As Filed with The Securities and Exchange Commission on December 20, 1995.
File Nos. 2-10659
811-93
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 87 X
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26 X
KEYSTONE DIVERSIFIED BOND FUND (B-2)
------------------------------------
(formerly named Keystone Custodian Fund, Series B-2)
(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,
-----------------------------------------------------------
Massachusetts 02116-5034
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b)
on (date) pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(2)
on (date) pursuant to paragraph (a)(2) of Rule 485.
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
----------------------------------------------------------------
Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Per Offering Registration
Registered Registered Unit* Price** Fee
- --------------------------------------------------------------------------------
Shares of 14,905,409 $15.35 $289,992 $100
$1.00
Par Value
- --------------------------------------------------------------------------------
* Computed under Rule 457(d) on the basis of the offering price per share at
the close of business on December 13, 1995.
** The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940. 14,886,517 shares of the
Fund were redeemed during its fiscal year ended August 31, 1995. Of such shares,
none were used for a reduction pursuant to Rule 24f-2(c).
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has elected to register an indefinite number of its securities under
the Securities Act of 1933. A Rule 24f-2 Notice for Registrant's most recent
fiscal year ended August 31, 1995 was filed on October 24, 1995.
<PAGE>
KEYSTONE DIVERSIFIED BOND FUND (B-2)
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 87
to
REGISTRATION STATEMENT
This Post-Effective Amendment No. 87 to Registration
Statement No. 2-10659/811-93 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 24(b)
Financial Statements
Independent Auditors' Report
Listing of Exhibits
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 DIVERSIFIED BOND FUND (B-2)
Cross-Reference Sheet pursuant to Rules 404 and 495 under the Securities Act of
1933.
Items in
Part A of
Form N-1A Prospectus Caption
- --------- ------------------
1 Cover Page
2 Fee Table
3 Performance Data
Financial Highlights
4 Cover Page
Fund Description
Fund Objective and Policies
Investment Restrictions
Risk Factors
5 Fund Management and Expenses
Additional Information
5A Not applicable
6 Fund Description
Dividends and Taxes
Fund Shares
Shareholder Services
Pricing Shares
7 How to Buy Shares
Distribution Plan
Shareholder Services
8 How to Redeem Shares
9 Not applicable
Items in
Part B of
Form N-1A Statement of Additional Information Caption
- --------- --------------------------------------------
10 Cover Page
11 Table of Contents
12 The Fund's Objective and Policies
<PAGE>
KEYSTONE DIVERSIFIED BOND FUND (B-2)
Cross-Reference Sheet continued.
Items in
Part B of
Form N-1A Statement of Additional Information Caption
- --------- --------------------------------------------
13 The Fund's Objective and Policies
Investment Restrictions
Brokerage
Appendix
14 The Trust Agreement
Trustees and Officers
15 Additional Information
16 Sales Charges
Distribution Plan
Investment Manager
Investment Adviser
Principal Underwriter
Additional Information
17 Brokerage
18 The Fund's Objective and Policies
The Trust Agreement
19 Valuation of Securities
Distribution Plan
20 Distributions and Taxes
21 Principal Underwriter
22 Standardized Total Return and
Yield Quotations
23 Financial Statements
<PAGE>
KEYSTONE DIVERSIFIED BOND FUND (B-2)
PART A
PROSPECTUS
<PAGE>
- ------------------------------------------------------------------------------
PROSPECTUS DECEMBER 20, 1995
- ------------------------------------------------------------------------------
KEYSTONE DIVERSIFIED BOND FUND (B-2)
(FORMERLY NAMED KEYSTONE CUSTODIAN FUND, SERIES B-2)
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
- ------------------------------------------------------------------------------
Keystone Diversified Bond Fund (B-2) (the "Fund") is a mutual fund whose
investment objective is maximum income without undue risk of principal. The Fund
invests primarily in corporate bonds that are normally characterized by liberal
returns and moderate price fluctuations.
The Fund seeks to maximize return with respect to a portion of its assets.
Such maximum return is ordinarily associated with high yield, high risk bonds
and similar securities in the lower rating categories of the recognized rating
agencies or with securities that are unrated (high yield bonds). Such high
yield, high risk bonds generally involve greater volatility of price and risk of
principal and income than bonds in the higher rating categories and are, on
balance, considered predominantly speculative.
Your purchase payment is fully invested. There is no sales charge when you buy
the Fund's shares. The Fund may, however, impose a deferred sales charge, which
declines from 4% to 1%, if you redeem your shares within four years of purchase.
The Fund has adopted a Distribution Plan (the "Distribution Plan") pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act"), under
which it bears some of the costs of selling its shares to the public.
This prospectus sets forth concisely the 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 December 20, 1995, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, or for other information about the Fund, write to
the address or call the telephone number listed above.
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.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page Page
Fee Table .......................... 2 How to Buy Shares ................ 11
Financial Highlights .............. 3 Distribution Plan ................ 12
Fund Description ................... 4 How to Redeem Shares ............. 14
Fund Objective and Policies ....... 4 Shareholder Services ............. 16
Risk Factors ....................... 5 Performance Data ................. 17
Investment Restrictions ............ 8 Fund Shares ...................... 17
Pricing Shares ..................... 8 Additional Information ........... 18
Dividends and Taxes ................ 9 Additional Investment Information (i)
Fund Management and Expenses ....... 9
- --------------------------------------------------------------------------------
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 DIVERSIFIED BOND FUND (B-2)
The purpose of the fee table is to assist investors in understanding the
costs and expenses that an investor in 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"; "Distribution Plan"; and "Shareholder Services."
SHAREHOLDER TRANSACTION EXPENSES
Contingent Deferred Sales Charge (1) ................. 4.00%
(as a percentage of the lesser of total cost or the net asset
value of shares redeemed)
Exchange Fee(2) ...................................... $10.00
(per exchange)
ANNUAL FUND OPERATING EXPENSES(3)
(as a percentage of average net assets)
Management Fees ...................................... 0.53%
12b-1 Fees(4) ........................................ 1.00%
Other Expenses ....................................... 0.28%
-----
Total Fund Operating Expenses ........................ 1.81%
=====
EXAMPLE(5) 1 Year 3 Years 5 Years 10 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: ...................... $ 58 $ 77 $ 98 $213
You would pay the following
expenses on the same
investment, assuming no
redemption: .................. $ 18 $ 57 $ 98 $213
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) The deferred sales charge declines from 4% to 1% of amounts redeemed within
four calendar years after purchase. No deferred sales charge is imposed
thereafter.
(2) There is no fee for exchange orders received by the Fund directly from an
individual shareholder over the Keystone Automated Response Line ("KARL").
(For a description of KARL, see "Shareholder Services".)
(3) Expense ratios are for the Fund's fiscal year ended August 31, 1995.
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum front end sales charges permitted by rules adopted by the National
Association of Securities Dealers, Inc. ("NASD").
(5) 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>
FINANCIAL HIGHLIGHTS
KEYSTONE DIVERSIFIED BOND FUND (B-2)
(For a share outstanding throughout the year)
The following table contains important financial information about the Fund
and has been audited by KPMG Peat Marwick LLP, the Fund's independent auditors.
The table appears in the Fund's Annual Report and should be read in conjunction
with the Fund's financial statements and related notes, which also appear,
together with the auditors' report, in the Fund's Annual Report. The Fund's
financial statements, related notes, and auditors' report are included in the
statement of additional information. Additional information about the Fund's
performance is contained in its Annual Report, which will be made available upon
request and without charge.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR $15.28 $17.06 $16.44 $15.37 $15.51 $17.74 $17.99 $18.91 $20.08 $18.84
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment
income ............ 1.06 1.06 1.28 1.33 1.33 1.53 1.71 1.78 1.83 2.07
Net gain (loss) on
investments and
closed futures
contracts ......... 0.11 (1.62) 0.70 1.14 0.17 (1.94) (0.13) (0.81) (1.01) 1.38
Net commissions paid on
fund share sales <F1> 0 0 0 0 0 0 0 0 0 (0.21)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ........ 1.17 (0.56) 1.98 2.47 1.50 (0.41) 1.58 0.97 0.82 3.24
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income. (1.06) (1.22) (1.28) (1.33) (1.63) (1.61) (1.83) (1.85) (1.85) (2.00)
In excess of net
investment income . (0.22) 0 (0.08) (0.07) (0.01) (0.21) 0 0 00
Tax basis return of
capital ........... (0.08) 0 0 0 0 0 0 0 00
Net realized gain on
investments ....... 0 0 0 0 0 0 0 (0.04) (0.14) 0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (1.36) (1.22) (1.36) (1.40) (1.64) (1.82) (1.83) (1.89) (1.99) (2.00)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE END
OF YEAR ........... $15.09 $15.28 $17.06 $16.44 $15.37 $15.51 $17.74 $17.99 $18.91 $20.08
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN <F2> .. 8.13% (3.53%) 12.73% 16.88% 10.58% (2.44%) 9.23% 5.61% 4.20% 18.01%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses ..... 1.81% 1.75% 1.89% 1.99% 1.94% 1.89% 1.84% 1.68% 1.68% 1.00%
Net investment income 7.05% 6.48% 7.73% 8.29% 8.74% 9.26% 9.52% 9.82% 9.31% 10.37%
Portfolio turnover
rate .............. 178% 200% 133% 117% 101% 43% 47% 46% 74% 69%
Net assets end of
year (thousands)...$734,837 $814,245 $1,004,393 $902,339 $814,528 $860,615 $1,000,305 $838,892 $889,333 $558,734
<FN>
- ---------------
<F1>Prior to June 30, 1987, net commissions paid on new sales of shares under the Fund's Rule 12b-1 Distribution Plan had been
treated for both financial statement and tax purposes as capital charges. On June 11, 1987, the Securities and Exchange
Commission adopted a rule which required for financial statements for the periods ended on or after June 30, 1987, that net
commissions paid under Rule 12b-1 be treated as operating expenses rather than capital charges. Accordingly, beginning with
the year ended August 31, 1987, the Fund's financial statements reflect 12b-1 Distribution Plan expenses (i.e., shareholder
service fees plus commissions paid net of deferred sales charges received by the Fund) as a component of the net investment
income.
<F2>Excluding applicable sales charges.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
FUND DESCRIPTION
- --------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. The Fund was created under Pennsylvania law as a common
law trust and has been offering its shares continuously since September 11,
1935. The Fund is one of twenty funds managed by Keystone Management, Inc.
("Keystone Management"), the Fund's investment manager, and is one of thirty
funds managed or advised by Keystone Investment Management Company (formerly
Keystone Custodian Funds, Inc.) ("Keystone"), the Fund's investment adviser.
Keystone and Keystone Management are, from time to time, collectively referred
to as "Keystone."
- --------------------------------------------------------------------------------
FUND OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide shareholders with maximum income
without undue risk of principal.
There can be no assurance that the Fund will achieve its investment objective
since there is uncertainty in every investment. The investment objective of the
Fund cannot be changed without a vote of the holders of a majority (as defined
in the 1940 Act) of the Fund's outstanding shares.
The Fund will invest, under normal circumstances, at least 65% of its total
assets in bonds, debentures and income obligations that are normally
characterized by liberal returns and moderate price fluctuations. Such bonds,
which include both secured and unsecured debt obligations and may be of any
assigned rating by Standard & Poor's Corporation ("S&P") or Moody's Investors
Service ("Moody's") or unrated, as a group have possessed a fairly high degree
of dependability of interest payments. While the Fund's primary objective is
income, the Fund gives careful consideration to security of principal,
marketability and diversification.
In addition to its other investment options, the Fund may invest in limited
partnerships, including master limited partnerships, and may invest up to 25% of
its assets in foreign securities. The Fund may also invest in participations in
bank loans. The Fund seeks to maximize return with respect to a portion of its
assets. Such maximum return is ordinarily associated with high yield, high risk
bonds and similar securities in the lower rating categories of the recognized
rating agencies or with securities that are unrated (high yield bonds). Such
high yield, high risk bonds generally involve greater volatility of price and
risk of principal and income than bonds in the higher rating categories and are,
on balance, considered predominantly speculative.
The Fund's investments may include fixed and adjustable rate or stripped
bonds, including zero coupon bonds and payment-in-kind ("PIK") securities,
debentures, notes, equipment trust certificates, United States ("U.S.")
government securities and debt securities convertible into or exchangeable for
preferred or common stock. The Fund may invest in preferred stock, including
adjustable rate preferred stock, and warrants, which can be used to purchase or
create otherwise permissible investments. The Fund may continue to hold
preferred or common stock received in connection with convertible or
exchangeable securities and may hold common stock received in connection with
the purchase of a permitted security.
When, in the opinion of Keystone, market conditions warrant, the Fund may
adopt a defensive position to preserve shareholders' capital by investing in
money market instruments. Such instruments, which must mature within one year of
their purchase, consist of U.S. government securities; instruments, including
certificates of deposit, demand and time deposits and bankers' acceptances, of
banks that are members of the Federal Deposit Insurance Corporation and have
assets of at least $1 billion, including U.S. branches of foreign banks and
foreign branches of U.S. banks; prime commercial paper, including master demand
notes; and repurchase agreements secured by U.S. government securities.
The Fund intends to follow policies of the Securities and Exchange Commission
as they are adopted from time to time with respect to illiquid securities,
including, at this time, (1) treating as illiquid securities which may not be
sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued such securities on its
books and (2) limiting its holdings of such securities to 15% of net assets.
The Fund may write covered call and put options. The Fund may also purchase
call and put options, including call and put options to close out existing
positions, and may employ new investment techniques with respect to such
options.
The Fund may enter into reverse repurchase agreements and firm commitment and
when-issued transactions for securities and currencies. In addition, the Fund
may enter into currency and other financial futures contracts and related
options transactions for hedging purposes and not for speculation and may employ
new investment techniques with respect to such futures contracts and related
options transactions.
In addition to the options, futures contracts and forwards mentioned above,
the Fund may also invest in certain other types of derivative instruments,
including collateralized mortgage obligations, structured notes, interest rate
swaps, index swaps, currency swaps and caps and floors. These basic vehicles can
also be combined to create more complex products called hybrid derivatives or
structured securities.
Investments in foreign securities, options transactions and other complex or
derivative securities involve certain risks.
For a further explanation of the types of investments and investment
techniques available to the Fund and the associated risks, see the section of
this prospectus entitled "Additional Investment Information" and the statement
of additional information.
- --------------------------------------------------------------------------------
RISK FACTORS
- --------------------------------------------------------------------------------
Like any investment, your investment in the Fund involves an element of risk.
Before you invest in the Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses. YOU CAN LOSE MONEY BY
INVESTING IN THE FUND. YOUR INVESTMENT IS NOT GUARANTEED. A DECREASE IN THE
VALUE OF THE FUND'S PORTFOLIO SECURITIES CAN RESULT IN A DECREASE IN THE VALUE
OF YOUR INVESTMENT.
Certain risks related to the Fund are discussed below. To the extent not
discussed in this section, specific risks attendant to individual securities or
investment practices are discussed in greater detail in "Additional Investment
Information" at the back of the prospectus.
By itself the Fund does not constitute a balanced investment program. You
should take into account your own investment objectives as well as your other
investments when considering an investment in the Fund.
Should the Fund need to raise cash to meet a large number of redemptions it
might have to sell portfolio securities at a time when it would be
disadvantageous to do so.
NON-INVESTMENT GRADE BONDS
The Fund's flexible investment policy allows the Fund to invest a portion of its
assets in high yield, high risk bonds and similar securities. The degree to
which the Fund will hold such securities will, among other things, depend upon
its adviser's economic forecast and its judgment as to the comparative values
offered by high yield, high risk securities and higher quality issues. While the
Fund currently intends to invest less than 35% of its assets in high yield, high
risk securities, over the past 10 years portfolio holdings of high yield, high
risk securities have ranged from a low of approximately 25% of total assets to a
high of approximately 60%.
The Fund invests a portion of its assets aggressively and seeks to maximize
return on such assets over time from a combination of many factors, including
high current income and capital appreciation from high yield, high risk
securities. Such aggressive investing involves risks that are greater than the
risks of investing in higher quality debt securities. These risks are discussed
in greater detail below and include risks from (1) interest rate fluctuation;
(2) changes in credit status, including weaker overall credit condition of
issuers and risks of default; (3) industry, market and economic risk; (4)
volatility of price resulting from broad and rapid changes in the value of
underlying securities; and (5) greater price variability and credit risks of
certain high yield, high risk securities such as zero coupon bonds and PIK
securities.
These risks provide the opportunity for maximizing return over time on a
portion of the Fund's assets, but may result in greater upward and downward
movement of the net asset value per share of the Fund. As a result, they should
be carefully considered by investors. The portion of the Fund's assets invested
in high yield, high risk securities may vary and may at times be substantial.
The maximum return sought by the Fund with respect to a portion of its assets
is ordinarily associated with securities in the lower rating categories of the
recognized rating agencies or with securities that are unrated. Such high yield,
high risk securities are generally rated BB or lower by S&P or Ba or lower by
Moody's. The Fund may invest in securities that are rated as low as D by S&P and
C- by Moody's. For a description of these rating categories see "Additional
Investment Information." The Fund intends to invest in D rated debt only in
cases where, in Keystone's judgment, there is a distinct prospect of improvement
in the issuer's financial position as a result of the completion of
reorganization or otherwise. The Fund may also invest in unrated securities
that, in Keystone's judgment, offer comparable yields and risks to those of
securities that are rated as well as in non-investment quality zero coupon and
PIK securities.
While investment in the Fund provides opportunities to maximize return over
time, investors should be aware of the following risks associated with
noninvestment grade bonds:
(1) Securities rated BB or lower by S&P or Ba or lower by Moody's are
considered predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments.
(2) The lower ratings of certain securities held by the Fund reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest rates
may impair the ability of the issuer to make payments of interest and principal,
especially if the issuer is highly leveraged. Such issuer's ability to meet its
debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. Also, an economic
downturn or an increase in interest rates may increase the potential for default
by the issuers of these securities.
(3) The value of certain securities held by the Fund may be more susceptible
to real or perceived adverse economic, company or industry conditions and
publicity than is the case for higher quality securities.
(4) The values of certain securities, like those of other fixed income
securities, fluctuate in response to changes in interest rates. When interest
rates decline, the value of a portfolio invested in bonds can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested in
bonds can be expected to decline. For example, in the case of an investment in a
fixed-income security, if interest rates increase after the security is
purchased, the security, if sold prior to maturity, may return less than its
cost. The prices of noninvestment grade bonds, however, are generally less
sensitive to interest rate changes than the prices of higher-rated bonds;
noninvestment grade bonds are more sensitive to adverse or positive economic
changes or individual corporate developments.
(5) The secondary market for certain securities held by the Fund may be less
liquid at certain times than the secondary market for higher quality debt
securities, which may have an adverse effect on market price and the Fund's
ability to dispose of particular issues and may also make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing its
assets.
(6) Zero coupon bonds and PIKs involve additional special considerations. Zero
coupon bonds do not require the periodic payment of interest. PIK bonds are debt
obligations that provide that the issuer may, at its option, pay interest on
such bonds in cash or in the form of additional debt obligations. Such
investments may experience greater fluctuation in value due to changes in
interest rates than debt obligations that pay interest currently. Even though
these investments do not pay current interest in cash, the Fund is nonetheless
required by tax laws to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate investments in order to fulfill its intention
to distribute substantially all of its net income as dividends.
The following table shows the weighted average percentages of the Fund's
assets invested at the end of each month during the last fiscal year in
securities assigned to the various rating categories by S&P and in unrated
securities determined by Keystone to be of comparable quality. Since the
percentages in this table are based on month-end averages throughout the Fund's
fiscal year, they do not reflect the Fund's holdings at any one point in time.
The percentages in each category may be higher or lower on any day than those
shown in the table.
*UNRATED
SECURITIES
OF COMPARABLE
RATED SECURITIES QUALITY AS
AS PERCENTAGE OF PERCENTAGE OF
RATING FUND'S ASSETS FUND'S ASSETS
- ------ ---------------- -------------
AAA 20.36% 0%
AA 9.07% 0%
A 9.40% 0%
BBB 11.47% 0%
BB 9.12% 0.80%
B 19.47% 1.45%
CCC 0.72% .06%
CC and below 0% 0%
Unrated* 2.31%
U.S. Governments,
equities and others 18.08%
------
TOTAL 100.00%
======
Since the Fund takes an aggressive approach to investing a portion of its
assets, Keystone tries to maximize the return by controlling risk through
diversification, credit analysis, review of sector and industry trends, interest
rate forecasts and economic analysis. Keystone's analysis of securities focuses
on values based on factors such as interest or dividend coverage, asset values,
earnings prospects and the quality of management of the company. In making
investment recommendations, Keystone also considers current income, potential
for capital appreciation, maturity structure, quality guidelines, coupon
structure, average yield, percentage of zeros and PIKs, percentage of
non-accruing items and yield to maturity. Keystone also 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 (1) Moody's and S&P assigned ratings
are based largely on historical financial data and may not accurately reflect
the current financial outlook of companies, and (2) there can be large
differences among the current financial conditions of issuers within the same
rating category.
Income and yields on high yield, high risk securities, as on all securities,
will fluctuate over time.
RULE 144A SECURITIES
The Fund may invest in restricted securities, including securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933 (the "1933
Act"). Generally, Rule 144A establishes a safe harbor from the registration
requirements of the 1933 Act for resales by large institutional investors of
securities not publicly traded in the U.S. The Fund may purchase Rule 144A
securities when such securities present an attractive investment opportunity and
otherwise meet the Fund's selection criteria. The Board of Trustees has adopted
guidelines and procedures pursuant to which the liquidity of the Fund's Rule
144A securities is determined by Keystone, and the Board of Trustees monitors
Keystone's implementation of such guidelines and procedures.
At the present time, the Fund cannot accurately predict exactly how the market
for Rule 144A securities will develop. A Rule 144A security that was readily
marketable upon purchase may subsequently become illiquid. In such an event, the
Board of Trustees will consider what action, if any, is appropriate.
DERIVATIVE SECURITIES
With respect to derivative or structured securities, the market value of such
securities may vary depending on the manner in which such securities have been
structured. As a result, the value of such investments may change at a more
rapid rate than that of traditional fixed income securities. For more
information on derivatives, see "Additional Investment 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
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, computed at market value at the time of purchase, in the
securities of any one issuer (other than U.S. government securities) except that
up to 25% of its total assets may be invested without regard to this limit; (2)
borrow money, except that the Fund may borrow money from banks for temporary or
emergency purposes in aggregate amounts up to 10% of the value of the Fund's net
assets (computed at cost) or enter into reverse repurchase agreements; and (3)
invest more than 25% of its total assets in securities of issuers in the same
industry.
In addition, the Fund may, notwithstanding any other investment policy or
restriction, 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. The Fund does not currently
intend to implement this policy and would do so only if the Trustees were to
determine such action to be in the best interest of the Fund and its
shareholders. In the event of such implementation, the Fund will comply with
such requirements as to written notice to shareholders as are then in effect.
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PRICING SHARES
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The net asset value of a Fund share is computed each day on which the New York
Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. Eastern time for the purpose of pricing Fund
shares), except on days when changes in the value of the Fund's 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 is arrived at by determining the value of all of the Fund's
assets, subtracting all liabilities and dividing the result by the number of
shares outstanding.
The Fund values short-term investments having maturities of more than sixty
days for which market quotations are readily available at current market value.
Where market quotations are not available, such instruments are valued at fair
value as determined by the Board of Trustees. Short-term investments that are
purchased with maturities of sixty days or less (including all master demand
notes) are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market. Short-term investments maturing in more
than sixty days when purchased that are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day adjusted
for amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market, and in any case reflects fair value as
determined by the Board of Trustees.
The Fund believes that reliable market quotations are generally not readily
available for purposes of valuing fixed income securities. As a result,
depending on the particular securities owned by the Fund, 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 the Fund's fixed income securities and certain other
securities. Securities for which market quotations are readily available are
valued on a consistent basis at the price quoted that, in the opinion of the
Board of Trustees or the person designated by the Board of Trustees to make the
determination, most nearly represents the market value of the particular
security. Any securities for which market quotations are not readily available
or other assets are valued on a consistent basis at fair value as determined in
good faith using methods prescribed by the Board of Trustees.
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DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code. The 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 when 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 substantially all of its net
investment income and net capital gains, if any, to shareholders, it will be
relieved of any federal income tax liability. Any taxable dividend declared in
October, November or December to shareholders of record in such month and paid
by the following January 31 will be includable in the taxable income of the
shareholder as if paid on December 31 of the year in which the dividend was
declared. The Fund will make distributions from its net investment income on or
about the 5th day of each month and net capital gains, if any, at least
annually.
As of April 1, 1995, in compliance with a recent ruling issued by the Internal
Revenue Service, the Fund treats its 12b-1 fees for tax purposes as operating
expenses rather than capital charges.
The Fund makes distributions in additional shares of the Fund or, at the
shareholder's election (which must be made before the record date for the
distribution), in cash. Income dividends and net short-term gains distributions
are taxable as ordinary income, and net long-term gains distributions are
taxable as capital gains regardless of how long the shareholder has held the
Fund's shares. 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. Dividends and
distributions may also be subject to state and local taxes. The Fund advises its
shareholders annually as to the federal tax status of all distributions made
during the year.
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FUND MANAGEMENT AND EXPENSES
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FUND MANAGEMENT
Subject to the general supervision of the Fund's Board of Trustees, Keystone
Management, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
serves as investment manager to the Fund and is responsible for the overall
management of the Fund's business and affairs.
INVESTMENT MANAGER
Keystone Management, organized in 1989, is a wholly-owned subsidiary of
Keystone. Its directors and principal executive officers have been affiliated
with Keystone, a seasoned investment adviser, for a number of years. Keystone
Management also serves as investment manager to each of the other Keystone
Custodian Funds and to certain other funds in the Keystone Family of Funds.
The Fund pays Keystone Management a fee for its services at the annual rate
set forth below:
AGGREGATE
ANNUAL NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE INCOME OF THE FUND
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2% of
Gross Dividend and
Interest Income
Plus
0.50% of the first $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 $100,000,000 plus
0.30% of the next $100,000,000 plus
0.25% of amounts over $500,000,000;
computed as of the close of business each business day and paid daily.
Pursuant to its Investment Management Agreement with the Fund (the "Management
Agreement"), Keystone Management has delegated its investment management
functions, except for certain administrative and management services, to
Keystone and has entered into an Investment Advisory Agreement with Keystone
(the "Advisory Agreement"), under which Keystone provides investment advisory
and management services to the Fund.
Services currently performed by Keystone Management include (1) performing
research and planning with respect to (a) the Fund's qualification as a
regulated investment company under Subchapter M of the Internal Revenue Code,
(b) tax treatment of the Fund's portfolio investments, (c) tax treatment of
special corporate actions (such as reorganizations), (d) state tax matters
affecting the Fund, and (e) the Fund's distributions of income and capital
gains; (2) preparing the Fund's federal and state tax returns; and (3) providing
services to the Fund's shareholders in connection with federal and state
taxation and distributions of income and capital gains.
INVESTMENT ADVISER
Keystone, the Fund's investment adviser, located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034, has provided investment advisory and
management services to investment companies and private accounts since it was
organized in 1932. Keystone is a wholly-owned subsidiary of Keystone
Investments, Inc. (formerly Keystone Group, Inc.) ("Keystone Investments"),
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a 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 and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Keystone, their affiliates and the Keystone
Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone receives for its services an
annual fee representing 85% of the management fee received by Keystone
Management under the Management Agreement.
During the fiscal year ended August 31, 1995, the Fund paid or accrued to
Keystone Management investment management and administrative services fees of
$3,982,976 which represented 0.53% of the Fund's average net assets. Of such
amount paid to Keystone Management, $3,385,529 was paid to Keystone for its
services to the Fund.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
<PAGE>
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and management fees discussed above, the principal expenses that the Fund is
expected to pay include, but are not limited to, expenses of its transfer agent,
its custodian and its independent auditors; expenses under its Distribution
Plan; fees of its Independent Trustees ("Independent Trustees"); expenses of
shareholders' and Trustees' meetings; fees payable to government agencies,
including registration and qualification fees of the Fund and its shares under
federal and state securities laws; expenses of preparing, printing and mailing
Fund prospectuses, notices, reports and proxy material; and certain
extraordinary expenses. In addition to such expenses, the Fund will pay its
brokerage commissions, interest charges and taxes. For the fiscal year ended
August 31, 1995, the Fund paid 1.81% of its average net assets in expenses.
During the fiscal year ended August 31, 1995, the Fund paid or accrued to
Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and
dividend disbursing agent and Keystone Investments, $26,592 for certain
accounting services and $1,674,129 for transfer agent services. KIRC is a
wholly-owned subsidiary of Keystone.
PORTFOLIO MANAGER
Christopher P. Conkey has been the Fund's portfolio manager since January,
1995. He is a Keystone Senior Vice President and has over twelve years of
experience in fixed-income investing.
SECURITIES TRANSACTIONS
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 follow a policy of considering as a
factor the number of shares of the Fund sold by such broker-dealers. In
addition, broker-dealers may, from time to time, be affiliated with the Fund,
Keystone Management, Keystone, the Fund's principal underwriter or their
affiliates.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rates for the fiscal years ended August 31, 1994
and 1995 were 200% and 178%, respectively. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund, as well as additional realized gains and/or
losses to shareholders. The Fund pays brokerage commissions in connection with
the writing of options and effecting the closing purchase or sale transactions,
as well as for certain purchases and sales of portfolio securities.
For further information about brokerage and distributions, see the statement
of additional information.
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HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Shares of the Fund may be purchased from any broker-dealer that has a selling
agreement with Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc. (the "Principal Underwriter")), the Fund's principal
underwriter. The Principal Underwriter, a wholly-owned subsidiary of Keystone,
is located at 200 Berkeley Street, Boston, Massachusetts 02116- 5034.
In addition, you may open an account for the purchase of Fund shares by
mailing to the Fund, c/o KIRC, P.O. Box 2121, Boston, Massachusetts 02106-2121,
a completed account application and a check payable to the Fund. Or you may
telephone 1-800-343- 2898 to obtain the number of an account to which you can
wire or electronically transfer funds and then send in a completed account
application. Subsequent investments in any amount may be made by check, by
wiring federal funds or by an electronic funds transfer ("EFT").
The Fund's shares are sold at the net asset value per share next computed
after it receives the purchase order. The initial purchase must be at least
$1,000, except for purchases by participants in certain retirement plans for
which the minimum is waived. There is no minimum for subsequent purchases.
Purchase payments are fully invested at net asset value. There are no sales
charges on purchases of Fund shares at the time of purchase.
CONTINGENT DEFERRED SALES CHARGE
With certain exceptions, when shares are redeemed within four calendar years
after their purchase, a contingent deferred sales charge may be imposed at rates
ranging from a maximum of 4% of amounts redeemed during the same calendar year
of purchase to 1% of amounts redeemed during the third calendar year after the
year of purchase. No contingent deferred sales charge is imposed on amounts
redeemed thereafter or on shares purchased through reinvestment of dividends. If
imposed, the contingent deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. Prior to July 8, 1992, the Fund retained the
deferred sales charge. Since July 8, 1992, the deferred sales charge
attributable to shares purchased prior to January 1, 1992 has been retained by
the Fund, and the deferred sales charge attributable to shares purchased after
January 1, 1992 is, to the extent permitted by the NASD, paid to the Principal
Underwriter. For the fiscal year ended August 31, 1995, the Fund recovered
$32,800 in deferred sales charges.
The contingent deferred sales charge is a declining percentage of the lesser
of (1) the net asset value of the shares redeemed or (2) the total cost of such
shares. No deferred sales charge is imposed when a shareholder redeems amounts
derived from (1) increases in the value of his account above the total cost of
such shares due to increases in the net asset value per share of the Fund; (2)
certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; or (3) shares held in all or part of more than four
consecutive calendar years.
In determining whether a contingent deferred sales charge is payable and, if
so, the percentage charge applicable, it is assumed that shares held the longest
are the first to be redeemed. No deferred sales charge is payable on permitted
exchanges of shares between Keystone funds that have adopted distribution plans
pursuant to Rule 12b-1 under the 1940 Act. Moreover, when shares of one such
fund have been exchanged for shares of another such fund, for purposes of any
future contingent deferred sales charge, the calendar year of the purchase of
the shares of the fund exchanged into, is assumed to be the year shares tendered
for exchange were originally purchased.
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% 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) returns of excess contributions or excess deferral amounts
made to a retirement plan participant.
WAIVER OF DEFERRED SALES CHARGE
Shares also may be sold, to the extent permitted by applicable law, at net
asset value without the payment of commissions or the imposition of a contingent
deferred sales charge upon redemption of Fund shares to (1) certain officers,
Directors, Trustees and employees of the Fund, Keystone Management, Keystone and
certain of their affiliates; (2) registered representatives of firms with dealer
agreements with the Principal Underwriter; and (3) a bank or trust company
acting as trustee for a single account. See the statement of additional
information for more details.
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DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted pursuant to Rule 12b-1 under the 1940 Act. The Fund's Distribution
Plan provides that the Fund may expend up to 0.3125% quarterly (approximately
1.25% annually) of the average daily net asset value of its shares to pay
distribution costs for sales of its shares and to pay shareholder service fees.
The NASD currently limits such annual expenditures to 1%, of which 0.75% may be
used to pay such distribution costs and 0.25% may be used to pay shareholder
service fees. The aggregate amount that the Fund may pay for such distribution
costs is limited to 6.25% of gross share sales since the inception of the Fund's
Distribution Plan plus interest at the prime rate plus 1% on unpaid amounts
thereof (less any contingent deferred sales charges paid by shareholders to the
Principal Underwriter).
Payments under the Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as dealers) (1) as
commissions for Fund shares sold and (2) as shareholder service fees in respect
of shares maintained by the recipients on the Fund's books for specified
periods. Amounts paid or accrued to the Principal Underwriter under (1) and (2)
in the aggregate may not exceed the annual limitations referred to above. The
Principal Underwriter generally reallows to brokers or others a commission equal
to 4% of the price paid for each Fund share sold as well as a shareholder
service fee at a rate of 0.25% per annum of the net asset value of shares
maintained by such recipients on the books of the Fund for specified periods.
If the Fund is unable to pay the Principal Underwriter a commission on a new
sale because the annual maximum (0.75% of average daily net assets) has been
reached, the Principal Underwriter intends, but is not obligated, to continue to
accept new orders for the purchase of Fund shares and to pay or accrue
commissions and service fees to dealers in excess of the amount it currently
receives from the Fund. While the Fund is under no contractual obligation to pay
the Principal Underwriter such amounts that exceed the Distribution Plan
limitation, the Principal Underwriter intends to seek full payment of such
charges from the Fund (together with interest at the rate of prime plus 1%) at
such time in the future as, and to the extent that, payment thereof by the Fund
would be within permitted limits. The Principal Underwriter currently intends to
seek payment of interest only on such charges paid or accrued by the Principal
Underwriter subsequent to July 7, 1992. If the Fund's Independent Trustees (the
"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. If the 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.
During the year ended August 31, 1995, the Fund recovered $32,800 in deferred
sales charges. During the year, the Fund paid the Principal Underwriter
$7,545,356 under the Distribution Plan. For the year ended August 31, 1995, the
Principal Underwriter also received $941,583 in deferred sales charges. The
amount paid by the Fund under its Distribution Plan, net of deferred sales
charges, was $7,512,556 (1.00% of the Fund's average daily net asset value).
During the year, the Principal Underwriter paid commissions on new sales and
service fees to dealers and others of $3,216,034. At August 31, 1995, unpaid
distribution costs amounted to $22,382,869 (3.05% of net assets as of August 31,
1995).
At each Trustee's meeting (usually quarterly), the Independent Trustees of the
Fund consider whether to authorize payments to such extent until the next
quarterly Trustees' meeting and, pursuant to such authorizations, such payments
are made. Except as described above, the Fund has no obligation to pay any
portion of this amount, and the times, conditions for payment of any remainder,
and amount, if any, to be paid by the Fund are solely within the discretion of
the Independent Trustees.
The amounts and purposes of expenditures under the Distribution Plan must be
reported to the Independent Trustees quarterly. The Independent Trustees may
require or approve changes in the operation of the Distribution Plan, and may
require that total expenditures by the Fund under the Distribution Plan be kept
within limits lower than the maximum amount permitted by the Distribution Plan
as stated above. If such costs are not limited by the Independent Trustees, such
costs could, for some period of time, be higher than such costs permitted by
most other plans presently adopted by other investment companies.
The Distribution Plan may be terminated at any time by vote of the Fund's
Independent Trustees or by vote of a majority of the outstanding voting shares
of the Fund. Any change in the Distribution Plan that would materially increase
the distribution expenses of the Fund provided for in the Distribution Plan
requires shareholder approval. Otherwise, the Distribution Plan may be amended
by votes of the majority of both (1) the Fund's Trustees and (2) the Independent
Trustees, cast in person at a meeting called for the purpose of voting on such
amendment.
While the Distribution Plan is in effect, the Fund is required to commit the
selection and nomination of candidates for Independent Trustees to the
discretion of the Independent Trustees.
Whether any expenditure under the Distribution Plan is subject to a state
expense limit depends 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.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
Upon written notice to dealers, the Principal Underwriter, at its own expense,
may periodically sponsor programs that offer additional compensation in
connection with sales of Fund shares. Participation in such programs may be
available to all dealers or to selected dealers who have sold or are expected to
sell significant amounts of shares. Additional compensation may also include
financial assistance to dealers in connection with preapproved 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.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to dealers that satisfy certain criteria established
from time to time by the Principal Underwriter. These conditions relate to
increasing sales of shares of Keystone funds over specified periods and
certain other factors. Such payments may, depending on the dealer's satisfaction
of the required conditions, be periodic and may be up to 0.25% of the value of
shares sold by such dealer.
The Principal Underwriter also may pay banks and other financial services
firms that facilitate transactions in shares of the Fund for their clients a
transaction fee up to the level of the payments made allowable to dealers for
the sale of such shares as described above.
The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
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HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
Fund shares may be redeemed for cash at the redemption value upon written
order by the shareholder(s) to the Fund, c/o Keystone Investor Resource Center,
Inc., P.O. Box 2121, Boston, Massachusetts 02106-2121, and presentation to the
Fund of a properly endorsed share certificate if certificates have been issued.
The signature(s) of the shareholder(s) on the written order and certificates
must be guaranteed. The redemption value is the net asset value adjusted for
fractions of a cent and may be more or less than the shareholder's cost
depending upon changes in the value of the Fund's portfolio securities between
purchase and redemption. The Fund may impose a deferred sales charge at the time
of redemption of certain shares as explained in "How to Buy Shares." If imposed,
the Fund deducts the deferred sales charge from the redemption proceeds
otherwise payable to the shareholder.
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. In such a case the Fund will mail the redemption
proceeds upon clearance of the purchase check, which may take up to 15 days or
more. Any delay as explained in this paragraph may be avoided by purchasing
shares with a certified check drawn on a U.S. bank or by bank wire of funds.
Although the mailing of a redemption check 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 mailing of a redemption check
has been delayed, the check will be mailed promptly after good payment has been
collected.
The Fund computes the redemption value at the close of the Exchange at the end
of the day on which it has received all proper documentation from the
shareholder. Payment of the amount due on redemption, less any applicable
deferred sales charge, will be made within seven days thereafter.
Shareholders also may redeem their shares through their broker-dealers. The
Principal Underwriter, acting as agent for the Fund, stands ready to repurchase
Fund shares upon orders from dealers as follows: redemption requests received by
broker-dealers prior to that day's close of trading on the Exchange and
transmitted to the Fund prior to its close of business that day will receive the
net asset value per share computed at the close of trading on the Exchange on
the same day. Redemption requests received by broker-dealers after that day's
close of trading on the Exchange and transmitted to the Fund prior to the close
of business on the next business day will receive the next business day's net
asset value price. The Principal Underwriter will pay the redemption proceeds,
less any applicable deferred sales charge, to the dealer placing the order
within seven days thereafter, assuming it has received proper documentation. The
Principal Underwriter charges no fees for this service, but the shareholder's
broker-dealer may do so.
For the protection of shareholders, 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
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 where 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 or repurchase order, but the shareholder has
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 the shareholder and process the order the day it receives such
information.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of of
30 days.
If the redemption proceeds are less than $2,500, they will be mailed by check.
If they are $2,500 or more, they will be mailed, wired or sent by EFT to your
previously designated bank account as you direct. If you do not specify how you
wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth above.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value falls 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
contingent 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.
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) the Fund cannot dispose of its
investments or fairly determine their value; or (4) the Securities and Exchange
Commission, for the protection of shareholders, so orders.
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SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Details on all shareholder services may be obtained from KIRC by calling toll
free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers shareholders specific fund account information and price and yield
quotations as well as the ability to effect account transactions, including
investments, exchanges and redemptions. Shareholders 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 funds in the Keystone Fund Family,
Keystone Precious Metals Holdings, Inc. ("KPMH"), Keystone International Fund
Inc. ("KIF"), Keystone Tax Exempt Trust ("KTET"), Keystone Liquid Trust ("KLT")
or Keystone Tax Free Fund ("KTFF") on the basis of their respective net asset
values by calling toll free 1-800-343-2898 or by writing KIRC at P.O. Box 2121,
Boston, Massachusetts 02106-2121. Fund shares purchased by check may be
exchanged for shares of the named funds, other than KPMH, KTET or KTFF, after 15
days, provided good payment for the purchase of Fund shares has been collected.
In order to exchange Fund shares for shares of KPMH, KTET or KTFF, a shareholder
must have held Fund shares for a period of at least six months. You may exchange
your shares for another Keystone fund for a $10 fee by calling or writing to
Keystone. The exchange fee is waived for individual investors who make an
exchange using KARL. If the shares being tendered for exchange have been held
for less than four years and are still subject to a deferred sales charge, such
charge will carry over to the shares being acquired in the exchange transaction.
The Fund reserves the right, after 60 days' notice to shareholders, to terminate
this exchange offer or to change its terms, including the right to change the
fee for any exchange.
Orders to exchange shares of the Fund for shares of KLT will be executed by
redeeming the shares of the Fund and purchasing shares of KLT at the net asset
value of KLT shares 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 funds are 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 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.
RETIREMENT PLANS
The Fund has various pension and profit-sharing plans available to investors
including: Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified
Employee Pension Plans ("SEPs"); Tax Sheltered Annuity Plans ("TSAs"); 401(k)
Plans; Keogh Plans; Corporate Profit-Sharing Plans; Pension and Target Benefit
Plans; Money Purchase Pension Plans and Salary-Reduction Plans. For details,
including fees and application forms, call KIRC toll free at 1-800-247-4075 or
write to KIRC at P.O. Box 2121, Boston, Massachusetts 02106-2121.
AUTOMATIC INVESTMENT PLAN
Shareholders may take advantage of investing on an automatic basis by
establishing an automatic investment plan. Funds are drawn on a shareholder's
checking account monthly and used to purchase Fund shares.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, shareholders may arrange for regular
monthly or quarterly fixed withdrawal payments. Each payment must be at least
$100 and may be as much as 1% per month or 3% per quarter of the total net asset
value of the Fund shares in the shareholder's account when the Automatic
Withdrawal Plan is opened. Fixed withdrawal payments are not subject to a
deferred sales charge. Excessive withdrawals may decrease or deplete the value
of a shareholder's account.
OTHER SERVICES
Under certain circumstances shareholders may, within 30 days after a
redemption, reinstate their accounts at current net asset value.
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PERFORMANCE DATA
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From time to time, the Fund may advertise "total return" and "current yield."
BOTH FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. Total return refers to the Fund's average annual compounded
rates of return over specified periods determined by comparing the initial
amount invested to the ending redeemable value of that amount. The resulting
equation assumes reinvestment of all dividends and distributions and deduction
of all recurring charges, if any, applicable to all shareholder accounts. The
deduction of the contingent deferred sales charge is reflected in the applicable
years. 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 include comparative performance information 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.
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FUND SHARES
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The Fund currently issues one class of shares, which participate equally in
dividends and distributions and have equal voting, liquidation and other rights.
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.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares are transferable, redeemable and freely
assignable as collateral. There are no sinking fund provisions. The Fund may
establish additional classes or series of shares.
The Fund does not have annual meetings. The Fund will have special meetings
from time to time as required under its Restatement of Trust Agreement and under
the 1940 Act. As provided in the Fund's Restatement of Trust Agreement,
shareholders have the right to remove Trustees by an affirmative vote of
two-thirds of the outstanding shares. A special meeting of the shareholders will
be held when 10% of the outstanding shares request a meeting for the purpose of
removing a Trustee. 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. However, the Fund's Restatement of
Trust provides that shareholders shall not be subject to any personal liability
for the Fund's obligations and provides indemnification from Fund assets for any
shareholder held personally liable for the Fund's obligations. Disclaimers of
such liability are included in each Fund agreement.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone and serves as the Fund's transfer agent and
dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon written notice to those shareholders, the Fund intends, when an
annual report or 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>
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ADDITIONAL INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
CORPORATE BOND RATINGS
Higher yields are usually available on securities that are lower rated or that
are unrated. Bonds rated Baa by Moody's are considered as medium grade
obligations which are neither highly protected nor poorly secured. Debt rated
BBB by S&P is regarded as having an adequate capacity to pay interest and repay
principal, although adverse economic conditions are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. Lower rated securities are usually defined as
Baa or lower by Moody's or BBB or lower by S&P. The Fund may purchase unrated
securities, which are not necessarily of lower quality than rated securities but
may not be attractive to as many buyers. Debt rated BB, B, CCC, CC and C by S&P
is regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the highest
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. Debt rated CI by S&P is debt (income
bonds) on which no interest is being paid. Debt rated D by S&P is in default and
payment of interest and/or repayment of principal is in arrears. The Fund
intends to invest in D-rated debt only in cases where in Keystone's judgment
there is a distinct prospect of improvement in the issuer's financial position
as a result of the completion of reorganization or otherwise. Bonds which are
rated Caa by Moody's are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca by Moody's represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings. Bonds which are rated C by Moody's are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
ZERO COUPON "STRIPPED" BONDS
A zero coupon "stripped" bond represents ownership in serially maturing
interest payments or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. Coupon zero coupon bonds of any
series mature periodically from the date of issue of such series through the
maturity date of the securities related to such series. Principal zero coupon
bonds mature on the date specified therein, which is the final maturity date of
the related securities. Each zero coupon bond entitles the holder to receive a
single payment at maturity. There are no periodic interest payments on a zero
coupon bond. Zero coupon bonds are offered at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the rights and
privileges of owners of the underlying coupon obligations or principal
obligations. Owners of zero coupon bonds have the right upon default on the
underlying coupon obligations or principal obligations to proceed directly and
individually against the issuer and are not required to act in concert with
other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon bonds or
coupon zero coupon bonds (either initially or in the secondary market) is
treated as if the buyer had purchased a corporate obligation issued on the
purchase date with an original issue discount equal to the excess of the amount
payable at maturity over the purchase price. The purchaser is required to take
into income each year as ordinary income an allocable portion of such discounts
determined on a "constant yield" method. Any such income increases the holder's
tax basis for the zero coupon bond, and any gain or loss on a sale of the zero
coupon bonds relative to the holder's basis, as so adjusted, is a capital gain
or loss. If the holder owns both principal zero coupon bonds and coupon zero
coupon bonds representing interest in the same underlying issue of securities, a
special basis allocation rule (requiring the aggregate basis to be allocated
among the items sold and retained based on their relative fair market value at
the time of sale) may apply to determine the gain or loss on a sale of any such
zero coupon bonds.
PAYMENT-IN-KIND SECURITIES
Payment-in-kind securities pay interest in either cash or additional
securities, at the issuer's option, for a specified period. The issuer's option
to pay in additional securities typically ranges from one to six years, compared
to an average maturity for all PIK securities of eleven years. Call protection
and sinking fund features are comparable to those offered on traditional debt
issues.
PIKs, like zero coupon bonds, are designed to give an issuer flexibility in
managing cash flow. Several PIKs are senior debt. In other cases, where PIKs are
subordinated, most senior lenders view them as equity equivalents.
An advantage of PIKs for the issuer -- as with zero coupon securities -- is
that interest payments are automatically compounded (reinvested) at the stated
coupon rate, which is not the case with cash-paying securities. However, PIKs
are gaining popularity over zeros since interest payments in additional
securities can be monetized and are more tangible than accretion of a discount.
As a group, PIK bonds trade flat (i.e., without accrued interest). Their price
is expected to reflect an amount representing accreted interest since the last
payment. PIKs generally trade at higher yields than comparable cash- paying
securities of the same issuer. Their premium yield is the result of the lesser
desirability of non-cash interest, the more limited audience for non-cash paying
securities, and the fact that many PIKs have been issued to equity investors who
do not normally own or hold such securities.
Calculating the true yield on a PIK security requires a discounted cash flow
analysis if the security (ex interest) is trading at a premium or a discount
because the realizable value of additional payments is equal to the current
market value of the underlying security, not par.
Regardless of whether PIK securities are senior or deeply subordinated,
issuers are highly motivated to retire them because they are usually their most
costly form of capital.
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 amount 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 acquired by the Fund must permit the Fund to demand
payment of principal and accrued interest at any time (on not more than seven
days' notice). 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 may invest in them only
if at the time of an investment the issuer meets the criteria established for
commercial paper discussed in the statement of additional information (which
limits such investments to commercial paper rated A-1 by S&P, Prime-1 by Moody's
and F-1 by Fitch Investors Service, Inc.).
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 will be 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 only intends 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
which the Fund is obligated to repurchase may decline below the repurchase
price. Borrowing and reverse repurchase agreements magnify the potential for
gain or loss on the portfolio securities of the Fund and, therefore, increase
the possibility of fluctuation in the Fund's net asset value. Such practices may
consititute leveraging. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities and the Fund's use of
the proceeds of the reverse repurchase agreement may effectively be restricted
pending such determination. The staff of the Securities and Exchange Commission
has taken the position that the 1940 Act treats reverse repurchase agreements as
being included in the percentage limit on borrowings imposed on the Fund.
"WHEN ISSUED" AND "FORWARD COMMITMENT" TRANSACTIONS
The Fund may also purchase securities on a when issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis. When
issued and delayed delivery transactions arise when securities are purchased by
the Fund with payment and delivery taking place in the future in order to secure
what is considered to be an advantageous price and yield to the Fund at the time
of purchase. A forward commitment transaction is an agreement by the Fund to
purchase or sell securities at a specified future date. The Fund may also enter
into foreign currency forward contracts which are described in more detail in
the section of this Exhibit entitled "Foreign Currency Transactions". When the
Fund engages in these transactions, the Fund relies on the buyer or seller, as
the case may be, to consummate the sale. Failure to do so may result in the Fund
missing the opportunity to obtain a price or yield considered to be
advantageous. When issued, delayed delivery and forward commitment transactions
may be expected to occur a month or more before delivery is due. However, no
payment or delivery is made by the Fund until it receives payment or delivery
from the other party to the transaction. The Securities and Exchange Commission
has established certain requirements to assure that the Fund is able to meet its
obligations under these contracts, for example a separate account of liquid
assets equal to the value of such purchase commitments may be maintained until
payment is made. When issued, delayed delivery and forward commitment 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 any of these
transactions, it will do so for the purpose of acquiring portfolio securities or
currencies 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.
FOREIGN SECURITIES
The Fund may invest up to 25% of its assets in securities principally traded
in securities markets outside the U.S. While investment in foreign securities is
intended to reduce risk by providing further diversification, such investments
involve sovereign risk in addition to the credit and market risks normally
associated with domestic securities. Foreign investments may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid or more volatile than securities of U.S. companies,
and foreign brokerage commissions and custodian fees are generally higher than
in the United States. Investments in foreign securities may also be subject to
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of
assets,imposition of withholding taxes on dividend or interest payments and
currency blockage (which would prevent cash from being brought back to the
U.S.). These risks are carefully considered by Keystone prior to the purchase of
these securities.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to brokers and 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
The Fund may use derivatives while seeking to achieve 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 use of derivatives for non-hedging purposes
entails greater risks than if derivatives were used solely for hedging purposes.
The Fund uses futures contracts and related options as well as forwards for
hedging purposes. Derivatives are a valuable tool which, when used properly, can
provide significant benefit to Fund shareholders. Keystone is not an aggressive
user of derivatives with respect to the Fund. However, the Fund may take
positions in those derivatives that are within its investment policies if, in
Keystone's judgement, this represents an effective response to current or
anticipated market conditions. Keystone's use of derivatives is subject to
continuous risk assessment and control from the standpoint of the Fund's
investment 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, futures, forwards and swaps,
is provided later in this section and is provided in the Fund's statement of
additional information.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. See "Indexed Commercial Paper" and
"Structured Securities" below. The term "derivative" is also sometimes used to
describe securities involving rights to a portion of the cash flows from an
underlying pool of mortgages or other assets from which payments are passed
through to the owner of, or that collateralize, the securities. See "Mortgage
Related Securities," "Collateralized Mortgage Obligations," "Adjustable Rate
Mortgage Securities," "Stripped Mortgage Securities," "Mortgage Securities -
Special Considerations," and "Other Asset-Backed Securities" and 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 -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to as
a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange-traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
* 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 the 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 may
result. The Fund does not expect, however, that this will occur.
The Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits and
maintains 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 a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and, by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS. The Fund may purchase put or call options, including 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 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 fix what is
believed by Keystone to be a favorable price and rate of return for securities
or favorable exchange rate for currencies the Fund intends to purchase.
The Fund also 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 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.
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. This 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 currently 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 rate 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
than 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 enables 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 receives 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 or 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 obligations 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.
INVERSE FLOATING RATE COLLATERALIZED MORTGAGE OBLIGATIONS. In addition to
investing in fixed rate and adjustable rate CMOs, the Fund may also invest in
CMOs with rates that move inversely to market rates ("inverse floaters").
An inverse floater bears an interst rate that resets in the opposite direction
of the change in a specified interest rate index. As market interest rates rise,
the interest rate on the inverse floater goes down, and vice versa. Inverse
floaters tend to exhibit greater price volatility than fixed-rate bonds of
similar maturity and credit quality. The interest rates on inverse floaters may
be significantly reduced, even to zero, if interest rates rise. Moreover, the
secondary market for inverse floaters may be limited in rising interest rate
environments.
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 or 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 mortgage-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"), receives all of the principal
payments from the underlying assets. IOs and POs are extremely sensitive to
interest rate changes and are more volatile than 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 than 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 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 property owners make unscheduled prepayments of 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 inaccurately 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 underlying collateral may become damaged or stolen.
VARIABLE, FLOATING AND LEVERAGED 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.
If permitted by its investment policies, 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.
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 purpose of restructuring the investment
characteristics of sovereign debt obligations or foreign government securities.
This type of restructuring involves the deposit with or purchase by an 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 different 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 have higher yields 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, in 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>
KEYSTONE
FUND FAMILY
Quality Bond Fund (B-1)
Diversified Bond Fund (B-2)
High Income Bond Fund (B-4)
Balanced Fund (K-1)
Strategic Growth Fund (K-2)
Growth and Income Fund (S-1)
Mid-Cap Growth Fund (S-3)
Small Company Growth Fund (S-4)
International Fund
Precious Metals Holdings
Tax Free Fund
Tax Exempt Trust
Liquid Trust
[LOGO] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[recycle symbol]
B2-P 11/95
27M
KEYSTONE
Photo:
Mother and
daughter
sitting
in wagon
DIVERSIFIED
BOND FUND (B-2)
[LOGO]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE DIVERSIFIED BOND FUND (B-2)
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE DIVERSIFIED BOND FUND (B-2)
DECEMBER 20, 1995
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Diversified Bond Fund (B-2) (formerly named Keystone Custodian Fund, Series B-2)
(the "Fund") dated December 20, 1995. A copy of the prospectus may be obtained
from Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal
underwriter, 200 Berkeley Street, Boston, Massachusetts, 02116-5034, or your
broker-dealer.
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TABLE OF CONTENTS
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Page
The Fund's Objective and Policies 2
Investment Restrictions 2
Valuation of Securities 4
Distributions and Taxes 5
Sales Charges 6
Distribution Plan 8
The Trust Agreement 10
Investment Manager 12
Investment Adviser 14
Trustees and Officers 16
Principal Underwriter 19
Brokerage 20
Standardized Total Return
and Yield Quotations 23
Additional Information 23
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-16
<PAGE>
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THE FUND'S OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company. The
Fund's investment objective is to provide shareholders with maximum income
without undue risk of principal. To achieve this objective, the Fund invests
primarily in bonds and obligations that are normally characterized by liberal
returns and moderate price fluctuations. Such bonds, which include both secured
and unsecured debt obligations, as a group possess a fairly high degree of
dependability of interest payments. While the Fund's primary objective is
income, the Fund gives careful consideration to security of principal,
marketability and diversification. The Fund invests primarily in securities of
domestic companies, but may also invest up to 25% of its assets in foreign
securities. On August 31, 1995, the Fund owned foreign securities equal to 6%
(denominated in US dollars) of its net assets. On May 1, 1995, the Fund changed
its name from Keystone Custodian Fund, Series B-2 to its present name.
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
None of the restrictions enumerated in this paragraph may be changed
without a vote of the holders of a majority, as defined in the Investment
Company Act of 1940 (the "1940 Act"), of the Fund's outstanding shares.
The Fund will not do the following:
(1) invest more than 5% of its total assets, computed at market value,
in the securities of any one issuer, other than securities issued or guaranteed
by the United States ("U.S.") government, its agencies or instrumentalities;
(2) invest more than 5% of the value of its total assets in companies
which have been in operation for less than three years;
(3) borrow money, except that the Fund may (a) borrow money from banks
for temporary or emergency purposes in aggregate amounts up to 10% of the value
of the Fund's net assets (computed at cost), or (b) enter into reverse
repurchase agreements;
(4) underwrite securities, except that the Fund may purchase securities
from issuers thereof or others and dispose of such securities in a manner
consistent with its other investment policies; in the disposition of restricted
securities the Fund may be deemed to be an underwriter, as defined in the
Securities Act of 1933 (the "1933 Act");
(5) purchase or sell real estate or interests in real estate, except
that it may purchase and sell securities secured by real estate and securities
of companies which invest in real estate, and will not purchase or sell
commodities or commodity contracts, except that the Fund may engage in currency
or other financial futures contracts and related options transactions;
(6) invest for the primary purpose of exercising control over or
management of any issuer;
(7) make margin purchases or short sales of securities;
(8) make loans, except that the Fund may make, purchase or hold debt
securities and other debt investments, including loans, consistent with its
investment objective, lend limited portfolio securities valued at not more than
15% of its total assets to broker-dealers, and enter into repurchase agreements;
(9) invest more than 25% of its assets in the securities of issuers in
any single industry, other than securities issued by banks and savings and loan
associations or securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities; and
(10) purchase the securities of any other investment company except in
the open market and at customary brokerage rates and in no event more than 3% of
the voting securities of any investment company.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in the value of
a security or a decrease in Fund assets is not a violation of the limit.
Although not fundamental restrictions or policies requiring a
shareholders' vote to change, the Fund has undertaken to a state securities
authority that, so long as the state authority requires and shares of the Fund
are registered for sale in that state, the Fund will (1) limit its purchase of
warrants to 5% of net assets, of which 2% may be warrants not listed on the New
York or American Stock Exchange; (2) not invest in real estate limited
partnership interests; and (3) not invest in oil, gas or other mineral leases.
Additional restrictions adopted by the Fund, which may be changed by
the Board of Trustees, provide that the Fund may not purchase or retain
securities of an issuer if, to the knowledge of the Fund, officers, Trustees or
Directors of the Fund, Keystone Management, Inc. ("Keystone Management") or
Keystone Investment Management Company (formerly Keystone Custodian Funds, Inc.)
("Keystone"), each owning beneficially more than 1/2 of 1% of the securities of
such issuer, own, in the aggregate, more than 5% of the securities of such
issuer, or such persons or management personnel of the Fund, Keystone Management
or Keystone have a substantial beneficial interest in the securities of such
issuer. Portfolio securities of the Fund may not be purchased from or sold or
loaned to Keystone Management, Keystone or any affiliate thereof or any of their
Directors, officers or employees.
The Fund has no current intention of attempting to increase its net
income by borrowing and currently intends to repay any borrowings made in
accordance with the third investment restriction enumerated above before it
makes any additional investments.
The Fund intends to follow policies of the Securities and Exchange
Commission as they are adopted from time to time with respect to illiquid
securities, including, at this time, (1) treating as illiquid securities which
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued such securities on
its books and (2) limiting its holdings of such securities to 15% of its net
assets.
In order to permit the sale of Fund shares in certain states, the Fund
may make commitments more restrictive than the investment restrictions described
above. Should the Fund determine that any such commitment is no longer in the
best interests of the Fund, it will revoke the commitment by terminating sales
of its shares in the state involved.
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VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current value for the Fund's portfolio securities is determined in the
following manner:
Securities that are traded on an established exchange are valued on the
basis of the last sales price on the exchange where the securities are primarily
traded prior to the time of the valuation. Securities traded in the
over-the-counter market, for which complete quotations are readily available,
are valued at the mean of the bid and asked prices at the time of valuation.
Short-term money market instruments that are purchased with maturities of sixty
days or less are valued at amortized cost (original purchase cost as adjusted
for amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market. Short-term money market instruments
maturing in more than sixty days for which market quotations are readily
available are valued at current market value. Short-term money market
instruments having maturities of more than sixty days when purchased that are
held on the sixtieth day prior to maturity are valued at amortized cost (market
value on the sixtieth day adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates market; and
in any case reflects fair value as determined by the Fund's Board of Trustees.
The Board of Trustees values the following at prices it deems in good
faith to be fair: (1) securities, including restricted securities, for which
complete quotations are not readily available; (2) listed securities, if in the
Fund's opinion the last sales price does not reflect a current market value or
if no sale occurred; and (3) other assets. While market quotations may be
readily available for certain long-term corporate bonds and notes, such
investments are stated at fair value on the basis of valuations furnished by a
pricing service, approved by the Board of Trustees, which determines valuations
for normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various relationships
between securities that are generally recognized by institutional traders.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Fund ordinarily makes distributions in shares of the Fund or, at
the option of the shareholder, in cash. All shareholders may reinvest dividends
without being subject to a deferred sales charge when shares so purchased are
redeemed. Shareholders who have opted prior to the record date to receive shares
with regard to capital gains and/or income distributions will have the number of
such shares determined on the basis of the share value computed at the end of
the day on the record date after adjustment for the distribution. Net asset
value is used in computing the appropriate number of shares in both a capital
gains distribution and an income distribution reinvestment.
The Fund will make distributions from its net investment income on or
about the 5th day of each month and net capital gains, if any, at least
annually. 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.
The Fund's income distributions are largely derived from interest on
bonds and thus are not to any significant degree eligible in whole or in part
for the 70% corporate dividends received deduction. Distributed long-term
capital gains are taxable as such to the shareholder whether received in cash or
in additional Fund shares and regardless of the period of time Fund shares have
been held by the shareholder. Distributions designated by the Fund as capital
gains dividends are not eligible for the 70% corporate dividends received
deduction. If the net asset value of shares were reduced below a shareholder's
cost by distribution of capital gains realized on sales of securities, 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
securities profits actually realized, 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. Shareholders of the
Fund will be advised annually of the federal tax status of distributions.
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SALES CHARGES
- --------------------------------------------------------------------------------
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (see "Distribution Plan"), a contingent deferred sales charge
may be imposed at the time of redemption of certain Fund shares within four
calendar years after their purchase. If imposed, the contingent deferred sales
charge is deducted from the redemption proceeds otherwise payable to the
shareholder. Since July 8, 1992, the deferred sales charge attributable to
shares purchased prior to January 1, 1992 has been retained by the Fund, and the
deferred sales charge attributable to shares purchased after January 1, 1992 is,
to the extent permitted by the National Association of Securities Dealers, Inc.
("NASD"), paid to the Principal Underwriter. During the fiscal year ended August
31, 1995, the Fund recovered $32,800 in deferred sales charges.
The contingent deferred sales charge is a declining percentage of the
lesser of (1) the net asset value of the shares redeemed, or (2) the total cost
of such shares. No deferred sales charge is imposed when the shareholder redeems
amounts derived from (1) increases in the value of his account above the total
cost of such shares due to increases in the net asset value per share of the
Fund, or (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, or (3) shares held in all or
part of more than four consecutive calendar years.
Subject to the limitations stated above, the Fund imposes the deferred
sales charge according to the following schedule: 4% of amounts redeemed during
the calendar year of purchase; 3% of amounts redeemed during the calendar year
after the year of purchase; 2% of amounts redeemed during the second calendar
year after the year of purchase; and 1% of amounts redeemed during the third
calendar year after the year of purchase. No deferred sales charge is imposed on
amounts redeemed thereafter.
The following example will illustrate the operation of the contingent
deferred sales charge. Assume that an investor makes a purchase payment of
$10,000 during the calendar year 1995 and on a given date in 1996 the value of
the investor's account has grown through investment performance and reinvestment
of distributions to $12,000. On such date in 1996, the investor could redeem up
to $2,000 ($12,000 minus $10,000) without incurring a deferred sales charge. If,
on such date, the investor should redeem $3,000, a deferred sales charge would
be imposed on $1,000 of the redemption (the amount by which the investor's
account was reduced by the redemption below the amount of the initial purchase
payment). The charge would be imposed at the rate of 3% (because the redemption
is made during the calendar year after the calendar year of purchase) and would
total $30.
In determining whether a contingent deferred sales charge is payable
and, if so, the percentage charge applicable, it is assumed that shares held the
longest are the first to be redeemed. There is no contingent deferred sales
charge on permitted exchanges of shares between Keystone funds that have adopted
Distribution Plans pursuant to Rule 12b-1 under the 1940 Act. Moreover, when
shares of one such fund have been exchanged for shares of another such fund, for
purposes of any future contingent deferred sales charge, the calendar year of
the purchase of the shares of the fund exchanged into is assumed to be the year
shares tendered for exchange were originally purchased.
Shares also may be sold, to the extent permitted by applicable law,
regulations, interpretations or exemptions, at net asset value without the
imposition of a deferred sales charge, upon redemption of shares by (1)
officers, Directors, Trustees, full-time employees and sales representatives of
Keystone Management, Keystone, Keystone Investments, Inc. (formerly named
Keystone Group, Inc.), Harbor Capital Management Company, Inc., their
subsidiaries and the Principal Underwriter who have been such for not less than
ninety days; and (2) the pension and profit-sharing plans established by said
companies, their subsidiaries and affiliates, for the benefit of their officers,
Directors, Trustees, full-time employees and sales representatives, provided all
such sales are made upon the written assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
resold except through redemption by the Fund.
In addition, no contingent deferred sales charge is imposed on a
redemption of shares of the Fund purchased 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, any other Keystone Investments Family
of Funds (as hereinafter defined), Keystone Precious Metals Holdings, Inc.,
Keystone International Fund Inc., Keystone Tax Exempt Trust, Keystone Tax Free
Fund, Keystone Liquid Trust and/or any Keystone America Fund (as hereinafter
defined) is at least $500,000 and any commission paid by the Fund and such other
funds at the time of such purchase is not more than 1% of the amount invested.
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DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a Distribution Plan
containing certain provisions set forth in Rule 12b-1. The Fund bears some of
the costs of selling its shares under a Distribution Plan adopted pursuant to
Rule 12b-1 (the "Distribution Plan").
The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (approximately 1.25% annually) of the average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. The NASD rule limits such annual expenditures to 1%,
of which 0.75% may be used to pay such distribution costs and 0.25% may be used
to pay shareholder service fees. The aggregate amount that the Fund may pay for
such distribution costs is limited to 6.25% of gross share sales since the
inception of the Fund's Distribution Plan plus interest at the prime rate plus
1% on unpaid amounts thereof (less any contingent deferred sales charges paid by
shareholders to the Principal Underwriter).
Payments under the Distribution Plan are currently made to the
Principal Underwriter (which may reallow all or part to others) (1) as
commissions for Fund shares sold; and (2) as shareholder service fees in respect
of shares maintained by the recipients on the Fund's books for specific periods.
Amounts paid or accrued to the Principal Underwriter under (1) and (2) in the
aggregate may not exceed the annual limitation referred to above. The Principal
Underwriter generally reallows to brokers or others a commission equal to 4% of
the price paid for each Fund share sold as well as a shareholder service fee at
a rate of 0.25% per annum of the net asset value of shares maintained by such
recipients on the books of the Fund for specified periods.
If the Fund is unable to pay the Principal Underwriter a commission on
a new sale because the annual maximum (0.75% of average daily net assets) has
been reached, the Principal Underwriter intends, but is not obligated, to
continue to accept new orders for the purchase of Fund shares and to pay
commissions and service fees to dealers in excess of the amount it currently
receives from the Fund. While the Fund is under no contractual obligation to
repay the Principal Underwriter for such amounts in excess of Distribution Plan
limitations, the Principal Underwriter intends to seek full payment of such
charges from the Fund (together with interest rate of prime plus 1%) at such
time in the future as, and to the extent that, payment thereof by the Fund would
be within permitted limits. The Principal Underwriter currently intends to seek
payment of interest only on such charges paid or accrued by the Principal
Underwriter subsequent to July 7, 1992. If the Fund's independent Trustees
("Independent Trustees") authorize such payments, the effect will be to extend
the period of time during which the Fund incurs the maximum amount of costs
allowed by the Distribution Plan. If the 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. If under changing conditions the Principal Underwriter were to seek
payment of interest on such amounts, any such interest payments also would have
to be approved by the Independent Trustees (and possibly the shareholders).
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above, and the amounts
and purposes of expenditures under the Distribution Plan must be reported to the
Fund's Rule 12b-1 Trustees ("Rule 12b-1 Trustees") quarterly. The Fund's Rule
12b-1 Trustees may require or approve changes in the implementation or operation
of the Distribution Plan, and may require that total expenditures by the Fund
under the Distribution Plan be kept within limits lower than the maximum amount
permitted by the Distribution Plan as stated above. If such costs are not
limited by the Independent Trustees, such costs could, for some period of time,
be higher than such costs permitted by most other plans presently adopted by
other investment companies.
The Distribution Plan may be terminated at any time by vote of the Rule
12b-1 Trustees, or by vote of a majority of the outstanding voting securities of
the Fund. Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by the
Trustees, including the Fund's Rule 12b-1 Trustees.
While the Distribution Plan is in effect, the Fund is required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
During the fiscal year ended August 31, 1995, the Fund paid the
Principal Underwriter $7,545,356 under the Distribution Plan. During the fiscal
year, the Principal Underwriter received $4,329,322 after payment of commissions
on new sales and service fees to dealers and others of $3,216,034.
Whether any expenditure under the 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.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plan have
benefited the Fund.
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THE TRUST AGREEMENT
- --------------------------------------------------------------------------------
The Fund is a Pennsylvania common law trust established under a
Declaration of Trust Agreement, amended and restated as of December 19, 1989
(the "Restatement of Trust Agreement"). The Restatement of Trust Agreement
provides for a Board of Trustees, and enables the Fund to enter into an
agreement with an investment manager and/or adviser to provide the Fund with
investment advisory, management and administrative services. A copy of the
Restatement of Trust Agreement is filed as an exhibit to the Fund's Registration
Statement, of which this statement of additional information is a part. This
summary is qualified in its entirety by reference to the Restatement of Trust
Agreement.
DESCRIPTION OF SHARES
The Restatement of Trust Agreement authorizes the issuance of an
unlimited number of shares of beneficial interest and the creation of additional
series and/or classes of series of Fund shares. Each share represents an equal
proportionate interest in the Fund with each other share of that class. Upon
liquidation, shares are entitled to a pro rata share in the net assets of their
class of Fund shares. Shareholders shall have no preemptive or conversion
rights. Shares are transferable. The Fund currently intends to issue only one
class of shares.
SHAREHOLDER LIABILITY
Pursuant to court decisions or other theories of law, shareholders of a
Pennsylvania common law trust could possibly be held personally liable for the
obligations of the Fund. The possibility of Fund shareholders incurring
financial loss under such circumstances appears to be remote, however, because
the Restatement of Trust Agreement (1) contains an express disclaimer of
shareholder liability for obligations of the Fund; (2) requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees; and (3) provides for
indemnification out of Fund property for any shareholder held personally liable
for the obligations of the Fund.
VOTING RIGHTS
Under the terms of the Restatement of Trust Agreement, the Fund does
not hold annual meetings. At shareholder meetings, shares are entitled to one
vote per share. Shares generally vote together as one class on all matters. No
amendment may be made to the Restatement of Trust Agreement, however, that
adversely affects any class of shares without the approval of a majority of the
shares of that class. There shall be no cumulative voting in the election of
Trustees.
After the initial meeting electing Trustees, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law or until such time as less than a majority of the Trustees holding office
have been elected by shareholders, at which time the Trustees then in office
will call a shareholders' meeting for the election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law and may appoint successor
Trustees. A Trustee may cease to hold office or may be removed from office (as
the case may be) (1) at any time by two-thirds vote of the remaining Trustees;
(2) when such Trustee becomes mentally or physically incapacitated; or (3) at a
special meeting of shareholders by a two-thirds vote of the outstanding shares.
Any Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Restatement of Trust Agreement provides that a Trustee shall be
liable only for his own willful defaults and, if reasonable care has been
exercised in the selection of officers, agents, employees or investment
advisers, shall not be liable for any neglect or wrongdoing of any such person;
provided, however, that nothing in the Restatement of Trust Agreement shall
protect a Trustee against any liability for his willful misfeasance, bad faith,
gross negligence or reckless disregard of his duties.
The Trustees have absolute and exclusive control over the management
and disposition of all 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.
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INVESTMENT MANAGER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone Management, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, serves as investment manager to the Fund and is responsible for the
overall management of the Fund's business and affairs. Keystone Management,
organized in 1989, is a wholly-owned subsidiary of Keystone, and its directors
and principal executive officers have been affiliated with Keystone, a seasoned
investment adviser, for a number of years. Keystone Management also serves as
investment manager to each of the other Keystone Investments Family of Funds and
to certain other Keystone funds.
Except as otherwise noted below, pursuant to an Investment Management
Agreement with the Fund (the "Management Agreement"), and subject to the
supervision of the Fund's Board of Trustees, Keystone Management manages and
administers the operation of the Fund and manages the investment and
reinvestment of the Fund's assets in conformity with the Fund's investment
objective and restrictions. The Management Agreement stipulates that Keystone
Management shall provide office space, all necessary office facilities,
equipment and personnel in connection with its services under the Management
Agreement and pay or reimburse the Fund for the compensation of Fund officers
and Trustees who are affiliated with the investment manager as well as pay all
expenses of Keystone Management incurred in connection with the provision of its
services. All charges and expenses, other than those specifically referred to as
being borne by Keystone Management, 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 Fund's Distribution Plan; 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 Securities and Exchange Commission (sometimes referred to herein as the
"SEC" or 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 Trustees of the Fund on matters relating to the
Fund; charges and expenses of filing annual and other reports with the SEC and
other authorities; and all extraordinary charges and expenses of the Fund.
The Management Agreement permits Keystone Management to enter into an
agreement with Keystone or another investment adviser, under which Keystone or
such other investment adviser, as investment adviser, will provide substantially
all the services to be provided by Keystone Management under the Management
Agreement. The Management Agreement also permits Keystone Management to delegate
to Keystone or another investment adviser substantially all of the investment
manager's rights, duties and obligations under the Management Agreement.
Services performed by Keystone Management include (1) performing research and
planning with respect to (a) the Fund's qualification as a regulated investment
company under Subchapter M of the Internal Revenue Code, (b) tax treatment of
the Fund's portfolio investments, (c) tax treatment of special corporate actions
(such as reorganizations), (d) state tax matters affecting the Fund, and (e) the
Fund's distributions of income and capital gains; (2) preparing the Fund's
federal and state tax returns; and (3) providing services to the Fund's
shareholders in connection with federal and state taxation and distributions of
income and capital gains.
The Fund pays Keystone Management a fee for its services at the annual
rate of:
Aggregate Net
Annual Asset Value of the
Management Fee Income Shares of the Fund
- -------------- -------------------------- --------------------
2% of Gross Dividend, and
Interest Income, Plus
0.50% of the first $ 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 $ 100,000,000 plus
0.30% of the next $ 100,000,000 plus
0.25% of amounts over $ 500,000,000;
computed as of the close of business on each business day and paid daily.
The Fund is subject to certain state annual expense limitations, the
most restrictive of which is as follows:
2.5% of the first $30 million of Fund average net assets;
2.0% of the next $70 million of Fund average net assets; and
1.5% of Fund average net assets over $100 million.
Capital charges and certain expenses, including a portion of the Fund's
Distribution Plan expenses, are not included in the calculation of the state
expense limitation. This limitation may be modified or eliminated in the future.
As a continuing condition of registration of shares in a state,
Keystone Management has agreed to reimburse the Fund annually for certain
operating expenses incurred by the Fund in excess of certain percentages of the
Fund's average daily net assets. Keystone Management is not required, however,
to make such reimbursements to the extent it would result in the Fund's
inability to qualify as a regulated investment company under provisions of the
Internal Revenue Code. This condition may be modified or eliminated in the
future.
The Management Agreement will continue in effect only if approved at
least annually by the Fund's Board of Trustees or by a vote of a majority of the
outstanding shares, and such renewal has been approved by the vote of a majority
of the Independent Trustees cast in person at a meeting called for the purpose
of voting on such approval. The Management Agreement may be terminated, without
penalty, on 60 days' written notice by the Fund's Board of Trustees or by a vote
of a majority of outstanding shares. The Management Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
For additional discussion of fees paid to Keystone Management, see
"Investment Adviser" below.
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INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Pursuant to its Management Agreement with the Fund, Keystone Management
has delegated its investment management functions, except for certain
administrative and management services, to Keystone and has entered into an
Investment Advisory Agreement (the "Advisory Agreement") with Keystone under
which Keystone provides investment advisory and management services to the Fund.
Keystone, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Investments, 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation privately owned by current and
former members of Keystone's management 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, and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Keystone, their affiliates and the Keystone
Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone receives for its services
an annual fee representing 85% of the management fee received by Keystone
Management under the Management Agreement.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone manages and administers the Fund's
operation and manages the investment and reinvestment of the Fund's assets in
conformity with the Fund's investment objective and restrictions. The Advisory
Agreement stipulates that Keystone shall provide office space, all necessary
office facilities, equipment and personnel in connection with its services under
the Advisory Agreement and pay or reimburse the Fund for the compensation of
Fund officers and Trustees who are affiliated with the investment adviser and
will pay 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 Fund's Distribution Plan; 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 SEC 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 Trustees of the Fund on matters relating to the Fund; charges and expenses
of filing annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
During the fiscal year ended August 31, 1993, the Fund paid or accrued
to Keystone Management investment management and administrative services fees of
$4,866,030, which represented 0.52% of the Fund's average net assets. Of such
amount paid to Keystone Management, $4,136,126 was paid to Keystone for its
services to the Fund.
During the fiscal year ended August 31, 1994, the Fund paid or accrued
to Keystone Management investment management and administrative services fees of
$4,624,138 which represented 0.50% of the Fund's average net assets. Of such
amount paid to Keystone Management, $3,930,517 was paid to Keystone for its
services to the Fund.
During the fiscal year ended August 31, 1995, the Fund paid or accrued
to Keystone Management investment management and administrative services fees of
$3,982,976, representing 0.53% of the Fund's average net assets. Of such amount
paid to Keystone Management, $3,385,529 was paid to Keystone for its services to
the Fund.
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TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
*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 Investments, Inc. ("Keystone Investments");
President, Chief Executive Officer and Trustee or Director of all 30
Funds in the Keystone Investments Family of Funds; Director and
Chairman of the Board, Chief Executive Officer and Vice Chairman of
Keystone Investment Management Company ("Keystone"); Chairman of the
Board and Director of Keystone Institutional Company, Inc. ("Keystone
Institutional") (formerly named Keystone Investment Management
Corporation), and Keystone Fixed Income Advisors ("KFIA"); Director,
Chairman of the Board, Chief Executive Officer and President of
Keystone Management, Inc. ("Keystone Management"), Keystone Software
Inc. ("Keystone Software"); former Director and President of Hartwell
Keystone Advisers, Inc. ("Hartwell Keystone"); Director and President
of Keystone Asset Corporation, Keystone Capital Corporation, and
Keystone Trust Company; Director of Keystone Investment Distributors
Company ("the Principal Underwriter"), Keystone Investor Resource
Center, Inc. ("KIRC"), and Fiduciary Investment Company, Inc. ("FICO");
former Director and Vice President of Robert Van Partners, Inc.;
Director of Boston Children's Services Association; Trustee of Anatolia
College, Middlesex School, and Middlebury College; Member, Board of
Governors, New England Medical Center; and former Trustee of Neworld
Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member,
Board of Advisers, Credito Emilano (banking); and former Economics and
Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone 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; 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; former Director and Chairman
of the Board of Hartwell Keystone; 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).
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.
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.
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 Economic Advisers; Chairman of the
Board and Director, Central Vermont Public Service Corporation and
Hitchcock Clinic; Director, Vermont Yankee Nuclear Power Corporation,
Vermont Electric Power Company, Inc., Grand Trunk Corporation, Central
Vermont Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual
Fire Insurance Company, New England Guaranty Insurance Company, Inc.
and the Investment Company Institute; former Governor of Vermont;
former Director and President, Associated Industries of Vermont; former
Chairman and President, Vermont Marble Company; former Director of
Keystone; and former Director and Chairman of the Board, Green Mountain
Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
Keystone 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 Enhanced Financial
Services, Inc.; Member, Georgetown College Board of Advisors; Chairman,
Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-Oxford
School and Greater Hartford YMCA; former Director, Executive Vice
President and Vice Chairman of The Travelers Corporation; and former
Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky
& Armentano, P.C.; former President, Nassau County Bar Association;
former Associate Dean and Professor of Law, St. John's University
School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; Director, Senior Vice President,
Chief Financial Officer and Treasurer of Keystone Investments, the
Principal Underwriter, Keystone Asset Corporation, Keystone Capital
Corporation, and Keystone Trust Company; Treasurer of Keystone
Institutional, and FICO; Treasurer and Director of Keystone Management,
Keystone Software; Vice President and Treasurer of KFIA; Director of
KIRC; former Treasurer and Director of Hartwell Keystone and Keystone;
and 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.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Investments Funds; Vice President of Keystone Investments; Assistant
Treasurer of FICO and Keystone; and former Vice President and Treasurer
of KIRC.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone 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:
former Senior Vice President and former Secretary of Hartwell Keystone
and Robert Van Partners, Inc.; 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.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Bissell and Mr. Elfner are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Hartwell Keystone, the Principal Underwriter and KIRC.
Mr. Bissell and Mr. Elfner own shares of Keystone Investments. Mr. Bissell is a
Director of Keystone Investments. Mr. Elfner is Chairman of the Board, Chief
Executive Officer and Director of Keystone Investments.
During the fiscal year ended August 31, 1995, no Trustee affiliated
with Keystone or any officer received any direct remuneration from the Fund.
During this same period, the nonaffiliated Trustees received $40,014 in
retainers and fees from the Fund. For the twelve month period ended December 31,
1995, aggregate compensation paid to Independent Trustees on a complex wide
basis was $585,990. As of November 30, 1995, the Trustees, officers and members
of the Advisory Board of Keystone beneficially owned less than 1% of the Fund's
outstanding shares.
The address of all the Fund's Trustees, officers and Advisory Board
members is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
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Pursuant to a Principal Underwriting Agreement ("Underwriting
Agreement"), the Principal Underwriter acts as the Fund's principal underwriter.
The Principal Underwriter, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, is a Delaware corporation wholly-owned by Keystone. The Principal
Underwriter, as agent, has agreed to use its best efforts to find purchasers for
the shares. The Principal Underwriter may retain and employ representatives to
promote distribution of the shares and may obtain orders from brokers, dealers
and others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that the Principal Underwriter will bear the expense of
preparing, printing and distributing advertising and sales literature and
prospectuses used by it. In its capacity as principal underwriter, the Principal
Underwriter may receive payments from the Fund pursuant to the Fund's
Distribution Plan.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved by a majority of the Fund's
Independent Trustees at least annually at a meeting called for that purpose, and
if its continuance is approved annually by vote of a majority of Trustees, or by
vote of a majority of the outstanding shares.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its "assignment" as that term is defined in the 1940 Act.
From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of Fund shares, the Principal Underwriter may use its
discretion in providing to selected dealers promotional materials and selling
aids including, but not limited to, personal computers, related software and
Fund data files.
For the fiscal years ended August 31, 1993 and 1994, the Principal
Underwriter earned commissions of $4,799,745 and $5,118,615, respectively, after
allowing commissions and service fees of $8,804,930 and $5,770,600,
respectively, to retail dealers under the Distribution Plan. For the fiscal year
ended August 31, 1995, the Principal Underwriter received $4,329,322 after
payments of commissions on new sales and services to dealers and others of
$3,216,034.
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BROKERAGE
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It is the policy of the Fund, in effecting transactions in 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 ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Such
considerations are judgmental and are weighed by management in determining the
overall reasonableness of brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund, Keystone Management or Keystone is
considered to be in addition to and not in lieu of services required to be
performed by Keystone Management under its Management Agreement with the Fund or
Keystone under its Advisory Agreement with Keystone Management. The cost, value
and specific application of such information are indeterminable and cannot be
practically allocated among the Fund and other clients of Keystone Management or
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 Management
Agreement and the Advisory Agreement, Keystone Management and Keystone are
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 Management and Keystone do follow such a practice,
they will do so on a basis which is fair and equitable to the Fund.
The Fund expects that purchases and sales of bonds and money market
instruments usually will be principal transactions. Bonds and money market
instruments are normally purchased directly from the issuer or from an
underwriter or market maker for the securities. There usually will be no
brokerage commissions paid by the Fund for such purchases. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include the spread between
the bid and asked prices. 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 purchase directly from an issuer of certain securities for the Fund's
portfolio in order to take advantage of the lower purchase price available to
members of such a group.
Neither Keystone, Keystone Management, nor the Fund have any intention
of placing securities transactions with any particular broker-dealer or group
thereof. The Fund's Board of Trustees, however, has determined that the Fund may
follow a policy of considering sales of shares as a factor in the selection of
broker-dealers to execute portfolio transactions, subject to the requirements of
best execution, including best price, described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently by Keystone
Management or Keystone from those of the other funds and investment accounts
managed by Keystone Management or Keystone. It may frequently develop 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.
For the fiscal years ended August 31, 1993, 1994 and 1995, the Fund
paid no brokerage commissions.
In no instance are portfolio securities purchased from or sold to
Keystone Management, Keystone, the Principal Underwriter or any of their
"affiliated persons", as defined in the 1940 Act and rules and regulations
issued thereunder.
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for the Fund as they may appear from time to
time in advertisements are calculated by finding the average annual compounded
rates of return over the one, five and ten year periods on a hypothetical $1,000
investment that would equate the initial amount invested to the ending
redeemable value. To the initial investment all dividends and distributions are
added, and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the one,
five or ten year periods.
The cumulative total returns of the Fund for the one, five and ten year
periods ended August 31, 1995 were 5.17% (including contingent deferred sales
charge), 51.98% and 110.34%, respectively. The average annual compounded returns
for the five and ten year periods ended August 31, 1995 were 8.73% and 7.72%,
respectively.
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 current yield of the Fund for the 30-day period ended August 31,
1995 was 6.78%.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian of all securities and cash of the Fund
(the "Custodian"). The Custodian may hold securities of some foreign issuers
outside the U.S. The Custodian performs no investment management functions for
the Fund but, in addition to its custodial services, is responsible for
accounting and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the independent auditors for the Fund.
KIRC, 101 Main Street, Cambridge, Massachusetts 02142, a wholly owned
subsidiary of Keystone, acts as transfer agent and dividend disbursing agent for
the Fund.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
On November 30, 1995, Merrill Lynch, Pierce, Fenner & Smith, Att.: Book
Entry, 4800 Deer Lake Drive E, 3rd Floor, Jacksonville, FL 32246-6484 owned
13.265% of the Fund's then outstanding shares.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this 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 this statement of additional information omit
certain information contained in the Fund's Registration Statement filed with
the SEC, which may be obtained from the SEC's principal office in Washington,
D.C. upon payment of the fee prescribed by the rules and regulations promulgated
by the SEC.
<PAGE>
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APPENDIX
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COMMON AND PREFERRED STOCK RATINGS
A. 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.
B. MOODY'S COMMON STOCK RANKINGS
Moody's Investor Service ("Moody's") presents a concise statement of
the important characteristics of a company and an evaluation of the grade
(quality) of its common stock. Data presented includes: (a) capsule stock
information which reveals short and long term growth and yield afforded by the
indicated dividend, based on a recent price; (b) a long term price chart which
shows patterns of monthly stock price movements and monthly trading volumes; (c)
a breakdown of a company's capital account which aids in determining the degree
of conservatism or financial leverage in a company's balance sheet; (d) interim
earnings for the current year to date, plus three previous years; (e) dividend
information; (f) company background; (g) recent corporate developments; (h)
prospects for a company in the immediate future and the next few years; and (i)
a ten year comparative statistical analysis.
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings and record of dividend payments. Other
considerations include conservativeness of capitalization, depth and caliber of
management, accounting practices, technological capabilities and industry
position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
C. MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. aaa: An issue which 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 which 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 which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
4. baa: An issue which 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 which 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 which 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 which 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 which 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 thatthe 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.
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 double 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 Securities and Exchange Commission
and are freely exchanged on a securities exchange or in the over-the-counter
market.
CORPORATE BOND RATINGS
A. 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 United States,
with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
B. MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds which 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 which 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 which 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 which 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 which 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 which 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.
ZERO COUPON "STRIPPED" BONDS
A zero coupon "stripped" bond represents ownership in serially maturing
interest payments or principal payments on specific underlying notes and bonds,
including coupons relating to such notes and bonds. The interest and principal
payments are direct obligations of the issuer. Coupon zero coupon bonds of any
series mature periodically from the date of issue of such series through the
maturity date of the securities related to such series. Principal zero coupon
bonds mature on the date specified therein, which is the final maturity date of
the related securities. Each zero coupon bond entitles the holder to receive a
single payment at maturity. There are no periodic interest payments on a zero
coupon bond. Zero coupon bonds are offered at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the
rights and privileges of owners of the underlying coupon obligations or
principal obligations. Owners of zero coupon bonds have the right upon default
on the underlying coupon obligations or principal obligations to proceed
directly and individually against the issuer and are not required to act in
concert with other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon
bonds or coupon zero coupon bonds (either initially or in the secondary market)
is treated as if the buyer had purchased a corporate obligation issued on the
purchase date with an original issue discount equal to the excess of the amount
payable at maturity over the purchase price. The purchaser is required to take
into income each year as ordinary income an allocable portion of such discounts
determined on a "constant yield" method. Any such income increases the holder's
tax basis for the zero coupon bond, and any gain or loss on a sale of the zero
coupon bonds relative to the holder's basis, as so adjusted, is a capital gain
or loss. If the holder owns both principal zero coupon bonds and coupon zero
coupon bonds representing interest in the same underlying issue of securities, a
special basis allocation rule (requiring the aggregate basis to be allocated
among the items sold and retained based on their relative fair market values at
the time of sale) may apply to determine the gain or loss on a sale of any such
zero coupon bonds items.
PAYMENT-IN-KIND SECURITIES
Payment-in-Kind (PIK) securities pay interest in either cash or
additional securities, at the issuer's option, for a specified period. The
issuer's option to pay in additional securities typically ranges from one to six
years, compared to an average maturity for all PIK securities of 11 years. Call
protection and sinking fund features are comparable to those offered on
traditional debt issues.
PIKs, like zero coupon bonds, are designed to give an issuer
flexibility in managing cash flow. Several PIKs are senior debt. In other cases,
where PIKs are subordinated, most senior lenders view them as equity
equivalents.
An advantage of PIKs for the issuer - as with zero coupon securities -
is that interest payments are automatically compounded (reinvested) at the
stated coupon rate, which is not the case with cash-paying securities. However,
PIKs are gaining popularity over zeros since interest payments in additional
securities can be monetized and are more tangible than accretion of a discount.
As a group, PIK bonds trade flat (i.e., without accrued interest).
Their price is expected to reflect an amount representing accreted interest
since the last payment. PIKs generally trade at higher yields than comparable
cash-paying securities of the same issuer. Their premium yield is the result of
the lesser desirability of non-cash interest, the more limited audience for
non-cash paying securities, and the fact that many PIKs have been issued to
equity investors who do not normally own or hold such securities.
Calculating the true yield on a PIK security requires a discounted cash
flow analysis if the security (ex interest) is trading at a premium or a
discount, because the realizable value of additional payments is equal to the
current market value of the underlying security, not par.
Regardless of whether PIK securities are senior or deeply subordinated,
issuers are highly motivated to retire them because they are usually their most
costly form of capital. 68% of the PIK debentures issued prior to 1987 have
already been redeemed, and approximately 35% of the over $10 billion PIK
debentures issued through year-end 1988 have been retired.
EQUIPMENT TRUST CERTIFICATES
Equipment Trust Certificates are a mechanism for financing the purchase
of transportation equipment, such as railroad cars and locomotives, trucks,
airplanes and oil tankers.
Under an equipment trust certificate, the equipment is used as the
security for the debt and title to the equipment is vested in a trustee. The
trustee leases the equipment to the user, i.e. the railroad, airline, trucking
or oil company. At the same time equipment trust certificates in an aggregate
amount equal to a certain percentage of the equipment's purchase price are sold
to lenders. The trustee pays the proceeds from the sale of certificates to the
manufacturer. In addition, the company using the equipment makes an initial
payment of rent equal to their balance of the purchase price to the trustee,
which the trustee then pays to the manufacturer. The trustee collects lease
payments from the company and uses the payments to pay interest and principal on
the certificates. At maturity, the certificates are redeemed and paid, the
equipment is sold to the company and the lease is terminated.
Generally, these certificates are regarded as obligations of the
company that is leasing the equipment and are shown as liabilities on its
balance sheet. However, the company does not own the equipment until all the
certificates are redeemed and paid. In the event the company defaults under its
lease, the trustee terminates the lease. If another lessee is available, the
trustee leases the equipment to another user and makes payments on the
certificates from new lease rentals.
MONEY MARKET INSTRUMENTS
The Fund's investments in commercial paper are limited to those rated
A-1 by S&P, Prime-1 by Moody's or F-1 by Fitch Investors Service, Inc.
("Fitch"). These ratings and other money market instruments are described as
follows:
COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. The issuer's long-term
senior debt is rated "A" or better, although in some cases "BBB" credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
The rating F-1 is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1.
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. 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.
Securities issued or guaranteed by U.S. Government agencies or
instrumentalities include direct obligations of the U.S. Treasury and securities
issued or guaranteed by the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the U.S., Small Business Administration,
Government National Mortgage Association, 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 Treasury bills and Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U.S.; others,
such as securities of Federal Home Loan Banks, by the right of the issuer to
borrow from the Treasury; still 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 that the credit risk with respect to the instrumentality does not
make its securities unsuitable investments. U.S. Government securities will not
include international agencies or instrumentalities in which the U.S.
Government, its agencies or instrumentalities participate, such as the World
Bank, the Asian Development Bank or the InterAmerican Development Bank, or
issues insured by the Federal Deposit Insurance Corporation or Federal Savings
and Loan Insurance Corporation.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a 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.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks (including their branches abroad) and of U.S.
branches of foreign banks, which are members of the Federal Reserve System or
the Federal Deposit Insurance Corporation, and have at least $1 billion in
assets as of the date of their most recently published financial statements, or
of savings and loan associations which are members of the Federal Savings and
Loan Insurance Corporation, and have at least $1 billion in deposits as of the
date of their most recently published financial statements.
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Fund does not
currently intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
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 on 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 assets at the time of purchase in excess of $1 billion and must be payable
in U.S. dollars.
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.
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 will not purchase a put option if, as a result of such
purchase, more than 10% of its total assets would be invested in premiums for
such options. The Fund's ability to purchase put and call options may be limited
by the Internal Revenue Code's requirements for qualification as a regulated
investment company.
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 security
price 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 debt 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, in 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.
OPTIONS TRADING MARKETS
Options which the Fund will trade are generally listed on national
securities exchanges (Exchanges). Exchanges on which such options currently are
traded are 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 Securities and Exchange Commission is of the view that
the premiums that a Fund pays for the purchase of unlisted options, and the
value of securities used to cover unlisted options written by the Fund, are
considered to be invested in illiquid securities or assets for the purpose of
calculating whether the Fund is in compliance with its fundamental investment
restrictions relating 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 its Custodian liquid assets maturing no
later than those which would be deliverable in the event of an assignment of an
exercise notice to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. Options on GNMA certificates are not currently
traded on any Exchange. However, the Fund may purchase and write such options in
the over-the-counter market or, should they commence trading, on any Exchange.
Since the remaining principal balance of GNMA certificates declines
each month as a result of mortgage payments, the Fund, as a writer of a covered
GNMA call holding GNMA certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA certificates from the same pool (if
obtainable) or replacement GNMA certificates in the cash market in order to
remain covered.
A GNMA certificate held by the Fund to cover an option position in any
but the nearest expiration month may cease to present cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA certificate with a certificate
which represents cover. When the Fund closes its position or replaces the GNMA
certificate, it may realize an unanticipated loss and incur transaction costs.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be
closed out only in a secondary market for an option of the same series. Although
the Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular option at any particular time,
and for some options no secondary market may exist. In such event, it might not
be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize any
profit and might incur transaction costs in connection therewith. If the Fund as
a covered call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market include the
following: (i) insufficient trading interest in certain options; (ii)
restrictions imposed on transactions; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an Exchange
or by a broker; (v) inadequacy of the facilities of an Exchange, the OCC or a
broker to handle current trading volume; or (vi) a decision by one or more
Exchanges or a broker to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market in that class
or series of options would cease to exist, although outstanding options that had
been issued as a result of trades would generally continue to be exercisable in
accordance with their terms.
The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by so doing, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Fund intends to engage in options transactions which are related to
currency and other financial futures contracts for hedging purposes and in
connection with the hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed 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").
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
the Fund, as seller, to deliver the type of financial instrument specified in
the contract at a specified future time for a specified price. The purchase of
an interest rate futures contract creates an obligation by the Fund, as
purchaser, to accept delivery of the type of financial instrument specified at a
specified future time for a specified price. The specific securities delivered
or accepted, respectively, at settlement date are not determined until at or
near that date. The determination is in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Currently, interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, Government National Mortgage Association
("GNMA") certificates, 90-day domestic bank certificates of deposit, 90-day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills,
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S. government securities are not obligations of the U.S.
Treasury.
INDEX BASED FUTURES CONTRACTS
STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the common stocks included in
the index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently, stock index futures contracts can be purchased or sold on
the Standard and Poor's Corporation ("S&P") Index of 500 Stocks, the S&P Index
of 100 Stocks, the New York Stock Exchange Composite Index, the Value Line Index
and the Major Market Index. It is expected that futures contracts trading in
additional stock indices will be authorized. The standard contract size is $500
times the value of the index.
The Fund does not believe that differences between existing stock
indices will create any differences in the price movements of the stock index
futures contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
OTHER INDEX BASED FUTURES CONTRACTS
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indices or other measures, such as the consumer price index. In the event that
such futures contracts are developed, the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded, and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from
the Broker, are made on a daily basis as the value of the underlying instrument
or index fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its Custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its Custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e., on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase after allowance for
transaction costs represents the profit or loss to the Fund.
There can be no assurance, however, 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.
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 to terminate an existing
position. 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 making up a financial
futures index, 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 currency or other financial
futures contracts is analagous to the purchase of protective puts on individual
stocks, where an absolute level of protection is sought below which no
additional economic loss would be incurred by the Fund. Put options may be
purchased to hedge a portfolio of 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 a call option on currency and other financial futures
contracts represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock, which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, the purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on currency or other financial futures
contracts may be purchased to hedge against an interest rate increase or a
market advance when the Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and
other financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund will not enter into a futures contract if, as a result
thereof, more than 5% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to margin deposits on
such futures contracts.
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 of futures contracts by the Fund,
an amount of cash and cash equivalents, equal to the market value of the futures
contracts will be deposited in a segregated account with the Fund's Custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, the Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
RISKS OF FUTURES CONTRACTS
Currency and other financial futures contracts prices are volatile and
are influenced, among other things, by changes in stock prices, market
conditions, prevailing interest rates and anticipation of future stock prices,
market movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. In addition,
futures contract transactions involve the remote risk that a party be unable to
fulfill its obligations and that the amount of the obligation will be beyond the
ability of the clearing broker to satisfy. A decision of whether, when and how
to hedge involves the exercise of skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
will establish a segregated account in connection with its futures contracts
which will hold cash or cash equivalents equal in value to the current value of
the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for currency and other
financial futures contracts, there are several special risks relating to options
on futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract 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 purhcase 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 rate 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.
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
Commodity Futures Trading Commission ("CFTC") and National Futures Association
("NFA"). Currently the only national futures exchange on which currency futures
are traded is the International Monetary Market of the Chicago Mercantile
Exchange. Foreign currency futures trading is conducted in the same manner and
subject to the same regulations as trading in interest rate and index based
futures. The Fund intends to only engage in currency futures contracts for
hedging purposes, and not for speculation. The Fund may engage in currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.
Currently currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark and Swiss Francs,
C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and 1,000,000 for
the Peso. In contrast to Forward Currency Exchange Contracts which can be traded
at any time, only four value dates per year are available, the third Wednesday
of March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a
variety of currencies in both the U,S, and Europe. On the Philadelphia Stock
Exchange, for example, contracts for half the size of the corresponding futures
contracts on the Chicago Board Options Exchange are traded with up to nine
months maturity in Marks, Sterling, Yen, Swiss Francs and Canadian Dollars.
Options can be exercised at any time during the contract life and require a
deposit subject to normal margin requirements. Since a futures contract must be
exercised, the Fund must continually make up the margin balance. As a result, a
wrong price move could result in the Fund losing more than the original
investment as it cannot walk away from the futures contract as it can an option
contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in
connection with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is
analagous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of foreign stocks or foreign debt instruments or a position in the foreign
currency upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock, which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments, the
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Fund would purchase a call option on a
foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Fund is not fully invested.
The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
which may be developed from time to time, and which are consistent with the
Fund's investment objective. The Fund believes that no additional techniques
have been identified for employment by the Fund in the foreseeable future other
than those described above.
CURRENCY TRADING RISKS
Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.
EXCHANGE RATE RISK
Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the Fund
buys or sells a foreign currency, an exposure called an open position is
created. Until the time that position can be "covered" by selling or buying an
equivalent amount of the same currency, the Fund is exposed to the risk that the
exchange rate might move against it. Since exchange rate changes can readily
move in one direction, a position carried overnight or over a number of days
involves greater risk than one carried a few minutes or hours. Techniques such
as foreign currency forward and futures contracts and options on foreign
currency are intended to be used by the Fund to reduce exchange rate risk.
MATURITY GAPS AND INTEREST RATE RISK
Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Fund's foreign exchange currency holdings, which is
the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short term and
lending longer term to benefit from the normal tendency of interest rates to be
higher for longer maturities. However, in foreign exchange trading, while the
maturity pattern of interest rates for one currency is important, it is the
differential between interest rates for two currencies that is decisive.
CREDIT RISK
Whenever the Fund enters into a foreign exchange contract, it faces a
risk, however small, that the counterparty will not perform under the contract.
As a result there is a credit risk, although no extension of "credit" is
intended. To limit credit risk, the Fund intends to evaluate the
creditworthiness of each other party. The Fund does not intend to trade more
than 5% of its net assets under foreign exchange contracts with one party.
Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges, a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts which are advantageous to the company but disclaim those contracts
which are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone differences
between the U.S. and foreign nations. If the Fund sells sterling, it generally
must pay pounds to a counterparty earlier in the day than it will be credited
with dollars in New York. In the intervening hours, the buyer can go into
bankruptcy or can be declared insolvent. Thus, the dollars may never be credited
to the Fund.
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents or limits on inflows of investment funds from abroad. Governments take
such measures, for example, to improve control over the domestic banking system
or to influence the pattern of receipts and payments between residents and
foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally, a serious foreign exchange shortage may lead to
payment interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules which interfere
with the normal payments mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Fund might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Fund.
Other changes in official regulations influence international
investment transactions. If one of the factors affecting the buying or selling
of a currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain) or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and control on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the
Fund may be dealing with a foreign trader whose home country is facing a
payments problem. Even though the foreign trader intends to perform on its
foreign exchange contracts, the contracts are tied to other external liabilities
the country has incurred. As a result performance may be delayed and can result
in unanticipated cost to the Fund. This aspect of country risk is a major
element in the Fund's credit judgment as to with whom it will deal and in what
amounts.
<PAGE>
EXHIBIT A
GLOSSARY OF TERMS
CLASS OF OPTIONS. Options covering the same underlying security.
CLEARING CORPORATION. The Options Clearing Corporation, Trans Canada
Options, Inc., The European Options Clearing Corporation B.V., or the London
Options Clearing House.
CLOSING PURCHASE TRANSACTION. A transaction in which an investor who is
obligated as a writer of an option or seller of a futures contract terminates
his obligation by purchasing on an Exchange an option of the same series as the
option previously written or futures contract identical to the futures contract
previously sold, as the case may be. (Such a purchase does not result in the
ownership of an option or futures contract.)
CLOSING SALE TRANSACTION. A transaction in which an investor who is the
holder or buyer of an outstanding option or futures contract liquidates his
position as a holder or buyer by selling an option of the same series as the
option previously purchased or futures contract identical to the futures
contract previously purchased. (Such sale does not result in the investor
assuming the obligations of a writer or seller.)
COVERED CALL OPTION WRITER. A writer of a call option who, so long as
he remains obligated as a writer, owns the shares of the underlying security or
holds on a share for share basis a call on the same security where the exercise
price of the call held is equal to or less than the exercise price of the call
written, or, if greater than the exercise price of the call written, the
difference is maintained by the writer in cash, U.S. Treasury bills or other
high grade, short term obligations in a segregated account with the writer's
broker or custodian.
COVERED PUT OPTION WRITER. A writer of a put option who, so long as he
remains obligated as a writer, has deposited Treasury bills with a value equal
to or greater than the exercise price with a securities depository and has
pledged them to the Options Clearing Corporation for the account of the
broker-dealer carrying the writer's position or holds on a share for share basis
a put on the same security as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written, or,
if less than the exercise price of the put written, the difference is maintained
by the writer in cash, U.S. Treasury bills or other high grade, short term
obligations in a segregated account with the writer's broker or custodian.
SECURITIES EXCHANGE. A securities exchange on which call and put option
are traded. The U.S. Exchanges are as follows: The Chicago Board Options
Exchange; American Stock Exchange; New York Stock Exchange; Philadelphia Stock
Exchange; and Pacific Stock Exchange. The foreign securities exchanges in Canada
are the Toronto Stock Exchange and the Montreal Stock Exchange; in the
Netherlands, the European Options Exchange; and in the United Kingdom, the Stock
Exchange (London).
Those issuers whose common stocks have been approved by the Exchanges
as underlying securities for options transactions are published in various
financial publications.
COMMODITIES EXCHANGE. A commodities exchange on which futures contracts
are traded which is regulated by exchange rules that have been approved by the
Commodity Futures Trading Commission. The U.S. Exchanges are as follows: The
Chicago Board of Trade of the City of Chicago; Chicago Mercantile Exchange;
International Monetary Market (a division of the Chicago Mercantile Exchange);
the Kansas City Board of Trade; and the New York Futures Exchange.
EXERCISE PRICE. The price per unit at which the holder of a call option
may purchase the underlyng security upon exercise or the holder of a put option
may sell the underlying security upon exercise.
EXPIRATION DATE. The latest date when an option may be exercised or a
futures contract must be completed according to its terms.
HEDGING. An action taken by an investor to neutralize an investment
risk by taking an investment position which will move in the opposite direction
as the risk being hedged so that a loss (or gain) on one will tend to be offset
by a gain (or loss) on the other.
OPTION. Unless the context otherwise requires, the term "option" means
either a call or put option issued by a Clearing Corporation, as defined above.
A call option gives a holder the right to buy from such Clearing Corporation the
number of shares of the underlying security covered by the option at the stated
exercise price by the filing of an exercise notice prior to the expiration time
of the option. A put option gives a holder the right to sell to a Clearing
Corporation the number of shares of the underlying security covered by the put
at the stated exercise price by the filing of an exercise notice prior to the
expiration time of the option. The Fund will sell ("write") and purchase puts
only on U.S. Exchanges.
OPTION PERIOD. The time during which an option may be exercised,
generally from the date the option is written through its expiration date.
PREMIUM. The price of an option agreed upon between the buyer and
writer or their agents in a transaction on the floor of an Exchange.
SERIES OF OPTIONS. Options covering the same underlying security and
having the same exercise price and expiration date.
STOCK INDEX. A stock index assigns relative values to the common stocks
included in the index, and the index fluctuates with chanqes in the market
values of the common stocks so included.
INDEX BASED FUTURES CONTRACT. An index based futures contract is a
bilateral agreement pursuant to which a party agrees to buy or deliver at
settlement an amount of cash equal to $500 times the difference between the
closing value of an index on the expiration date and the price at which the
futures contract is originally struck. Index based futures are traded on
Commodities Exchanges. Currently index based stock index futures contracts can
be purchased or sold with respect to the Standard & Poor's Corporation (S&P) 500
Stock Index and S&P 100 Stock Index on the Chicago Mercantile Exchange, the New
York Stock Exchange Composite Index on the New York Futures Exchange and the
Value Line Stock Index and Major Market Index on the Kansas City Board of Trade.
UNDERLYING SECURITY. The security subject to being purchased upon the
exercise of a call option or subject to being sold upon the exercise of a put
option.
<PAGE>
Keystone Diversified Bond Fund (B-2)
(formerly Keystone Custodian Fund, Series B-2)
SCHEDULE OF INVESTMENTS--August 31, 1995
<TABLE>
<CAPTION>
Interest Maturity Par Market
Rate Date Value Value
=============================================================================================================
<S> <C> <C> <C> <C> <C>
FIXED INCOME (91.1%)
CONVERTIBLE BONDS (0.4%)
RESTAURANTS (0.4%)
Boston Market, Inc. Conv. Deb.
(Subord.) 4.500% 2004 $ 3,250,000 $ 3,083,438
- -------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $3,250,000) 3,083,438
- -------------------------------------------------------------------------------------------------------------
INDUSTRIAL BONDS & NOTES (50.3%)
ADVERTISING & PUBLISHING (0.7%)
Outlet Broadcast, Inc. Sr. Notes (Subord.) 10.875 2003 4,375,000 4,725,000
- -------------------------------------------------------------------------------------------------------------
AMUSEMENTS (1.3%)
Affinity Group, Inc. Gtd. Sr. Notes
(Subord.) 11.500 2003 3,000,000 3,007,500
Boyd Gaming Corp. Sr. Notes (Subord.) 10.750 2003 3,000,000 3,105,000
Six Flags Theme Parks, Inc.
(Effective Yield 11.123%) (c)
(f) Sr. Disc. Notes 0.000 2005 4,250,000 3,113,125
- -------------------------------------------------------------------------------------------------------------
9,225,625
- -------------------------------------------------------------------------------------------------------------
AUTOMOTIVE (1.5%)
Olympic Automobile Series 1995 C Class
A2 6.200 2002 10,730,000 10,717,875
- -------------------------------------------------------------------------------------------------------------
BROADCASTING (2.0%)
Continental Cablevision, Inc. Sr. Deb. 9.500 2013 7,750,000 8,089,063
MFS Communications, Inc.
(Effective Yield 9.373%) (c) Sr. Disc. Notes 0.000 2004 4,000,000 2,980,000
Sinclair Broadcast Group, Inc. Sr. Notes (Subord.) 10.000 2005 3,575,000 3,610,750
- -------------------------------------------------------------------------------------------------------------
14,679,813
- -------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS (1.3%)
Associated Materials, Inc. Sr. Notes (Subord.) 11.500 2003 2,000,000 1,840,000
HMH Properties, Inc. (f) Sr. Secd. Notes 9.500 2005 5,000,000 4,800,000
Schuller International Group, Inc. Sr. Notes 10.875 2004 3,000,000 3,285,000
- -------------------------------------------------------------------------------------------------------------
9,925,000
- -------------------------------------------------------------------------------------------------------------
CAPITAL GOODS (1.2%)
Inland Steel Industries, Inc. Notes 12.750 2002 4,200,000 4,714,500
Tenneco, Inc. Notes 10.375 2000 3,555,000 4,092,338
- -------------------------------------------------------------------------------------------------------------
8,806,838
- -------------------------------------------------------------------------------------------------------------
CHEMICALS (1.4%)
Key Plastics, Inc. Sr. Notes Series B 14.000 1999 6,500,000 6,565,000
Uniroyal Chemical Corp. Investors
Holding, Inc. Sr. Notes (Subord.) 11.000 2003 4,000,000 4,020,000
- -------------------------------------------------------------------------------------------------------------
10,585,000
- -------------------------------------------------------------------------------------------------------------
See Notes to Schedule of Investments.
8
<PAGE>
CONSUMER GOODS (1.7%)
Coty, Inc. Sr. Notes (Subord.) 10.250% 2005 $ 4,500,000 $ 4,635,000
Drypers Corp. Sr. Notes Series B 12.500 2002 5,000,000 2,750,000
Ralphs Grocery Co. Sr. Notes 10.450 2004 5,000,000 4,887,500
- -------------------------------------------------------------------------------------------------------------
12,272,500
- -------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES (2.5%)
General Electric Capital Corp. Notes 8.750 2007 10,275,000 11,822,621
Jordan Industries, Inc. Sr. Notes 10.375 2003 5,000,000 4,637,500
Jordan Industries, Inc. Sr. Disc. Deb.
(Effective Yield 11.740%) (c) (Subord.) 0.000 2005 3,000,000 1,815,000
- -------------------------------------------------------------------------------------------------------------
18,275,121
- -------------------------------------------------------------------------------------------------------------
FINANCE (13.9%)
American Life Holding Co. Sr. Notes (Subord.) 11.250 2004 4,000,000 4,200,000
Banc One Credit Card Master Trust Series 1994-A
Class A 7.150 1998 7,260,000 7,346,176
Comerica, Inc. Subord. Notes 7.250 2007 5,000,000 5,038,650
Commercial Credit Group, Inc. Notes 10.000 2009 5,000,000 6,163,400
Commercial Credit Group, Inc. Notes 10.000 2008 6,000,000 7,368,180
Corestates Home Equity Loan Notes 6.650 2009 1,563,106 1,552,414
European Investment Bank Deb. 9.125 2002 6,750,000 7,684,808
Ford Motor Credit Co. Notes 6.750 2008 9,000,000 8,707,590
General Motors Acceptance Corp. Med. Term Notes 7.375 1998 3,300,000 3,371,742
Marine Midland Asset Backed 8.000 2024 4,579,169 4,476,138
MBNA Master Credit Card Trust II Series 1995-C
Class A 6.450 2008 9,000,000 8,797,500
Norwest Corp. Med. Term Notes 6.500 2005 9,250,000 9,001,453
Paine Webber Group, Inc. Notes 8.250 2002 6,650,000 6,934,953
Premium Standard Farms Finance L P Sr. Secd. Disc.
(b) (h) Exch. Notes 12.000 2003 9,577,000 6,991,210
Sears Roebuck Acceptance Corp. Med. Term Notes 6.240 1999 3,725,000 3,673,446
Standard Credit Card Trust Series 1990 Class A 9.500 1998 6,890,000 7,230,159
Tembec Finance Corp. Sr. Notes 9.875 2005 3,700,000 3,700,000
- -------------------------------------------------------------------------------------------------------------
102,237,819
- -------------------------------------------------------------------------------------------------------------
FOODS (2.2%)
Brunos, Inc. Sr. Notes 10.500 2005 3,500,000 3,403,750
Cott Corp. Quebec Sr. Notes 9.375 2005 5,000,000 5,000,000
PM Holdings Corp. Units (Sr. Disc.
Notes/Wts.) 11.500 2005 4,812,000 2,502,240
Specialty Foods Corp. Sr. Notes (Subord.)
Series B 11.250 2003 5,250,000 5,145,000
- -------------------------------------------------------------------------------------------------------------
16,050,990
- -------------------------------------------------------------------------------------------------------------
HEALTHCARE (0.5%)
Ornda Healthcorp Sr. Notes (Subord.) 11.375 2004 3,000,000 3,300,000
- -------------------------------------------------------------------------------------------------------------
(continued on next page)
9
<PAGE>
- -------------------------------------------------------------------------------------------------------------
INSURANCE (4.2%)
CCP Insurance Sr. Notes 10.500% 2004 $ 5,000,000 $ 5,237,500
Chartwell Re Corp. Sr. Notes 10.250 2004 4,000,000 3,940,000
MBIA, Inc. Deb. 9.375 2011 15,000,000 17,701,050
Reliance Group Holdings, Inc. Sr. Deb. (Subord.) 9.750 2003 4,000,000 3,880,000
- -------------------------------------------------------------------------------------------------------------
30,758,550
- -------------------------------------------------------------------------------------------------------------
MISCELLANEOUS (0.7%)
Los Angeles, California Fire Safety
Improvements
Assessment Dist. #1 8.480 2015 5,000,000 5,181,250
- -------------------------------------------------------------------------------------------------------------
NATURAL GAS (0.7%)
TransTexas Gas Corp. Sr. Secd. Notes 11.500 2002 5,000,000 5,237,500
- -------------------------------------------------------------------------------------------------------------
OFFICE & BUSINESS EQUIPMENT (0.4%)
Specialty Equipment Companies,
Inc. Sr. Notes (Subord.) 11.375 2003 2,500,000 2,625,000
- -------------------------------------------------------------------------------------------------------------
OIL (2.0%)
Occidental Petroleum Corp. Med. Term Notes 6.350 2000 1,900,000 1,852,405
Occidental Petroleum Corp. Med. Term Notes 6.240 2000 5,550,000 5,383,334
Plains Resources, Inc. Sr. Notes (Subord.) 12.000 1999 4,000,000 4,120,000
Wainoco Oil Corp. Sr. Notes 12.000 2002 3,250,000 3,315,000
- -------------------------------------------------------------------------------------------------------------
14,670,739
- -------------------------------------------------------------------------------------------------------------
PAPER & PACKAGING (1.4%)
Owens Illinois, Inc. Deb. 11.000 2003 4,500,000 4,916,250
Rainy River Forest Products, Inc. Sr. Secd. Notes 11.000 2001 5,000,000 5,350,000
- -------------------------------------------------------------------------------------------------------------
10,266,250
- -------------------------------------------------------------------------------------------------------------
RETAIL (2.2%)
Big 5 Holdings, Inc. Sr. Notes (Subord.) 13.625 2002 1,000,000 980,000
Cole National Group, Inc. Sr. Notes 11.250 2001 4,000,000 3,960,000
Hills Stores Co. Sr. Notes 10.250 2003 3,500,000 3,325,000
Pamida, Inc. Sr. Notes (Subord.) 11.750 2003 4,500,000 3,960,000
Service Merchandise Co. Sr. Deb. (Subord.) 9.000 2004 5,000,000 4,175,000
- -------------------------------------------------------------------------------------------------------------
16,400,000
- -------------------------------------------------------------------------------------------------------------
SERVICES (1.1%)
Comcast Cellular Corp. (Effective
Yield 11.732%) (c) Sr. Part. Notes 0.000 2000 7,380,000 5,535,000
Community Health Systems, Inc. Sr. Deb. (Subord.) 10.250 2003 2,500,000 2,637,500
Santa Fe Hotel, Inc. 1st Mtge. Notes 11.000 2000 530,000 471,700
- -------------------------------------------------------------------------------------------------------------
8,644,200
- -------------------------------------------------------------------------------------------------------------
See Notes to Schedule of Investments.
10
<PAGE>
- -------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (3.2%)
Adelphia Communications Corp. Sr. Notes 12.500% 2002 $ 3,000,000 $ 3,045,000
Pagemart, Inc. (Effective Yield Unit (Sr. Disc.
12.250%) (c) Notes/Wts.) 0.000 2003 3,050,000 1,986,313
Rogers Cablesystems Ltd. Sr. Secd. 2nd
Priority Note 10.000 2005 5,500,000 5,651,250
Time Warner Entertainment Co. Notes 8.875 2012 7,500,000 8,027,325
Videotron Group Ltd. Voting Conv. Deb.
(Subord.) 10.625 2005 5,000,000 5,225,000
- -------------------------------------------------------------------------------------------------------------
23,934,888
- -------------------------------------------------------------------------------------------------------------
TRANSPORTATION (1.9%)
California Petroleum Transport
Corp. 1st Mtge. Notes 8.520 2015 5,000,000 5,252,450
Eletson Holdings, Inc. 1st Mtge. Notes 9.250 2003 4,999,500 4,799,520
Gearbulk Holding Ltd. Sr. Notes 11.250 2004 4,000,000 4,180,000
- -------------------------------------------------------------------------------------------------------------
14,231,970
- -------------------------------------------------------------------------------------------------------------
UTILITIES (2.3%)
Chugach Electric Association, Inc. 1st Mtge. Bds. 9.140 2022 13,150,000 14,683,290
Montana Power Co. 1st Mtge. Notes 7.700 1999 2,400,000 2,496,792
- -------------------------------------------------------------------------------------------------------------
17,180,082
- -------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES (Cost--$368,010,432) 369,932,010
- -------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLARS)
(6.0%)
Gulf Canada Resources Ltd. Sr. Notes (Subord.) 9.625 2005 3,500,000 3,500,000
Indah Kiat International Finance Gtd. Sr. Secd.
Co. B. V. Notes 11.875 2002 4,000,000 4,080,000
Ispat Mexicana S.A. Sr. Unsecd. Deb. 10.375 2001 5,000,000 4,400,000
Manitoba Province, Canada Deb. 9.625 1999 8,750,000 9,637,600
Midland Amern Capital Corp Gtd. Notes 12.750 2003 2,500,000 2,931,475
Northern Telecom Ltd. Notes 8.250 1996 3,500,000 3,556,140
Republic of Argentina Sr. Notes 8.375 2003 5,500,000 4,028,750
Republic of Argentina Sr. Notes 5.000 2023 3,500,000 1,645,000
Wharf International Capital 1994
Ltd. Gtd. Notes 8.875 2004 10,000,000 10,258,300
- -------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$42,126,720) 44,037,265
- -------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE SECURITIES (1.4%)
FNMA Pool #070119 Cap 12.018%, Margin
2.000% + CMT 7.173 2017 3,265,861 3,361,796
FNMA Pool #124289 Cap 13.432%, Margin
2.005% + CMT 7.678 2021 6,844,955 7,027,852
- -------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (Cost--$10,473,461) 10,389,648
- -------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (16.7%)
Chase Mortgage Finance Corp. Series 1992 F Class 8.250 2007 421,552 420,642
(Est. Mat. 1995) (g) A4
(continued on next page)
11
<PAGE>
COLLATERALIZED MORTGAGE OBLIGATIONS (continued)
Collateralized Mortgage Investors
Trust
(Est. Mat. 1996) (g) Series 6 Class D 8.800% 2006 $ 5,000,000 $ 5,060,750
Debartolo Capital Partnership
(Est. Mat. 2000) (g) Commercial Mtge. 7.610 2004 9,000,000 9,185,625
Class B
FHA Pool #02043143 (Est. Mat.
1999) (g) Blair House Project 9.125 2034 3,284,180 3,382,706
FHA Pool #02043143 (Est. Mat.
1999) (g) Blair House Project 10.250 2034 2,508,755 2,584,018
FHLMC (Est. Mat. 2010) (g) Series G8 Class SB
inverse floater 9.600 2023 191,912 144,894
FHLMC (Est. Mat. 2005) (g) Series 1615 Class
SB inverse floater 3.214 2008 5,265,900 3,218,781
FHLMC (Est. Mat. 2005) (g) Series 1666 inverse
floater 5.360 2024 7,101,893 4,678,159
FHLMC (Est. Mat. 1999) (g) Series 1684 Class
JC 5.507 2020 6,161,109 6,072,543
FHLMC (Est. Mat. 1999) (g) Series 1684 Class
JD COFI inverse IO 3.493 2020 6,385,302 381,123
FHLMC (Est. Mat. 2004) (g) Series 1360 Class
PK 10.000 2020 5,000,000 5,638,650
FNMA REMIC Trust (Est. Mat. 2001) Series 1992 117
(g) Class K 7.500 2021 7,250,000 7,261,745
FNMA REMIC Trust (Est. Mat. 2007) Series 1993 038
(g) Class L 5.000 2022 5,000,000 4,117,750
Green Tree Financial Corp. (Est. Series 1994 A Class
Mat. 1998) (g) A 6.900 2004 3,222,499 3,183,217
Green Tree Financial Corp. (Est. Series 1994 B Class
Mat. 1997) (g) A 7.850 2004 3,551,783 3,551,783
Merrill Lynch Mortgage Investors, Series 1992 D Class
Inc. (Est. Mat. 1999) (g) B 8.500 2017 3,081,199 3,192,461
The Money Store Home Equity Trust Series 1995 A Class
(Est. Mat. 1997) (g) A 7.925 2014 7,270,000 7,431,031
Paine Webber Mortgage Acceptance Series 1993 5 Class
Corp. IV (Est. Mat. 1997) (g) A3 6.875 2008 5,553,412 5,553,412
Prudential Home Mortgage Series 1992 A Class
(Est. Mat. 2001) (g) 2B2 (Subord.) 7.900 2022 14,000,000 12,950,000
Prudential Home Mortgage Series 1995 A Class
(Est. Mat. 2007) (g) B (Subord.) 8.980 2025 6,440,073 6,472,274
Residential Funding Mortgage
Securities I Series 1994 S15
(Est. Mat. 1997) (g) Class A1 7.750 2024 7,404,153 7,540,611
U.S. Home Equity Loan (Est. Mat. Series 1991 2 Class
1997) (g) B 9.125 2021 4,569,000 4,698,897
Volvo Car Finance Grantor Trust
(Effective Yield 6.62%) Series 1993 2 Class
(Est. Mat. 1996) (c) (f) (g) A 0.000 1997 4,601,203 4,363,235
Zale Funding Trust (Est. Mat. Series 1994 1 Class
1999) (f) (g) A2 7.325 2003 11,000,000 11,292,188
- -------------------------------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost--$123,014,375) 122,376,495
- -------------------------------------------------------------------------------------------------------------
MORTGAGE PASS-THROUGH CERTIFICATE (1.0%)
Resolution Trust Corp. Mortgage Series 1995 Class
Pass-Through (Cost $7,137,846) 2C 7.500 2028 7,250,000 7,277,188
- -------------------------------------------------------------------------------------------------------------
See Notes to Schedule of Investments.
12
<PAGE>
- -------------------------------------------------------------------------------------------------------------
UNITED STATES GOVERNMENT ISSUES (15.3%)
U.S. Treasury Notes 6.500% 2005 $ 5,000,000 $ 5,076,550
U.S. Treasury Notes 6.750 2000 15,500,000 15,899,583
U.S. Treasury Notes 7.500 2002 3,200,000 3,429,984
U.S. Treasury Notes 7.875 2004 16,700,000 18,450,828
U.S. Treasury Notes 8.875 1998 14,350,000 15,547,364
U.S. Treasury Notes 8.875 2000 9,750,000 10,845,315
U.S. Treasury Bonds 6.875 2025 7,500,000 7,707,450
U.S. Treasury Bonds 7.625 2025 31,730,000 35,354,201
- -------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES GOVERNMENT ISSUES (Cost--$112,908,472) 112,311,275
- -------------------------------------------------------------------------------------------------------------
TOTAL FIXED INCOME (Cost--$666,921,306) 669,407,319
=============================================================================================================
COMMON STOCKS/RIGHTS/WARRANTS (0.9%)
Hollywood Casino Corp. (d) 611,665 5,160,923
Pagemart, Inc., wts. (b) (d) (f) 14,030 56,120
PM Holdings Corp. (d) 2,964 3
Purity Supreme, Inc. wts. (d) 34,655 347
Reliance Group Holdings, Inc. wts.
(d) 67,904 135,808
Santa Fe Hotel, Inc. wts. (d) 53,000 530
Uniroyal Chemical Corp. Investors
Holding, Inc. (d) 119,971 1,244,699
- -------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS/RIGHTS/WARRANTS (Cost--$173,560) 6,598,430
=============================================================================================================
SHORT-TERM INVESTMENTS (6.6%)
United States Government or Agency
Issues (4.7%)
Federal Home Loan Bank Discount
Notes 1995 20,000,000 19,943,400
U.S. Treasury Bills 1995 14,800,000 14,695,068
- -------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES GOVERNMENT OR AGENCY ISSUES (Cost $34,636,447) 34,638,468
- -------------------------------------------------------------------------------------------------------------
Maturity
Value
- -------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (1.9%)
Goldman Sachs Group LP, purchased 8/31/95, (Collateralized
by $13,894,431 FHLMC, 6.257%, 4/1/31) (Cost $13,633,000)
(e) 5.820 9/1/95 $13,635,204 13,633,000
- -------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost--$48,269,447) 48,271,468
=============================================================================================================
TOTAL INVESTMENTS (Cost--$715,364,313) (a) (98.6%) 724,277,217
- -------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (1.4%) 10,560,063
- -------------------------------------------------------------------------------------------------------------
NET ASSETS (100%) $734,837,280
=============================================================================================================
(continued on next page)
</TABLE>
13
<PAGE>
Notes to Schedule of Investments:
(a) The cost of investments for federal income tax purposes amounted to
$715,969,343. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at August 31, 1995, are as
follows:
Gross unrealized appreciation $ 19,064,680
Gross unrealized depreciation (10,756,806)
-----------
Net unrealized appreciation $ 8,307,874
===========
(b) Illiquid securities which may not be sold or disposed of in the ordinary
course of business within seven days at approximately the current market
value. The combined value of such securities at August 31, 1995 was
$7,047,330 (1.0% of the Fund's net assets at August 31, 1995).
(c) Effective yield (calculated at date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
(d) Non-income-producing security.
(e) The repurchase ageements are fully collateralized by U.S. Government
and/or agency obligations based on market prices at August 31, 1995.
(f) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(g) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is
based on current and projected pre-payment rates. Changes in interest
rates can cause the estimated maturity to differ from the listed date.
The estimated maturity dates are unaudited.
(h) Securities valued in good faith by management under procedures approved
by the Fund's Board of Trustees. At August 31, 1995, the fair value of
these securities was $6,991,210 (1.0% of the Fund's net assets at August
31, 1995).
Legend of Portfolio Abbreviations:
CMO--Collateralized Mortgage Obligation
CMT--1, 3 or 5 year Constant Maturity Treasury Index
COFI--Cost of Funds Index
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
GNMA--Government National Mortgage Association
IO--Interest Only
REMIC--Real Estate Mortgage Investment Conduit
See Notes to Financial Statements.
14
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value
beginning
of year $15.28 $17.06 $16.44 $15.37 $15.51 $17.74 $17.99 $18.91 $20.08 $18.84
- -----------------------------------------------------------------------------------------------------------------------------------
Income from
investment
operations:
Net
investment
income 1.06 1.06 1.28 1.33 1.33 1.53 1.71 1.78 1.83 2.07
Net gain
(loss) on
investments
and closed
futures
contracts 0.11 (1.62) 0.70 1.14 0.17 (1.94) (0.13) (0.81) (1.01) 1.38
Net
commissions
paid on
fund share
sales (a) 0 0 0 0 0 0 0 0 0 (0.21)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from
investment
operations 1.17 (0.56) 1.98 2.47 1.50 (0.41) 1.58 0.97 0.82 3.24
- -----------------------------------------------------------------------------------------------------------------------------------
Less
distributions
from:
Net
investment
income (1.06) (1.22) (1.28) (1.33) (1.63) (1.61) (1.83) (1.85) (1.85) (2.00)
In excess of
net
investment
income (0.22) 0 (0.08) (0.07) (0.01) (0.21) 0 0 0 0
Tax basis
return of
capital (0.08) 0 0 0 0 0 0 0 0 0
Net realized
gain on
investments 0 0 0 0 0 0 0 (0.04) (0.14) 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total
distributions (1.36) (1.22) (1.36) (1.40) (1.64) (1.82) (1.83) (1.89) (1.99) (2.00)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset
value end
of year $15.09 $15.28 $17.06 $16.44 $15.37 $15.51 $17.74 $17.99 $18.91 $20.08
- -----------------------------------------------------------------------------------------------------------------------------------
Total return
(b) 8.13% (3.53%) 12.73% 16.88% 10.58% (2.44%) 9.23% 5.61% 4.20% 18.01%
Ratios/supple-
mental data
Ratios to
average net
assets:
Total
expenses 1.81% 1.75% 1.89% 1.99% 1.94% 1.89% 1.84% 1.68% 1.68% 1.00%
Net
investment
income 7.05% 6.48% 7.73% 8.29% 8.74% 9.26% 9.52% 9.82% 9.31% 10.37%
Portfolio
turnover
rate 178% 200% 133% 117% 101% 43% 47% 46% 74% 69%
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets
end of year
(thousands) $734,837 $814,245 $1,004,393 $902,339 $814,528 $860,615 $1,000,305 $838,892 $889,333 $558,734
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both
financial statement and tax purposes as capital charges. On June 11,
1987, the Securities and Exchange Commission adopted a rule which
required for financial statements for the periods ended on or after June
30, 1987, that net commissions paid under Rule 12b-1 be treated as
operating expenses rather than capital charges. Accordingly, beginning
with the year ended August 31, 1987, the Fund's financial statements
reflect 12b-1 Distribution Plan expenses (i.e., shareholder service fees
plus commissions paid net of deferred sales charges received by the Fund)
as a component of net investment income.
(b) Excluding applicable sales charges.
See Notes to Financial Statements.
15
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1995
===================================================================
Assets: (Note 1):
Investments at market value
(identified cost--$715,364,313) $ 724,277,217
Cash 103
Receivable for:
Investments sold 3,705,516
Fund shares sold 354,497
Interest 11,346,054
Prepaid expenses 116,450
- -------------------------------------------------------------------
Total assets 739,799,837
- -------------------------------------------------------------------
Liabilities (Notes 2, 4 and 5):
Payable for:
Investments purchased 244,800
Fund shares redeemed 2,341,151
Distributions to shareholders 2,237,949
Due to related parties 13,385
Other accrued expenses 125,272
- -------------------------------------------------------------------
Total liabilities 4,962,557
- -------------------------------------------------------------------
Net assets $ 734,837,280
===================================================================
Net assets represented by (Note 1):
Paid-in capital $ 897,724,605
Accumulated distributions in excess of net
investment income (2,237,949)
Accumulated net realized gain (loss) on investments (169,562,280)
Net unrealized appreciation (depreciation) on
investments 8,912,904
- -------------------------------------------------------------------
Total net assets applicable to outstanding
shares of beneficial interest ($15.09 a
share on 48,710,058 shares outstanding) $ 734,837,280
===================================================================
STATEMENT OF OPERATIONS
Year Ended August 31, 1995
===================================================================
Investment income (Note 1):
Interest $ 67,051,003
- -------------------------------------------------------------------
Expenses (Notes 2 and 4):
Management fee $ 3,982,976
Transfer agent fees 1,674,129
Accounting, auditing and legal 88,904
Custodian fees 259,614
Printing 34,214
Trustees' fees and expenses 40,014
Distribution plan expenses 7,512,556
Registration fees 46,386
Miscellaneous 51,615
- -------------------------------------------------------------------
Total expenses 13,690,408
- -------------------------------------------------------------------
Net investment income 53,360,595
- -------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
closed futures contracts (Notes 1 and 3):
Net realized gain (loss) on:
Investments (24,643,115)
Closed futures contracts (627,562)
- -------------------------------------------------------------------
Net realized gain (loss) on
investments
and closed futures contracts (25,270,677)
- -------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on investments 29,299,264
- -------------------------------------------------------------------
Net gain (loss) on investments and
closed futures contracts 4,028,587
- -------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $ 57,389,182
===================================================================
See Notes to Financial Statements.
16
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------
1995 1994
==========================================================================================================
<S> <C> <C>
Operations:
Net investment income $ 53,360,595 $ 60,539,075
Net realized gain (loss) on investments and closed futures contracts (25,270,677) (14,280,675)
Net change in unrealized appreciation (depreciation) on investments 29,299,264 (77,265,931)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 57,389,182 (31,007,531)
- ----------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Notes 1 and 5):
Net investment income (53,360,595) (70,243,075)
In excess of net investment income (11,593,245) 0
Tax basis return of capital (3,726,265) 0
- ----------------------------------------------------------------------------------------------------------
Total distributions to shareholders (68,680,105) (70,243,075)
- ----------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold 115,263,649 128,708,064
Payments for shares redeemed (222,230,419) (257,623,056)
Net asset value of shares issued in reinvestment of dividends and
distributions 38,850,254 40,016,840
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share
transactions (68,116,516) (88,898,152)
- ----------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (79,407,439) (190,148,758)
- ----------------------------------------------------------------------------------------------------------
Net assets:
Beginning of year 814,244,719 1,004,393,477
- ----------------------------------------------------------------------------------------------------------
End of year [Accumulated distributions in excess of net investment
income as follows: 1995--($2,237,949) and 1994--($6,280,569)] (Note 1) $ 734,837,280 $ 814,244,719
==========================================================================================================
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Diversified Bond Fund (B-2) (formerly Keystone Custodian Fund,
Series B-2), (the "Fund") is a common law trust for which Keystone
Management, Inc. ("KMI") is the Investment Manager and Keystone Investment
Management Company (formerly Keystone Custodian Funds, Inc.) ("Keystone") is
the Investment Adviser. The Fund is registered under the Investment Company
Act of 1940 as a diversified, open-end investment company.
Keystone is a wholly-owned subsidiary of Keystone Investments Inc. (fomerly
Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is privately owned
by an investor group consisting of members of current and former members of
management of Keystone and its affiliates. Keystone Investor Resource Center,
Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer
agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting
principles.
A. Investments are usually valued at the closing sales price or, in the
absence of sales and for over-the-counter securities, the mean of bid and
asked quotations. Management values the following securities at prices it
deems in good faith to be fair: (a) securities (including restricted
securities) for which complete quotations are not readily available and (b)
listed securities if, in the opinion of management, the last sales price does
not reflect a current value or if no sale occurred. Short-term investments
maturing in sixty days or less are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates market.
Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value.
Short-term investments maturing in more than sixty days when purchased which
are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest,
approximates market. Investments denominated in a foreign currency are
adjusted daily to reflect changes in exchange rates. Market quotations are
not considered to be readily available for long-term corporate bonds and
notes; such investments are stated at fair value on the basis of valuations
furnished by a pricing service, approved by the Trustees, which determines
valuations for normal institutional-size trading units of such securities
using methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders.
The Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency rates. A futures contract is an
agreement between two parties to buy and sell a specific amount of a
commodity, security, financial instrument, or, in the case of a stock index,
cash at a set price on a future date. Upon entering into a futures contract
the Fund is required to deposit with a broker an amount ("initial margin")
equal to a certain percentage of the purchase price indicated in the futures
contract. Subsequent payments ("variation margin") are made or received by
the Fund each day, as the value of the underlying instrument or index
fluctuates, and are recorded for book purposes as unrealized gains or losses
by the Fund. For federal tax purposes, any futures contracts which remain
open at fiscal year-end are marked-to-market and the resultant net gain or
18
<PAGE>
loss is included in federal taxable income. In addition to market risk, the
Fund is subject to the credit risk that the other party will not be able to
complete the obligations of the contract.
Foreign currency amounts are translated into United States dollars as
follows: market value of investments, assets and liabilities at the daily
rate of exchange, purchases and sales of investments, income and expenses at
the rate of exchange prevailing on the respective dates of such transactions.
Net unrealized foreign exchange gains/losses are a component of unrealized
appreciation/depreciation of investments.
B. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis and
dividend income is recorded on the ex-dividend date. All discounts are
amortized for both financial reporting and federal income tax purposes.
Distributions to shareholders are recorded at the close of business on the
record date.
C. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, the Fund expects to be relieved of
any federal income tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The Fund intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of the collateral falls below required levels,
the Fund intends to seek additional collateral from the seller or terminate
the repurchase agreement. If the seller defaults, the Fund would suffer a
loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. Any such loss would be
increased by any cost incurred on disposing of such securities. If bankruptcy
proceedings are commenced against the seller under the repurchase agreement,
the realization on the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
E. The Fund may enter into forward foreign currency exchange contracts
("contracts") to settle portfolio purchases and sales of securities
denominated in a foreign currency and to hedge certain foreign currency
assets. Contracts are recorded at market value and are marked-to-market
daily. Realized gains and losses arising from such transactions are included
in net realized gain (loss) on foreign currency related transactions.
19
<PAGE>
The Fund is subject to the credit risk that the other party will not complete
the obligations of the contract.
F. The Fund distributes net investment income monthly and net capital gains,
if any, annually. Distributions are determined in accordance with income tax
regulations. The significant differences between financial statement amounts
available for distribution and distributions made in accordance with income
tax regulations are primarily due to the different treatment of 12b-1
expenses prior to April 1995, differences in the treatment of paydown losses
and the deferral of losses for income tax purposes that have been recognized
for financial statement purposes.
(2.) Capital Share Transactions
The Trust agreement authorizes the issuance of an unlimited number of
shares of beneficial interest with a par value of $1.00. Transactions in
shares of the Fund were as follows:
Year Ended August 31,
1995 1994
- ----------------------------------------------------------
Shares sold 7,685,412 7,793,456
Shares redeemed (14,886,517) (15,835,294)
Shares issued in
reinvestment of
dividends and
distributions 2,612,246 2,454,488
- ----------------------------------------------------------
Net increase (decrease) (4,588,859) (5,587,350)
==========================================================
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted pursuant to Rule 12b-1 under the Investment Company
Act of 1940. Under the Distribution Plan, the Fund pays Keystone Investment
Distributors Company (formerly Keystone Distributors, Inc.) ("KIDC"), the
principal underwriter and a wholly-owned subsidiary of Keystone, amounts
which in total may not exceed the Distribution Plan maximum.
In connection with the Distribution Plan and subject to the limitations
discussed below, Fund shares are offered for sale at net asset value without
any initial sales charge. From the amounts received by KIDC in connection
with the Distribution Plan, and subject to the limitations discussed below,
KIDC generally pays dealers or others a commission equal to 4.00% of the
price paid to the Fund for each sale of Fund shares as well as a shareholder
service fee at a rate of 0.25% per annum of the net asset value of shares
sold by such brokers or others and remaining outstanding on the books of the
Fund for specified periods.
To the extent Fund shares are redeemed within four calendar years of
original issuance, the Fund may be eligible to receive a deferred sales
charge from the investor as partial reimbursement for sales commissions
previously paid on those shares. This charge is based on declining rates,
which begin at 4.00%, applied to the lesser of the net asset value of shares
redeemed or the total cost of such shares.
Commencing on July 8, 1992, contingent deferred sales charges applicable
to shares of the Fund issued after January 1, 1992 have, to the extent
permitted by the NASD Rule, been paid to KIDC rather than to the Fund.
The Distribution Plan provides that the Fund may incur certain expenses
which may not exceed a maximum amount equal to 0.3125% of the Fund's average
daily net assets for any calendar year (approximately 1.25% annually)
occuring after the inception of the Distribution Plan. A rule of the National
Association of Securities Dealers, Inc. ("NASD Rule") limits the annual
expenditures which the Fund may incur under the Distribution Plan to 1% of
which 0.75% may be used to pay such distribution expenses and 0.25% may be
used to pay shareholder service fees. The NASD Rule also will limit the
aggregate amount which the
20
<PAGE>
Fund may pay for such distribution costs to 6.25% of gross share sales since
the inception of the Fund's 12b-1 Distribution Plan, plus interest at the
prime rate plus 1.00% on unpaid amounts thereof (less any contingent deferred
sales charges paid by the shareholders to KIDC).
KIDC intends, but is not obligated, to continue to pay or accrue
distribution charges which exceed current annual payments permitted to be
received by KIDC from the Fund. KIDC 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 permitted limits. KIDC currently
intends to seek payment of interest only on such charges paid or accrued by
KIDC subsequent to January 1, 1992.
During the year ended August 31, 1995, the Fund paid KIDC $7,545,356 under
its Distribution Plan. The amount paid by the Fund under its Distribution
Plan, net of deferred sales charges, was $7,512,556 (1.00% of the Fund's
average daily net asset value). During the year ended August 31, 1995, KIDC
received $5,813,521 after payments of commissions on new sales to dealers and
others of $3,216,034.
Under the NASD Rule, the maximum uncollected amount for which KIDC may
seek payment from the Fund under its distribution Plan is $22,382,869 (3.05%
of the Fund's net assets at August 31, 1995).
(3.) Securities Transactions
As of August 31, 1995, the Fund had a capital loss carryover for federal
income tax purposes of approximately $149,889,000 which expires as follows:
1998--$38,243,000; 1999--$85,002,000; and 2003--$26,644,000. For the year
ended August 31, 1995, purchases and sales of investment securities were as
follows:
Cost of Proceeds
Purchases from Sales
- ---------------------------------------------------------
Portfolio securities $1,303,878,601 $1,394,796,648
Short-term investments 3,233,485,118 3,233,177,500
- ---------------------------------------------------------
$4,537,363,719 $4,627,974,148
=========================================================
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, 1989, KMI provides investment management and administrative services to
the Fund. In return, KMI is paid a management fee computed and paid daily
which is based upon both Fund net assets and gross income earned by the Fund.
The fee is calculated at a rate of 2.0% of the Fund's gross investment income
plus an amount determined by applying percentage rates, that start at 0.50%
and decline, as net assets increase to 0.25% per annum, to the net asset
value of the Fund. KMI has entered into an Investment Advisory Agreement with
Keystone, under which Keystone provides investment advisory and management
services to the Fund and receives for its services an annual fee representing
85% of the management fee received by KMI. During the year ended August 31,
1995, the Fund paid or accrued to KMI investment management and
administrative services fees of $3,982,976 which represented 0.53% of the
Fund's average net assets. Of such amount paid to KMI, $3,385,529 was paid to
Keystone for its services to the Fund.
During the year ended August 31, 1995, the Fund paid or accrued to KII
$26,592 for certain accounting services and to KIRC $1,674,129 for transfer
agent fees.
(5.) Distributions to Shareholders
A distribution of net investment income of $0.10 per share was declared
payable by October 5, 1995 to shareholders of record September 25, 1995. This
distribution is not reflected in the accompanying financial statements.
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees
Keystone Diversified Bond Fund (B-2)
(formerly Keystone Custodian Fund, Series B-2)
We have audited the accompanying statement of assets and liabilities of
Keystone Diversified Bond Fund (B-2), including the schedule of investments,
as of August 31, 1995, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in
the two-year period then ended, and the financial highlights for each of the
years in the ten-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of August 31, 1995 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Diversified Bond Fund (B-2) as of August 31, 1995, the results of
its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the ten-year period then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
September 29, 1995
22
<PAGE>
<TABLE>
<CAPTION>
Schedule VII
Keystone Diversified Bond Fund (B-2)
Schedule of Short-Term Borrowings
(as required by Rule 12-10 of Regulation S-X)
Year ended August 31, 1995
(1.) (2.) (3.)
Maximum amount Average amount Weighted average
Category of aggregate Balance at Weighted average outstanding outstanding interest rate
short-term borrowing end of period interest rate during the period during the period during the period
- -------------------- ------------- ---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Reverse Repurchase Agreement 0 0 $30,000,000 7,877,128 5.70%
- -----------
1. Amount represents maximum borrowings outstanding at any week end during the year ended August 31, 1995.
2. Average borrowing is determined by dividing the sum of (principal borrowed times the number of days outstanding) by the
total number of days the fund had borrowings outstanding during the year.
3. Weighted average interest rate is determined by dividing the annualized interest paid on borrowings by the average amount
outstanding.
</TABLE>
<PAGE>
KEYSTONE DIVERSIFIED BOND FUND (B-2)
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Item 24 (a). FINANCIAL STATEMENTS
All Financial Statements listed below are included in Registrant's Statement of
Additional Information.
Schedule of Investments August 31, 1995
Financial Highlights For fiscal years
ended August 31,
1986 through August
31, 1995
Statement of Assets and Liabilities August 31, 1995
Statement of Operations Year ended
August 31, 1995
Statement of Changes in Net Assets Two years ended
August 31, 1995
Notes to Financial Statements
Independent Auditors' Report
dated September 29, 1995
<PAGE>
Item 24(b). Exhibits
--------
(1) A copy of the Restatement of Trust Agreement, as amended, is filed
herewith.
(2) A copy of Registrant's By-Laws is filed herewith.
(3) Not applicable.
(4) A specimen of the security issued by Registrant was filed with
Post-Effective Amendment No. 30 to Registration Statement No.
2-10659/811-93 as Exhibit 24(b)(4) and is incorporated by reference
herein.
(5)(A) A copy of the Investment Management Agreement between Registrant and
Keystone Management, Inc. is filed herewith.
(B) A copy of the Investment Advisory Agreement between Keystone
Management, Inc. and Keystone Investment Management Company
(formerly named Keystone Custodian Funds, Inc.) is filed herewith.
(6)(A) A copy of the Principal Underwriting Agreement between Registrant
and Keystone Investment Distributors Company (formerly named
Keystone Distributors, Inc.) is filed herewith.
(B) A copy of the form of Dealer Agreement used by Keystone Investment
Distributors Company is filed herewith.
(C) Current copies of Registrant's respective Underwriting Agreements
with Kokusai Securities Co., Ltd. and Nomura Securities Co., Ltd.
are filed herewith.
(7) Not applicable.
(8) A copy of the Custodian, Fund Accounting and Recordkeeping
Agreements, as amended, between Registrant and State Street Bank and
Trust Company are filed herewith.
(9) Not applicable.
(10) Consent of counsel as to the legality of securities registered by
the Fund is filed herewith.
(11) Consent as to use of opinion of Registrant's Independent Auditors is
filed herewith.
(12) Not applicable.
(13) Not applicable.
<PAGE>
Item 24(b) Exhibits (continued).
(14) Copies of model plans used in the establishment of retirement plans
in connection with which Registrant offers its securities were filed
with Post-Effective Amendment No. 66 to the Registration Statement
No. 2-10527/811-96 as Exhibit 24(b)(14) and are incorporated by
reference herein.
(15) A copy of Registrant's Distribution Plan adopted pursuant to Rule
12b-1 is filed herewith.
(16) Schedules for the computation of total return and current yield
quotations are filed herewith.
(17) Financial Data Schedules are filed herewith as Exhibit 27.
(18) Not applicable.
(19) Powers of Attorney are filed herewith.
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Not applicable.
Item 26. Number of Holders of Securities
-------------------------------
Number of Record
Title of Class Holders as of November 30, 1995
-------------- ------------------------------
Shares of $1.00 34,180
Par Value
Item 27. Indemnification
---------------
Provisions for the indemnification of Registrant's Trustees and
officers are contained in Article VIII of the Restatement of Trust
Agreement, a copy of which is filed herewith and incorporated by
reference herein.
Provisions for the indemnification of Keystone Investment
Distributors Company (formerly named Keystone Distributors, Inc.),
Registrant's principal underwriter, are contained in Section 9 of
the Principal Underwriting Agreement between Registrant and Keystone
Investment Distributors Company, a copy of which is filed herewith
and incorporated by reference herein.
Provisions for the indemnification of Kokusai Securities Co., Ltd.
and Nomura Securities Co., Ltd., underwriters for the sale of
Registrant's securities in Japan, are contained in Section 11 of
Registrant's respective Underwriting Agreements with said entities,
copies of which are filed herewith and incorporated by reference
herein.
Provisions for the indemnification of Keystone Management, Inc. and
Keystone Investment Management Company, Registrant's investment
manager and investment adviser, are contained in Section 6 of the
Investment Management Agreement between Registrant and Keystone
Management, Inc. and in Section 5 of the Investment Advisory
Agreement between Keystone Management, Inc. and Keystone Investment
Management Company, copies of which are filed herewith and
incorporated by reference herein.
<PAGE>
Item 28. Business and other Connections of Investment Adviser
----------------------------------------------------
The following tables list the names of the various officers and
directors of Keystone Investment Management Company and Keystone
Management, Inc., Registrant's investment adviser and manager,
respectively, and their respective positions. For each named
individual, the tables list, for the past two fiscal years, (i) any
other organizations (for Keystone Investment Management Company,
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
Investment
Name Management Company Other Business 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.
<PAGE>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
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.
Former President:
Keystone Management, Inc.
Former Treasurer:
The Kent Funds
Keystone Investments, Inc.
Keystone Investment
Management Company
<PAGE>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
Rosemary D. Senior Vice General Counsel, Senior
Van Antwerp President, Vice President and
General Counsel Secretary:
and Secretary Keystone Investments, Inc.
Senior Vice President and
General Counsel:
Keystone Institutional
Company, Inc.
Senior Vice President,
General Counsel and
Director:
Keystone Investor
Resource Center, Inc.
Fiduciary Investment
Company, Inc.
Keystone Investment
Distributors Company
Senior Vice President,
General Counsel, Director
and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Former Senior Vice
President and Secretary:
Hartwell Keystone
Advisers, Inc.
Vice President and
Secretary:
Keystone Fixed Income
Advisers, Inc.
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
<PAGE>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
Christopher P. Senior Vice None
Conkey President
Richard Cryan Senior Vice None
President
Maureen E. Senior Vice None
Cullinane President
George E. Dlugos Vice President None
Antonio T. Docal Vice President None
Christopher R. Senior Vice None
Ely President
Robert L. Hockett Vice President None
Sami J. Karam Vice President None
Donald M. Keller Senior Vice None
President
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
<PAGE>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
William H. Vice President None
Parsons
Daniel A. Rabasco Vice President None
David L. Smith Vice President None
Kathy K. Wang Vice President None
Judith A. Warners Vice President None
J. Kevin Kenely Vice President None
and Controller
Joseph J. Asst. Vice President None
Decristofaro
<PAGE>
LIST OF OFFICERS AND DIRECTORS OF KEYSTONE MANAGEMENT, INC.
Position with
Keystone
Name Management Inc. Other Business Affiliations
- ---- ------------------ ---------------------------
Albert H. Chairman of Chairman of the Board,
Elfner, III the Board, Chief Executive Officer,
Chief Execu- President and Director:
tive Officer, Keystone Investments,
President and Inc.
Director Keystone Software, Inc.
Keystone Asset
Corporation
Keystone Capital
Corporation
Keystone Investments
Family of Funds
Chairman of the Board
and Director:
Keystone Investment
Management Company
Keystone Institutional
Company, Inc.
Keystone Fixed Income
Advisers, Inc.
President and Director:
Keystone Trust Company
Director or Trustee:
Fiduciary Investment
Company, Inc.
Keystone Investor
Resource Center, Inc.
Boston Children's
Services Association
Middlesex School
Middlebury College
Former Trustee or
Director:
Neworld Bank
Robert Van Partners, Inc.
<PAGE>
Position with
Keystone
Name Management, Inc. Other Business Affiliations
- ---- ------------------ ---------------------------
Edward F. Godfrey Treasurer and Senior Vice President,
Director Chief Financial Officer,
Treasurer and Director:
Keystone Investments,
Inc.
Keystone Investment
Management Company
Keystone Investment
Distributors Company
Treasurer:
Keystone Institutional
Company, Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Former Treasurer and
Director:
Hartwell Keystone
Advisers, Inc.
Senior Vice President:
Keystone Investments
Family of Funds
Ralph J. Director President and Director:
Spuehler, Jr. Keystone Investment
Distributors Company
Chairman and Director:
Keystone Investor
Resource Center, Inc.
Keystone Investment
Management Company
Senior Vice President and
Director:
Keystone Investments,
Inc.
Treasurer:
Hartwell Emerging Growth
Fund, Inc.
Hartwell Growth Fund
Former President:
Keystone Management,
Inc.
Former Treasurer:
Keystone Investments,
Inc.
Keystone Investment
Management Company
<PAGE>
Position with
Keystone
Name Management, Inc. Other Business Affiliations
- ---- ------------------ ---------------------------
Rosemary D. Van Senior Vice General Counsel, Senior
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 and
and Controller Controller:
Keystone Investments,
Inc.
Keystone Investment
Management Company
Keystone Investment
Distributors Company
<PAGE>
Position with
Keystone
Name Management, Inc. Other Business Affiliations
- ---- ------------------ ---------------------------
J. Kevin Kenely (con't) Keystone Institutional
Company, Inc.
Fiduciary Investment
Company, Inc.
Keystone Software, Inc.
Former Vice President
and Controller:
Hartwell Keystone
Advisers, Inc.
Michael A. Thomas Vice President Vice President:
Keystone Investments, Inc.
<PAGE>
Item 29. Principal Underwriter
---------------------
Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc.), which acts as Registrant's principal
underwriter, also acts as principal underwriter for the following
entities:
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Hartwell Growth Fund
Keystone Quality Fund (B-1)
Keystone Diversified Bond Fund B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Strategic Growth Fund (K-2)
Keystone Growth and Income Fund (S-1)
Keystone Mid-Cap Growth Fund S-3)
Keystone Small Company Growth Fund (S-4)
Keystone Capital Preservation and Income Fund
Keystone Fund for Total Return
Keystone Global Opportunities Fund
Keystone Government Securities Fund
Keystone Intermediate Term Bond Fund
Keystone International Fund Inc.
Keystone Liquid Trust
Keystone Omega Fund
Keystone Precious Metals Holdings, Inc.
Keystone State Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Strategic Development Fund
Keystone Strategic Income Fund
Keystone Tax Free Income Fund
Keystone Tax Exempt Trust
Keystone Tax Free Fund
Keystone World Bond Fund
Keystone Fund of the Americas
(b)For information with respect to each officer and director of
Registrant's principal underwriter, see the following pages.
<PAGE>
Item 29(b) (continued)
Position with
Keystone Investment
Name Distributors Company Positions with Registrant
- ---- -------------------- ---------------------------
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 President
Counsel and Secretary and Secretary
Albert H. Elfner, III* Director President
Charles W. Carr* Senior Vice President None
Peter M. Delehanty* Senior Vice President None
J. Kevin Kenely* Vice President and None
Controller
C. Kenneth Molander Divisional Vice None
8 King Edward Drive President
Londenderry, NH 03053
David S. Ashe Regional Manager and None
32415 Beaconsfield Vice President
Birmingham, MI 48025
David E. Achzet Regional Vice None
60 Lawn Avenue President
Greenway 27
Stamford, CT 06902
William L. Carey, Jr. Regional Vice None
4 Treble Lane President
Malvern, PA 19355
John W. Crites Regional Vice None
2769 Oakland Circle W. President
Aurora, CO 80014
Michael S. Festa* Vice President None
Jeffrey M. Lundes* Vice President None
<PAGE>
Item 29(b) (continued)
Position with
Keystone Investment
Name Distributors Company Positions with Registrant
- ---- -------------------- ---------------------------
Richard J. Fish Regional Vice None
309 West 90th Street President
New York, NY 10024
Michael T. Flaherty* Regional Vice None
President
Michael E. Gathings Regional Vice None
245 Wicklawn Way President
Roswell, GA 30076
Robert G. Holz, Jr. Regional None
313 Meadowcrest Drive President
Richardson, Texas 75080
Todd L. Kobrin Regional Vice None
20 Iron Gate President
Metuchen, NJ 08840
Ralph H. Johnson Regional Vice None
345 Masters Court, #2 President
Walnut Creek, CA 94598
Paul J. McIntyre* Regional Vice None
President
Thomas E. Meloy* Regional Vice None
President
Juliana Perkins Regional Vice None
2348 West Adrian Street President
Newbury Park, CA 91320
Matthew D. Twomey Regional Vice None
9627 Sparrow Court President
Ellicott City, MD 21042
Mitchell I. Weiser Regional Vice None
7031 Ventura Court President
Parkland, FL 33067
Welden L. Evans Vice President None
490 Huntcliff Green
Atlanta, GA 30350
Russell A. Haskell* Vice President None
<PAGE>
Item 29(b) (continued)
Position with
Keystone Investment
Name Distributors Company Positions with Registrant
- ---- -------------------- ---------------------------
John M. McAllister* Vice President None
Gregg A. Mahalich Vice President None
14952 Richards Drive W.
Minnetonka, MN 55345
Robert J. Matson* Vice President None
Alan V. Neimi* Vice President None
Ronald L. Noble* Vice President None
Burton Robbins Vice President None
1586 Folkstone Terrace
Westlake Village, CA
91361
Thomas E. Ryan, III* Vice President None
Peter Willis* Vice President None
Raymond P. Ajemian* Vice President None
Joan M. Balchunas* Assistant Vice None
President
Jody R. Baum* Assistant Vice None
President
Thomas J. Gainey* Assistant Vice None
President
Eric S. Jeppson* Assistant Vice None
President
Julie A. Robinson* Assistant Vice None
President
Peter M. Sullivan Assistant Vice None
21445 Southeast 35th Way President
Issaquah, WA 98027
*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 02142-1519
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, Massachusetts 02171
Data Vault Inc.
3431 Sharp Slot Road
Swansea, Massachusetts 02277
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
Upon request and without charge, Registrant hereby
undertakes to furnish to each person to whom a copy of
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 meets all of the
requirements for the effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston, in The
Commonwealth of Massachusetts, on the 19th day of December, 1995.
KEYSTONE DIVERSIFIED BOND
FUND (B-2)
By: /s/ Rosemary D. Van Antwerp
-----------------------------
Rosemary D. Van Antwerp
Senior Vice President
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities indicated on the 19th day of December, 1995.
SIGNATURES TITLE
- ---------- -----
/s/ George S. Bissell Chairman of the Board, and
- ---------------------------- Director
George S. Bissell*
/s/ Albert H. Elfner, III Chief Executive Officer,
- ---------------------------- President, and Director
Albert H. Elfner, III*
J. Kevin Kenely Treasurer (Principal Financial
- --------------------------- and Accounting (Officer)
J. Kevin Kenely
*By: /s/ James M. Wall
------------------------------
James M. Wall**
Attorney-in-Fact
<PAGE>
SIGNATURES TITLE
/s/ Frederick Amling Director
- ---------------------------
Frederick Amling*
/s/ Charles A. Austin, III Director
- ---------------------------
Charles A. Austin, III*
/s/ Edwin D. Campbell Director
Edwin D. Campbell*
/s/ Charles F. Chapin Director
- ---------------------------
Charles F. Chapin*
/s/ K. Dun Gifford Director
- ---------------------------
K. Dun Gifford*
/s/ Leroy Keith, Jr. Director
- ---------------------------
Leroy Keith, Jr.*
/s/ F. Ray Keyser, Jr. Director
- ---------------------------
F. Ray Keyser, Jr.*
/s/ David M. Richardson Director
- ---------------------------
David M. Richardson*
/s/ Richard J. Shima Director
- ---------------------------
Richard J. Shima*
/s/ Andrew J. Simons Director
- ---------------------------
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
Page Number
In Sequential
Exhibit Number Exhibit Numbering System
- -------------- ------- ----------------
1 Restatement of Trust, as amended
2 By-Laws
4 Specimen Stock Certificate1
5 (A) Investment Management Agreement
(B) Investment Advisory Agreement
6 (A) Principal Underwriting Agreement
(B) Dealers Agreement
(C) Additional Underwriting Agreements
8 Custodian, Fund Accounting and
Recordkeeping Agreements,
Amendments to Custody Agreement
10 Opinion and Consent of Counsel
11 Independent Auditors' Consent
14 Model Retirement Plans2
15 Distribution Plan
16 Performance Data Schedules
17 Financial Data Schedules (filed as Exhibit 27)
19 Powers of Attorney
- ----------------------------------
1Incorporated herein by reference to Post-Effective Amendment No. 30 to
Registration Statement No. 2-10659/811-93.
2Incorporated herein by reference to Post-Effective Amendment No. 66 to
Registration Statement No. 2-10527/811-96.
<PAGE>
Exhibit 99.1
KEYSTONE CUSTODIAN FUND, SERIES B-2
RESTATEMENT OF TRUST AGREEMENT
DATED DECEMBER 19, 1989
This RESTATEMENT of TRUST AGREEMENT amending in its entirety the Trust
Agreement of Keystone Custodian Fund, Series B-2 (the "Fund"), dated July 15,
1935, as heretofore amended, made at Boston, Massachusetts on December 19, 1989
by and between Keystone Custodian Funds, Inc., a Delaware corporation (the
"Corporate Trustee"), such persons who may be elected or appointed to the office
of Trustee pursuant to Article IV of this Restatement (hereinafter with their
successors referred to as the "Individual Trustees" and together with the
Corporate Trustee, as appropriate, the "Trustees"), and such persons, trusts,
estates, corporations and other legal entities as have or may become parties
hereto by the acquisition of shares of the Fund issued hereunder.
WHEREAS, the Trustees have agreed to manage all property received by them
as Trustees in accordance with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash,
securities and other assets which they may from time to time acquire in any
manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the
following terms and conditions for the pro rata benefit of the holders from time
to time of Shares in this Trust as hereinafter set forth; provided, however,
that, notwithstanding any provision herein to the contrary, until such time as
the Corporate Trustee shall resign or shall be removed by action of a majority
of the Individual Trustees (after which resignation or removal there shall no
longer be any Corporate Trustee), the Corporate Trustee shall remain in office
and, subject to the approval, direction and control of a majority of the
Individual Trustees, shall continue to exercise all the powers and functions of
the Trustees and to manage the business and affairs of the Fund and to provide
investment and other services to the Fund in the same manner, to the same
extent, for the same consideration and upon the same terms and conditions as are
provided for in said Trust Agreement as it existed on the date hereof prior to
this Restatement thereof, the terms of which Trust Agreement are hereby
incorporated herein by this reference for the purposes of this provision.
ARTICLE I
NAME AND DEFINITIONS
Section 1. Name. This Trust shall be known as the Keystone Custodian Fund,
Series B-2 and the Trustees shall conduct the business of this Trust under that
name or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required by
the context or specifically provided
(a) The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person" and "Principal Underwriter" shall have the meanings
given them in the 1940 Act;
(b) The "Trust" refers to the Pennsylvania common law trust established
under a Trust Agreement, dated July 15, 1935, as amended from time to time
and restated by this Restatement of Trust Agreement;
(c) "Trust Agreement" shall mean this Restatement of Trust Agreement as
amended or restated from time to time;
(d) "Net Asset Value Per Share" means the net asset value per share of
the Trust determined in the manner provided or authorized in Article VI,
Section 4;
(e) "Shareholder" means a record owner of Shares of the Trust;
(f) "Shares" means the equal proportionate units of interest into which
the beneficial interest in the Trust shall be divided from time to time or,
if more than one series ("Series") or more than one class ("Class") of a
Series of Shares is authorized by the Trustees, the equal proportionate
units into which each such Series or Class of Shares shall be divided from
time to time, and includes where appropriate fractions of a Share as well
as a whole Share, unless the Trustees provide that there shall be no
fractions of any particular Shares.
(g) "Trustees" refers to the Trustee or Trustees of the Trust who
become such in accordance with Article IV and where appropriate means a
majority or other portion of them acting in accordance with this Trust
Agreement or the By-laws of the Trust; and
(h) The "1940 Act" refers to the Investment Company Act of 1940 and the
Rules and Regulations thereunder, all as amended from time to time.
ARTICLE II
PURPOSE OF TRUST
The purpose of the Trust is to provide investors a continuous source of
managed investments.
ARTICLE III
BENEFICIAL INTEREST
Section 1. Shares of Beneficial Interest. The beneficial interest in the
Trust shall at all times be divided into transferable Shares, $1.00 par value,
each of which shall represent an equal proportionate interest in the Trust with
each other Share outstanding, none having priority or preference over another,
except to the extent modified by the Trustees under the provisions of this
Section. The number of Shares which may be issued is unlimited. The Trustees may
from time to time divide or combine the outstanding Shares into a greater or
lesser number without thereby changing the proportionate beneficial interests in
the Trust. Contributions to the Trust may be accepted for, and Shares shall be
redeemed as, whole Shares and/or fractions.
From time to time, as they deem appropriate, the Trustees may create
additional Series and/or Classes of Series of Shares, in addition to the Shares
initially created under this instrument ("Original Series"). References in this
Trust Agreement to Shares of the Trust shall apply, as appropriate, to each such
Series of Shares and to each such Class of Shares.
Any additional Series of Shares created hereunder shall represent the
beneficial interest in the assets (and related liabilities) allocated by the
Trustees to such Series of Shares and acquired by the Trust only after creation
of the respective Series of Shares and only on account of such Series. If the
Trustees create any additional Series of Shares hereunder, then the Original
Series shall be deemed a separate Series of Shares. Upon creation of each Series
of Shares, the Trustees may designate it appropriately and determine the
investment policies with respect to the assets allocated to such Series of
Shares, redemption rights, dividend policies, conversion rights, liquidation
rights, voting rights, and such other rights and restrictions as the Trustees
deem appropriate, to the extent not inconsistent with the provisions of this
Trust Agreement.
The Trustees may divide any Series (including the Original Series) into
more than one Class of Shares. Upon creation of each additional Class of Shares
the Trustees may designate it appropriately and determine its rights and
restrictions (including without limitation such redemption rights, dividend
rights, conversion rights, liquidation rights, voting rights, and other rights
and restrictions as the Trustees deem appropriate).
Section 2. Ownership of Shares. The ownership of Shares shall be recorded
in the books of the Trust or a transfer agent or a similar agent. The Trustees
may make such rules as they consider appropriate for the transfer of Shares and
similar matters. The record books of the Trust as kept by the Trust or any
transfer agent or similar agent, as the case may be, shall be conclusive as to
who are the holders of Shares of each Series or Class and as to the number of
Shares of each Series or Class held from time to time by each.
Section 3. Investments in the Trust. The Trustees shall accept investments
in the Trust from such persons and on such terms and, subject to any
requirements of law, for such consideration as the Trustees from time to time
authorize and may cease offering Shares to the public at any time. After such
acceptance, the number of Shares of the appropriate Series or Class to represent
the contribution may in the Trustees' discretion be considered as outstanding
and the amount receivable by the Trustees on account of the contribution may be
treated as an asset of the Series or Class.
Section 4. No Preemptive Rights. Shareholders shall have no preemptive or
other right to subscribe to any additional Shares or other securities issued by
the Trust.
Section 5. Provisions Relating to Series or Classes of Shares. Whenever no
Shares of a Series or Class are outstanding, then the Trustees may abolish such
Series or Class. Whenever more than one Series or Class of Shares is
outstanding, then the following provisions shall apply:
(a) Assets Belonging to Each Series or Class. All consideration received
by the Trust for the issue or sale of Shares of a particular Series or
Class, together with all assets in which such consideration is invested or
reinvested, all income, earnings and proceeds thereof, and any funds
derived from any reinvestment of such proceeds, shall, except to the extent
specifically otherwise provided in the provisions adopted by the Board of
Trustees establishing the Series or Class, irrevocably belong to that
Series or Class for all purposes, subject only to the rights of creditors,
and shall be so recorded upon the books of the Trust. In the event there
are assets, income, earnings, and proceeds thereof which are not readily
identifiable as belonging to a particular Series or Class, then the
Trustees shall allocate such items to the various Series or Classes then
existing, in such manner and on such basis as they, in their sole
discretion, deem fair and equitable. The amount of each such item allocated
to a particular Series or Class by the Trustees shall then belong to that
Series or Class, and each such allocation shall be conclusive and binding
upon the Shareholders of all Series and Classes for all purposes.
(b) Liabilities Belonging to Each Series or Class. The assets belonging
to each particular Series or Class shall, except to the extent specifically
otherwise provided in the provisions adopted by the Board of Trustees
establishing the Series or Class, be charged with the liabilities,
expenses, costs and reserves of the Trust attributable to that Series or
Class; and any general liabilities, expenses, costs and reserves of the
Trust which are not readily identifiable as attributable to a particular
Series or Class shall be allocated by the Trustees to the various Series
and Classes then existing, in such manner and on such basis as they, in
their sole discretion, deem fair and equitable. Each such allocation shall
be conclusive and binding upon the Shareholders of all Series and Classes
for all purposes.
(c) Series or Class Shares, Dividends and Liquidation. Each Share of
each respective Class or Series shall, except to the extent specifically
otherwise provided in the provisions adopted by the Board of Trustees
establishing the Series or Class, have the same rights and pro rata
beneficial interest in the assets and liabilities of the Series or Class as
any other such Share. Any dividends paid on the Shares of any Series or
Class shall, except to the extent specifically otherwise provided in the
provisions adopted by the Board of Trustees establishing the Series or
Class, only be payable from and to the extent of the assets (net of
liabilities) belonging to that respective Series or Class. In the event of
liquidation of a Series or Class, only the assets (less provision for
liabilities) of that Series or Class shall be distributed to the holders of
the Shares of that Series or Class.
(d) Voting by Series or Class. Except as provided in this Section or as
limited by the rights and restrictions of any Series or Class, each Share
of the Trust may vote with and in the same manner as any other Share on
matters submitted to a vote of the Shareholders entitled to vote thereon,
without differentiation among votes from the separate Series or Classes;
provided, however, that (i) as to any matter with respect to which a
separate vote of any Series or Class is required by the 1940 Act, or
otherwise by applicable law, such requirement as to a separate vote shall
apply in lieu of the voting described above; (ii) in the event that the
separate vote requirements referred to in (i) above apply with respect to
one or more Series or Classes, then, subject to (iii) below, the Shares of
all other Series or Classes shall vote without differentiation among their
votes; and (iii) as to any matter which does not affect the interest of any
particular Series or Class, only the holders of Shares of the one or more
affected Series or Classes shall be entitled to vote.
Section 6. Limitation of Personal Liability. The Trustees shall have no
power to bind any Shareholder personally or to call upon any Shareholder for the
payment of any sum of money or assessment whatsoever other than such as the
Shareholder may at any time personally agree to pay by way of subscription to
any Shares or otherwise. Every note, bond, contract or other undertaking issued
by or on behalf of the Trust or the Trustees relating to the Trust shall include
a recitation limiting the obligation represented thereby to the Trust and its
assets (but the omission of such a recitation shall not operate to bind any
Shareholder).
ARTICLE IV
THE TRUSTEES
Section 1. Number of Trustees. The number of Individual Trustees shall
initially be such number as shall be elected as such by a vote of the
shareholders of the Trust, and thereafter shall be such number as shall be fixed
from time to time by action of a majority of the Trustees.
Section 2. Election or Appointment and Term. The initial Individual
Trustees shall be the individuals who shall have been previously elected as such
by a vote of the shareholders of the Trust. Thereafter, subject to Section 16(a)
of the 1940 Act, the Trustees may elect themselves or their successors at such
regular intervals, if any, as they deem proper, and may appoint Trustees to fill
vacancies as provided in Section 4 hereof; provided, that Trustees shall be
elected by the vote of a majority of shares voting thereon at such time or times
as the Trustees shall determine that such action is advisable. Subject to
Section 3 hereof, the Trustees shall have the power to set and alter the terms
of office of the Trustees, and they may at any time lengthen or shorten their
own terms or make their terms of unlimited duration; provided, that the term of
office of any incumbent Trustee shall continue until terminated as provided in
Section 4 hereof, or, if not so terminated, until the election of such Trustee's
successor in office has become effective in accordance with this Section 2.
Section 3. Resignation and Removal. Any Trustee may resign his trust
(without need for prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees, and such resignation shall be
effective upon such delivery or at any later date according to the terms of the
instrument. Any Trustee may be removed by the action of two-thirds of the
remaining Trustees. Upon the resignation or removal of a Trustee, or his
otherwise ceasing to be a Trustee, he shall execute and deliver such documents
as the remaining Trustees shall require for the purpose of conveying to the
Trust or the remaining Trustees any Trust property held in his name. Upon the
incapacity or death of any Trustee, his legal representative shall execute and
deliver on his behalf such documents as the remaining Trustees shall require as
provided in the preceding sentence. However, the execution and delivery of such
documents by a former Trustee or his legal representative shall not be requisite
to the vesting of title to the Trust property in the remaining Trustees.
Section 4. Vacancies. The term of office of a Trustee shall terminate and a
vacancy shall occur in the event of such Trustee's death, resignation, removal,
bankruptcy, adjudicated incompetence or other incapacity to perform the duties
of the office of Trustee. No such vacancy shall operate to annul this Trust
Agreement or to revoke any existing agency created pursuant to the terms of this
Trust Agreement. In the case of an existing vacancy, including a vacancy
existing by reason of an increase in the number of Trustees, subject to
applicable law, the remaining Trustees, or, if only one Trustee shall then
remain in office, the sole remaining Trustee, shall appoint such individual to
fill such vacancy as they or he, in their or his discretion, shall see fit. An
appointment of a Trustee may be made in anticipation of a vacancy to occur at a
later date by reason of retirement or resignation of a Trustee or an increase in
the number of Trustees; provided, that such appointment shall not become
effective prior to such retirement or resignation or such increase in the number
of Trustees. Whenever a vacancy in the number of Trustees shall occur, until
such vacancy is filled as provided in this Section 4, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this Trust
Agreement in the manner provided by this Trust Agreement. A written instrument
certifying the existence of such vacancy signed by a majority of the Trustees
shall be conclusive evidence of the existence of such vacancy.
Section 5. Management of the Trust. Subject to the provisions of this Trust
Agreement, the business and affairs of the Trust shall be managed by the
Trustees, and they shall have all powers necessary and desirable to carry out
that responsibility. Action by the Trustees may be taken by majority vote of the
Trustees at a meeting at which a quorum (which shall be a majority of the
Trustees then in office) shall be present, or by a consent in writing signed by
a majority of the Trustees in office.
Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with this Trust Agreement providing for the conduct of the business
of the Trust and may amend and repeal them to the extent that they do not
reserve that right to any Shareholders; they may elect and remove such officers
and appoint and terminate such agents as they consider appropriate; they may
appoint from their own number and terminate any one or more committees; they may
employ one or more custodians of the assets of the Trust and may authorize such
custodians to employ subcustodians and to deposit all or any part of such assets
in a system or systems for the central handling of securities, retain a transfer
agent or a Shareholder servicing agent, or both, provide for the distribution of
Shares by the Trust, through one or more principal underwriters or otherwise,
set, or otherwise provide for the setting of, record dates, and in general
delegate such authority to do any or all things which the Trustees may do in the
operation of the business of the Trust as they consider desirable to any
officers of the Trust and committees of the Trustees and to any agent or
employee, custodian or underwriter. Any action relating to the operation of the
Trust provided for herein to be taken by the Trustees may be taken by any other
person under authority granted by the Trustees whether or not specifically as
stated, and unless specifically so stated to the contrary. A specific statement
indicating that the Trustees may delegate any authority shall not give rise to
any contrary implication with respect to any provision of this Trust Agreement.
Without limiting the foregoing, the Trustees in addition to all powers
granted by law shall have power and authority:
(a) To invest and reinvest cash, and to hold cash uninvested, without in
anywise being bound or limited by any present or future law or custom in
regard to investments by trustees;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate or lease any
or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property, and to execute and
deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power
and discretion with relation to securities or property as the Trustees
shall deem proper;
(d) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form, or in its own
name or in the name of a custodian or subcustodian or a nominee or nominees
or otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of
which is held in the Trust; to consent to any contract, lease, mortgage,
purchase or sale of property by such corporation or concern, and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depository, voting Trustee or otherwise, and in that connection to deposit
any security with, or transfer any security to, any such committee,
depository or Trustee, and to delegate to them such power and authority
with relation to any security (whether or not so deposited or transferred)
as the Trustees shall deem proper, and to agree to pay, and to pay, such
portion of the expenses and compensation of such committee, depository or
Trustee as the Trustees shall deem proper;
(h) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust for any matter in controversy, including, but not limited
to, claims for taxes; and
(i) To borrow funds.
The Trustees shall not be required to obtain any court order to deal with
any assets of the Trust or take any other action hereunder.
Section 6. Ownership of Assets of the Trust. The assets of the Trust shall
be held separate and apart from any assets now or hereafter held in any capacity
other than as Trustee hereunder by the Trustees or by any successor Trustees.
All of the assets of the Trust shall at all times be considered as vested in the
Trustees. No Shareholder shall be deemed to have a severable ownership in any
individual asset of the Trust or any right of partition or possession thereof,
but each Shareholder shall have a proportionate undivided beneficial interest in
the assets of the Series or Class of Shares of which he is a holder, subject to
any rights or restrictions applicable to any Series or Class of Shares of which
he is a holder.
Section 7. Payment of Expenses. The Trustees shall pay or cause to be paid
out of the principal or income of the Trust, or partly out of principal and
partly out of income, as they deem fair, all expenses, charges, taxes and
liabilities incurred or arising in connection with the Trust, or in connection
with the management thereof, including, but not limited to, the Trustees'
compensation and such expenses and charges for the services of the Trust's
investment adviser or manager, administrator, auditor, counsel, custodian,
transfer agent, Shareholder servicing agent, and such other agents or
independent contractors and such other expenses and charges as the Trustees may
deem necessary or proper to incur.
Section 8. Investment Management and Other Services. Without limiting the
generality of the powers of the Trustees, subject to applicable law, the
Trustees may enter into a contract with any person or persons, including any
firm, corporation, trust or association in which any Trustee, Shareholder or
officer of the Trust may be interested, to act as investment advisers and/or
managers of the Trust and to provide such investment advice and/or management as
the Trustees may from time to time consider appropriate (the "Adviser"). Any
such contract may authorize the Adviser to determine from time to time what
securities shall be acquired, held or disposed of by the Trust and what portion
of assets of the Trust shall be held uninvested and to take, on behalf of the
Trust, actions which the Adviser deems necessary to implement the investment
policies of the Trust, including the placement of all orders for the purchase,
sale or loan of portfolio securities for the Trust's account with brokers or
dealers or others selected by the Adviser and the giving of instructions to the
custodian of the Trust's assets as to deliveries of securities and payments of
cash for the account of the Trust.
Without limiting the generality of the powers of the Trustees, subject to
applicable law, the Adviser may enter into an agreement to retain at its own
expense any person or persons, including any firm, corporation, trust or
association in which any Trustee, Shareholder or officer of the Trust may be
interested, to provide the Trust investment advice and/or management and any
person or persons so retained may be granted all authority which has been
granted to the Adviser under the contract which the Adviser entered into
pursuant to the preceding paragraph.
Without limiting the generality of the powers of the Trustees, the Trustees
may enter into a contract with any person or persons, including any firm,
corporation, trust or association in which any Trustee, Shareholder or officer
of the Trust may be interested, to act as principal underwriter for the Shares.
Section 9. Affiliations of Trustees or Officers, Etc. The fact that (i) any
of the Shareholders, Trustees or officers of the Trust is a Shareholder,
Director, officer, partner, Trustee, employee, manager, adviser or distributor
of or for any partnership, corporation, trust, association or other organization
or for any parent or affiliate of any organization with which any contract
including, without limitation, contracts for services as manager, investment
adviser, distributor, principal underwriter, custodian, transfer agent or
disbursing agent or for related services may have been or may hereafter be made,
or that any such organization, or any parent or affiliate thereof, is a
Shareholder of or has an interest in the Trust, or that (ii) any partnership,
corporation, trust, association or other organization with which a contract
referred to in (i) above may have been or may hereafter be made also has any one
or more of such contracts with one or more other partnerships, corporations,
trusts, associations or other organizations, or has other business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 1. Voting Powers. The Shareholders shall have power to vote only
(i) for the election of Trustees as provided in Section 2 of Article IV hereof
and the removal of Trustees to the extent provided in Section 16(c) of the 1940
Act, (ii) with respect to approval or termination in accordance with the 1940
Act of any investment advisory, management or underwriting agreement described
in Article IV hereof, (iii) with respect to any amendment of this Trust
Agreement to the extent and as provided in Section 7 of Article IX hereof, (iv)
as to whether or not a court action, proceeding or claim should be brought or
maintained derivatively or as a class action on behalf of the Trust or its
Shareholders, and (v) with respect to such additional matters relating to the
Trust as may be required by this Trust Agreement or the By-Laws, or as to which
the Trustees in their discretion shall determine such Shareholder vote to be
required by law or otherwise lo be necessary, appropriate or advisable.
Each whole Share shall be entitled to one vote as to any matter on which it
is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. Until Shares are issued, the Trustees
may exercise all rights of Shareholders and may take any action required by law,
this Trust Agreement or any By-Laws of the Trust to be taken by Shareholders.
Section 2. Meetings. Meetings of Shareholders shall be held at such times
at the principal office of the Trust or such other place as the Trustees may
designate. Meetings of the Shareholders may be called by the Trustees or such
other person or persons as may be specified in the By-laws. Shareholders shall
be entitled to at least seven days' notice of any meeting.
Section 3. Quorum and Required Vote. Except as otherwise provided by law,
to constitute a quorum for the transaction of business at a Shareholders'
meeting there must be present, in person or by proxy, holders of a majority of
the total number of Shares of the Trust then outstanding and entitled to vote at
the meeting, but any lesser number shall be sufficient for adjournment, and any
adjourned session or sessions may be held within 90 days after the date set for
the original meeting without the necessity of further notice. Subject to any
applicable requirements of law, a majority of the Shares present and entitled to
vote on a question or election shall decide such question or election, except
when a larger vote is required by any provision of this Trust Agreement, the
By-Laws of the Trust or any applicable provision of law.
Section 4. Action by Written Consent. Except as otherwise required by law,
any action required or permitted to be taken at any meeting may be taken without
a meeting if a consent in writing setting forth such action is signed by the
Shareholders entitled to vote on the subject matter thereof holding a majority
of the Shares entitled to vote thereon.
Section 5. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and matters.
ARTICLE VI
DISTRIBUTIONS AND REDEMPTIONS
Section 1. Distributions. The Trustees may, but need not, each year
distribute to the Shareholders of each Series or Class such income and gains as
the Trustees may determine, after providing for actual and accrued expenses and
liabilities (including such reserves as the Trustees may establish) determined
in accordance with generally accepted accounting practices. The Trustees shall
have full discretion to determine which items shall be treated as income and
which items as capital and their determination shall be binding upon the
Shareholders. Distributions of each year's income of each Series or Class, if
any be made, may be made in one or more payments, which shall be in Shares, in
cash or otherwise and on a date or dates and as of a record date or dates
determined by or under the authority of the Trustees. At any time and from time
to time in their discretion the Trustees may distribute to the Shareholders of
any one or more Series or Classes as of a record date or dates determined by or
under the authority of the Trustees, in Shares, in cash or otherwise, all or
part of any gain realized on the sale or disposition of property of the Trust or
otherwise, or all or part of any other principal of the Trust. Each distribution
pursuant to this Section 1 shall be made ratably according to the number of
Shares of the Series or Class held by the several Shareholders on the applicable
record date thereof, provided that no distribution need be made on Shares
purchased pursuant to orders received or for which payment is made after such
time or times as may be determined by or under the authority of the Trustees.
Any such distribution paid in Shares will be paid at the net asset value thereof
as determined in accordance with Section 4 hereof.
Section 2. Redemptions. Upon offer by any Shareholder of all or part of the
Shares held by the Shareholder for redemption hereunder, in accordance with such
methods, upon such terms and subject to such conditions as from time to time may
be determined by or under the authority of the Trustees, the Trust shall redeem
the Shares so offered by distributing to the Shareholder the Net Asset Value Per
Share thereof determined as of a time fixed by or under the authority of the
Trustees. The Trust shall have the right at its option and at any time to redeem
the Shares of any Shareholder for their Net Asset Value Per Share if the
Shareholder owns Shares of a Series or Class having an aggregate net asset value
of less than such minimum amount as may from time to time be prescribed by or
under the authority of the Trustees or if ownership of such Shares by the
Shareholder could create adverse tax consequences for the Trust or any Series or
Class thereof. With respect to all Shares or any Series or Class of Shares, the
right to redemption or the date for payment may, however, be delayed or
suspended by the Trustees if there is an extraordinary closing or restriction of
trading on the New York Stock Exchange as determined under rules and regulations
of the Commission, or an emergency exists as a result of which it is not
reasonably practicable for the Trust to dispose of securities or fairly to
determine the value of its net assets, or as the Commission may permit. The
completion of such distribution on redemption of Shares shall constitute a full
discharge of the Trust and Trustees with respect to such Shares, and the
Trustees may require that any certificate or certificates issued by the Trust to
evidence the ownership of the Shares shall be surrendered to the Trustees for
cancellation or notation. Shares so redeemed shall be canceled or held by the
Trust for reissue, as the Trustees may from time to time determine.
Section 3. Payment in Kind. Subject to any generally applicable limitation
imposed by the Trustees, any distribution on redemption may, if authorized by
the Trustees, be made wholly or partly in kind, instead of in cash. Such
distribution in kind shall be made by distributing investments constituting, in
the opinion of the Trustees, a fair representation of the various types of
securities then held by the Series or Class of Shares being redeemed (but not
necessarily including a portion of each particular investment) and in each case
having an aggregate value equal to the amount of cash instead of which such
distribution in kind is made.
Section 4. Determination of Net Asset Value Per Share. Subject to
applicable law, the Net Asset Value Per Share of each Series or Class shall be
computed as of such times as may be determined by or under authority of the
Trustees by determining the value of all the investments of such Series or Class
in such manner as may be determined by or under authority of the Trustees,
adding any other assets of such Series or Class, subtracting all liabilities of
such Series or Class and dividing the result by the number of Shares of such
Series or Class outstanding.
Determination of Net Asset Value Per Share so made in good faith and
pursuant to the provisions of the 1940 Act shall be binding on all parties
concerned.
Section 5. Automatic Redemption from Small Accounts. The Trustees shall
have the power to redeem shares at a redemption price determined in accordance
with Section 4 of this article if at any time the total investment in such
account does not have a value of at least $1,000 or such other minimum amount as
the Trustees may from time to time determine. Before redeeming such Shares, the
Shareholder will be notified that the value of his account is less than the
required minimum amount and be allowed 60 days or such period as is permitted by
law to make an additional investment to bring the total value of such account to
such amount or more.
Section 6. Power to Modify Foregoing Procedures. Notwithstanding any of the
foregoing provisions of this Article VI, the Trustees may prescribe, in their
absolute discretion, such other bases and times for the declaration and payment
of dividends and distributions as they may deem desirable or necessary to enable
the Trust to comply with any provision of the 1940 Act, including any rule or
regulation adopted by the Commission or any securities association registered
under the Securities Exchange Act of 1934, or any order of exemption issued by
the Commission, all as in effect now or as hereafter amended or modified.
ARTICLE VII
COMPENSATION AND LIMITATION OF LIABILITY OF TRUSTEES
Section 1. Compensation. The Trustees shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Section 2. Limitation of Liability. Provided they have exercised reasonable
care in their selection, the Trustees shall not be responsible or liable in any
event for any neglect or wrongdoing of any officer, agent, employee or Adviser
of the Trust nor shall any Trustee be responsible for the act or omission of any
other Trustee, but nothing herein contained shall protect any Trustee against
any liability to which he would otherwise be subject by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Every note, bond, contract, instrument, certificate, share or undertaking
and every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only in their or his capacity
as Trustees or Trustee, and such Trustees or Trustee shall not be personally
liable thereon.
The Trustees shall use their best efforts to ensure that every note, bond,
contract, instrument, certificate or undertaking made or issued by the Trustees
or by any officers shall give notice of the existence of this Trust Agreement
and shall recite to the effect that the same was executed or made by or on
behalf of the Trust or by them as Trustees or officers, and not individually,
and is not binding upon any of them or the Shareholders individually, but is
binding only upon the Trust property, or the assets of the particular Series or
Class in question, as the case may be, but the omission thereof shall not
operate to bind any Trustee or officer or Shareholder individually, or to
subject the assets of any Series or Class to the obligations of any other Series
or Class.
ARTICLE VIII
INDEMNIFICATION
Section 1. Trustees, Officers, etc. The Trust shall indemnify each of its
present and former Trustees and Officers and may indemnify any of its present or
former employees or agents, and shall indemnify any persons who serve or have
served at the Trust's request as Directors, officers or Trustees of another
organization, and may indemnify persons who serve or have served at the Trust's
request as employees or agents of another organization, in which the Trust has
any interest as a shareholder, creditor or otherwise (hereinafter referred to as
a "Covered Person") against all liabilities and expenses, including, but not
limited to, amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by any such Covered Person
in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or may have been
threatened, while in office, employed or acting as agent thereafter, by reason
of being or having been such a Trustee, officer, Director, employee or agent,
except with respect to any matter as to which such Covered Person shall have
been finally adjudicated in any such action, suit or other proceeding not to
have acted in good faith in the reasonable belief that such Covered Person's
action was in the best interest of the Trust and except that no person shall be
indemnified against any liability to the Trust or its Shareholders to which such
Covered Person shall otherwise be subject by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office. Expenses, including counsel fees so incurred by any
Covered Person, may in the discretion of the Trustees be paid from time to time
by the Trust in advance of the final disposition of any such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such Covered Person
to repay amounts so paid to the Trust if it is ultimately determined that
indemnification against such expenses is not authorized under this Article.
Except as otherwise provided by law, the Trust shall have power to purchase
and maintain insurance on behalf of a Covered Person against any liability
asserted against him and incurred by him in his capacity as a Covered Person, or
arising out of his status as such, whether or not the Trust would have the power
to indemnify him against the liability under the provisions of this Section.
Section 2. Compromise Payment. As to any matter disposed of by a compromise
payment by any Covered Person referred to in Section 1 above, pursuant to a
consent decree or otherwise, no such indemnification either for such payment or
for any other expenses shall be provided unless such compromise shall be
approved as in the best interests of the Trust, after notice that it involved
such indemnification, (a) by a disinterested majority of the Trustees then in
office; or (b) by a majority of the disinterested Trustees then in office, or
(c) by any disinterested person or persons to whom the question may be referred
by the Trustees, provided that in the case of approval pursuant to clause (b) or
(c) there has been obtained an opinion in writing of independent legal counsel
to the effect that such Covered Person appears to have acted in good faith in
the reasonable belief that his action was in the best interests of the Trust and
that such indemnification would not protect such person against any liability to
the Trust to which such person would otherwise be subject by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office; or (d) by the vote of a majority of the
Shares voting thereon, exclusive of any Shares beneficially owned by any
interested Covered Person. Approval by the Trustees pursuant to clause (a) or
(b) or any disinterested person or persons pursuant to clause (c) of this
Section shall not prevent the recovery from any Covered Person of any amount
paid to such Covered Person in accordance with any such clause as
indemnification if such Covered Person is subsequently adjudicated by a court of
competent jurisdiction not to have acted in good faith in the reasonable belief
that such person's action was in the best interests of the Trust or to have been
liable to the Trust or its Shareholders by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
Section 3. Indemnification Not Exclusive. The right of indemnification
hereby provided shall not be exclusive or affect any other rights to which any
such Covered Person may be entitled. As used in this Article VIII, the term
"Covered Person" shall include such person's heirs, executors and
administrators. An "interested Covered Person" is one against whom the action,
suit or other proceeding in question or another action, suit or other proceeding
on the same or similar grounds is then or has been pending, and a "disinterested
person" is a person against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust other than
Trustees and officers or other persons may be entitled by contract or otherwise
under law.
Section 4. Shareholders. In case any Shareholder or former Shareholder
shall be held to be personally liable solely by reason of his being or having
been a Shareholder and not because of his acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other successor) shall be entitled out of the
assets of the Trust to be held harmless from and indemnified against all loss
and expense arising from such liability.
ARTICLE IX
MISCELLANEOUS
Section 1. Trust Not a Partnership. It is hereby expressly declared that a
trust and not a partnership is created hereby. Neither the Trust nor the
Trustees, nor any officer, employee or agent of the Trust shall have any power
to bind personally either the Trust's Trustees or officers or any Shareholders.
All persons extending credit to, contracting with or having any claim against
the Trust shall look only to the assets of the Trust for payment under such
credit, contract or claim, and neither the Shareholders nor the Trustees, nor
any of the Trust's officers, employees or agents, whether past, present or
future, shall be personally liable therefor. Nothing in this Trust Agreement
shall protect any Trustee against any liability to which such Trustee would
otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee hereunder.
Section 2. Trustee's Good Faith Action, Expert Advice, No Bond or Surety.
The exercise by the Trustees of their powers and discretions hereunder in good
faith and with reasonable care under the circumstances then prevailing shall be
binding upon everyone interested. Subject to the provisions of Section 1 of this
Article IX, a Trustee shall be liable for his own wilful defaults, and for
nothing else, and shall not be liable for errors of judgment or mistakes of fact
or law. The Trustees may take advice of counsel or other experts with respect to
the meaning and operation of this Trust Agreement, and subject to the provisions
of said Section 1 shall be under no liability for any act or omission in
accordance with such advice or for failing to follow such advice. The Trustees
shall not be required to give any bond as such, nor any surety if a bond is
required.
Section 3. Liability of Third Persons Dealing with Trustees. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees pursuant hereto
or to see to the application of any payments made or property transferred to the
Trust or upon its order.
Section 4. Duration; Termination of Trust; Amendments; Mergers, etc.
(a) This Trust shall continue without limitation of time but subject to
the provisions of this Section 4.
(b) The Trust (as used in this Section 4 the term "Trust" specifically
also means any Series or Class) may be terminated by action of the
Trustees. Upon the termination of the Trust:
(i) The Trust shall carry on no business except for the purpose of
winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust
and all of the powers of the Trustees under this Trust Agreement shall
continue until the affairs of the Trust shall have been wound up,
including the power to fulfill or discharge the contracts of the Trust,
collect its assets, sell, convey, assign, exchange, transfer or
otherwise dispose of all or any part of the remaining Trust property to
one or more persons at public or private sale for consideration which
may consist in whole or in part of cash, securities or other property of
any kind, discharge or pay its liabilities, and to do all other acts
appropriate to liquidate its business.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the
Trustees shall distribute the remaining Trust property, in cash or in
kind or partly each, among the Shareholders according to their
respective rights and interests.
(c) After termination of the Trust and distribution to the Shareholders
as herein provided, a majority of the Trustees shall execute and lodge
among the records of the Trust an instrument in writing setting forth the
fact of such termination, and the Trustees shall thereupon be discharged
from all further liabilities and duties hereunder, and the rights and
interests of all Shareholders shall thereupon cease.
(d) Upon completion of the distribution of the remaining proceeds or the
remaining assets as provided in paragraph (b), the Trust shall terminate
and the Trustees shall be discharged of any and all further liabilities and
duties hereunder and the right, title and interest of all parties shall be
canceled and discharged.
Section 5. Filing of Copies; References, Headings. The original or a copy
of this instrument and of each Trust Agreement supplemental hereto or Amendment
hereof shall be kept at the office of the Trust where it may be inspected by any
Shareholder. Anyone dealing with the Trust may rely on a certificate by an
officer of the Trust as to whether or not any Supplemental Trust Agreement or
Amendments have been made and as to any matters in connection with the trust
hereunder; and, with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or of
any such Supplemental Trust Agreement or Amendment. In this instrument or in any
such Amendment or Supplemental Trust Agreement, references to this instrument,
and all expressions such as "herein," "hereof," and "hereunder," shall be deemed
to refer to this instrument as amended or affected by any such Supplemental
Trust Agreement or Amendment. Headings are placed herein for convenience of
reference only and in case of any conflict, the text of this instrument, rather
than the headings, shall control. This instrument may be executed in any number
of counterparts each of which shall be deemed an original.
Section 6. Applicable Law. The Trust set forth in this instrument is made
in The Commonwealth of Pennsylvania, and it is created under and is to be
governed by and construed and administered according to the laws of such
Commonwealth. The Trust shall be of the type commonly called a Pennsylvania
common law trust, and, without limiting the provisions hereof, the Trust may
exercise all powers which are ordinarily exercised by such a Trust.
Section 7. Amendments. (a) This Trust Agreement may be amended by a vote or
written consent of the Trustees. However, if such amendment adversely affects
the rights of any Shares of any Series or any Class thereof with respect to
matters to which such amendment is applicable, such amendment shall be subject
to approval by holders of a majority of the Shares of such Series or Class. An
amendment or other action which provides for an additional Series of Shares
(and/or Class thereof), which Series may vote together with Shares of other
Series (and/or Classes thereof) and makes other provisions with respect to such
Series (and/or Class thereof) and its relation to existing Series (and/or
Classes thereof), shall not be deemed to adversely affect the rights of any
other Series of Shares or Class thereof. The Trustees may also amend this Trust
Agreement without any Shareholder approval to change the name of the Trust, to
supply any omission, to cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof, or, if they deem it necessary, to conform this
Trust Agreement to the requirements of applicable federal laws or regulations or
the requirements of the Internal Revenue Code, or to eliminate or reduce any
federal, state or local taxes which are or may be payable by the Trust or the
Shareholders, but the Trustees shall not be liable for failing to do so.
(b) Nothing contained in this Trust Agreement shall permit the amendment of
this Trust Agreement to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to permit
assessments upon Shareholders.
(c) A certificate signed by a majority of the Trustees or by the Secretary
or any Assistant Secretary of the Trust, setting forth an amendment by reciting
that it was duly adopted by the Shareholders or by the Trustees as aforesaid, or
a copy of the Trust Agreement as amended, and executed by a majority of the
Trustees or certified by the Secretary or any Assistant Secretary of the Trust,
shall be conclusive evidence of such amendment when lodged among the records of
the Trust.
Section 8. Merger, Consolidation and Sale of Assets. The Trust may merge
into or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust property, including its good will, upon such terms and conditions and for
such consideration when and as authorized by the Trustees.
Section 9. Incorporation. The Trustees may cause to be organized or assist
in organizing a corporation or corporations under the laws of any jurisdiction
or any other trust, partnership, association or other organization to take over
all the Trust property or to carry on any business in which the Trust shall
directly or indirectly have any interest, and lo sell, convey and transfer the
Trust property to any such corporation, trust, partnership, association or
organization in exchange for the shares or securities thereof or otherwise, and
to lend money to, subscribe for the shares or securities of, and enter into any
contracts with any such corporation, trust, partnership, association or
organization in which the Trust holds or is about to acquire shares or any other
interest. The Trustees may also cause a merger or consolidation between the
Trust or any successor thereto and any corporation, trust, partnership,
association or other organization if and to the extent permitted by law, as
provided under the law then in effect. Nothing contained herein shall be
construed as requiring approval of Shareholders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferring the
Trust property to such organizations or entities.
IN WITNESS WHEREOF, the undersigned has hereunto set its hand and seal in
the City of Boston, Massachusetts, for itself and its assigns, as of the day and
year first above written.
KEYSTONE CUSTODIAN FUNDS, INC.
By: /s/Albert H. Elfner, III
------------------------------------
Albert H. Elfner, III
President
<PAGE>
KEYSTONE CUSTODIAN FUND, SERIES B-2
FIRST AMENDMENT
TO
RESTATEMENT OF TRUST AGREEMENT
EFFECTIVE MAY 1, 1995
FIRST AMENDMENT dated March 15, 1995 made by George S. Bissell, Albert H.
Elfner, III, Frederick Amling, Charles A. Austin, III, Edwin D. Campbell,
Charles F. Chapin, K. Dun Gifford, Leroy Keith, Jr., F. Ray Keyser, Jr., David
M. Richardson, Richard J. Shima and Andrew J. Simons (hereinafter with their
successors referred to as the "Trustees") to RESTATEMENT OF TRUST AGREEMENT,
dated December 19, 1989.
WHEREAS the Trustees have determined to change the name of the Trust and to
change the designation of its principal office to 200 Berkeley Street Boston
Massachusetts 02116.
NOW, THEREFORE, the Trustees hereby declare that they will amend the
Restatement of Trust Agreement as hereinafter set forth:
ARTICLE I, Name and Definitions, Section 1. Name., is hereby amended to
read as follows:
"This Trust shall be known as the "Keystone Diversified Bond Fund (B-2)"
and the Trustees shall conduct the business of this Trust under that name
or any other name as they may from time to time determine."
This Amendment shall become effective as of May 1, 1995.
All other provisions of the Restatement of Trust Agreement shall continue
as originally stated.
IN WITNESS WHEREOF, the undersigned, being all of the Trustees of the
Trust, have caused this First Amendment to Restatement of Trust Agreement to be
executed on the 15th day of March, 1995.
/s/ George S. Bissell
- ------------------------------------------
George S. Bissell, Trustee
/s/ Albert H. Elfner, III
- ------------------------------------------
Albert H. Elfner, III, Trustee
/s/ Frederick Amling
- ------------------------------------------
Frederick Amling, Trustee
/s/ Charles A. Austin, III
- ------------------------------------------
Charles A. Austin, III, Trustee
/s/ Edwin D. Campbell
- ------------------------------------------
Edwin D. Campbell, Trustee
/s/ Charles F. Chapin
- ------------------------------------------
Charles F. Chapin, Trustee
<PAGE>
/s/ K. Dun Gifford
- ------------------------------------------
K. Dun Gifford, Trustee
/s/ Leroy Keith, Jr.
- ------------------------------------------
Leroy Keith, Jr., Trustee
/s/ F. Ray Keyser, Jr.
- ------------------------------------------
F. Ray Keyser, Jr., Trustee
/s/ David M. Richardson
- ------------------------------------------
David M. Richardson, Trustee
/s/ Richard J. Shima
- ------------------------------------------
Richard J. Shima, Trustee
/s/ Andrew J. Simons
- ------------------------------------------
Andrew J. Simons, Trustee
<PAGE>
Exhibit 99.2
BY-LAWS
KEYSTONE CUSTODIAN FUND, SERIES B-2
ARTICLE 1.
Restatement of Trust Agreement and Principal Office
1.1 Restatement of Trust Agreement. These By-laws are adopted pursuant to and
are subject to the terms of the Restatement of Trust Agreement ("Trust
Agreement") of Keystone Custodian Fund, Series B-2 ("Fund").
1.2 Principal Office of the Fund. The principal office of the Fund shall be
located in Boston, Massachusetts, or such other place as the Trustees may
designate from time to time.
ARTICLE 2.
Meetings of Shareholders
2.1 Meetings. Meetings may be called by the Trustees or by the President or by
any other officers designated for the purpose by the Trustees.
2.2 Business to be Transacted. At any meeting of shareholders, such business may
be transacted as is referred to in the notice of the meeting, and any other
business considered appropriate by or under authority of the Trustees.
2.3 Notice. A written notice of each meeting of the shareholders, specifying the
time, place and purposes thereof, shall be given as hereinafter provided by the
Secretary of the Fund or any Assistant Secretary or by a person or persons
designated by either of them, to each shareholder who is entitled to vote
thereat at least seven (7) days (including Sundays and holidays) before such
meeting. Notice of a meeting need not be given to any shareholder if a written
waiver of notice, executed by the shareholder or his attorney thereunto duly
authorized before or after the meeting, is filed with the records of the
meeting, or to any shareholder who attends the meeting either in person or by
proxy without protesting, prior thereto or at its commencement, the lack of
notice to such shareholder. Every notice to any shareholder required or provided
for herein may be given to him personally or by mailing it to him postage
prepaid, addressed to him at his address specified in the records of the Trust.
Notice shall be deemed to have been given at the time when it is so mailed. In
respect of any share held jointly by several persons notice so given to any one
of them shall be sufficient notice to all of them. Any notice so sent to the
address of any shareholder shall be deemed to have been duly sent in respect of
any such share whether held by him solely or jointly with others,
notwithstanding he be then deceased or be bankrupt or insolvent or legally
incompetent, and whether or not the Trustees or any person sending such notice
have knowledge of his death, bankruptcy or insolvency or legal incompetence,
until some other person or persons shall be registered as holders. The
certificate of the person or persons giving such notice shall be sufficient
evidence thereof, and shall protect all persons acting in good faith in reliance
on such certificate.
2.5 Voting. Shares may be voted in person by the shareholder or by proxy in form
reasonably acceptable to the Trust. If the holder of any share is a minor or a
person of unsound mind, or subject to guardianship or to the legal control of
any other person as regards the charge or management of such share, he may vote
by his guardian or such other person appointed or having such control, and such
vote may be given in person or by proxy.
2.6 Record Dates. For the purpose of determining the shareholders who are
entitled to vote or act at any meeting or any adjournment thereof, or who are
entitled to receive payment of any dividend or of any other distribution, the
Trustees may from time to time fix or authorize the fixing by others of a time
as the record date for determining the shareholders having the right to notice
of and to vote at such meeting and any adjournment thereof or the right to
receive such dividend or distribution, and in such case only shareholders of
record on such record date shall have such right, notwithstanding any transfer
of shares on the books of the Fund after the record date; or without fixing such
record date the Trustees may for any of such purposes close the register or
transfer books for all or any part of such period.
ARTICLE 3.
Meetings of Trustees
3.1 Regular Meetings. Regular meetings of the Trustees may be held without call
or notice at such places and at such times as the Trustees may from time to time
determine.
3.2 Special Meetings. Special meetings of the Trustees may be held at any time
and at any place designated in the call of the meeting when called by the
Chairman, the President or the Treasurer, or by any other officer authorized by
the Trustees to do so, or by two or more Trustees, sufficient notice thereof
being given to each Trustee by the Secretary or an Assistant Secretary or by the
officer or one of the Trustees calling the meeting.
3.3 Notice. It shall be sufficient notice to a Trustee of a special meeting to
send notice by mail at least forty-eight hours or by telegram at least
twenty-four hours before the meeting addressed to him at his usual or last known
business or residence address or to give notice to him in person or by telephone
at least twenty-four hours before the meeting. Notice of a meeting need not be
given to any Trustee if a written waiver of notice, executed by him before or
after the meeting, is filed with the records of the meeting, or to any Trustee
who attends the meeting without protesting prior thereto or at its commencement
the lack of notice to him. Neither notice of a meeting nor a waiver of a notice
need specify the purposes of the meeting.
3.4 Quorum. At any meeting of the Trustees a majority of the Trustees then in
office shall constitute a quorum. Any meeting may be adjourned from time to time
by a majority of the votes cast upon the question, whether or not a quorum is
present and the meeting may be held as adjourned without further notice.
3.5 Action by Vote. When a quorum is present at any meeting, a majority of the
Trustees present may take any action, except when a larger vote is required by
the Trust Agreement or any applicable law.
3.6 Participation by Conference Telephone. The Trustees may participate in a
meeting of the Trustees by means of conference telephone or similar
communications equipment. Participation by such means shall constitute presence
in person at a meeting.
3.7 Action by Writing. The Trustees may act without a meeting and the action of
a majority of the Trustees then in office evidenced by a writing signed by such
a majority shall be valid and binding as the action of the Trustees.
ARTICLE 4.
Trustees
4.1 Term. A Trustee shall serve until his death, Retirement, resignation or
removal from office or until his successor is elected and qualifies.
ARTICLE 5.
Officers
5.1 Election. The President, the Treasurer and the Secretary shall be elected
annually by the Trustees and shall serve until their successors are elected and
qualified or until their earlier death, resignation or removal. Other officers,
if any, including if desired a Controller, may be elected or appointed by the
Trustees at the meeting or at any other time. A Chairman of the Board may be
elected or appointed by the Trustees at the meeting or at any other time.
Vacancies in any office may be filled at any time by the Trustees.
5.2 Tenure. Each officer and each agent shall hold office at the pleasure of the
Trustees.
5.3 Powers. Subject to law and to the other provisions of these By-laws, each
officer shall have, in addition to any duties and powers set forth herein and in
the Trust Agreement, such duties and powers as are commonly incident to the
office occupied by him as if the Fund were organized as a Pennsylvania business
corporation and such other duties and powers as the Trustees may from time to
time designate.
5.4 President. Unless the Trustees otherwise provide, the President shall
preside at all meetings of shareholders and of the Trustees and the President
shall be the chief executive officer.
5.5 Treasurer. The Treasurer shall be the chief financial officer of the Fund.
In the absence of the Treasurer, or if there is then no person serving in such
office, the Controller of the Fund shall be the chief financial officer of the
Fund. He shall, subject to the provisions of the Trust Agreement and subject to
any arrangement made by the Trustees with a bank or other trust company or
organization as custodian, be in charge of valuable papers, books of account and
accounting records, and shall have such other duties and powers as may be
designated from time to time by the Trustees or by the President.
5.6 Secretary. The Secretary shall record all proceedings of the shareholders
and Trustees in books to be kept therefor, which books shall be kept at the
principal office of the Fund. In the absence of the Secretary, an Assistant
Secretary, or if there be none or if he is absent, a temporary Secretary chosen
by the shareholders or the Trustees, as the case may be, shall record the
proceedings in the aforesaid books.
5.7 Resignation and Removals. Any Trustee or officer may resign at any time by
written instrument signed by him and deposited with the Trustees by delivering
such resignation to the President or the Secretary or to a meeting of the
Trustees. Such resignation shall be effective upon receipt unless specified to
be effective at some other time. The Trustees may remove any officer elected by
them with or without cause by vote of a majority of the Trustees then in office.
Except to the extent expressly provided in a written agreement with the Fund, no
Trustee or officer resigning and no officer removed shall have any right to
compensation for any period following his resignation or removal, or any right
to damages on account of such removal.
ARTICLE 6.
Committees
6.1 General. The Trustees may appoint from their number an executive committee
to serve during their pleasure. The executive committee may, when the Trustees
are not in session at a meeting, exercise such of the powers and authority of
the Trustees as may be conferred from time to time by the Trustees. Rules
governing the actions of the executive committee may be adopted by the Trustees
from time to time as they deem appropriate. The Trustees may appoint from their
number such other committees from time to time as they deem appropriate. The
number composing such committees, the powers and authority conferred upon such
committees and the rules governing the actions of such committees shall be
determined by the Trustees at their discretion.
6.2 Quorum; Voting. A majority of the members of any committee of the Trustees
shall constitute a quorum for the transaction of business, and any action of
such a committee may be taken at a meeting by a vote of a majority of the
members present (a quorum being present) or evidenced by one or more writings
signed by such a majority. Members of a committee may participate in a meeting
of such committee by means of conference telephone or similar communications
equipment. Participation by such means shall constitute presence in person at a
meeting.
ARTICLE 7.
Fiscal Year and Seal
7.1 Fiscal Year. The fiscal year of the Fund shall end on the last day of August
in each year.
7.2 Seal. The seal of the Fund shall consist of a flat-faced die with the name
of the Fund and 1932 cut or engraved thereon.
ARTICLE 8.
Amendments
8.1 Amendment by Trustees. These By-laws may also be altered, amended or
repealed by the Trustees, except with respect to any provision which by law, the
Trust Agreement or these By-laws requires action by the shareholders.
<PAGE>
Exhibit 99.5(A)
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made the 19th day of August, 1993, by and between KEYSTONE
CUSTODIAN FUND, SERIES B-2, a Pennsylvania common law trust (the "Fund"), and
KEYSTONE MANAGEMENT, INC., a Nevada corporation (the "Manager").
WHEREAS, the Fund and the Manager wish to enter into an Agreement setting
forth the terms on which the Manager will perform certain services for the Fund.
THEREFORE, in consideration of the promises and the mutual agreements
hereinafter contained, the Fund and the Manager agree as follows:
1. The Fund hereby employs the Manager to manage and administer the
operation of the Fund, to supervise the provision of services to the Fund by
others, and to manage the investment and reinvestment of the assets of the Fund
in conformity with the Fund's 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 Manager 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 Manager 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 Manager shall place all orders for the purchase and sale of portfolio
securities for the account of the Fund with broker-dealers selected by the
Manager. In executing portfolio transactions and selecting broker-dealers, the
Manager will use its best efforts to seek best execution on behalf of the Fund.
In assessing the best execution available for any transaction, the Manager 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 Manager 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 Manager or an affiliate of the Manager exercises investment
discretion. The Manager is authorized to pay a broker-dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Fund which is in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction if, but only if,
the Manager 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 Manager, at its own expense, shall furnish to the Fund office space
in the offices of the Manager or in such other place as may be agreed upon by
the parties from time to time, all necessary office facilities, equipment and
personnel in connection with its services hereunder, and shall arrange, if
desired by the Fund, for members of the Manager'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 Manager assumes and shall pay or reimburse the Fund for:
(1) the compensation (if any) of the Trustees of the Fund who are affiliated
with the Manager or with its affiliates, or with any adviser retained by the
Manager, and of all officers of the Fund as such, and (2) all expenses of the
Manager incurred in connection with its services hereunder. The Fund assumes and
shall pay all other expenses of the Fund, including, without limitation: (1) all
charges and expenses of any custodian or depository appointed by the Fund for
the safekeeping of its cash, securities and other property; (2) all charges and
expenses for bookkeeping and auditors; (3) all charges and expenses of any
transfer agents and registrars appointed by the Fund; (4) all fees of all
Trustees of the Fund who are not affiliated with the Manager or any of its
affiliates, or with any adviser retained by the Manager; (5) all broker's fees,
expenses and commissions and issue and transfer taxes chargeable to the Fund in
connection with transactions involving securities and other property to which
the Fund is a party; (6) all costs and expenses of distribution of its shares
incurred pursuant to a Plan of Distribution adopted under Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act"); (7) all taxes and trust fees
payable by the Fund to Federal, state or other governmental agencies; (8) all
costs of certificates representing shares of the Fund; (9) all fees and expenses
involved in registering and maintaining registrations of the Fund and of its
shares with the Securities and Exchange Commission (the "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; (10) expenses of preparing, printing
and mailing prospectuses and statements of additional information to
shareholders of the Fund; (11) all expenses of shareholders' and Trustees'
meetings and of preparing, printing and mailing notices, reports and proxy
materials to shareholders of the Fund; (12) all charges and expenses of legal
counsel for the Fund and for Trustees of the Fund in connection with legal
matters relating to the Fund, including, without limitation, legal services
rendered in connection with the Fund's existence, 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; (13) all charges and expenses of filing
annual and other reports with the Commission and other authorities; and (14) all
extraordinary expenses and charges of the Fund. In the event that the Manager
provides any of these services or pays any of these expenses, the Fund will
promptly reimburse the Manager therefor.
The services of the Manager to the Fund hereunder are not to be deemed
exclusive, and the Manager shall be free to render similar services to others.
4. As compensation for the Manager's services to the Fund during the
period of this Agreement, the Fund will pay to the Manager a fee at the annual
rate of:
FOR B-1, B-2, B-4:
MANAGEMENT AGGREGATE NET ASSET VALUE
FEE OF THE SHARES OF THE FUND
- ------------------------------------------------------------------------------
2.0% of Gross Dividend and
Interest Income Plus
0.50% of the first $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 $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
- ------------------------------------------------------------------------------
computed as of the close of business on each business day.
<PAGE>
FOR K-1:
MANAGEMENT AGGREGATE NET ASSET VALUE
FEE OF THE SHARES 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 on each business day.
FOR K-2, S-1, S-3 AND S-4:
MANAGEMENT AGGREGATE NET ASSET VALUE
FEE OF THE SHARES OF THE FUND
- ------------------------------------------------------------------------------
0.70% of the first $ 100,000,000, plus
0.65% of the next $ 100,000,000, plus
0.60% of the next $ 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 $ 500,000,000, plus
0.40% of the next $ 500,000,000, plus
0.35% of amounts over $1,500,000,000
- ------------------------------------------------------------------------------
computed as of the close of business on each business day.
A pro rata portion of the fee shall be payable in arrears at the end of each
day or calendar month as the Manager 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 Manager may enter into an agreement to retain, at its own expense,
Keystone Custodian Funds, Inc. or any other firm or firms ("Adviser") to provide
the Fund all of the services to be provided by the Manager hereunder, if such
agreement is approved as required by law. Such agreement may delegate to such
Adviser all of Manager's rights, obligations and duties hereunder.
6. The Manager 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 Manager'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 Manager, 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 Manager'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 Manager
even though paid by it. The Fund agrees to indemnify and hold the Manager
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, as amended from time to time) and expenses, including (without
limitation) attorneys' fees and disbursements, arising directly or indirectly
from any action or thing which the Manager takes or does or omits to take or do
hereunder provided that the Manager 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 Manager 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 Trust Agreement of the Fund, the
Articles of Incorporation of the Manager and the governing documents of any
Adviser, it is understood that Trustees, Directors, officers, agents and
shareholders of the Fund or any Adviser are or may be interested in the Manager
(or any successor thereof) as Directors and officers of the Manager or its
affiliates, as stockholders of Keystone Group, Inc. or otherwise; that
Directors, officers and agents of the Manager and its affiliates or stockholders
of Keystone Group, Inc. are or may be interested in the Fund or any Adviser as
Trustees, Directors, officers, shareholders or otherwise; that the Manager (or
any such successor) is or may be interested in the Fund or any Adviser as
shareholder, or otherwise; and that the effect of any such adverse interests
shall be governed by said Trust Agreement of the Fund, Articles of Incorporation
of the Manager and governing documents of any Adviser.
9. This Agreement shall continue in effect after July 1, 1994 only so long
as (1) such continuance is specifically approved at least annually by the Board
of Trustees of the Fund or by a vote of a majority of the outstanding voting
securities of the Fund, and (2) such renewal has been approved by the vote of a
majority of Trustees of the Fund who are not interested persons, as that term is
defined in the 1940 Act, of the Manager or of the Fund, cast in person at a
meeting called for the purpose of voting on such approval.
10. On sixty days' written notice to the Manager, this Agreement may be
terminated at any time without the payment of any penalty by the Board of
Trustees of the Fund or by vote of the holders of a majority of the outstanding
voting securities of the Fund; and on sixty days' written notice to the Fund,
this Agreement may be terminated at any time without the payment of any penalty
by the Manager. 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 outstanding
voting securities of the Fund and by the vote of a majority of Trustees of the
Fund who are not interested persons (as that term is defined in the 1940 Act) of
the Manager, any predecessor of the Manager, 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 Manager hereunder for any period other
than a full year shall be proportionately adjusted.
13. The provisions of this Agreement shall be governed, construed and
enforced in accordance with the laws of The Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the day and year first above written.
KEYSTONE CUSTODIAN FUND, SERIES B-2
By: /s/ Ralph J. Spuehler
-----------------------------------------------------------
Title: Treasurer
KEYSTONE MANAGEMENT, INC.
By: /s/ Edward Godfrey
-----------------------------------------------------------
Title: Treasurer
<PAGE>
Exhibit 99.5(B)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made the 19th day of August, 1993, by and between KEYSTONE
MANAGEMENT, INC., a Nevada corporation (the "Manager"), and KEYSTONE CUSTODIAN
FUNDS, INC., a Delaware corporation (the "Adviser").
WHEREAS, the Manager and the Adviser wish to enter into an Agreement setting
forth the terms on which the Adviser will perform certain services for the
Manager and KEYSTONE CUSTODIAN FUND, SERIES B-2 (the "Fund").
THEREFORE, in consideration of the promises and the mutual agreements
hereinafter contained, the Manager and the Adviser agree as follows:
1. The Manager hereby employs the Adviser to manage and administer the
operation of the Fund (with the exception of certain managerial and
administrative services to be provided by the Manager), to supervise the
provision of services to the Fund by others, and to manage the investment and
reinvestment of the assets of the Fund in conformity with the Fund's 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 Manager and
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 Manager or the Fund in any way or otherwise be deemed an agent of
the Manager or 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 which is in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction if, but 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 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 and the Fund from time to time, all necessary office facilities,
equipment and personnel in connection with its services hereunder, and shall
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 Manager or the Fund, as the case may be, for: (1) the compensation (if any)
of the Trustees of the Fund who are affiliated with the Adviser, any of its
affiliates, or the Manager, and of all officers of the Fund as such, and (2) all
expenses of the Adviser incurred in connection with its services hereunder. The
Manager represents and warrants that the Fund has assumed and has agreed to pay
all other expenses of the Fund, including, without limitation: (1) all charges
and expenses of any custodian or depository appointed by the Fund for the
safekeeping of its cash, securities and other property; (2) all charges and
expenses for bookkeeping and auditors; (3) all charges and expenses of any
transfer agents and registrars appointed by the Fund; (4) all fees of all
Trustees of the Fund who are not affiliated with the Adviser, any of its
affiliates, or the Manager; (5) all broker's fees, expenses and commissions and
issue and transfer taxes chargeable to the Fund in connection with transactions
involving securities and other property to which the Fund is a party; (6) all
costs and expenses of distribution of its shares incurred pursuant to a Plan of
Distribution adopted under Rule 12b- 1 under the Investment Company Act of 1940
("1940 Act"); (7) all taxes and trust fees payable by the Fund to Federal, state
or other governmental agencies; (8) all costs of certificates representing
shares of the Fund; (9) all fees and expenses involved in registering and
maintaining registrations of the Fund and of its shares with the Securities and
Exchange Commission (the "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;
(10) expenses of preparing, printing and mailing prospectuses and statements of
additional information to shareholders of the Fund; (11) all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
notices, reports and proxy materials to shareholders of the Fund; (12) all
charges and expenses of legal counsel for the Fund and for Trustees of the Fund
in connection with legal matters relating to the Fund, including, without
limitation, legal services rendered in connection with the Fund's existence,
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; (13) all
charges and expenses of filing annual and other reports with the Commission and
other authorities; (14) all charges and expenses of any manager appointed by the
Fund; and (15) all extraordinary expenses and charges of the Fund; and that 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 and the Manager 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 Manager will pay to the Adviser a fee at the annual rate
of 85% of the management fee paid by the Fund to the Manager.
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
Manager. 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 shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund or the Manager 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, Director, employee or agent of the Fund or the
Manager, shall be deemed, when rendering services to the Fund or the Manager or
acting on any business of the Fund or the Manager, (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 or the Manager, as the case may
be, 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 Manager
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, as amended from
time to time) and expenses, including (without limitation) attorneys' fees and
disbursements, arising directly or indirectly from any action or thing which 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.
6. The Manager represents and warrants that the Fund has agreed to 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.
7. Subject to and in accordance with the Trust Agreement of the Fund, the
Certificate of Incorporation of the Adviser and Articles of Incorporation of the
Manager, respectively, it is understood that Trustees, Directors, officers,
agents and shareholders of the Fund or the Manager are or may be interested in
the Adviser (or any successor thereof) as Directors and officers of the Adviser
or its affiliates, as stockholders of Keystone Group, Inc. or otherwise; that
Directors, officers and agents of the Adviser and its affiliates or stockholders
of Keystone Group, Inc. are or may be interested in the Fund or the Manager as
Trustees, Directors, officers, shareholders or otherwise; that the Adviser (or
any such successor) is or may be interested in the Fund or the Manager as
shareholder or otherwise; and that the effect of any such adverse interests
shall be governed by said Trust Agreement of the Fund, Certificate of
Incorporation of the Adviser, and Articles of Incorporation of the Manager.
8. This Agreement shall continue in effect after July 1, 1994 only so long
as (1) such continuance is specifically approved at least annually by the Board
of Trustees of the Fund or by a vote of a majority of the outstanding voting
securities of the Fund, and (2) such renewal has been approved by the vote of a
majority of Trustees of the Fund who are not interested persons, as that term is
defined in the 1940 Act, of the Adviser, the Manager or of the Fund, cast in
person at a meeting called for the purpose of voting on such approval.
9. On sixty days' written notice to the Adviser, this Agreement may be
terminated at any time without the payment of any penalty by the Manager, by the
Board of Trustees of the Fund or by vote of the holders of a majority of the
outstanding voting securities of the Fund; and on sixty days' written notice to
the Manager and the 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.
10. 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 shall have been first
approved by the vote of the holders of a majority of the outstanding voting
securities of the Fund and by the vote of a majority of Trustees of the Fund who
are not interested persons (as that term is defined in the 1940 Act) of the
Adviser, the Manager, or of any predecessor of either, 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.
11. Any compensation payable to the Adviser hereunder for any period other
than a full year shall be proportionately adjusted.
12. The provisions of this Agreement shall be governed, construed and
enforced in accordance with the laws of The Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the day and year first above written.
KEYSTONE MANAGEMENT, INC.
By: /s/ Edward Godfrey
-------------------------------
Title: Treasurer
KEYSTONE CUSTODIAN FUNDS, INC.
By: /s/ Edward Godfrey
-------------------------------
Title: Senior Vice President
<PAGE>
Exhibit 99.6(A)
PRINCIPAL UNDERWRITING AGREEMENT
AGREEMENT made as of the 19th day of August 1993 by and between KEYSTONE
CUSTODIAN FUND, SERIES B-2 (the "Fund"), and KEYSTONE DISTRIBUTORS, INC., a
Delaware corporation (the "Principal Underwriter").
It is hereby mutually agreed as follows:
1. The Fund hereby appoints Principal Underwriter a Principal Underwriter
pursuant to the terms of the 12b-1 Plan most recently adopted by the Fund
("12b-1 Plan") and a Principal Underwriter of the shares of beneficial interest
of the Fund (the "Shares") as an independent contractor upon the terms and
conditions hereinafter set forth. Except as the Fund may from time to time
agree, 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
the Shares and in so doing may retain and employ representatives to promote
distribution of the Shares and may obtain orders from brokers, dealers or others
for sales of Shares to them. No such representative, dealer or broker shall have
any authority to act as agent for the Fund; such dealer or broker shall act only
as principal in the sale of Shares.
3. All sales of Shares by Principal Underwriter shall be at the applicable
public offering price determined in the manner set forth in the prospectus
and/or statement of additional information of the Fund current at the time of
the Fund's acceptance of the order for 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 Shares, the Fund shall receive the current net asset
value and Principal Underwriter shall be entitled to the commissions and
maintenance and of the fees provided under the 12b-1 Plan ("12b-1 commissions")
and as set forth in the then current prospectus and/or statement of additional
information of the Fund. Principal Underwriter may reallow all or a part of the
12b-1 commissions to such of its representatives, or to such brokers or dealers,
as Principal Underwriter may determine.
5. Payment 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 notice of 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
issue of the Shares.
6. Principal Underwriter shall not make, or permit any representative,
broker or dealer to make, in connection with any sale or solicitation of a sale
of the Shares, any representations concerning the 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/or statement of additional
information. Copies of the then current prospectus and/or 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 then current prospectus of the Fund.
9. Principal Underwriter covenants and agrees that it will in all respects
duly conform with all state and federal laws and regulations applicable to the
sale of the Shares and will indemnify and hold harmless the Fund and each person
who has been, is or may hereafter be a Trustee or officer of the Fund against
expenses reasonably incurred by any of them in connection with any claim or in
connection with any action, suit or proceeding to which any of them may be a
party, which arises out of or is alleged to arise out of any misrepresentation
or omission to state a material fact on the part of Principal Underwriter or any
other person for whose acts 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 term "expenses" includes
amounts paid in satisfaction of judgments or in settlement. The foregoing right
of indemnification shall be in addition to any other rights to which the Fund or
any such Trustee or officer may be entitled as a matter of law.
10. 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 and maintaining the registration of the
Fund and of the Shares under the federal Securities Act of 1933, as amended
("1933 Act"), and the federal Investment Company Act of 1940, as amended (" 1940
Act"). Principal Underwriter shall bear the expense of preparing, printing and
distributing advertising and sales literature and prospectuses and statements of
additional information used by it (but not the expenses of registering Shares
under the 1933 Act and the 1940 Act, qualifying Shares for sale under the
so-called "blue sky" laws of any state and the preparation and printing of
prospectuses and statements of additional information and reports required to be
filed with the Securities and Exchange Commission by said Acts and the direct
expenses of the issue of Shares.)
11. The 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 purpose for
which such expenditures were made.
12. Unless sooner terminated or continued as provided below, the term of
this agreement shall begin on the date hereof, and expire after one year. This
agreement shall continue in effect after said 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 the 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 the 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 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).
13. 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, on the day and year first written above.
KEYSTONE CUSTODIAN FUND SERIES B-2
By: /s/ George S. Bissell
Office: Chairman
KEYSTONE DISTRIBUTORS, INC.
By: /s/ Edward F. Godfrey
Office: Sr. Vice President
<PAGE>
Exhibit 99.6(B)
[LOGO] KEYSTONE
INVESTMENTS
200 Berkeley Street
Boston, Massachusetts 02116-5034
Dealer No._________________________________________________________
(Please indicate Exchange Membership(s), if any.)__________________
-------------------------------------------------------------------
Effective Date_____________________________________________________
CLASS A AND B SHARES
To Whom It May Concern:
Keystone Investment Distributors Company ("the Company"), principal
underwriter, invites you to participate in the distribution of shares of the
Keystone Fund Family, Classes A and B shares of the Keystone America Fund Family
and other Funds ("Funds") designated by us which are currently or hereafter
underwritten by the Company, subject to the following terms:
1. In the distribution and sale of shares, you shall not have authority to act
as agent for the issuer, the Company or any other dealer in any respect in such
transactions. All orders are subject to acceptance by us and become effective
only upon confirmation by us. The Company reserves the unqualified right not to
accept any specific order for the purchase or exchange of shares.
2. You will offer and sell shares of the Funds other than Class A shares of the
Keystone America Funds only at their respective net asset values in accordance
with the terms and conditions of a current prospectus of the Fund whose shares
you offer. With respect to Class A shares of the Keystone America Funds and
other Funds designated by us, you will offer and sell such shares at the public
offering price described in a current prospectus of the Fund whose shares you
offer. You will offer shares only on a forward pricing basis, i.e. orders for
the purchase or repurchase of shares accepted by you prior to the close of the
New York Stock Exchange and placed with us the same day prior to the close of
our business day, 5:00 p.m. Eastern Time, and orders to exchange shares of one
Fund for shares of another Fund eligible for exchange placed with us prior to
3:00 p.m. Eastern Time, shall be confirmed at the closing price for that
business day. You agree to place orders for shares only with us and at such
closing price. You further agree to confirm the transaction with your customer
at the price confirmed in writing by us. In the event of a difference between
verbal and written price confirmations, the written confirmations shall be
considered final. Prices of the Funds' shares are computed by and are subject to
withdrawal by the Funds in accordance with their current respective
prospectuses. You agree to place orders with us only through your central order
department unless we accept your written Power of Attorney authorizing others to
place orders on your behalf.
3. So long as this agreement remains in effect, we will pay you commissions on
sales of shares of the Funds and service fees, all in accordance with the
Schedule of Commissions and Service Fees ("Schedule") attached hereto and made a
part hereof, effective June 1, 1995, which Schedule may be modified from time to
time or rescinded by us, in either case without prior notice. You shall have no
vested right to receive any continuing service fees, other fees, or other
commissions which we may elect to pay to you from time to time on shares
previously sold by you. You agree not to share or rebate any portion of such
commissions or to otherwise grant any concessions, discounts or other allowances
to any person who is not a broker or dealer actually engaged in the investment
banking or securities business. You will receive commissions in accordance with
the attached Schedule on all purchase transactions in shareholder accounts
(excluding reinvestment of income dividends and capital gains distributions) for
which you are designated as Dealer of Record except where we determine that any
such purchase was made with the proceeds of a redemption or repurchase of shares
of the same Fund or another Fund whether or not the transaction constitutes the
exercise of the exchange privilege. Commissions will be paid to you twice a
month.
You hereby authorize us to act as your agent in connection with all
transactions in shareholder accounts in which you are designated as Dealer of
Record. All designations of Dealer of Record and all authorizations of the
Company to act as your Agent shall cease upon the termination of this Agreement,
or upon the shareholder's instruction to transfer his or her account to another
Dealer of Record.
4. Payment for all shares purchased from us shall be made to the Company and
shall be received by the Company within ten business days after the acceptance
of your order or such shorter time as may be required by law. If such payment is
not received by us, we reserve the right, without prior notice, forthwith to
cancel the sale, or, at our option, to sell the shares ordered by you back to
the Fund concerned in which latter case we may hold you responsible for any
loss, including loss of profit, suffered by us or by the Fund resulting from
your failure to make payment as aforesaid.
5. You agree to purchase shares of the Funds only from us or from your
customers. If you purchase shares from us, you agree that all such purchases
shall be made only to cover orders already received by you from your customers,
or for your own bonafide investment without a view to resale. If you purchase
shares from your customers, you agree to pay such customers the applicable net
asset value per share less any contingent deferred sales charge that would be
applicable if such shares were then tendered for redemption in accordance with
the then current applicable prospectus ("repurchase price").
6. You will sell shares only --
(a) to your clients at the prices described in paragraph 2 above; or
(b) to us as agent for the Funds at the repurchase price. In such a
sale to us, you may act either as principal for your own account or as
agent for your customer. If you act as principal for your own account
in purchasing shares for resale to us, you agree to pay your customer
not less than nor more than the repurchase price which you receive
from us. If you act as agent for your customer in selling shares to
us, you agree not to charge your customer more than a fair commission
for handling the transaction.
7. You shall not withhold placing with us orders received from your customers so
as to profit yourself as a result of such withholding.
8. We will not accept from you any conditional orders for shares.
9. If any shares sold to you under the terms of this agreement are repurchased
by a Fund, or are tendered for redemption, within seven business days after the
date of our confirmation of the original purchase by you, it is agreed that you
shall forfeit your right to any commissions on such sales even though the
shareholder may be charged a contingent deferred sales charge by the Fund.
We will notify you of any such repurchase or redemption within the next ten
business days after the date on which the certificate or written request for
redemption is delivered to us or to the Fund, and you shall forthwith refund to
us the full amount of any commission you received on such sale. We agree, in the
event of any such repurchase or redemption, to refund to the Fund any commission
we retained on such sale and, upon receipt from you of the commissions paid to
you, to pay such commissions forthwith to the Fund.
10. Shares sold to you hereunder shall not be issued in certificate form or
otherwise until payment has been received by the Fund concerned. If transfer
instructions are not received from you within 15 days after our acceptance of
your order, the Company reserves the right to instruct the transfer agent for
the Fund concerned to register a certificate for the shares sold to you in your
name and forward such certificate to you. You agree to hold harmless and
indemnify the Company, the Fund and its transfer agent for any loss or expense
resulting from such registration.
11. No person is authorized to make any representations concerning shares of the
Funds except those contained in the current applicable prospectuses and in sales
literature issued by us supplemental to such prospectuses. In purchasing shares
from us you shall rely solely on the representations contained in the
appropriate prospectus and in such sales literature. We will furnish additional
copies of the current prospectuses and such sales literature and other releases
and information issued by us in reasonable quantities upon request. You agree
that you will in all respects duly conform with all laws and regulations
applicable to the sale of shares of the Funds and will indemnify and hold
harmless the Funds, their directors and trustees and the Company from any damage
or expenses on account of any wrongful act by you, your representatives, agents
or sub-agents in connection with any orders or solicitation of orders of shares
of the Funds by you, your representatives, agents or sub-agents.
12. Each party hereto represents that it is a member of the National Association
of Securities Dealers, Inc., and agrees to notify the other should it cease to
be a member of such Association and agrees to the automatic termination of this
agreement at that time. It is further agreed that all rules or regulations of
said Association now in effect or hereafter adopted, which are binding upon
underwriters and dealers in the distribution of the securities of open-end
investment companies, shall be deemed to be a part of this agreement to the same
extent as if set forth in full herein.
13. You will not offer the Funds for sale in any State where they are not
qualified for sale under the Blue Sky Laws and regulations of such State or
where you are not qualified to act as a dealer, except for States in which they
are exempt from qualification.
14. This agreement supersedes and cancels any prior agreement with respect to
the sales of shares of any of the Funds underwritten by the Company and the
Company reserves the right to amend this agreement at any time and from time to
time.
15. This agreement shall be effective upon acceptance by us in Boston,
Massachusetts and all sales hereunder are to be made, and title to shares of the
Funds shall pass, in Boston. This agreement is made in the Commonwealth of
Massachusetts and shall be interpreted in accordance with the laws of
Massachusetts.
16. All communications to the Company should be sent to the above address. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
17. Either party may terminate this agreement at any time by written notice to
the other party.
Signed: Accepted:
- ---------------------------------- Boston, MA (USA) as of June 1, 1995
Dealer or Broker Name
- ---------------------------------- KEYSTONE INVESTMENT DISTRIBUTORS COMPANY
Address 200 Berkeley Street, Boston, MA 02116-5034
- ---------------------------------- -----------------------------------------
Authorized Signature Authorized Signature
<PAGE>
Exhibit 99.6(C)
UNDERWRITING AGREEMENT
December 29, 1989
Kokasai Securities Co., Ltd.
Shinjuku Nomura Building
26-2 Nishishinjuku 1-Chome
Shinjuku-ku Tokyo 160 Japan
Gentlemen:
INTRODUCTION
Each of the Keystone Custodian Funds, Series B-1, B-2, B-4, K-1, K-2, S-1,
S-3 and S-4 (hereinafter referred to collectively as the "Keystone Funds")
invites you ("Kokasai") to act as Underwriter in Japan of the shares ("Shares")
of the Keystone Funds, subject to the following terms and conditions:
1. In the distribution and sale in Japan of Shares, Kokasai agrees to act
as principal. Kokasai shall not have authority to act as agent for the Keystone
Funds, Keystone Custodian Funds, Inc. ("Keystone"), Keystone Distributors, Inc.
("KDI") or for any other dealer in any respect in such transactions.
CONCERNING THE CONTINUOUS OFFERING
2. Kokasai intends to undertake the continuous offering and sale of Shares
of Keystone Custodian Fund, Series S-4 (the "S-4 Fund") in Japan to Japanese and
non-U.S. nationals (the "Continuous Offering") and the proposed schedule of
sales charges, sub-dealer concessions and net retention by Kokasai will be as
follows:
Kokasai's
Sales Sub-Dealer Net
Amount of Purchase Charge Concession Retention
- -------------------------------------------------------------------
Y500,000 but less than Y5 million 5.0% 4.0% 1.0%
Y5 million but less than Y10 million 4.0 3.2 0.8
Y10 million but less than Y100 million 3.0 2.4 0.6
Y100 million and over 2.0 1.6 0.4
The minimum unit of sale of Shares shall be Y500,000.
Kokasai will be entitled to continuing maintenance fees for services to its
customers in accordance with the attached schedule of maintenance fees which may
be modified from time to time. Kokasai shall not have any vested right to
receive any continuing maintenance fees on Shares sold by it.
3. The Continuous Offering will be made on a forward pricing basis, i.e.,
orders accepted by Kokasai prior to the close of business in Tokyo and placed
with the S-4 Fund the same day prior to the close of the S-4 Fund's business
day, 5:00 p.m. Boston, Massachusetts time, shall be confirmed at the closing per
share net asset value, which the S-4 Fund agrees to furnish to Kokasai each day
by telex, and which Kokasai agrees to make public each day at its head and
branch offices. Orders taken by Kokasai on days when the New York Stock Exchange
is closed will be priced at the closing price on the next day when the New York
Stock Exchange is open. In the event of differences between verbal and telex
orders on the one hand, and written price confirmations on the other, the
written price confirmations shall be considered final.
4. In connection with sales to sub-dealers, the concession to sub-dealers
and Kokasai's net retention shall be subject to the regulations as set forth in
the rules concerning Foreign Securities Transactions of Japanese Securities
Dealers' Association ("Association's Rules"). Kokasai agrees to furnish the S-4
Fund with English copies of agreements entered into between Kokasai and its
sub-dealers. Such agreements and sales by sub-dealers shall conform in all cases
with the terms and conditions of this Agreement.
5. Payment at the appropriate per share net asset value shall be made to
the S-4 Fund by Kokasai and shall be received by the S-4 Fund within ten
business days after its acceptance of Kokasai's order or such shorter time as
may be required by U.S. law.
If such payment is not received by the S-4 Fund, it reserves the right
without notice, forthwith to cancel the sale in which case the S-4 Fund may hold
Kokasai responsible for any loss to it, provided, however, that this paragraph
shall have no force and effect if Kokasai's failure to pay shall be caused by
reason of force majeure.
6. Kokasai agrees to act as agent of the S-4 Fund for the purpose of
facilitating redemptions of Shares of the S-4 Fund sold pursuant to the terms of
this Agreement and held by Japanese investors. If Kokasai repurchases Shares
from its customers or customers of sub-dealers, it agrees to pay not less than
the applicable net asset value as in effect on the date of such repurchase.
7. The S-4 Fund will not accept from Kokasai any conditional orders for
sales of Shares.
8. The S-4 Fund agrees that whenever Kokasai places orders for purchase of
Shares from the S-4 Fund or redemption of Shares by the S-4 Fund, the S-4 Fund
shall unconditionally accept such orders, unless trading on the New York Stock
Exchange has been suspended or there are other reasons, including force majeure,
which prevent such unconditional acceptance. The S-4 Fund also agrees to notify
Kokasai promptly by telex after the S-4 Fund has executed any such orders from
Kokasai. In the case of sales of Shares to the S-4 Fund, the S-4 Fund agrees to
make payment to Kokasai within seven days after its acceptance of Kokasai's
order or such shorter time as may be required by U.S. law. Subject to the
provisions of this Paragraph 8, if the S-4 Fund fails to make payment to Kokasai
as above provided, the S-4 Fund agrees to indemnify and save Kokasai harmless
from any loss resulting therefrom.
9. Kokasai will pay all costs and expenses directly attributable to the
Continuous Offering, including costs of translation, filing and legal and
accounting fees and disbursements of auditors and counsel of Keystone and the
S-4 Fund in conjunction with the filing under the Ordinance of Japanese Ministry
of Finance, costs of advertising, publicity and due diligence and other
meetings, costs and expenses of translating, printing and distributing the
Japanese prospectus (hereinafter referred to, in accordance with the
Association's Rules as the "Explanatory Brochure") and other sales literature
for the Continuous Offering.
10. The S-4 Fund agrees that Kokasai, on behalf of the S-4 Fund, shall
prepare, in conformance with the Association's Rules and applicable Japanese
laws and regulations, the Explanatory Brochure covering the S-4 Fund continuous
offering based on prospectuses, securities reports, semi-annual securities
reports and material information furnished from time to time by the S-4 Fund in
connection with the S-4 Fund (hereinafter collectively referred to as
"Prospectuses-Reports"). In preparing the Explanatory Brochure, Kokasai shall
rely solely on the representations contained in the "Prospectuses-Reports."
Kokasai agrees that it will furnish a draft of the Explanatory Brochure to the
S-4 Fund's designated agent in Tokyo to obtain prior approval for the contents
thereof and will also furnish the S-4 Fund with the required number of Japanese
and English language translations of the Explanatory Brochure for filing as
required by United States law. No person is authorized to make any
representations concerning Shares of the S-4 Fund except those contained in the
then current applicable Explanatory Brochure. Kokasai also agrees that it will
deliver a copy of the then current Japanese Explanatory Brochure, at or prior to
the time of sale, to each of its own purchasers and, in the case of sale by
sub-dealers, it will require that they also deliver a copy of such Explanatory
Brochure to each of their purchasers.
11. The S-4 Fund agrees to indemnify and save Kokasai harmless from any
damages which shall have occurred in the sale of Shares of the S-4 Fund pursuant
to this Agreement to the extent such damages result from a false statement of a
material fact contained in the "Prospectuses-Reports" of the S-4 Fund, an
omission of a material fact which should be stated therein or an omission of a
material fact necessary to make the statement therein not misleading. If the
"Prospectuses-Reports" or any other material used in connection with the sale of
S-4 Fund Shares contains information furnished by Kokasai which information
contains a false statement of a material fact, an omission of a material fact
which should be stated therein, or an omission of a material fact necessary to
make the statement therein not misleading, Kokasai likewise agrees to indemnify
and save the S-4 Fund harmless from any damages it shall have incurred in any
sales of the Shares of the S-4 Fund pursuant to the terms of this Agreement.
12. The S-4 Fund agrees to designate Kokasai if Kokasai so requests, or
such other representative as shall meet the qualification requirements as set
forth in Section 1 of Article 6 of the Japanese Standard Rules Relating to
Selection of Foreign Investment Company Shares to be Sold in Japan (the
"Standard Rules") as legal agent for service of process against the S-4 Fund.
13. The S-4 Fund hereby appoints Kokasai as its agent securities company as
defined in Article 13 of the Association's Rules and Kokasai agrees that it will
submit to the Association on the S-4 Fund's behalf all such documents as may be
required by the provisions the Association's Rules.
14. The S-4 Fund agrees that all its financial statements which appear in
the Japanese Explanatory Brochure and Registration Statement, or in annual
reports to the Ministry of Finance will be certified by independent certified
public accountants who are licensed public accountants under the laws of Japan.
Any such financial statements submitted to the Ministry of Finance will be
manually signed and certified by such representative. The S-4 Fund also agrees
to submit semi-annual reports to the Ministry of Finance which need not be
certified.
15. The S-4 Fund hereby represents and warrants that it currently conforms
to the requirements of the Japanese Standard Rules. The S-4 Fund understands
that if subsequently it is made aware that it does not so conform, the S-4 Fund
will advise Kokasai promptly and Kokasai may suspend further sales of Shares
but, even in such event, the S-4 Fund will continue to be obligated to
repurchase or redeem Shares of the S-4 Fund from Kokasai as hereinbefore
provided.
16. In offering the Shares of the S-4 Fund for sale in Japan, Kokasai
agrees to comply with the applicable laws, rules, regulations and criteria of
the Ministry of Finance and Associations' Rules.
Kokasai also agrees that any advertisements used by Kokasai will in general
conform to the Statement of Policy of the United States Securities and Exchange
Commission (U.S. Release No. 40-2621), except for Paragraph (h) which deals with
comparisons.
17. With the consent of the Board of Trustees of the appropriate Keystone
Fund, Kokasai may also undertake block and/or continuous offerings of the Shares
of such other Keystone Funds on the terms and conditions herein stated or as may
be contained in any supplemental agreement hereto.
18. This Agreement is, to the extent applicable, governed by the laws of
Japan.
19. This Agreement shall continue in effect as long as permitted under the
U.S. Investment Company Act of 1940, as amended from time to time, the rules
promulgated thereunder or under the Japanese Securities and Exchange Law of
1948, appropriate exemptions therefrom. This Agreement may be terminated at any
time by mutual consent or by either party upon thirty days written notice, and
shall terminate automatically in the event of its assignment.
KEYSTONE CUSTODIAN FUND,
SERIES B-1, B-2, B-4, K-1,
K-2, S-1, S-3 and S-4, each
for itself and not jointly
By Albert H. Elfner, III
-------------------------------
Title: President
ACCEPTED as of the 29th day of December 1989:
KOKASAI SECURITIES CO., LTD.
By Hiroshi Ohno
-------------------------------
Title:
<PAGE>
SCHEDULE OF MAINTENANCE FEES
Except as otherwise provided for in the Underwriting Agreement, Kokasai
will be entitled to quarterly maintenance fees based on the aggregate net asset
value of shares of the S-4 Fund which Kokasai has sold, which remain issued and
outstanding on the books of the S-4 Fund on the last business day of the
calendar quarter and which are registered in the names of clients for whom
Kokasai is broker of record ("Eligible Shares"). Such maintenance fees will be
calculated at the rate of 0.0625% per quarter of the aggregate net asset value
of all such Eligible Shares (approximately 0.25% annually); provided, however,
that no maintenance fees will be paid to Kokasai for any calendar quarter if the
aggregate net asset value of such Eligible Shares on the last business day of
the calendar quarter is less than $1 million. Quarterly maintenance fees shall
be payable 90 days after the end of the calendar quarter. Such maintenance fee
rate may be modified by the S-4 Fund from time to time without prior notice.
<PAGE>
UNDERWRITING AGREEMENT
December 29, 1989
Nomura Securities Co., Ltd.
1-9-1, Nihonbashi, Chuo-ku
Tokyo, Japan
Gentlemen:
INTRODUCTION
Each of the Keystone Custodian Funds, Series B-1, B-2, B-4, K-1, K-2, S-1,
S-3 and S-4 (hereinafter referred to collectively as the "Keystone Funds")
invites you ("Nomura") to act as Underwriter in Japan of the shares ("Shares")
of the Keystone Funds, subject to the following terms and conditions:
1. In the distribution and sale in Japan of Shares, Nomura agrees to act as
principal. Nomura shall not have authority to act as agent for the Keystone
Funds, Keystone Custodian Funds, Inc. ("Keystone"), Keystone Distributors, Inc.
("KDI") or for any other dealer in any respect in such transactions.
CONCERNING THE CONTINUOUS OFFERING
2. Nomura intends to undertake the continuous offering and sale of Shares
of Keystone Custodian Fund, Series S-4 (the "S-4 Fund") in Japan to Japanese and
non-U.S. nationals (the "Continuous Offering") and the proposed schedule of
sales charges, sub-dealer concessions and net retention by Nomura will be as
follows:
Nomura's
Sales Sub-Dealer Net
Amount of Purchase Charge Concession Retention
- -------------------------------------------------------------------
Y500,000 but less than Y5 million 5.0% 4.0% 1.0%
Y5 million but less than Y10 million 4.0 3.2 0.8
Y10 million but less than Y100 million 3.0 2.4 0.6
Y100 million and over 2.0 1.6 0.4
The minimum unit of sale of Shares shall be Y500,000.
Nomura will be entitled to continuing maintenance fees for services to its
customers in accordance with the attached schedule of maintenance fees which may
be modified from time to time. Nomura shall not have any vested right to receive
any continuing maintenance fees on Shares sold by it.
3. The Continuous Offering will be made on a forward pricing basis, i.e.,
orders accepted by Nomura prior to the close of business in Tokyo and placed
with the S-4 Fund the same day prior to the close of the S-4 Fund's business
day, 5:00 p.m. Boston, Massachusetts time, shall be confirmed at the closing per
share net asset value, which the S-4 Fund agrees to furnish to Nomura each day
by telex, and which Nomura agrees to make public each day at its head and branch
offices. Orders taken by Nomura on days when the New York Stock Exchange is
closed will be priced at the closing price on the next day when the New York
Stock Exchange is open. In the event of differences between verbal and telex
orders on the one hand, and written price confirmations on the other, the
written price confirmations shall be considered final.
4. In connection with sales to sub-dealers, the concession to sub-dealers
and Nomura's net retention shall be subject to the regulations as set forth in
the rules concerning Foreign Securities Transactions of Japanese Securities
Dealers' Association ("Association's Rules"). Nomura agrees to furnish the S-4
Fund with English copies of agreements entered into between Nomura and its
sub-dealers. Such agreements and sales by sub-dealers shall conform in all cases
with the terms and conditions of this Agreement.
5. Payment at the appropriate per share net asset value shall be made to
the S-4 Fund by Nomura and shall be received by the S-4 Fund within ten business
days after its acceptance of Nomura's order or such shorter time as may be
required by U.S. law.
If such payment is not received by the S-4 Fund, it reserves the right
without notice, forthwith to cancel the sale in which case the S-4 Fund may hold
Nomura responsible for any loss to it, provided, however, that this paragraph
shall have no force and effect if Nomura's failure to pay shall be caused by
reason of force majeure.
6. Nomura agrees to act as agent of the S-4 Fund for the purpose of
facilitating redemptions of Shares of the S-4 Fund sold pursuant to the terms of
this Agreement and held by Japanese investors. If Nomura repurchases Shares from
its customers or customers of sub-dealers, it agrees to pay not less than the
applicable net asset value as in effect on the date of such repurchase.
7. The S-4 Fund will not accept from Nomura any conditional orders for
sales of Shares.
8. The S-4 Fund agrees that whenever Nomura places orders for purchase of
Shares from the S-4 Fund or redemption of Shares by the S-4 Fund, the S-4 Fund
shall unconditionally accept such orders, unless trading on the New York Stock
Exchange has been suspended or there are other reasons, including force majeure,
which prevent such unconditional acceptance. The S-4 Fund also agrees to notify
Nomura promptly by telex after the S-4 Fund has executed any such orders from
Nomura. In the case of sales of Shares to the S-4 Fund, the S-4 Fund agrees to
make payment to Nomura within seven days after its acceptance of Nomura's order
or such shorter time as may be required by U.S. law. Subject to the provisions
of this Paragraph 8, if the S-4 Fund fails to make payment to Nomura as above
provided, the S-4 Fund agrees to indemnify and save Nomura harmless from any
loss resulting therefrom.
9. Nomura will pay all costs and expenses directly attributable to the
Continuous Offering, including costs of translation, filing and legal and
accounting fees and disbursements of auditors and counsel of Keystone and the
S-4 Fund in conjunction with the filing under the Ordinance of Japanese Ministry
of Finance, costs of advertising, publicity and due diligence and other
meetings, costs and expenses of translating, printing and distributing the
Japanese prospectus (hereinafter referred to, in accordance with the
Association's Rules as the "Explanatory Brochure") and other sales literature
for the Continuous Offering.
10. The S-4 Fund agrees that Nomura, on behalf of the S-4 Fund, shall
prepare, in conformance with the Association's Rules and applicable Japanese
laws and regulations, the Explanatory Brochure covering the S-4 Fund continuous
offering based on prospectuses, securities reports, semi-annual securities
reports and material information furnished from time to time by the S-4 Fund in
connection with the S-4 Fund (hereinafter collectively referred to as
"Prospectuses-Reports"). In preparing the Explanatory Brochure, Nomura shall
rely solely on the representations contained in the "Prospectuses-Reports."
Nomura agrees that it will furnish a draft of the Explanatory Brochure to the
S-4 Fund's designated agent in Tokyo to obtain prior approval for the contents
thereof and will also furnish the S-4 Fund with the required number of Japanese
and English language translations of the Explanatory Brochure for filing as
required by United States law. No person is authorized to make any
representations concerning Shares of the S-4 Fund except those contained in the
then current applicable Explanatory Brochure. Nomura also agrees that it will
deliver a copy of the then current Japanese Explanatory Brochure, at or prior to
the time of sale, to each of its own purchasers and, in the case of sale by
sub-dealers, it will require that they also deliver a copy of such Explanatory
Brochure to each of their purchasers.
11. The S-4 Fund agrees to indemnify and save Nomura harmless from any
damages which shall have occurred in the sale of Shares of the S-4 Fund pursuant
to this Agreement to the extent such damages result from a false statement of a
material fact contained in the "Prospectuses-Reports" of the S-4 Fund, an
omission of a material fact which should be stated therein or an omission of a
material fact necessary to make the statement therein not misleading. If the
"Prospectuses-Reports" or any other material used in connection with the sale of
S-4 Fund Shares contains information furnished by Nomura which information
contains a false statement of a material fact, an omission of a material fact
which should be stated therein, or an omission of a material fact necessary to
make the statement therein not misleading, Nomura likewise agrees to indemnify
and save the S-4 Fund harmless from any damages it shall have incurred in any
sales of the Shares of the S-4 Fund pursuant to the terms of this Agreement.
12. The S-4 Fund agrees to designate Nomura if Nomura so requests, or such
other representative as shall meet the qualification requirements as set forth
in Section 1 of Article 6 of the Japanese Standard Rules Relating to Selection
of Foreign Investment Company Shares to be Sold in Japan (the "Standard Rules")
as legal agent for service of process against the S-4 Fund.
13. The S-4 Fund hereby appoints Nomura as its agent securities company as
defined in Article 13 of the Association's Rules and Nomura agrees that it will
submit to the Association on the S-4 Fund's behalf all such documents as may be
required by the provisions the Association's Rules.
14. The S-4 Fund agrees that all its financial statements which appear in
the Japanese Explanatory Brochure and Registration Statement, or in annual
reports to the Ministry of Finance will be certified by independent certified
public accountants who are licensed public accountants under the laws of Japan.
Any such financial statements submitted to the Ministry of Finance will be
manually signed and certified by such representative. The S-4 Fund also agrees
to submit semi-annual reports to the Ministry of Finance which need not be
certified.
15. The S-4 Fund hereby represents and warrants that it currently conforms
to the requirements of the Japanese Standard Rules. The S-4 Fund understands
that if subsequently it is made aware that it does not so conform, the S-4 Fund
will advise Nomura promptly and Nomura may suspend further sales of Shares but,
even in such event, the S-4 Fund will continue to be obligated to repurchase or
redeem Shares of the S-4 Fund from Nomura as hereinbefore provided.
16. In offering the Shares of the S-4 Fund for sale in Japan, Nomura agrees
to comply with the applicable laws, rules, regulations and criteria of the
Ministry of Finance and Associations' Rules.
Nomura also agrees that any advertisements used by Nomura will in general
conform to the Statement of Policy of the United States Securities and Exchange
Commission (U.S. Release No. 40-2621), except for Paragraph (h) which deals with
comparisons.
17. With the consent of the Board of Trustees of the appropriate Keystone
Fund, Nomura may also undertake block and/or continuous offerings of the Shares
of such other Keystone Funds on the terms and conditions herein stated or as may
be contained in any supplemental agreement hereto.
18. This Agreement is, to the extent applicable, governed by the laws of
Japan.
19. This Agreement shall continue in effect as long as permitted under the
U.S. Investment Company Act of 1940, as amended from time to time, the rules
promulgated thereunder or under the Japanese Securities and Exchange Law of
1948, appropriate exemptions therefrom. This Agreement may be terminated at any
time by mutual consent or by either party upon thirty days written notice, and
shall terminate automatically in the event of its assignment.
KEYSTONE CUSTODIAN FUND,
SERIES B-1, B-2, B-4, K-1,
K-2, S-1, S-3 and S-4, each
for itself and not jointly
By Albert H. Elfner, III
-------------------------------
Title: President
ACCEPTED as of the 29th day of December 1989:
NOMURA SECURITIES CO., LTD.
By Mr. Saito
-------------------------------
Title:
<PAGE>
SCHEDULE OF MAINTENANCE FEES
Except as otherwise provided for in the Underwriting Agreement, Nomura will
be entitled to quarterly maintenance fees based on the aggregate net asset value
of shares of the S-4 Fund which Nomura has sold, which remain issued and
outstanding on the books of the S-4 Fund on the last business day of the
calendar quarter and which are registered in the names of clients for whom
Nomura is broker of record ("Eligible Shares"). Such maintenance fees will be
calculated at the rate of 0.0625% per quarter of the aggregate net asset value
of all such Eligible Shares (approximately 0.25% annually); provided, however,
that no maintenance fees will be paid to Nomura for any calendar quarter if the
aggregate net asset value of such Eligible Shares on the last business day of
the calendar quarter is less than $1 million. Quarterly maintenance fees shall
be payable 90 days after the end of the calendar quarter. Such maintenance fee
rate may be modified by the S-4 Fund from time to time without prior notice.
<PAGE>
Exhibit 99.8
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
by and between
KEYSTONE CUSTODIAN FUND, SERIES B-2
and
STATE STREET BANK AND TRUST COMPANY
Agreement made as of this 31st day of December 1979 by and between Keystone
Custodian Fund, Inc., a Delaware business corporation ("KCF"), as trustee of
Keystone Custodian Fund, Series B-2, a Pennsylvania common law trust having its
principal place of business at 99 High Street, Boston, Massachusetts 02110, (the
"Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking
corporation, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts 02110 ("State Street").
WITNESSETH THAT:
In consideration of the mutual agreements herein contained, the Fund and
State Street agree as follows:
I. DEPOSITORY.
The Fund hereby appoints State Street as its Depository subject to the
provisions hereof. The Fund shall deliver to State Street certified or
authenticated copies of its Trust Agreement, all amendments thereto, a certified
copy of the resolution of KCF's board of directors 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 KCF's board of directors,
contracts and other documents as may be reasonably required by State Street in
the performance of its duties hereunder.
II. CUSTODIAN.
1. The Fund appoints State Street as its 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 or in the name
of the Fund, of 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. As Custodian, State Street shall promptly:
A. Safekeeping. Keep safely in a separate account the securities of
the Fund, including without limitation all securities in bearer form, and on
behalf of the Fund, 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 accounts 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 appointed pursuant to paragraph 6-C of section II
hereof, State Street may rely upon certificates from such agent as to the
holdings of such agent, 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. Use of a System for the Central Handling of Securities. Not
withstanding any other provision of this Agreement, if in the best interest of
the Fund, deposit all or any part of the securities owned by the Fund in the
book-entry system of the Federal Reserve Banks (hereinafter called the "system")
and to use the facilities of such system, all as provided under the provisions
of Rule 17f-4 of the Investment Company Act of 1940, as amended. Without
limiting the generality of such use, the following provisions shall apply
thereto:
1) State Street may keep securities of the Fund in the system provided that
such securities are represented in an account ("Account") of State Street's (or
its agent) in the system which shall not include any assets of State Street (or
such agent) other than assets held as fiduciary, custodian or otherwise for
customers. The records of State Street (and such agents) shall at all times
during the regular business hours of State Street (or such agents) be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission.
2) State Street shall send to the Fund a confirmation of all transfers to or
from the System for the account of the Fund. Where securities are transferred to
the Fund's account, State Street shall, by book-entry or otherwise, identify as
belonging to the Fund a quantity of securities in a fungible bulk of securities
(i) registered in the name of State Street or its nominee or (ii) shown on State
Street's account on the books of the appropriate Federal Reserve Bank. For this
purpose, the term "confirmation" means advice or notice of transaction; it is
not intended to require preparation by State Street of the confirmation required
of broker-dealers under the Securities Exchange Act of 1934.
3) State Street shall promptly send to the Fund any report it receives from
the appropriate Federal Reserve Bank on its system of internal accounting
control.
4) Anything to the contrary in this Agreement notwithstanding, State Street
shall be liable to the Fund for any claim, liability, loss or expense, including
attorney's fees, resulting to such Fund from use of the system by reason of any
negligence, misfeasance or misconduct of State Street (or any of its agents) or
of any of its (or their) employees or from any failure of State Street (or any
such agent) to enforce effectively such rights as it (or they) may have against
the system. At the election of the Fund, it shall be entitled to be subrogated
to State Street or its agents in any claim against the system or any other
person which State Street, its agents may have as a consequence of any such
claim, liability, loss or expense if and to the extent that the Fund has not
been made whole for such claim, liability, loss or expense.
C. Registered Name, Nominee. Register securities of the Fund held by
State Street in the name of the Fund, of a nominee of State Street for the
exclusive use of the Fund, of such other nominee as may be mutually agreed upon,
or of any mutually acceptable nominee of any agent appointed pursuant to
paragraph 6-C of section II hereof.
D. Purchases. Upon receipt of proper instructions (as defined in
paragraph 5-A of section II hereof; hereafter "proper instructions") and insofar
as cash is available for the purpose, 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 6-C of section II hereof as State Street's agent
for this purpose) registered as provided in paragraph 3-C of section II hereof
or in form for transfer satisfactory to State Street, or, in the case of
repurchase agreements entered into between the Fund and 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. 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 which 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.
E. Exchanges. Upon receipt of proper instruction, exchange securities,
interim receipts or temporary securities held by it or by any agent appointed by
it pursuant to paragraph 6-C of section II 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 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. State
Street shall give notice as provided under paragraph 6-F of section II 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 appointed pursuant to paragraph 6-C of section II
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 appointed by State Street pursuant to paragraph 6-C of
section II 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 in
sufficient time to permit such agent to act prior to any expiration date.
F. Sales. Upon receipt of proper instructions and upon receipt of full
payment therefor, 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.
G. Purchases by Issuer. Upon receipt of proper instructions, 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.
H. Changes of Name and Denomination. Upon receipt of proper
instructions, release and deliver securities owned by the Fund to the issuer
thereof or its agent for transfer into the name of the Fund or of 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.
I. 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, 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 the Custodian that same day. In the event
existing "street delivery" custom is modified, State Street shall obtain
authorization from the board of directors of KCF prior to any use of such
modified "street delivery" custom.
J. Release of Securities for Use as Collateral. Upon receipt of proper
instructions and subject to section 3(b) of Article III of the Trust Agreement,
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, pay such loan upon redelivery to
it of the securities pledged or hypothecated therefore and upon surrender of the
note or notes evidencing the loan.
K. Release or Delivery of Securities for Other Purposes. Upon receipt of
proper instructions, 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 3-E, 3-F, 3-G, 3-H, 3-I and 3-J of section II hereof) which the Fund
declares is a proper corporate purpose pursuant to proper instructions.
L. Proxies, Notices, Etc. State Street shall promptly forward upon
receipt to the Fund all forms of proxies and all notices of meetings and any
other notices or announcements affecting or relating to the securities,
including without limitation notices relating to class action claims and
bankruptcy claims, and upon receipt of proper instructions 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 shall not vote upon
any of the 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 sub-custodians appointed pursuant to paragraph 6-C of
section II hereof to forward any such announcements and notices to State Street
upon receipt.
M. 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 itemized statement of security transactions
which settled the day before and shall render to the Fund weekly an itemized
statement of security transactions which failed to settle as scheduled. At the
end of each week State Street shall provide a list of all security transactions
that remain unsettled at such time.
4. Additionally, as Custodian, State Street shall promptly:
A. Bank Account. 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 Investment Company Act of 1940, as amended, in the banking
department of State Street 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 directors of KCF, 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 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, collect, receive and deposit in the bank account or accounts
maintained pursuant to paragraph 4-A of section II 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 which 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; the Custodian 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. It 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. 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 the Fund as may be issued or
sold from time to time by the Fund, all in accordance with the Fund's Trust
Agreement, as amended.
D. Dividends and Distributions. Upon receipt of proper instructions,
release or otherwise apply cash insofar as cash is available for the purpose for
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 Trust Agreement as
amended, and applicable resolutions of the board of directors of KCF pursuant
thereto, make funds available to shareholders who have delivered to the Transfer
Agent a request for redemption of their shares by the Fund pursuant to said
Trust Agreement, as amended.
In connection with the redemption of shares of the Fund pursuant to the
Fund's Trust Agreement, as amended, State Street is authorized and directed upon
receipt of proper instructions from the Transfer Agent for 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 shareholder.
F. Stock Dividends, Rights, Etc. 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, make or cause to
be made, insofar as cash is available for the purpose, disbursements for the
payment on behalf of the Fund of taxes or reimbursement to State Street or
Keystone Custodian Funds, Inc. for their payment of any such taxes and of the
management fee and recurring charge as provided by Article I, section 3 of the
Fund's Trust Agreement, as amended.
H. Other Proper Corporate Purposes. Upon receipt of proper instructions,
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 3-D, 3-E, 4-D, 4-E, and 4-G of this Agreement) which the Fund
declares is a proper corporate purpose.
I. Records. Create, maintain and retain all records a) relating to its
activities and obligations under this Agreement in such manner as shall meet the
obligations of the Fund under the Investment Company Act of 1940, as amended,
particularly Section 31 thereof and Rules 31a-1 and 31a-2 thereunder, under
applicable Federal and State tax laws and under any other law or administrative
rules or procedures which may be applicable to the Fund, b) necessary to comply
with the representations of Part I - Fund Custodian Services and Part II
Portfolio Pricing and Accounting of State Street's Response, dated May 1, 1979,
as amended, to Keystone Custodian Funds, Inc.'s and the Massachusetts Companies,
Inc.'s Request for Proposal, dated March 19, 1979, as amended, (amendments after
June 22, 1979 are set forth in Exhibit B) ("Parts I and II"), insofar as such
representations relate to the creation, maintenance and retention of records for
the Fund or c) 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 8 below.
J. Miscellaneous. Assist generally in the preparation of routine reports
to holders of shares of the Fund, to the Securities and Exchange Commission,
including forms N1-R and N-1Q, to State "Blue Sky" authorities, to others in the
auditing of accounts and in other matters of like nature, as required to comply
with the representations of Parts I and II insofar as such representations
relate to the preparation of reports for the Fund 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 for the Fund's portfolio. In addition, upon receipt of
proper instructions, which may be deemed to be continuing instructions, State
Street shall daily compute 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.
L. Services under Parts I and Part II. In addition to the services
specified herein, State Street shall perform those services set forth in Parts I
and II, including without limitation general ledger accounting, daily Fund
portfolio pricing and custodian services to the extent such services relate to
the Fund; provided, however, that in the event that Parts I and II as they
relate to the Fund are in conflict with the terms of this Agreement, the terms
of this Agreement shall govern.
5. 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 KCF's board
of directors or by one or more person or persons as KCF's board of directors
shall have from time to time authorized to give the particular class of
instructions for different purposes. A copy of a resolution or action of the
board of directors certified by the secretary or an assistant secretary of KCF
may be received and accepted by State Street as conclusive evidence of the
instruction of KCF's board of directors 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 the Custodian reasonably believes them to have been by a person
authorized by the board of directors to give such oral instructions with respect
to the class of instruction in question. The Fund shall cause all oral
instructions to be confirmed in writing.
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 Trust Agreement 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 Trust Agreement of the Fund, as
amended, or resolutions or proceedings of the board of directors of KCF.
6. State Street and the Fund further agree as follows:
A. Indemnification. State Street, as Depository and 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, and 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. In order that the indemnification
provision contained in this paragraph shall apply, however, 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 which 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 which may be the
subject of this indemnification, 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, as set forth on
Schedule A.
C. Appointment of Agent. State Street, as Custodian, may appoint (and
may remove) any other bank, trust company or responsible commercial agent as its
agent 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 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 Depository
and 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 KCF's board
of directors, the secretary or an assistant secretary of the Fund or any other
person expressly authorized by the board of directors of KCF.
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 directors of, attorneys for, auditors employed by the Fund or any other
person as KCF's board of directors shall direct.
G. Record-Keeping. 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 and shall comply with the representations of Parts I and II as
such representations relate to maintaining records of the Fund.
7. The Fund shall pay State Street for its services as Custodian such
compensation as shall be as specified in the attached Exhibit A. Such
compensation shall remain fixed for two years from the date hereof, unless this
Agreement is terminated as provided in section 8A, and shall remain fixed for an
additional year in the event the Fund decides to continue this Agreement for
such period; provided, however, that in the event either party terminates this
Agreement as provided in section 8A State Street hereby guarantees and agrees
that no new Agreement entered into between the parties shall require payment of
compensation greater than that specified herein during such three year period.
8. 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, 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 to
take effect sixty (60) days after the date of such delivery or mailing; and
further provided, that the Fund may by action of KCF's board of directors
substitute another bank or trust company for State Street by giving notice as
provided above to State Street. The Fund or State Street shall not amend or
terminate this Agreement in contravention of any applicable Federal or State
laws or regulations, or any provision of the Trust Agreement of the Fund, as
amended, and provided, that prior to three years from the date hereof State
Street shall not terminate this Agreement except in the event of the Fund's
substantial default hereunder which default continues uncorrected after notice
to the Fund of such default for thirty (30) days, such termination to take
effect as provided above; 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
Trust Agreement 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 the
Custodian 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 and shall likewise reimburse State Street for its costs, expenses
and disbursements incurred prior to such termination in accordance with
paragraph 6-B of section II hereof and such reasonable costs, expenses and
disbursements as may be incurred by State Street in connection with such
termination.
If a Successor Custodian is appointed by the board of directors of KCF in
accordance with section l(b) of Article V of the Fund's Trust Agreement, as
amended, 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 section l(b) of Article V of the Fund's Trust
Agreement, 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 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 of
State Street under this Agreement and subject to the restrictions, limitations
and other requirements of the Fund's Trust Agreement 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 KCF's board
of directors 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 upon reasonable notice to State Street, and, upon
request of such 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.
(a) 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, or (ii) is
demonstrably known previously to the party to whom it is disclosed, or (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.
9. The Fund shall not circulate any printed matter which 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
Depository or 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.
10. 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 the Custodian upon surrender to the Custodian 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. The Custodian 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.
11. 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 said Commonwealth.
12. Notices and other writings delivered or mailed postage prepaid to the
Fund, c/o Keystone Custodian Funds, Inc., 99 High Street, 32nd Floor, Boston,
Massachusetts 02110 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.
13. It is understood and is expressly stipulated that neither the holders of
shares in the Fund nor KCF's board of directors, officers or employees shall be
personally liable hereunder, but only the assets of the Fund shall be bound.
14. This Agreement shall be binding on and shall inure to the benefit of the
Fund and State Street and their respective successors or assigns.
15. State Street and the Fund hereby agree that the Custodian Agreement,
dated August 1, 1963 between them shall terminate upon the effectiveness of this
Agreement.
16. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
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 CUSTODIAN FUNDS, INC., as
Trustee for Keystone Custodian Fund,
Series B-2
Rosemary D. Van Antwerp George S. Bissell
- ---------------------------- By: -------------------------------
Chief Executive Officer
ATTEST: STATE STREET BANK AND TRUST COMPANY
Paul F. Lorenz J. R. Towers
- ---------------------------- -----------------------------------
Vice President
<PAGE>
SCHEDULE A
Keystone Custodian Fund, Series B-2
State Street Bank and Trust Company
Custodian, Fund Accounting and Records Keeping Fee Schedule
I. Annual Fee
$6,000
II. 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 the
following:
Telephone
Postage and insurance
Courier service
Legal fees
Supplies related to Fund records
Duplicating
Transfer fees
Sub-Custodian charges
Wire Service ($2.00 in or out)
III. Additional Services
Any modifications, innovations, improvements or other changes made by State
Street in the services and reports which it provides to other customers
receiving its custodial, portfolio accounting and recordskeeping services
without additional charges or fees shall be provided to the Fund at its
request for no additional charge or fee.
<PAGE>
SCHEDULE B
I. Operating Plan - Fund Custodian Services
1. Page 1
a) Trade instructions by tape input compatible with the SPARK system will
not be given.
b) System 34 terminals will not be provided for trade input.
2. Page 2
a) Distributions will be charged against the custodian account and credited
to the disbursement account on the payable date.
b) Reports - improved or new SPARK Reports will be made available to the
Fund at its request for no additional cost, if made available at no additional
cost to other customers of State Street.
II. Fund Custodian Services
A. Page 1
1) The Fund will receive Custody and Full Accounting Services.
B. Page 2
1) Polaris Fund Inc. is now Keystone International Fund Inc.
III. I. Custodian Reports
A. Page 1
2) Analytics - Spark information reports - the Funds will receive none of
these.
IV. KM - SSB Reports Comparison
A. Page 1 - MASSCO Report
1) (9) Different form with similar content to be prepared for Keystone Tax
Free Fund (Massachusetts Fund for Tax Exempt Income) rather than Master Reserves
Trust (MRT)
2) (12) To be prepared for all Funds.
3) (13) Trade Settlement Authorizations and all other reports as provided
to the Keystone Funds will be provided MassCo Funds.
4) (26) Initial instructions in memo from Mr. Joseph Naples. Instructions
may be changed from time to time by proper instructions.
5) (30) Letter to be supplied by Bradford Trust Company.
6) (31) Report to be supplied by Bradford Trust Company.
B. Keystone Reports
1) (3) Information to be supplied by Open Order System.
2) (16) Will be prepared manually by State Street. Calculations to be based
on initial instructions provided under (4)(26) memo.
3) (18) To be prepared by State Street.
4) (30) New SPARK Report to be provided the Funds.
5) (31) Pricing Quotes for foreign issues, restricted securities and
private placements not otherwise available to State Street to be supplied by the
Fund.
6) (46) KIMCO Reports unnecessary.
7) (58) State Street to prepare manually.
8) (57) Keystone to provide.
9) (70) New SPARK Report to be provided the Funds.
10) (73) SPARK Report to be provided the Funds.
11) (74) New SPARK Report and hard copy tape to be provided the Funds.
12) (75) State Street to provide weekly report of fails for each Fund.
13) All new SPARK reports must be reviewed and accepted by the Funds before
they will be considered to comply with State Street's Custodian, Portfolio
Accounting and Recordskeeping Agreements with the Funds, such acceptance not to
be unreasonably withheld.
VI. Responses
I. Fund Custodian Services
a) Page 2
Checkwriting privilege is $.35 per check - charged only for American
Liquid Trust at this time. Other Fund agreements to be amended to include this
charge if such privilege is ever offered to shareholders of other Funds.
b) Page 3 (6) Individuals responsible for Fund services may change as long
as the quality of the personnel is maintained.
c) Page 6 (11) State Street is liable for the acts of its sub-custodians to
the same extent that it is liable for the acts of its agents.
II. Exhibits
1. Exhibit 1-2
a) (6) Notices of corporate actions shall include, without limitation
notices of class actions and bankruptcy actions in connection with issues held
by the Funds.
<PAGE>
FIRST AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE CUSTODIAN FUNDS, SERIES B-2
AND
STATE STREET BANK AND TRUST COMPANY
This First Amendment to the Custodian, Fund Accounting and Recordkeeping
Agreement by and between Keystone Custodian Funds, Inc. ("KCF") as Trustee of
Keystone Custodian Funds, Series B-2 (the "Fund") and State Street Bank and
Trust Company ("State Street"), dated December 31, 1979 (the "Agreement") is
made by and between the Fund and State Street as of January 1, 1982.
In consideration of the mutual agreements contained herein, State Street
and the Fund hereby agree to amend the Agreement by replacing all of Section II,
Paragraph 3(B) with the following provisions:
"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 Depository Trust
Company, a clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934, which
acts as a securities depository, or in the book-entry system authorized by
the U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "Securities System(s)" in accordance
with applicable Federal Reserve Board and Securities and Exchange
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 ("Account")
of State Street in the Securities System which 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
which are maintained in a Securities System shall identify by
bookentry 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 by State Street 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 any report on State Street's accounting system,
internal accounting control and procedures for safeguarding securities
deposited with State Street which is reasonably requested by the Fund;
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 or any of its agents or of
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
which 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."
"BB. State Street's Records
The records of State Street (and its agents) with respect to its services
for the Fund shall at all times during the regular business hours of State
Street (or its agents) be open for inspection by duly authorized officers,
employees or agents of the Fund and employees and agents of the Securities
and Exchange Commission."
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 written above.
KEYSTONE CUSTODIAN FUNDS, INC.
AS TRUSTEE FOR KEYSTONE CUSTODIAN FUNDS,
SERIES B-2
By: William W. Hennig
-----------------------------------
Attest:
- -----------------------------
STATE STREET BANK AND TRUST COMPANY
By: Barbara Weidlich
-----------------------------------
Vice President
Attest:
- -----------------------------
Assistant Secretary
<PAGE>
SECOND AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE CUSTODIAN FUNDS, SERIES B-2
AND
STATE STREET BANK AND TRUST COMPANY
This Second Amendment to the Custodian, Fund Accounting and Recordkeeping
Agreement by and between KEYSTONE CUSTODIAN FUNDS, INC. ("KCF") as Trustee of
KEYSTONE CUSTODIAN FUNDS, SERIES B-2 (the "Fund") and STATE STREET BANK AND
TRUST COMPANY ("State Street"), dated December 31, 1979 and amended January 1,
1982 (the "Agreement") is made by and between the Fund and State Street as of
December 31, 1982.
In consideration of the mutual agreements contained herein, State Street
and the Fund hereby agree to amend the Agreement by replacing each of Section
II, Paragraph 4(G), Section II, Paragraph 6(B), and Section II, Paragraph 7 with
the following provisions:
"4. G. Disbursements. Upon receipt of proper instructions, 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 costs and expenses or reimbursement to
State Street or Keystone Custodian Funds, Inc. for their payment of any such
costs and expenses including the management fee of the Fund as provided by the
Fund's Trust Agreement, as amended."
6. B. Expense 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, as set forth on the
attached Schedule C."
"7. The Fund shall pay State Street for its services as Custodian such
compensation as shall be as specified in the attached Scheduled C. Such
compensation shall remain as provided in Schedule C until December 31, 1984,
unless this Agreement is terminated as provided in section 8A; provided,
however, that in the event either party terminates this Agreement as provided in
section 8A State Street hereby guarantees and agrees that no new Agreement
entered into between the parties shall require payment of compensation greater
than that specified herein during such period."
IN WITNESS WHEREOF, each of the parties hereto has caused this SECOND
Amendment to the Agreement to be executed in its name and on its behalf by a
duly authorized officer as of the day and year first written above.
KEYSTONE CUSTODIAN FUNDS, INC.
AS TRUSTEE FOR KEYSTONE CUSTODIAN
FUNDS, SERIES B-2
By: /S/ RALPH J. SPUEHLER, JR.
------------------------------
Treasurer
Attest:
/S/ ROSEMARY D. VAN ANTWERP
- -----------------------------------
STATE STREET BANK AND TRUST COMPANY
By: /S/ Barbara Weidlich
------------------------------
Vice President
Attest:
/S/
- -----------------------------------
<PAGE>
Schedule C
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
KEYSTONE B-2
(Effective 1/1/83)
- --------------------------------------------------------------------------------
I. Administration
Custody, Portfolio and Fund Accounting Service - 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. 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 from a source
designated by the Fund.
The administration fee shown below is an annual charge, billed and payable
monthly, based on average net assets and calculated in the same manner as
the fund management fee.
Annual Fee
Fund Net Assets
First $35 million 1/15 of 1%
Next $65 million 1/30 of 1%
Excess 1/100 of 1%
No Minimum
<PAGE>
II. Portfolio Trades - For each line item processed
All Trades $10.00
III. Holdings & Appraisal Charge
For each issue maintained - monthly charge $ 5.00
IV. Cut-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
Wire charges ($3.65 per wire in and $3.50 out)
Postage and insurance
Courier service
Legal fees
Supplies related to fund records
Rush transfer - $8 each
Duplicating
DTC Eligibility Books
Transfer fees
Sub-custodian charges
Price Waterhouse Audit Letter
Check writing ($.50 per check)
This fee schedule will terminate 12/31/83
<PAGE>
Schedule C
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
KEYSTONE B-2
(Effective 1/1/84)
- --------------------------------------------------------------------------------
I. Administration
Custody, Portfolio and Fund Accounting Service - 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. 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 from a source
designated by the Fund.
The administration fee shown below is an annual charge, billed and payable
monthly, based on average net assets and calculated in the same manner as
the fund management fee.
Annual Fee
Fund Net Assets
First $35 million 1/15 of 1%
Next $65 million l/30 of 1%
Excess 1/100 of 1%
No Minimum
II. Portfolio Trades - For each line item processed
All Trades $12.25
III. Holdings & Appraisal Charge
For each issue maintained - monthly charge $ 5.00
IV. 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
Wire charges ($3.65 per wire in and $3.50 out)
Postage and insurance
Courier service
Legal fees
Supplies related to fund records
Rush transfer - $8 each
Duplicating
DTC Eligibility Books
Transfer fees
Sub-custodian charges
Price Waterhouse Audit Letter
Check writing ($.50 per check)
This fee schedule will terminate 12/31/84
<PAGE>
THIRD AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE CUSTODIAN FUND, SERIES B-2
AND
STATE STREET BANK AND TRUST COMPANY
This Third Amendment to the Custodian, Fund Accounting and Recordkeeping
Agreement by and between KEYSTONE CUSTODIAN FUNDS, INC., AS TRUSTEE OF KEYSTONE
CUSTODIAN FUND, SERIES B-2 (the "Fund") and STATE STREET BANK AND TRUST COMPANY
("State Street"), dated December 31, 1979, amended January 1, 1982, and December
31, 1982 ("Agreement") is made by and between the Fund and State Street as of
December 31, 1984.
In consideration of the mutual agreements contained herein, State Street
and the Fund hereby agree to amend the Agreement by replacing each of Section
II, Paragraph 6(B), and Section II, Paragraph 7 with the following provisions:
"6. B. Expense 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, as set forth on the
attached Schedule D.
"7. The Fund shall pay State Street for its services as Custodian such
compensation as shall be as specified in the attached Schedule D. Such
compensation shall remain as provided in Schedule D until December 31, 1986,
unless this Agreement is terminated as provided in Section 8A; provided,
however, that in the event either party terminates this Agreement as provided in
Section 8A State Street hereby guarantees and agrees that no new agreement
entered into between the parties shall require payment during such period of
compensation greater than that specified herein."
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
the Agreement to be executed in its name and on its behalf by a duly authorized
officer as of the day and year first written above.
KEYSTONE CUSTODIAN FUNDS, INC.,
AS TRUSTEE OF KEYSTONE CUSTODIAN
FUND, SERIES B-2
Attest: By: /S/ RALPH J. SPUEHLER, JR.
/S/ ROSEMARY D. VAN ANTWERP -------------------------------
- --------------------------- Office: Treasurer
STATE STREET BANK AND TRUST COMPANY
By: /S/ B. Weidlich
-------------------------------
Attest: Office: Vice President
/S/
- ---------------------------
<PAGE>
Schedule D
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
KEYSTONE CUSTODIAN FUND, SERIES B-2
(Effective l/1/85 )
- --------------------------------------------------------------------------------
I. Administration
Custodian, Portfolio and Fund Accounting Service - 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. 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 from a source designated by the
Fund.
The administration fee shown below is an annual charge, billed and payable
monthly, based on average net assets and calculated in the same manner as the
Fund management fee.
Annual Fee
Fund Net Assets
First $35 million 1/15 of 1%
Next $65 million 1/30 of 1%
Excess 1/100 of 1%
No minimum
<PAGE>
II. Portfolio Trades - For each line item processed
a) Depository Trust Company and Federal Reserve Book Entry System $12.25
b) Physical delivery, options and all other trades $16.00
III. Holdings & Appraisal Charge
For each issue maintained - monthly charge $5.00
IV. 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
Wire charges ($3.85 per wire in and $3.60 out)
Postage and insurance
Courier service
Legal fees
Supplies related to Fund records
Rush transfer - $8.00 each
Duplicating
DTC eligibility books
Transfer fees
Sub-custodian charges
Price Waterhouse audit letter
Check writing ($.50 per check)
V. Additional Accounting and Reporting Functions
$150 per month
This fee schedule will terminate 12/31/86
<PAGE>
FOURTH
AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE CUSTODIAN FUNDS, INC.
AS TRUSTEE OF
KEYSTONE CUSTODIAN FUND, SERIES B-2
AND
STATE STREET BANK AND TRUST COMPANY
This Fourth Amendment to the Custodian, Fund Accounting and
Recordkeeping Agreement by and between KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE
OF KEYSTONE CUSTODIAN FUND, SERIES B-2 ("Fund") and STATE STREET BANK AND TRUST
COMPANY ("State Street"), dated December 31, 1979 and amended through December
31, 1984 ("Agreement") is made by and between the Fund and State Street as of
September 1, 1988.
In consideration of the mutual agreements contained herein, State
Street and the Fund hereby agree to amend the Agreement as follows:
1. Section II, Paragraph 3(K) is amended by inserting the following
language after Paragraph 3(J) and by renumbering existing Paragraph 3(K) as
Paragraph 3(L):
"K. Compliance with Applicable Rules and Regulations of The Options
Clearing Corporation and National Securities or Commodities Exchanges or
Commissions. Upon receipt of proper instructions, deliver securities in
accordance with the provisions of any agreement among the Fund, the Custodian
and a broker-dealer registered under the Securities Exchange Act of 1934
("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, deliver securities in accordance with the provisions of any
agreement among the Fund, the Custodian, 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."
2. Existing Section II, Paragraph 3(L) is renumbered as Paragraph 3(M).
3. The following language is inserted after new Section II, Paragraph
3(M) as Paragraph 3(N):
"N. Segregated Account. The Custodian shall upon receipt of proper
instructions, establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Paragraph 3(B) hereof, (i) in accordance with the
provisions of any agreement among the Fund, the Custodian 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 Securities and Exchange 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."
4. Existing Section II, Paragraphs 3(M) and 3(N) are renumbered as
Paragraphs 3(O) and 3(Q).
5. The following language in inserted after new Section II, Paragraph
3(O) as Paragraph 3(P):
P. 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 C hereto ("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 C 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 from the Fund, State Street
shall 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 D 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 for 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
of 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 institutions
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 of 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 Subcustodian to
transfer, exchange or deliver foreign securities owned by the Fund, but, except
to the extent explicitly provided in this Section II(3)(P), only in any of the
cases specified in this Agreement; (b) 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 this Section
II(3)(P), only in any of the cases specified in this Agreement; (c)
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; (d) 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 Section II, Paragraphs (2) and (3)(P)
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
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 Section 3(P)(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 $200
million (in each case computed in accordance with generally accepted U.S.
accounting principles.)
(12) Branches of U.S. Banks. Except as otherwise set forth in this
Agreement, the provisions hereof shall not apply where the custody of the Fund
assets maintained in a foreign branch of a banking institution which is a "bank"
as defined by Section 2(a)-(5) of the 1940 Act which meets the qualifications
set forth in Section 26(a) of the 1940 Act. The appointment of any such branch
as a subcustodian shall be governed by Paragraph 6-C of Section II of this
Agreement."
10. In all other respects the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by a duly authorized
officer as of the day and year first above written.
ATTEST: KEYSTONE CUSTODIAN FUNDS, INC.
/s/ Rosemary D. VanAntwerp AS TRUSTEE OF KEYSTONE CUSTODIAN FUND,
- -------------------------- SERIES B-2
By: /s/ Albert H. Elfner, III
President
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ By: /s/ Kate Donelin
- -------------------------- Vice President
<PAGE>
SCHEDULE C
STATE STREET BANK AND TRUST COMPANY
GLOBAL CUSTODY NETWORK FOR
MUTUAL FUND CLIENTS
FISCAL SHAREHOLDERS
COUNTRY BANK YEAR END EQUITY US$
- ------- ---- -------- ------------
AUSTRALIA ANZ BANKING GROUP LTD. 09/30 $2.221 Billion
AUSTRIA GIROZENTRALE UND BANK 12/31 $485 Million
DER OSTERREICHISCHEN
BELGIUM BANQUE BRUXELLES LAMBERT 09/30 $718 Million
CANADA CANADA TRUST COMPANY 12/31 $872 Million
DENMARK DEN DANSKE BANK 12/31 $1.449 Billion
FINLAND KANSALLIS-OSAKE PANKKI 12/31 $978 Million
FRANCE CREDIT COMMERCIAL DE FRANCE 12/31 $515 Million
GERMANY BERLINER HANDELS UND 12/31 $554.9 Million
FRANKFURTER BANK
HONG KONG STANDARD CHARTERED BANK 12/31 $1.119 Billion
ITALY CREDITO ITALIANO 12/31 $1.404 Billion
JAPAN SUMITOMO TRUST & BANKING 03/31 $2.069 Billion
COMPANY LIMITED
MALAYSIA STANDARD CHARTERED BANK 12/31 $1.119 Billion
MEXICO CITIBANK MEXICO 12/31 $8.810 Billion
NETHERLANDS BANK MEES & HOPE, N.V. 12/31 $415 Million
NEW ZEALAND WESTPAC BANKING CORP. 09/30 $1.1958 Billion
NORWAY CHRISTIANIA BANK OG 12/31 $468 Million
KREDITKASSE
PHILIPPINES STANDARD CHARTERED BANK 12/31 $1.119 Billion
SINGAPORE DBS BANK 12/31 $926 Million
SPAIN BANCO HISPANO AMERICANO 12/31 $1.306 Billion
SWEDEN SKANDINAVISKA ENSKILDA BANKEN 12/31 $620 Million
SWITZERLAND UNION BANK OF SWITZERLAND 12/31 $7.625 Billion
THAILAND STANDARD CHARTERED BANK 12/31 $1.119 Billion
UNITED KINGDOM STATE STREET LONDON LIMITED 12/31 $471 Million
<PAGE>
DEPOSITORIES
Austria: Oesterreichischen Kontrollbank AG
Wertpaiersammelbank beider
(OeKB-WSB)
Belgium: Caisse Interprofessionelle de Depots et de
Virements de Titres S.A.
(C.I.K.)
Canada: The Canadian Depository for Securities Ltd.
(CDS)
Denmark: Vaerdipapircentralen
(VP-Centralen)
France: Societe Interprofessionnelle pour la
Compensation des Valeurs Mibilieres
(SICOVAM)
Germany: Kassenverein
Italy: Monte Titoli, SpA
Mexico: Instituto Nacionel de Valares
(INDEVAl)
Netherlands: Netherlands Clearing Institute for Giro
Securities Deliveries
(NECIGEF)
Switzerland: Schweizerische Effekten Giro A.G.
(SEGA)
- --------------------------------------------------------------------------------
EuroClear (Brussels, Belgium)
Cedel (Luxembourg)
<PAGE>
FIFTH
AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE OF
KEYSTONE CUSTODIAN FUND, SERIES B-2
AND
STATE STREET BANK AND TRUST COMPANY
This Fifth Amendment to the Custodian, Fund Accounting and
Recordkeeping Agreement by and between KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE
OF KEYSTONE CUSTODIAN FUND, SERIES B-2 ("Fund") and STATE STREET BANK AND TRUST
COMPANY ("State Street"), dated December 31, 1979 and amended through September
1, 1988 ("Agreement") is made by and between the Fund and State Street as of
January 1, 1989.
In consideration of the mutual agreements contained herein, State
Street and the Fund hereby agree to amend the Agreement as follows:
1. Section 3-D of Section II entitled, Purchases is amended by
concluding the first sentence of such paragraph with the following:
"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 as defined in Section 5-A, 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."
2. Section II is amended by deleting existing Paragraph 7 and by
inserting the following as Paragraphs 7 and 8:
" 7. Lien on Assets. 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 and should the Fund fail to repay State Street
promptly, State Street shall be entitled to utilize available cash and
to dispose of the Fund assets to the extent necessary to obtain
reimbursement.
8. The Fund shall pay State Street for its services as Custodian
such compensation as shall be specified in the attached Exhibit A. Such
compensation shall remain fixed until December 31, 1989, unless this
Agreement is terminated as provided in Section 8A."
3. In all other respects the Agreement shall remain in full force and
effect.
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 CUSTODIAN FUNDS, INC.
/s/ Rosemary D. VanAntwerp AS TRUSTEE OF KEYSTONE CUSTODIAN FUND,
- ------------------------------- SERIES B-2
By: /s/ Albert H. Elfner, III
President
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ By: /s/ Kate Donelin
Vice President
<PAGE>
SIXTH
AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE CUSTODIAN FUND, SERIES B-2
AND
STATE STREET BANK AND TRUST COMPANY
This Sixth Amendment to the Custodian, Fund Accounting and
Recordkeeping Agreement by and between KEYSTONE CUSTODIAN FUND, SERIES B-2
("Fund") and STATE STREET BANK AND TRUST COMPANY ("State Street"), dated
December 31, 1979 and amended through January 1, 1989 ("Agreement"), is made by
and between the Fund and State Street as of February 8, 1990.
In consideration of the mutual agreements contained herein, State
Street and the Fund hereby agree to amend the Agreement as follows:
1. Section II is amended by deleting Paragraph 8 and by inserting the
following as Paragraph 7A:
" 7A. The Fund shall pay State Street for its services as
Custodian such compensation as specified in the existing Schedule A.
Such compensation shall remain fixed until March 31, 1990 unless this
Agreement is terminated as provided in Paragraph 8A."
2. In all other respects the Agreement shall remain in full force and
effect.
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 CUSTODIAN FUND, SERIES B-2
/s/ By: /s/ James R. McCall
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ By: /s/ Kate Donelin
Vice President
<PAGE>
SEVENTH
AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE CUSTODIAN FUND, SERIES B-2
AND
STATE STREET BANK AND TRUST COMPANY
This Seventh Amendment to the Custodian, Fund Accounting and
Recordkeeping Agreement by and between KEYSTONE CUSTODIAN FUND, SERIES B-2, a
Pennsylvania common law trust organized and existing under the laws of the state
of Pennsylvania and having a principal place of business at 99 High Street,
Boston, Massachusetts 02110 (hereinafter called the "Fund"), and State Street
Bank and Trust Company, a Massachusetts trust company, having its principal
place of business at 225 Franklin Street, Boston, Massachusetts 02110
(hereinafter called the "Custodian").
WHEREAS: The Fund and the Custodian are parties to a Custodian, Fund
Accounting and Recordkeeping Agreement dated December 31, 1979, as most recently
amended January 1, 1989 (the "Custodian Contract");
WHEREAS: The Fund desires that the Custodian issue a letter of credit
(the "Letter of Credit") on behalf of the Fund for the benefit of ICI Mutual
Insurance Company (the "Company") in accordance with the Continuing Letter of
Credit and Security Agreement and that the Fund's obligations to the Custodian
with respect to the Letter of Credit shall be fully collateralized at all times
while the Letter of Credit is outstanding by, among other things, segregated
assets of the Fund equal to 100% of the Fund's proportionate share of the face
amount of the Letter of Credit;
WHEREAS: the Custodian Contract provides for the establishment of
segregated accounts for proper Fund purposes upon Proper Instructions (as
defined in the Custodian Contract); and
WHEREAS: The Fund and the Custodian desire to establish a segregated
account to hold the collateral for the Fund's obligations to the Custodian with
respect to the Letter of Credit and to amend the Custodian Contract to provide
for the establishment and maintenance thereof:
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto hereby amend the Custodian
Contract as follows:
1. Capitalized terms used herein without definition shall
have the meanings ascribed to them in the Custodian
Contract.
2. The Fund hereby instructs the Custodian to establish and
maintain a segregated account (the "Letter of Credit Custody
Account") for and on behalf of the Fund as contemplated by
Section II, Paragraph 3N (iv) of the Custodian Contract for
the purpose of collateralizing the Fund's obligations under
this Amendment to the Custodian Contract.
3. The Fund shall deposit with the Custodian and the
Custodian shall hold in the Letter of Credit Custody
Account cash, certificates of deposit, U.S. government
securities or other high-grade debt securities owned
by the Fund acceptable to the Custodian (collectively
"Collateral Securities") equal to 100% of the Fund's
proportionate share of the face amount which the
Company may draw under the Letter of Credit. Upon
receipt of such Collateral Securities in the Letter of
Credit Custody Account, the Custodian shall issue the
Letter of Credit to the Company.
4. The Fund hereby grants to the Custodian a security interest in
the Collateral Securities from time to time in the Letter of
Credit Custody Account (the "Collateral") to secure the
performance of the Fund's obligations to the Custodian with
respect to the Letter of Credit, including, without
limitation, under Section 5-144(3) of the Uniform Commercial
Code. The Fund shall register the pledge of Collateral and
execute and deliver to the Custodian such powers and
instruments of assignment as may be requested by the Custodian
to evidence and perfect the limited interest in the Collateral
granted hereby.
5. The Collateral Securities in the Letter of Credit
Custody Account may be substituted or exchanged
(including substitutions or exchanges which increase
or decrease the aggregate value of the Collateral) only
pursuant to Proper Instructions from the Fund after
the Fund notifies the Custodian of the contemplated
substitution or exchange and the Custodian agrees that
such substitution or exchange is acceptable to the
Custodian.
6. Upon any payment made pursuant to the Letter of Credit
by the Custodian to the Company, the Custodian may
withdraw from the Letter of Credit Custody Account
Collateral Securities in an amount equal in value to the
amount actually so paid. The Custodian shall have with respect
to the Collateral so withdrawn all of the rights of a secured
creditor under the Uniform Commercial Code as adopted in the
Commonwealth of Massachusetts at the time of such withdrawal
and all other rights granted or permitted to it under law.
7. The Custodian will transfer upon receipt all income earned on
the Collateral to the Fund custody account unless the
Custodian receives Proper Instructions from the Fund to the
contrary.
8. Upon the drawing by the Company of all amounts which may
become payable to it under the Letter of Credit and the
withdrawal of all Collateral Securities with respect thereto
by the Custodian pursuant to Section 6 hereof, or upon the
termination of the Letter of Credit by the Fund with the
written consent of the Company, the Custodian shall transfer
any Collateral Securities then remaining in the Letter of
Credit Custody Account to another fund custody account.
9. Collateral held in the Letter of Credit Custody Account shall
be released only in accordance with the provisions of this
Amendment to Custodian Contract. The Collateral shall at all
times until withdrawn pursuant to Section 6 hereof remain the
property of the Fund, subject only to the extent of the
interest granted herein to the Custodian.
10. Notwithstanding any other termination of the Custodian
Contract, the Custodian Contract shall remain in full force
and effect with respect to the Letter of Credit Custody
Account until transfer of all Collateral Securities pursuant
to Section 8 hereof.
11. The Custodian shall be entitled to reasonable compensation for
its issuance of the Letter of Credit and for its services in
connection with the Letter of Credit Custody Account as agreed
upon from time to time between the Fund and the Custodian.
12. The Custodian Contract as amended hereby shall be governed by,
and construed and interpreted under, the laws of the
Commonwealth of Massachusetts.
13. The parties agree to execute and deliver all such further
documents and instruments and to take such further action as
may be required to carry out the purposes of the Custodian
Contract, as amended hereby.
14. Except as provided in this Amendment, the Custodian
Contract shall remain in full force and effect,
without amendment or modification, and all applicable
provisions of the Custodian Contract, as amended
hereby, shall govern the Letter of Credit Custody
Account and the rights and obligations of the Fund and
the Custodian under this Amendment to Custodian
Contract. No provision of this Amendment to Custodian
Contract shall be deemed to constitute a waiver of any
rights of the Custodian under the Custodian Contract
or under law.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to
Custodian Contract to be executed in its name and behalf by its duly authorized
representatives and its seal to be hereunder affixed as of the 8th day of
February, 1990.
ATTEST: KEYSTONE CUSTODIAN FUND, SERIES B-2
By: /s/ By: /s/ Tom Drum
ATTEST: STATE STREET BANK AND TRUST COMPANY
By: /s/ By: /s/ Kate Donelin
Assistant Secretary Vice President
EXHIBIT 99.10
December 18, 1995
Keystone Diversified Bond Fund (B-2)
200 Berkeley Street
Boston, Massachusetts 02116-5034
Ladies and Gentlemen:
I am a Senior Vice President of and General Counsel to Keystone Investment
Management Company, investment adviser to Keystone Diversified Bond Fund (B-2)
(the "Fund"). You have asked for my opinion with respect to the proposed
issuance of 14,905,409 additional shares of the Fund.
To my knowledge, a Prospectus is on file with the Securities and
Exchange Commission (the "Commission") as part of Post-Effective Amendment No.
86 to the Fund's Registration Statement, which covers the public offering and
sale of the Fund shares currently registered with the Commission.
In my opinion, such additional shares, if issued and sold in accordance
with the Fund's Restatement of Trust Agreement, as amended ("Restatement of
Trust") and offering Prospectus, will be legally issued, fully paid and
nonassessable by the Fund, entitling the holders thereof to the rights set forth
in the Restatement of Trust and subject to the limitations set forth therein.
My opinion is based upon my examination of the Fund's Restatement of Trust
and By-Laws; a review of the minutes of the Fund's Board of Trustees, signed by
the Secretary of the Fund, authorizing the issuance of such additional shares;
and the Fund's Prospectus. In my examination of such documents, I have assumed
the genuineness of all signatures and the conformity of copies to originals.
I hereby consent to the use of this opinion in connection with
Post-Effective Amendment No. 87 to the Fund's Registration Statement, which
covers the registration of such additional shares.
Very truly yours,
/s/ Rosemary D. Van Antwerp
Rosemary D. Van Antwerp
Senior Vice President
and General Counsel
10510207
<PAGE>
Exhibit 99.11
CONSENT OF INDEPENDENT AUDITORS
The Trustees
Keystone Diversified Bond Fund (B-2)
(formerly Keystone Custodian Fund, Series B-2)
We consent to the use of our report dated September 29, 1995 included
herein and to the references to our firm under the captions "FINANCIAL
HIGHLIGHTS" in the prospectus and "ADDITIONAL INFORMATION" in the statement of
additional information.
/S/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
December 20, 1995
<PAGE>
Exhibit 99.15
1989
DISTRIBUTION PLAN OF KEYSTONE CUSTODIAN FUND, SERIES B-2
SECTION 1. Keystone Custodian Fund, Series B-2 (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 "Act") according to the terms of
this Distribution Plan (the "Plan").
SECTION 2. Amounts not exceeding in the aggregate a maximum amount equal
to .3125% of the average of the daily aggregate net asset values of the Fund
during each quarter elapsed after the inception of the Plan (i.e., the first
time that shares of the Fund are generally offered to the public at a price
equal to their net asset value) may be paid by the Fund to the Principal
Underwriter at any time after inception of the Plan in order (i) to pay to the
Principal Underwriter commissions in respect of shares of the Fund previously
sold at any time after the inception of the Plan, all or any part of which may
be or may have been reallowed or otherwise paid to others by the Principal
Underwriter in respect of or in furtherance of sales of shares of the Fund after
the inception of the Plan; and (ii) to enable the Principal Underwriter to pay
or to have paid to others who sell Fund shares a maintenance or other fee, at
such intervals as the Principal Underwriter may determine, in respect of Fund
shares previously sold by any such others at any time after the inception of the
Plan and remaining outstanding during the period in respect of which such fee is
or has been paid.
SECTION 3. This Plan shall not take effect until it has been approved by a
vote of at least a majority (as defined in the Act) of the outstanding shares of
the Fund.
SECTION 4. This Plan shall not take effect until it has been approved
together with any related agreements of the Fund by votes of the majority of
both (a) the Board of Trustees of the Fund and (b) those Trustees of the Fund
who, except for their positions as Trustees, are not "interested persons" (as
defined in the 1940 Act) of the Fund and who have no direct or indirect
financial interest in the operation of this Plan or any agreements of the Fund
or any other person related to this Plan (the "Rule 12b-1 Trustees"), cast in
person at a meeting called for the purpose of voting on this Plan or such
agreements.
SECTION 5. Unless sooner terminated pursuant to Section 8, this Plan shall
continue in effect for a period of one year from the date it takes effect and
thereafter shall continue in effect so long as such continuance is specifically
approved at least annually in the manner provided for approval of this Plan in
Section 4.
SECTION 6. Any person authorized to direct the disposition of monies paid
or payable by the Fund pursuant to this Plan or any related agreement shall
provide to the Fund's Board and the Board shall review at least quarterly a
written report of the amounts so expended and the purposes for which such
expenditures were made.
SECTION 7. This Plan may be terminated at any time by vote of a majority
of the Rule 12b-1 Trustees, or by vote of a majority of the Fund's outstanding
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, 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 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.
<PAGE>
Exhibit 99.16
<TABLE>
<CAPTION>
B-2 MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR
31-Aug-95 TOTAL RETURN COMPOUNDED TOTAL RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
with cdsc N/A 7.16% 5.17% 16.67% 5.27% 51.98%
W/O CDSC 0.46% 10.16% 8.13% 17.59% 5.55% 51.98%
Beg dates 31-Jul-95 30-Dec-94 31-Aug-94 31-Aug-92 31-Aug-92 31-Aug-90
Beg Value (no load) 39,601 36,115 36,794 33,834 33,834 26,178
End Value (W/O CDSC) 39,785 39,785 39,785 39,785 39,785 39,785
End Value (with cdsc) 38,702 38,695 39,474 39,474 39,785
beg nav 15.12 14.44 15.28 16.44 16.44 15.51
end nav 15.09 15.09 15.09 15.09 15.09 15.09
shares originally purhased 2,619.11 2,501.07 2,408.00 2,058.02 2,058.02 1,687.81
3
</TABLE>
<TABLE>
<CAPTION>
B-2 FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
31-Aug-95 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
with cdsc 51.98% 8.73% 110.34% 7.72%
W/O CDSC 51.98% 8.73% 110.34% 7.72%
Beg dates 31-Aug-90 31-Aug-90 30-Aug-85 30-Aug-85
Beg Value (no load) 26,178 26,178 18,915 18,915
End Value (W/O CDSC) 39,785 39,785 39,785 39,785
End Value (with cdsc) 39,785 39,785 39,785 39,785
beg nav 15.51 15.51 18.84 18.84
end nav 15.09 15.09 15.09 15.09
shares originally purhased 1,687.81 1,687.81 1,003.96 1,003.96
5 10
</TABLE>
INCEPTION DATE 31-Mar-81
B-2
31-Aug-95
BEGINNING DATE INPUT: ESTIMATED EDIT
MONTH/YR ACTUAL DATE
MTD Jul-95 31-Jul-95
YTD Dec-94 30-Dec-94
1 YEAR Aug-94 31-Aug-94
3 YEAR Aug-92 31-Aug-92
5 YEAR Aug-90 31-Aug-90
10 YEAR Aug-85 30-Aug-85
<PAGE>
FUND #: 4202 SEC STANDARDIZED ADVERTISING YIELD
FUND NAME: KEYSTONE DIVERSIFIED BOND FUND B=2
PRICING DATE 29-Aug-95
<TABLE>
<CAPTION>
TOTAL INCOME FOR PERIOD 5,158,357.12
TOTAL EXPENSES FOR PERIOD 1,055,755.74
30 DAY YTM 6.78442% AVERAGE SHARES OUTSTANDING 48,893,076.83
======== LAST PRICE DURING PERIOD 15.05
- -------------------------------------------------------------------------------------------------------------------
PRICE EQUITY AMORT MORTGAGE PIK ST FIXED GAIN/LOSS LONG TERM TOTAL
DATE INCOME INCOME INCOME INCOME INCOME ADJ INCOME INCOME
0.00 367,413.92 820,690.45 0.00 15,359.53 (12,364.22) 3,967,257.44 5,158,357.12
0.00000% 0.61541% 1.37253% 0.00000% 0.02576% -0.02074% 6.56476%
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 31-Jul-95 0.00 11,351.19 27,104.68 O.00 1,322.99 0.00 133,287.97 173,066.83
2 01-Aug-95 0.00 11,463.98 25,272.82 0.00 2,455.92 0.00 133,937.24 173,129.96
3 02-Aug-95 0.00 11,463.85 25,271.84 0.00 2,772.85 0.00 134,373.30 173,881.84
4 03-Aug-95 0.00 11,462.98 27,590.84 O.00 69.33 0.00 134,687.45 173,810.60
5 04-Aug-95 0.00 11,462.88 27,590.84 0.00 235.98 0.00 134,506.18 173,795.88
6 05-Aug-95 0.00 11,462.88 27,590.84 0.00 235.98 0.00 134,506.18 173,795.88
7 06-Aug-95 0.00 11,462.88 27,590.84 O.00 235.97 0.00 134,506.18 173,795.87
8 07-Aug-95 0.00 11,419.87 27,590.84 0.00 1,863.68 0.00 130,892.32 171,766.71
9 08-Aug-95 0.00 11,437.13 27,590.84 0.00 119.54 0.00 134,138.47 173,285.98
10 09-Aug-95 0.00 11,433.97 27,590.84 O.00 150.6 0.00 134,677.27 173,852.68
11 10-Aug-95 0.00 11,427.18 27,590.84 0.00 358.59 0.00 133,264.90 172,641.51
12 11-Aug-95 0.00 11,359.11 27,590.84 0.00 289.97 0.00 133,574.08 172,814.00
13 12-Aug-95 0.00 11,359.11 27,590.84 O.00 289.97 0.00 133,574.08 172,814.00
14 13-Aug-95 0.00 11,359.10 27,590.84 0.00 289.97 0.00 133,574.08 172,813.99
15 14-Aug-95 0.00 11,359.01 27,579.50 0.00 117.33 0.00 132,042.43 171,098.27
16 15-Aug-95 0.00 11,359.16 27,546.09 O.00 188.93 0.00 133,437.72 172,531.90
17 16-Aug-95 0.00 11,359.13 27,491.36 0.00 318.24 0.00 133,354.38 172,523.11
18 17-Aug-95 0.00 11,359.12 27,491.36 0.00 218.77 0.00 133,574.50 172,643.75
19 18-Aug-95 0.00 11,359.15 27,491.36 O.00 141.22 0.00 133,742.40 172,734.13
20 19-Aug-95 0.00 11,359.15 27,491.36 0.00 141.22 0.00 133,742.40 172,734.13
21 20-Aug-95 0.00 11,359.14 27,491.36 0.00 141.21 0.00 133,742.40 172,734.11
22 21-Aug-95 0.00 10,943.18 27,491.36 O.00 156.35 0.00 133,511.47 172,102.36
23 22-Aug-95 0.00 10,943.21 27,491.36 0.00 285.54 0.00 133,659.08 172,379.19
24 23-Aug-95 0.00 10,942.57 27,491.36 0.00 614.95 0.00 127,572.64 166,621.52
25 24-Aug-95 0.00 19,731.34 27,491.36 O.00 517.20 0.00 127,290.66 175,030.56
26 25-Aug-95 0.00 15,337.00 27,429.66 0.00 511.20 0.00 127,180.30 170,458.16
27 26-Aug-95 0.00 15,337.00 27,429.66 0.00 511.20 0.00 127,180.30 170,458.16
28 27-Aug-95 0.00 15,336.99 27,429.66 O.00 511.20 0.00 127,180.30 170,458.15
29 28-Aug-95 0.00 15,336.98 27,352.53 0.00 200.93 0.00 127,055.40 169,945.84
30 29-Aug-95 0.00 14,065.68 27,352.53 0.00 92.70 (12,364.22) 129,491.36 158,638.05
<PAGE>
<CAPTION>
30 DAY 30 DAY 30 DAY
PRICE 12B-1 & SERVICE DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
DATE EXPENSES CDSC EXPENSES SHARES PRICE INCOME EXPENSES SHARES
606,045.75 0.00 1,055,755.74 48,893,076.83
-1.01845%
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 31-Jul-95 20,376.11 0.00 41,709.22 49,120,103.654 15.12 173,066.83 41,709.22 49,120,103.65
2 01-Aug-95 20,352.72 0.00 32,607.87 49,076,267.734 15.09 346,196.79 74,317.09 98,196,371.39
3 02-Aug-95 20,088.71 0.00 35,095.83 49,067,903.403 15.13 520,078.63 109,412.92 147,264,274.79
4 03-Aug-95 20,338.16 0.00 35,374.69 49,059,366.185 15.08 693,889.23 144,787.61 196,323,640.98
5 04-Aug-95 60,821.36 0.00 32,978.34 49,026,894.763 15.11 867,685.11 177,765.95 245,350,535.74
6 05-Aug-95 0.00 0.00 32,978.34 49,026,894.763 15.11 1,041,480.99 210,744.29 294,377,430.50
7 06-Aug-95 0.00 0.00 32,978.35 49,026,894.763 15.11 1,215,276.86 243,722.64 343,404,325.27
8 07-Aug-95 20,294.45 0.00 42,194.31 48,997,386.594 15.10 1,387,043.57 285,916.95 392,401,711.86
9 08-Aug-95 20,472.49 0.00 32,427.18 48,925,068.390 15.11 1,560,329.55 318,344.13 441,326,780.25
10 09-Aug-95 20,248.65 O.00 35,236.17 48,892,541.881 15.09 1,734,182.23 353,580.30 490,219,322.13
11 10-Aug-95 20,208.92 0.00 35,169.91 48,870,846.023 15.07 1,906,823.74 388,750.21 539,090,168.15
12 11-Aug-95 60,528.48 0.00 32,977.38 48,866,699.018 15.02 2,079,637.74 421,727.59 587,956,867.17
13 12-Aug-95 0.00 0.00 32,977.38 48,866,699.018 15.02 2,252,451.74 454,704.97 636,823,566.19
14 13-Aug-95 0.00 0.00 32,977.39 48,866,699.018 15.02 2,425,265.73 487,682.36 685,690,265.21
15 14-Aug-95 20,115.65 0.00 41,859.78 48,790,141.904 15.03 2,596,364.00 529,542.14 734,480,407.11
16 15-Aug-95 20,086.46 0.00 34,968.73 48,776,768.374 15.03 2,768,895.90 564,510.87 783,257,175.49
17 16-Aug-95 20,090.04 0.00 9,189.97 48,925,850.272 15.05 2,941,419.01 573,700.84 832,183,025.76
18 17-Aug-95 20,174.11 0.00 35,090.35 48,908,389.014 15.03 3,114,062.76 608,791.19 881,091,414.77
19 18-Aug-95 60,413.20 0.00 32,796.11 48,871,489.043 15.03 3,286,796.89 641,587.30 929,962,903.81
20 19-Aug-95 0.00 0.00 32,796.11 48,871,489.043 15.03 3,459,531.02 674,383.41 978,834,392.86
21 20-Aug-95 0.00 0.00 32,796.10 48,871,489.043 15.03 3,632,265.13 707,179.51 1,027,705,881.90
22 21-Aug-95 20,129.03 0.00 41,897.71 48,834,080.480 15.06 3,804,367.49 749,077.22 1,076,539,962.38
23 22-Aug-95 20,152.67 0.00 35,085.17 48,790,889.148 15.06 3,976,746.68 784,162.39 1,125,330,851.53
24 23-Aug-95 20,125.83 0.00 35,054.18 48,788,769.591 15.04 4,143,368.20 819,216.57 1,174,119,621.12
25 24-Aug-95 20,102.53 0.00 34,908.06 48,757,529.164 15.07 4,318,398.76 854,124.63 1,222,877,150.28
26 25-Aug-95 60,384.07 0.00 32,803.43 48,808,711.439 15.14 4,488,856.92 886,928.06 1,271,685,861.72
27 26-Aug-95 0.00 0.00 32,803.43 48,808,711.439 15.14 4,659,315.08 919,731.49 1,320,494,573.16
28 27-Aug-95 0.00 0.00 32,803.43 48,808,711.439 15.14 4,829,773.23 952,534.92 1,369,303,284.60
29 28-Aug-95 20,250.71 0.00 41,976.22 48,790,972.682 15.16 4,999,719.07 994,511.14 1,418,094,257.28
30 29-Aug-95 20,291.40 0.00 35,344.22 48,698,047.683 15.05 5,158,357.12 1,029,855.36 1,466,792,304.97
</TABLE>
<PAGE>
Exhibit 99.19
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief
Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser
or Manager and registering from time to time the shares of such companies, and
generally to do all such things in my name and in my behalf to enable such
investment companies to comply with the provisions of the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
my said attorneys to any and all registration statements and amendments thereto.
/s/ George S. Bissell
George S. Bissell
Director/Trustee,
Chairman of the Board
Dated: December 14, 1994
<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 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> KEYSTONE DIVERSIFIED BOND FUND (B-2) CLASS A
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 715,364,313
<INVESTMENTS-AT-VALUE> 724,277,217
<RECEIVABLES> 15,406,067
<ASSETS-OTHER> 116,553
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 739,799,837
<PAYABLE-FOR-SECURITIES> 244,800
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,717,757
<TOTAL-LIABILITIES> 4,962,557
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 897,724,605
<SHARES-COMMON-STOCK> 48,710,058
<SHARES-COMMON-PRIOR> 53,298,917
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2,237,949)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (169,562,280)
<ACCUM-APPREC-OR-DEPREC> 8,912,904
<NET-ASSETS> 734,837,280
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 67,051,003
<OTHER-INCOME> 0
<EXPENSES-NET> (13,690,408)
<NET-INVESTMENT-INCOME> 53,360,595
<REALIZED-GAINS-CURRENT> (25,270,677)
<APPREC-INCREASE-CURRENT> 29,299,264
<NET-CHANGE-FROM-OPS> 57,389,182
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (64,953,840)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (3,726,265)
<NUMBER-OF-SHARES-SOLD> 7,685,412
<NUMBER-OF-SHARES-REDEEMED> (14,886,517)
<SHARES-REINVESTED> 2,612,246
<NET-CHANGE-IN-ASSETS> (79,407,439)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (6,280,569)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3,982,976)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (13,690,408)
<AVERAGE-NET-ASSETS> 756,415,442
<PER-SHARE-NAV-BEGIN> 15.28
<PER-SHARE-NII> 1.06
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> (1.06)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (0.30)
<PER-SHARE-NAV-END> 15.09
<EXPENSE-RATIO> 1.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
