<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1996.
File Nos. 333-6937
and 811-7679
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1 X
Post-Effective Amendment No
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 1 X
KEYSTONE BALANCED FUND II
(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)
Registrant declares that it hereby elects pursuant to Rule 24f-2 promulgated
under the Investment Company Act of 1940 to register by this Pre-Effective
Amendment an indefinite number or amount of its securities under the Securities
Act of 1933, as amended.
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of
The Registration Statement.
The Registrant hereby amends this Pre-Effective Amendment No. 1 to its
Registration Statement on such date or dates as may be necessary to delay its
effective date until the Registrant shall file a further amendment that
specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until
this Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
<PAGE>
KEYSTONE BALANCED FUND II
CONTENTS OF
PRE-EFFECTIVE AMENDMENT NO.1
TO REGISTRATION STATEMENT
This Pre-Effective Amendment No. 1 to
Registration Statement No. 333-6937/811-7679
consists of the following pages,
items of information 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 (b)
Financial Statements
Report of Independent Auditors
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)
<PAGE>
KEYSTONE BALANCED FUND II
Cross-Reference Sheet pursuant to Rule 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
4 Cover Page
The Fund
Investment Objective and Policies
Investment Restrictions
Risk Factors
Additional Investment Information
5 Fund Management and Expenses
5A Not Applicable
6 The Fund
Dividends and Taxes
Alternative Sales Options
Fund Shares
Shareholder Services
Pricing Shares
7 How to Buy Shares
Pricing Shares
Distribution Plans
Shareholder Services
Exhibit A
8 How to Redeem Shares
Contingent Deferred Sales Charge
and Waiver of Sales Charges
9 Not Applicable
<PAGE>
KEYSTONE BALANCED FUND II
Cross-Reference Sheet continued.
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 Objective and Strategies
Investment Restrictions
Appendix
14 Trustees and Officers
15 Additional Information
16 Investment Adviser
Principal Underwriter
Additional Information
17 Brokerage
18 Declaration of Trust
19 Valuation of Securities
20 Distributions and Taxes
21 Principal Underwriter
22 Standardized Total Return and Yield Quotations
23 Audited Balance Sheet
<PAGE>
KEYSTONE BALANCED FUND II
PART A
PROSPECTUS
<PAGE>
KEYSTONE BALANCED FUND II
PROSPECTUS AUGUST 16, 1996
Keystone Balanced Fund II (the "Fund") seeks to provide current income and
capital appreciation consistent with the preservation of principal.
The Fund currently offers Class A, B, and C shares. Information on share
classes and their fee and sales charge structures may be found in the "Fee
Table," "How to Buy Shares," "Alternative Sales Options," "Contingent Deferred
Sales Charge and Waiver of Sales Charges," "Distribution Plans," and "Fund
Shares" sections of this prospectus.
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 August 16, 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 provided on this page.
KEYSTONE BALANCED FUND II
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
TABLE OF CONTENTS
Page
Fee Table .................................................2
The Fund...................................................3
Investment Objective and Policies..........................3
Investment Restrictions....................................5
Risk Factors .............................................5
Pricing Shares.............................................7
Dividends and Taxes........................................7
Fund Management and Expenses...............................8
How to Buy Shares.........................................10
Alternative Sales Options.................................10
Contingent Deferred Sales Charge and
Waiver of Sales Charges.................................14
Distribution Plans........................................15
How to Redeem Shares......................................16
Shareholder Services......................................17
Performance Data..........................................20
Fund Shares...............................................20
Additional Information....................................20
Additional Investment Information..........................i
Exhibit A................................................A-1
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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FEE TABLE
KEYSTONE BALANCED FUND II
The purpose of this fee table is to assist investors in understanding
the costs and expenses that an investor in each class of shares of the Fund 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"; "Alternative Sales Options"; "Contingent
Deferred Sales Charges and Waiver of Sales Charges"; "Distribution Plans"; and
"Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT-END BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION1 OPTION2
----------- ------------ -------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases . . . . . . . . . . 5.75%3 None None
(as a percentage of offering price)
Deferred Sales Load . . . . . . . . . . . . . . . . . . . . . .0.00%4 5.00% in the first year 1.00% in the first year
(as a percentage of the lesser of original purchase price declining to 1.00% in the and 0.00% thereafter
or redemption proceeds, as applicable) sixth year and 0.00%
thereafter
Exchange Fee (per exchange) 5. . . . . . . . . . . . . . . . . .$10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES6
After Expense Reimbursements
(as a percentage of average net assets)
Management Fees. . . . . . . . . . . . . . . . . . . . . . . . .0.65% 0.65% 0.65%
12b-1 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.25% 1.00%7 1.00%7
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . .0.60% 0.60% 0.60%
Total Fund Operating Expenses. . . . . . . . . . . . . . . . . .1.50% 2.25% 2.25%
===== ===== =====
</TABLE>
<TABLE>
<S> <C> <C>
EXAMPLES8 1 YEAR 3 YEARS
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the
end of each period:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72 $102
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $73 $100
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33 $70
You would pay the following expenses on the same investment,
assuming no redemption at the end of each period:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72 $102
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23 $70
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23 $70
</TABLE>
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 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 estimated for the Fund's fiscal year ending June 30, 1997
after giving effect to the reimbursement by Keystone Investment Management
Company ("Keystone") of expenses in accordance with certain voluntary
expense limitations. Currently, Keystone has limited the annual expenses of
the Fund's Class A, B, and C shares to 1.50%, 2.25%, and 2.25% of average
net class assets, respectively. Keystone intends to continue the foregoing
expense limitations on a calendar month-by-month basis and may modify or
terminate them in the future. The estimated expense ratios above assume the
extension of the limitations until June 30, 1997, which Keystone is under no
obligation to do. Without reimbursement, expense ratios for the fiscal year
ended June 30, 1997 for the Fund's Class A, B, and C shares are estimated to
be 2.52%, 3.27%, and 3.27%, respectively. Total Fund Operating Expenses will
include indirectly paid expenses.
7 Long-term shareholders may pay more than the economic equivalent of the
maximum front end sales charges permitted by the
National Association of Securities Dealers, Inc. (the "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%.
<PAGE>
THE FUND
The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. The Fund was formed as a Massachusetts business trust on
June 19, 1996. The Fund is one of the more than thirty funds managed or advised
by Keystone Investment Management Company ("Keystone"), the Fund's investment
adviser.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and capital appreciation consistent
with the preservation of principal.
The Fund's objective is fundamental and cannot be changed without the
approval of a majority of the Fund's outstanding shares (as defined in the
Investment Company Act of 1940 (the "1940 Act"), which means the lesser of (1)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (2) more than 50% of the outstanding
shares).
Any investment involves risk, and there is no assurance that the Fund will
achieve its investment objective.
INVESTMENT STRATEGIES
To achieve its objective, the Fund invests in a balance of equity and debt
securities. Generally, the Fund purchases common and preferred stocks for growth
and income and buys various debt securities for income and relative stability.
Keystone allocates the Fund's assets in accordance with its assessment of
economic conditions and investment opportunities.
Under normal market conditions, the Fund will invest a majority of its
assets in equity securities. The Fund will always maintain, however, at least
25% of its total assets in fixed income securities.
The Fund may invest up to 35% of its assets in foreign securities.
PRINCIPAL INVESTMENTS
EQUITY SECURITIES. The Fund's equity investments will typically include
common stocks, preferred stocks, and securities convertible into stocks as well
as warrants to purchase such securities. The Fund may invest in rights
convertible into common or preferred stock, partly paid stock, and structured
equity based securities.
The Fund may also purchase limited partnerships, including master limited
partnerships.
When selecting equity securities, the Fund intends to invest primarily in
well established companies with relatively large market capitalizations; i.e.,
companies having a market capitalization of $3 billion or more. The Fund may
invest, however, in companies with market capitalizations of less than $3
billion. Typically, the Fund will invest in companies found in the Standard &
Poor's 500 Index or the Standard and Poor's MidCap 400 Index.
DEBT SECURITIES. Subject to the constraints on investments in foreign
securities and the quality constraints discussed below, the Fund may invest in
any kind of debt security issued by private corporations (foreign or domestic),
the United States ("U.S.") government (including any of its political
subdivisions, agencies, or instrumentalities), and foreign governments.
The Fund's investments in U.S. government securities may include U.S.
Treasury obligations, Government National Mortgage Association certificates
("Ginnie Maes"), obligations of the Federal Home Loan Mortgage Corporation
("Freddie Macs"), and obligations of the Federal National Mortgage Association
("Fannie Maes").
The Fund may also invest in mortgage backed securities, adjustable rate
securities, asset back securities, and zero-coupon bonds and payment-in-kind
bonds ("PIKs"). The Fund does not currently intend to invest more than 5% of its
assets in PIKs.
A minimum of 50% of the Fund's investments in debt securities must be rated
investment grade or higher, i.e., debt securities rated at least Baa by Moody's
Investor Service ("Moody's") or at least BBB by Standard and Poor's Corporation
("S&P") or, if unrated, deemed by Keystone to be of comparable quality.
Conversely, subject to the general limits on below investment grade debt
securities discussed below, 50% of the Fund's investments in debt securities
could, from time to time, consist of below investment grade debt securities.
Debt securities rated Baa by Moody's are considered to be medium grade
obligations, i.e., they are neither highly protected nor poorly secured. Such
bonds lack outstanding investment characteristics and have speculative
characteristics as well. Debt securities rated BBB by S&P are regarded as having
adequate capacity to pay interest and repay principal. While such securities
normally exhibit 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.
The Fund may also invest more than 5% but less than 35% of its total assets
in below investment grade debt securities. The Fund will not invest in debt
securities rated below B by either rating agency, or, if unrated, of comparable
quality. Compared to investment grade bonds, lower rated bonds usually produce
higher yields and involve higher risks. Below investment grade bonds are
considered predominantly speculative and may be subject to greater price
volatility and greater risk of default. Either of these factors can adversely
affect the Fund's return and share price. See the "Risk Factors" section of the
prospectus.
TEMPORARY OR DEFENSIVE INVESTMENTS
When, in Keystone's judgment, market conditions warrant, the Fund may invest
up to 100% of its assets for temporary or defensive purposes in the following
types of securities: (1) commercial paper of U.S. issuers, including master
demand notes, that at the date of investment is rated Prime-1 (the highest grade
given by Moody's), A-1 (the highest grade given by S&P) or, if not rated by such
services, is issued by a company that has an outstanding issue rated A or better
by Moody's or S&P; (2) obligations, including certificates of deposit and
banker's acceptances, of bank or savings and loan associations with at least $1
billion in assets as of the date of their most recently published financial
statements that are members of the Federal Deposit Insurance Corporation,
including U.S. branches of foreign banks and foreign branches of U.S. banks; (3)
corporate obligations of U.S. issuers that are rated A or better by Moody's or
S&P at the date of investment; or (4) obligations that are issued or guaranteed
by the U.S. government or by any agency or instrumentality of the U.S.
government.
When the Fund invests for defensive purposes, it seeks to limit the risk of
loss of principal and is not pursuing its investment objective.
OTHER ELIGIBLE INVESTMENTS
INVESTMENT TECHNIQUES AND DERIVATIVES. The
Fund may enter into repurchase and reverse repurchase agreements, purchase and
sell securities and currencies on a when issued and delayed delivery basis,
purchase and sell securities on a forward commitment basis, lend portfolio
securities, write covered call and put options, and purchase call and put
options to close out existing positions. The Fund may also enter into currency
and other financial futures contracts and related options transactions for
hedging purposes and not for speculation. In addition, the Fund may employ new
or subsequently developed investment techniques with respect to options or
financial futures contracts and related options.
The Fund may invest in certain types of derivative instruments, including
mortgage related securities, such as collateralized mortgage obligations, and
interest rate transactions, such as "swaps," "caps," and "floors." These
securities can be combined to create more complex products called hybrid
derivatives or structured securities.
ILLIQUID AND RESTRICTED SECURITIES. The Fund may invest up to 15% of its net
assets in illiquid and restricted securities. See the "Risk Factors" section of
the prospectus for more information on illiquid and restricted securities.
For further information about the types of investments and investment
techniques available to the Fund, including the associated risks, see the "Risk
Factors" and "Additional Investment Information" sections of this prospectus as
well as the statement of additional information.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restrictions summarized below, which may
not be changed without the approval of a 1940 Act majority of the Fund's
outstanding shares. These restrictions and certain other fundamental and
non-fundamental restrictions are set forth in the statement of additional
information.
Generally, the Fund may not do the following: (1) invest more than 5% of its
total assets in the securities of any one issuer or invest in more than 10% of
the outstanding voting 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 these limits; (2) 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; and (b) enter into reverse
repurchase agreements; and (3) concentrate its investments in any particular
industry.
RISK FACTORS
Like any investment, your investment in the Fund involves an element of risk.
Before you 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.
Certain risks related to the Fund are discussed below. In addition to the
risks discussed in this section, specific risks attendant to individual
securities or investment practices are discussed in "Additional Investment
Information" and the statement of additional information.
NATURE OF THE FUND. By itself, the Fund does not constitute a complete
investment plan. The Fund seeks to provide current income and capital
appreciation consistent with the preservation of principal. Therefore, you
should not expect capital growth comparable to that of a fund with a capital
appreciation objective. Conversely, you should not expect the high levels of
income that might be provided by a fund with a generous income objective. The
Fund makes sense for those investors who can afford to ride out changes in the
stock market because it invests a substantial portion of its assets in common
and preferred stocks.
BELOW-INVESTMENT GRADE BONDS. The Fund may invest more than 5% but less than 35%
of its assets in below-investment grade bonds. 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.
FOREIGN RISK. The Fund may invest up to 35% of its assets in foreign securities.
Securities of foreign issuers generally entail more risk than those of domestic
issuers for the following reasons: publicly available information on issuers and
securities may be scarce; many foreign countries do not follow the same
accounting, auditing, and financial reporting standards as are used in the U.S.;
market trading volumes may be smaller, resulting in less liquidity and more
price volatility compared to U.S. securities of comparable quality; there may be
less regulation of securities trading and its participants; the possibility may
exist for expropriation, confiscatory taxation, nationalization, establishment
of exchange controls, political or social instability or negative diplomatic
developments; and dividend or interest withholding may be imposed at the source.
Fluctuations in foreign exchange rates impose an additional level of risk,
possibly affecting the value of the Fund's foreign investments and earnings, as
well as gains and losses realized through trades, and the unrealized
appreciation or depreciation of investments. The Fund may also incur costs when
it shifts assets from one country to another.
Investing in securities of issuers located 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. The typically small size of the markets for
securities issued by companies in emerging markets countries and the possibility
of slow or nonexistent volume of trading in those securities may also result in
a lack of liquidity and in price volatility of those securities.
U.S. GOVERNMENT SECURITIES. Some of the U.S. government securities in which the
Fund may invest, such as U.S. Treasury obligations, are backed by the "full
faith and credit" of the U.S. Other U.S. government securities, such as those
securities issued or guaranteed by various government agencies or
instrumentalities, may or may not be backed by the full faith and credit of the
U.S. In the case of securities not backed by the full faith and credit of the
U.S., the Fund must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim against
the U.S. if the agency or instrumentality does not meet its commitments. To
illustrate, Ginnie Maes are backed by the full faith and credit of the U.S.,
Freddie Macs are supported by the right of the Federal Home Loan Mortgage
Corporation to borrow from the U.S. Treasury, and Fannie Maes are supported by
the credit of the Federal National Mortgage Association.
While the U.S. government securities in which the Fund may invest may be
guaranteed as to principal and interest, the market value of these securities is
not guaranteed. As a general matter, their market value will vary inversely with
changes in interest rates. For example, if interest rates rise after the Fund
purchases a U.S. government security and the Fund sells the security before it
matures, the Fund may incur a loss on the sale.
In addition, the yields on relatively short-term investments, such as U.S.
government securities, are subject to substantial and rapid fluctuation.
ILLIQUID AND RESTRICTED SECURITIES. The Fund may invest up to 15% of its net
assets in securities that are not registered for public trading or are otherwise
illiquid, including securities eligible for resale under Rule 144A under the
Securities Act of 1933 ("1933 Act"). The Fund deems a security to be illiquid if
it cannot dispose of the security within seven days at the price at which it is
carrying the security on its books. With regard to Rule 144A securities,
Keystone determines the liquidity of such securities on a case by case basis in
accordance with guidelines adopted by the Fund's Board of Trustees. As the name
implies, the risk of these securities is primarily one of liquidity. Typically,
the only market for these securities consists of other large institutions.
Consequently, the Fund may not be able to divest itself of illiquid securities
at the time or price it desires.
DERIVATIVES. The Fund may invest in derivative securities. Derivatives are
instruments whose value is based upon (i.e., derived from) either an underlying
asset, such as a security or commodity, or an underlying rate, such as a market
index or a currency exchange rate. The term "derivative" encompasses a wide
variety of financial instruments. The nature and degree of the risks of these
instruments also vary widely.
The Fund may use derivatives to earn income and enhance returns or to hedge
or adjust the risk profile of its portfolio. The Fund may also invest in
derivatives in place of more traditional direct investments or to obtain
exposure to otherwise inaccessible markets. The Fund is permitted to use
derivatives for more than one of these purposes. The use of derivatives to
enhance returns, rather than for hedging purposes, entails greater risks. The
Fund does not use derivatives aggressively and its use of derivatives is subject
to continuous risk assessment and control.
Generally, the principal risks associated with derivatives include the risk
of decreases in the value of a derivative caused by changes in interest rates or
other market conditions; the risk that the counterparty to the derivative
transaction will default on its obligations; and the risk that a particular
derivative will be difficult to liquidate at an advantageous price.
For more information with respect to derivatives, see "Additional Investment
Information" and the statement of additional information.
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 purposes 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 portfolio securities are determined as follows:
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the time
of the valuation, provided that a sale has occurred and that this price reflects
current market value according to procedures established by the Board of
Trustees.
(2) Securities traded in the over-the-counter market, other than NMS, are
valued at the mean of the bid and asked prices at the time of valuation.
(3) Short-term instruments maturing in 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.
(4) Short-term instruments maturing in more than sixty days for which market
quotations are readily available are valued at current market value.
(5) Short-term 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.
(6) 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.
The Fund believes that reliable market quotations are generally not readily
available for purposes of valuing certain fixed income securities. As a result,
it is likely that most of the valuations for such securities will be based upon
their fair value determined under procedures that have been approved by the
Board of Trustees. The Board of Trustees has authorized the use of a pricing
service to determine the fair value of such fixed income securities and certain
other securities.
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
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.
Securities for which market quotations are readily available are valued on a
consistent basis at the price quoted that, in the opinion of the Trustees or the
person designated by the Trustees to make the determination, most nearly
represents the market value of the particular security.
DIVIDENDS AND TAXES
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). The
Fund qualifies if, among other things, it distributes to its shareholders at
least 90% of its net investment income for its fiscal year. The Fund also
intends to make timely distributions, if necessary, sufficient in amount to
avoid the nondeductible 4% excise tax imposed on a regulated investment company
to the extent that it fails to distribute, with respect to each calendar year,
at least 98% of its ordinary income for such calendar year and 98% of its net
capital gains for the one-year period ending on October 31 of such calendar
year.
If the Fund qualifies and if it distributes all of its net investment income
and net capital gains, if any, to shareholders, it will be relieved of any
federal income tax liability.
The Fund will make distributions from its net investment income quarterly and
from its net capital gains, if any, annually. 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.
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 shares and income distributions paid by the Fund with respect
to Class A shares will generally be greater than those paid with respect to
Class B and Class C shares.
Dividends and distributions are taxable whether they are received in cash or
in shares. Income dividends and net short-term gains dividends are taxable as
ordinary income, and net long-term gains dividends are taxable as capital gains
regardless of how long the Fund's shares are held. If Fund shares held for less
than six months are sold at a loss, however, such loss will be treated for tax
purposes as a long-term capital loss to the extent of any long-term capital
gains dividends received. Any taxable dividend declared in October, November or
December to shareholders of record in such a month and paid by the following
January 31 will be includable in the taxable income of the shareholder as if
paid on December 31 of the year in which the dividend was declared.
The Fund advises its shareholders annually as to the federal tax status of all
distributions made during the year.
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 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. ("Keystone
Investments"). Both Keystone and Keystone Investments are 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 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 set forth
below:
ANNUAL AGGREGATE NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE INCOME OF THE FUND
1.5% of Gross Dividend and Interest Income
0.60% of the first $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 100,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 500,000,000, plus
0.30% of amounts over $1,000,000,000.
computed as of the close of business each business day and payable daily.
The Advisory Agreement continues in effect from year to year only so long as
such continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of the Fund's outstanding shares. In either
case, the terms of the Advisory Agreement and continuance thereof must be
approved by the vote of a majority of the Fund's disinterested trustees, as
defined in the 1940 Act (the "Independent Trustees"), cast in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated, without penalty, on 60 days' written notice by the
Fund or Keystone or may be terminated by a vote of the Fund's shareholders. The
Advisory Agreement will terminate automatically upon its assignment.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
PORTFOLIO MANAGER
Walter T. McCormick has been the Fund's portfolio manager since the Fund's
inception in 1996. He is a Keystone Senior Vice President and has over 25 years
of investment experience.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and distribution plan fees discussed in the prospectus, 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.
Keystone has currently voluntarily limited the expenses of the Fund's Class A,
B, and C shares to 1.50%, 2.25%, and 2.25% of each class's average daily net
assets, respectively. Keystone intends to continue the foregoing expense
limitations on a calendar month-by-month basis. Keystone will periodically
evaluate these limitations and may modify or terminate them in the future.
Keystone will not be required to reimburse the Fund to the extent such
reimbursement would result in the Fund's inability to qualify as a regulated
investment company under the Internal Revenue Code.
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 generally does not expect to exceed a portfolio turnover rate of 100%.
High portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs, which would be borne directly by the
Fund, as well as additional realized gains and/or losses to shareholders.
For further information about brokerage and distributions, see the statement
of additional information.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with Keystone Investment Distributors Company (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 purchase 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 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 day's offering price) plus, in the case of Class A
shares, the applicable sales charge.
The Fund reserves the right to determine the net asset value more frequently
than once a day if deemed desirable. Broker-dealers and other financial services
firms are obligated to transmit orders promptly.
The initial purchase amount 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 Keystone Investor Resource Center,
Inc. ("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 Classes A, B and 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 deferred sales charge if redeemed
during the 72-month period from and including the month of purchase. Class B
shares 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 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, currently pays an
annual service fee of 0.25% of the Fund's average daily net assets attributable
to that class. In addition to the 0.25% service fee, the Class B and C
Distribution Plans provide for the payment of an annual distribution fee of up
to 0.75% of the average daily net assets attributable to their respective
classes.
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.
<PAGE>
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge as
follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than $50,000. . . . . . . . . . . . . . . . . . . . . . . . . . . 5.75% 6.10% 5.25%
$50,000 but less than $100,000 . . . . . . . . . . . . . . . . . . . . 4.75% 4.99% 4.25%
$100,000 but less than $250,000 . . . . . . . . . . .. . . . . . . . . .3.75% 3.90% 3.25%
$250,000 but less than $500,000 . . . . . . . . . . .. . . . . . . . . .2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 . . . . . . . . . .. . . . . . . . . .1.50% 1.52% 1.50%
</TABLE>
*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 educational 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
the recipient and outstanding on the books of the Fund for specified periods.
Upon written notice to broker-dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A shares
that are 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.
In addition, 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.
Beginning September 1, 1996, through November 30, 1996, the Principal
Underwriter will reallow to broker-dealers or others a commission based upon the
price paid for each Class A share sold at the following rates: full reallowance
plus an additional 0.50% for each Class A share sold with respect to purchases
in an amount not exceeding $499,999; and full reallowance for each Class A share
sold with respect to purchases in an amount in excess of $499,999. Such payments
will be made to those broker-dealers and others selling such shares who pay
registered representatives making such sales a portion of the additional amount
payable under this special dealer offer, as determined in accordance with their
regular payment arrangements with such persons for sales not made under a
special dealer offer.
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. The Fund, with certain exceptions, imposes a deferred sales charge on
Class B shares 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.
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 Plan 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 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. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to KIRC.) Under
current law, it is the Fund's opinion that such a conversion will not constitute
a taxable event. 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 such Class B shareholders.
The Class B shares so converted will no longer be subject to the higher
expenses borne by Class B shares. Because the net asset value per share of 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.
CLASS B DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class B shares
(the "Class B 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 B
shares to pay expenses of the distribution of Class B shares. Payments under the
Class B 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 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 recipien and outstanding on the books of the Fund for
specified periods. See "Distribution Plans" below.
Beginning September 1, 1996, through November 30, 1996, the Principal
Underwriter will reallow to broker-dealers or others an increased commission
equal to 4.75% of the price paid for each Class B share sold. Such payments will
be made to those broker-dealers and others selling such shares who pay
registered representatives making such sales a portion of the additional amount
payable under this special dealer offer, as determined in accordance with their
regular payment arrangements with such persons for sales not made under a
special dealer offer.
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 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 incurred in connection with 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 broker-dealers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold,
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately fifteen months after
purchase, the broker-dealer or other party will receive 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) Class A shares held for more than 24 months;
(4) Class B shares held for more than 72 months; or (5) Class C shares held for
more than one year. 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 an automatic
withdrawal plan of up to 1.5% 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. See the statement of additional information
for more details.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
From time to time, the Principal Underwriter may 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 receive
additional cash payments. The Principal Underwriter may also provide written
information to broker-dealers with whom it has broker-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 broker-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 broker-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 currently limits the amount that the Fund may pay annually in
distribution costs for the sale of its shares and shareholder service fees. The
NASD limits annual expenditures to 1% of the aggregate average daily net asset
value of the Fund's shares, of which 0.75% may be used to pay distribution costs
and 0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the 12b-1 Distribution Plan, plus
interest at the prime rate plus 1% on such amounts (less any 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 Fund's 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 the Distribution Plan.
In connection with financing its distribution costs, including commission
advances to broker-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 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. 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.
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 redemption 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.
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 broker-dealers and will calculate the net asset value on
the same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable 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.
The redemption value equals the net asset value adjusted for fractions of a
cent and may be more or less than your cost depending upon changes in the value
of the Fund's portfolio securities between purchase and redemption. A deferred
sales charge may be imposed by the Fund at the time of redemption of certain
shares as explained in "How to Buy Shares." 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 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.
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 and KIRC may not only waive
this requirement, but may also require additional documents in certain cases.
Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less when the account address of record has been the
same for a minimum period of 30 days. The Fund and KIRC reserve the right to
withdraw this waiver at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money 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 calling toll free 1-800-343-2898. As mentioned, to engage in telephone
transactions generally, you must complete the appropriate sections of the Fund's
application.
In order to insure that instructions received by 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 you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth herein.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No deferred
sales charges are applied to such redemptions.
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. If, for any reason, reasonable procedures are
not followed, the Fund, KIRC, or the Principal Underwriter may be liable for any
losses due to unauthorized or fraudulent instructions.
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 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
(1) Class A shares acquired in an NAV Purchase or otherwise without a
front-end sales charge,
(2) Class B shares that have been held for less than 72 months, or
(3) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares for another Keystone America fund or KLT 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
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 into 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 terminate service
(which could take up to 30 days), you must write to KIRC, P.O. Box 2121 Boston,
Massachusetts 20106-2121, and include your account number.
RETIREMENT PLANS
The Fund has various retirement plans available to investors, including
Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified Employee
Pension Plans; Salary Reduction Plans; Tax Sheltered Annuity Plans; 403(b) (7)
Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money
Purchase Plans. For details, including fees and application forms, call toll
free 1- 800-247-4075 or write to 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.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class of
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on your application and indicate the Keystone America Fund(s) into which
distributions are to be invested. The value of shares purchased will be
ineligible for Rights of Accumulation and Letters of Intent.
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 issues Class A, B, and C shares, which participate in dividends and
distributions and have equal voting, liquidation and other rights, except that
(1) expenses related to the distribution of each class of shares or other
expenses that the Board of Trustees may designate as class expenses from time to
time, are borne solely by each class; (2) each class of shares has exclusive
voting rights with respect to its Distribution Plan; (3) each class has
different exchange privileges; and (4) each class has a different designation.
When issued and paid for, the shares will be fully paid and nonassessable by the
Fund. Shares may be exchanged as explained under "Shareholder Services," but
will have no other preference, conversion, exchange or preemptive rights. Shares
are redeemable, transferable and freely assignable as collateral. The Fund is
authorized to issue additional series or classes of shares.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of the Fund vote together except when
required by law to vote separately by 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 prescribed 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.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone, serves as the Fund's transfer agent and
dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S., and the Fund may be subject to the risks associated with the
holding of such property overseas. Examples of governmental actions would be the
imposition of currency controls, interest limitations, withholding taxes,
seizure of assets or the declaration of a moratorium. Various provisions of
federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer, as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. The Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes purchased by the Fund permit the Fund to demand
payment of principal and accrued interest at any time (on not more than seven
days notice) and to resell the note at any time to a third party. Notes acquired
by the Fund may have maturities of more than one year, provided that (1) the
Fund is entitled to payment of principal and accrued interest upon not more than
seven days notice, and (2) the rate of interest on such notes is adjusted
automatically at periodic intervals, which normally will not exceed 31 days, but
may extend up to one year. The notes are deemed to have a maturity equal to the
longer of the period remaining to the next interest rate adjustment or the
demand notice period. Because these types of notes are direct lending
arrangements between the lender and borrower, such instruments are not normally
traded and there is no secondary market for these notes, although they are
redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with master demand note arrangements, Keystone considers, under
standards established by the Board of Trustees, earning power, cash flow and
other liquidity ratios of the borrower and will monitor the ability of the
borrower to pay principal and interest on demand. These notes are not typically
rated by credit rating agencies. Unless rated, the Fund will invest in them only
if, at the time of investment, the issuer meets the criteria established for
commercial paper.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. government securities or other financial institutions believed by Keystone
to be creditworthy. Such persons must be registered as U.S. government
securities dealers with an appropriate regulatory organization. Under such
agreements, the bank, primary dealer or other financial institution agrees upon
entering into the contract to repurchase the security at a mutually agreed upon
date and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations during
such period. Under a repurchase agreement, the seller must maintain the value of
the securities subject to the agreement at not less than the repurchase price,
such value being determined on a daily basis by marking the underlying
securities to their market value. Although the securities subject to the
repurchase agreement might bear maturities exceeding a year, the Fund intends
only to enter into repurchase agreements that provide for settlement within a
year and usually within seven days. Securities subject to repurchase agreements
will be held by the Fund's custodian or in the Federal Reserve book entry
system. The Fund does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under its repurchase obligation.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
securities and losses, including (1) possible declines in the value of the
underlying securities during the period while the Fund seeks to enforce its
rights thereto; (2) possible subnormal levels of income and lack of access to
income during this period; and (3) expenses of enforcing its rights. The Board
of Trustees has established procedures to evaluate the creditworthiness of each
party with whom the Fund enters into repurchase agreements by setting guidelines
and standards of review for Keystone and monitoring Keystone's actions with
regard to repurchase agreements.
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.
"WHEN ISSUED" SECURITIES
The Fund may also purchase and sell securities and currencies on a when issued
and delayed delivery basis. When issued or delayed delivery transactions arise
when securities or currencies are purchased or sold 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. When the Fund engages in when issued and delayed delivery
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 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 such
purchase commitments will be maintained until payment is made.
When issued and delayed delivery agreements are subject to risks from
changes in value based upon changes in the level of interest rates, currency
rates and other market factors, both before and after delivery. The Fund does
not accrue any income on such securities or currencies prior to their delivery.
To the extent the Fund engages in when issued and delayed delivery transactions,
it will do so consistent with its investment objective and policies and not for
the purpose of investment leverage. The Fund currently does not intend to invest
more than 5% of its assets in when issued or delayed delivery transactions.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to brokers-dealers pursuant to agreements
requiring that the loans be continuously secured by cash or securities of the
U.S. government, its agencies or instrumentalities, or any combination of cash
and such securities, as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to the Fund 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. The Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other
high-grade, short-term obligations or interest bearing cash equivalents.
Although voting rights attendant to securities loaned pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted by the Fund if, in the opinion of the Fund, a material event affecting the
investment is to occur. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. Loans may
only be made to borrowers deemed to be of good standing, under standards
approved by the Board of Trustees, when the income to be earned from the loan
justifies the attendant risks.
DERIVATIVES - GENERAL
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. 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. The Fund is not an
aggressive user of derivatives. The Fund may take positions, however, 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. The Fund's use of derivatives is subject to continuous risk
assessment and control from the standpoint of the Fund's investment objective
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.
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 -- Credit risk is the risk that a loss may be sustained by the
Fund as a result of the failure of another party to a derivative (usually
referred to as a "counterparty") to comply with the terms of the derivative
contract. The credit risk for exchange- traded derivatives is generally less
than for privately negotiated derivatives, since the clearing house, which is
the issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment system
(i.e., margin requirements) operated by the clearing house in order to reduce
overall credit risk. For privately negotiated derivatives, there is no similar
clearing agency guarantee. Therefore, the Fund considers the creditworthiness of
each counterparty to a privately negotiated derivative in evaluating potential
credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly large
or if the relevant market is illiquid (as is the case with many privately
negotiated derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous price.
* Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can result
in a loss substantially greater than the amount invested in the derivative
itself. In the case of swaps, the risk of loss generally is related to a
notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risks -- Other risks in using derivatives include the risk of mispricing
or improper valuation and the inability of derivatives to correlate perfectly
with underlying assets, rates and indices. Many derivatives, in particular
privately negotiated derivatives, are complex and often valued subjectively.
Improper valuations can result in increased cash payment requirements to
counterparties or a loss of value to a Fund. Derivatives do not always perfectly
or even highly correlate or track the value of the assets, rates or indices they
are designed to closely track. Consequently, the Fund's use of derivatives may
not always be an effective means of, and sometimes could be counterproductive
to, furthering the Fund's investment objective.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and put
options. 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 also may write straddles
(combinations of covered puts and calls on the same underlying security).
The Fund may only write "covered" options. This means that so long as the Fund
is obligated as the writer of a call option it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
the Fund has written options
against all of its securities that are available 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 might 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 with its custodian, in a segregated account, liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through the
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 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 or dispose of assets held in a segregated account until the options
expire or are exercised.
An option position may be closed out only in a secondary market for an option
of the same series. Although the Fund generally will 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. In addition to the limits on its use of options
discussed herein, the Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.
The staff of 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 policies on illiquid securities.
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and
write options on such contracts. The Fund intends to enter into such contracts
and related options for hedging purposes. The Fund will enter into securities,
currency or index-based futures contracts in order to hedge against changes in
interest or exchange rates or securities prices. A futures contract on
securities or currencies is an agreement to buy or sell securities or currencies
at a specified price during a designated month. A futures contract on a
securities index does not involve the actual delivery of securities, but merely
requires the payment of a cash settlement based on changes in the securities
index. The Fund does not make payment or deliver securities upon entering into a
futures contract. Instead, it puts down a margin deposit, which is adjusted to
reflect changes in the value of the contract and which continues until the
contract is terminated.
The Fund may sell or purchase futures contracts. When a futures contract is
sold by the Fund, the value of the Fund's 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 sells futures
contracts in order to offset a possible decline in the value of its securities
or currencies. If a futures contract is purchased by the Fund, the value of the
contract will tend to rise when the value of the underlying securities or
currencies increases and to fall when the value of such securities or currencies
declines. The Fund intends to purchase futures contracts in order to establish
what is believed by Keystone to be a favorable price and rate of return for
securities or a favorable exchange rate for currencies the Fund intends to
purchase.
The Fund also intends to purchase put and call options on 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 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 related 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. 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. The Fund has the ability to write options on futures, but intends to
write such options only to close out options purchased by the Fund. The Fund
will not change these policies without supplementing the information in its
prospectus and statement of additional information.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, 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 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 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 accurately predict 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 U.S. 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.
Although the Fund does not currently intend to do so, the Fund may also purchase
and sell options related to foreign currencies. The Fund does not intend to
enter into foreign currency transactions for speculation or leverage.
INTEREST RATE TRANSACTIONS (SWAPS, CAPS AND FLOORS). If the Fund enters into
interest rate swap, cap or floor transactions, it expects to do so primarily for
hedging purposes, which may include preserving a return or spread on a
particular investment or portion of its portfolio or protecting against an
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund does not intend to use these transactions in a speculative
manner.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments). Interest rate caps and floors
are similar to options in that the purchase of an interest rate cap or floor
entitles the purchaser, to the extent that a specified index exceeds (in the
case of a cap) or falls below (in the case of a floor) a predetermined interest
rate, to receive payments of interest on a contractually-based principal
("notional") amount from the party selling the interest rate cap or floor. The
Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending upon whether it is hedging its
assets or liabilities, and will usually enter into interest rates swaps on a net
basis (i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments).
The swap market has grown substantially in recent years, with a large number
of banks and investment banking firms acting as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become more established and relatively liquid. Caps and floors are less liquid
that swaps. These transactions also involve the delivery of securities or other
underlying assets and principal. Accordingly, the risk of loss to the Fund from
interest rate transactions is limited to the net amount of interest payments
that the Fund is contractually obligated to make.
INDEXED COMMERCIAL PAPER. Indexed commercial paper may have its principal linked
to changes in foreign currency exchange rates whereby its principal amount is
adjusted upwards or downwards (but not below zero) at maturity to reflect
changes in the referenced exchange rate. If permitted by its investment
policies, the Fund will purchase such commercial paper with the currency in
which it is denominated and, at maturity, will receive interest and principal
payments thereon in that currency, but the amount of principal payable by the
issuer at maturity will change in proportion to the change (if any) in the
exchange rate between the two specified currencies between the date the
instrument is issued and the date the instrument matures. While such commercial
paper entails the risk of loss of principal, the potential for realizing gains
as a result of changes in foreign currency exchange rates enable the Fund to
hedge (or cross-hedge) against a decline in the U.S. dollar value of investments
denominated in foreign currencies while providing an attractive money market
rate of return.
MORTGAGE-RELATED SECURITIES. The mortgage-related securities in which the Fund
may invest typically are securities representing interests in pools of mortgage
loans made to home owners. Mortgage-related securities bear interest at either a
fixed rate or an adjustable rate determined by reference to an index rate. The
mortgage loan pools may be assembled for sale to investors (such as the Fund) by
governmental or private organizations. Mortgage-related securities issued by the
Government National Mortgage Association ("GNMA") are backed by the full faith
and credit of the U.S. government; those issued by Federal National Mortgage
Associated ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") are not
so backed.
Securities representing interests in pools created by private issuers
generally offer a higher rate of interest than securities representing interests
in pools created by governmental issuers because there are no direct or indirect
governmental guarantees of the underlying mortgage payments. However, private
issuers sometimes obtain committed loan facilities, lines of credit, letters of
credit, surety bonds or other forms of liquidity and credit enhancement to
support the timely payment of interest and principal with respect to their
securities if the borrowers on the underlying mortgages fail to make their
mortgage payments. The ratings of such non-governmental securities are generally
dependent upon the ratings of the providers of such liquidity and credit support
and would be adversely affected if the rating of such an enhancer were
downgraded. The Fund may buy mortgage-related securities without credit
enhancement if the securities meet the Fund's investment standards. Although the
market for mortgage-related securities is becoming increasingly liquid, those of
certain private organizations may not be readily marketable.
One type of mortgage-related security is of the "pass-through" variety. The
holder of a pass-through security is considered to own an undivided beneficial
interest in the underlying pool of mortgage loans and received a pro rata share
of the monthly payments made by the borrowers on their mortgage loans, net of
any fees paid to the issuer or guarantor of the securities. Prepayments of
mortgages resulting from the sale, refinancing or foreclosure of the underlying
properties are also paid to the holders of these securities. Some
mortgage-related securities, such as securities issued by GNMA, are referred to
as "modified pass-through" securities. The holders of these securities are
entitled to the full and timely payment of principal and interest, net of
certain fees, regardless of whether payments are actually made on the underlying
mortgages. Another form of mortgage-related security is a "pay-through"
security, which is a debt obligation of the issuer secured by a pool of mortgage
loans pledged as collateral that is legally required to be paid by the issuer
regardless of whether payments are actually made on the underlying mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are the predominant type of
"pay-through" mortgage-related security. CMOs are designed to reduce the risk of
prepayment for investors by issuing multiple classes of securities, each having
different maturities, interest rates and payment schedules, and with the
principal and interest on the underlying mortgages allocated among the several
classes in various ways. The collateral securing the CMOs may consist of a pool
of mortgages, but may also consist of mortgage-backed bonds of pass-through
securities. CMOs may be issued by a U.S. government instrumentality or agency or
by a private issuer. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by GNMA,
FNMA or FHLMC, these CMOs represent obligation solely of the private issuer and
are not insured or guaranteed by GNMA, FNMA, FHLMC, any other governmental
agency or any other person or entity.
ADJUSTABLE RATE MORTGAGE SECURITIES. Another type of mortgage-related security,
known as adjustable rate mortgage securities ("ARMS"), bears interest at a rate
determined by reference to a predetermined interest rate or index. There are two
main categories of rates of indices: (1) rates based on the yield on U.S.
Treasury securities and (2) indices derived from a calculated measure such as a
cost of funds index or a moving average of mortgage rates. Some rates and
indices closely mirror changes in market interest rate levels, while others tend
to lag changes in market rate levels and tend to be somewhat less volatile.
ARMS may be secured by adjustable rate mortgages or fixed rate mortgages.
ARMS secured by fixed rate mortgages generally have lifetime caps on the coupon
rates of the securities. To the extent that general interest rates increase
faster than the interest rates on the ARMS, these ARMS will decline in value.
The adjustable rate mortgages that secure ARMS will frequently have caps that
limit the maximum amount by which the interest rate or the monthly principal and
interest payments on the mortgages may increase. These payment caps can result
in negative amortization (i.e., an increase in the balance of the mortgage
loan). Furthermore, since many adjustable rate mortgages only reset on an annual
basis, the values of ARMS tend to fluctuate to the extent that changes in
prevailing interest rates are not immediately reflected in the interest rates
payable on the underlying adjustable rate mortgages.
STRIPPED MORTGAGE SECURITIES. Stripped mortgages-related securities ("SMRS") are
mortgage-related securities that are usually structured with two classes of
securities collateralized by a pool of mortgages or a pool of mortgaged-backed
bonds or pass-through securities, with each class receiving different
proportions of the principal and interest payments from the underlying assets. A
common type of SMRS has one class of interest-only securities ("IOs") receiving
all of the interest payments from the underlying assets, while the other class
of securities, principal-only securities ("POs"), received all of the principal
payments from the underlying assets. IOs and POs are extremely sensitive to
interest rate changes and are more volatile that mortgage-related securities
that are not stripped. IOs tend to decrease in value as interest rates decrease,
while POs generally increase in value as interest rates decrease. If prepayments
of the underlying mortgages are greater that anticipated, the amount of interest
earned on the overall pool will decrease due to the decreasing principal balance
of the assets. Changes in the values of IOs and POs can be substantial and occur
quickly, such as occurred in the first half of 1994 when the value of many POs
dropped precipitously due to an increase in interest rates. For this reason the
Fund does not rely on IOs and POs as the principal means of furthering its
investment objective.
MORTGAGE-RELATED SECURITIES --- SPECIAL CONSIDERATIONS. The value of
mortgage-related securities is affected by a number of factors. Unlike
traditional debt securities, which have fixed maturity dates, mortgage-related
securities may be paid earlier than expected as a result of prepayment of the
underlying mortgages. If the property owners make unscheduled prepayments or
their mortgage loans, these prepayments will result in the early payment of the
applicable mortgage-related securities. In that event the Fund may be unable to
invest the proceeds from the early payment of the mortgage-related securities in
an investment that provides as high a yield as the mortgage-related securities.
Consequently, early payment associated with mortgage-related securities causes
these securities to experience significantly greater price and yield volatility
than experienced by traditional fixed-income securities. The occurrence of
mortgage prepayments is affected by the level of general interest rates, general
economic conditions and other social and demographic factors. During periods of
falling interest rates, the rate of mortgage prepayments tends to increase,
thereby tending to decrease the life of mortgage-related securities. During
periods of rising interest rates, the rate of mortgage prepayments usually
decreases, thereby tending to increase the life of mortgage-related securities.
If the life of a mortgage-related security is in accurately predicted, the Fund
may not be able to realize the rate of return it expected.
As with fixed-income securities generally, the value of mortgage-related
securities can also be adversely affected by increases in general interest rates
relative to the yield provided by such securities. Such adverse effect is
especially possible with fixed-rate mortgage securities,. If the yield available
on other investments rises above the yield of the fixed-rate mortgage securities
as a result of general increases in interest rate levels, the value of the
mortgage-related securities will decline. Although the negative effect could be
lessened if the mortgage-related securities were to be paid earlier (thus
permitting the Fund to reinvest the prepayment proceeds in investments yielding
the higher current interest rate), as described above the rate of mortgage
prepayments and earlier payment of mortgage-related securities generally tends
to decline during a period of rising interest rates.
Although the value of ARMS may not be affected by rising interest rates as much
as the value of fixed-rate mortgage securities is affected by rising interest
rates, ARMS may still decline in value as a result of rising interest rates.
Although, as described above, the yield on ARMS varies with changes in the
applicable interest rate or index, there is often a lag between increases in
general interest rates and increases in the yield on ARMS as a result of
relatively infrequent interest rate reset dates. In addition, adjustable-rate
mortgages and ARMS often have interest rate or payment caps that limit the
ability of the adjustable-rate mortgages or ARMS to fully reflect increases in
the general level of interest rates.
OTHER ASSET-BACKED SECURITIES. The securitization techniques used to develop
mortgage-related securities are being applied to a broad range of financial
assets. Through the use of trusts and special purpose corporations, various
types of assets, including automobile loans and leases, credit card receivables,
home equity loans, equipment leases and trade receivables, are being securitized
in structures similar to the structures used in mortgage securitizations. These
asset-backed securities are subject to risks associated with changes in interest
rates and prepayment of underlying obligations similar to the risks of
investment in mortgage-related securities discussed above.
Each type of asset-backed security also entails unique risks depending on the
type of assets involved and the legal structure used. For example, credit card
receivables are generally unsecured obligations of the credit card holder and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
There have also been proposals to cap the interest rate that a credit card
issuer may charge. In some transactions, the value of the asset-backed security
is dependent on the performance of a third party acting as credit enhancer or
servicer. Furthermore, in some transactions (such as those involving the
securitization of vehicle loans or leases) it may be administratively burdensome
to perfect the interest of the security issuer in the underlying collateral and
the under-lying collateral may become damaged or stolen.
VARIABLE, FLOATING AND INVERSE FLOATING RATE INSTRUMENTS. Fixed-income
securities may have fixed, variable or floating rates of interest. Variable and
floating rate securities pay interest at rates that are adjusted periodically,
according to a specified formula. A "variable" interest rate adjusts at
predetermined intervals (e.g., daily, weekly or monthly), while a "floating"
interest rate adjusts whenever a specified benchmark rate (such as the bank
prime lending rate) changes.
The Fund may invest in fixed income securities that pay interest at a coupon
rate equal to a base rate, plus additional interest for a certain period of time
if short-term interest rates rise above a predetermined level or "cap". The
amount of such an additional interest payment typically is calculated under a
formula based on a short-term interest rate index multiplied by a designated
factor.
Leveraged inverse floating rate debt instruments are sometimes known as
inverse floaters. The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to the extent that
its interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in market value.
STRUCTURED SECURITIES. Structured securities represent interests in entities
organized and operated solely for the prupose of restructuring the investment
characteristics of sovereign debt obligations or foreign government securities.
This type of restructuring involves the deposit with or purchase by any entity,
such as a corporation or trust, of specified instruments (such as commercial
bank loans or Brady Bonds) and the issuance by that entity of one or more
classes of structured securities backed by, or representing interests, in
the underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued structured securities to create securities
with difference investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to structured securities is dependent on the extent of the cash
flow on the underlying instruments. Because structured securities typically
involve no credit enhancement, their credit risk generally will be equivalent to
that of the underlying instruments. Structured securities of a given class may
be either subordinated or unsubordinated to the right of payment of another
class. Subordinated structured securities typically are higher yield and present
greater risks than unsubordinated structured securities.
BRADY BONDS. Brady Bonds are created through the exchange of existing commercial
bank loans to foreign entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued only
recently, and, accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar-denominated) and they are actively traded in the
over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations that
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments, but generally are not collateralized. Brady
Bonds are often viewed as having up to four valuation components: (1)
collateralized repayment of principal at final maturity, (2) collateralized
interest payments, (3) uncollateralized interest payments, and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments that would have then
been due on the Brady Bonds in the normal course. In addition, the light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
<PAGE>
EXHIBIT A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of other Keystone America Funds. Only Class A shares subject to
an initial or deferred sales charge are eligible for inclusion in reduced sales
charge programs.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may combine
concurrent direct purchases of Class A shares of two or more of the "Eligible
Funds," as defined below. For example, if a Purchaser concurrently invested
$75,000 in one of the other "Eligible Funds" and $75,000 in the Fund, the sales
charge would be that applicable to a $150,000 purchase, i.e., 3.75% of the
offering price, as indicated in the Sales Charge Schedule in the prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of the Fund's
Class A shares, a Purchaser is entitled to accumulate current purchases with the
current value of previously purchased Class A shares of the Fund and Class A
shares of certain other eligible funds that are still held in (or exchanged for
shares of and are still held in) the same or another eligible fund ("Eligible
Fund(s)"). The Eligible Funds are the Keystone America Funds and Keystone Liquid
Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75% of the offering price as indicated in the Sales
Charge Schedule. 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 irrevocably constitutes and appoints
KIRC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform 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
Strategic Development Fund
Small Company Growth Fund II
[logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[recycle logo]
KEYSTONE BALANCED FUND II
[logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE BALANCED FUND II
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
KEYSTONE BALANCED FUND II
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 16, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Balanced Fund II (the "Fund") dated August 16, 1996. A copy of the prospectus
may be obtained from Keystone Investment Distributors Company (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 Objective and Strategies 2
Investment Restrictions 3
Distributions and Taxes 7
Valuation of Securities 8
Brokerage 10
Sales Charges 12
Distribution Plans 16
Trustees and Officers 20
Investment Adviser 25
Principal Underwriter 28
Declaration of Trust 30
Standardized Total Return
and Yield Quotations 32
Additional Information 33
Appendix A-1
Audited Balance Sheet F-1
Independent Auditors' Report F-3
<PAGE>
THE FUND
The Fund is an open-end, diversified management investment company
commonly known as a mutual fund. The Fund was formed as a Massachusetts business
trust on June 19, 1996. The Fund is one of more than 30 funds advised by
Keystone Investment Management Company ("Keystone").
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
INVESTMENT OBJECTIVE AND STRATEGIES
The Fund seeks to provide current income and capital appreciation
consistent with the preservation of principal.
The Fund invests in a balance of equity and debt securities. Generally,
the Fund purchases common and preferred stocks for growth and income and buys
various debt securities for income and relative stability. Keystone allocates
the Fund's assets in accordance with its assessment of economic conditions and
investment opportunities. Under normal market conditions, the Fund will invest a
majority of its assets in equity securities. The Fund will always maintain at
least 25% of its total assets in fixed income securities.
The Fund may invest up to 35% of its assets in foreign securities.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below, which may not be changed without the approval 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) concentrate its investments 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; and (b) enter into 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 of
shares;
(5) engage in the business of underwriting securities issued by other
persons, except insofar as the Fund may be deemed to be an underwriter in
connection with the disposition of its portfolio investments;
(6) 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; and
(7) make loans, except that the Fund may (a) 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.
It is the position of the staff of the Securities and Exchange
Commission (the "Commission") that investment (including holdings of debt
securities) of 25% or more of the value of the Fund's assets in any one industry
represents concentration; it being understood that securities issued by the U.S.
government or state governments or political subdivisions thereof are excluded
from the calculation because these issuers are not considered by the staff of
the Commission to be members of any industry.
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);
(6) invest in real estate limited partnerships; and
(7) 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 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.
STATE UNDERTAKINGS
In addition to the restrictions above, the Fund has undertaken to
various state securities authorities that, so long as applicable state law
requires and the Fund has registered its shares in the state in question, the
Fund shall not do the following:
(1) purchase securities of issuers which the company is restricted from
selling to the public without registration under the Securities Act of 1933 if
by any reason thereof the value of its aggregate investment in such classes of
securities will exceed 10% of its total assets;
(2) purchase puts, calls, straddles spreads, and any combination
thereof if by reason thereof the value of its aggregate investment in such
classes of securities will exceed 5% of its total assets; and
(3) purchase or retain the securities of any issuer if the officers,
Directors, or Trustees of the Fund, its advisers, or managers owning
beneficially more than 1/2 of 1% of the securities of an issuer together own
beneficially more than 5% of the securities of that issuer.
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 and undertakings 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 quarterly and net realized capital gains, if any, annually in shares or,
at the option of the shareholder, in cash. Distributions are taxable whether
received in cash or additional shares. 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. If such shares are held less than six months and redeemed at a
loss, however, the shareholder will recognize a long term capital loss on such
shares to the extent of the long term capital gain distribution received in
connection with such shares. If the net asset value of the Fund's shares is
reduced below a shareholder's cost by a capital gains distribution, such
distribution, to the extent of the reduction, would be a return of investment
though taxable as stated above. Since distributions of capital gains depend upon
profits actually realized from the sale of securities by the Fund, they may or
may not occur. The foregoing comments relating to the taxation of dividends and
distributions paid on the Fund's shares relate solely to federal income
taxation. Such dividends and distributions may also be subject to state and
local taxes.
When the Fund makes a distribution, it intends to distribute only the
Fund's net capital gains and such income as has been 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.
VALUATION OF SECURITIES
Current values for the Fund's securities are generally determined as
follows:
(1) securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or NMS prior to the time
of the valuation, provided that a sale has occurred and that this price reflects
current market value according to procedures established by the Board of
Trustees;
(2) securities traded in the over-the-counter market, other than on
NMS, for which market quotations are readily available, are valued at the mean
of the bid and asked prices at the time of valuation;
(3) short-term instruments having maturing in more than sixty days, for
which market quotations are readily available, are valued at current market
value;
(4) instruments purchased with maturities of sixty days or less
(including all master demand notes) are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of discount),
which, when combined with accrued interest, approximates market;
(5) 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
(6) 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.
The Fund believes that reliable market quotations are generally not
readily available for purposes of valuing certain fixed income securities. As a
result, it is likely that most of the valuations for such securities will be
based upon their fair value determined under procedures that have been approved
by the Board of Trustees. The Board of Trustees has authorized the use of a
pricing service to determine the fair value of such fixed income securities and
certain other securities.
Foreign securities for which market quotations are not readily
available are valued on the basis of valuations provided by a pricing service,
approved by the Fund's Board of Trustees, which uses information with respect to
transactions in such securities, quotations from broker-dealers, market
transactions in comparable securities and various relationships between
securities and yield to maturity in determining value.
BROKERAGE
It is the policy of the Fund when effecting transactions in the Fund's
portfolio securities, 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 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 are considered to be in
addition to, and not in lieu of, services required to be performed by Keystone
under its Investment Advisory and Management Agreement with the Fund (the
"Advisory Agreement"). The cost, value and specific application of such
information are indeterminable and cannot be practically allocated among the
Fund and other clients of Keystone who may indirectly benefit from the
availability of such information. Similarly, the Fund may indirectly benefit
from information made available as a result of transactions effected for such
other clients. Under 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 to purchase and sell its equity securities through
brokerage transactions for which commissions are payable. Purchases and sales of
debt securities will usually be principal transactions. Such debt securities,
however, are purchased directly from the issuer or from an underwriter or market
maker for the securities. The Fund does not usually pay brokerage commissions
when buying a security in a principal transaction. Purchases from underwriters
will include the underwriting commission or concession. Purchases from dealers
serving as market makers will include a dealer's mark up or reflect a dealer's
mark down. Where transactions are made in the over-the-counter market, the Fund
will deal with primary market makers unless more favorable prices are otherwise
obtainable.
The Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities, thereby taking
advantage of the lower purchase price available to such a group.
Neither Keystone nor the Fund 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 Fund shares as a
factor when selecting broker-dealers to execute portfolio transactions, subject
to the requirements of best execution described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently 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, the Principal Underwriter, or any of their affiliated persons, as
defined in the 1940 Act and rules and regulations issued thereunder.
SALES CHARGES
GENERAL
The Fund offers Class A, B and 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 are subject to a contingent deferred sales charge
payable upon redemption during the 72 month period from and including the month
of purchase ("Back-End Load Option"). Class B shares that have been outstanding
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. (Conversion of Class B shares represented by stock certificates will
require the return of the stock certificates to Keystone Investor Resource
Center, Inc., the Fund's transfer and dividend disbursing agent ("KIRC").) Class
C shares are sold subject to a contingent deferred sales charge payable upon
redemption within one year after 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 is imposed at the time of redemption of certain Fund shares as described
below. 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 "Calcuation of Contingent Deferred Sales Charge"
below.
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) made by a corporate qualified
retirement plan or a non-qualified deferred compensation plan 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 1.00%
during the 24 month period following the date of purchase.
CLASS B SHARES
With respect to Class B shares, the Fund, with certain exceptions, will
impose a deferred sales charge as a percentage of the lesser of net asset value
or net cost of such Class B shares redeemed during succeeding twelve-month
periods as follows: 5% during the first period; 4% during the second period; 3%
during the third period; 3% during the fourth period; 2% during the fifth
period, and 1% during the sixth period. No deferred sales charge is imposed on
amounts redeemed thereafter.
Amounts received by the Principal Underwriter under the Class
B Distribution Plan are reduced by deferred sales charges retained
by the Principal Underwriter. See "Calculation of Contingent
Deferred Sales Charge" below.
CLASS C SHARES
With certain exceptions, the Fund will impose a deferred sales charge
of 1% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter.
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 24
months; (4) Class B shares held for more than 72 months; or (5) Class C shares
held for more than one year.
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, for the
purposes of any future contingent deferred sales charge, the calendar year of
purchase of the shares being exchanged is deemed to be the year the shares being
acquired by 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 Management, Inc. ("Keystone Management"), Keystone, Keystone
Investments, Inc. ("Keystone Investments"), their subsidiaries and affiliates or
the Principal Underwriter 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 1.5% 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 - OBLIGATION TO REDEEM FOR CASH
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 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 Distribution 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 that is currently limited to 0.25% of
the Fund's average daily net asset value attributable to Class A shares to
finance any activity that is primarily intended to result in the sale of Class A
shares, including, without limitation, expenditures consisting of payments to
the principal underwriter of the Fund (currently the Principal Underwriter) to
enable the Principal Underwriter to pay or to have paid to others who sell Class
A shares a service or other fee, at such intervals as the Principal Underwriter
may determine, in respect of Class A shares maintained by any such recipients
and outstanding on the books of the Fund for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.25% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLAN The Fund has adopted a Distribution Plan for its Class
B shares. The Class B Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the Fund's average daily net asset
value attributable to Class B shares to finance any activity 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 (broker-dealers) commissions in respect of Class B 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 B shares maintained
by any such recipients and outstanding on the books of the Fund for specified
periods.
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 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 the 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 one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits.
If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by the Class B Distribution Plan. If the 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 broker-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 1.00% of the Fund's average
daily net asset value attributable to Class C shares to finance any activity
that is primarily intended to result in the sale of Class C shares, including,
without limitation, expenditures consisting of payments to the principal
underwriter of the Fund (currently the Principal Underwriter) (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class C shares sold since inception of the Distribution Plan; 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 broker-dealers or
others a commission in the amount of 0.75% of the price paid for each Class C
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class C share sold. Beginning approximately fifteen
months after purchase, 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 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 Rule 12b-1 Trustees (i.e., 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 Rule 12b-1 Trustees.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the Rule
12b-1 Trustees quarterly. The Rule 12b-1 Trustees may require or approve changes
in the implementation or operation of a Distribution Plan and may also require
that total expenditures by the Fund under a Distribution Plan be kept within
limits lower than the maximum amount permitted by a Distribution Plan as stated
above.
The Fund's Independent Trustees have determined that the sales of the
Fund's shares resulting from payments under the Distribution Plans are expected
to benefit the Fund.
TRUSTEES AND OFFICERS
Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone, Keystone Investments, 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") and Keystone Fixed Income Advisors, Inc. ("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 of Robert Van Partners, Inc.; and former Trustee of
Neworld Bank.
FREDERICKAMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Professor, Finance Depart ment, George Washington
University; President, Amling & Company (investment advice); Member,
Board of Advisers, Cre dito Emilano (banking); and former Economics and
Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Investment Counselor to Appleton Partners,
Inc.; former Managing Director, Seaward Management Corporation
(investment advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment
advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of
all other Keystone Investments Funds; former Director and Chairman of
the Board of Hartwell Keystone; Chairman of the Board and Trustee of
Anatolia College; Trustee of University Hospital (and Chairman of its
Investment Committee); former Chairman of the Board and Chief Executive
Officer of Keystone Investments; and former Chief Executive Officer of
the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Director, Coalition of Essential
Schools, Brown University; Director and former Executive Vice
President, National Alliance of Business; former Vice President,
Educational Testing Services; and former Dean, School of Business,
Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
Keystone Investments 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
Keystone Investments 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
Keystone Investments 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
Keystone Investments Funds; Of Counsel, Keyser, Crowley & Meub, P.C.;
Member, Governor's (VT) Council of Eco nomic Advisers; Chairman of the
Board and Director, Central Vermont Public Service Corporation and
Hitchcock Clinic; Di rector, 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 Presi dent, Vermont Marble Company; former Director of
Keystone; and former Director and Chairman of the Board, Green Mountain
Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Vice President, DHR
International, Inc. (executive recruitment); former Senior Vice
President, Boyden International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New Jersey, 411
International, Inc. and J & M Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
Keystone Investments 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
Keystone Investments Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; former Presi dent, Nassau County Bar
Association; and former Associate Dean and Professor of Law, St. John's
University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments 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
and Keystone Software; Vice President and Treasurer of KFIA; Director
of KIRC; and former Treasurer and Director of Hartwell Keystone; former
Treasurer of Robert Van Partners, Inc.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; and President of Keystone.
J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other Keystone
Investments Funds; Vice President and former Controller of Keystone
Investments, Keystone, the Principal Underwriter, FICO and Keystone
Software; and former Controller of Keystone Asset Corporation and
Keystone Capital Corporation.
DONALD C. DATES: Vice President of the Fund; Vice President of certain other
Keystone Investments Funds; and Senior Vice President of Keystone.
WALTER T. MCCORMICK: Vice President of the Fund; Vice President of certain
other Keystone Investments Funds; and Senior Vice President of
Keystone.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Investments 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 both 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.
For the calendar year ended December 31, 1995, aggregate compensation
received by the Independent Trustees on a fund complex wide basis (which
includes more than 30 funds) was $450,716. As of July 31, 1996, the Fund's
Trustees and officers beneficially owned less than 1% of the Fund's then
outstanding Class A, Class B or Class C shares.
The address of all the Fund's Trustees and officers and the address of
the Fund is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
INVESTMENT ADVISER
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 and certain employees 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 the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone (1) 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 (2) pays (or causes to be paid) the
compensation of all officers and Trustees of the Fund who are affiliated with
the investment adviser and pays all expenses of Keystone incurred in connection
with the provision of its services.
All charges and expenses, other than those specifically referred to as
being borne by Keystone, will be paid by the Fund, including, but not limited
to, custodian charges and expenses; bookkeeping and auditors' charges and
expenses; transfer agent charges and expenses; fees of Independent Trustees;
brokerage commissions, brokers' fees and expenses; issue and transfer taxes;
costs and expenses under the Distribution Plans; taxes and trust fees payable to
governmental agencies; the cost of share certificates; fees and expenses of the
registration and qualification of the Fund and its shares with the Commission or
under state or other securities laws; expenses of preparing, printing and
mailing prospectuses, statements of additional information, notices, reports and
proxy materials to shareholders of the Fund; expenses of shareholders' and
Trustees' meetings; charges and expenses of legal counsel for the Fund and for
the Independent Trustees of the Fund on matters relating to the Fund; charges
and expenses of filing annual and other reports with the Commission and other
authorities, and all extraordinary charges and expenses of the Fund.
The Fund pays Keystone a fee for its services at the annual rate set forth
below:
ANNUAL AGGREGATE NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE INCOME OF THE FUND
1.5% of
Gross Dividend and
Interest Income
Plus
0.60% of the first $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 100,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 500,000,000, plus
0.30% of amounts over $1,000,000,000.
computed as of the close of business each business day and payable
daily.
Keystone has currently voluntarily limited the expenses of the Fund's Class
A, B, and C shares to 1.50%, 2.25%, and 2.25% of each class's average daily net
assets respectively. Keystone intends to continue the foregoing expense
limitations on a calendar month-by- month basis. Keystone will periodically
evaluate these limitations and may modify or terminate them in the future.
Keystone will not be required to reimburse the Fund to the extent such
reimbursement would result in the Fund's inability to qualify as a regulated
investment company under the Internal Revenue Code.
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 June 19, 1998 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 Fund's 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 cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement may be terminated,
without penalty, on 60 days' written notice by the Fund or Keystone or may be
terminated by a vote of the Fund's shareholders. The Advisory Agreement will
terminate automatically upon its assignment.
STATE EXPENSE LIMITATIONS
The Fund may be also subject to certain annual state expense limitations,
the most restrictive of which is anticipated to be 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.
PRINCIPAL UNDERWRITER
The Fund has entered into Principal Underwriting Agreements (the
"Underwriting Agreements") with Keystone Investment Distributors Company, a
Delaware corporation and a wholly-owned subsidiary of Keystone.
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 Agreements, the Fund is not liable to
anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all expenses
in connection with 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 with all state and federal laws applicable to the sale of the shares and
will indemnify and hold harmless the Fund, and each person who has been, is or
may be a Trustee or officer of the Fund, against expenses reasonably incurred by
any of them in connection with any claim, 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 for the Fund's Class A and Class C shares will
remain in effect until June 19, 1998. The Underwriting Agreement for the Fund's
Class B shares will remain in effect until June 19, 1997. After such dates, the
Underwriting Agreements will remain in effect only so long as its terms and
continuance are approved by a majority of the Fund's Independent Trustees at
least annually at a meeting called for that purpose and if its continuance is
approved annually by vote of a majority of Trustees or by vote of a majority of
the Fund's outstanding shares.
The Underwriting Agreements 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 the Fund's outstanding shares. The Underwriting Agreements will terminate
automatically upon their "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 June 19, 1996 (the "Declaration of Trust"). The Fund
is similar in most respects to a business corporation. The principal distinction
between the Fund and a corporation relates to the shareholder liability
described below. A copy of the Declaration of Trust 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. The Fund currently
issues Class A, B and C shares, but may issue additional classes or series of
shares.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Fund were held to be a partnership, the possibility of the
shareholders' incurring financial loss for that reason appears remote because
the Fund's Declaration of Trust (1) contains an express disclaimer of
shareholder liability for obligations of the Fund 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) provides for
indemnification out of the Fund's property for any shareholder held personally
liable for the obligations of the Fund.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matters, shares are entitled to one vote per share. 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 that adversely affects any class of shares
without the approval of a majority of the shares of that class. Shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Trustees can elect 100% of the Trustees to
be elected at a meeting and, in such event, the holders of the remaining 50% or
less of the shares voting will not be able to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, 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 Fund's 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.
The Trustees have absolute and exclusive control over the management
and disposition of assets of the Fund and may perform such acts as in their sole
judgment and discretion are necessary and proper for conducting the business and
affairs of the Fund or promoting the interests of the Fund and the shareholders.
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.
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 (the "Custodian") of all securities and
cash of the Fund. The Custodian performs no investment management functions for
the Fund, but, in addition to its custodial services, is responsible for
accounting and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts
02110, Certified Public Accountants, serves as the independent
auditors for the Fund.
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 July 31, 1996, Keystone owned 100% of the Fund's outstanding
Class A, B, and 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 16 different investment companies in the Keystone
America Fund Family, which offers a range of choices to serve shareholder needs.
In addition to the Fund, the Keystone America Fund Family consists of the
following Funds having the various investment objectives described below:
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying common stocks, preferred stocks,
convertible bonds, other fixed-income securities and foreign securities.
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 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 through
investments primarily in equity securities of companies with small market
capitalizations.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of four separate series
of shares investing in different portfolio securities each of 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 each of
which seeks the highest possible current income, exempt from federal income
taxes and applicable state taxes.
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long-term capital growth by
investing primarily in equity securities.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds.
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
<PAGE>
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)
limited partnerships, (iv) money market instruments, and (v) 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,
Standard & Poor's Corporation ("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 Investors Services, Inc. ("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 Payment in Kind bonds ("PIKs") involve
additional special considerations. A zero coupon bond respresents ownership in
serially maturing interst payments or principal payments on specific underlying
notes and bonds, including copuons relating to such notes and bonds. The
interest and principal payments are direct obligations of the issuer. A zero
coupon bond entitles the holder to receive a single payment at maturity. There
are no periodic interest payments on a zero coupon bond. 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. PIK bonds
trade flate (i.e., without accrued interest). Their price is expected to reflect
an amount representing accreted interest since the last payment.
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.
LIMITED PARTNERSHIPS
The Fund may invest in limited and master limited partnerships. A
limited partnership is a partnership consisting of one or more general partners,
jointly and severally responsible as ordinary partners, and by whom the business
is conducted, and one or more limited partners who contribute cash as capital to
the partnership and who generally are not liable for the debts of the
partnership beyond the amounts contributed. Limited partners are not involved in
the day-to-day management of the partnership. They receive income, capital gains
and other tax benefits associated with the partnership project in accordance
with terms established in the partnership agreement. Typical limited
partnerships are in real estate, oil and gas and equipment leasing, but they
also finance movies, research and development and other projects.
For an organization classified as a partnership under the Internal
Revenue Code, each item of income, gain, loss, deduction and credit is not taxed
at the partnership level but flows through to the holder of the partnership
unit. This allows the partnership to avoid taxation and to pass through income
to the holder of the partnership unit at lower individual rates.
A master limited partnership is a publicly traded limited partnership.
The partnership units are registered with the Commission and are freely
exchanged on a securities exchange or in the over-the-counter market.
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 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:
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-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.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument n its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
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 ered 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
<PAGE>
A-23
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 that 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.
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 that 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.
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
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 that 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. evertheless, a secondary market for swaps
is never assured, and caps and floors, which are more recent innovations for
which standardized documentation has not yet been fully developed, are much less
liquid than swaps.
Credit risk is primarily the risk that counterparties may be
financially unable to fulfill their contracts on a timely basis, if at all. If
there is a default by the counterparty to any such contract, the Fund will be
limited to contractual remedies pursuant to the agreements related to the
transaction. There is no assurance that contract counterparties will be able to
meet contract obligations or that, in the event of default, the Fund will
succeed in pursuing contractual remedies. The Fund thus assumes the risk that it
may be delayed in or prevented from obtaining payments owed to it pursuant to
such contracts. The Fund will closely monitor the credit of swap counterparties
in order to minimize this risk. The Fund will not enter into any equity swap
contract or reverse equity swap contract unless, at the time of entering into
such transaction, the unsecured senior debt of the counterparty is rated at
least A by Moody's or S&P.
<PAGE>
KEYSTONE BALANCED FUND II
STATEMENT OF NET ASSETS
JUNE 30, 1996
ASSETS:
Cash (Note 1) $100,000
Prepaid registration 60,000
Organizational expenses (Note 2) 25,200
--------
Total assets 185,200
LIABILITIES:
Accrued expenses 85,200
--------
NET ASSETS $100,000
========
Net assets represented by: (Note 3)
Class A Shares: Net assets equivalent to $10.00
per share for 4,000 shares $ 40,000
Class B Shares: Net assets equivalent to $10.00
per share for 3,000 shares 30,000
Class C Shares: Net assets equivalent to $10.00
per share for 3,000 shares 30,000
--------
Total net assets $100,000
========
Net asset value and redemption price per share:
Class A $10.00
======
Class B $10.00
======
Class C $10.00
======
Offering price per share:
Class A (Including 5.75% sales charge) $10.61
======
Class B $10.00
======
Class C $10.00
======
See Notes to Statement of Net Assets
F-1
<PAGE>
KEYSTONE BALANCED FUND II
NOTES TO STATEMENT OF NET ASSETS
JUNE 30, 1996
1. Keystone Balanced Fund II (the "Fund") was organized on June 19,
1996, and had no operations prior to June 30, 1996 other than organizational
matters and activities in connection with the purchase of 10,000 shares of the
Fund by Keystone Investment Management Company ("Keystone"). The Fund is a
mutual fund that seeks income and capital appreciation by investing in a
balanced portfolio.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
("Keystone Investments"), a private corporation predominantly owned by current
and former members of management and certain employees of Keystone Investments
and its affiliates.
The Fund currently offers three classes of shares. Class A shares are
subject to 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 that varies depending on when shares were purchased and how
long they have been held. Class C shares are sold subject to a contingent
deferred sales charge payable upon redemption within the year of purchase. 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.
2. In the event any of the initial shares are redeemed by any holder
thereof during the five year amortization period, redemption proceeds will be
reduced by any unamortized organizational expenses in the same proportion as the
number of initial shares of the Fund being redeemed bears to the number of
initial shares of the Fund outstanding at the time of the redemption.
3. The Fund is authorized to issue an unlimited number of shares of
beneficial interest, without par value.
4. Pursuant to its Investment Management and Advisory Agreement with
the Fund, 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 management fee is calculated at a rate of 1.50% of the Fund's gross
investment income plus an amount determined by applying percentage rates, that
start at 0.60% and decline as net assets increase to 0.30% per annum, to the net
asset value of the Fund.
5. 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 Investment Company Act of 1940.
The Class A Distribution Plan provides for payments which are
currently limited to 0.25% annually of the average daily net asset value of
Class A shares to pay expenses of the distribution of Class A shares.
The Class B and Class C Distribution Plans provide for payments at an
annual rate of up to 1.00% of the average daily net asset value of Class B or
Class C shares, of which 0.75% may be used to pay distribution expenses and
0.25% may be used to pay shareholder service fees.
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholder
Keystone Balanced Fund II
We have audited the accompanying statement of net assets of Keystone Balanced
Fund II as of June 30, 1996. This financial statement is the responsibility of
the Fund's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of net assets is free of material
misstatement. An audit of a statement of net assets includes examining, on a
test basis, evidence supporting the amounts and disclosures in that statement of
net assets. An audit of a statement of net assets also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall statement of net assets presentation. We believe that
our audit of the statement of net assets provides a reasonable basis for our
opinion.
In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of Keystone Balanced Fund II
at June 30, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
July 1, 1996
F-3
<PAGE>
KEYSTONE BALANCED FUND II
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
The following financial statements are filed as part of the Statement of
Additional Information.
Item 24(a). Financial Statements:
Financial Highlights Not Applicable
Statement of Investments Not Applicable
Statement of Net Assets June 30, 1996
Statement of Operations Not Applicable
Statement of Change in Net Assets Not Applicable
Notes to Statement of Net Assets June 30, 1996
Independent Auditors' Report July 1, 1996
SUPPORTING SCHEDULES
All schedules are omitted as the required information is inapplicable.
Item (24)(b) Exhibits
(1) A copy of the Registrant's Declaration of Trust was filed with
Registration Statement No. 333-6937/811-7679 as Exhibit 24(b)(1) and is
incorporated by reference herein.
(2) A copy of the Registrant's By-Laws was filed with Registration Statement
No. 333-6937/811-7679 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. 333-6937/811-7679 as
Exhibit 24(b)(1) and are incorporated by reference herein.
(B) Registrant's By-Laws, Article 2, Section 2.5, was filed with
Registration Statement No. 333-6937/811-7679 as Exhibit 24(b)(2) and
is incorporated by reference herein.
(5) A copy of the Investment Advisory and Management Agreement between
Registrant and Keystone Investment Management Company is filed herewith
as Exhibit 24(b)(5).
(6) (A) Copies of the Principal Underwriting Agreements between
Registrant and Keystone Investment Distributors Company are filed
herewith as Exhibit 24(b)(6)(A).
(B) Copies of the forms of Dealer Agreements for Class A, B and C shares
were filed with Registration Statement No. 333-6937/811-7679 as
Exhibit 24(b)(6)(B) and are incorporated by reference herein.
(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 is
filed herewith as Exhibit 24(b)(8).
(9) Not applicable.
(10) Opinion and consent of counsel as to the legality of the shares being
registered was filed with Registration Statement No. 333-6937/811-7679 as
Exhibit 24(b)(10)is incorporated by reference herein.
(11) Consent as to use of Report 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 Management Company was filed with Registration Statement
No. 333-6937/811-7679 as Exhibit 24(b)(13) and is incorporated by reference
herein.
(14) Not applicable.
(15) Copies of the Registrant's Distribution Plans for its Class A,
Class B and Class C shares are filed herewith as Exhibit 24(b)(15).
(16) Not applicable.
(17) Not applicable.
(18) A copy of the Registrant's Multiple Class Plan adopted pursuant to Rule
18f-3 is filed herewith as Exhibit 24(b)(18).
(19) Powers of Attorney are filed herewith as Exhibit 24(b)(19).
Item 25. Persons Controlled by or Under Common Control With Registrant
Not applicable.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of July 31, 1996*
-------------- -----------------------
Shares of Beneficial Class A 1
Interest, without Class B 1
par value Class C 1
*As of July 31, 1996, Keystone Investment Management Company owned all
of the Registrant's outstanding shares.
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 which was filed with Registration Statement No. 333-6937/811-7679 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, copies of which are filed herewith as Exhibit
24(b)(6) (A) and are incorporated by reference herein.
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 which is filed herewith 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.
<PAGE>
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 Keystone Investments, 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
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:
Keystone Investments, Inc.
Keystone Investment
Management Company
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.
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
Sami J. Karam Vice President None
George J. Kimball Vice President None
JoAnn L. Lyndon Vice President None
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
Kathy K. Wang Vice President None
Judith A. Warners Vice President None
Joseph J. Asst. Vice None
Decristofaro President
<PAGE>
Item 29. Principal Underwriter
(a) Keystone Investment Distributors Company, 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 Bond Fund (B-1)
Keystone Diversified Bond Fund (B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Emerging Markets Fund
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 for Total Return
Keystone Global Opportunities Fund
Keystone Government Securities Fund
Keystone Intermediate Term Bond Fund
Keystone Omega Fund
Keystone State Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Strategic Income Fund
Keystone Tax Free Income Fund
Keystone World Bond Fund
Keystone Fund of the Americas
Keystone International Fund Inc.
Keystone Liquid Trust
Keystone Precious Metals Holdings, Inc.
Keystone Strategic Development Fund
Keystone Tax Free Fund
Keystone Small Company Growth Fund II
(b) For information with respect to each director and officer of
Registrant's acting principal underwriter see the following pages.
<PAGE>
Name and Position and Offices with Position 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
Gregg A. Mahalich Divisional Vice None
14952 Richards Drive W. President
Minnetonka, MN 55345
C. Kenneth Molander Divisional Vice None
8 King Edward Drive President
Londenderry, NH 03053
William L. Carey, Jr. Regional Manager and None
4 Treble Lane Vice President
Malvern, PA 19355
John W. Crites Regional Manager and None
2769 Oakland Circle W. Vice President
Aurora, CO 80014
Richard J. Fish Regional Manager and None
309 West 90th Street Vice President
New York, NY 10024
Michael E. Gathings Regional Manager and None
245 Wicklawn Way Vice President
Roswell, GA 30076
Paul D. Graffy Regional Manager and None
15509 Janas Drive Vice President
Lockport, IL 60441
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
Robert P. Matson Regional Manager and None
4557 N. O'Connor Blvd. Vice President
No. 1286
Irving, TX 75062
Paul J. McIntyre Regional Manager and None
118 Main Centre, #203 Vice President
Northville, MI 48167
Thomas O. Meloy Regional Manager and None
2808 McKinney Ave. Vice President
No. 141
Dallas, TX 75204
Alan V. Niemi Regional Manager and None
3511 Grant Street and Vice President
Lee's Summit, MO 64064
Ronald L. Noble Regional Manager and None
428 N. Adventure Trail and Vice President
Virginia Beach, VA 23454
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
L. Welden Evans Regional Banking Officer None
490 Huntcliff Green and Vice President
Atlanta, GA 30350
Raymond P. Ajemian* Manager and Vice President None
Jonathan I. Cohen* Vice President None
Michael S. Festa* Vice President None
Russell A. Haskell* Vice President None
Robert J. Matson* Vice President None
John M. McAllister* Vice President None
Mark Minnucci* Vice President None
Ashley M.Norwood* Assistant Vice President None
Burton Robbins Vice President None
1586 Folkstone Terrace
Westlake Village, CA
91361
Julie A. Robinson* Vice President None
Thomas E. Ryan, III* Vice President None
Joan M. Balchunas* Assistant Vice President None
Thomas J. Gainey* Assistant Vice President None
Lyman Jackson* Assistant Vice President None
Eric S. Jeppson* 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
<PAGE>
Item 30. Location of Accounts and Records
200 Berkeley Street
Boston, Massachusetts 02116-5034
Keystone Investor Resource Center, Inc.
101 Main Street
Cambridge, Massachusetts 02142
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, Massachusetts 02171
Iron Mountain
3431 Sharp Slot Road
Swansea, Massachusetts 02777
Item 31. Management Services
Not applicable.
Item 32. Undertakings
UNDERTAKING RE INDEMNIFICATION UNDER 1933 ACT
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer, or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or thereafter duly adopted pursuant to
authority conferred in that section.
UNDERTAKING TO FILE POST-EFFECTIVE AMENDMENT
The undersigned, Registrant, hereby undertakes to file with the
Securities and Exchange Commission a Post-Effective Amendment to this
Registration Statement using financial statements, which need not be audited,
within four to six months from the effective date of Registrant's Registration
Statement.
UNDERTAKING TO COMPLY WITH SECTION 16(c) OF THE INVESTMENT COMPANY ACT OF 1940
APPLICABLE TO SHAREHOLDER COMMUNICATIONS
So long as Registrant is not required by its Declaration of Trust or
otherwise to hold annual meetings, Registrant hereby undertakes to comply with
the provisions of Section 16(c) of the Investment Company Act of 1940 applicable
to shareholder communications.
UNDERTAKING FOR DELIVERY OF ANNUAL REPORTS
Upon request and without charge, the 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Pre-Effective 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 9th day of August, 1996.
KEYSTONE BALANCED FUND II
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 Pre-Effective
Amendment to Registrant's Registration Statement has been signed below by the
following persons in the capacities indicated on the 9th day of August, 1996.
SIGNATURES TITLE
- ---------- -----
/s/ George S. Bissell Chairman of the Board and Trustee
- --------------------------
George S. Bissell*
/s/ Albert H. Elfner,III Chief Executive Officer, President
- -------------------------- and Trustee
Albert H. Elfner, III*
/s/ J. Kevin Kenely Treasurer (Principal Financial and
- -------------------------- Accounting Officer)
J. Kevin Kenely*
/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/ James M. Wall
--------------------------
James M. Wall**
Attorney-in-Fact
** James M. Wall, by signing his 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).
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
- -------------- -------
1 Declaration of Trust (1)
2 By-Laws (1)
5 Investment Advisory
and Management Agreement
6 (A) Principal Underwriting
Agreements
(B) Forms of Dealer Agreements (1)
8 Form of Custodian, Fund Accounting
and Recordkeeping Agreement
10 Opinion and Consent of Counsel (1)
11 Consent of Independent Auditors
13 Subscription Agreement (1)
15 Distribution Plans
for Class A, Class B and
Class C shares
18 Multiple Class Plan
19 Powers of Attorney
(1) Incorporated by reference herein to Registration Statement
No. 333-6937/811-7679
<PAGE>
Exhibit 99.24(B)(5)
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
Agreement made as of the 19th day of June, 1996, by and between
KEYSTONE BALANCED FUND II, a Massachusetts business trust (the "Fund"), and
KEYSTONE INVESTMENT MANAGEMENT COMPANY, a Delaware corporation (the "Adviser").
WHEREAS, the Fund and the Adviser wish to enter into an Agreement
setting forth the terms on which the Adviser will perform certain services for
the Fund.
NOW THEREFORE, in consideration of the promises and the mutual
agreements hereinafter contained, the Fund and the Adviser agree as follows:
1. The Fund hereby employs the Adviser (a) to manage and administer the
operation of the Fund; (b) to supervise the provision of services to the Fund by
others; and (c) to manage the investment and reinvestment of the assets of the
Fund in conformity with its investment objectives and restrictions as may be set
forth from time to time in the Fund's then current prospectus and statement of
additional information, if any, and other governing documents; all subject to
the supervision of the Board of Trustees of the Fund for the period and on the
terms set forth in this Agreement. The Adviser hereby accepts such employment
and agrees during such period, at its own expense, to render the services and to
assume the obligations set forth herein for the compensation provided herein.
The Adviser shall, for all purposes herein, be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
2. The Adviser shall place all orders for the purchase and sale of
portfolio securities for the account of the Fund with broker-dealers selected by
the Adviser. In executing portfolio transactions and selecting broker-dealers,
the Adviser will use its best efforts to seek best execution on behalf of the
Fund. In assessing the best execution available for any transaction, the Adviser
shall consider all factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker-dealer, and the reasonableness of the
commission, if any (all for the specific transaction and on a continuing basis).
In evaluating the best execution available, and in selecting the
broker-dealer to execute a particular transaction, the Adviser may also consider
the brokerage and research services (as those terms are used in Section 28(e) of
the Securities Exchange Act of 1934 (the "1934 Act")) provided to the Fund
and/or other accounts over which the Adviser or an affiliate of the Adviser
exercises investment discretion. The Adviser is authorized to pay a
broker-dealer who provides such brokerage and research services a commission for
executing a portfolio transaction for the Fund that is in excess of the amount
of commission another broker-dealer would have charged for effecting that
transaction if, and only if, the Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer viewed in terms of that particular
transaction or in terms of all of the accounts over which investment discretion
is so exercised.
3. The Adviser, at its own expense, shall (a) furnish to the Fund
office space in the offices of the Adviser or in such other place as may be
agreed upon by the parties from time to time; (b) furnish all necessary office
facilities, equipment and personnel in connection with its services hereunder;
and (c) arrange, if desired by the Fund, for members of the Adviser's
organization to serve without salaries from the Fund as officers or, as may be
agreed from time to time, as agents of the Fund.
The Adviser assumes and shall pay or reimburse the Fund for (a) the
compensation (if any) of the Trustees of the Fund who are affiliated with the
Adviser or with its affiliates, or with any adviser retained by the Adviser, (b)
of all officers of the Fund as such, and (c) all expenses of the Adviser
incurred in connection with its services hereunder.
The Fund assumes and shall pay all of its other expenses, including,
without limitation (a) all charges and expenses of any custodian or depository
appointed by the Fund for the safekeeping of its cash, securities and other
property; (b) all charges and expenses for bookkeeping and auditors; (c) all
charges and expenses of any transfer agents and registrars appointed by the
Fund; (d) all fees of all Trustees of the Fund who are not affiliated with the
Adviser or any of its affiliates, or with any adviser retained by the Adviser;
(e) all brokers' fees, expenses and commissions and issue and transfer taxes
chargeable to the Fund in connection with transactions involving securities and
other property to which the Fund is a party; (f) all costs and expenses of
distribution of its shares incurred pursuant to a Plan or Plans of Distribution
adopted under Rule 12b-1 under the Investment Company Act of 1940, as amended,
("1940 Act"); (g) all taxes and business trust fees payable by the Fund to
federal, state or other governmental agencies; (h) all costs of certificates
representing shares of the Fund; (i) all fees and expenses involved in
registering and maintaining registrations of the Fund and of its shares with the
Securities and Exchange Commission (the "Commission") and registering or
qualifying its shares under state or other securities laws, including, without
limitation, the preparation and printing of registration statements,
prospectuses and statements of additional information for filing with the
Commission and other authorities; (j) expenses of preparing, printing and
mailing prospectuses and statements of additional information to shareholders of
the Fund; (k) all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing notices, reports and proxy materials to
shareholders of the Fund; (l) all charges and expenses of legal counsel for the
Fund and for Trustees of the Fund in connection with legal matters relating to
the Fund, including, without limitation, legal services rendered in connection
with the Fund's existence, business trust and financial structure and relations
with its shareholders, registrations and qualifications of securities under
federal, state and other laws, issues of securities, expenses which the Fund has
herein assumed, whether customary or not, and extraordinary matters, including,
without limitation, any litigation involving the Fund, its Trustees, officers,
employees or agents; (m) all charges and expenses of filing annual and other
reports with the Commission and other authorities; and (n) all extraordinary
expenses and charges of the Fund. In the event that the Adviser provides any of
these services or pays any of these expenses, the Fund will promptly reimburse
the Adviser therefor.
The services of the Adviser to the Fund hereunder are not to be deemed
exclusive, and the Adviser shall be free to render similar services to others.
4. As compensation for the Adviser's services to the Fund during the
period of this Agreement, the Fund will pay to the Adviser a fee at the annual
rate as set forth below:
Annual Aggregate Net Asset Value
Management of the Shares
Fee Income of the Fund
1.5% of
Gross Dividend and
Interest Income
Plus
0.60% of the first $ 100,000,000, plus
0.55% of the next $ 100,000,000, plus
0.50% of the next $ 100,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 500,000,000, plus
0.30% of amounts over $1,000,000,000.
A pro rata portion of the fee shall be payable in arrears at the end of
each day or calendar month as the Adviser may from time to time specify to the
Fund. If and when this Agreement terminates, any compensation payable hereunder
for the period ending with the date of such termination shall be payable upon
such termination. Amounts payable hereunder shall be promptly paid when due.
5. The Adviser may enter into an agreement to retain, at its own
expense, any other firm or firms ("Sub-Adviser") to provide the Fund all of the
services to be provided by the Adviser hereunder, if such agreement is approved
as required by law. Such agreement may delegate to such Sub-Adviser all of the
Adviser's rights, obligations and duties hereunder.
6. The Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the performance
of this Agreement, except a loss resulting from the Adviser's willful
misfeasance, bad faith, gross negligence or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though also an
officer, Director, partner, employee or agent of the Adviser who may be or
become an officer, Trustee, employee or agent of the Fund, shall be deemed, when
rendering services to the Fund or acting on any business of the Fund (other than
services or business in connection with the Adviser's duties hereunder), to be
rendering such services to or acting solely for the Fund and not as an officer,
Director, partner, employee or agent or one under the control or direction of
the Adviser even though paid by it.
The Fund agrees to indemnify and hold the Adviser harmless from all
taxes, charges, expenses, assessments, claims and liabilities (including,
without limitation, liabilities arising under the Securities Act of 1933, the
1934 Act, the 1940 Act, and any state and foreign securities and blue sky laws
(all as amended from time to time) and expenses, including (without limitation)
attorneys' fees and disbursements, arising directly or indirectly from any
action or thing that the Adviser takes or does or omits to take or do hereunder;
provided that the Adviser shall not be indemnified against any liability to the
Fund or to its shareholders (or any expenses incident to such liability) arising
out of a breach of fiduciary duty with respect to the receipt of compensation
for services, willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its duties, or from reckless disregard by it
of its obligations and duties under this Agreement.
7. The Fund shall cause its books and accounts to be audited at least
once each year by a reputable independent public accountant or organization of
public accountants who shall render a report to the Fund.
8. Subject to and in accordance with the Fund's Declaration of Trust
Fund, the Adviser's Certificate of Incorporation and the governing documents of
any Sub-Adviser, it is understood that Trustees, Directors, officers, agents and
shareholders of the Fund or any Sub-Adviser are or may be interested in the
Adviser (or any successor thereof) as Directors and officers of the Adviser or
its affiliates, that Directors, officers and agents of the Adviser and its
affiliates are or may be interested in the Fund or any Sub-Adviser as Trustees,
Directors, officers, shareholders or otherwise; that the Adviser (or any such
successor) is or may be interested in the Fund or any such Sub-Adviser as
shareholder, or otherwise; and that the effect of any such adverse interests
shall be governed by said Fund's Declaration of Trust, the Adviser's Certificate
of Incorporation and governing documents of any such Sub-Adviser.
9. This Agreement shall continue in effect two (2) years from the date
of its execution only so long as (1) such continuance is specifically approved
at least annually by the Fund's Board of Trustees or by a vote of a majority of
the Fund's outstanding voting securities, and (2) such renewal has been approved
by the vote of a majority of the Fund's Trustees who are not interested persons,
as that term is defined in the 1940 Act, of the Adviser or of the Fund, cast in
person at a meeting called for the purpose of voting on such approval.
10. On sixty (60) days' written notice to the Adviser, this Agreement
may be terminated at any time without the payment of any penalty by the Fund's
Board of Trustees or by vote of the holders of a majority of the Fund's
outstanding voting securities; and on sixty (60) days' written notice to Fund,
this Agreement may be terminated at any time without the payment of any penalty
by the Adviser. This Agreement shall automatically terminate upon its assignment
(as that term is defined in the 1940 Act). Any notice under this Agreement shall
be given in writing, addressed and delivered, or mailed postage prepaid, to the
other party at the main office of such party.
11. This Agreement may be amended at any time by an instrument in
writing executed by both parties hereto or their respective successors, provided
that, with regard to amendments of substance, such execution by the Fund shall
have been first approved by the vote of the holders of a majority of the Fund's
outstanding voting securities and by the vote of a majority of Fund's Trustees
who are not interested persons (as that term is defined in the 1940 Act) of the
Adviser, any predecessor of the Adviser, or of the Fund, cast in person at a
meeting called for the purpose of voting on such approval.
A "majority of the outstanding voting securities of the Fund" shall
have, for all purposes of this Agreement, the meaning provided therefor in the
1940 Act.
12. Any compensation payable to the Adviser hereunder for any period
other than a full year shall be proportionately adjusted.
13. The provisions of the Agreement shall be governed, construed and
enforced in accordance with the laws of The Commonwealth of Massachusetts.
14. A copy of the Fund's Declaration of Trust is on file with the
Secretary of The Commonwealth of Massachusetts. This instrument is executed on
behalf of the Trustees of the Fund as trustees and not individually, and the
obligations of this instrument are not binding upon the Trustees or holders of
shares of the Fund individually but are binding only upon the assets and
property of the Fund.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
KEYSTONE BALANCED FUND II
By: /s/ Albert H. Elfner, III
-------------------------------
Albert H. Elfner, III
President
KEYSTONE INVESTMENT MANAGEMENT
COMPANY
By: /s/ James R. McCall
-------------------------------
James R. McCall
President
<PAGE>
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS A AND C SHARES
KEYSTONE BALANCED FUND II
AGREEMENT made as of this 19th day of June, 1996, by and between
Keystone Balanced Fund II, a Massachusetts business trust (the "Fund"), and
Keystone Investment Distributors Company, a Delaware corporation (the "Principal
Underwriter").
It is hereby mutually agreed as follows:
1. The Fund hereby appoints the Principal Underwriter as a principal
underwriter of the Class A and Class C shares of beneficial interest of the Fund
(the "Shares"). Principal Underwriter shall act 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. Principal Underwriter will use its best efforts to find purchasers
for and to promote distribution of Shares and may obtain orders from brokers,
dealers or other persons for sales of Shares to them. No such brokers, dealers
or other persons shall have any authority to act as agent for the Fund; such
brokers, dealers or other persons shall act only as principal in the sale of
Shares.
3. Sales of Shares by Principal Underwriter shall be at the applicable
public offering price determined in the manner set forth in the Fund's
prospectus and/or statement of additional information current at the time of the
Fund's acceptance of the order for Shares; provided that Principal Underwriter
shall also have the right to sell Shares at net asset value, if such sale is
permissible under and consistent with applicable statutes, rules, regulations
and orders. 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 Shares, the Fund shall receive the current net asset
value. The Principal Underwriter shall be entitled to receive (a) payments in
accordance with the Fund's Distribution Plans ("12b-1 Plans") adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act"); and (b)
contingent deferred sales charges, all as set forth in the Fund's then current
prospectus and/or statement of additional information. Principal Underwriter may
reallow all or a part of the payments made under any 12b-1 Plan to such brokers,
dealers or other persons as Principal Underwriter may determine.
5. Payment to the Fund for Shares shall be in New York or Boston
Clearing House funds received by Principal Underwriter within ten (10) 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 ten-day 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 issuance of Shares.
6. Principal Underwriter shall not make, in connection with any sale or
solicitation of a sale of Shares, any representations concerning Shares except
those contained in the then current prospectus and/or statement of additional
information covering 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 Principal Underwriter in reasonable quantities upon request.
7. Principal Underwriter agrees to comply with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
8. The Fund appoints Principal Underwriter as its agent to accept
orders for redemptions and repurchases of Shares at values and in the manner
determined in accordance with the Fund's then current prospectus and/or
statement of additional information.
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, as amended ("1933 Act"), against any losses, claims, damages,
liabilities and expenses (including the cost of any legal fees incurred in
connection therewith) that the Principal Underwriter, its officers, Directors or
any such control ling 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 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. Principal Underwriter agrees to indemnify and hold harmless the
Fund, its officers, Directors 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 there with) that 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 that
(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 Principal
Underwriter for the purpose of qualifying the Shares for sale under the
so-called "blue sky" laws of any state or for registering Shares under the 1933
Act or the Fund under the 1940 Act. Principal Underwriter shall bear the expense
of preparing, printing and distributing advertising, sales literature,
prospectuses and statements of additional information. The Fund shall bear the
expense of registering Shares under the 1933 Act and the Fund under the 1940
Act, qualifying 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 shareholders of the
Fund, and the direct expenses of the issuance of Shares.
12. To the extent required by any 12b-1 Plan of the Fund, Principal
Underwriter shall provide to the Board of Trustees of the Fund in connection
with the 12b-1 Plan, not less than quarterly, a written report of the amounts
expended pursuant to such 12b-1 Plan and the purposes for which such
expenditures 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 two
years. This Agreement shall continue in effect after such term if its
continuance is specifically approved by a majority of the Trustees of the Fund
and a majority of the 12b-1 Trustees referred to in any 12b-1 Plan of the Fund
("Rule 12b-1 Trustees") 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 Rule 12b-1 Trustees or by a vote of a
majority of the Fund's outstanding Shares on not more than sixty (60) days
written notice to any other party to the Agreement. This Agreement shall
terminate automatically in the event of its assignment (as defined in the 1940
Act).
14. 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, as of the day and year first written above.
KEYSTONE BALANCED FUND II
By:/s/ Albert H. Elfner, III
-------------------------
Albert H. Elfner, III
Chief Executive Officer
and President
KEYSTONE INVESTMENT
DISTRIBUTORS COMPANY
By:/s/ Ralph J. Spuehler, Jr.
-------------------------
Ralph J. Spuehler, Jr.
President
<PAGE>
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS B SHARES
OF
KEYSTONE BALANCED FUND II
AGREEMENT made as of this 19th day of June, 1996 by and between
Keystone Balanced Fund II, a Massachusetts business trust ("Fund"), and Keystone
Investment Distributors Company, a Delaware corporation (the "Principal
Underwriter").
Keystone Balanced Fund II, 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 as a principal
underwriter of the Class B shares of beneficial interest of the Fund ("B
Shares"). The Principal Underwriter shall act 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 Shares and to promote distribution of the B Shares and may
obtain orders from brokers, dealers or other persons for sales of B 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 Shares.
3. Sales of B Shares by the Principal Underwriter shall be at the
public offering price determined in the manner set forth in the Fund's
prospectus and/or statement of additional information current at the time of the
Fund's acceptance of the order for B 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 Shares the Fund shall receive the current net
asset value. The Fund shall pay the Principal Underwriter Distribution Fees (as
defined in Section 14.1 hereof), as commissions for the sale of B 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 14.2 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
0.25% per annum of the average daily net asset value of the Class B 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 Shares shall be in New York or Boston
Clearing House funds received by the Principal Underwriter within three (3)
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 Shares.
6. The Principal Underwriter shall not make in connection with any sale
or solicitation of a sale of the B Shares any representations concerning the B
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
applied 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 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)
that 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) that 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 that
(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 Shares for sale under the
so-called "blue sky" laws of any state or for registering B Shares under the
1933 Act or the Fund under the 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 Shares under the 1933 Act and the Fund
under the 1940 Act, qualifying B 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 Shares,
and the direct expenses of the issue of B Shares.
12. The Principal Underwriter shall, at the request of the Fund,
provide to the Fund's Board of Trustees (the "Trustees") in connection with
sales of B 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 of the Fund or by a majority of the Fund's Trustees and a majority of
the Fund's Trustees 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 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 Trustees of the Fund, or a majority of
such Trustees 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
Shares or in any agreement related to the plan or by a vote of a majority of the
outstanding voting securities of Class B 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 Allocable Portions (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 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 of a fee (the "Distribution Fee(s)") at the rate
of 0.75% 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 that
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 that 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 Shares shall be
the Distribution Fees attributable to B Shares that 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 that 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 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 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 Class of
Shares of the Fund and each other class of shares of the Fund hereafter issued
that would be treated as Shares under Schedule I hereto or that has
substantially similar economic characteristics to the B-1 or B 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 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 that 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 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 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 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 BALANCED FUND II
By:
-------------------------
Albert H. Elfner, III
Chief Executive Officer and
President
KEYSTONE INVESTMENT
DISTRIBUTORS COMPANY
By:
--------------------------
Ralph J. Spuehler, Jr.
President
<PAGE>
SCHEDULE I
TO
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS B SHARES
OF
KEYSTONE BALANCED FUND II
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
Shares of the Instant Fund dated as of June 19, 1996 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 xchange 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 Balanced Fund II.
"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.
"Post-distributor Shares" shall mean in respect of any Fund, all shares
of such Fund the Month of Original Purchase of which occurs afer the
Distributor's last Sale Cutoff 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.
<PAGE>
<PAGE>
Exhibit 99.24(B)(8)
FORM OF
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE BALANCED FUND II
AND
STATE STREET BANK AND TRUST COMPANY
Agreement made as of this 19th day of June, 1996, by and between
KEYSTONE BALANCED FUND II, a Massachusetts business trust, (the "Fund") having
its principal place of business at 200 Berkeley Street, Boston, Massachusetts,
02116, and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking
corporation ("State Street"), having its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110.
In consideration of the mutual agreements herein contained, the Fund
and State Street agree as follows:
1. The Fund appoints State Street as its custodian ("Custodian"),
subject to the provisions hereof. State Street hereby accepts such appointment
as Custodian. As such Custodian, State Street shall retain all securities, cash
and other assets now owned or hereafter acquired by the Fund, and the Fund shall
deliver and pay or cause to be delivered and paid to State Street, as Custodian,
all securities, cash and other assets now owned or hereafter acquired by the
Fund during the period of this Agreement.
2. All securities delivered to State Street (other than in bearer form)
shall be properly endorsed and in proper form for transfer into the name of the
Fund or a nominee of State Street for the exclusive use of the Fund or of such
other nominee as may be mutually agreed upon by State Street and the Fund.
3. The Fund shall deliver to State Street certified or authenticated
copies of its Declaration of Trust and By-Laws, all amendments thereto, a
certified copy of the resolution of the Fund's Board of Trustees appointing
State Street to act in the capacities covered by this Agreement and authorizing
the signing of this Agreement and copies of such resolutions of its Board of
Trustees, contracts and other documents as may be reasonably required by State
Street in the performance of its duties hereunder.
4. As Custodian, State Street shall promptly do the following:
A. Safekeeping. State Street shall keep safely in a separate account
the securities and other assets of the Fund, including without limitation all
securities in bearer form, other than (i) securities that are maintained
pursuant to Paragraph 4B in a Securities System (as defined in Paragraph 4B) and
(ii) commercial paper of an issuer for which State Street Bank acts as issuing
and paying agent ("Direct Paper") that is deposited and/or maintained in the
Direct Paper System of State Street pursuant to Paragraph 4C. State Street, on
behalf of the Fund, shall receive delivery of certificates, including, without
limitation, all securities in bearer form, for safekeeping and keep such
certificates physically segregated at all times from those of any other person.
State Street shall maintain records of all receipts, deliveries and locations of
such securities, together with a current inventory thereof, and shall conduct
periodic physical inspections of certificates representing bonds and other
securities held by it under this Agreement at least annually in such manner as
State Street shall determine from time to time to be advisable in order to
verify the accuracy of such inventory. State Street shall provide the Fund with
copies of any reports of its internal count or other verification of the
securities of the Fund held in its custody, including reports on its own system
of internal accounting control. In addition, if and when independent certified
public accountants retained by State Street shall count or otherwise verify the
securities of the Fund held in State Street's custody, State Street shall
provide the Fund with a copy of the report of such accountants. With respect to
securities held by any agent or subcustodian ("Subcustodian") appointed pursuant
to Paragraph 7C hereof, State Street may rely upon certificates from such agent
or Subcustodian as to the holdings of such agent or Subcustodian, it being
understood that such reliance in no way releases State Street of its
responsibilities or liabilities under this Agreement. State Street shall
promptly report to the Fund the results of such inspections, indicating any
shortages or discrepancies uncovered thereby, and take appropriate action to
remedy any such shortages or discrepancies.
B. Deposit of Fund Assets in Securities Systems. Notwithstanding any
other provision of this Agreement, State Street may deposit and/or maintain
securities owned by the Fund in (i) Depository Trust Company, a clearing agency
registered with the Securities and Exchange Commission ("Commission") under
Section 17A of the Securities Exchange Act of 1934 ("Exchange Act"), which acts
as a securities depository; (ii) any other clearing agency registered under
Section 17A of the Exchange Act that has been authorized by the Fund's Board of
Trustees; (iii) the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies; or (iv) any other book entry system which
the Commission has authorized for use by investment companies as a securities
depository by order or interpretive or no-action letter that has been authorized
by the Fund's Board of Trustees (all such agencies and systems, collectively
referred to herein as "Securities System(s)") in accordance with applicable
Federal Reserve Board and Commission rules and regulations, if any, and subject
to the following provisions:
1) State Street may keep securities of the Fund in a Securities
System provided that such securities are deposited in an account of State Street
in the Securities System that shall not include any assets of State Street other
than assets held as a fiduciary, custodian or otherwise for customers;
2) The records of State Street with respect to securities of the
Fund that are maintained in a Securities System shall identify by book entry
those securities belonging to the Fund;
3) State Street shall pay for securities purchased for the account
of the Fund upon (i) receipt of advice from the Securities System that such
securities have been transferred to the account, and (ii) the making of an entry
on the records of State Street to reflect such payment and transfer for the
account of the Fund. State Street shall transfer securities sold for the account
of the Fund upon (i) receipt of advice from the Securities System that payment
for such securities has been transferred to the account, and (ii) the making of
an entry on the records of State Street to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the Securities System of
transfers of securities for the account of the Fund shall identify the Fund, be
maintained for the Fund and be provided to the Fund at its request. State Street
shall furnish the Fund confirmation of each transfer to or from the account of
the Fund in the form of a written advice or notice and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's transactions in the
Securities System for the account of the Fund on the next business day;
4) State Street shall promptly provide the Fund with any report
obtained by State Street on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Securities System. State Street shall promptly provide the Fund with any report
on State Street's accounting system, internal accounting control and procedures
for safeguarding securities deposited with State Street that is reasonably
requested by the Fund; and
5) Anything to the contrary in this Agreement notwithstanding, State
Street shall be liable to the Fund for any claim, loss, liability, damage or
expense to the Fund, including attorney's fees, resulting from use of a
Securities System by reason of any negligence, misfeasance or misconduct of
State Street, its agents or any of its or their employees or from failure of
State Street or any such agent to enforce effectively such rights as it may have
against a Securities System. At the election of the Fund, it shall be entitled
to be subrogated to the rights of State Street or its agents with respect to any
claim against the Securities System or any other person that State Street or its
agents may have as a consequence of any such claim, loss, liability, damage or
expense if and to the extent that the Fund has not been made whole for any such
loss or damage.
C. Assets Held in State Street's Direct Paper System. State Street
may deposit and/or maintain securities owned by the Fund in the Direct Paper
System of State Street subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions;
2) State Street may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account of State Street in
the Direct Paper System that shall not include any assets of State Street other
than assets held as a fiduciary, custodian or otherwise for customers;
3) The records of State Street with respect to securities of the
Fund that are maintained in the Direct Paper System shall identify by book-entry
those securities belonging to the Fund;
4) State Street shall pay for securities purchased for the account
of the Fund upon the making of an entry on the records of State Street to
reflect such payment and transfer of securities to the account of the Fund;
State Street shall transfer securities sold for the account of the Fund upon the
making of an entry on the records of State Street to reflect such transfer and
receipt of payment for the account of the Fund;
5) State Street shall furnish the Fund confirmation of each transfer
to or from the account of the Fund, in the form of a written advice or notice,
of Direct Paper on the next business day following such transfer and shall
furnish to the Fund copies of daily transaction sheets reflecting each day's
transaction in the Securities System for the account of the Fund; and
6) State Street shall provide the Fund with any report on its system
of internal accounting control as the Fund may reasonably request from time to
time.
D. State Street's Records. The records of State Street (and
its agents and Subcustodians) with respect to its services for the Fund shall at
all times during the regular business hours of State Street (or its agents or
Subcustodians) be open for inspection by duly authorized officers, employees or
agents of the Fund and employees and agents of the Commission.
E. Delivery of Securities. State Street shall release and deliver
securities owned by the Fund held by State Street or in a Securities System
account of State Street or in State Street's Direct Paper book entry system
account ("Direct Paper System Account") only upon receipt of Proper Instructions
(as defined in Paragraph 6A hereof; hereafter "Proper Instructions"), which may
be continuing instructions when deemed appropriate by the parties, and only in
the cases specified in Paragraphs 4F, 4G, 4H, 4I, 4J, 4K, 4L, 4M, 4N and 4O
hereof.
F. Registered Name, Nominee. State Street shall register securities
of the Fund held by State Street in the name of the Fund or in the name of a
nominee of State Street for the exclusive use of the Fund, or of such other
nominee as may be mutually agreed upon, or of any mutually acceptable nominee of
any agent or Subcustodian appointed pursuant to Paragraph 7C hereof.
G. Purchases. Upon receipt of proper instructions and insofar as cash
is available for the purpose, State Street shall pay for and receive all
securities purchased for the account of the Fund, payment being made only upon
receipt of the securities by State Street (or any bank, banking firm,
responsible commercial agent or trust company doing business in the United
States and appointed pursuant to Paragraph 7C hereof as State Street's agent or
Subcustodian for this purpose) registered as provided in Paragraph 4F hereof or
in form for transfer satisfactory to State Street, or, in the case of repurchase
agreements entered into between the Fund and a bank or a dealer, delivery of the
securities either in certificate form or through an entry crediting State
Street's account at the Federal Reserve Bank with such securities, or, upon
receipt by State Street of a facsimile copy of a letter of understanding with
respect to a time deposit account of the Fund signed by any bank, whether
domestic or foreign, and pursuant to Proper Instructions from the Fund, for
transfer to the time deposit account of the Fund in such bank; such transfer may
be effected prior to receipt of a confirmation from a broker and/or the
applicable bank or in the case of a purchase involving the Direct Paper System,
in accordance with the conditions set forth in Paragraph 4C. All securities
accepted by State Street shall be accompanied by payment of, or a "due bill"
for, any dividends, interest or other distributions of the issuer due the
purchaser. In any and every case of a purchase of securities for the account of
the Fund where payment is made by State Street in advance of receipt of the
securities purchased, State Street shall be absolutely liable to the Fund for
such securities to the same extent as if the securities had been received by
State Street, except that in the case of repurchase agreements entered into by
the Fund with a bank that is a member of the Federal Reserve System, State
Street may transfer funds to the account of such bank prior to the receipt of
written evidence that the securities subject to such repurchase agreement have
been transferred by book-entry into a segregated nonproprietary account of State
Street maintained with the Federal Reserve Bank of Boston, provided that such
securities have in fact been so transferred by book-entry; provided, further,
however, that State Street and the Fund agree to use their best efforts to
insure receipt by State Street of copies of documentation for each such
transaction as promptly as possible.
H. Exchanges. Upon receipt of Proper Instructions, State Street
shall exchange securities, interim receipts or temporary securities held by it
or by any agent or Subcustodian appointed by it pursuant to Paragraph 7C hereof
for the account of the Fund for other securities alone or for other securities
and cash, and expend cash insofar as cash is available in connection with any
merger, consolidation, reorganization, recapitalization, split-up of shares,
changes of par value, conversion or in connection with the exercise of warrants,
subscription or purchase rights, or otherwise, and deliver securities to the
designated depository or other receiving agent or Subcustodian in response to
tender offers or similar offers to purchase received in writing; provided that
in any such case the securities and/or cash to be received as a result of any
such exchange, expenditure or delivery are to be delivered to State Street (or
its agents or Subcustodians). State Street shall give notice as provided under
Paragraph 14 hereof to the Fund in connection with any transaction specified in
this paragraph and at the same time shall specify to the Fund whether such
notice relates to securities held by an agent or Subcustodian appointed pursuant
to Paragraph 7C hereof, so that the Fund may issue to State Street Proper
Instructions for State Street to act thereon prior to any expiration date (which
shall be presumed to be two business days prior to such date unless State Street
has previously advised the Fund of a different period). The Fund shall give to
State Street full details of the time and method of submitting securities in
response to any tender or similar offer, exercising any subscription or purchase
right or making any exchange pursuant to this paragraph. When such securities
are in the possession of an agent or Subcustodian appointed by State Street
pursuant to Paragraph 7C hereof, the Proper Instructions referred to in the
preceding sentence must be received by State Street in timely enough fashion
(which shall be presumed to be three business days unless State Street has
advised the Fund in writing of a different period) for State Street to notify
the agent or Subcustodian in sufficient time to permit such agent to act prior
to any expiration date.
I. Sales. Upon receipt of Proper Instructions and upon receipt of
full payment therefor, State Street shall release and deliver securities which
have been sold for the account of the Fund. At the time of delivery all such
payments are to be made in cash, by a certified check upon or a treasurer's or
cashier's check of a bank, by effective bank wire transfer through the Federal
Reserve Wire System or, if appropriate, outside of the Federal Reserve Wire
System and subsequent credit to the Fund's custodian account, or, in case of
delivery through a stock clearing company, by book-entry credit by the stock
clearing company in accordance with the then current "street" custom.
J. Purchases by Issuer. Upon receipt of Proper Instructions, State
Street shall release and deliver securities owned by the Fund to the issuer
thereof or its agent when such securities are called, redeemed, retired or
otherwise become payable; provided that in any such case, the cash or other
consideration is to be delivered to State Street.
K. Changes of Name and Denomination. Upon receipt of Proper
Instructions, State Street shall release and deliver securities owned by the
Fund to the issuer thereof or its agent for transfer into the name of the Fund
or a nominee of State Street or of the Fund for the exclusive use of the Fund or
for exchange for a different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units bearing the same
interest rate, maturity date and call provisions if any; provided that in any
such case, the new securities are to be delivered to State Street.
L. Street Delivery. In connection with delivery in New York City and
upon receipt of Proper Instructions, which in the case of registered securities
may be standing instructions, State Street shall release securities owned by the
Fund upon receipt of a written receipt for such securities to the broker selling
the same for examination in accordance with the existing "street delivery"
custom. In every instance, either payment in full for such securities shall be
made or such securities shall be returned to State Street that same day. In the
event existing "street delivery" custom is modified, State Street shall obtain
authorization from the Board of Trustees of the Fund prior to any use of such
modified "street delivery" custom.
M. Release of Securities for Use as Collateral. Upon receipt of
Proper Instructions and subject to the Fund's Declaration of Trust, State Street
shall release securities belonging to the Fund to any bank or trust company for
the purpose of pledge, mortgage or hypothecation to secure any loan incurred by
the Fund; provided, however, that securities shall be released only upon payment
to State Street of the monies borrowed, except that in cases where additional
collateral is required to secure a borrowing already made, subject to proper
prior authorization from the Fund, further securities may be released for that
purpose. Upon receipt of Proper Instructions, State Street shall pay such loan
upon redelivery to it of the securities pledged or hypothecated therefor and
upon surrender of the note or notes evidencing the loan.
N. Compliance with Applicable Rules and Regulations of The Options
Clearing Corporation and National Securities or Commodities Exchanges or
Commissions. Upon receipt of Proper Instructions, State Street shall deliver
securities of the Fund in accordance with the provisions of any agreement among
the Fund, State Street and a broker- dealer registered under the Exchange Act
and a member of the National Association of Securities Dealers, Inc. ("NASD")
relating to compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Fund; or, upon receipt of Proper Instructions, State Street
shall deliver securities in accordance with the provisions of any agreement
among the Fund, State Street, and a Futures Commission Merchant registered under
the Commodity Exchange Act relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Fund.
O. Release or Delivery of Securities for Other Purposes. Upon
receipt of Proper Instructions, State Street shall release or deliver any
securities held by it for the account of the Fund for any other purpose (in
addition to those specified in Paragraphs 4E, 4F, 4G, 4H, 4I, 4J, 4K, 4L, 4M and
4N hereof) that the Fund declares is a proper corporate purpose pursuant to
Proper Instructions.
P. Proxies, Notices, Etc. State Street shall, upon receipt, promptly
forward to the Fund all forms of proxies and all notices of meetings and any
other notices or announcements affecting or relating to the Fund's securities,
including without limitation, notices relating to class action claims and
bankruptcy claims. Upon receipt of Proper Instructions, State Street shall
execute and deliver or cause its nominee to execute and deliver such proxies or
other authorizations as may be required. State Street, its nominee or its agents
or Subcustodian shall not vote upon any of the Fund's securities or execute any
proxy to vote thereon or give any consent or take any other action with respect
thereto (except as otherwise herein provided) unless ordered to do so by Proper
Instructions. State Street shall require its agents and Subcustodians appointed
pursuant to Paragraph 7C hereof to forward any such announcements and notices to
State Street upon receipt.
Q. Segregated Account. State Street shall, upon receipt of Proper
Instructions, establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which State Street may transfer cash
and/or securities, including securities maintained in an account by State Street
pursuant to Paragraph 4B hereof, (i) in accordance with the provisions of any
agreement among the Fund, State Street and a broker-dealer registered under the
Exchange Act and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Fund; (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund; (iii) for
the purposes of compliance by the Fund with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or releases
of the Commission relating to the maintenance of segregated accounts by
registered investment companies; and (iv) for other proper corporate purposes,
but only, in the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of Trustees signed
by an officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated account and
declaring such purposes to be proper corporate purposes.
R. Property of the Fund Held Outside of the United States.
1) Appointment of Foreign Subcustodians. State Street is authorized
and instructed to employ as Subcustodians for the Fund's securities and other
assets maintained outside of the United States, the foreign banking institutions
and foreign securities depositories designated on Schedule B hereto as revised
from time to time ("Foreign Subcustodians"). Upon receipt of Proper
Instructions, together with a certified resolution of the Fund's Board of
Trustees, State Street and the Fund may agree to amend Schedule B hereto from
time to time to designate additional foreign banking institutions and foreign
securities depositories to act as Foreign Subcustodians. Upon receipt of Proper
Instructions, the Fund may instruct State Street to cease the employment of any
one or more of such Subcustodians for maintaining custody of the Fund's assets.
2) Assets to be Held. State Street shall limit the securities and
other assets maintained in the custody of the Foreign Subcustodians to (a)
"foreign securities," as defined in paragraph (c)(1) of Rule 17f-5 under the
Investment Company Act of 1940 ("1940 Act"); and (b) cash and cash equivalents
in such amounts as State Street or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions.
3) Foreign Securities Depositories. Except as may otherwise be
agreed upon in writing by State Street and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as Foreign Subcustodians
pursuant to the terms hereof.
4) Segregation of Securities. State Street shall identify on its
books as belonging to the Fund the foreign securities of the Fund held by each
Foreign Subcustodian. Each agreement pursuant to which State Street employs a
foreign banking institution shall require that such institution establish a
custody account for State Street on behalf of the Fund and physically segregate
in that account securities and other assets of the Fund, and, in the event that
such institution deposits the Fund's securities in a foreign securities
depository, that it shall identify on its books as belonging to State Street, as
agent for the Fund, the securities so deposited (all collectively referred to as
the "account").
5) Agreements with Foreign Banking Institutions. Each agreement with
a foreign banking institution shall be substantially in the form set forth in
Schedule C hereto and shall provide that (a) the Fund's assets will not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b) the Foreign
Subcustodian shall maintain insurance covering the Fund's assets; (c) beneficial
ownership of the Fund's assets will be freely transferable without the payment
of money or value other than for custody or administration; (d) adequate records
will be maintained identifying the assets as belonging to the Fund; (e) officers
or auditors employed by, or other representatives of State Street, including, to
the extent permitted under applicable law, the independent public accountants
for the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions under its agreement with State
Street; (f) assets of the Fund held by the Foreign Subcustodian will be subject
only to the instructions of State Street or its agents; and (g) the Foreign
Subcustodian will provide periodic reports with respect to the safekeeping of
the Fund's assets, including notification of any transfer to or from the Fund's
account.
6) Access of Independent Accountants of the Fund. Upon request of
the Fund, State Street will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a Foreign Subcustodian insofar as such
books and records relate to the performance of such foreign banking institution
under its agreement with State Street.
7) Reports by State Street. State Street will supply to the Fund
from time to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by Foreign Subcustodians,
including, but not limited to, an identification of entities having possession
of the Fund's securities and other assets and advices or notifications of any
transfers of securities to or from each custodial account maintained by a
foreign banking institution for State Street on behalf of the Fund indicating,
as to securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
8) Transactions in Foreign Custody Account. (a) Upon receipt of
Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, State Street shall make or cause its Foreign
Subcustodians to transfer, exchange or deliver foreign securities owned by the
Fund, but, except to the extent explicitly provided in Paragraph 4R(8)(b), only
in any of the cases specified in this Agreement. Upon receipt of Proper
Instructions, which may be continuing instructions when deemed appropriate by
the parties, State Street shall pay out or cause its Foreign Subcustodians to
pay out monies of the Fund, but, except to the extent explicitly provided in
Paragraph 4R(8)(b), only in any of the cases specified in this Agreement.
(b) Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of the Fund and
delivery of securities maintained for the account of the Fund may be effected in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer. Securities maintained in the
custody of a Foreign Subcustodian may be maintained in the name of such entity's
nominee to the same extent as set forth in Paragraphs 2 and 4F of this
Agreement, and the Fund agrees to hold any such nominee harmless from any
liability as a holder of record of such securities.
9) Liability of Foreign Subcustodians. Each agreement pursuant to
which State Street employs a foreign banking institution as a Foreign
Subcustodian shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, State Street and
the Fund from and against any loss, damage, cost, expense, liability or claim
arising out of, or in connection with, the institution's performance of such
obligations. At the election of the Fund, it shall be entitled to be subrogated
to the rights of State Street with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost, expense,
liability or claim if, and to the extent that, the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim.
10) Liability of State Street. State Street shall be liable to the
Fund for the acts or omissions of a foreign banking institution appointed
pursuant to these provisions to the same extent that such foreign banking
institution is liable to State Street as provided under Paragraph 4R(9);
provided, however, that State Street shall not be liable to the Fund for any
loss resulting from, or caused by, nationalization, expropriation, currency
restrictions, acts of war or terrorism or other similar events or acts.
11) Monitoring Responsibilities. State Street shall furnish annually
to the Fund, during the month of June, information concerning the Foreign
Subcustodians employed by State Street. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Agreement. In addition, State Street will promptly inform the
Fund in the event that State Street learns of a material adverse change in the
financial condition of a Foreign Subcustodian or any material loss in the assets
of the Fund, or is notified by a foreign banking institution employed as a
Foreign Subcustodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders equity has declined below $200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
12) Branches of U.S. Banks. Except as otherwise set forth in this
Agreement, the provisions hereof shall not apply where the custody of the Fund's
assets are maintained in a foreign branch of a banking institution that is a
"bank" as defined by Section 2(a)(5) of the 1940 Act and which meets the
qualifications set forth in Section 26(a) of the 1940 Act. The appointment of
any such branch as a subcustodian shall be governed by Paragraph 7C of this
Agreement.
S. Miscellaneous. In general, attend to all nondiscretionary details
in connection with the sale, exchange, substitution, purchase, transfer or other
dealing with such securities or property of the Fund, except as otherwise
directed by the Fund pursuant to Proper Instructions. State Street shall render
to the Fund daily a report of all monies received or paid on behalf of the Fund,
an itemized statement of the securities and cash for which it is accountable to
the Fund under this Agreement, and an itemized statement of security
transactions that settled the day before. State Street shall render to the Fund
weekly an itemized statement of security transactions that failed to settle as
scheduled. At the end of each week, State Street shall provide to the Fund a
list of all security transactions that remain unsettled at such time.
5. Additionally, as Custodian, State Street shall promptly do the
following:
A. Bank Account. State Street shall retain safely all cash of the
Fund, other than cash maintained by the Fund, in a bank account, established and
used in accordance with Rule 17f-3 under the 1940 Act, in the banking department
of State Street and in a separate account or accounts in the name of the Fund,
subject only to draft or order by State Street acting pursuant to the terms of
this Agreement. If and when authorized by Proper Instructions in accordance with
a vote of the Board of Trustees of the Fund, State Street may open and maintain
an additional account or accounts in such other bank or trust companies as may
be designated by such instructions; such account or accounts, however, to be
solely in the name of State Street in its capacity as Custodian and subject only
to its draft or order in accordance with the terms of this Agreement. State
Street shall furnish to the Fund, not later than thirty (30) calendar days after
the last business day of each month, a statement reflecting the current status
of its internal reconciliation of the closing balance as of that day in all
accounts described in this paragraph to the balance shown on the daily cash
report for that day rendered to the Fund.
B. Collections. Unless otherwise instructed by receipt of Proper
Instructions, State Street shall collect, receive and deposit in the bank
account or accounts maintained pursuant to Paragraph 5A hereof all income and
other payments with respect to the securities held hereunder, execute ownership
and other certificates and affidavits for all federal and state tax purposes in
connection with the collection of bond and note coupons, do all other things
necessary or proper in connection with the collection of such income, and
without waiving the generality of the foregoing:
1) present for payment on the date of payment all coupons and other
income items requiring presentation;
2) present for payment all securities that may mature or be called,
redeemed, retired or otherwise become payable on the date such
securities become payable;
3) endorse and deposit for collection, in the name of the Fund,
checks, drafts or other negotiable instruments on the same day as
received.
In any case in which State Street does not receive any such due and
unpaid income within a reasonable time after it has made proper demands for the
same (which shall be presumed to consist of at least three demand letters and at
least one telephonic demand), it shall so notify the Fund in writing, including
copies of all demand letters, any written responses thereto, and memoranda of
all oral responses thereto and to telephonic demands, and await proper
instruction. State Street shall not be obliged to take legal action for
collection unless and until reasonably indemnified to its satisfaction for the
reasonable costs of such legal action for collection. State Street shall also
notify the Fund as soon as reasonably practicable whenever income due on
securities is not collected in due course.
C. Sale of Shares of the Fund. State Street shall make such
arrangements with the Transfer Agent of the Fund as will enable State Street to
make certain it receives the cash consideration due to the Fund for shares of
beneficial interest ("shares") of the Fund as may be issued or sold from time to
time by the Fund, all in accordance with the Fund's Declaration of Trust and
By-Laws, as amended.
D. Dividends and Distributions. Upon receipt of Proper Instructions,
State Street shall release or otherwise apply cash, insofar as cash is
available, for the purpose of the payment of dividends or other distributions to
shareholders of the Fund.
E. Redemption of Shares of the Fund. From such funds as may be
available for the purpose, but subject to the limitation of the Fund's
Declaration of Trust and By-Laws, as amended, and applicable resolutions of the
Board of Trustees of the Fund pursuant thereto, State Street shall make funds
available for payment to shareholders who have delivered to the Transfer Agent a
request for redemption of their shares by the Fund pursuant to such Declaration
of Trust, as amended.
In connection with the redemption of shares of the Fund pursuant to the
Fund's Declaration of Trust and By-Laws, as amended, State Street is authorized
and directed upon receipt of Proper Instructions from the Transfer Agent of the
Fund to make funds available for transfer through the Federal Reserve Wire
System or by other bank wire to a commercial bank account designated by the
redeeming stockholder.
F. Stock Dividends, Rights, Etc. State Street shall receive and
collect all stock dividends, rights and other items of like nature; and deal
with the same pursuant to Proper Instructions relative thereto.
G. Disbursements. Upon receipt of Proper Instructions, State Street
shall make or cause to be made, insofar as cash is available for the purpose,
disbursements for the payment on behalf of the Fund of its expenses, including
without limitation, interest, taxes and fees or reimbursement to State Street or
to the Fund's investment advisers for their payment of any such expenses.
H. Other Proper Corporate Purposes. Upon receipt of Proper
Instructions, State Street shall make or cause to be made, insofar as cash is
available for the purpose, disbursements for any other purpose (in addition to
the purposes specified in Paragraphs 4G, 4H, 5D, 5E, and 5G of this Agreement)
that the Fund declares is a proper corporate purpose.
I. Records. State Street shall create, maintain and retain all
records relating to its activities and obligations under this Agreement in such
manner as shall meet the obligations of the Fund under the 1940 Act,
particularly Section 31 thereof and Rules 31a-1 and 31a-2 thereunder or as
reasonably requested from time to time by the Fund. All records maintained by
State Street in connection with the performance of its duties under this
Agreement shall remain the property of the Fund, and, in the event of
termination of this Agreement, shall be delivered in accordance with the terms
of Paragraph 10 below.
J. Miscellaneous. State Street shall assist generally in the
preparation of routine reports to holders of shares of the Fund, to the
Commission, including form N-SAR, to state "Blue Sky" authorities, to others in
the auditing of accounts and in other matters of like nature and as otherwise
reasonably requested by the Fund.
K. Fund Accounting and Net Asset Value Computation. State Street
shall maintain the general ledger and all other books of account of the Fund,
including the accounting of the Fund. In addition, upon receipt of Proper
Instructions, which may be deemed to be continuing instructions, State Street
shall compute daily, the net asset value of the shares of the Fund and the total
net asset value of the Fund. State Street shall, in addition, perform such other
services incidental to its duties hereunder as may be reasonably requested from
time to time by the Fund.
6. State Street and the Fund further agree as follows:
A. Proper Instructions. State Street shall be deemed to have
received Proper Instructions upon receipt of written instructions signed by the
Fund's Trustees or by one or more person or persons as the Fund's Board of
Trustees shall have from time to time authorized to give the particular class of
instructions for different purposes. Different persons may be authorized to give
instructions for different purposes. A copy of a resolution or action of the
Trustees certified by the Secretary or an Assistant Secretary of the Fund may be
received and accepted by State Street as conclusive evidence of the instruction
of the Fund's Board of Trustees and/or the authority of any person or persons to
act on behalf of the Fund and may be considered as in full force and effect
until receipt of written notice to the contrary. Such instruction may be general
or specific in terms. Oral instructions will be considered Proper Instructions
if State Street reasonably believes them to have been given by a person
authorized by the Board of Trustees to give such oral instructions with respect
to the class of instruction involved. The Fund shall cause all oral instructions
to be confirmed in writing. Proper instructions may include communications
effected directly between electromechanical or electronic devices; provided that
the Fund and State Street are satisfied that such communications afford adequate
safeguards for the assets of the Fund. Use by the Fund of such communication
systems shall constitute approval by the Fund of the safeguards available
therewith.
B. Investments, Limitations. In performing its duties generally,
and more particularly in connection with the purchase, sale and exchange of
securities made by or for the Fund, State Street may take cognizance of the
provisions of the Declaration of Trust of the Fund, as amended; provided,
however, that, except as otherwise expressly provided herein, State Street may
assume unless and until notified in writing to the contrary that instructions
purporting to be Proper Instructions received by it are not in conflict with or
in any way contrary to any provision of the Declaration of Trust of the Fund, as
amended, or resolutions or proceedings of the Board of Trustees of the Fund.
7. State Street and the Fund further agree as follows:
A. Indemnification. State Street, as Custodian, shall be entitled
to receive and act upon advice of counsel (who may be counsel for the Fund) and
shall be without liability for any action reasonably taken or thing reasonably
done pursuant to such advice; provided that such action is not in violation of
applicable federal or state laws or regulations or contrary to written
instructions received from the Fund. State Street shall be indemnified by the
Fund and without liability for any action taken or thing done by it in carrying
out the terms and provisions of this Agreement in good faith and without
negligence, misfeasance or misconduct. However, in order for the indemnification
provision contained in this paragraph to apply, if the Fund is asked to
indemnify or save State Street harmless, the Fund shall be fully and promptly
advised of all pertinent facts concerning the situation in question, and State
Street shall use all reasonable care to identify and notify the Fund fully and
promptly concerning any situation that presents or appears likely to present the
probability of such a claim for indemnification against the Fund. The Fund shall
have the option to defend State Street against any claim that may be the subject
of this indemnification. In the event that the Fund elects to defend State
Street, it will so notify State Street, and thereupon the Fund shall take over
complete defense of the claim, and State Street shall initiate no further legal
or other expenses for which it shall seek indemnification under this paragraph.
State Street shall in no case confess any claim or make any compromise in any
case in which the Fund will be asked to indemnify State Street except with the
Fund's prior written consent.
B. Expenses Reimbursement. State Street shall be entitled to
receive from the Fund on demand, reimbursement for its cash disbursements,
expenses and charges, excluding salaries and usual overhead expenses with
respect to the Fund, as set forth in Schedule A.
C. Appointment of Agents and Subcustodians. State Street, as
Custodian, may appoint (and may remove), only in compliance with the terms and
conditions of the Fund's Declaration of Trust and By- Laws, as amended, any
other bank, trust company or responsible commercial agent as its agent or
Subcustodian to carry out such of the provisions of this Agreement as State
Street may from time to time direct; provided, however, that the appointment of
any such agent or Subcustodian shall not relieve State Street of any of its
responsibilities under this Agreement.
D. Reliance on Documents. So long as, and to the extent that, it
is in good faith and in the exercise of reasonable care, State Street, as
Custodian, shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement, shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper reasonably
believed by it to be genuine and to constitute Proper Instructions under this
Agreement and shall, except as otherwise specifically provided in this
Agreement, be entitled to receive as conclusive proof of any fact or matter
required to be ascertained by it hereunder a certificate signed by the Fund's
Trustees, the Secretary or an Assistant Secretary of the Fund or any other
person expressly authorized by the Board of Trustees of the Fund.
E. Access to Records. Subject to security requirements of State
Street applicable to its own employees having access to similar records within
State Street and such regulations as to the conduct of such monitors as may be
reasonably imposed by State Street after prior consultation with an authorized
officer of the Fund, books and records of State Street pertaining to its actions
under this Agreement shall be open to inspection and audit at reasonable times
by the Trustees of, attorneys for or auditors employed by the Fund or any other
person as the Fund's Board of Trustees shall direct.
F. Recordkeeping. State Street shall maintain such records as
shall enable the Fund to comply with the requirements of all federal and state
laws and regulations applicable to the Fund with respect to the matters covered
by this Agreement.
8. If the Fund requires State Street to advance cash or securities
for any purpose or in the event that State Street or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Agreement, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor. Should the Fund fail to repay State Street promptly, State
Street shall be entitled to utilize available cash and to dispose of the Fund's
assets to the extent necessary to obtain reimbursement. However, the total value
of any property of the Fund that at any time is security for any payment by
State Street hereunder shall not exceed 15% of the Fund's total net asset value.
9. The Fund shall pay State Street for its services as Custodian
such compensation as shall be specified on the attached Schedule A. Such
compensation shall remain fixed until [December 31, 1996], unless this Agreement
is terminated as provided in paragraph 10.
10. State Street and the Fund further agree as follows:
A. Effective Period, Termination, Amendment and Interpretive and
Additional Provisions. This Agreement shall become effective as of the date of
its execution, shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be amended at any time by mutual
agreement of the parties hereto and may be terminated by either party by an
instrument in writing delivered or mailed, postage prepaid, to the other party.
Such termination shall take effect sixty (60) days after the date of such
delivery or mailing. The Fund may, by action of the Fund's Board of Trustees,
substitute another bank or trust company for State Street by giving notice as
provided above to State Street, provided, however that State Street shall not
act under paragraphs 4B or 4C hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary, certifying that the
Board of Trustees of the Fund has approved the initial use of a particular
Securities System and the receipt of an annual certificate of the Secretary or
an Assistant Secretary, certifying that the Board of Trustees has reviewed the
use by the Fund of such Securities System, as required in each case by Rule
17f-4 under the 1940 Act, and that State Street shall not act under paragraph 4C
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary, certifying that the Board of Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary, certifying that the Board of
Trustees has reviewed the use by the Fund of the Direct Paper System. Neither
the Fund nor State Street shall amend or terminate this Agreement in
contravention of any applicable federal or state laws or regulations, or any
provision of the Declaration of Trust of the Fund, as amended; provided,
however, that in the event of such termination State Street shall remain as
Custodian hereunder for a reasonable period thereafter, if the Fund after using
its best efforts is unable to find a Successor Custodian.
In connection with the operation of this Agreement, State Street and
the Fund may agree from time to time on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement, any such interpretive or
additional provision to be signed by both parties and annexed hereto, provided
that no such interpretive or additional provisions shall contravene any
applicable federal or state laws or regulations, or any provision of the Fund's
Declaration of Trust as amended. No interpretive provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
B. Successor Custodian. Upon termination hereof or the inability
of State Street to continue to serve hereunder, the Fund shall pay to State
Street such compensation as may be due for services through the date of such
termination. The Fund shall likewise reimburse State Street for its costs,
expenses and disbursements incurred prior to such termination in accordance with
paragraph 7B hereof and such reasonable costs, expenses and disbursements as may
be incurred by State Street in connection with such termination.
If a successor Custodian ("Successor Custodian") is appointed by the
Fund's Board of Trustees in accordance with the Fund's Declaration of Trust,
State Street shall, upon termination, deliver to such Successor Custodian at the
office of State Street, properly endorsed and in proper form for transfer, all
securities then held hereunder, all cash and other assets of the Fund deposited
with or held by it hereunder.
If no such Successor Custodian is appointed, State Street shall, in
like manner at its office, upon receipt of a certified copy of a resolution of
the shareholders pursuant to the Fund's Declaration of Trust and By-Laws, as
amended, deliver such securities, cash and other properties in accordance with
such resolutions.
In the event that no written order designating a Successor Custodian
or certified copy of a resolution of the shareholders shall have been delivered
to State Street on or before the date when such termination shall become
effective, then State Street shall have the right to deliver to a bank or trust
company doing business in Boston, Massachusetts of its own selection, having an
aggregate capital, surplus and undivided profits, as shown by its last published
report, of not less than $5,000,000, all securities, cash and other properties
held by State Street and all instruments held by it relative thereto and all
other property held by it under this Agreement. Thereafter, such bank or trust
company shall be the Successor Custodian of State Street under this Agreement
and subject to the restrictions, limitations and other requirements of the
Fund's Declaration of Trust and By-Laws, both as amended.
In the event that securities, funds and other properties remain in the
possession of State Street after the date of termination hereof, owing to
failure of the Fund to procure the certified copy above referred to, or of the
Fund's Board of Trustees to appoint a Successor Custodian, State Street shall be
entitled to fair compensation for its services during such period, and the
provisions of this Agreement relating to the duties and obligations of State
Street shall remain in full force and effect.
C. Duplicate Records and Backup Facilities. State Street shall
not be liable for loss of data occurring by reason of circumstances beyond its
control, including, but not limited, to acts of civil or military authority,
national emergencies, fire, flood or catastrophe, acts of God, insurrection,
war, riots or failure of transportation, communication or power supply. However,
State Street shall keep in a separate and safe place additional copies of all
records required to be maintained pursuant to this Agreement or additional
tapes, disks or other sources of information necessary to reproduce all such
records. Furthermore, at all times during this Agreement, State Street shall
maintain a contractual arrangement whereby State Street will have a back-up
computer facility available for its use in providing the services required
hereunder in the event circumstances beyond State Street's control result in
State Street not being able to process the necessary work at its principal
computer facility. State Street shall, from time to time, upon request from the
Fund provide written evidence and details of its arrangement for obtaining the
use of such a back-up computer facility. State Street shall use its best efforts
to minimize the likelihood of all damage, loss of data, delays and errors
resulting from an uncontrollable event, and should such damage, loss of data,
delays or errors occur, State Street shall use its best efforts to mitigate the
effects of such occurrence. Representatives of the Fund shall be entitled to
inspect the State Street premises and operating capabilities within reasonable
business hours and upon reasonable notice to State Street. Upon request of the
Fund's representative or representatives, State Street shall from time to time
as appropriate, furnish to the Fund a letter setting forth the insurance
coverage thereon, any changes in such coverage which may occur and any claim
relating to the Fund which State Street may have made under such insurance.
D. Confidentiality. State Street agrees to treat all records and
other information relative to the Fund confidentially and State Street, on
behalf of itself and its officers, employees and agents, agrees to keep
confidential all such information, except after prior notification to and
approval by the Fund (which approval shall not be unreasonably withheld and may
not be withheld where State Street may be exposed to civil or criminal contempt
proceedings), when requested to divulge such information by duly constituted
authorities or when so requested by a properly authorized person.
State Street and the Fund agree that they, their officers, employees
and agents shall maintain all information disclosed to them by the other in
connection with this Agreement in confidence and will not disclose any such
information to any other person, nor use such information for their own benefit
or for the benefit of third parties without the consent in writing of the other;
provided, however, that each party shall have the right to use any such
information for its own necessary internal purposes while this Agreement is in
effect. The provisions of the paragraph shall not apply to information which (i)
is in or becomes part of the public domain, (ii) is demonstrably known
previously to the party to whom it is disclosed, (iii) is independently
developed outside this Agreement by the party to whom it is disclosed, or (iv)
is rightfully obtained from third parties by the party to whom it is disclosed.
11. The Fund shall not circulate any printed matter that contains any
reference to State Street without the prior written approval of State Street,
excepting solely such printed matter as merely identifies State Street as
Custodian. The Fund will submit printed matter requiring approval to State
Street in draft form, allowing sufficient time for review by State Street and
its counsel prior to any deadline for printing.
12. In the event of a reorganization of the Fund through a merger,
consolidation, sale of assets or other reorganization, State Street, at the
request of the Fund, shall act as Custodian for shares of any investment company
or other company obtained in any such reorganization by the Fund for
distribution to those Fund shareholders whose shares are represented by
certificates. The Fund shall give notice to each such shareholder of his or her
right to exchange his or her Fund shares represented by certificates for shares
held by State Street upon surrender to State Street of his or her certificates
representing such Fund shares properly endorsed and in proper form for transfer.
Upon the surrender of such Fund certificates, State Street will issue a
certificate or certificates to the surrendering shareholder for an approximate
number of shares held by State Street, unless such shareholder establishes an
Open Account Plan or other similar account at that time in which case such
shares will be credited to his or her account. State Street shall not be
required to issue certificates for any fractional shares held by it. Instead,
fractional interests in such shares shall be distributed to the shareholder in
cash at their then current market value or, if the fractional share represents
an interest in an investment company, it shall be redeemed by State Street at
the then current redemption price for such shares and the proceeds of such
redemption shall be distributed to such shareholder in cash. State Street shall
not release to any shareholder any such shares held by it until such shareholder
has properly surrendered for exchange his or her Fund shares represented by
certificates.
13. This Agreement is executed and delivered in The Commonwealth of
Massachusetts and shall be subject to and be construed in accordance with the
laws of The Commonwealth of Massachusetts.
14. Notices and other writings delivered or mailed postage prepaid to
Keystone Balanced Fund II, c/o Keystone Investment Management Company, 200
Berkeley Street, Boston, Massachusetts 02116, or to State Street at 225 Franklin
Street, Boston, Massachusetts 02110, or to such other address as the Fund or
State Street may hereafter specify, shall be deemed to have been properly
delivered or given hereunder to the respective address.
15. This Agreement shall be binding upon and shall inure to the benefit
of the Fund and State Street and their respective successors or assigns.
16. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
17. This Agreement is made on behalf of the Fund by an officer or
Trustee of the Fund, not individually but solely as an officer or Trustee under
the Fund's Declaration of Trust, and the obligations under this Agreement are
not binding upon, nor shall resort be had to the property of any of the
Trustees, shareholders, officers, employees or agents of the fund personally,
but are binding only on the property of the Fund.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by a duly authorized
officer as of the day and year first above written.
ATTEST: KEYSTONE BALANCED FUND II
By:
- --------------------------- -------------------------------
Name: J. Kevin Kenely
Title: Treasurer
ATTEST: STATE STREET BANK AND TRUST COMPANY
By:
- --------------------------- -------------------------------
Name:
Title:
<PAGE>
Schedule A
FEE SCHEDULE
Schedule A
STATE STREET BANK AND TRUST COMPANY
CUSTODY AND ACCOUNTING FEE SCHEDULE
KEYSTONE
I. Custody, Portflio and Fund Accounting
Custody: Maintain custody of Fund assets. Settle portfolio
purchases and sales. Report, buy and sell fails. Determine and
collect portfolio income. Make cash disbursements and report cash
transaction. Monitor corporate actions. Report portfolio
positions.
Portfolio and Fund Accounting: Maintain investment ledgers, provide selected
portfolio transactions, position and income reports. Maintain general ledger and
capital stock accounts. Prepare daily trial balance. Calculate net asset value
daily. Provide selected general ledger reports. Securities yield or market value
quotations will be provided to State Street vis State Street's Automated Pricing
System or by the fund.
The fee shown below is an annual charge, billed and payable monthly, based on
average monthly net assets.
ANNUAL FEES PER PORTFOLIO
Per Fund Domestic Net Assets
First 15 million 4.0 basis points
Next 60 million 3.5 basis points
Next 150 million 3.15 basis points
Next 200 million 3.0 basis points
Next 200 million 2.5 basis points
Excess 1.5 basis points
II. GLOBAL CUSTODY
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income. Make cash
disbursements and report cash transactions in local and base currency. Withhold
foreign taxes. File foreign tax reclaims. Monitor corporate actions. Report
portfolio positions.
Country Grouping
GROUP I GROUP II GROUP III GROUP IV
5BP TRADE 15BP TRADE 35BP TRADE 70BP TRADE
Australia 45 Hong Kong 30 Argentina 100 Colombia 150
Austria 75 Indonesia 60 Brazil 85 Hungary 150
Belgium 45 Luxembourg 75 Chile 85 India 150
Canada 30 Malaysia 60 China 150 Peru 150
Denmark 60 Mexico 75 Czech 100 Uruguay 150
Euroclear 25 Singapore 45 Greece 75 Egypt 150
Finland 60 Thailand 60 Israel 150
France 60 Pakistan 150
Germany 30 Phillippines
75
Ireland 75 Poland 125
Italy 60 Portugal 75
Japan 30 So. Korea 50
Netherlands 45 Sri Lanka 75
Norway 45 Taiwan 75
So. Africa 150 Turkey 75
Spain 75 Venezuela 75
Sweden 75
Switzerland 45
UK 30
New Zealand 45
III. PORTFOLIO TRANSACTIONS
State Street Bank Repos $0.00
DTC or Fed Book Entry $10.00
New York Physical Settlements $24.00
Maturity Collections $8.00
Transfer $6.00
PTC Purchase, Sale, Deposit or Withdrawal $20.00
Per paydown $5.00
All Other Trades & Options $24.00
Global Trades see above
Futures Trades $8.00
State Street Foreign Exchange $0.00
IV. HOLDINGS CHARGE
For each issue maintained - monthly charge $5.00
V. ADDITIONAL ACCOUNTING AND REPORTING FUNCTIONS
Per month per fund $150.00
VI. MULTIPLE CLASS ACCOUNTING FEE
Monthly Fee per Class per Fund
CLASS A CLASS B
$400.00 $250.00
VII. ADVERTISED YIELD SERVICE: APPLICABLE FUNDS
Annual Maintenance Fee:
For each portfolio maintained, monthly charge is based on the number of
holdings* as follows:
Holdings per portfolio Monthly Charge
0 to 50 $250.00
50 to 100 $300.00
over 100 $350.00
* For mortgage backed assets, the charge is per composite
holding.
VII. SPECIAL SERVICES
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations, extraordinary security shipments and
the preparation of special reports will be subject to negotiation.
IX. OUT OF POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of- pocket expenses include, but
are not limited to the following:
- Telephone - Transfer Fees
- Wire Charges ($5.25 in and $5 out) - Sub-custodian Charges
- Postage and Insurance - Price Waterhouse Audit
- Courier Services Letter
- Duplicating - Federal Reserve Fee
for
- Legal Fees return of Check items
- Supplies related to Fund Records over $2,500 (4.25
each)
- Rush Transfer ($8 each) - GNMA Transfer ($15
each)
- Items held in Street name over - PTC deposit/Withdrawal
record date at the request of for same day
turnaround
traders ($50 each) ($50 each)
- CWP (.50 per check) - Government Imposed
- Telexes Taxes and Duties
- Legal - 17f-5 review - Registration Fees
- Specific Country
related costs such as
stamp duty, taxes,
local administration
fees, local
accounting etc.
XI. PAYMENT
The Fee Schedule is effective from January 1, 1995 through December 31,
1996.
<PAGE>
SCHEDULE B
Approved Foreign Subcustodians
The Board of Directors/Trustees of KEYSTONE BALANCED FUND II has
approved certain foreign banking institutions and foreign securities
depositories within State Street's Global Custody Network for use as
subcustodians for the Fund's securities, cash and cash equivalents held outside
of the United States. Board approval is as indicated by the initials of the
Fund's Authorized Officer
<TABLE>
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- -------- ------- ------------ ------------------
<S> <C> <C> <C>
RVA Argentina Citibank, N.A. Caja de Valores S.A.
RVA Australia Westpac Banking Austraclear Limited;
Corporation
Reserve Bank Information and
Transfer System (RITS)
RVA Austria GiroCredit Bank Oesterreichische
Aktiengesellschaft Kontrollbank AG
der Sparkassen (Wertpapiersammelbank Division)
Bangladesh Standard Chartered Bank None
RVA Belgium Generale Bank Caisse Interprofessionnelle
de Depots et de
Virements de Titres S.A. (CIK);
Banque Nationale de Belgique
Botswana Barclays Bank of Botswana None
Limited
Brazil Citibank, N.A. Bolsa de Valores de Sao Paulo
(Bovespa);
Banco Central do Brasil,
Systema Especial de Liquidacao
e Custodia (SELIC)
RVA Canada Canada Trustco The Canadian Depository
Mortgage Company for Securities Limited
(CDS)
<PAGE>
SCHEDULE B
PAGE 2
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- -------- ------- ------------ ------------------
RVA Chile Citibank, N.A. None
RVA People's Republic The Hongkong and Shanghai Shanghai Securities Central
of China Banking Corporation Limited, Clearing and Registration
Shanghai and Shenzhen branches Corporation (SSCCRC);
Shenzhen Securities Registrars
Co., Ltd. and its designated
agent banks
Colombia Cititrust Colombia S.A. None
Sociedad Fiduciaria
Cyprus Barclays Bank PLC None
Czech Republic Ceskoslovenska Obchodni Stredisko cennych papiru(SCP);
Banka A.S.
Czech National Bank (CNB)
RVA Denmark Den Danske Bank Vaerdipapircentralen -
The Danish Securities
Center (VP)
Ecuador Citibank, N.A. None
Egypt National Bank of Egypt None
RVA Finland Merita Bank Limited The Central Share Register of
Finland
RVA France Banque Paribas Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM);
Banque de France,
Saturne System
RVA Germany Dresdner Bank AG The Deutscher Kassenverein AG
<PAGE>
SCHEDULE B
PAGE 3
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- -------- ------- ------------ ------------------
Ghana Barclays Bank of Ghana Limited None
Greece National Bank of Greece S.A. The Central Securities Depository
(Apothetirion Titlon A.E.)
RVA Hong Kong Standard Chartered Bank The Central Clearing and
Settlement System (CCASS)
Hungary Citibank Budapest Rt. The Central Depository and
Clearing House (Budapest) Ltd.
(KELER Ltd.)
India Deutsche Bank AG None
RVA Indonesia Standard Chartered Bank None
RVA Ireland Bank of Ireland None;
The Central Bank of Ireland,
The Gilt Settlement Office (GSO)
Israel Bank Hapoalim B.M. The Clearing House of the
Tel Aviv Stock Exchange
RVA Italy Morgan Guaranty Trust Monte Titoli S.p.A.;
Company
Banca d'Italia
RVA Japan The Sumitomo Trust Japan Securities Depository
& Banking Co., Ltd. Center (JASDEC);
Bank of Japan Net System
Jordan The British Bank of the None
Middle East
<PAGE>
SCHEDULE B
PAGE 4
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- -------- ------- ------------ ------------------
Kenya Barclays Bank of Kenya Limited None
RVA Republic of Korea SEOULBANK Korea Securities Depository (KSD)
RVA Malaysia Standard Chartered Bank Malaysian Central Depository Sdn.
Malaysia Berhad Bhd. (MCD)
Mauritius The Hongkong and Shanghai None
Banking Corporation Limited
RVA Mexico Citibank Mexico, S.A. S.D. INDEVAL, S.A. de C.V.
(Instituto pare el Deposito de
Valores);
Banco de Mexico
Morocco Banque Commerciale du Maroc None
RVA Netherlands MeesPierson N.V. Nederlands Centraal
Instituut voor Giraal
Effectenverkeer B.V.
(NECIGEF)
RVA New Zealand ANZ Banking Group None;
(New Zealand) Limited
Reserve Bank of New Zealand,
Austraclear NZ
RVA Norway Christiania Bank og Verdipapirsentralen -
Kreditkasse The Norwegian Registry
of Securities (VPS)
Pakistan Deutsche Bank AG None
RVA Peru Citibank, N.A. Caja de Valores (CAVAL)
RVA Philippines Standard Chartered Bank None
<PAGE>
SCHEDULE B
PAGE 5
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- -------- ------- ------------ ------------------
Poland Citibank Poland S.A. The National Depository
of Securities (Centrum
Krajowego Depozytu
Papierow Wartosciowych)
RVA Portugal Banco Comercial Portugues Central de Valores
Mobiliarios (Central)
RVA Singapore The Development Bank The Central Depository
of Singapore Ltd. (Pte) Limited (CDP)
Slovak Republic Ceskoslovenska Obchodna Stredisko cennych papierov (SCP);
Banka A.S.
National Bank of Slovakia
South Africa Standard Bank of None
South Africa Limited
RVA Spain Banco Santander, S.A. Servicio de Compensacion y
Liquidacion de Valores (SCLV);
Banco de Espana,
Anotaciones en Cuenta
Sri Lanka The Hongkong and Shanghai The Central Depository
Banking Corporation Limited System (Pvt) Limited
Swaziland Barclays Bank of Swaziland None
Limited
RVA Sweden Skandinaviska Enskilda Vardepapperscentralen VPC AB,
Banken The Swedish Central Securities
Depository
RVA Switzerland Union Bank of Switzerland Schweizerische Effekten -
Giro AG (SEGA)
RVA Taiwan - R.O.C. Central Trust of China The Taiwan Securities
Central Depository
Company, Ltd. (TSCD)
<PAGE>
SCHEDULE B
PAGE 6
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- -------- ------- ------------ ------------------
RVA Thailand Standard Chartered Bank Thailand Securities Depository
Company Limited (TSD)
RVA Turkey Citibank, N.A. Istanbul Stock Exchange
Settlement and Custody Co. Inc.
(I.M.K.B. Takas ve Saklama A.S.)
RVA United Kingdom State Street Bank and None;
Trust Company
The Bank of England,
The Central Gilts Office (CGO);
The Central Moneymarkets Office
(CMO)
Uruguay Citibank, N.A. None
RVA Venezuela Citibank, N.A. None
Zambia Barclays Bank of Zambia Limited None
Zimbabwe Barclays Bank of Zimbabwe None
Limited
RVA Euroclear (The Euroclear System)/State Street London Limited
RVA Cedel (Cedel Bank societe anonyme)/State Street London Limited
CERTIFIED BY:
/s/Rosemary D. Van Antwerp June 21, 1996
- ---------------------------------------- ----------------------------
FUND'S AUTHORIZED OFFICER DATE
</TABLE>
<PAGE>
SCHEDULE C
FORM OF
SUBCUSTODIAN AGREEMENT
AGREEMENT made this day of , 19 , between State Street Bank
and Trust Company, a Massachusetts Trust Company (hereinafter referred to as the
"Custodian"), having its principal place of business at 225 Franklin Street,
Boston, MA, and
(hereinafter referred to as the "Subcustodian"), a
organized under the laws of and having an office
at .
WHEREAS, Custodian has been appointed to act as Trustee, Custodian or
Subcustodian of securities and monies on behalf of certain of its customers
including, without limitation, collective investment undertakings, investment
companies subject to the U.S. Investment Company Act of 1940, as amended, and
employee benefit plans subject to the U.S. Employee Retirement Income Security
Act of 1974, as amended;
WHEREAS, Custodian wishes to establish Account (the "Account") with the
Subcustodian to hold and maintain certain property for which Custodian is
responsible as custodian; and
WHEREAS, Subcustodian agrees to establish the Account and to hold and
maintain all Property in the Account in accordance with the terms and conditions
herein set forth.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the Custodian and the Subcustodian agree as follows:
I. The Account
A. Establishment of the Account. Custodian hereby requests that
Subcustodian establish for each client of the Custodian an Account which shall
be composed of:
1. A Custody Account for any and all Securities (as hereinafter defined)
from time to time received by Subcustodian therefor, and
2. A Deposit Account for any and all Cash (as hereinafter defined) from
time to time received by Subcustodian therefor.
B. Use of the Account. The Account shall be used exclusively to hold,
acquire, transfer or otherwise care for, on behalf of Custodian as custodian and
the customers of Custodian and not for Custodian's own interest, Securities and
such Cash or cash equivalents as are transferred to Subcustodian or as are
received in payment of any transfer of, or as payment on, or interest on, or
dividend from, any such Securities (herein collectively called "Cash").
C. Transfer of Property in the Account. Beneficial ownership of the
Securities and Cash in the Account shall be freely transferable without payment
of money or value other than for safe custody and administration.
D. Ownership and Segregation of Property in the Account. The ownership of
the property in the Account, whether Securities, Cash or both, and whether any
such property is held by Subcustodian in an Eligible Depository, shall be
clearly recorded on Subcustodian's books as belonging to Custodian on behalf of
Custodian's customers, and not for Custodian's own interest and, to the extent
that Securities are physically held in the Account, such Securities shall also
be physically segregated from the general assets of Subcustodian, the assets of
Custodian in its individual capacity and the assets of Subcustodian's other
customers. In addition, Subcustodian shall maintain such other records as may be
necessary to identify the property hereunder as belonging to each Account.
E. Registration of Securities in the Account. Securities which are eligible
for deposit in a depository as provided for in Paragraph III may be maintained
with the depository in an account for Subcustodian's customers. Securities which
are not held in a depository and that are ordinarily held in registered form
will be registered in the name of Subcustodian or in the name of Subcustodian's
nominee, unless alternate Instructions are furnished by Custodian.
II. Services to Be Provided By the Subcustodian
The services Subcustodian will provide to Custodian and the manner in which
such services will be performed will be as set forth below in this Agreement.
A. Services Performed Pursuant to Instructions. All transactions involving
the Securities and Cash in the Account shall be executed solely in accordance
with Custodian's Instructions as that term is defined in Paragraph IV hereof,
except those described in paragraph B below.
B. Services to Be Performed Without Instructions. Subcustodian will, unless
it receives Instructions from Custodian to the contrary:
1. Collect Cash. Promptly collect and receive all dividends, income,
principal, proceeds from transfer and other payments with respect to property
held in the Account, and present for payment all Securities held in the Account
which are called, redeemed or retired or otherwise become payable and all
coupons and other income items which call for payment upon presentation, and
credit Cash receipts therefrom to the Deposit Account.
2. Exchange Securities. Promptly exchange Securities where the exchange
is purely ministerial including, without limitation, the exchange of temporary
Securities for those in definitive form and the exchange of warrants, or other
documents of entitlement to Securities, for the Securities themselves.
3. Sale of Rights and Fractional Interests. Whenever notification of a
rights entitlement or a fractional interest resulting from a rights issue, stock
dividend or stock split is received for the Account and such rights entitlement
or fractional interest bears an expiration date, Subcustodian will promptly
endeavor to obtain Custodian's Instructions, but should these not be received in
time for Subcustodian to take timely action, Subcustodian is authorized to sell
such rights entitlement or fractional interest and to credit the Account.
4. Execute Certificates. Execute in Custodian's name for the Account,
whenever Subcustodian deems it appropriate, such ownership and other
certificates as may be required to obtain the payment of income from the
Securities held in the account.
5. Pay Taxes and Receive Refunds. To pay or cause to be paid from the
Account any and all taxes and levies in the nature of taxes imposed on the
property in the Account by any governmental authority, and to take all steps
necessary to obtain all tax exemptions, privileges or other benefits, including
reclaiming and recovering any foreign withholding tax, relating to the Account
and to execute any declaration, affidavits, or certificates of ownership which
may be necessary in connection therewith.
6. Prevent Losses. Take such steps as may be reasonably necessary to
secure or otherwise prevent the loss of, entitlements attached to or otherwise
relating to property held in the Account.
C. Additional Services.
1. Transmission of Notices of Corporate Action. By such means as will
permit Custodian to take timely action with respect thereto, Subcustodian will
promptly notify Custodian upon receiving notices or reports, or otherwise
becoming aware, of corporate action affecting Securities held in the Account
(including, but not limited to, calls for redemption, mergers, consolidations,
reorganizations, recapitalizations, tender offers, rights offerings, exchanges,
subscriptions and other offerings) and dividend, interest and other income
payments relating to such Securities.
2. Communications Regarding the Exercise of Entitlements. Upon request
by Custodian, Subcustodian will promptly deliver, or cause any Eligible
Depository authorized and acting hereunder to deliver, to Custodian all notices,
proxies, proxy soliciting materials and other communications that call for
voting or the exercise of rights or other specific action (including material
relative to legal proceedings intended to be transmitted to security holders)
relating to Securities held in the Account to the extent received by
Subcustodian or said Eligible Depository, such proxies or any voting instruments
to be executed by the registered holder of the Securities, but without
indicating the manner in which such Securities are to be voted.
3. Monitor Financial Service. In furtherance of its obligations under
this Agreement, Subcustodian will monitor a leading financial service with
respect to announcements and other information respecting property held in the
Account, including announcements and other information with respect to corporate
actions and dividend, interest and other income payments.
III. Use of Securities Depository
Subcustodian may, with the prior written approval of Custodian, maintain all or
any part of the Securities in the Account with a securities depository or
clearing agency which is incorporated or organized under the laws of a country
other than the United States of America and is supervised or regulated by a
government agency or regulatory authority in the foreign jurisdiction having
authority over such depositories or agencies, and which operates (a) the central
system for handling of designated securities or equivalent book entries in , or
(b) a transnational system for the central handling of securities or equivalent
book entries (herein called "Eligible Depository"), provided however, that,
while so maintained, such Securities shall be subject only to the directions of
Subcustodian, and that Subcustodian duties, obligations and responsibilities
with regard to such Securities shall be the same as if such Securities were held
by Subcustodian on its premises.
IV. Claims Against Property in the Account
The property in the account shall not be subject to any right, charge, security
interest, lien or claim of any kind (collectively "Charges") in favor of
Subcustodian or any Eligible Depository or any creditor of Subcustodian or of
any Eligible Depository except a claim for payment for such property's safe
custody or administration in accordance with the terms of this Agreement.
Subcustodian will immediately notify Custodian of any attempt by any party to
assert any Charge against the property held in the Account and shall take all
lawful actions to protect such property from such Charges until Custodian has
had a reasonable time to respond to such notice.
V. Subcustodian's Warranty
Subcustodian represents and warrants that:
(A) It is a branch of a "qualified U.S. bank" or an "eligible foreign
custodian" as those terms are defined in Rule 17f-5 of the Investment Company
Act of 1940, a copy of which is attached hereto as Attachment A (the "Rule"),
and Subcustodian shall immediately notify Custodian, in writing or by other
authorized means, in the event that there appears to be a substantial likelihood
that Subcustodian will cease to qualify under the Rule as currently in effect or
as hereafter amended, or
(B) It is the subject of an exemptive order issued by the United States
Securities and Exchange Commission which order permits Custodian to employ
Subcustodian notwithstanding the fact that Subcustodian fails to qualify under
the terms of the Rule, and Subcustodian shall immediately notify Custodian, in
writing or by other authorized means, if for any reason it is no longer covered
by such exemptive order.
Upon receipt of any such notification required under (A) or (B) of this section,
Custodian may terminate this Agreement immediately without prior notice to
Subcustodian.
VI. Definitions
A. Instructions. The term "Instructions" means:
1. instructions in writing signed by authorized individuals designated
as such by Custodian;
2. telex or tested telex instructions of Custodian;
3. other forms of instructions in computer readable form as shall
customarily be used for the transmission of like information, and
4. such other forms of communication as from time to time may be agreed
upon by Custodian and Subcustodian, which Subcustodian believes in good faith to
have been given by Custodian or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Custodian may specify.
Unless otherwise expressly provided, all Instructions shall continue in full
force and effect until canceled or superseded. Subcustodian shall act in
accordance with Instructions and shall not be liable for any act or omission in
respect of any Instruction except in the case of willful default, negligence,
fraud, bad faith, willful misconduct, or reckless disregard of duties on the
part of Subcustodian. Subcustodian in executing all Instructions will take
relevant action in accordance with accepted industry practice and local
settlement practice.
B. Account. The term "Account" means collectively the Custody Account, and
the Deposit Account.
C. Securities. The term "Securities" includes, without limitation, stocks,
shares, bonds, debentures, debt securities (convertible or non-convertible),
notes, or other obligations or securities and any certificates, receipts,
futures contracts, foreign exchange contracts, options, warrants, scrip or other
instruments representing rights to receive, purchase or subscribe for the same,
or evidencing or representing any other rights or interests therein, or in any
property or assets.
VII. Miscellaneous Provisions
A. Statements Regarding the Account. Subcustodian will supply Custodian
with such statements regarding the Account as Custodian may request, including
the identity and location of any Eligible Depository authorized and acting
hereunder. In addition, Subcustodian will supply Custodian an advice or
notification of any transfers of Securities to or from the Account indicating,
as to Securities acquired for the Account, if applicable, the Eligible
Depository having physical possession of such Securities.
B. Examination of Books and Records. Subcustodian agrees that its books and
records relating to the Account and Subcustodian's actions under this Agreement
shall be open to the physical, on-premises inspection and audit at reasonable
times by officers of, auditors employed by or other representatives of Custodian
including (to the extent permitted under the law of ) the independent public
accountants for any customer of Custodian whose property is being held hereunder
and such books and records shall be retained for such period as shall be agreed
upon by Custodian and Subcustodian.
As Custodian may reasonably request from time to time, Subcustodian will furnish
its auditor's reports on its system of internal controls, and Subcustodian will
use its best efforts to obtain and furnish similar reports of any Eligible
Depository authorized and acting hereunder.
C. Standard of Care. In holding, maintaining, servicing and disposing of
Property under this Agreement, and in fulfilling any other obligations
hereunder, Subcustodian shall exercise the same standard of care that it
exercises over its own assets, provided that Subcustodian shall exercise at
least the degree of care and maintain adequate insurance as expected of a
prudent professional Subcustodian for hire and shall assume the burden of
proving that it has exercised such care in its maintenance of Property held by
Subcustodian in its Account. The maintenance of the Property in an Eligible
Depository shall not affect Subcustodian's standard of care, and Subcustodian
will remain as fully responsible for any loss or damage to such securities as if
it had itself retained physical possession of them. Subcustodian shall also
indemnify and hold harmless Custodian and each of Custodian's customers from and
against any loss, damage, cost, expense, liability or claim (including
reasonable attorney's fees) arising out of or in connection with the improper or
negligent performance or the nonperformance of the duties of Subcustodian.
Subcustodian shall be responsible for complying with all provisions of the law
of , __________________ or any other law, applicable to Subcustodian in
connection with its duties hereunder, including (but not limited to) the payment
of all transfer taxes or other taxes and compliance with any currency
restrictions and securities laws in connection with its duties as Subcustodian.
D. Loss of Cash or Securities. Subcustodian agrees that, in the even of any
loss of Securities or Cash in the Account, Subcustodian will use its best
efforts to ascertain the circumstances relating to such loss and will promptly
report the same to Custodian and shall use every legal means available to it to
effect the quickest possible recovery.
E. Compensation of Subcustodian. Custodian agrees to pay to Subcustodian
from time to time such compensation for its services and such out-of-pocket or
incidental expenses of Subcustodian pursuant to this Agreement as may be
mutually agreed upon in writing from time to time.
F. Operating Requirements. The Subcustodian agrees to follow such Operating
Requirements as the Custodian may establish from time to time. A copy of the
current Operating Requirements is attached as Attachment B to this Agreement.
G. Termination. This Agreement may be terminated by Subcustodian or
Custodian on 60 days' written notice to the other party, sent by registered
mail, provided that any such notice, whether given by Subcustodian or Custodian,
shall be followed within 60 days by Instructions specifying the names of the
persons to whom Subcustodian shall deliver the Securities in the Account and to
whom the Cash in the account shall be paid. If within 60 days following the
giving of such notice of termination, Subcustodian does not receive such
Instructions, Subcustodian shall continue to hold such Securities and Cash
subject to this Agreement until such Instructions are given. The obligations of
the parties under this Agreement shall survive the termination of this
Agreement.
G. Notices. Unless otherwise specified in this Agreement, all notices and
communications with respect to matters contemplated by this Agreement shall be
in writing, and delivered by mail, postage prepaid, telex, SWIFT, or other
mutually agreed telecommunication methods to the following addresses (or to such
other address as either party hereto may from time to time designate by notice
duly given in accordance with this paragraph):
To Subcustodian:
To Custodian: State Street Bank and Trust Company
Securities Operations/
Network Administration
P.O. Box 1631
Boston, MA 02105
H. Confidentiality. Subcustodian and Custodian shall each use its best
efforts to maintain the confidentiality of the property in the Account and the
beneficial owners thereof, subject, however, to the provisions of any laws,
requiring disclosure. In addition, Subcustodian shall safeguard any test keys,
identification codes or other security devices which Custodian shall make
available to it. The Subcustodian further agrees it will not disclose the
existence of this Agreement or any current business relationship unless
compelled by applicable law or regulation or unless it has secured the
Custodian's written consent.
I. Assignment. This Agreement shall not be assignable by either party but
shall bind any successor in interest of Custodian and Subcustodian respectively.
J. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of __________________. To the extent inconsistent with
this Agreement or Custodian's Operating Requirements as attached hereto,
Subcustodian's rules and conditions regarding accounts generally or custody
accounts specifically shall not apply.
CUSTODIAN: STATE STREET BANK AND TRUST COMPANY
By: ________________________________________________________
Date: ______________________________________________________
AGREED TO BY SUBCUSTODIAN
_____________________________________________________________
By: _________________________________________________________
Date: _______________________________________________________
<PAGE>
Exhibit 99.24(b)(11)
CONSENT OF INDEPENDENT AUDITORS
Trustees and Shareholder
Keystone Balanced Fund II
We consent to the use of our report dated July 1, 1996 included
herein.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
August 9, 1996
<PAGE>
KEYSTONE BALANCED FUND II
CLASS A DISTRIBUTION PLAN
Section 1. Keystone Balanced Fund II ("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 ("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 that 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 of the Fund 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 service 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 1940 Act) of the Fund's
outstanding Class A 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 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 ("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, 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 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 Fund's outstanding
Class A shares.
Section 8. Any agreement of the Fund related to this Plan shall be in
writing, and shall provide:
a. that such agreement may be terminated at any time, with out payment of
any penalty, by vote of a majority of the Rule 12b-1 Trustees or by a
vote of a 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 materi ally 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.
<PAGE>
KEYSTONE BALANCED FUND II
CLASS B DISTRIBUTION PLAN
Section 1. Keystone Balanced Fund II, 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
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 Trustees (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
Trustees, or agreed to by the Fund with such approval, all subject to such
specific implementation as such 12b-1 Trustees 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 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 1940 Act, 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 Shares that 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 the B 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 Class 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 Class 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 Class 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 Trustees (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 (the "Trustees")
of the Fund and (b) a majority of 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 Trusteess"), 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 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, in whole or in part, at any
time by vote of a majority of the Rule 12b-1 Trustees 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 Trustees 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.
5
<PAGE>
KEYSTONE BALANCED FUND II
CLASS C DISTRIBUTION PLAN
Section 1. Keystone Blanaced Fund II (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, with out
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 material ly 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.
2
<PAGE>
<PAGE>
MULTIPLE CLASS PLAN FOR KEYSTONE BALANCED FUND II
Keystone Balanced Fund II (the "Fund") currently offers three classes of shares
with the following class provisions and current offering and exchange
characteristics. Additional classes of shares, when created, may have
characteristics that differ from those described. References to percentages not
otherwise defined are to percentages of average daily net assets of a class.
I. Classes
A. Class A Shares
Class A Shares have a distribution plan adopted pursuant to
Rule 12b-1 ("Rule 12b-1") under the Investment Company Act of
1940, as amended ("1940 Act") and may have a shareholder
services plan. The plans provide for payments annually for
distribution and/or shareholder services fees based on a
percentage of average daily net assets of Class A Shares.
Class A Shares are offered with a front-end sales load, except
that purchases of Class A Shares made under certain
circumstances (i) are not subject to a front-end sales load,
but are subject to a contingent deferred sales charge ("CDSC")
of limited duration, or (ii) are not subject to a front-end
sales load or a CDSC.
Class A Shares may be exchanged for Class A Shares of other
Keystone America Funds and Class A Shares of Keystone Liquid
Trust. Class A Shares subject to a CDSC when exchanged will
remain subject to the CDSC after the exchange.
B. Class B Shares
Class B Shares have a distribution plan adopted pursuant to
Rule 12b-1 and may have a shareholder services plan. The plans
provide for payments annually for distribution and/or
shareholder services fees based on a percentage of average
daily net assets of Class B Shares.
Class B Shares are offered at net asset value without a
front-end sales load, but with a CDSC, which is a
declining percentage of the lesser of current net asset value
or initial cost and is of limited duration.
Class B Shares automatically convert to Class A Shares within
a specified number of years without a sales load or exchange
fee.
Class B Shares may be exchanged for Class B Shares of other
Keystone America Funds issued on or after June 1, 1995 and
Class B Shares of Keystone Liquid Trust issued on or after
June 1, 1995. Class B Shares subject to a CDSC when exchanged
will remain subject to the CDSC after the exchange.
C. Class C Shares
Class C Shares have a distribution plan adopted pursuant to
Rule 12b-1 and may have a shareholder services plan. The plans
provide for payments annually for distribution and/or
shareholder services fees based on a percentage of average
daily net assets of Class C Shares.
Class C Shares are offered at net asset value without a
front-end sales load. Class C Shares are subject to a CDSC,
which is a percentage of the lesser of current net asset value
or initial cost and is of limited duration.
Class C Shares may be exchanged for Class C Shares of other
Keystone America Funds and Class C Shares of Keystone Liquid
Trust. Class C Shares subject to a CDSC when exchanged will
remain subject to the CDSC after the exchange.
II. Class Expenses
Each class bears the expenses of its Rule 12b-1 plan and/or
shareholder services plan. There currently are no other class
specific expenses.
III. Expense Allocation Method
All income, realized and unrealized capital gains and losses
and expenses not assigned to a class will be allocated to each
class based on the relative net asset value of each class.
IV. Voting Rights
Each class shall have exclusive voting rights on any matter
submitted to its shareholders that relates solely to its class
arrangement.
Each class shall have separate voting rights on any matter
submitted to shareholders when the interests of one class
differs from the interests of any other class.
Each class has in all other respects the same rights and
obligations as each other class.
V. Expense Waivers or Reimbursements
Any expense waivers or reimbursements shall be in compliance
with Rule 18f-3 issued under the 1940 Act.
<PAGE>
Exhibit 24(b)(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
