase agreements are fully collateralized by U.S. government and/or agency obligations based on market prices at March 31, 1996. (b) Non-income-producing security. (c) The cost of investments for federal income tax purposes is $18,424,106. Gross unrealized appreciation and depreciation of investments based on identified tax cost, at March 31, 1996 are as follows: Gross unrealized appreciation $3,590,038 Gross unrealized depreciation (278,020) ---------- $3,312,018 ========== See Notes to Financial Statements. PAGE 12 Keystone Strategic Development Fund SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
Net Unrealized Exchange U.S. Value at In Exchange Appreciation/ Date March 31, 1996 for U.S. $ (Depreciation) --------------------------------------------------------------------------------------------------- Forward Foreign Currency Exchange Contracts to Sell: Contracts to Deliver - --------------------------------------------------------------------------------------------------- 03/31/96 575,735 French Francs $ 113,000 $ 114,475 ($ 1,475) 03/31/96 2,814,174 Australian Dollars $2,122,000 $2,193,395 ($71,395) ----------- ($72,870) ----------- Forward Foreign Currency Exchange Contracts to Buy: Contracts to Receive - --------------------------------------------------------------------------------------------------- 03/31/96 100,918 Pound Sterling $ 153,749 $ 154,027 $ 278 ----------- Net Unrealized Depreciation on Forward Foreign Currency Exchange Contracts ($72,592) ===========
See Notes to Financial Statements. PAGE 13 FINANCIAL HIGHLIGHTS--CLASS A SHARES (For a share outstanding throughout the year)
Period from October 7, 1994 Year Ended (commencement of operations) March 31, 1996 to March 31, 1995 ===================================================================================================== Net asset value beginning of year $ 9.02 $ 10.00 ---------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.040) (0.002) Net gain (loss) on investment and foreign currency related transactions 1.760 (0.978) ---------------------------------------------------------------------------------------------------- Total income (loss) from investment operations 1.720 (0.980) ---------------------------------------------------------------------------------------------------- Net asset value end of year $ 10.74 $ 9.02 ===================================================================================================== Total return(a) 19.07% (9.80%) Ratios/supplemental data Ratios to average net assets: Operating and management expenses 2.38%(c) 2.77%(b) Net investment loss (0.41%) (0.07%)(b) Portfolio turnover rate 40% 13% Average commission rate paid $0.0025 N/A Net assets end of year (thousands) $ 4,574 $ 4,890 =====================================================================================================
(a) Excluding applicable sales charges. (b) Annualized (c) "Ratio of total expenses to average net assets" for the year ended March 31, 1996 includes indirectly paid expenses. Excluding indirectly paid expenses for the year ended March 31, 1996, the expense ratio would have been 2.37%. See Notes to Financial Statements. PAGE 14 Keystone Strategic Development Fund FINANCIAL HIGHLIGHTS--CLASS B SHARES (For a share outstanding throughout the year)
Period from October 7, 1994 Year Ended (commencement of operations) March 31, 1996 to March 31, 1995 ===================================================================================================== Net asset value beginning of year $ 8.99 $ 10.00 ---------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.130) (0.026) Net gain (loss) on investment and foreign currency related transactions 1.760 (0.984) Total income from investment operations 1.630 (1.010) Net asset value end of year $ 10.62 $ 8.99 ===================================================================================================== Total return(a) 18.13% (10.10%) Ratios/supplemental data Ratios to average net assets: Operating and management expenses 3.13%(c) 3.55%(b) Net investment income (loss) 1.16% (.80%)(b) Portfolio turnover rate 40% 13% Average commission rate paid $0.0025 N/A Net assets end of year (thousands) $15,161 $14,688 =====================================================================================================
(a) Excluding applicable sales charges. (b) Annualized (c) "Ratio of total expenses to average net assets" for the year ended March 31, 1996 includes indirectly paid expenses. Excluding indirectly paid expenses for the year ended March 31, 1996, the expense ratio would have been 3.12%. See Notes to Financial Statements. PAGE 15 FINANCIAL HIGHLIGHTS--CLASS C SHARES (For a share outstanding throughout the year)
Period from October 7, 1994 Year Ended (commencement of operations) March 31, 1996 to March 31, 1995 ===================================================================================================== Net asset value beginning of year $ 8.99 $ 10.00 ----------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.100) (0.034) Net gain (loss) on investment and foreign currency related transactions 1.730 (0.976) Total income from investment operations 1.630 (1.010) ----------------------------------------------------------------------------------------------------- Net asset value end of year $ 10.62 $ 8.99 ===================================================================================================== Total return(a) 18.13% (10.10%) Ratios/supplemental data Ratios to average net assets: Operating and management expenses 3.13%(c) 3.51%(b) Net investment income (loss) 1.16% (.93%)(b) Portfolio turnover rate 40% 13% Average commission rate paid $0.0025 N/A Net assets end of year (thousands) $ 2,023 $ 1,393 =====================================================================================================
(a) Excluding applicable sales charges. (b) Annualized (c) "Ratio of total expenses to average net assets" for the year ended March 31, 1996 includes indirectly paid expenses. Excluding indirectly paid expenses for the year ended March 31, 1996, the expense ratio would have been 3.12%. See Notes to Financial Statements. PAGE 16 Keystone Strategic Development Fund STATEMENT OF ASSETS AND LIABILITIES-- March 31, 1996 Assets: ================================================================= Investments at market value (identified cost--$18,424,106) (Note 1) $21,736,420 Foreign currency holdings (identified cost--$7,586) (Note 1) 7,455 - ----------------------------------------------------------------- Total Investments (identified cost--$18,431,692) 21,743,875 - ----------------------------------------------------------------- Cash 338 Receivable for: Investments sold 37,340 Dividends and interest 68,761 Fund shares sold 173,983 Deferred organization expense (Note 1) 34,076 Prepaid expenses 990 Foreign tax receivable 2,142 - ----------------------------------------------------------------- Total assets 22,061,505 - ----------------------------------------------------------------- Liabilities: Payable for: Investments purchased 191,367 Net unrealized depreciation on forward foreign currency exchange contracts 72,592 Fund shares redeemed 21,456 Foreign taxes withheld 2,557 Other accrued expenses 16,078 - ----------------------------------------------------------------- Total liabilities 304,050 - ----------------------------------------------------------------- Net assets $21,757,455 ================================================================= Net assets represented by: Paid-in-capital (Note 1) $19,347,224 Undistributed net investment income 3,718 Accumulated net realized losses on investment and foreign currency related transactions (832,661) Net unrealized appreciation on investments and foreign currency related transactions 3,311,766 Net unrealized depreciation on forward foreign currency exchange contracts (72,592) - ----------------------------------------------------------------- Total net assets $21,757,455 - ----------------------------------------------------------------- Net asset value per share: (Note 2) Class A Shares ($10.74 425,914 shares outstanding) $ 4,573,576 Class B Shares ($10.62 1,427,520 shares outstanding) 15,161,116 Class C Shares ($10.62 190,428 shares outstanding) 2,022,763 - ----------------------------------------------------------------- $21,757,455 - ----------------------------------------------------------------- Offering price per share: Class A Shares (including sales charge of 5.75%) (Note 1) $11.40 - ----------------------------------------------------------------- Class B Shares $10.62 - ----------------------------------------------------------------- Class C Shares $10.62 ================================================================= STATEMENT OF OPERATIONS-- Year Ended March 31, 1996 ================================================================= Investment income (Note 1): Interest $ 63,179 Dividends (net of withholding taxes of $29,052) 362,677 - --------------------------------------------------------------- Total income 425,856 - ---------------------------------------------------------------- Expenses (Notes 1, 2 and 4): Management fee 217,332 Shareholder Services 87,125 Accounting, Auditing and Legal 29,791 Custodian fees 29,732 Printing 28,702 Distribution Plan expenses 181,551 Registration fees 60,396 Amortization of organization expense 9,467 Miscellaneous expenses 3,027 - --------------------------------------------------------------- Total expenses 647,123 Less: Expenses paid indirectly (Note 5) (3,498) - --------------------------------------------------------------- Net expenses 643,625 - --------------------------------------------------------------- Net investment loss (217,769) - --------------------------------------------------------------- Net realized and unrealized gain (loss) on investments and foreign currency related transactions (Note 3): Realized gain (loss) on: Investment transactions 279,944 Foreign currency related transactions (148,032) - --------------------------------------------------------------- Net realized gain on investments and foreign currency related transactions 131,912 - --------------------------------------------------------------- Net unrealized appreciation (depreciation) on investments and foreign currency related transactions Beginning of period (561,958) End of period 3,311,766 - --------------------------------------------------------------- 3,873,724 - --------------------------------------------------------------- Net unrealized appreciation (depreciation) on forward foreign currency exchange contracts Beginning of period 25,799 End of period (72,592) --------------------------------------------------------------- (98,391) --------------------------------------------------------------- Net change in unrealized appreciation on investments, foreign currency related transactions and forward foreign currency exchange contracts 3,775,333 --------------------------------------------------------------- Net gain on investments, foreign currency related transactions and forward foreign currency exchange contracts 3,907,245 --------------------------------------------------------------- Net increase in net assets resulting from operations $3,689,476 ================================================================ See Notes to Financial Statements. PAGE 17 STATEMENTS OF CHANGES IN NET ASSETS
Period from October 7, 1994 Year Ended (commencement of operations) March 31, 1996 to March 31, 1995 - -------------------------------------------------------------------------------------------------------------- Operations: Net Investment loss ($ 217,769) ($ 54,640) Net realized gain (loss) on investment and foreign currency related transactions 131,912 (1,120,540) Net change in unrealized appreciation (depreciation) on investments, foreign currency related transactions and foreign currency exchange contracts 3,775,333 (536,159) - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 3,689,476 (1,711,339) - -------------------------------------------------------------------------------------------------------------- Capital share transactions (Note 2): Proceeds from shares sold--Class A Shares 1,145,130 5,752,543 Proceeds from shares sold--Class B Shares 2,628,135 17,241,435 Proceeds from shares sold--Class C Shares 672,747 1,573,595 Payments for shares redeemed--Class A Shares (2,328,932) (506,367) Payments for shares redeemed--Class B Shares (4,711,542) (1,400,994) Payments for shares redeemed--Class C Shares (308,032) (78,400) - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from capital share transactions (2,902,494) 22,581,812 - -------------------------------------------------------------------------------------------------------------- Total increase in net assets 786,982 20,870,473 - -------------------------------------------------------------------------------------------------------------- Net assets: Beginning of period 20,970,473 100,000 - -------------------------------------------------------------------------------------------------------------- End of period (including undistributed net investment income and accumulated distributions in excess of net investment income as follows: 1996--$3,718 and 1995-- ($24,251)) (Note 1) $21,757,455 $20,970,473 ==============================================================================================================
See Notes to Financial Statements. PAGE 18 Keystone Strategic Development Fund NOTES TO FINANCIAL STATEMENTS (1.) Significant Accounting Policies Keystone Strategic Development Fund (the "Fund") is a Massachusetts business trust for which Keystone Investment Management Company (formerly, Keystone Custodian Funds, Inc.)("Keystone"), is the investment adviser. The Fund is registered under the Investment Company Act of 1940 (the "1940 Act"), as a diversified, open-end investment company. The Fund seeks long term capital growth by investing primarily in equity securities. Equitilink International Management Limited ("EIML"), acts as sub-adviser 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 Investments, Inc. (formerly, Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is a private corporation predominately owned by current and former members of management of Keystone and its affiliates. Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer agent. The Fund currently offers three classes of shares. Class A shares are offered at a public offering price which includes a maximum sales charge of 5.75% payable at the time of purchase. Class B shares are sold subject to a contingent deferred sales charge payable upon redemption which decreases depending on when the shares were purchased and 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 Investment Distributors Company (formerly, Keystone Distributors, Inc.), ("KIDCO") the Fund's principal underwriter. 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 which require management to make estimates and assumptions that affect amounts reported herein. Although actual results could differ from these estimates, any such differences are expected to be immaterial to the net assets of the Fund. 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 by or under the direction of the Board of Trustees: (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. 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. PAGE 19 Investments denominated in foreign currencies are adjusted daily to reflect changes in exchange rates. These 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. Net unrealized foreign exchange gains/losses are a component of unrealized appreciation/depreciation of investments. 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. C. Securities transactions are accounted for no later than one business day after 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. Distributions to shareholders are 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 is 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 PAGE 20 Keystone Strategic Development Fund agreements that are fully collateralized by U.S. Treasury and/or Federal Agency obligations. F. From time to time the Fund may enter into forward foreign currency exchange contracts to hedge certain foreign currency assets. Contracts are recorded at market value. Realized gains and losses arising from such transactions are included in net realized gain (loss) on foreign currency related transactions. The Fund is subject to the credit risk that the other party will not complete the obligations of the contract. G. The Fund distributes net investment income and net capital gains, if any, annually. Distributions are determined in accordance with income tax regulations. Distributions from taxable net investment income and net capital gains can exceed from book basis net investment income and net capital gains. The significant differences between financial statement amounts available for distribution and distributions made in accordance with income tax regulations are due to differing treatment of 12b-1 expenses prior to April 1995 and unrealized appreciation on foreign currency exchange contracts. H. Organizational expenses are being amortized to operations over a five-year period on a straight-line basis. In the event any of the initial shares are redeemed by any holder thereof during the five-year amortization period, redemption proceeds will be reduced by any unamortized organization expense in the same proportion as the number of initial shares being redeemed bears to the number of initial shares outstanding at the time of redemption. (2) Capital Share Transactions The Trust Agreement authorizes the issuance of an unlimited number of shares of beneficial interest without par value. Transactions in shares of the Fund were as follows: Class A Shares ------------------------------------------------- Year Ended Period from October 7, 1994 March 31, 1996 to March 31, 1995 - ------------------------------------------------------------------------------ Shares sold 114,080 594,548 Shares redeemed (230,445) (55,269) - ------------------------------------------------------------------------------ Net increase/(decrease) (116,365) 539,279 =============================================================================== Class B Shares ----------------------------------------------- Year Ended Period from October 7, 1994 March 31, 1996 to March 31, 1995 - ------------------------------------------------------------------------------ Shares sold 263,001 1,787,714 Shares redeemed (469,950) (156,245) - ------------------------------------------------------------------------------ Net increase/(decrease) (206,949) 1,631,469 =============================================================================== Class C Shares ----------------------------------------------- Year Ended Period from October 7, 1994 March 31, 1996 to March 31, 1995 - ------------------------------------------------------------------------------ Shares sold 65,799 160,011 Shares redeemed (30,391) (8,991) - ------------------------------------------------------------------------------ Net increase 35,408 151,020 =============================================================================== 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 1940 Act. Under its Distribution Plans, the Fund pays KIDCO a wholly owned subsidiary of Keystone, amounts that in total may not exceed each Distribution Plan's maximum. The Class A Distribution Plan provides for payments that 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 KIDCO 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 daily net asset value of shares maintained by such recipients and outstanding on the books of the Fund for specified periods. The Class B Distribution Plans provide for payments at an annual rate of 1.00% of the average daily net asset value of Class B shares to pay expenses of the PAGE 21 distribution of Class B shares. Amounts paid by the Fund under the Class B Distribution Plans are currently used to pay others (dealers) a commission at the time of purchase normally equal to 4.00% of the price paid for each share sold plus the first year's service fee in advance of 0.25% of the price paid for each Class B share sold. Beginning approximately 12 months after the purchase of a Class B share, the dealer or other party will receive service fees at an annual rate of 0.25% of the average daily net asset value of such Class B shares maintained by such others and remaining outstanding on the Fund's books for specified periods. A contingent deferred sales charge will be imposed, if applicable, on Class B shares purchased on or after June 1, 1995 at rates ranging from a maximum of 5% of amounts redeemed during the first 12 months following the date of purchase to 1% of amounts redeemed during the sixth twelve-month period following the date of purchase. Class B shares purchased on or after June 1, 1995 that have been outstanding for eight years following the month of purchase will automatically convert to Class A shares without a front end sales charge or exchange fee. Class B shares purchased prior to June 1, 1995 will retain their existing conversion rights. The Class C Distribution Plan provides for payments at an annual rate of up to 1.00% of the average daily net asset value of Class C shares; to pay expenses 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) a commission at the time of purchase in the amount of 0.75% of the price paid for each Class C share sold, plus the first year's service fee in advance in the amount of 0.25% of the price paid for each Class C share. Beginning approximately 15 months after purchase, a commission at an annual rate of 0.75% (subject to applicable limitations imposed by the National Association of Securities Dealers, Inc.) ("NASD") 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 and 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 KIDCO may continue as compensation for its services which have been earned while the Distribution Plan was in effect. During the fiscal year ended March 31, 1996, the Fund paid KIDCO $11,886, under its Class A Distribution Plan; $144,420 for Class B shares sold prior to June 1, 1995 and $7,960 for Class B share on or after June 1, 1995 under its Class B Distribution plans; and $17,285 under its Class C Distribution Plan. Under the NASD Rule, the maximum uncollected amounts for which KIDCO may seek payment from the Fund under its Class B Distribution Plans were $872,923 for class B shares purchased prior to June 1, 1995 and $95,782 for Class B shares purchased on or after June 1, 1995, and remaining outstanding on the Fund's books as of March 31, 1996. The maximum uncollected amount for which KIDCO may seek payment from the Fund under its Class C Distribution Plan was $119,301 as of March 31, 1996. Presently, the Fund's class-specific expenses are limited to Distribution Plan expenses incurred by a class of shares. (3.) Securities Transactions Realized gains and losses are computed on the identified cost basis. Gains and losses on foreign currency related transactions are treated as ordinary income for federal income tax purposes. As of March 31, 1996 the Fund had a capital loss carryover for federal income tax purposes of approximately $833,000, which expires in the year 2003. PAGE 22 Keystone Strategic Development Fund Cost of purchases and proceeds from sales of investment securities excluding short-term securities for the year ended March 31, 1996 were $8,692,047 and $8,232,846, respectively. (4.) Investment Management Agreement and Other Transactions with Affiliates Under the terms of the Investment Advisory and Management Agreement between Keystone and the Fund, dated September 21, 1994, Keystone provides investment management and administrative services to the Fund. In return, Keystone is paid a management fee at the annual rate of 1.00% of the aggregate net asset value of the Fund. Keystone 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 from Keystone a monthly fee equal to (1) 20% of Keystone's net fee for such month for services rendered in a non-discretionary capacity, plus (2) 10% of Keystone's net fee for such month for services rendered in a discretionary capacity. For the year ended March 31, 1996, the Fund paid or accrued to Keystone investment management and administrative service fees of $217,332, which represented 1.00% of the Fund's average daily net assets. For the year ended March 31, 1996, Keystone paid or accrued to EIML $43,466 for its services rendered in a non-discretionary capacity. During the year ended March 31, 1996, the Fund paid or accrued to KII and KIRC $8,622 for certain accounting and printing services, and $87,125 for shareholder services. 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. Keystone has agreed to reimburse the Fund annually for certain operating expenses incurred by the Fund in excess of the applicable state expense limit. However, Keystone is not required to make such reimbursement to an extent which would result in the Fund's inability to qualify as a regulated investment company under provisions of the Internal Revenue Code. 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. The Fund has entered into an expense offset arrangement with its custodian. for the year ended March 31, 1996 the Fund paid or incurred custody fees in the amount of $29,732 and received credit of $3,498 pursuant to the expense offset arrangement, resulting in a net custody expense of $26,234. The assets deposited with the custodian under the expense offset arrangement could have been invested in income-producing assets. (5.) Distributions to Shareholders The Fund intends to distribute to its shareholders dividends from net investment income and net capital gains, if any, annually. Any taxable distribution which is declared in October, November or December and paid by January 31 of the following year will be includable in the taxable income of the shareholder in the year declared. PAGE 23 INDEPENDENT AUDITORS' REPORT The Trustees and Shareholders of Keystone Strategic Development Fund We have audited the accompanying statement of assets and liabilities of the Keystone Strategic Development Fund, including the schedule of investments as of March 31, 1996, and the related statement of operations for the year then ended, the statement of changes in net assets and the financial highlights for the year then ended and for the period from October 7, 1994 (commencement of operations) to March 31, 1995. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of March 31, 1996 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Keystone Strategic Development Fund as of March 31, 1996, the results of its operations for the year then ended, the changes in its net assets and financial highlights for the year then ended and for the period from October 7, 1994 (commencement of operations) to March 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts April 26, 1996 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. Schedule of Investments March 31, 1996 Financial Highlights For the period October 17, 1994 (commencement of operations) through March 31, 1996 Statement of Assets and March 31, 1996 Liabilities Statement of Operations Year ended March 31, 1996 Statement of Changes in For the period October 17, 1994 Assets (commencement of operations) through March 31, 1996 Notes to Financial Statements March 31, 1996 Independent Auditors' Report Dated April 26, 1996 All other schedules are omitted as the required information is inapplicable. 24 (b) Exhibits (1) (A) 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. (B) 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 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) Registrant's Declaration of Trust, Articles III, V, VI and VIII were filed with Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(1) and is incorporated by reference herein. (B) Registrant's By-Laws, Article 2 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. (5) (A) A copy of the form of Investment Advisory and Management Agreement between Registrant and Keystone Investment Management Company (formerly, 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. (B) A copy of the form of SubInvestment Advisory Agreement between Registrant and EquitiLink International Management Limited 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. (6) (A) A copy of the form of Principal Underwriting Agreement between Registrant and Keystone Investment Distribution Company (formerly, 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. A copy of an amendment to the Principal Underwriting Agreement is filed herewith as Exhibit 24(b)(6). (B) Copies of the forms of Principal Underwriting Agreements dated May 31, 1995 between Registrant and Keystone Investment Distributors Company, with respect to Class B shares are filed herewith as Exhibit 24(b)(6)(B). (C) Copies of the forms of Dealer Agreements used by Keystone Investment Distributors Company are filed herewith as Exhibit 24(b)(6)(C). (7) Not applicable. (8) A copy of the form of Custodian, Fund Accounting and Recordkeeping Agreement between Registrant 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. A copy of the Amendment to the Custodian, Fund Accounting and Recordkeeping Agreement is filed herewith as Exhibit 24(b)(8). 24 (b) Exhibits (con't) (9) Not applicable. (10) An opinion and consent of counsel with respect to the registration of 314,074 additional shares of the Fund pursuant to Section 24(e)(1) of the 1940 Act is filed herewith as Exhibit 24(b)(10). (11) Consent as to use of opinion of Registrant's Independent Auditors is filed herewith as Exhibit 24(b)(11). (12) Not applicable. (13) A copy of the Subscription Agreement between Registrant and Keystone Investment Distributors Company 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 Balanced Fund (K-1) (formerly 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 Registrant's Class A, Class B and Class C Distribution Plans are filed herewith as Exhibit 24(b)(15). (16) Schedules of computation of total return are filed herewith as Exhibit 24(b)(16). (17) A financial data schedule is filed herewith as Exhibit 24(b)(17). (18) A copy of the form of Registrant's Multiple Class Plan was filed with Post-Effective Amendment No. 2 as Exhibit 24(b)(18) and is incorporated by reference herein. (19) 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 April 30, 1996 -------------- ---------------------------- Shares of Beneficial Class A - 304 Interest, without par value Shares of Beneficial Class B - 835 Interest, without par value Shares of Beneficial Class C - 159 Interest, 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 Investment Distributors Company, the Registrant's Principal Underwriter, are contained in Section 9 of the Principal Underwriting Agreements between the Registrant and Keystone Investment Distributors Company, a copy of the form of which relating to Class A and C shares was filed with Registration Statement No. 33-82520/811-8694 as Exhibit 24(b)(6) and is incorporated by reference herein and copies relating to Class B shares are filed herewith as Exhibit 24(b)(6)(B). Provisions for the indemnification of Keystone Investment Management Company, Registrant's investment adviser, are contained in Section 6 of the Investment Advisory and Management Agreement between Registrant and Keystone Investment Management Company, 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 Investment Management Company, 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 INVESTMENT MANAGEMENT COMPANY Position with Keystone Other Investment Business Name Management Company Affiliations - ---- ------------------ ------------ Albert H. Chairman of Chairman of the Board, Elfner, III the Board, Chief Executive Officer, Chief Executive President and Director: Officer,and KeystoneInvestments,Inc. Director Keystone Management,Inc. Keystone Software, Inc. Keystone Asset Corporation Keystone Capital Corporation Chairman of the Board and Director: Keystone Fixed Income Advisers, Inc. Keystone Institutional Company, Inc. President and Director: Keystone Trust Company Director or Trustee: Fiduciary Investment Company, Inc. Keystone Investment Distributors Company Keystone Investor Resource Center, Inc. Boston Children's Services Associates Middlesex School Middlebury College Former Trustee or Director: Neworld Bank Robert Van Partners, Inc. Philip M. Byrne Director President and Director: Keystone Institutional Company, Inc. Senior Vice President: Keystone Investments, Inc. Herbert L. Senior Vice None Bishop, Jr. President Donald C. Dates Senior Vice None President Position with Keystone Other Investment Business Name Management Company Affiliations - ---- ------------------ ------------ Gilman Gunn Senior Vice None President Edward F. Director, Director, Senior Vice Godfrey Senior Vice President President, Chief Financial Officer and Treasurer and Treasurer: Chief Financial Keystone Investments, Inc. Officer Keystone Investment Distributors Company Treasurer: Keystone Institutional Company, Inc. Keystone Management, Inc. Keystone Software, Inc. Fiduciary Investment Company, Inc. Former Treasurer and Director: Hartwell Keystone Advisers, Inc. James R. McCall Director and None President Ralph J. Director President and Director: Spuehler, Jr. Keystone Investment Distributors Company Senior Vice President and Director: Keystone Investments, Inc. Chairman and Director: Keystone Investor Resource Center, Inc. Keystone Management, Inc. Formerly President: Keystone Management, Inc. Formerly Treasurer: The Kent Funds Keystone Investments, Inc. Keystone Investment Management Company Position with Keystone Other Investment Business Name Management Company Affiliations - ---- ------------------ ------------ Rosemary D. Senior Vice General Counsel, Senior Van Antwerp President, Vice President and General Counsel Secretary: and Secretary Keystone Investments, Inc. Senior Vice President and General Counsel: Keystone Institutional Company, Inc. Senior Vice President, General Counsel and Director: Keystone Investor Resource Center, Inc. Fiduciary Investment Company, Inc. Keystone Investment Distributors Company Senior Vice President, General Counsel, Director and Secretary: Keystone Management, Inc. Keystone Software, Inc. Former Senior Vice President and Secretary: Hartwell Keystone Advisers, Inc. Vice President and Secretary: Keystone Fixed Income Advisers, Inc. J. Kevin Kenely Vice President Vice President: Keystone Investments, Inc. Keystone Investment Distributors Company Keystone Institutional Company, Inc. Keystone Management, Inc. Keystone Institutional Company, Inc. Keystone Software, Inc. Fiduciary Investment Company, Inc. Formerly Controller: Keystone Investments, Inc. Keystone Investment Management Company Keystone Investment Distributors Company Keystone Institutional Company, Inc. Keystone Management, Inc. Keystone Software, Inc. Fiduciary Investment Company, Inc. John D. Rogol Vice President Vice President and and Controller Controller: Keystone Investments, Inc. Keystone Invesmtent Distributors Company Keystone Institutional Company, Inc. Keystone Management, Inc. Position with Keystone Other Investment Business Name Management Company Affiliations - ---- ------------------ ------------ John D. Rogol (con't) Keystone Software, Inc. Fiduciary Investment Company, Inc. Controller: Keystone Asset Corporation Keystone Capital Corporation Robert K. Vice President None Baumback Betsy A. Blacher Senior Vice None President Francis X. Claro Vice President None Kristine R. Vice President None Cloyes Christopher P. Senior Vice None Conkey President Richard Cryan Senior Vice None President Maureen E. Senior Vice None Cullinane President George E. Dlugos Vice President None Antonio T. Docal Vice President None Christopher R. Senior Vice None Ely President Sami J. Karam Vice President None George J. Kimball Vice President None JoAnn L. Lyndon Vice President None Position with Keystone Other Investment Business Name Management Company Affiliations - ---- ------------------ ------------ John C. Vice President None Madden, Jr. Stephen A. Marks Vice President None Eleanor H. Marsh Vice President None Walter T. Senior Vice None McCormick President 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. Vice President None Parsons Daniel A. Rabasco Vice President None David L. Smith Vice President None Kathy K. Wang Vice President None Judith A. Warners Vice President None Joseph J. Asst. Vice None Decristofaro President Item 29. Principal Underwriter Keystone Investment Distributors Company (formerly named 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 Quality Fund (B-1) Keystone Diversified Bond Fund (B-2) Keystone High Income Bond Fund (B-4) Keystone Balanced Fund (K-1) Keystone Strategic Growth Fund (K-2) Keystone Growth and Income Fund (S-1) Keystone Mid-Cap Growth Fund (S-3) Keystone Small Company Growth Fund (S-4) Keystone Capital Preservation and Income Fund Keystone Fund of the Americas Keystone Fund for Total Return Keystone Global Opportunities Fund Keystone Government Securities Fund Keystone Intermediate Term Bond Fund Keystone International Fund, Inc. Keystone Liquid Trust Keystone Omega Fund Keystone Precious Metals Holdings, Inc. Keystone Small Company Growth Fund II Keystone State Tax Free Fund Keystone State Tax Free Fund - Series II Keystone Strategic Income Fund Keystone Tax Free Income Fund Keystone Tax Free Fund Keystone World Bond Fund (b) For information with respect to each officer and director of Registrant's principal underwriter, see the following pages. Item 29(b) (continued). Position and Offices with Position and Name and Principal Keystone Investment Offices with Business Address Distributors Company 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 Treasurer John D. Rogol* 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 Londonderry, 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 Item 29(b) (continued) Position and Offices with Position and Name and Principal Keystone Investment Offices with Business Address Distributors Company the Fund - ------------------ ------------------------- ------------ 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 Item 29(b) (continued) Position and Offices with Position and Name and Principal Keystone Investment Offices with Business Address Distributors Company the Fund - ------------------ ------------------------- ------------ 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 02142-1519 Harbor Capital Management Company, Inc. 125 High Street Boston, Massachusetts 02110 State Street Bank and Trust Company 1776 Heritage Drive Quincy, Massachusetts 02171 Iron Mountain, Inc. 3431 Sharpslot Road Swansea, Massachusetts 02777 Item 31. Management Services Not applicable. Item 32. Undertakings Upon request and without charge, Registrant hereby undertakes to furnish each person to whom a copy of the Registrant's prospectus is delivered with a copy of the Registrant's latest annual report to shareholders. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant 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 30th day of May, 1996. KEYSTONE STRATEGIC DEVELOPMENT FUND By: /s/ Rosemary D. Van Antwerp ------------------------------- Rosemary D. Van Antwerp Senior Vice President and Secretary 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 30th day of May, 1996. SIGNATURES TITLE /s/ George S. Bissell Chairman of the Board and Trustee - ---------------------------- George S. Bissell* President, Chief Executive Officer /s/ Albert H. Elfner, III and Trustee - ---------------------------- Albert H. Elfner, III* Treasurer (Principal Financial /s/ J. Kevin Kenely and Accounting Officer) - ---------------------------- J. Kevin Kenely* *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)(19). INDEX TO EXHIBITS Page Number in Sequential Exhibit Number Exhibit Numbering System - -------------- ------- ---------------- 1 Declaration of Trust(1) First Supplemental Declaration of Trust(2) 2 By-Laws(2) 5 Investment Advisory and Management Agreement(2) SubAdvisory Agreement(2) 6 (A) Principal Underwriting Agreement for Class A and Class C(2) First Amendment to Principal Underwriting Agreement (B) Principal Underwriting Agreement for Class B (C) Dealer Agreements 8 Custodian, Fund Accounting and Recordkeeping Agreement(2) First Amendment to Custodian, Fund Accounting and Recordkeeping Agreement 10 Opinion and Consent of Counsel 11 Independent Auditor's Consent 13 Subscription Agreement(1) 14 Model Retirement Plans(3) 15 Class A, B and C Distribution Plans 16 Performance Data Schedules 17 Financial Data Schedules (filed as Exhibit 27) 18 18f-3 Plan(5) 19 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. (3) Incorporated herein by reference to Post-Effective Amendment No. 66 to Registration Statement No. 2-10527/811-96 for Keystone Balanced Fund (K-1). (4) Incorporated herein by reference to Post-Effective Amendment No. 2 to Registration Statement No. 33-82520/811-8694. EX-99.6(A) 2 PRINCIPAL UNDERWRITING AGREEMENT EXHIBIT 99.6(A) FIRST AMENDMENT TO PRINCIPAL UNDERWRITING AGREEMENT OF KEYSTONE STRATEGIC DEVELOPMENT FUND FIRST AMENDMENT (the "Amendment") made as of the 31st day of May 1995 to AGREEMENT (the "Agreement") made the 21st day of September 1994 by and between Keystone Strategic Development Fund, a Massachusetts business trust, ("Fund"), and Keystone Investment Distributors Company, a Delaware corporation (the "Principal Underwriter"). 1. This Amendment is made by the Fund, individually and/or on behalf of its series if any, referred to above in the title of this Amendment, to which series, if any, this Amendment shall relate, as applicable (the "Fund"). The Fund and the Principal Underwriter mutually agree that Section 1 of the Agreement is amended as follows: " 1. The Fund hereby appoints the Principal Underwriter a principal underwriter of the Class A and Class C shares of beneficial interest of the Fund ("Shares") as an independent contractor upon the terms and conditions hereinafter set forth. Except as the Fund may from time to time agree, the Principal Underwriter will act as agent for the Fund and not as principal." 2. In all other respects the Agreement is unchanged. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed by their respective officers thereunto duly authorized at Boston, Massachusetts on the day and year first written above. KEYSTONE STRATEGIC DEVELOPMENT FUND By: Albert H. Elfner III ------------------------------------ Title: President KEYSTONE INVESTMENT DISTRIBUTORS COMPANY By: Ralph J. Spuehler ------------------------------------ Title: President EX-99.6(B) 3 PRINCIPAL UNDERWRITING AGREEMENT Exhibit 99.6(B) PRINCIPAL UNDERWRITING AGREEMENT FOR CLASS B-1 SHARES OF KEYSTONE STRATEGIC DEVELOPMENT FUND AGREEMENT made this 31st day of May 1995 by and between Keystone Strategic Development Fund, a Massachusetts business trust, ("Fund"), and Keystone Investment Distributors Company, a Delaware corporation (the "Principal Underwriter"). The Fund, individually and/or on behalf of its series, if any, referred to above in the title of this Agreement, to which series, if any, this Agreement shall relate, as applicable (the Fund ), may act as the distributor of certain securities of which it is the issuer pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the 1940 Act ). Accordingly, it is hereby mutually agreed as follows: 1. The Fund hereby appoints the Principal Underwriter a principal underwriter of the Class B-1 shares of beneficial interest of the Fund ("B-1 Shares") as an independent contractor upon the terms and conditions hereinafter set forth. The general term "Shares" as used herein has the same meaning as is provided therefor in Schedule I hereto. Except as the Fund may from time to time agree, the Principal Underwriter will act as agent for the Fund and not as principal. 2. The Principal Underwriter will use its best efforts to find purchasers for the B-1 Shares and to promote distribution of the B-1 Shares and may obtain orders from brokers, dealers or other persons for sales of B-1 Shares to them. No such dealer, broker or other person shall have any authority to act as agent for the Fund; such dealer, broker or other person shall act only as principal in the sale of B-1 Shares. 3. Sales of B-1 Shares by Principal Underwriter shall be at the public offering price determined in the manner set forth in the prospectus and/or statement of additional information of the Fund current at the time of the Fund's acceptance of the order for B-2 Shares. All orders shall be subject to acceptance by the Fund and the Fund reserves the right in its sole discretion to reject any order received. The Fund shall not be liable to anyone for failure to accept any order. 4. On all sales of B-1 Shares the Fund shall receive the current net asset value. The Fund shall pay the Principal Underwriter Distribution Fees (as defined in Section 14 hereof), as commissions for the sale of B-1 Shares and other Shares, which shall be paid in conjunction with distribution fees paid to the Principal Underwriter by other classes of Shares of the Fund to the extent required in order to comply with Section 14 hereof, and shall pay over to the Principal Underwriter CDSCs (as defined in Section 14 hereof) as set forth in the Fund's current prospectus and statement of additional information, and as required by Section 14 hereof. The Principal Underwriter shall also receive payments consisting of shareholder service fees ("Service Fees") at the rate of .25% per annum of the average daily net asset value of the Class B-1 Shares. The Principal Underwriter may allow all or a part of said Distribution Fees and CDSCs received by it (not paid to others as hereinafter provided) to such brokers, dealers or other persons as Principal Underwriter may determine. 5. Payment to the Fund for B-1 Shares shall be in New York or Boston Clearing House funds received by the Principal Underwriter within three business days after notice of acceptance of the purchase order and the amount of the applicable public offering price has been given to the purchaser. If such payment is not received within such period, the Fund reserves the right, without further notice, forthwith to cancel its acceptance of any such order. The Fund shall pay such issue taxes as may be required by law in connection with the issue of the B-1 Shares. 6. The Principal Underwriter shall not make in connection with any sale or solicitation of a sale of the B-1 Shares any representations concerning the B-1 Shares except those contained in the then current prospectus and/or statement of additional information covering the Shares and in printed information approved by the Fund as information supplemental to such prospectus and statement of additional information. Copies of the then current prospectus and statement of additional information and any such printed supplemental information will be supplied by the Fund to the Principal Underwriter in reasonable quantities upon request. 7. The Principal Underwriter agrees to comply with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (as defined in the Purchase and Sale Agreement, dated as of May 31, 1995 (the Purchase Agreement ), between the Principal Underwriter, Citibank, N.A. and Citicorp North America, Inc., as agent (the "Rules of Fair Practice")). 8. The Fund appoints the Principal Underwriter as its agent to accept orders for redemptions and repurchases of B-1 Shares at values and in the manner determined in accordance with the then current prospectus and/or statement of additional information of the Fund. 9. The Fund agrees to indemnify and hold harmless the Principal Underwriter, its officers and Directors and each person, if any, who controls the Principal Underwriter within the meaning of Section 15 of the Securities Act of 1933 ("1933 Act"), against any losses, claims, damages, liabilities and expenses (including the cost of any legal fees incurred in connection therewith) which the Principal Underwriter, its officers, Directors or any such controlling person may incur under the 1933 Act, under any other statute, at common law or otherwise, arising out of or based upon a. any untrue statement or alleged untrue statement of a material fact contained in the Fund's registration statement, prospectus or statement of additional information (including amendments and supplements thereto) or b. any omission or alleged omission to state a material fact required to be stated in the Fund's registration statement, prospectus or statement of additional information necessary to make the statements therein not misleading, provided, however, that insofar as losses, claims, damages, liabilities or expenses arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission made in reliance and in conformity with information furnished to the Fund by the Principal Underwriter for use in the Fund's registration statement, prospectus or statement of additional information, such indemnification is not applicable. In no case shall the Fund indemnify the Principal Underwriter or its controlling person as to any amounts incurred for any liability arising out of or based upon any action for which the Principal Underwriter, its officers and Directors or any controlling person would otherwise be subject to liability by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties or by reason of the reckless disregard of its obligations and duties under this Agreement. 10. The Principal Underwriter agrees to indemnify and hold harmless the Fund, its officers and Trustees and each person, if any, who controls the Fund within the meaning of Section 15 of the 1933 Act against any loss, claims, damages, liabilities and expenses (including the cost of any legal fees incurred in connection therewith) which the Fund, its officers, Directors or any such controlling person may incur under the 1933 Act, under any other statute, at common law or otherwise arising out of the acquisition of any Shares by any person which (a) may be based upon any wrongful act by the Principal Underwriter or any of its employees or representatives, or (b) may be based upon any untrue statement or alleged untrue statement of a material fact contained in the Fund's registration statement, prospectus or statement of additional information (including amendments and supplements thereto), or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon information furnished or confirmed in writing to the Fund by the Principal Underwriter. 11. The Fund agrees to execute such papers and to do such acts and things as shall from time to time be reasonably requested by the Principal Underwriter for the purpose of qualifying the B-1 Shares for sale under the so-called "blue sky" laws of any state or for registering B-1 Shares under the 1933 Act or the Fund under the Investment Company Act of 1940 ("1940 Act"). The Principal Underwriter shall bear the expenses of preparing, printing and distributing advertising, sales literature, prospectuses, and statements of additional information. The Fund shall bear the expense of registering B-1 Shares under the 1933 Act and the Fund under the 1940 Act, qualifying B-1 Shares for sale under the so-called "blue sky" laws of any state, the preparation and printing of prospectuses, statements of additional information and reports required to be filed with the Securities and Exchange Commission and other authorities, the preparation, printing and mailing of prospectuses and statements of additional information to holders of B-1 Shares, and the direct expenses of the issue of B-1 Shares. 12. The Principal Underwriter shall, at the request of the Fund, provide to the Board of Trustees or Directors (together herein called the Directors ) of the Fund in connection with sales of B-1 Shares not less than quarterly a written report of the amounts received from the Fund therefor and the purpose for which such expenditures by the Fund were made. 13. The term of this Agreement shall begin on the date hereof and, unless sooner terminated or continued as provided below, shall expire after one year. This Agreement shall continue in effect after such term if its continuance is specifically approved by a majority of the outstanding voting securities of Class B-1 of the Fund or by a majority of the Directors of the Fund and a majority of the Directors who are not parties to this Agreement or "interested persons", as defined in the Investment Company Act of 1940 (the 1940 Act ), of any such party and who have no direct or indirect financial interest in the operation of the Fund's Rule 12b-1 plan for Class B-1 Shares or in any agreements related to the plan at least annually in accordance with the 1940 Act and the rules and regulations thereunder. This Agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the Directors of the Fund, or a majority of such Directors who are not parties to this Agreement or "interested persons", as defined in the 1940 Act, of any such party and who have no direct or indirect financial interest in the operation of the Fund's Rule 12b-1 plan for Class B-1 Shares or in any agreement related to the plan or by a vote of a majority of the outstanding voting securities of Class B-1 on not more than sixty days written notice to any other party to the agreement; and shall terminate automatically in the event of its assignment (as defined in the 1940 Act), which shall not include assignment of the Principal Underwriter's (as hereinafter defined) provided for hereunder and/or rights related to such Allocable Portions. 14. The provisions of this Section 14 shall be applicable to the extent necessary to enable the Fund to comply with the obligation of the Fund to pay the Principal Underwriter its Allocable Portion of Distribution Fees paid in respect of Shares while the Fund is required to do so pursuant the Principal Underwriting Agreement, of even date herewith, in respect of Class B-2 Shares, and shall remain in effect so long as any payments are required to be made by the Fund pursuant to the irrevocable payment instruction (as defined in the Purchase Agreement (the Irrevocable Payment Instruction )). 14.1 The Fund shall pay to the Principal Underwriter the Principal Underwriter's Allocable Portion (as hereinafter defined) of a fee (the "Distribution Fee") at the rate of .75% per annum of the average daily net asset value of the Shares, subject to the limitation on the maximum aggregate amount of such fees under the Rules of Fair Practice as applicable to such Distribution Fee on the date hereof. 14.2 The Principal Underwriter's Allocable Portion of Distribution Fees paid by the Fund in respect of Shares shall be equal to the portion of the Asset Based Sales Charge allocable to Distributor Shares (as defined in Schedule I hereto to this Agreement) in accordance with Schedule I hereto. The Fund agrees to cause its transfer agent to maintain the records and arrange for the payments on behalf of the Fund at the times and in the amounts and to the accounts required by Schedule I hereto, as the same may be amended from time to time. It is acknowledged and agreed that by virtue of the operation of Schedule I hereto the Principal Underwriter's Allocable Portion of Distribution Fees paid by the Fund in respect of Shares, may, to the extent provided in Schedule I hereto, take into account Distribution Fees payable by the Fund in respect of other existing and future classes and/or sub-classes of shares of the Fund which would be treated as "Shares" under Schedule I hereto. The Fund will limit amounts paid to any subsequent principal underwriters of Shares to the portion of the Asset Based Sales Charge paid in respect of Shares which is allocable to Post-distributor Shares (as defined in Schedule I hereto) in accordance with Schedule I hereto. The Fund's payments to the Principal Underwriter in consideration of its services in connection with the sale of B-1 Shares shall be the Distribution Fees attributable to B-1 Shares which are Distributor Shares (as defined in Schedule I hereto) and all other amounts constituting the Principal Underwriter's Allocable Portion of Distribution Fees shall be the Distribution Fees related to the sale of other Shares which are Distributor Shares (as defined in Schedule I hereto). The Fund shall cause its transfer agent and sub-transfer agents to withhold from redemption proceeds payable to holders of Shares on redemption thereof the contingent deferred sales charges payable upon redemption thereof as set forth in the then current prospectus and/or statement of additional information of the Fund ("CDSCs") and to pay over to the Principal Underwriter The Principal Underwriter's Allocable Portion of said CDSCs paid in respect of Shares which shall be equal to the portion thereof allocable to Distributor Shares (as defined in Schedule I hereto) in accordance with Schedule I hereto. 14.3 The Principal Underwriter shall be considered to have completely earned the right to the payment of its Allocable Portion of the Distribution Fee and the right to payment over to it of its' Allocable Portion of the CDSC in respect of Shares as provided for hereby upon the completion of the sale of each Commission Share (as defined in Schedule I hereto) taken into account as a Distributor Share in computing the Principal Underwriter's Allocable Portion in accordance with Schedule I hereto. 14.4 Except as provided in Section 14.5 hereof in respect of Distribution Fees only, the Fund's obligation to pay the Principal Underwriter the Distribution Fees and to pay over to the Principal Underwriter CDSCs provided for hereby shall be absolute and unconditional and shall not be subject to dispute, offset, counterclaim or any defense whatsoever (it being understood that nothing in this sentence shall be deemed a waiver by the Fund of its right separately to pursue any claims it may have against the Principal Underwriter and enforce such claims against any assets (other than the Principal Underwriter's right to its Allocable Portion of the Distribution Fees and CDSCs (the "Collection Rights") of the Principal Underwriter). 14.5 Notwithstanding anything in this Agreement to the contrary, the Fund shall pay to the Principal Underwriter its Allocable Portion of Distribution Fees provided for hereby notwithstanding its termination as Principal Underwriter for the Shares or any termination of this Agreement and such payment of such Distribution Fees, and that obligation and the method of computing such payment, shall not be changed or terminated except to the extent required by any change in applicable law, including, without limitation, the 1940 Act, the Rules promulgated thereunder by the Securities and Exchange Commission and the Rules of Fair Practice, in each case enacted or promulgated after June 1, 1995, or in connection with a Complete Termination (as hereinafter defined). For the purposes of this Section 14.5, "Complete Termination" means a termination of the Fund's Rule 12b-1 plan for B-2 Shares involving the cessation of payments of the Distribution Fees, and the cessation of payments of distribution fees pursuant to every other Rule 12b-1 plan of the Fund for every existing or future B-Class-of-Shares (as hereinafter defined) and the Fund's discontinuance of the offering of every existing or future B-Class-of-Shares, which conditions shall be deemed satisfied when they are first complied with hereafter and so long thereafter as they are complied with prior to the earlier of (i) the date upon which all of the B-2 Shares which are Distributor Shares pursuant to Schedule I hereto shall have been redeemed or converted or (ii) June 1, 2005. For purposes of this Section 14.5, the term B-Class-of-Shares means each of the B-1 Class of Shares of the Fund, the B-2 Class of Shares of the Fund and each other class of shares of the Fund hereafter issued which would be treated as Shares under Schedule I hereto or which has substantially similar economic characteristics to the B-1 or B-2 Classes of Shares taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of the shares of such class. The parties agree that the existing C Class of Shares of the Fund does not have substantially similar economic characteristics to the B-1 or B-2 Classes of Shares taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares. For purposes of clarity the parties to this agreement hereby state that they intend that a new installment load class of shares which may be authorized by amendments to Rule 6(c)-10 under the 1940 Act will be considered to be a B-Class-of-Shares if it has economic characteristics substantially similar to the economic characteristics of the existing B-1 or B-2 Classes of Shares taking into account the total sale charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares and will not be considered to be a B-Class-of-Shares if it has economic characteristics substantially similar to the economic characteristics of the existing C Class of shares of the Fund taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares. 14.6 The Principal Underwriter may assign any part of its Allocable Portions and obligations of the Fund related thereto (but not the Principal Underwriter's obligations to the Fund provided for in this Agreement) to any person (an "Assignee") and any such assignment shall be effective as to the Fund upon written notice to the Fund by the Principal Underwriter. In connection therewith the Fund shall pay all or any amounts in respect of its Allocable Portions directly to the Assignee thereof as directed in a writing by the Principal Underwriter in the Irrevocable Payment Instruction, as the same may be amended from time to time with the consent of the Fund, and the Fund shall be without liability to any person if it pays such amounts when and as so directed, except for underpayments of amounts actually due, without any amount payable as consequential or other damages due to such underpayment and without interest except to the extent that delay in payment of Distribution Fees and CDSCs results in an increase in the maximum Sales Charge allowable under the Rules of Fair Practice, which increases daily at a rate of prime plus one percent per annum. 14.7 The Fund will not, to the extent it may otherwise be empowered to do so, change or waive any CDSC with respect to B-1 Shares, except as provided in the Fund's prospectus or statement of additional information without the Principal Underwriter's or Assignee's consent, as applicable. Notwithstanding anything to the contrary in this Agreement or any termination of this Agreement or the Principal Underwriter as principal underwriter for the Shares of the Fund, the Principal Underwriter shall be entitled to be paid its Allocable Portion of the CDSCs whether or not the Fund's Rule 12b-1 plan for B-1 Shares is terminated and whether or not any such termination is a Complete Termination, as defined above. 15. This Agreement shall be construed in accordance with the laws of The Commonwealth of Massachusetts. All sales hereunder are to be made, and title to the Shares shall pass, in Boston, Massachusetts. 16. The Fund is a Massachusetts business trust established under a Declaration of Trust, as it may be amended from time to time. The obligations of the Fund are not personally binding upon, nor shall recourse be had against the private property of any of the Trustees, shareholders, officers, employees or agents of the Fund, but only the property of the Fund shall be bound. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed by their respective officers thereunto duly authorized at Boston, Massachusetts, on the day and year first written above. KEYSTONE STRATEGIC DEVELOPMENT FUND By: /s/ Rosemary D. Van Antwerp -------------------------------- Title: Senior Vice President KEYSTONE INVESTMENT DISTRIBUTORS, INC. By: /s/ Ralph J. Spuehler, Jr. -------------------------------- Title: President SCHEDULE I TO PRINCIPAL UNDERWRITING AGREEMENT FOR CLASS B-1 SHARES OF KEYSTONE STRATEGIC DEVELOPMENT FUND TRANSFER AGENT PROCEDURES FOR DIFFERENTIATING AMONG DISTRIBUTOR SHARES AND POST-DISTRIBUTOR SHARES Amounts (in respect of Asset Based Sales Charges (as hereinafter defined) and CDSCs (as hereinafter defined) in respect of Shares (as hereinafter defined) of each Fund (as hereinafter defined) shall be allocated between Distributor Shares (as hereinafter defined) and Post-distributor Shares (as hereinafter defined) of such Fund in accordance with the rules set forth in clauses (B) and (C). Clause (B) sets forth the rules to be followed by the Transfer Agent for each Fund and the record owner of each Omnibus Account (as hereinafter defined) in maintaining records relating to Distributor Shares and Post-distributor Shares. Clause (C) sets forth the rules to be followed by the Transfer Agent for each Fund and the record owner of each Omnibus Account in determining what portion of the Asset Based Sales Charge (as hereinafter defined) payable in respect of each class of Shares of such Fund and what portion of the CDSC (as hereinafter defined) payable by the holders of Shares of such Fund is attributable to Distributor Shares and Post-distributor Shares, respectively. (A) DEFINITIONS: Generally, for purposes of this Schedule I, defined terms shall be used with the meaning assigned to them in the Agreement, except that for purposes of the following rules the following definitions are also applicable: "Agreement" shall mean the Principal Underwriting Agreement for Class B-1 Shares of the Instant Fund dated as of June 1, 1995 between the Instant Fund and the Distributor. "Asset Based Sales Charge" shall have the meaning set forth in Section 26(b)(8)(C) of the Rules of Fair Practice it being understood that for purposes of this Exhibit I such term does not include the Service Fee. "Business Day" shall mean any day on which the banks and the New York Stock Exchange are not authorized or required to close in New York City. "Capital Gain Dividend" shall mean, in respect of any Share of any Fund, a Dividend in respect of such Share which is designated by such Fund as being a "capital gain dividend" as such term is defined in Section 852 of the Internal Revenue Code of 1986, as amended. "CDSC" shall mean with respect to any Fund, the contingent deferred sales charge payable, either directly or by withholding from the proceeds of the redemption of the Shares of such Fund, by the shareholders of such Fund on any redemption of Shares of such Fund in accordance with the Prospectus relating to such Fund. "Commission Share" shall mean, in respect of any Fund, a Share of such Fund issued under circumstances where a CDSC would be payable upon the redemption of such Share if such CDSC is not waived or shall have not otherwise expired. "Date of Original Purchase" shall mean, in respect of any Commission Share of any Fund, the date on which such Commission Share was first issued by such Fund; provided, that if such Share is a Commission Share and such Fund issued the Commission Share (or portion thereof) in question in connection with a Free Exchange for a Commission Share (or portion thereof) of another Fund, the Date of Original Purchase for the Commission Share (or portion thereof) in question shall be the date on which the Commission Share (or portion thereof) of the other Fund was first issued by such other Fund (unless such Commission Share (or portion thereof) was also issued by such other Fund in a Free Exchange, in which case this proviso shall apply to that Free Exchange and this application shall be repeated until one reaches a Commission Share (or portion thereof) which was issued by a Fund other than in a Free Exchange). "Distributor" shall mean Keystone Investment Distributors Company, its successors and assigns. "Distributor's Account" shall mean the account of the Distributor, account no. 9903-584-2, ABA No. 011 0000 28, entitled "General Account" maintained with State Street Bank & Trust Company or such other account as the Distributor may designate in a notice to the Transfer Agent. "Distributor Inception Date" shall mean, in respect of any Fund, the date identified as the date Shares of such Fund are first sold by the Distributor. "Distributor Last Sale Cut-off Date" shall mean, in respect of any Fund, the date identified as the last sale of a Commission Share during the period the Distributor served as principal underwriter under the Agreement. "Distributor Shares" shall mean, in respect of any Fund, all Shares of such Fund the Month of Original Purchase of which occurs on or after the Inception Date for such Fund and on or prior to the Distributor Last Sale Cut-off Date in respect of such Fund. "Dividend" shall mean, in respect of any Share of any Fund, any dividend or other distribution by such Fund in respect of such Share. "Free Exchange" shall mean any exchange of a Commission Share (or portion thereof) of one Fund (the "Redeeming Fund") for a Share (or portion thereof) of another Fund (the "Issuing Fund"), under any arrangement which defers the exchanging Shareholder's obligation to pay the CDSC in respect of the Commission Share (or portion thereof) of the Redeeming Fund so exchanged until the later redemption of the Share (or portion thereof) of the Issuing Fund received in such exchange. "Free Share" shall mean, in respect of any Fund, each Share of such Fund other than a Commission Share, including, without limitation: (i) Shares issued in connection with the automatic reinvestment of Capital Gain Dividends or Other Dividends by such Fund, (ii) Special Free Shares issued by such Fund and (iii) Shares (or portion thereof) issued by such Fund in connection with an exchange whereby a Free Share (or portion thereof) of another Fund is redeemed and the Net Asset Value of such redeemed Free Share (or portion thereof) is invested in such Shares (or portion thereof) of such Fund. "Fund" shall mean each of the regulated investment companies or series or portfolios of regulated investment companies identified in Schedule II to the Irrevocable Payment Instruction, as the same may be amended from time to time in accordance with the terms thereof. "Instant Fund" shall mean Keystone Strategic Development Fund. "ML Omnibus Account" shall mean, in respect of any Fund, the Omnibus Account maintained by Merrill Lynch, Pierce, Fenner & Smith as subtransfer agent. "Month of Original Purchase" shall mean, in respect of any Share of any Fund, the calendar month in which such Share was first issued by such Fund; provided, that if such Share is a Commission Share and such Fund issued the Commission Share (or portion thereof) in question in connection with a Free Exchange for a Commission Share (or portion thereof) of another Fund, the Month of Original Purchase for the Commission Share (or portion thereof) in question shall be the calendar month in which the Commission Share (or portion thereof) of the other Fund was first issued by such other Fund (unless such Commission Share (or portion thereof) was also issued by such other Fund in a Free Exchange, in which case this proviso shall apply to that Free Exchange and this application shall be repeated until one reaches a Commission Share (or portion thereof) which was issued by a Fund other than in a Free Exchange); provided, further, that if such Share is a Free Share and such Fund issued such Free Share in connection with the automatic reinvestment of dividends in respect of other Shares of such Fund, the Month of Original Purchase of such Free Share shall be deemed to be the Month of Original Purchase of the Share in respect of which such dividend was paid; provided, further, that if such Share is a Free Share and such Fund issued such Free Share in connection with an exchange whereby a Free Share (or portion thereof) of another Fund is redeemed and the Net Asset Value of such redeemed Free Share (or portion thereof) is invested in a Free Share (or portion thereof) of such Fund, the Month of Original Issue of such Free Share shall be the Month of Original Issue of the Free Share of such other Fund so redeemed (unless such Free Share of such other Fund was also issued by such other Fund in such an exchange, in which case this proviso shall apply to that exchange and this application shall be repeated until one reaches a Free Share which was issued by a Fund other than in such an exchange); and provided, finally, that for purposes of this Schedule I each of the following periods shall be treated as one calendar month for purposes of applying the rules of this Schedule I to any Fund: (i) the period of time from and including the Distributor Inception Date for such Fund to and including the last day of the calendar month in which such Distributor Inception Date occurs; (ii) the period of time commencing with the first day of the calendar month in which the Distributor Last Sale Cutoff Date in respect of such Fund occurs to and including such Distributor Last Sale Cutoff Date; and (iii) the period of time commencing on the day immediately following the Distributor Last Sale Cutoff Date in respect of such Fund to and including the last day of the calendar month in which such Distributor Last Sale Cut-off Date occurs. "Omnibus Account" shall mean any Shareholder Account the record owner of which is a registered broker-dealer which has agreed with the Transfer Agent to provide sub-transfer agent functions relating to each Sub-shareholder Account within such Shareholder Account as contemplated by this Schedule I in respect of each of the Funds. "Omnibus Asset Based Sales Charge Settlement Date" shall mean, in respect of each Omnibus Account, the Business Day next following the twentieth day of each calendar month for the calendar month immediately preceding such date so long as the record owner is able to allocate the Asset Based Sales Charge accruing in respect of Shares of any Fund as contemplated by this Schedule I no more frequently than monthly; provided, that at such time as the record owner of such Omnibus Account is able to provide information sufficient to allocate the Asset Based Sales Charge accruing in respect of such Shares of such Fund owned of record by such Omnibus Account as contemplated by this Schedule I on a weekly or daily basis, the Omnibus Asset Based Sales Charge Settlement Date shall be a weekly date as in the case of the Omnibus CDSC Settlement Date or a daily date as in the case of Asset Based Sales Charges accruing in respect of Shareholder Accounts other than Omnibus Accounts, as the case may be. "Omnibus CDSC Settlement Date" shall mean, in respect of each Omnibus Account, the third Business Day of each calendar week for the calendar week immediately preceding such date so long as the record owner of such Omnibus Account is able to allocate the CDSCs accruing in respect of any Shares of any Fund as contemplated by this Schedule I for no more frequently than weekly; provided, that at such time as the record owner of such Shares of such Fund owned of record by such Omnibus Account is able to provide information sufficient to allocate the CDSCs accruing in respect of such Omnibus Account as contemplated by this Schedule I on a daily basis, the Omnibus CDSC Settlement Date for such Omnibus Account shall be a daily date as in the case of CDSCs accruing in respect of Shareholder Accounts other than Omnibus Accounts. "Original Purchase Amount" shall mean, in respect of any Commission Share of any Fund, the amount paid (i.e., the Net Asset Value thereof on such date), on the Date of Original Purchase in respect of such Commission Share, by such Shareholder Account or Sub-shareholder Account for such Commission Share; provided, that if such Fund issued the Commission Share (or portion thereof) in question in connection with a Free Exchange for a Commission Share (or portion thereof) of another Fund, the Original Purchase Amount for the Commission Share (or portion thereof) in question shall be the Original Purchase Amount in respect of such Commission Share (or portion thereof) of such other Fund (unless such Commission Share (or portion thereof) was also issued by such other Fund in a Free Exchange, in which case this proviso shall apply to that Free Exchange and this application shall be repeated until one reaches a Commission Share (or portion thereof) which was issued by a Fund other than in a Free Exchange). "Other Dividend" shall mean in respect of any Share, any Dividend paid in respect of such Share other than a Capital Gain Dividend. "Post-distributor Shares" shall mean, in respect of any Fund, all Shares of such Fund the Month of Original Purchase of which occurs after the Distributor Last Sale Cut-off Date for such Fund. "Program Agent" shall mean Citicorp North America, Inc., as Program Agent under the Purchase Agreement, and its successors and assigns in such capacity. "Purchase Agreement" shall mean that certain Purchase and Sale Agreement dated as of May 31, 1995, among Keystone Investment Distributors Company, as Seller, Citibank, N.A., as Purchaser, and Citicorp North America, Inc., as Program Agent. "Share" shall mean in respect of any Fund any share of the classes of shares specified in Schedule II to the Irrevocable Payment Instruction opposite the name of such Fund, as the same may be amended from time to time by notice from the Distributor and the Program Agent to the Fund and the Transfer Agent; provided, that such term shall include, after the Distributor Last Sale Cut-off Date, a share of a new class of shares of such Fund: (i) with respect to each record owner of Shares which is not treated in the records of each Transfer Agent and Sub-transfer Agent for such Fund as an entirely separate and distinct class of shares from the classes of shares specified Schedule II to the Irrevocable Payment Instruction or (ii) the shares of which class may be exchanged for shares of another Fund of the classes of shares specified on Schedule II to the Irrevocable Payment Instruction of any class existing on or prior to the Distributor Last Sale Cut-off Date; or (iii) dividends on which can be reinvested in shares of the classes specified on Schedule II to the Irrevocable Payment Instruction under the automatic dividend reinvestment options; or (iv) which is otherwise treated as though it were of the same class as the class of shares specified on Schedule II to the Irrevocable Payment Instruction. "Shareholder Account" shall have the meaning set forth in clause (B)(1) hereof. "Special Free Share" shall mean, in respect of any Fund, a Share (other than a Commission Share) issued by such Fund other than in connection with the automatic reinvestment of Dividends and other than in connection with an exchange whereby a Free Share (or portion thereof) of another Fund is redeemed and the Net Asset Value of such redeemed Share (or portion thereof) is invested in a Share (or portion thereof) of such Fund. "Sub-shareholder Account" shall have the meaning set forth in clause (B)(1) hereof. "Sub-transfer Agent" shall mean, in respect of each Omnibus Account, the record owner thereof. (B) RECORDS TO BE MAINTAINED BY THE TRANSFER AGENT FOR EACH FUND AND THE RECORD OWNER OF EACH OMNIBUS ACCOUNT: The Transfer Agent shall maintain Shareholder Accounts, and shall cause each record owner of each Omnibus Account to maintain Sub-shareholder Accounts, each in accordance with the following rules: (1) SHAREHOLDER ACCOUNTS AND SUB-SHAREHOLDER ACCOUNTS. The Transfer Agent shall maintain a separate account (a "Shareholder Account") for each record owner of Shares of each Fund. Each Shareholder Account (other than Omnibus Accounts) will represent a record owner of Shares of such Fund, the records of which will be kept in accordance with this Schedule I. In the case of an Omnibus Account, the Transfer Agent shall require that the record owner of the Omnibus Account maintain a separate account (a "Sub-shareholder Account") for each record owner of Shares which are reflected in the Omnibus Account, the records of which will be kept in accordance with this Schedule I. Each such Shareholder Account and Sub-shareholder Account shall relate solely to Shares of such Fund and shall not relate to any other class of shares of such Fund. (2) COMMISSION SHARES. For each Shareholder Account (other than an Omnibus Account), the Transfer Agent shall maintain daily records of each Commission Share of such Fund which records shall identify each Commission Share of such Fund reflected in such Shareholder Account by the Month of Original Purchase of such Commission Share. For each Omnibus Account, the Transfer Agent shall require that the Sub-transfer Agent in respect thereof maintain daily records of such Sub-shareholder Account which records shall identify each Commission Share of such Fund reflected in such Sub-shareholder Account by the Month of Original Purchase; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall maintain daily records of Sub-shareholder Accounts which identify each Commission Share of such Fund reflected in such Sub-shareholder Account by the Date of Original Purchase. Each such Commission Share shall be identified as either a Distributor Share or a Post-distributor Share based upon the Month of Original Purchase of such Commission Share (or in the case of a Sub-shareholder Account within the ML Omnibus Account, based upon the Date of Original Purchase). (3) FREE SHARES. The Transfer Agent shall maintain daily records of each Shareholder Account (other than an Omnibus Account) in respect of any Fund so as to identify each Free Share (including each Special Free Share) reflected in such Shareholder Account by the Month of Original Purchase of such Free Share. In addition, the Transfer Agent shall require that each Shareholder Account (other than an Omnibus Account) have in effect separate elections relating to reinvestment of Capital Gain Dividends and relating to reinvestment of Other Dividends in respect of any Fund. Either such Shareholder Account shall have elected to reinvest all Capital Gain Dividends or such Shareholder Account shall have elected to have all Capital Gain Dividends distributed. Similarly, either such Shareholder Account shall have elected to reinvest all Other Dividends or such Shareholder Account shall have elected to have all Other Dividends distributed. The Transfer Agent shall require that the Sub-transfer Agent in respect of each Omnibus Account maintain daily records for each Sub-shareholder Account in the manner described in the immediately preceding paragraph for Shareholder Accounts (other than Omnibus Accounts); provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall not be obligated to conform to the foregoing requirements. Each Sub-shareholder Account shall also have in effect Dividend reinvestment elections as described in the immediately preceding paragraph. The Transfer Agent and each Sub-transfer Agent in respect of an Omnibus Account shall identify each Free Share as either a Distributor Share or a Post-distributor Share based upon the Month of Original Purchase of such Free Share; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, the Transfer Agent shall require such Sub-transfer Agent to identify each Free Share of a given Fund in the ML Omnibus Account as a Distributor Share, or Post-distributor Share, as follows: (a) Free Shares of such Fund which are outstanding on the Distributor Last Sale Cut-off Date for such Fund shall be identified as Distributor Shares. (b) Free Shares of such Fund which are issued (whether or not in connection with an exchange for a Free Share of another Fund) to the ML Omnibus Account during any calendar month (or portion thereof) after the Distributor Last Sale Cut-off Date for such Fund shall be identified as Distributor Shares in a number computed as follows: A X (B/C) where: A = Free Shares of such Fund issued to the ML Omnibus Account during such calendar month (or portion thereof) B = Number of Commission Shares and Free Shares of such Fund in the ML Omnibus Account identified as Distributor Shares and outstanding as of the close of business in the last day of the immediately preceding calendar month (or portion thereof) C = Total number of Commission Shares and Free Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof). (c) Free Shares of such Fund which are issued (whether or not in connection with an exchange for a free share of another Fund) to the ML Omnibus Account during any calendar month (or portion thereof) after the Distributor Last Sale Cut-off Date for such Fund shall be identified as Post-distributor Shares in a number computed as follows: (A X (B/C) where: A = Free Shares of such Fund issued to the ML Omnibus Account during such calendar month (or portion thereof) B = Number of Commission Shares and Free Shares of such Fund in the ML Omnibus Account identified as Post-distributor Shares and outstanding as of the close of business in the last day of the immediately preceding calendar month (or portion thereof) C = Total number of Commission Shares and Free Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof). (d) Free Shares of such Fund which are redeemed (whether or not in connection with an exchange for Free Shares of another Fund or in connection with the conversion of such Shares into a Class A Share of such Fund) from the ML Omnibus Account in any calendar month (or portion thereof) after the Distributor Last Sale Cut-off Date for such Fund shall be identified as Distributor Shares in a number computed as follows: A X (B/C) Where: A = Free Shares of such Fund which are redeemed (whether or not in connection with an exchange for Free Shares of another Fund or in connection with the conversion of such Shares into a class A share of such Fund) from the ML Omnibus Account during such calendar month (or portion thereof) B = Free Shares of such Fund in the ML Omnibus Account identified as Distributor Shares and outstanding as of the close of business on the last day of the immediately preceding calendar month. C = Total number of Free Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month. (e) Free Shares of such Fund which are redeemed (whether or not in connection with an exchange for Free Shares of another Fund or in connection with the conversion of such Shares into a class A share of such Fund) from the ML Omnibus Account in any calendar month (or portion thereof) after the Distributor Last Sale Cut-off Date for such Fund shall be identified as Post-distributor Shares in a number computed as follows: A X (B/C) where: A = Free Shares of such Fund which are redeemed (whether or not in connection with an exchange for Free Shares of another Fund or in connection with the conversion of such Shares into a class A share of such Fund) from the ML Omnibus Account during such calendar month (or portion thereof) B = Free Shares of such Fund in the ML Omnibus Account identified as Post-distributor Shares and outstanding as of the close of business on the last day of the immediately preceding calendar month. C = Total number of Free Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month. (4) APPRECIATION AMOUNT AND COST ACCUMULATION AMOUNT. The Transfer Agent shall maintain on a daily basis in respect of each Shareholder Account (other than Omnibus Accounts) a Cost Accumulation Amount representing the total of the Original Purchase Amounts paid by such Shareholder Account for all Commission Shares reflected in such Shareholder Account as of the close of business on each day. In addition, the Transfer Agent shall maintain on a daily basis in respect of each Shareholder Account (other than Omnibus Accounts) sufficient records to enable it to compute, as of the date of any actual or deemed redemption or Free Exchange of a Commission Share reflected in such Shareholder Account an amount (such amount an "Appreciation Amount") equal to the excess, if any, of the Net Asset Value as of the close of business on such day of the Commission Shares reflected in such Shareholder Account minus the Cost Accumulation Amount as of the close of business on such day. In the event that a Commission Share (or portion thereof) reflected in a Shareholder Account is redeemed or under these rules is deemed to have been redeemed (whether in a Free Exchange or otherwise), the Appreciation Amount for such Shareholder Account shall be reduced, to the extent thereof, by the Net Asset Value of the Commission Share (or portion thereof) redeemed, and if the Net Asset Value of the Commission Share (or portion thereof) being redeemed equals or exceeds the Appreciation Amount, the Cost Accumulation Amount will be reduced to the extent thereof, by such excess. If the Appreciation Amount for such Shareholder Account immediately prior to any redemption of a Commission Share (or portion thereof) is equal to or greater than the Net Asset Value of such Commission Share (or portion thereof) deemed to have been tendered for redemption, no CDSCs will be payable in respect of such Commission Share (or portion thereof). The Transfer Agent shall require that the Sub-transfer Agent in respect of each Omnibus Account maintain on a daily basis in respect of each Sub-shareholder Account reflected in such Omnibus Account a Cost Accumulation Amount and sufficient records to enable it to compute, as of the date of any actual or deemed redemption or Free Exchange of a Commission Share reflected in such Sub-shareholder Account an Appreciation Amount in accordance with the preceding paragraph and to apply the same to determine whether a CDSC is payable (as though such Sub-shareholder Account were a Shareholder Account other than an Omnibus Account; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall maintain for each Sub-shareholder Account a separate Cost Accumulation Amount and a separate Appreciation Amount for each Date of Original Purchase of any Commission Share which shall be applied as set forth in the preceding paragraph as if each Date of Original Purchase were a separate Month of Original Purchase. (5) NASD CAP. On the date the distribution fees paid in respect of any class of Shares equals the maximum amount thereon under the Rules of Fair Practice, in respect of such class, all outstanding Shares of such class of such Fund shall be converted into Class A shares of such Fund and will be deemed to have been redeemed for their Net Asset Value for purposes of this Schedule I. (6) IDENTIFICATION OF REDEEMED SHARES. If a Shareholder Account (other than an Omnibus Account) tenders a Share of a Fund for redemption (other than in connection with an exchange of such Share for a Share of another Fund or in connection with the conversion of such Share pursuant to a Conversion Feature), such tendered Share will be deemed to be a Free Share if there are any Free Shares reflected in such Shareholder Account immediately prior to such tender. If there is more than one Free Share reflected in such Shareholder Account immediately prior to such tender, such tendered Share will be deemed to be the Free Share with the earliest Month of Original Purchase. If there are no Free Shares reflected in such Shareholder Account immediately prior to such tender, such tendered Share will be deemed to be the Commission Share with the earliest Month of Original Purchase reflected in such Shareholder Account. If a Sub-shareholder Account reflected in an Omnibus Account tenders a Share for redemption (other than in connection with an Exchange of such Share for a Share of another Fund or in connection with the conversion of such Share pursuant to a Conversion Feature), the Transfer Agent shall require that the record owner of each Omnibus Account supply the Transfer Agent sufficient records to enable the Transfer Agent to apply the rules of the preceding paragraph to such Sub-shareholder Account (as though such Sub-shareholder Account were a Shareholder Account other than an Omnibus Account); provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall not be required to conform to the foregoing rules regarding Free Shares (and the Transfer Agent shall account for such Free Shares as provided in (3) above) but shall apply the foregoing rules to each Commission Share with respect to the Date of Original Purchase of any Commission Share as though each such Date were a separate Month of Original Purchase. (7) IDENTIFICATION OF EXCHANGED SHARES. When a Shareholder Account (other than an Omnibus Account) tenders Shares of one Fund (the "Redeeming Fund") for redemption where the proceeds of such redemption are to be automatically reinvested in shares of another Fund (the "Issuing Fund") to effect an exchange (whether or not pursuant to a Free Exchange) into Shares of the Issuing Fund: (1) such Shareholder Account will be deemed to have tendered Shares (or portions thereof) of the Redeeming Fund with each Month of Original Purchase represented by Shares of the Redeeming Fund reflected in such Shareholder Account immediately prior to such tender in the same proportion that the number of Shares of the redeeming Fund with such Month of Original Purchase reflected in such Shareholder immediately prior to such tender bore to the total number of Shares of the Redeeming Fund reflected in such Shareholder Account immediately prior to such tender, and on that basis the tendered Shares of the Redeeming Fund will be identified as Distributor Shares or Post-distributor Shares; (2) such Shareholder Account will be deemed to have tendered Commission Shares (or portions thereof) and Free Shares (or portions thereof) of the Redeeming Fund of each category (i.e., Distributor Shares or Post-distributor Shares) in the same proportion that the number of Commission Shares or Free Shares (as the case may be) of the Redeeming Fund in such category reflected in such Shareholder Account bore to the total number of Shares of the Redeeming Fund in such category reflected in such Shareholder Account immediately prior to such tender, (3) the Shares (or portions thereof) of the Issuing Fund issued in connection with such exchange will be deemed to have the same Months of Original Purchase as the Shares (or portions thereof) of the Redeeming Fund so tendered and will be categorized as Distributor Shares and Post-distributor Shares accordingly, and (4) the Shares (or portions thereof) of each Category of the Issuing Fund issued in connection with such exchange will be deemed to be Commission Shares and Free Shares in the same proportion that the Shares of such Category of the Redeeming Fund were Commission Shares and Free Shares. The Transfer Agent shall require that each record owner of an Omnibus Account maintain records relating to each Sub-shareholder Account in such Omnibus Account sufficient to apply the foregoing rules to each such Sub-shareholder Account (as though such Sub-shareholder Account were a Shareholder Account other than an Omnibus Account); provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall not be required to conform to the foregoing rules relating to Free Shares (and the Sub-transfer Agent shall account for such Free Shares as provided in (3) above) and shall apply a first-in-first-out procedure (based upon the Date of Original Purchase) to determine which Commission Shares (or portions thereof) of a Redeeming Fund were redeemed in connection with an exchange. (8) IDENTIFICATION OF CONVERTED SHARES. The Transfer Agent records maintained for each Shareholder Account (other than an Omnibus Account) will treat each Commission Share of a Fund as though it were redeemed at its Net Asset Value on the date such Commission Share converts into a class A share of such Fund in accordance with an applicable Conversion Feature applied with reference to its Month of Original Purchase and will treat each Free Share of such Fund with a given Month of Original Purchase as though it were redeemed at its Net Asset Value when it is simultaneously converted to a class A share at the time the Commission Shares of such Fund with such Month of Original Purchase are so converted. The Transfer Agent shall require that each record owner of an Omnibus Account maintain records relating to each Sub-shareholder Account in such Omnibus Account sufficient to apply the foregoing rules to each such Sub-shareholder Account (as though such Sub-shareholder Account were a Shareholder Account other than an Omnibus Account) ; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall apply the foregoing rules to Commission Shares with reference to the Date of Original Issue of each Commission Share (as though each such date were a separate Month of Original Issue) and shall not be required to apply the foregoing rules to Free Shares (and the Sub-transfer Agent shall account for such Free Shares as provided in (3) above). (C) ALLOCATIONS OF ASSET BASED SALE CHARGES AND CDSCS AMONG DISTRIBUTOR SHARES AND POST-DISTRIBUTOR SHARES: The Transfer Agent shall use the following rules to allocate the amounts of Asset Based Sales Charges and CDSCs payable by each Fund in respect of Shares between Distributor Shares and Post-distributor Shares: (1) RECEIVABLES CONSTITUTING CDSCS: CDSCs will be treated as relating to Distributor Shares or Post-distributor Shares depending upon the Month of Original Purchase of the Commission Share the redemption of which gives rise to the payment of a CDSC by a Shareholder Account. The Transfer Agent shall cause each Sub-transfer Agent to apply the foregoing rule to each Sub-shareholder Account based on the records maintained by such Sub-transfer Agent; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall apply the foregoing rules to each Sub-shareholder Account with respect to the Date of Original Purchase of any Commission Share as though each such date were a separate Month of Original Purchase. (2) RECEIVABLES CONSTITUTING ASSET BASED SALES CHARGES: The Asset Based Sales Charges accruing in respect of each Shareholder Account (other than an Omnibus Account) shall be allocated to each Share reflected in such Shareholder Account as of the close of business on such day on an equal per share basis. For example, the Asset Based Sales Charges attributable to Distributor Shares on any day shall be computed and allocated as follows: A X (B/C) where: A. = Total amount of Asset Based Sales Charge accrued in respect of such Shareholder Account (other than an Omnibus Account) on such day. B. = Number of Distributor Shares reflected in such Shareholder Account (other than an Omnibus Account) on the close of business on such day C. = Total number of Distributor Shares and Post-Distributor Shares reflected in such Shareholder Account (other than an Omnibus Account) and outstanding as of the close of business on such day. The Portion of the Asset Based Sales Charges of such Fund accruing in respect of such Shareholder Account for such day allocated to Post-distributor Shares will be obtained using the same formula but substituting for "B" the number of Post-distributor Shares, as the case may be, reflected in such Shareholder Account and outstanding on the close of business on such day. The foregoing allocation formula may be adjusted from time to time by notice to the Fund and the transfer agent for the Fund from the Seller and the Program Agent pursuant to Section 8.18 of the Purchase Agreement. The Transfer Agent shall, based on the records maintained by the record owner of such Omnibus Account, allocate the Asset Based Sales Charge accruing in respect of each Omnibus Account on each day among all Sub-shareholder Accounts reflected in such Omnibus Account on an equal per share basis based upon the total number of Distributor Shares and Post-distributor Shares reflected in each such Sub-shareholder Account as of the close of business on such day. In addition, the Transfer Agent shall apply the foregoing rules to each Sub-shareholder Account (as though it were a Shareholder Account other than an Omnibus Account), based on the records maintained by the record owner, to allocate the Asset Based Sales Charge so allocated to any Sub-shareholder Account among the Distributor Shares and Post-distributor Shares reflected in each such Sub-shareholder Account in accordance with the rules set forth in the preceding paragraph; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capacity to apply the rules of this Schedule I as applicable to Sub-shareholder Accounts other than ML Omnibus Accounts, the Transfer Agent shall allocate the Asset Based Sales Charge accruing in respect of Shares of any Fund in the ML Omnibus Account during any calendar month (or portion thereof) among Distributor Shares and Post-distributor Shares as follows: (a) The portion of such Asset Based Sales Charge allocable to Distributor Shares shall be computed as follows: A X ((B + C)/2) ----------- ((D + E)/2) where: A = Total amount of Asset Based Sales Charge accrued during such calendar month (or portion thereof) in respect of Shares of such Fund in the ML Omnibus Account B = Shares of such Fund in the ML Omnibus Account and identified as Distributor Shares and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof), times Net Asset Value per Share as of such time C = Shares of such Fund in the ML Omnibus Account and identified as Distributor Shares and outstanding as of the close of business on the last day of such calendar month (or portion thereof), times Net Asset Value per Share as of such time D = Total number of Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof), times Net Asset Value per Share as of such time. E = Total number of Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of such calendar month (or portion thereof), times Net Asset Value per Share as of such time. (b) The portion of such Asset Based Sales Charge allocable to Post-distributor Shares shall be computed s follows: A X ((B + C)/2) ----------- ((D + E)/2) where: A = Total amount of Asset Based Sales Charge accrued during such calendar month (or portion thereof) in respect of Shares of such Fund in the ML Omnibus Account B = Shares of such Fund in the ML Omnibus Account and identified as Post-distributor Shares and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof), times Net Asset Value per Share as of such time C = Shares of such Fund in the ML Omnibus Account and identified as Post-distributor Shares and outstanding as of the close of business on the last day of such calendar month (or portion thereof), times Net Asset Value per Share as of such time D = Total number of Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof), times Net Asset Value per Share as of such time. E = Total number of Shares of such Fund in the ML Omnibus Account outstanding as of the close of business on the last day of such calendar month, times Net Asset Value per Share as of such time. (3) PAYMENTS ON BEHALF OF EACH FUND. On the close of business on each day the Transfer Agent shall cause payment to be made of the amount of the Asset Based Sales Charge and CDSCs accruing on such day in respect of the Shares of such Fund owned of record by Shareholder Accounts (other than Omnibus Accounts) by two separate wire transfers, directly from accounts of such Fund as follows: 1. The Asset Based Sales Charge and CDSCs accruing in respect of Shareholder Accounts other than Omnibus Accounts and allocable to Distributor Shares in accordance with the preceding rules shall be paid to the Distributor's Account, unless the Distributor otherwise instructs the Fund in any irrevocable payment instruction; and 2. The Asset Based Sales Charges and CDSCs accruing in respect of Shareholder Accounts other than Omnibus Accounts and allocable to Post-distributor Shares in accordance with the preceding rules shall be paid in accordance with direction received from any future distributor of Shares of the Instant Fund. On each Omnibus CDSC Settlement Date, the Transfer Agent for each Fund shall cause the applicable Sub-transfer Agent to cause payment to be made of the amount of the CDSCs accruing during the period to which such Omnibus CDSC Settlement Date relates in respect of the Shares of such Fund owned of record by each Omnibus Account by two separate wire transfers directly from the account of such Fund maintained by such Transfer Agent, as follows: 1. The CDSCs accruing in respect of such Omnibus Account and allocable to Distributor Shares in accordance with the preceding rules shall be paid to the Distributor's Account, unless the Distributor otherwise instructs the Fund in any irrevocable payment instruction; and 2. The CDSCs accruing in respect of such Omnibus Account and allocable to Post-distributor Shares in accordance with the preceding rules shall be paid in accordance with direction received from any future distributor of Shares of the Instant Fund. On each Omnibus Asset Based Sales Charge Settlement Date the Transfer Agent for each Fund shall cause payment to be made of the amount of the Asset Based Sales Charge accruing for the period to which such Omnibus Asset Based Sales Charge Settlement Date relates in respect of the Shares of such Fund owned of record by each Omnibus Account by two separate wire transfers directly from accounts of such Fund as follows: 1. The Asset Based Sales Charge accruing in respect of such Omnibus Account and allocable to Distributor Shares shall be paid to the Distributor's Collection Account, unless the Distributor otherwise instructs the Fund in any irrevocable payment instruction; and 2. The Asset Based Sales Charge accruing in respect of such Omnibus Account and allocable to Post-Distributor Shares shall be paid in accordance with direction received from any future distributor of Shares of the Instant Fund. PRINCIPAL UNDERWRITING AGREEMENT FOR CLASS B-2 SHARES OF KEYSTONE STRATEGIC DEVELOPMENT FUND AGREEMENT made this 31st day of May 1995 by and between Keystone Strategic Development Fund, a Massachusetts business trust, ("Fund"), and Keystone Investment Distributors Company, a Delaware corporation (the "Principal Underwriter"). The Fund, individually and/or on behalf of its series, if any, referred to above in the title of this Agreement, to which series, if any, this Agreement shall relate, as applicable (the Fund ), may act as the distributor of certain securities of which it is the issuer pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the 1940 Act ). Accordingly, it is hereby mutually agreed as follows: 1. The Fund hereby appoints the Principal Underwriter a principal underwriter of the Class B-2 shares of beneficial interest of the Fund ("B-2 Shares") as an independent contractor upon the terms and conditions hereinafter set forth. The general term "Shares" as used herein has the same meaning as is provided therefor in Schedule I hereto. Except as the Fund may from time to time agree, the Principal Underwriter will act as agent for the Fund and not as principal. 2. The Principal Underwriter will use its best efforts to find purchasers for the B-2 Shares and to promote distribution of the B-2 Shares and may obtain orders from brokers, dealers or other persons for sales of B-2 Shares to them. No such dealer, broker or other person shall have any authority to act as agent for the Fund; such dealer, broker or other person shall act only as principal in the sale of B-2 Shares. 3. Sales of B-2 Shares by Principal Underwriter shall be at the public offering price determined in the manner set forth in the prospectus and/or statement of additional information of the Fund current at the time of the Fund's acceptance of the order for B-2 Shares. All orders shall be subject to acceptance by the Fund and the Fund reserves the right in its sole discretion to reject any order received. The Fund shall not be liable to anyone for failure to accept any order. 4. On all sales of B-2 Shares the Fund shall receive the current net asset value. The Fund shall pay the Principal Underwriter Distribution Fees (as defined in Section 14 hereof), as commissions for the sale of B-2 Shares and other Shares, which shall be paid in conjunction with distribution fees paid to the Principal Underwriter by other classes of Shares of the Fund to the extent required in order to comply with Section 14 hereof, and shall pay over to the Principal Underwriter CDSCs (as defined in Section 14 hereof) as set forth in the Fund's current prospectus and statement of additional information, and as required by Section 14 hereof. The Principal Underwriter shall also receive payments consisting of shareholder service fees ("Service Fees") at the rate of .25% per annum of the average daily net asset value of the Class B-2 Shares. The Principal Underwriter may allow all or a part of said Distribution Fees and CDSCs received by it (not paid to others as hereinafter provided) to such brokers, dealers or other persons as Principal Underwriter may determine. 5. Payment to the Fund for B-2 Shares shall be in New York or Boston Clearing House funds received by the Principal Underwriter within three business days after notice of acceptance of the purchase order and the amount of the applicable public offering price has been given to the purchaser. If such payment is not received within such period, the Fund reserves the right, without further notice, forthwith to cancel its acceptance of any such order. The Fund shall pay such issue taxes as may be required by law in connection with the issue of the B-2 Shares. 6. The Principal Underwriter shall not make in connection with any sale or solicitation of a sale of the B-2 Shares any representations concerning the B-2 Shares except those contained in the then current prospectus and/or statement of additional information covering the Shares and in printed information approved by the Fund as information supplemental to such prospectus and statement of additional information. Copies of the then current prospectus and statement of additional information and any such printed supplemental information will be supplied by the Fund to the Principal Underwriter in reasonable quantities upon request. 7. The Principal Underwriter agrees to comply with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (as defined in the Purchase and Sale Agreement, dated as of May 31, 1995 (the Purchase Agreement ), between the Principal Underwriter, Citibank, N.A. and Citicorp North America, Inc., as agent (the "Rules of Fair Practice")). 8. The Fund appoints the Principal Underwriter as its agent to accept orders for redemptions and repurchases of B-2 Shares at values and in the manner determined in accordance with the then current prospectus and/or statement of additional information of the Fund. 9. The Fund agrees to indemnify and hold harmless the Principal Underwriter, its officers and Directors and each person, if any, who controls the Principal Underwriter within the meaning of Section 15 of the Securities Act of 1933 ("1933 Act"), against any losses, claims, damages, liabilities and expenses (including the cost of any legal fees incurred in connection therewith) which the Principal Underwriter, its officers, Directors or any such controlling person may incur under the 1933 Act, under any other statute, at common law or otherwise, arising out of or based upon a. any untrue statement or alleged untrue statement of a material fact contained in the Fund's registration statement, prospectus or statement of additional information (including amendments and supplements thereto) or b. any omission or alleged omission to state a material fact required to be stated in the Fund's registration statement, prospectus or statement of additional information necessary to make the statements therein not misleading, provided, however, that insofar as losses, claims, damages, liabilities or expenses arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission made in reliance and in conformity with information furnished to the Fund by the Principal Underwriter for use in the Fund's registration statement, prospectus or statement of additional information, such indemnification is not applicable. In no case shall the Fund indemnify the Principal Underwriter or its controlling person as to any amounts incurred for any liability arising out of or based upon any action for which the Principal Underwriter, its officers and Directors or any controlling person would otherwise be subject to liability by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties or by reason of the reckless disregard of its obligations and duties under this Agreement. 10. The Principal Underwriter agrees to indemnify and hold harmless the Fund, its officers and Trustees and each person, if any, who controls the Fund within the meaning of Section 15 of the 1933 Act against any loss, claims, damages, liabilities and expenses (including the cost of any legal fees incurred in connection therewith) which the Fund, its officers, Directors or any such controlling person may incur under the 1933 Act, under any other statute, at common law or otherwise arising out of the acquisition of any Shares by any person which (a) may be based upon any wrongful act by the Principal Underwriter or any of its employees or representatives, or (b) may be based upon any untrue statement or alleged untrue statement of a material fact contained in the Fund's registration statement, prospectus or statement of additional information (including amendments and supplements thereto), or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon information furnished or confirmed in writing to the Fund by the Principal Underwriter. 11. The Fund agrees to execute such papers and to do such acts and things as shall from time to time be reasonably requested by the Principal Underwriter for the purpose of qualifying the B-2 Shares for sale under the so-called "blue sky" laws of any state or for registering B-2 Shares under the 1933 Act or the Fund under the Investment Company Act of 1940 ("1940 Act"). The Principal Underwriter shall bear the expenses of preparing, printing and distributing advertising, sales literature, prospectuses, and statements of additional information. The Fund shall bear the expense of registering B-2 Shares under the 1933 Act and the Fund under the 1940 Act, qualifying B-2 Shares for sale under the so-called "blue sky" laws of any state, the preparation and printing of prospectuses, statements of additional information and reports required to be filed with the Securities and Exchange Commission and other authorities, the preparation, printing and mailing of prospectuses and statements of additional information to holders of B-2 Shares, and the direct expenses of the issue of B-2 Shares. 12. The Principal Underwriter shall, at the request of the Fund, provide to the Board of Trustees or Directors (together herein called the Directors ) of the Fund in connection with sales of B-2 Shares not less than quarterly a written report of the amounts received from the Fund therefor and the purpose for which such expenditures by the Fund were made. 13. The term of this Agreement shall begin on the date hereof and, unless sooner terminated or continued as provided below, shall expire after one year. This Agreement shall continue in effect after such term if its continuance is specifically approved by a majority of the outstanding voting securities of Class B-2 of the Fund or by a majority of the Directors of the Fund and a majority of the Directors who are not parties to this Agreement or "interested persons", as defined in the Investment Company Act of 1940 (the 1940 Act ), of any such party and who have no direct or indirect financial interest in the operation of the Fund's Rule 12b-1 plan for Class B-2 Shares or in any agreements related to the plan at least annually in accordance with the 1940 Act and the rules and regulations thereunder. This Agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the Directors of the Fund, or a majority of such Directors who are not parties to this Agreement or "interested persons", as defined in the 1940 Act, of any such party and who have no direct or indirect financial interest in the operation of the Fund's Rule 12b-1 plan for Class B-2 Shares or in any agreement related to the plan or by a vote of a majority of the outstanding voting securities of Class B-2 on not more than sixty days written notice to any other party to the agreement; and shall terminate automatically in the event of its assignment (as defined in the 1940 Act), which shall not include assignment of the Principal Underwriter's (as hereinafter defined) provided for hereunder and/or rights related to such Allocable Portions. 14. The provisions of this Section 14 shall be applicable to the extent necessary to enable the Fund to comply with the obligation of the Fund to pay the Principal Underwriter its Allocable Portion of Distribution Fees paid in respect of Shares while the Fund is required to do so pursuant the Principal Underwriting Agreement, of even date herewith, in respect of Class B-2 Shares, and shall remain in effect so long as any payments are required to be made by the Fund pursuant to the irrevocable payment instruction (as defined in the Purchase Agreement (the Irrevocable Payment Instruction )). 14.1 The Fund shall pay to the Principal Underwriter the Principal Underwriter's Allocable Portion (as hereinafter defined) of a fee (the "Distribution Fee") at the rate of .75% per annum of the average daily net asset value of the Shares, subject to the limitation on the maximum aggregate amount of such fees under the Rules of Fair Practice as applicable to such Distribution Fee on the date hereof. 14.2 The Principal Underwriter's Allocable Portion of Distribution Fees paid by the Fund in respect of Shares shall be equal to the portion of the Asset Based Sales Charge allocable to Distributor Shares (as defined in Schedule I hereto to this Agreement) in accordance with Schedule I hereto. The Fund agrees to cause its transfer agent to maintain the records and arrange for the payments on behalf of the Fund at the times and in the amounts and to the accounts required by Schedule I hereto, as the same may be amended from time to time. It is acknowledged and agreed that by virtue of the operation of Schedule I hereto the Principal Underwriter's Allocable Portion of Distribution Fees paid by the Fund in respect of Shares, may, to the extent provided in Schedule I hereto, take into account Distribution Fees payable by the Fund in respect of other existing and future classes and/or sub-classes of shares of the Fund which would be treated as "Shares" under Schedule I hereto. The Fund will limit amounts paid to any subsequent principal underwriters of Shares to the portion of the Asset Based Sales Charge paid in respect of Shares which is allocable to Post-distributor Shares (as defined in Schedule I hereto) in accordance with Schedule I hereto. The Fund's payments to the Principal Underwriter in consideration of its services in connection with the sale of B-2 Shares shall be the Distribution Fees attributable to B-2 Shares which are Distributor Shares (as defined in Schedule I hereto) and all other amounts constituting the Principal Underwriter's Allocable Portion of Distribution Fees shall be the Distribution Fees related to the sale of other Shares which are Distributor Shares (as defined in Schedule I hereto). The Fund shall cause its transfer agent and sub-transfer agents to withhold from redemption proceeds payable to holders of Shares on redemption thereof the contingent deferred sales charges payable upon redemption thereof as set forth in the then current prospectus and/or statement of additional information of the Fund ("CDSCs") and to pay over to the Principal Underwriter The Principal Underwriter's Allocable Portion of said CDSCs paid in respect of Shares which shall be equal to the portion thereof allocable to Distributor Shares (as defined in Schedule I hereto) in accordance with Schedule I hereto. 14.3 The Principal Underwriter shall be considered to have completely earned the right to the payment of its Allocable Portion of the Distribution Fee and the right to payment over to it of its' Allocable Portion of the CDSC in respect of Shares as provided for hereby upon the completion of the sale of each Commission Share (as defined in Schedule I hereto) taken into account as a Distributor Share in computing the Principal Underwriter's Allocable Portion in accordance with Schedule I hereto. 14.4 Except as provided in Section 14.5 hereof in respect of Distribution Fees only, the Fund's obligation to pay the Principal Underwriter the Distribution Fees and to pay over to the Principal Underwriter CDSCs provided for hereby shall be absolute and unconditional and shall not be subject to dispute, offset, counterclaim or any defense whatsoever (it being understood that nothing in this sentence shall be deemed a waiver by the Fund of its right separately to pursue any claims it may have against the Principal Underwriter and enforce such claims against any assets (other than the Principal Underwriter's right to its Allocable Portion of the Distribution Fees and CDSCs (the "Collection Rights") of the Principal Underwriter). 14.5 Notwithstanding anything in this Agreement to the contrary, the Fund shall pay to the Principal Underwriter its Allocable Portion of Distribution Fees provided for hereby notwithstanding its termination as Principal Underwriter for the Shares or any termination of this Agreement and such payment of such Distribution Fees, and that obligation and the method of computing such payment, shall not be changed or terminated except to the extent required by any change in applicable law, including, without limitation, the 1940 Act, the Rules promulgated thereunder by the Securities and Exchange Commission and the Rules of Fair Practice, in each case enacted or promulgated after May 31, 1995, or in connection with a Complete Termination (as hereinafter defined). For the purposes of this Section 14.5, "Complete Termination" means a termination of the Fund's Rule 12b-1 plan for B-2 Shares involving the cessation of payments of the Distribution Fees, and the cessation of payments of distribution fees pursuant to every other Rule 12b-1 plan of the Fund for every existing or future B-Class-of-Shares (as hereinafter defined) and the Fund's discontinuance of the offering of every existing or future B-Class-of-Shares, which conditions shall be deemed satisfied when they are first complied with hereafter and so long thereafter as they are complied with prior to the earlier of (i) the date upon which all of the B-2 Shares which are Distributor Shares pursuant to Schedule I hereto shall have been redeemed or converted or (ii) May 31, 2005. For purposes of this Section 14.5, the term B-Class-of-Shares means each of the B-1 Class of Shares of the Fund, the B-2 Class of Shares of the Fund and each other class of shares of the Fund hereafter issued which would be treated as Shares under Schedule I hereto or which has substantially similar economic characteristics to the B-1 or B-2 Classes of Shares taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of the shares of such class. The parties agree that the existing C Class of Shares of the Fund does not have substantially similar economic characteristics to the B-1 or B-2 Classes of Shares taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares. For purposes of clarity the parties to this agreement hereby state that they intend that a new installment load class of shares which may be authorized by amendments to Rule 6(c)-10 under the 1940 Act will be considered to be a B-Class-of-Shares if it has economic characteristics substantially similar to the economic characteristics of the existing B-1 or B-2 Classes of Shares taking into account the total sale charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares and will not be considered to be a B-Class-of-Shares if it has economic characteristics substantially similar to the economic characteristics of the existing C Class of shares of the Fund taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares. 14.6 The Principal Underwriter may assign any part of its Allocable Portions and obligations of the Fund related thereto (but not the Principal Underwriter's obligations to the Fund provided for in this Agreement) to any person (an "Assignee") and any such assignment shall be effective as to the Fund upon written notice to the Fund by the Principal Underwriter. In connection therewith the Fund shall pay all or any amounts in respect of its Allocable Portions directly to the Assignee thereof as directed in a writing by the Principal Underwriter in the Irrevocable Payment Instruction, as the same may be amended from time to time with the consent of the Fund, and the Fund shall be without liability to any person if it pays such amounts when and as so directed, except for underpayments of amounts actually due, without any amount payable as consequential or other damages due to such underpayment and without interest except to the extent that delay in payment of Distribution Fees and CDSCs results in an increase in the maximum Sales Charge allowable under the Rules of Fair Practice, which increases daily at a rate of prime plus one percent per annum. 14.7 The Fund will not, to the extent it may otherwise be empowered to do so, change or waive any CDSC with respect to B-2 Shares, except as provided in the Fund's prospectus or statement of additional information without the Principal Underwriter's or Assignee's consent, as applicable. Notwithstanding anything to the contrary in this Agreement or any termination of this Agreement or the Principal Underwriter as principal underwriter for the Shares of the Fund, the Principal Underwriter shall be entitled to be paid its Allocable Portion of the CDSCs whether or not the Fund's Rule 12b-1 plan for B-2 Shares is terminated and whether or not any such termination is a Complete Termination, as defined above. 15. This Agreement shall be construed in accordance with the laws of The Commonwealth of Massachusetts. All sales hereunder are to be made, and title to the Shares shall pass, in Boston, Massachusetts. 16. The Fund is a Massachusetts business trust established under a Declaration of Trust, as it may be amended from time to time. The obligations of the Fund are not personally binding upon, nor shall recourse be had against the private property of any of the Trustees, shareholders, officers, employees or agents of the Fund, but only the property of the Fund shall be bound. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed by their respective officers thereunto duly authorized at Boston, Massachusetts, on the day and year first written above. KEYSTONE STRATEGIC DEVELOPMENT FUND By: /s/ Rosemary D. Van Antwerp -------------------------------- Title: Senior Vice President KEYSTONE INVESTMENT DISTRIBUTORS, INC. By: /s/ Ralph J. Spuehler, Jr. -------------------------------- Title: President SCHEDULE I TO PRINCIPAL UNDERWRITING AGREEMENT FOR CLASS B-2 SHARES OF KEYSTONE STRATEGIC DEVELOPMENT FUND TRANSFER AGENT PROCEDURES FOR DIFFERENTIATING AMONG DISTRIBUTOR SHARES AND POST-DISTRIBUTOR SHARES Amounts (in respect of Asset Based Sales Charges (as hereinafter defined) and CDSCs (as hereinafter defined) in respect of Shares (as hereinafter defined) of each Fund (as hereinafter defined) shall be allocated between Distributor Shares (as hereinafter defined) and Post-distributor Shares (as hereinafter defined) of such Fund in accordance with the rules set forth in clauses (B) and (C). Clause (B) sets forth the rules to be followed by the Transfer Agent for each Fund and the record owner of each Omnibus Account (as hereinafter defined) in maintaining records relating to Distributor Shares and Post-distributor Shares. Clause (C) sets forth the rules to be followed by the Transfer Agent for each Fund and the record owner of each Omnibus Account in determining what portion of the Asset Based Sales Charge (as hereinafter defined) payable in respect of each class of Shares of such Fund and what portion of the CDSC (as hereinafter defined) payable by the holders of Shares of such Fund is attributable to Distributor Shares and Post-distributor Shares, respectively. (A) DEFINITIONS: Generally, for purposes of this Schedule I, defined terms shall be used with the meaning assigned to them in the Agreement, except that for purposes of the following rules the following definitions are also applicable: "Agreement" shall mean the Principal Underwriting Agreement for Class B-2 Shares of the Instant Fund dated as of June 1, 1995 between the Instant Fund and the Distributor. "Asset Based Sales Charge" shall have the meaning set forth in Section 26(b)(8)(C) of the Rules of Fair Practice it being understood that for purposes of this Exhibit I such term does not include the Service Fee. "Business Day" shall mean any day on which the banks and the New York Stock Exchange are not authorized or required to close in New York City. "Capital Gain Dividend" shall mean, in respect of any Share of any Fund, a Dividend in respect of such Share which is designated by such Fund as being a "capital gain dividend" as such term is defined in Section 852 of the Internal Revenue Code of 1986, as amended. "CDSC" shall mean with respect to any Fund, the contingent deferred sales charge payable, either directly or by withholding from the proceeds of the redemption of the Shares of such Fund, by the shareholders of such Fund on any redemption of Shares of such Fund in accordance with the Prospectus relating to such Fund. "Commission Share" shall mean, in respect of any Fund, a Share of such Fund issued under circumstances where a CDSC would be payable upon the redemption of such Share if such CDSC is not waived or shall have not otherwise expired. "Date of Original Purchase" shall mean, in respect of any Commission Share of any Fund, the date on which such Commission Share was first issued by such Fund; provided, that if such Share is a Commission Share and such Fund issued the Commission Share (or portion thereof) in question in connection with a Free Exchange for a Commission Share (or portion thereof) of another Fund, the Date of Original Purchase for the Commission Share (or portion thereof) in question shall be the date on which the Commission Share (or portion thereof) of the other Fund was first issued by such other Fund (unless such Commission Share (or portion thereof) was also issued by such other Fund in a Free Exchange, in which case this proviso shall apply to that Free Exchange and this application shall be repeated until one reaches a Commission Share (or portion thereof) which was issued by a Fund other than in a Free Exchange). "Distributor" shall mean Keystone Investment Distributors Company, its successors and assigns. "Distributor's Account" shall mean the account of the Distributor, account no. 9903-584-2, ABA No. 011 0000 28, entitled "General Account" maintained with State Street Bank & Trust Company or such other account as the Distributor may designate in a notice to the Transfer Agent. "Distributor Inception Date" shall mean, in respect of any Fund, the date identified as the date Shares of such Fund are first sold by the Distributor. "Distributor Last Sale Cut-off Date" shall mean, in respect of any Fund, the date identified as the last sale of a Commission Share during the period the Distributor served as principal underwriter under the Agreement. "Distributor Shares" shall mean, in respect of any Fund, all Shares of such Fund the Month of Original Purchase of which occurs on or after the Inception Date for such Fund and on or prior to the Distributor Last Sale Cut-off Date in respect of such Fund. "Dividend" shall mean, in respect of any Share of any Fund, any dividend or other distribution by such Fund in respect of such Share. "Free Exchange" shall mean any exchange of a Commission Share (or portion thereof) of one Fund (the "Redeeming Fund") for a Share (or portion thereof) of another Fund (the "Issuing Fund"), under any arrangement which defers the exchanging Shareholder's obligation to pay the CDSC in respect of the Commission Share (or portion thereof) of the Redeeming Fund so exchanged until the later redemption of the Share (or portion thereof) of the Issuing Fund received in such exchange. "Free Share" shall mean, in respect of any Fund, each Share of such Fund other than a Commission Share, including, without limitation: (i) Shares issued in connection with the automatic reinvestment of Capital Gain Dividends or Other Dividends by such Fund, (ii) Special Free Shares issued by such Fund and (iii) Shares (or portion thereof) issued by such Fund in connection with an exchange whereby a Free Share (or portion thereof) of another Fund is redeemed and the Net Asset Value of such redeemed Free Share (or portion thereof) is invested in such Shares (or portion thereof) of such Fund. "Fund" shall mean each of the regulated investment companies or series or portfolios of regulated investment companies identified in Schedule II to the Irrevocable Payment Instruction, as the same may be amended from time to time in accordance with the terms thereof. "Instant Fund" shall mean Keystone Strategic Development Fund. "ML Omnibus Account" shall mean, in respect of any Fund, the Omnibus Account maintained by Merrill Lynch, Pierce, Fenner & Smith as subtransfer agent. "Month of Original Purchase" shall mean, in respect of any Share of any Fund, the calendar month in which such Share was first issued by such Fund; provided, that if such Share is a Commission Share and such Fund issued the Commission Share (or portion thereof) in question in connection with a Free Exchange for a Commission Share (or portion thereof) of another Fund, the Month of Original Purchase for the Commission Share (or portion thereof) in question shall be the calendar month in which the Commission Share (or portion thereof) of the other Fund was first issued by such other Fund (unless such Commission Share (or portion thereof) was also issued by such other Fund in a Free Exchange, in which case this proviso shall apply to that Free Exchange and this application shall be repeated until one reaches a Commission Share (or portion thereof) which was issued by a Fund other than in a Free Exchange); provided, further, that if such Share is a Free Share and such Fund issued such Free Share in connection with the automatic reinvestment of dividends in respect of other Shares of such Fund, the Month of Original Purchase of such Free Share shall be deemed to be the Month of Original Purchase of the Share in respect of which such dividend was paid; provided, further, that if such Share is a Free Share and such Fund issued such Free Share in connection with an exchange whereby a Free Share (or portion thereof) of another Fund is redeemed and the Net Asset Value of such redeemed Free Share (or portion thereof) is invested in a Free Share (or portion thereof) of such Fund, the Month of Original Issue of such Free Share shall be the Month of Original Issue of the Free Share of such other Fund so redeemed (unless such Free Share of such other Fund was also issued by such other Fund in such an exchange, in which case this proviso shall apply to that exchange and this application shall be repeated until one reaches a Free Share which was issued by a Fund other than in such an exchange); and provided, finally, that for purposes of this Schedule I each of the following periods shall be treated as one calendar month for purposes of applying the rules of this Schedule I to any Fund: (i) the period of time from and including the Distributor Inception Date for such Fund to and including the last day of the calendar month in which such Distributor Inception Date occurs; (ii) the period of time commencing with the first day of the calendar month in which the Distributor Last Sale Cutoff Date in respect of such Fund occurs to and including such Distributor Last Sale Cutoff Date; and (iii) the period of time commencing on the day immediately following the Distributor Last Sale Cutoff Date in respect of such Fund to and including the last day of the calendar month in which such Distributor Last Sale Cut-off Date occurs. "Omnibus Account" shall mean any Shareholder Account the record owner of which is a registered broker-dealer which has agreed with the Transfer Agent to provide sub-transfer agent functions relating to each Sub-shareholder Account within such Shareholder Account as contemplated by this Schedule I in respect of each of the Funds. "Omnibus Asset Based Sales Charge Settlement Date" shall mean, in respect of each Omnibus Account, the Business Day next following the twentieth day of each calendar month for the calendar month immediately preceding such date so long as the record owner is able to allocate the Asset Based Sales Charge accruing in respect of Shares of any Fund as contemplated by this Schedule I no more frequently than monthly; provided, that at such time as the record owner of such Omnibus Account is able to provide information sufficient to allocate the Asset Based Sales Charge accruing in respect of such Shares of such Fund owned of record by such Omnibus Account as contemplated by this Schedule I on a weekly or daily basis, the Omnibus Asset Based Sales Charge Settlement Date shall be a weekly date as in the case of the Omnibus CDSC Settlement Date or a daily date as in the case of Asset Based Sales Charges accruing in respect of Shareholder Accounts other than Omnibus Accounts, as the case may be. "Omnibus CDSC Settlement Date" shall mean, in respect of each Omnibus Account, the third Business Day of each calendar week for the calendar week immediately preceding such date so long as the record owner of such Omnibus Account is able to allocate the CDSCs accruing in respect of any Shares of any Fund as contemplated by this Schedule I for no more frequently than weekly; provided, that at such time as the record owner of such Shares of such Fund owned of record by such Omnibus Account is able to provide information sufficient to allocate the CDSCs accruing in respect of such Omnibus Account as contemplated by this Schedule I on a daily basis, the Omnibus CDSC Settlement Date for such Omnibus Account shall be a daily date as in the case of CDSCs accruing in respect of Shareholder Accounts other than Omnibus Accounts. "Original Purchase Amount" shall mean, in respect of any Commission Share of any Fund, the amount paid (i.e., the Net Asset Value thereof on such date), on the Date of Original Purchase in respect of such Commission Share, by such Shareholder Account or Sub-shareholder Account for such Commission Share; provided, that if such Fund issued the Commission Share (or portion thereof) in question in connection with a Free Exchange for a Commission Share (or portion thereof) of another Fund, the Original Purchase Amount for the Commission Share (or portion thereof) in question shall be the Original Purchase Amount in respect of such Commission Share (or portion thereof) of such other Fund (unless such Commission Share (or portion thereof) was also issued by such other Fund in a Free Exchange, in which case this proviso shall apply to that Free Exchange and this application shall be repeated until one reaches a Commission Share (or portion thereof) which was issued by a Fund other than in a Free Exchange). "Other Dividend" shall mean in respect of any Share, any Dividend paid in respect of such Share other than a Capital Gain Dividend. "Post-distributor Shares" shall mean, in respect of any Fund, all Shares of such Fund the Month of Original Purchase of which occurs after the Distributor Last Sale Cut-off Date for such Fund. "Program Agent" shall mean Citicorp North America, Inc., as Program Agent under the Purchase Agreement, and its successors and assigns in such capacity. "Purchase Agreement" shall mean that certain Purchase and Sale Agreement dated as of May 31, 1995, among Keystone Investment Distributors Company, as Seller, Citibank, N.A., as Purchaser, and Citicorp North America, Inc., as Program Agent. "Share" shall mean in respect of any Fund any share of the classes of shares specified in Schedule II to the Irrevocable Payment Instruction opposite the name of such Fund, as the same may be amended from time to time by notice from the Distributor and the Program Agent to the Fund and the Transfer Agent; provided, that such term shall include, after the Distributor Last Sale Cut-off Date, a share of a new class of shares of such Fund: (i) with respect to each record owner of Shares which is not treated in the records of each Transfer Agent and Sub-transfer Agent for such Fund as an entirely separate and distinct class of shares from the classes of shares specified Schedule II to the Irrevocable Payment Instruction or (ii) the shares of which class may be exchanged for shares of another Fund of the classes of shares specified on Schedule II to the Irrevocable Payment Instruction of any class existing on or prior to the Distributor Last Sale Cut-off Date; or (iii) dividends on which can be reinvested in shares of the classes specified on Schedule II to the Irrevocable Payment Instruction under the automatic dividend reinvestment options; or (iv) which is otherwise treated as though it were of the same class as the class of shares specified on Schedule II to the Irrevocable Payment Instruction. "Shareholder Account" shall have the meaning set forth in clause (B)(1) hereof. "Special Free Share" shall mean, in respect of any Fund, a Share (other than a Commission Share) issued by such Fund other than in connection with the automatic reinvestment of Dividends and other than in connection with an exchange whereby a Free Share (or portion thereof) of another Fund is redeemed and the Net Asset Value of such redeemed Share (or portion thereof) is invested in a Share (or portion thereof) of such Fund. "Sub-shareholder Account" shall have the meaning set forth in clause (B)(1) hereof. "Sub-transfer Agent" shall mean, in respect of each Omnibus Account, the record owner thereof. (B) RECORDS TO BE MAINTAINED BY THE TRANSFER AGENT FOR EACH FUND AND THE RECORD OWNER OF EACH OMNIBUS ACCOUNT: The Transfer Agent shall maintain Shareholder Accounts, and shall cause each record owner of each Omnibus Account to maintain Sub-shareholder Accounts, each in accordance with the following rules: (1) SHAREHOLDER ACCOUNTS AND SUB-SHAREHOLDER ACCOUNTS. The Transfer Agent shall maintain a separate account (a "Shareholder Account") for each record owner of Shares of each Fund. Each Shareholder Account (other than Omnibus Accounts) will represent a record owner of Shares of such Fund, the records of which will be kept in accordance with this Schedule I. In the case of an Omnibus Account, the Transfer Agent shall require that the record owner of the Omnibus Account maintain a separate account (a "Sub-shareholder Account") for each record owner of Shares which are reflected in the Omnibus Account, the records of which will be kept in accordance with this Schedule I. Each such Shareholder Account and Sub-shareholder Account shall relate solely to Shares of such Fund and shall not relate to any other class of shares of such Fund. (2) COMMISSION SHARES. For each Shareholder Account (other than an Omnibus Account), the Transfer Agent shall maintain daily records of each Commission Share of such Fund which records shall identify each Commission Share of such Fund reflected in such Shareholder Account by the Month of Original Purchase of such Commission Share. For each Omnibus Account, the Transfer Agent shall require that the Sub-transfer Agent in respect thereof maintain daily records of such Sub-shareholder Account which records shall identify each Commission Share of such Fund reflected in such Sub-shareholder Account by the Month of Original Purchase; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall maintain daily records of Sub-shareholder Accounts which identify each Commission Share of such Fund reflected in such Sub-shareholder Account by the Date of Original Purchase. Each such Commission Share shall be identified as either a Distributor Share or a Post-distributor Share based upon the Month of Original Purchase of such Commission Share (or in the case of a Sub-shareholder Account within the ML Omnibus Account, based upon the Date of Original Purchase). (3) FREE SHARES. The Transfer Agent shall maintain daily records of each Shareholder Account (other than an Omnibus Account) in respect of any Fund so as to identify each Free Share (including each Special Free Share) reflected in such Shareholder Account by the Month of Original Purchase of such Free Share. In addition, the Transfer Agent shall require that each Shareholder Account (other than an Omnibus Account) have in effect separate elections relating to reinvestment of Capital Gain Dividends and relating to reinvestment of Other Dividends in respect of any Fund. Either such Shareholder Account shall have elected to reinvest all Capital Gain Dividends or such Shareholder Account shall have elected to have all Capital Gain Dividends distributed. Similarly, either such Shareholder Account shall have elected to reinvest all Other Dividends or such Shareholder Account shall have elected to have all Other Dividends distributed. The Transfer Agent shall require that the Sub-transfer Agent in respect of each Omnibus Account maintain daily records for each Sub-shareholder Account in the manner described in the immediately preceding paragraph for Shareholder Accounts (other than Omnibus Accounts); provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall not be obligated to conform to the foregoing requirements. Each Sub-shareholder Account shall also have in effect Dividend reinvestment elections as described in the immediately preceding paragraph. The Transfer Agent and each Sub-transfer Agent in respect of an Omnibus Account shall identify each Free Share as either a Distributor Share or a Post-distributor Share based upon the Month of Original Purchase of such Free Share; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, the Transfer Agent shall require such Sub-transfer Agent to identify each Free Share of a given Fund in the ML Omnibus Account as a Distributor Share, or Post-distributor Share, as follows: (a) Free Shares of such Fund which are outstanding on the Distributor Last Sale Cut-off Date for such Fund shall be identified as Distributor Shares. (b) Free Shares of such Fund which are issued (whether or not in connection with an exchange for a Free Share of another Fund) to the ML Omnibus Account during any calendar month (or portion thereof) after the Distributor Last Sale Cut-off Date for such Fund shall be identified as Distributor Shares in a number computed as follows: A X (B/C) where: A = Free Shares of such Fund issued to the ML Omnibus Account during such calendar month (or portion thereof) B = Number of Commission Shares and Free Shares of such Fund in the ML Omnibus Account identified as Distributor Shares and outstanding as of the close of business in the last day of the immediately preceding calendar month (or portion thereof) C = Total number of Commission Shares and Free Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof). (c) Free Shares of such Fund which are issued (whether or not in connection with an exchange for a free share of another Fund) to the ML Omnibus Account during any calendar month (or portion thereof) after the Distributor Last Sale Cut-off Date for such Fund shall be identified as Post-distributor Shares in a number computed as follows: (A X (B/C) where: A = Free Shares of such Fund issued to the ML Omnibus Account during such calendar month (or portion thereof) B = Number of Commission Shares and Free Shares of such Fund in the ML Omnibus Account identified as Post-distributor Shares and outstanding as of the close of business in the last day of the immediately preceding calendar month (or portion thereof) C = Total number of Commission Shares and Free Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof). (d) Free Shares of such Fund which are redeemed (whether or not in connection with an exchange for Free Shares of another Fund or in connection with the conversion of such Shares into a Class A Share of such Fund) from the ML Omnibus Account in any calendar month (or portion thereof) after the Distributor Last Sale Cut-off Date for such Fund shall be identified as Distributor Shares in a number computed as follows: A X (B/C) Where: A = Free Shares of such Fund which are redeemed (whether or not in connection with an exchange for Free Shares of another Fund or in connection with the conversion of such Shares into a class A share of such Fund) from the ML Omnibus Account during such calendar month (or portion thereof) B = Free Shares of such Fund in the ML Omnibus Account identified as Distributor Shares and outstanding as of the close of business on the last day of the immediately preceding calendar month. C = Total number of Free Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month. (e) Free Shares of such Fund which are redeemed (whether or not in connection with an exchange for Free Shares of another Fund or in connection with the conversion of such Shares into a class A share of such Fund) from the ML Omnibus Account in any calendar month (or portion thereof) after the Distributor Last Sale Cut-off Date for such Fund shall be identified as Post-distributor Shares in a number computed as follows: A X (B/C) where: A = Free Shares of such Fund which are redeemed (whether or not in connection with an exchange for Free Shares of another Fund or in connection with the conversion of such Shares into a class A share of such Fund) from the ML Omnibus Account during such calendar month (or portion thereof) B = Free Shares of such Fund in the ML Omnibus Account identified as Post-distributor Shares and outstanding as of the close of business on the last day of the immediately preceding calendar month. C = Total number of Free Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month. (4) APPRECIATION AMOUNT AND COST ACCUMULATION AMOUNT. The Transfer Agent shall maintain on a daily basis in respect of each Shareholder Account (other than Omnibus Accounts) a Cost Accumulation Amount representing the total of the Original Purchase Amounts paid by such Shareholder Account for all Commission Shares reflected in such Shareholder Account as of the close of business on each day. In addition, the Transfer Agent shall maintain on a daily basis in respect of each Shareholder Account (other than Omnibus Accounts) sufficient records to enable it to compute, as of the date of any actual or deemed redemption or Free Exchange of a Commission Share reflected in such Shareholder Account an amount (such amount an "Appreciation Amount") equal to the excess, if any, of the Net Asset Value as of the close of business on such day of the Commission Shares reflected in such Shareholder Account minus the Cost Accumulation Amount as of the close of business on such day. In the event that a Commission Share (or portion thereof) reflected in a Shareholder Account is redeemed or under these rules is deemed to have been redeemed (whether in a Free Exchange or otherwise), the Appreciation Amount for such Shareholder Account shall be reduced, to the extent thereof, by the Net Asset Value of the Commission Share (or portion thereof) redeemed, and if the Net Asset Value of the Commission Share (or portion thereof) being redeemed equals or exceeds the Appreciation Amount, the Cost Accumulation Amount will be reduced to the extent thereof, by such excess. If the Appreciation Amount for such Shareholder Account immediately prior to any redemption of a Commission Share (or portion thereof) is equal to or greater than the Net Asset Value of such Commission Share (or portion thereof) deemed to have been tendered for redemption, no CDSCs will be payable in respect of such Commission Share (or portion thereof). The Transfer Agent shall require that the Sub-transfer Agent in respect of each Omnibus Account maintain on a daily basis in respect of each Sub-shareholder Account reflected in such Omnibus Account a Cost Accumulation Amount and sufficient records to enable it to compute, as of the date of any actual or deemed redemption or Free Exchange of a Commission Share reflected in such Sub-shareholder Account an Appreciation Amount in accordance with the preceding paragraph and to apply the same to determine whether a CDSC is payable (as though such Sub-shareholder Account were a Shareholder Account other than an Omnibus Account; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall maintain for each Sub-shareholder Account a separate Cost Accumulation Amount and a separate Appreciation Amount for each Date of Original Purchase of any Commission Share which shall be applied as set forth in the preceding paragraph as if each Date of Original Purchase were a separate Month of Original Purchase. (5) NASD CAP. On the date the distribution fees paid in respect of any class of Shares equals the maximum amount thereon under the Rules of Fair Practice, in respect of such class, all outstanding Shares of such class of such Fund shall be converted into Class A shares of such Fund and will be deemed to have been redeemed for their Net Asset Value for purposes of this Schedule I. (6) IDENTIFICATION OF REDEEMED SHARES. If a Shareholder Account (other than an Omnibus Account) tenders a Share of a Fund for redemption (other than in connection with an exchange of such Share for a Share of another Fund or in connection with the conversion of such Share pursuant to a Conversion Feature), such tendered Share will be deemed to be a Free Share if there are any Free Shares reflected in such Shareholder Account immediately prior to such tender. If there is more than one Free Share reflected in such Shareholder Account immediately prior to such tender, such tendered Share will be deemed to be the Free Share with the earliest Month of Original Purchase. If there are no Free Shares reflected in such Shareholder Account immediately prior to such tender, such tendered Share will be deemed to be the Commission Share with the earliest Month of Original Purchase reflected in such Shareholder Account. If a Sub-shareholder Account reflected in an Omnibus Account tenders a Share for redemption (other than in connection with an Exchange of such Share for a Share of another Fund or in connection with the conversion of such Share pursuant to a Conversion Feature), the Transfer Agent shall require that the record owner of each Omnibus Account supply the Transfer Agent sufficient records to enable the Transfer Agent to apply the rules of the preceding paragraph to such Sub-shareholder Account (as though such Sub-shareholder Account were a Shareholder Account other than an Omnibus Account); provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall not be required to conform to the foregoing rules regarding Free Shares (and the Transfer Agent shall account for such Free Shares as provided in (3) above) but shall apply the foregoing rules to each Commission Share with respect to the Date of Original Purchase of any Commission Share as though each such Date were a separate Month of Original Purchase. (7) IDENTIFICATION OF EXCHANGED SHARES. When a Shareholder Account (other than an Omnibus Account) tenders Shares of one Fund (the "Redeeming Fund") for redemption where the proceeds of such redemption are to be automatically reinvested in shares of another Fund (the "Issuing Fund") to effect an exchange (whether or not pursuant to a Free Exchange) into Shares of the Issuing Fund: (1) such Shareholder Account will be deemed to have tendered Shares (or portions thereof) of the Redeeming Fund with each Month of Original Purchase represented by Shares of the Redeeming Fund reflected in such Shareholder Account immediately prior to such tender in the same proportion that the number of Shares of the redeeming Fund with such Month of Original Purchase reflected in such Shareholder immediately prior to such tender bore to the total number of Shares of the Redeeming Fund reflected in such Shareholder Account immediately prior to such tender, and on that basis the tendered Shares of the Redeeming Fund will be identified as Distributor Shares or Post-distributor Shares; (2) such Shareholder Account will be deemed to have tendered Commission Shares (or portions thereof) and Free Shares (or portions thereof) of the Redeeming Fund of each category (i.e., Distributor Shares or Post-distributor Shares) in the same proportion that the number of Commission Shares or Free Shares (as the case may be) of the Redeeming Fund in such category reflected in such Shareholder Account bore to the total number of Shares of the Redeeming Fund in such category reflected in such Shareholder Account immediately prior to such tender, (3) the Shares (or portions thereof) of the Issuing Fund issued in connection with such exchange will be deemed to have the same Months of Original Purchase as the Shares (or portions thereof) of the Redeeming Fund so tendered and will be categorized as Distributor Shares and Post-distributor Shares accordingly, and (4) the Shares (or portions thereof) of each Category of the Issuing Fund issued in connection with such exchange will be deemed to be Commission Shares and Free Shares in the same proportion that the Shares of such Category of the Redeeming Fund were Commission Shares and Free Shares. The Transfer Agent shall require that each record owner of an Omnibus Account maintain records relating to each Sub-shareholder Account in such Omnibus Account sufficient to apply the foregoing rules to each such Sub-shareholder Account (as though such Sub-shareholder Account were a Shareholder Account other than an Omnibus Account); provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall not be required to conform to the foregoing rules relating to Free Shares (and the Sub-transfer Agent shall account for such Free Shares as provided in (3) above) and shall apply a first-in-first-out procedure (based upon the Date of Original Purchase) to determine which Commission Shares (or portions thereof) of a Redeeming Fund were redeemed in connection with an exchange. (8) IDENTIFICATION OF CONVERTED SHARES. The Transfer Agent records maintained for each Shareholder Account (other than an Omnibus Account) will treat each Commission Share of a Fund as though it were redeemed at its Net Asset Value on the date such Commission Share converts into a class A share of such Fund in accordance with an applicable Conversion Feature applied with reference to its Month of Original Purchase and will treat each Free Share of such Fund with a given Month of Original Purchase as though it were redeemed at its Net Asset Value when it is simultaneously converted to a class A share at the time the Commission Shares of such Fund with such Month of Original Purchase are so converted. The Transfer Agent shall require that each record owner of an Omnibus Account maintain records relating to each Sub-shareholder Account in such Omnibus Account sufficient to apply the foregoing rules to each such Sub-shareholder Account (as though such Sub-shareholder Account were a Shareholder Account other than an Omnibus Account) ; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall apply the foregoing rules to Commission Shares with reference to the Date of Original Issue of each Commission Share (as though each such date were a separate Month of Original Issue) and shall not be required to apply the foregoing rules to Free Shares (and the Sub-transfer Agent shall account for such Free Shares as provided in (3) above). (C) ALLOCATIONS OF ASSET BASED SALE CHARGES AND CDSCS AMONG DISTRIBUTOR SHARES AND POST-DISTRIBUTOR SHARES: The Transfer Agent shall use the following rules to allocate the amounts of Asset Based Sales Charges and CDSCs payable by each Fund in respect of Shares between Distributor Shares and Post-distributor Shares: (1) RECEIVABLES CONSTITUTING CDSCS: CDSCs will be treated as relating to Distributor Shares or Post-distributor Shares depending upon the Month of Original Purchase of the Commission Share the redemption of which gives rise to the payment of a CDSC by a Shareholder Account. The Transfer Agent shall cause each Sub-transfer Agent to apply the foregoing rule to each Sub-shareholder Account based on the records maintained by such Sub-transfer Agent; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capability to conform to the foregoing requirements, such Sub-transfer Agent shall apply the foregoing rules to each Sub-shareholder Account with respect to the Date of Original Purchase of any Commission Share as though each such date were a separate Month of Original Purchase. (2) RECEIVABLES CONSTITUTING ASSET BASED SALES CHARGES: The Asset Based Sales Charges accruing in respect of each Shareholder Account (other than an Omnibus Account) shall be allocated to each Share reflected in such Shareholder Account as of the close of business on such day on an equal per share basis. For example, the Asset Based Sales Charges attributable to Distributor Shares on any day shall be computed and allocated as follows: A X (B/C) where: A. = Total amount of Asset Based Sales Charge accrued in respect of such Shareholder Account (other than an Omnibus Account) on such day. B. = Number of Distributor Shares reflected in such Shareholder Account (other than an Omnibus Account) on the close of business on such day C. = Total number of Distributor Shares and Post-Distributor Shares reflected in such Shareholder Account (other than an Omnibus Account) and outstanding as of the close of business on such day. The Portion of the Asset Based Sales Charges of such Fund accruing in respect of such Shareholder Account for such day allocated to Post-distributor Shares will be obtained using the same formula but substituting for "B" the number of Post-distributor Shares, as the case may be, reflected in such Shareholder Account and outstanding on the close of business on such day. The foregoing allocation formula may be adjusted from time to time by notice to the Fund and the transfer agent for the Fund from the Seller and the Program Agent pursuant to Section 8.18 of the Purchase Agreement. The Transfer Agent shall, based on the records maintained by the record owner of such Omnibus Account, allocate the Asset Based Sales Charge accruing in respect of each Omnibus Account on each day among all Sub-shareholder Accounts reflected in such Omnibus Account on an equal per share basis based upon the total number of Distributor Shares and Post-distributor Shares reflected in each such Sub-shareholder Account as of the close of business on such day. In addition, the Transfer Agent shall apply the foregoing rules to each Sub-shareholder Account (as though it were a Shareholder Account other than an Omnibus Account), based on the records maintained by the record owner, to allocate the Asset Based Sales Charge so allocated to any Sub-shareholder Account among the Distributor Shares and Post-distributor Shares reflected in each such Sub-shareholder Account in accordance with the rules set forth in the preceding paragraph; provided, that until the Sub-transfer Agent in respect of the ML Omnibus Account develops the data processing capacity to apply the rules of this Schedule I as applicable to Sub-shareholder Accounts other than ML Omnibus Accounts, the Transfer Agent shall allocate the Asset Based Sales Charge accruing in respect of Shares of any Fund in the ML Omnibus Account during any calendar month (or portion thereof) among Distributor Shares and Post-distributor Shares as follows: (a) The portion of such Asset Based Sales Charge allocable to Distributor Shares shall be computed as follows: A X ((B + C)/2) ((D + E)/2) where: A = Total amount of Asset Based Sales Charge accrued during such calendar month (or portion thereof) in respect of Shares of such Fund in the ML Omnibus Account B = Shares of such Fund in the ML Omnibus Account and identified as Distributor Shares and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof), times Net Asset Value per Share as of such time C = Shares of such Fund in the ML Omnibus Account and identified as Distributor Shares and outstanding as of the close of business on the last day of such calendar month (or portion thereof), times Net Asset Value per Share as of such time D = Total number of Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof), times Net Asset Value per Share as of such time. E = Total number of Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of such calendar month (or portion thereof), times Net Asset Value per Share as of such time. (b) The portion of such Asset Based Sales Charge allocable to Post-distributor Shares shall be computed s follows: A X ((B + C)/2) ----------- ((D + E)/2) where: A = Total amount of Asset Based Sales Charge accrued during such calendar month (or portion thereof) in respect of Shares of such Fund in the ML Omnibus Account B = Shares of such Fund in the ML Omnibus Account and identified as Post-distributor Shares and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof), times Net Asset Value per Share as of such time C = Shares of such Fund in the ML Omnibus Account and identified as Post-distributor Shares and outstanding as of the close of business on the last day of such calendar month (or portion thereof), times Net Asset Value per Share as of such time D = Total number of Shares of such Fund in the ML Omnibus Account and outstanding as of the close of business on the last day of the immediately preceding calendar month (or portion thereof), times Net Asset Value per Share as of such time. E = Total number of Shares of such Fund in the ML Omnibus Account outstanding as of the close of business on the last day of such calendar month, times Net Asset Value per Share as of such time. (3) PAYMENTS ON BEHALF OF EACH FUND. On the close of business on each day the Transfer Agent shall cause payment to be made of the amount of the Asset Based Sales Charge and CDSCs accruing on such day in respect of the Shares of such Fund owned of record by Shareholder Accounts (other than Omnibus Accounts) by two separate wire transfers, directly from accounts of such Fund as follows: 1. The Asset Based Sales Charge and CDSCs accruing in respect of Shareholder Accounts other than Omnibus Accounts and allocable to Distributor Shares in accordance with the preceding rules shall be paid to the Distributor's Account, unless the Distributor otherwise instructs the Fund in any irrevocable payment instruction; and 2. The Asset Based Sales Charges and CDSCs accruing in respect of Shareholder Accounts other than Omnibus Accounts and allocable to Post-distributor Shares in accordance with the preceding rules shall be paid in accordance with direction received from any future distributor of Shares of the Instant Fund. On each Omnibus CDSC Settlement Date, the Transfer Agent for each Fund shall cause the applicable Sub-transfer Agent to cause payment to be made of the amount of the CDSCs accruing during the period to which such Omnibus CDSC Settlement Date relates in respect of the Shares of such Fund owned of record by each Omnibus Account by two separate wire transfers directly from the account of such Fund maintained by such Transfer Agent, as follows: 1. The CDSCs accruing in respect of such Omnibus Account and allocable to Distributor Shares in accordance with the preceding rules shall be paid to the Distributor's Account, unless the Distributor otherwise instructs the Fund in any irrevocable payment instruction; and 2. The CDSCs accruing in respect of such Omnibus Account and allocable to Post-distributor Shares in accordance with the preceding rules shall be paid in accordance with direction received from any future distributor of Shares of the Instant Fund. On each Omnibus Asset Based Sales Charge Settlement Date the Transfer Agent for each Fund shall cause payment to be made of the amount of the Asset Based Sales Charge accruing for the period to which such Omnibus Asset Based Sales Charge Settlement Date relates in respect of the Shares of such Fund owned of record by each Omnibus Account by two separate wire transfers directly from accounts of such Fund as follows: 1. The Asset Based Sales Charge accruing in respect of such Omnibus Account and allocable to Distributor Shares shall be paid to the Distributor's Collection Account, unless the Distributor otherwise instructs the Fund in any irrevocable payment instruction; and 2. The Asset Based Sales Charge accruing in respect of such Omnibus Account and allocable to Post-Distributor Shares shall be paid in accordance with direction received from any future distributor of Shares of the Instant Fund. EX-99.6(C) 4 DEALER AGREEMENTS Exhibit 99.6(C) [LOGO] KEYSTONE INVESTMENTS 200 Berkeley Street Boston, Massachusetts 02116-5034 Dealer No._________________________________________________________ (Please indicate Exchange Membership(s), if any.)__________________ ------------------------------------------------------------------- Effective Date_____________________________________________________ CLASS A AND B SHARES To Whom It May Concern: Keystone Investment Distributors Company ("the Company"), principal underwriter, invites you to participate in the distribution of shares of the Keystone Fund Family, Classes A and B shares of the Keystone America Fund Family and other Funds ("Funds") designated by us which are currently or hereafter underwritten by the Company, subject to the following terms: 1. In the distribution and sale of shares, you shall not have authority to act as agent for the issuer, the Company or any other dealer in any respect in such transactions. All orders are subject to acceptance by us and become effective only upon confirmation by us. The Company reserves the unqualified right not to accept any specific order for the purchase or exchange of shares. 2. You will offer and sell shares of the Funds other than Class A shares of the Keystone America Funds only at their respective net asset values in accordance with the terms and conditions of a current prospectus of the Fund whose shares you offer. With respect to Class A shares of the Keystone America Funds and other Funds designated by us, you will offer and sell such shares at the public offering price described in a current prospectus of the Fund whose shares you offer. You will offer shares only on a forward pricing basis, i.e. orders for the purchase or repurchase of shares accepted by you prior to the close of the New York Stock Exchange and placed with us the same day prior to the close of our business day, 5:00 p.m. Eastern Time, and orders to exchange shares of one Fund for shares of another Fund eligible for exchange placed with us prior to 3:00 p.m. Eastern Time, shall be confirmed at the closing price for that business day. You agree to place orders for shares only with us and at such closing price. You further agree to confirm the transaction with your customer at the price confirmed in writing by us. In the event of a difference between verbal and written price confirmations, the written confirmations shall be considered final. Prices of the Funds' shares are computed by and are subject to withdrawal by the Funds in accordance with their current respective prospectuses. You agree to place orders with us only through your central order department unless we accept your written Power of Attorney authorizing others to place orders on your behalf. 3. So long as this agreement remains in effect, we will pay you commissions on sales of shares of the Funds and service fees, all in accordance with the Schedule of Commissions and Service Fees ("Schedule") attached hereto and made a part hereof, effective June 1, 1995, which Schedule may be modified from time to time or rescinded by us, in either case without prior notice. You shall have no vested right to receive any continuing service fees, other fees, or other commissions which we may elect to pay to you from time to time on shares previously sold by you. You agree not to share or rebate any portion of such commissions or to otherwise grant any concessions, discounts or other allowances to any person who is not a broker or dealer actually engaged in the investment banking or securities business. You will receive commissions in accordance with the attached Schedule on all purchase transactions in shareholder accounts (excluding reinvestment of income dividends and capital gains distributions) for which you are designated as Dealer of Record except where we determine that any such purchase was made with the proceeds of a redemption or repurchase of shares of the same Fund or another Fund whether or not the transaction constitutes the exercise of the exchange privilege. Commissions will be paid to you twice a month. You hereby authorize us to act as your agent in connection with all transactions in shareholder accounts in which you are designated as Dealer of Record. All designations of Dealer of Record and all authorizations of the Company to act as your Agent shall cease upon the termination of this Agreement, or upon the shareholder's instruction to transfer his or her account to another Dealer of Record. 4. Payment for all shares purchased from us shall be made to the Company and shall be received by the Company within ten business days after the acceptance of your order or such shorter time as may be required by law. If such payment is not received by us, we reserve the right, without prior notice, forthwith to cancel the sale, or, at our option, to sell the shares ordered by you back to the Fund concerned in which latter case we may hold you responsible for any loss, including loss of profit, suffered by us or by the Fund resulting from your failure to make payment as aforesaid. 5. You agree to purchase shares of the Funds only from us or from your customers. If you purchase shares from us, you agree that all such purchases shall be made only to cover orders already received by you from your customers, or for your own bonafide investment without a view to resale. If you purchase shares from your customers, you agree to pay such customers the applicable net asset value per share less any contingent deferred sales charge that would be applicable if such shares were then tendered for redemption in accordance with the then current applicable prospectus ("repurchase price"). 6. You will sell shares only -- (a) to your clients at the prices described in paragraph 2 above; or (b) to us as agent for the Funds at the repurchase price. In such a sale to us, you may act either as principal for your own account or as agent for your customer. If you act as principal for your own account in purchasing shares for resale to us, you agree to pay your customer not less than nor more than the repurchase price which you receive from us. If you act as agent for your customer in selling shares to us, you agree not to charge your customer more than a fair commission for handling the transaction. 7. You shall not withhold placing with us orders received from your customers so as to profit yourself as a result of such withholding. 8. We will not accept from you any conditional orders for shares. 9. If any shares sold to you under the terms of this agreement are repurchased by a Fund, or are tendered for redemption, within seven business days after the date of our confirmation of the original purchase by you, it is agreed that you shall forfeit your right to any commissions on such sales even though the shareholder may be charged a contingent deferred sales charge by the Fund. We will notify you of any such repurchase or redemption within the next ten business days after the date on which the certificate or written request for redemption is delivered to us or to the Fund, and you shall forthwith refund to us the full amount of any commission you received on such sale. We agree, in the event of any such repurchase or redemption, to refund to the Fund any commission we retained on such sale and, upon receipt from you of the commissions paid to you, to pay such commissions forthwith to the Fund. 10. Shares sold to you hereunder shall not be issued in certificate form or otherwise until payment has been received by the Fund concerned. If transfer instructions are not received from you within 15 days after our acceptance of your order, the Company reserves the right to instruct the transfer agent for the Fund concerned to register a certificate for the shares sold to you in your name and forward such certificate to you. You agree to hold harmless and indemnify the Company, the Fund and its transfer agent for any loss or expense resulting from such registration. 11. No person is authorized to make any representations concerning shares of the Funds except those contained in the current applicable prospectuses and in sales literature issued by us supplemental to such prospectuses. In purchasing shares from us you shall rely solely on the representations contained in the appropriate prospectus and in such sales literature. We will furnish additional copies of the current prospectuses and such sales literature and other releases and information issued by us in reasonable quantities upon request. You agree that you will in all respects duly conform with all laws and regulations applicable to the sale of shares of the Funds and will indemnify and hold harmless the Funds, their directors and trustees and the Company from any damage or expenses on account of any wrongful act by you, your representatives, agents or sub-agents in connection with any orders or solicitation of orders of shares of the Funds by you, your representatives, agents or sub-agents. 12. Each party hereto represents that it is a member of the National Association of Securities Dealers, Inc., and agrees to notify the other should it cease to be a member of such Association and agrees to the automatic termination of this agreement at that time. It is further agreed that all rules or regulations of said Association now in effect or hereafter adopted, which are binding upon underwriters and dealers in the distribution of the securities of open-end investment companies, shall be deemed to be a part of this agreement to the same extent as if set forth in full herein. 13. You will not offer the Funds for sale in any State where they are not qualified for sale under the Blue Sky Laws and regulations of such State or where you are not qualified to act as a dealer, except for States in which they are exempt from qualification. 14. This agreement supersedes and cancels any prior agreement with respect to the sales of shares of any of the Funds underwritten by the Company and the Company reserves the right to amend this agreement at any time and from time to time. 15. This agreement shall be effective upon acceptance by us in Boston, Massachusetts and all sales hereunder are to be made, and title to shares of the Funds shall pass, in Boston. This agreement is made in the Commonwealth of Massachusetts and shall be interpreted in accordance with the laws of Massachusetts. 16. All communications to the Company should be sent to the above address. Any notice to you shall be duly given if mailed or telegraphed to you at the address specified by you below. 17. Either party may terminate this agreement at any time by written notice to the other party. Signed: Accepted: - ---------------------------------- Boston, MA (USA) as of June 1, 1995 Dealer or Broker Name - ---------------------------------- KEYSTONE INVESTMENT DISTRIBUTORS COMPANY Address 200 Berkeley Street, Boston, MA 02116-5034 - ---------------------------------- ----------------------------------------- Authorized Signature Authorized Signature [LOGO] KEYSTONE INVESTMENTS 200 Berkeley Street Boston, Massachusetts 02116-5034 Dealer No._________________________________________________________ (Please indicate Exchange Membership(s), if any.)__________________ ------------------------------------------------------------------- Effective Date_____________________________________________________ CLASS C SHARES To Whom It May Concern: Keystone Investment Distributors Company ("the Company"), principal underwriter, invites you to participate in the distribution of Class C shares of the Keystone America Fund Family, Keystone Liquid Trust and other Funds ("Funds") designated by us which are currently or hereafter underwritten by the Company, subject to the following terms: 1. In the distribution and sale of shares, you shall not have authority to act as agent for the issuer, the Company or any other dealer in any respect in such transactions. All orders are subject to acceptance by us and become effective only upon confirmation by us. The Company reserves the unqualified right not to accept any specific order for the purchase or exchange of shares. 2. You will offer and sell Class C shares of the Funds only at their respective net asset values in accordance with the terms and conditions of a current prospectus of the Fund whose shares you offer. You will offer shares only on a forward pricing basis i.e. orders for the purchase or repurchase of shares accepted by you prior to the close of the New York Stock Exchange and placed with us the same day prior to the close of our business day, 5:00 p.m. Eastern Time, and orders to exchange shares of one Fund for shares of another Fund eligible for exchange placed with us prior to 3:00 p.m. Eastern Time, shall be confirmed at the closing price for that business day. You agree to place orders for shares only with us and at such closing price. You further agree to confirm the transaction with your customer at the price confirmed in writing by us. In the event of a difference between verbal and written price confirmations shall be considered final. Prices of the Funds' shares are computed by and are subject to withdrawal by the Funds in accordance with their current respective prospectuses. You agree to place orders with us only through your central order department unless we accept your written Power of Attorney authorizing others to place orders on your behalf. 3. So long as this agreement remains in effect, we will pay you commissions on sales of shares of the Funds and service fees, all in accordance with the Schedule of Commissions and Service Fees ("Schedule") attached hereto and made a part hereof, effective June 1, 1995, which Schedule may be modified from time to time or rescinded by us, in either case without prior notice. You shall have no vested right to receive any continuing service fees, other fees, or other commissions which we may elect to pay to you from time to time on shares previously sold by you. You agree not to share or rebate any portion of such commissions or to otherwise grant any concessions, discounts or other allowances to any person who is not a broker or dealer actually engaged in the investment banking or securities business. You will receive commissions in accordance with the attached Schedule on all purchase transactions in shareholder accounts (excluding reinvestment of income dividends and capital gains distributions) for which you are designated as Dealer of Record except where we determine that any such purchase was made with the proceeds of a redemption or repurchase of shares of the same Fund or another Fund whether or not the transaction constitutes the exercise of the exchange privilege. Commissions will be paid to you twice a month. You hereby authorize us to act as your agent in connection with all transaction in shareholder accounts in which you are designated as Dealer of Record. All designations of Dealer of Record and all authorizations of the Company to act as your Agent shall cease upon the termination of this Agreement, or upon the shareholder's instruction to transfer his or her account to another Dealer of Record. 4. Payment for all shares purchased from us shall be made to the Company and shall be received by the Company within ten business days after the acceptance of your order or such shorter time as may be required by law. If such payment is not received by us, we reserve the right, without prior notice, forthwith to cancel the sale, or, at our option, to sell the shares ordered by you back to the Fund concerned in which latter case we may hold you responsible for any loss, including loss of profit, suffered by us or by the Fund resulting from your failure to make payment as aforesaid. 5. You agree to purchase shares of the Funds only from us or from your customers. If you purchase shares from us, you agree that all such purchases shall be made only to cover orders already received by you from your customers, or for your own bonafide investment without a view to resale. If you purchase shares from your customers, you agree to pay such customers the applicable net asset value per share less any contingent deferred sales charge that would be applicable if such shares were then tendered for redemption in accordance with the then current applicable prospectus ("repurchase price"). 6. You will sell share only -- (a) to your clients at the prices described in paragraph 2 above; or (b) to us as agent for the Funds at the repurchase price. In such a sale to us, you may act either as principal for your own account or as agent for your customer. If you act as principal for your own account in purchasing shares for resale to us, you agree to pay your customer not less than nor more than the repurchase price which you receive from us. If you act as agent for your customer in selling shares to us, you agree not to charge your customer more than a fair commission for handling the transaction. 7. You shall not withhold placing with us orders received from your customers so as to profit yourself as a result of such withholding. 8. We will not accept from you any conditional orders for shares. 9. If any shares sold to you under the terms of this agreement are repurchased by a Fund, or are tendered for redemption, within seven business days after the date of our confirmation of the original purchase by you, it is agreed that you shall forfeit your right to any commissions on such sales even though the shareholder may be charged a contingent deferred sales charge by the Fund. We will notify you of any such repurchase or redemption within the next ten business days after the date on which the certificate or written request for redemption is delivered to us or to the Fund, and you shall forthwith refund to us the full amount of any commission you received on such sale. We agree, in the event of any such repurchase or redemption, to refund to the Fund any commission we retained on such sale and, upon receipt from you of the commissions paid to you, to pay such commissions forthwith to the Fund. 10. Shares sold to you hereunder shall not be issued in certificate form or otherwise until payment has been received by the Fund concerned. If transfer instructions are not received from you within 15 days after our acceptance of your order, the Company reserves the right to instruct the transfer agent for the Fund concerned to register a certificate for the shares sold to you in your name and forward such certificate to you. You agree to hold harmless and indemnify the Company, the Fund and its transfer agent for any loss or expense resulting from such registration. 11. No person is authorized to make any representations concerning shares of the Funds except those contained in the current applicable prospectuses and in sales literature issued by us supplemental to such prospectuses. In purchasing shares from us you shall rely solely on the representations contained in the appropriate prospectus and in such sales literature. We will furnish additional copies of the current prospectuses and such sales literature and other releases and information issued by us in reasonable quantities upon request. You agree that you will in all respects duly conform with all laws and regulations applicable to the sale of shares of the Funds and will indemnify and hold harmless the Funds, their directors and trustees and the Company from any damage or expenses on account of any wrongful act by you, your representatives, agents or sub-agents in connection with any orders or solicitation of orders of shares of the Funds by you, your representatives, agents or sub-agents. 12. Each party hereto represents that it is a member of the National Association of Securities Dealers, Inc., and agrees to notify the other should it cease to be a member of such Association and agrees to the automatic termination of this agreement at that time. It is further agreed that all rules or regulations of said Association now in effect or hereafter adopted, which are binding upon underwriters and dealers in the distribution of the securities of open-end investment companies, shall be deemed to be a part of this agreement to the same extent as if set forth in full herein. 13. You will not offer the Funds for sale in any State where they are not qualified for sale under the Blue Sky Laws and regulations of such State or where you are not qualified to act as a dealer, except for States in which they are exempt from qualification. 14. This agreement supersedes and cancels any prior agreement with respect to the sales of shares of any of the Funds underwritten by the Company and the Company reserves the right to amend this agreement at any time and from time to time. 15. This agreement shall be effective upon acceptance by us in Boston, Massachusetts and all sales hereunder are to be made, and title to shares of the Funds shall pass, in Boston. This agreement is made in the Commonwealth of Massachusetts and shall be interpreted in accordance with the laws of Massachusetts. 16. All communications to the Company should be sent to the above address. Any notice to you shall be duly given if mailed or telegraphed to you at the address specified by you below. 17. Either party may terminate this agreement at any time by written notice to the other party. Signed: Accepted: - ---------------------------------- Boston, MA (USA) as of June 1, 1995 Dealer or Broker Name - ---------------------------------- KEYSTONE INVESTMENT DISTRIBUTORS COMPANY Address 200 Berkeley Street, Boston, MA 02116-5034 - ---------------------------------- ----------------------------------------- Authorized Signature Authorized Signature EX-99.8 5 CUSTODIAN AGREEMENT EXHIBIT 99.8 AMENDMENT TO CUSTODIAN CONTRACT Agreement made by and between State Street Bank and Trust Company (the "Custodian") and Keystone Strategic Development Fund (the "Fund"). WHEREAS, the Custodian and the Fund are parties to a custodian contract dated September 21, 1994 (the "Custodian Contract") governing the terms and conditions under which the Custodian maintains custody of the securities and other assets of the Fund; and WHEREAS, the Custodian and the Fund desire to amend the terms and conditions under which the Custodian maintains the Fund's securities and other non-cash property in the custody of certain foreign sub-custodians in conformity with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as amended; NOW THEREFORE, in consideration of the premises and covenants contained herein, the Custodian and the Fund hereby amend the Custodian Contract by the addition of the following terms and provisions; 1. Notwithstanding any provisions to the contrary set forth in the Custodian Contract, the Custodian may hold securities and other non-cash property for all of its customers, including the Fund, with a foreign sub-custodian in a single account that is identified as belonging to the Custodian for the benefit of its customers, provided however, that (i) the records of the Custodian with respect to securities and other non-cash property of the Fund which are maintained in such account shall identify by bookentry those securities and other non-cash property belonging to the Fund and (ii) the Custodian shall require that securities and other non-cash property so held by the foreign sub-custodian be held separately from any assets of the foreign sub-custodian or of others. 2. Except as specifically superseded or modified herein, the terms and provisions of the Custodian Contract shall continue to apply with full force and effect. IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed as a sealed instrument in its name and behalf by its duly authorized representative this 20th day of March, 1996. KEYSTONE STRATEGIC DEVELOPMENT FUND By: Rosemary D. Van Antwerp --------------------------------- Title: Senior Vice President and Secretary STATE STREET BANK AND TRUST COMPANY By: [Illegible] -------------------------------- Title: Executive Vice President EX-99.10 6 OPINION AND CONSENT OF COUNSEL Exhibit 99.10 May 30, 1996 Keystone Strategic Development Fund 200 Berkeley Street Boston, Massachusetts 02116-5034 Ladies and Gentlemen: I am a Senior Vice President of and General Counsel to Keystone Investment Management Company (formerly named Keystone Custodian Funds, Inc.), the investment adviser to Keystone Strategic Development Fund (the "Fund"). You have asked for my opinion with respect to the proposed issuance of 314,074 additional shares of the Fund. To my knowledge, a Prospectus is being filed with the Securities and Exchange Commission (the "Commission") as part of this Post-Effective Amendment No. 3 to the Fund's Registration Statement, which will cover the public offering and sale of the Fund shares currently registered with the Commission. In my opinion, such additional shares, if issued and sold in accordance with the Fund's Declaration of Trust, as amended, and offering Prospectus, will be legally issued, fully paid, and nonassessable by the Fund, entitling the holders thereof to the rights set forth in the Declaration of Trust and subject to the limitations set forth therein. My opinion is based upon my examination of the Fund's Declaration of Trust, as amended, and By-Laws; a review of the minutes of the Fund's Board of Trustees authorizing the issuance of such additional shares; and the Fund's Prospectus. In my examination of such documents, I have assumed the genuineness of all signatures and the conformity of copies to originals. I hereby consent to the use of this opinion in connection with Post-Effective Amendment No. 3 to the Fund's Registration Statement, which covers the registration of such additional shares. Very truly yours, /s/ Rosemary D. Van Antwerp Rosemary D. Van Antwerp Senior Vice President and General Counsel 10160780 EX-99.11 7 INDEPENDENT AUDITORS CONSENT EXHIBIT 99.11 CONSENT OF INDEPENDENT AUDITORS The Trustees Keystone Strategic Development Fund We consent to the use of our report dated April 26, 1996 included herein and to the references to our firm under the captions "FINANCIAL HIGHLIGHTS" in the prospectus and "ADDITIONAL INFORMATION" in the statement of additional information. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Boston, Massachusetts May 30, 1996 EX-99.15 8 DISTRIBUTION PLANS Exhibit 99.15 KEYSTONE STRATEGIC DEVELOPMENT FUND CLASS A DISTRIBUTION PLAN SECTION 1. Keystone Strategic Development Fund ("Fund") may act as the distributor of securities of which it is the issuer, pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("Act") according to the terms of this Distribution Plan ("Plan"). SECTION 2. The Fund may expend daily amounts at an annual rate of 0.75% of the average daily net asset value of Class A shares of the Fund to finance any activity which is principally intended to result in the sale of Class A shares of the Fund, including, without limitation, expenditures consisting of payments to a principal underwriter of the Fund (Principal Underwriter) in order (i) to enable the Principal Underwriter to pay to others commissions in respect of sales of Class A shares since inception of the Plan; (ii) to enable the Principal Underwriter to pay or to have paid to others who sell Class A shares a maintenance or other fee, at such intervals as the Principal Underwriter may determine, in respect of Class A shares previously sold by any such others and remaining outstanding during the period in respect of which such fee is or has been paid; and/or (iii) to compensate the Principal Underwriter for its efforts in respect of sales of Class A shares of the Fund since inception of the Plan. SECTION 3. This Plan shall not take effect until it has been approved by a vote of at least a majority (as defined in the Act) of the outstanding Class A shares of the Fund. SECTION 4. This Plan shall not take effect until it has been approved, together with any related agreements of the Fund, by votes of a majority of both (a) the Trustees of the Fund and (b) those Trustees who are not "interested persons" of the Fund as defined in the 1940 Act and who have no direct or indirect financial interest in the operation of this Plan or any agreements of the Fund or any other person related to this Plan (the "Rule 12b-1 Trustees"), cast in person at a meeting called for the purpose of voting on this Plan or such agreements. SECTION 5. Unless sooner terminated pursuant to Section 8, this Plan shall continue in effect for a period of one year from the date it takes effect and thereafter shall continue in effect so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in Section 4. SECTION 6. Any person authorized to direct the disposition of monies paid or payable by the Fund pursuant to this Plan or any related agreement shall provide to the Fund's Board, and the Board shall review at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made. SECTION 7. This Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Trustees, or by vote of a majority of the Fund's outstanding Class A shares. SECTION 8. Any agreement of the Fund related to this Plan shall be in writing, and shall provide as follows: A. That such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the Rule 12b-1 Trustees or by a vote of majority of the Fund's outstanding Class A shares on not more than sixty days written notice to any other party to the agreement; and B. That such agreement shall terminate automatically in the event of its assignment. SECTION 9. This Plan may not be amended to increase materially the amount of distribution expenses provided for in Section 2 hereof unless such amendment is approved in the manner provided in Section 3 hereof, and no material amendment to the Plan shall be made unless approved in the manner provided in Section 4 hereof. #101505ae DISTRIBUTION PLAN FOR CLASS B-1 SHARES OF KEYSTONE STRATEGIC DEVELOPMENT FUND Section 1. Keystone Strategic Development Fund, individually and/or on behalf of its series, if any, referred to above in the title of this 12b-1 Plan (the "Plan"), to which series this Plan shall then relate, as applicable (the "Fund"), may act as the distributor of certain securities of which it is the issuer pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act") according to the terms of this Distribution Plan. Section 2. The Fund may expend daily amounts at an annual rate of up to 1.00% of the average daily net asset value of the Fund attributable to the Fund's Class B-1 shares (the "Shares"). Such amounts may be expended to finance any activity that is principally intended to result in the sale of Shares, including, without limitation, expenditures consisting of payments to a principal underwriter of the Fund or others as sales commissions or other compensation for services provided or to be provided ("Distribution Fees") or as reimbursement for expenses that are incurred or accrued at any time during which this Plan is in effect, together with interest on any such amounts, at rates approved by the Rule 12b-1 Directors (as defined below) in the manner referred to below, all whether or not this Plan has been otherwise terminated, if such payment of such expenditures is for services theretofore provided or for reimbursement of expenses theretofore incurred or accrued prior to termination of this Plan in other respects and if such payment is or has been so approved by such Rule 12b-1 Directors, or agreed to by the Fund with such approval, all subject to such specific implementation as such 12b-1 Directors may approve; provided that, at the time any such payment is made, whether or not this Plan has been otherwise terminated, the making of such payment will not cause the limitation upon such payments set forth in the preceding sentence to be exceeded. Without limiting the generality of the foregoing, the Fund may pay to, or on the order of, any person who has served from time to time as principal underwriter (a "Principal Underwriter") amounts for distribution services pursuant to a principal underwriting agreement or otherwise. No principal underwriting agreement or other agreement shall be an agreement related to this Plan, as referred to in Rule 12b-1 of the Securities and Exchange Commission, unless it specifically states that it is such a related agreement. Any such principal underwriting agreement may, but need not, provide that such Principal Underwriter may be paid for distribution services to Class B-1 Shares and/or other specified classes of shares of the Fund (together the "B-Class-of-Shares"), a fee which may be designated a Distribution Fee and may be paid at a rate per annum up to .75% of the average daily net asset value of such B-Class-of-Shares of the Fund and may, but need not, also provide: (I) that a Principal Underwriter will be deemed to have fully earned its "Allocable Portion" of the Distribution Fee upon the sale of the Commission Shares (as defined in the Allocation Schedule) taken into account in determining its Allocable Portion; (II) that the Fund's obligation to pay such Principal Underwriter its Allocable Portion of the Distribution Fees shall be absolute and unconditional and shall not be subject to dispute, offset, counterclaim or any defense whatsoever (it being understood that such provision is not a waiver of the Fund's right to pursue such Principal Underwriter and enforce such claims against the assets of such Principal Underwriter other than its right to its Allocable Portion of the Distribution Fees and CDSCs (as defined below) (III) that the Fund's obligation to pay such Principal Underwriter its Allocable Portion of the Distribution Fees shall not be changed or terminated except to the extent required by any change in applicable law, including without limitation, the Investment Company Act of 1940, the Rules promulgated thereunder by the Securities and Exchange Commission and the Rules of Fair Practice of the National Association of Securities Dealers, Inc., in each case enacted or promulgated after June 1, 1995, or in connection with a "Complete Termination" (as hereinafter defined); (IV) that the Fund will not waive or change any contingent deferred sales charge ("CDSC") in respect of the Distributor's Allocable Portion thereof, except as provided in the Fund's prospectus or statement of additional information without the consent of the Principal Underwriter or any assignee of such Principal Underwriter's rights to its Allocable Portion; (V) that the termination of the Principal Underwriter, the principal underwriting agreement or this Plan will not terminate such Principal Underwriter's rights to its Allocable Portion of the CDSCs; and (VI) that any Principal Underwriter may assign its rights to its Allocable Portion of the Distribution Fees and CDSCs (but not such Principal Underwriter's obligations to the Fund under its principal underwriting agreement) to raise funds to make expenditures described in Section 2 above and in connection therewith, and upon receipt of notice of such assignment, the Fund shall pay to the assignee such portion of the Principal Underwriter's Allocable Portion of the Distribution Fees and CDSCs so assigned. For purposes of such principal underwriting agreement, the term Allocable Portion of Distribution Fees as applied to any Principal Underwriter may mean the portion of the Distribution Fee allocable to Distributor Shares in accordance with the "Allocation Schedule" attached to such Principal Underwriter's principal underwriting agreement. For purposes of such principal underwriting agreement, the term Allocable Portion of CDSCs as applied to any Principal Underwriter may mean the portion of the CDSCs allocable to Distributor Shares in accordance with the Allocation Schedule attached to such Principal Underwriter's principal underwriting agreement. For purposes of such principal underwriting agreement, the term "Complete Termination" may mean a termination of this Plan involving the cessation of payments of the Distribution Fees thereunder, the cessation of payments of distribution fees pursuant to every other rule 12b-1 plan of the Fund for every existing or future B-Class-of-Shares and the cessation of the offering by the Fund of existing or future B-Class-of-Shares, which conditions shall be deemed to be satisfied when they are first complied with and so long thereafter as they are complied with prior to the earlier of (i) the date upon which all of the B-2 Shares which are Distributor Shares pursuant to the Allocation Schedule shall have been redeemed or converted or (ii) a specified date, after either of which times such conditions need no longer be complied with. For purposes of such principal underwriting agreement, the term "B-Class-of-Shares" may mean each of the B-1 Class of Shares of the Fund, the B-2 Class of Shares of the Fund and each other class of shares of the Fund hereafter issued which would be treated as "Shares" under such Allocation Schedule or which has economic characteristics substantially similar to those of the B-1 or B-2 Classes of Shares taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of the shares of such classes. The parties may agree that the existing C Class of Shares of the Fund does not have substantially similar economic characteristics to the B-1 or B-2 Classes of Shares taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares. For purposes of clarity the parties to such principal underwriting agreement may state that they intend that a new installment load class of shares which may be authorized by amendments to Rule 6(c)-10 under the 1940 Act will be considered to be a B-Class-of-Shares if it has economic characteristics substantially similar to the economic characteristics of the existing B-1 or B-2 Classes of Shares taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares and will not be considered to be a B-Class-of-Shares if it has economic characteristics substantially similar to the economic characteristics of the existing C Class of shares of the Fund taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares. For purposes of such principal underwriting agreement, "Allocation Schedule" may mean a schedule which shall be approved by Directors (as defined below) in connection with their required approval of such principal underwriting agreement as assigning to each Principal Underwriter of Shares the portion of the total Distribution Fees payable by the Fund under such principal underwriting agreement which has been earned by such Principal Underwriter to the extent necessary so that the continued payments thereof if such Principal Underwriter ceases to serve in that capacity does not penalize the Fund by requiring it to pay for services that have not been earned. Section 3. This Plan shall not take effect until it has been approved by a vote of at least a majority (as defined in the 1940 Act) of the outstanding Shares. Section 4. This Plan, and the specific implementation of expenditures provided for under this Plan, shall not take effect until this Plan, and such implementation, have been approved, together with any related agreements of the Fund, by votes of both (a) a majority of the Board of Trustees or Directors (together the "Directors") of the Fund and (b) a majority of those Directors of the Fund who are not "interested persons" of the Fund (as said term is defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of this Plan or any agreements of the Fund or any other person related to this Plan (the "Rule 12b-1 Directors"), cast in person at a meeting called for the purpose of voting on this Plan or such agreements. Section 5. Unless sooner terminated pursuant to Section 7 hereof, this Plan shall continue in effect for a period of one year from the date it takes effect and thereafter shall continue in effect so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in Section 4 hereof, except that, if terminated except for payments provided to be made after termination of other aspects of this Plan, such payments may be made pursuant to approvals made, and or agreements approved, as provided above. Section 6. Any person authorized to direct the disposition of monies paid or payable by the Fund pursuant to this Plan or any related agreement shall provide to the Fund's Board of Directors, and the Board shall review, at least quarterly a written report of the amounts so expended and the purposes for which such expenditures were made. Section 7. This Plan may be terminated, in whole or in part, at any time by vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the outstanding Shares, with the effects provided for in Section 2, as applicable. Section 8. Any agreement of the Fund related to this Plan shall be in writing, and shall provide as follows: (a) That such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the Rule 12b-1 Directors or by a vote of a majority of the outstanding Shares on not more than sixty days written notice to any other party to the agreement; and (b) That such agreement shall terminate automatically in the event of its assignment. Section 9. This Plan may not be amended to increase materially the amount of distribution expenses provided for in Section 2 hereof unless such amendment is approved in the manner provided in Section 3 hereof, and no material amendment to this Plan shall be made unless approved in the manner provided for in Section 4 hereof. DISTRIBUTION PLAN FOR CLASS B-2 SHARES OF KEYSTONE STRATEGIC DEVELOPMENT FUND Section 1. Keystone Strategic Development Fund, individually and/or on behalf of its series, if any, referred to above in the title of this 12b-1 Plan (the "Plan"), to which series this Plan shall then relate, as applicable (the "Fund"), may act as the distributor of certain securities of which it is the issuer pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act") according to the terms of this Distribution Plan. Section 2. The Fund may expend daily amounts at an annual rate of up to 1.00% of the average daily net asset value of the Fund attributable to the Fund's Class B-2 shares (the "Shares"). Such amounts may be expended to finance any activity that is principally intended to result in the sale of Shares, including, without limitation, expenditures consisting of payments to a principal underwriter of the Fund or others as sales commissions or other compensation for services provided or to be provided ("Distribution Fees") or as reimbursement for expenses that are incurred or accrued at any time during which this Plan is in effect, together with interest on any such amounts, at rates approved by the Rule 12b-1 Directors (as defined below) in the manner referred to below, all whether or not this Plan has been otherwise terminated, if such payment of such expenditures is for services theretofore provided or for reimbursement of expenses theretofore incurred or accrued prior to termination of this Plan in other respects and if such payment is or has been so approved by such Rule 12b-1 Directors, or agreed to by the Fund with such approval, all subject to such specific implementation as such 12b-1 Directors may approve; provided that, at the time any such payment is made, whether or not this Plan has been otherwise terminated, the making of such payment will not cause the limitation upon such payments set forth in the preceding sentence to be exceeded. Without limiting the generality of the foregoing, the Fund may pay to, or on the order of, any person who has served from time to time as principal underwriter (a "Principal Underwriter") amounts for distribution services pursuant to a principal underwriting agreement or otherwise. No principal underwriting agreement or other agreement shall be an agreement related to this Plan, as referred to in Rule 12b-1 of the Securities and Exchange Commission, unless it specifically states that it is such a related agreement. Any such principal underwriting agreement may, but need not, provide that such Principal Underwriter may be paid for distribution services to Class B-2 Shares and/or other specified classes of shares of the Fund (together the "B-Class-of-Shares"), a fee which may be designated a Distribution Fee and may be paid at a rate per annum up to .75% of the average daily net asset value of such B-Class-of-Shares of the Fund and may, but need not, also provide: (I) that a Principal Underwriter will be deemed to have fully earned its "Allocable Portion" of the Distribution Fee upon the sale of the Commission Shares (as defined in the Allocation Schedule) taken into account in determining its Allocable Portion; (II) that the Fund's obligation to pay such Principal Underwriter its Allocable Portion of the Distribution Fees shall be absolute and unconditional and shall not be subject to dispute, offset, counterclaim or any defense whatsoever (it being understood that such provision is not a waiver of the Fund's right to pursue such Principal Underwriter and enforce such claims against the assets of such Principal Underwriter other than its right to its Allocable Portion of the Distribution Fees and CDSCs (as defined below); (III) that the Fund's obligation to pay such Principal Underwriter its Allocable Portion of the Distribution Fees shall not be changed or terminated except to the extent required by any change in applicable law, including without limitation, the Investment Company Act of 1940, the Rules promulgated thereunder by the Securities and Exchange Commission and the Rules of Fair Practice of the National Association of Securities Dealers, Inc., in each case enacted or promulgated after June 1, 1995, or in connection with a "Complete Termination" (as hereinafter defined); (IV) that the Fund will not waive or change any contingent deferred sales charge ("CDSC") in respect of the Distributor's Allocable Portion thereof, except as provided in the Fund's prospectus or statement of additional information without the consent of the Principal Underwriter or any assignee of such Principal Underwriter's rights to its Allocable Portion; (V) that the termination of the Principal Underwriter, the principal underwriting agreement or this Plan will not terminate such Principal Underwriter's rights to its Allocable Portion of the CDSCs; and (VI) that any Principal Underwriter may assign its rights to its Allocable Portion of the Distribution Fees and CDSCs (but not such Principal Underwriter's obligations to the Fund under its principal underwriting agreement) to raise funds to make expenditures described in Section 2 above and in connection therewith, and upon receipt of notice of such assignment, the Fund shall pay to the assignee such portion of the Principal Underwriter's Allocable Portion of the Distribution Fees and CDSCs so assigned. For purposes of such principal underwriting agreement, the term Allocable Portion of Distribution Fees as applied to any Principal Underwriter may mean the portion of the Distribution Fee allocable to Distributor Shares in accordance with the "Allocation Schedule" attached to such Principal Underwriter's principal underwriting agreement. For purposes of such principal underwriting agreement, the term Allocable Portion of CDSCs as applied to any Principal Underwriter may mean the portion of the CDSCs allocable to Distributor Shares in accordance with the Allocation Schedule attached to such Principal Underwriter's principal underwriting agreement. For purposes of such principal underwriting agreement, the term "Complete Termination" may mean a termination of this Plan involving the cessation of payments of the Distribution Fees thereunder, the cessation of payments of distribution fees pursuant to every other rule 12b-1 plan of the Fund for every existing or future B-Class-of-Shares and the cessation of the offering by the Fund of existing or future B-Class-of-Shares, which conditions shall be deemed to be satisfied when they are first complied with and so long thereafter as they are complied with prior to the earlier of (i) the date upon which all of the B-2 Shares which are Distributor Shares pursuant to the Allocation Schedule shall have been redeemed or converted or (ii) a specified date, after either of which times such conditions need no longer be complied with. For purposes of such principal underwriting agreement, the term "B-Class-of-Shares" may mean each of the B-1 Class of Shares of the Fund, the B-2 Class of Shares of the Fund and each other class of shares of the Fund hereafter issued which would be treated as "Shares" under such Allocation Schedule or which has economic characteristics substantially similar to those of the B-1 or B-2 Classes of Shares taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of the shares of such classes. The parties may agree that the existing C Class of Shares of the Fund does not have substantially similar economic characteristics to the B-1 or B-2 Classes of Shares taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares. For purposes of clarity the parties to such principal underwriting agreement may state that they intend that a new installment load class of shares which may be authorized by amendments to Rule 6(c)-10 under the 1940 Act will be considered to be a B-Class-of-Shares if it has economic characteristics substantially similar to the economic characteristics of the existing B-1 or B-2 Classes of Shares taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares and will not be considered to be a B-Class-of-Shares if it has economic characteristics substantially similar to the economic characteristics of the existing C Class of shares of the Fund taking into account the total sales charge, CDSC or other similar charges borne directly or indirectly by the holder of such shares. For purposes of such principal underwriting agreement, "Allocation Schedule" may mean a schedule which shall be approved by Directors (as defined below) in connection with their required approval of such principal underwriting agreement as assigning to each Principal Underwriter of Shares the portion of the total Distribution Fees payable by the Fund under such principal underwriting agreement which has been earned by such Principal Underwriter to the extent necessary so that the continued payments thereof if such Principal Underwriter ceases to serve in that capacity does not penalize the Fund by requiring it to pay for services that have not been earned. Section 3. This Plan shall not take effect until it has been approved by a vote of at least a majority (as defined in the 1940 Act) of the outstanding Shares. Section 4. This Plan, and the specific implementation of expenditures provided for under this Plan, shall not take effect until this Plan, and such implementation, have been approved, together with any related agreements of the Fund, by votes of both (a) a majority of the Board of Trustees or Directors (together the "Directors") of the Fund and (b) a majority of those Directors of the Fund who are not "interested persons" of the Fund (as said term is defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of this Plan or any agreements of the Fund or any other person related to this Plan (the "Rule 12b-1 Directors"), cast in person at a meeting called for the purpose of voting on this Plan or such agreements. Section 5. Unless sooner terminated pursuant to Section 7 hereof, this Plan shall continue in effect for a period of one year from the date it takes effect and thereafter shall continue in effect so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in Section 4 hereof, except that, if terminated except for payments provided to be made after termination of other aspects of this Plan, such payments may be made pursuant to approvals made, and or agreements approved, as provided above. Section 6. Any person authorized to direct the disposition of monies paid or payable by the Fund pursuant to this Plan or any related agreement shall provide to the Fund's Board of Directors, and the Board shall review, at least quarterly a written report of the amounts so expended and the purposes for which such expenditures were made. Section 7. This Plan may be terminated, in whole or in part, at any time by vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the outstanding Shares, with the effects provided for in Section 2, as applicable. Section 8. Any agreement of the Fund related to this Plan shall be in writing, and shall provide as follows: (a) That such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the Rule 12b-1 Directors or by a vote of a majority of the outstanding Shares on not more than sixty days written notice to any other party to the agreement; and (b) That such agreement shall terminate automatically in the event of its assignment. Section 9. This Plan may not be amended to increase materially the amount of distribution expenses provided for in Section 2 hereof unless such amendment is approved in the manner provided in Section 3 hereof, and no material amendment to this Plan shall be made unless approved in the manner provided for in Section 4 hereof. KEYSTONE STRATEGIC DEVELOPMENT FUND CLASS C DISTRIBUTION PLAN SECTION 1. Keystone Strategic Development Fund (the "Fund") may act as the distributor of securities of which it is the issuer pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act") according to the terms of this Distribution Plan ("Plan"). SECTION 2. The Fund may expend daily amounts at an annual rate of 1.00% of the average daily net asset value of the Fund attributable to the Fund's Class C shares to finance any activity that is principally intended to result in the sale of Class C shares, including, without limitation, expenditures consisting of payments to a principal underwriter of the Fund ("Principal Under- writer") or others as sales commissions or other compensation for their services that have been earned or as reimbursement for expenses that have been incurred or accrued at any time during which this Plan has been in effect together with interest at a rate approved from time to time by the Rule 12b-1 Trustees (as defined below) on any such amounts. SECTION 3. This Plan shall not take effect until it has been approved by a vote of at least a majority (as defined in the 1940 Act) of the outstanding Class C shares. SECTION 4. This Plan shall not take effect until it has been approved, together with any related agreements of the Fund, by votes of a majority of both (a) the Board of Trustees of the Fund and (b) those Trustees of the Fund who are not "interested persons" of the Fund (as said term is defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of this Plan or any agreements of the Fund or any other person related to this Plan (the "Rule 12b-1 Trustees"), cast in person at a meeting called for the purpose of voting on this Plan or such agreements. SECTION 5. Unless sooner terminated pursuant to Section 7 hereof, this Plan shall continue in effect for a period of one year from the date it takes effect and thereafter shall continue in effect so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in Section 4 hereof. SECTION 6. Any person authorized to direct the disposition of monies paid or payable by the Fund pursuant to this Plan or any related agreement shall provide to the Fund's Board of Trustees, and the Board shall review at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made. SECTION 7. This Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Trustees or by vote of a majority of the outstanding Class C shares. SECTION 8. Any agreement of the Fund related to this Plan shall be in writing, and shall provide as follows: (a) That such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the Rule 12b-1 Trustees or by a vote of a majority of the outstanding Class C shares on not more than sixty days written notice to any other party to the agreement; and (b) That such agreement shall terminate automatically in the event of its assignment. SECTION 9. This Plan may not be amended to increase materially the amount of distribution expenses provided for in Section 2 hereof unless such amendment is approved in the manner provided in Section 3 hereof, and no material amendment to this Plan shall be made unless approved in the manner provided in Section 4 hereof. EX-99.16 9 PERFORMANCE DATA SCHEDULES EXHIBIT 99.16
KASDF CLASS A MTD YTD ONE YEAR THREE YEAR THREE YEAR 29-Feb-96 TOTAL RETURN COMPOUNDED 4.75% LOAD -0.70% 16.71% 1.88% 1.37% no load 0.09% 5.36% 23.83% 8.10% 5.84% Beg dates 31-Jan-96 29-Dec-95 28-Feb-95 17-Oct-94 17-Oct-94 Beg Value (LOAD) 11,459 10,886 9,263 10,610 10,610 Beg Value (no load) 10,800 10,260 8,730 10,000 10,000 End Value 10,810 10,810 10,810 10,810 10,810 TIME 1.3722222222 KASDF CLASS A FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR 29-Feb-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED 4.75% LOAD 1.88% 1.37% 1.88% 1.37% no load 8.10% 5.84% 8.10% 5.84% Beg dates 17-Oct-94 17-Oct-94 17-Oct-94 17-Oct-94 Beg Value (LOAD) 10,610 10,610 10,610 10,610 Beg Value (no load) 10,000 10,000 10,000 10,000 End Value 10,810 10,810 10,810 10,810 TIME 1.3722222222 1.3722222222
SDF-B MTD YTD ONE YEAR THREE YEAR THREE YEAR 29-Feb-96 TOTAL RETURN COMPOUNDED with cdsc N/A 0.31% 18.99% 3.00% 2.18% W/O CDSC 0.00% 5.31% 22.99% 7.00% 5.05% Beg dates 31-Jan-96 29-Dec-95 28-Feb-95 17-Oct-94 17-Oct-94 Beg Value (no load) 10,700 10,160 8,700 10,000 10,000 End Value (W/O CDSC) 10,700 10,700 10,700 10,700 10,700 End Value (with cdsc) 10,192 10,352 10,300 10,300 beg nav 10.70 10.16 8.70 10.00 10 end nav 10.70 10.70 10.7 10.7 10.7 shares originally purhased 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 5% cdsc thru date = 30-Sep-95 TIME 4% cdsc thru date = 30-Sep-96 1.3722222222 SDF-B FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR 29-Feb-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED with cdsc NA NA NA NA W/O CDSC NA NA NA NA Beg dates 17-Oct-94 17-Oct-94 17-Oct-94 17-Oct-94 Beg Value (no load) 10,000 10,000 10,000 10,000 End Value (W/O CDSC) 10,700 10,700 10,700 10,700 End Value (with cdsc) 10,600 10600 10,700 10700 beg nav 10.00 10 10.00 10 end nav 10.7 10.7 10.7 10.7 shares originally purhased 1,000.00 1,000.00 1,000.00 1,000.00 TIME 1.3722222222 1.3722222222
KASDF CLASS C MTD YTD ONE YEAR THREE YEAR THREE YEAR 29-Feb-96 TOTAL RETURN COMPOUNDED with cdsc N/A 4.21% 22.99% 7.00% 5.05% W/O CDSC 0.00% 5.21% 22.99% 7.00% 5.05% Beg dates 31-Jan-96 29-Dec-95 28-Feb-95 17-Oct-94 17-Oct-94 Beg Value (no load) 10,700 10,170 8,700 10,000 10,000 End Value (W/O CDSC) 10,700 10,700 10,700 10,700 10,700 End Value (with cdsc) 10,598 10,700 10,700 10,700 beg nav 10.70 10.17 8.70 10.00 10 end nav 10.70 10.70 10.7 10.7 10.7 shares originally purhased 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 TIME 1.3722222222 KASDF CLASS C FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR 29-Feb-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED with cdsc 7.00% 5.05% NA NA W/O CDSC 7.00% 5.05% NA NA Beg dates 17-Oct-94 17-Oct-94 17-Oct-94 17-Oct-94 Beg Value (no load) 10,000 10,000 10,000 10,000 End Value (W/O CDSC) 10,700 10,700 10,700 10,700 End Value (with cdsc) 10,700 10700 10,700 10700 beg nav 10.00 10 10.00 10 end nav 10.7 10.7 10.7 10.7 shares originally purhased 1,000.00 1,000.00 1,000.00 1,000.00 TIME 1.3722222222 1.3722222222
EX-99.19 10 POWERS OF ATTORNEY EXHIBIT 99.19 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 Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute 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 Investment Management Company 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/ J. Kevin Kenely J. Kevin Kenely Treasurer Dated: December 15, 1995 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 EX-27 11 CLASS A FDS
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING RECORDS. 101 KEYSTONE STRATEGIC DEVELOPMENT FUND CLASS A 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 18,431,692 21,743,875 280,084 37,546 0 22,061,505 191,367 0 112,683 304,050 0 3,997,162 425,914 542,279 53,898 (15,103) (204,231) 0 741,849 4,573,575 79,154 14,336 0 (113,149) (19,659) 20,384 866,789 867,515 0 0 0 0 114,081 (230,445) 0 (316,285) 4,608 (257,009) 0 0 (47,648) 0 (113,916) 4,783,095 9.02 (0.04) 1.76 0.00 0.00 0.00 10.74 2.38 0 0
EX-27 12 CLASS B FDS
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING RECORDS. 102 KEYSTONE STRATEGIC DEVELOPMENT FUND CLASS B 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 18,431,692 21,743,875 280,084 37,546 0 22,061,505 191,367 0 112,683 304,050 0 13,483,252 1,427,520 1,634,469 172,297 (203,555) (581,570) 0 2,290,695 15,161,116 254,293 44,248 0 (476,479) (177,939) 93,361 2,641,520 2,556,942 0 0 0 0 263,001 (469,950) 0 473,534 0 (779,896) (25,404) 0 (152,380) 0 (478,932) 15,290,315 8.99 (0.13) 1.76 0.00 0.00 0.00 10.62 3.13 0 0
EX-27 13 CLASS C FDS
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING RECORDS. 103 KEYSTONE STRATEGIC DEVELOPMENT FUND CLASS C 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 18,431,692 21,743,875 280,084 37,546 0 22,061,505 191,367 0 112,683 304,050 0 1,866,810 190,428 155,020 19,544 (23,361) (46,860) 0 206,630 2,022,763 29,230 4,594 0 (53,997) (20,172) 18,167 267,024 265,019 0 0 0 0 65,799 (30,391) 0 629,733 0 (75,700) (3,455) 0 (17,304) 0 (54,275) 1,734,407 8.99 (0.10) 1.73 0.00 0.00 0.00 10.62 3.13 0 0
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