-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, GoA3XIUBIvitw9Rzy1PZZt39kTM7NhRhOmsneUfGCYS2B6LBso2CmBwbvcOZceWG rajDFYXnorwCKWSrh/usOQ== 0000950146-95-000063.txt : 19950601 0000950146-95-000063.hdr.sgml : 19950601 ACCESSION NUMBER: 0000950146-95-000063 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19950228 EFFECTIVENESS DATE: 19950228 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE CUSTODIAN FUND SERIES B-1 CENTRAL INDEX KEY: 0000055611 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 042394419 FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-10658 FILM NUMBER: 95517215 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-00092 FILM NUMBER: 95517089 BUSINESS ADDRESS: STREET 1: 99 HIGH ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173383200 MAIL ADDRESS: STREET 1: 99 HIGH STREET CITY: BOSTON STATE: MA ZIP: 02110 485BPOS 1 KEYSTONE CUSTODIAN FUND, SERIES B-1 As filed with the Securities and Exchange Commission Feb. 28, 1995. File No. 2-10658/ 811-92 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. 94 X and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 27 X KEYSTONE CUSTODIAN FUND, SERIES B-1 (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) of Rule 485 on (date) pursuant to paragraph (b) of Rule 485 60 days after filing pursuant to paragraph (a)(i) of Rule 485 on (date) pursuant to paragraph (a)(i) of Rule 485 75 days after filing pursuant to paragraph (a)(ii) of Rule 485 on (date) pursuant to paragraph (a)(ii) of Rule 485 The Registrant has filed a Declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940. A Rule 24f-2 Notice for Registrant's last fiscal year was filed on December 26, 1994. KEYSTONE CUSTODIAN FUND, SERIES B-1 CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 94 to REGISTRATION STATEMENT This Post-Effective Amendment No. 94 to Registrant's Registration Statement No. 2-10658/811-92 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 - ITEM 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 Signatures Exhibits (including Powers of Attorney) KEYSTONE CUSTODIAN FUND, SERIES B-1 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 Financial Highlights 4 Cover Page Fund Description Fund Objective and Policies Investment Restrictions 5 Fund Management and Expenses Additional Information 5A Not applicable 6 Fund Description Dividends and Taxes Fund Shares Shareholder Services 7 Pricing Shares How to Buy Shares Distribution Plan 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 Not applicable 13 The Fund's Objective and Policies Investment Restrictions Brokerage Appendix KEYSTONE CUSTODIAN FUND, SERIES B-1 Cross-Reference Sheet continued. Items in Part B of Form N-1A Statement of Additional Information Caption 14 Trustees and Officers 15 Additional Information 16 Sales Charges Distribution Plan Investment Manager Investment Adviser Principal Underwriter Additional Information 17 Brokerage 18 The Trust Agreement 19 Valuation of Securities Distribution Plan Redemptions in Kind 20 Distributions and Taxes 21 Principal Underwriter 22 Standardized Total Return and Yield Quotations 23 Financial Statements KEYSTONE CUSTODIAN FUND, SERIES B-1 PART A PROSPECTUS - ------------------------------------------------------------------------------ PROSPECTUS FEBRUARY , 1995 - ------------------------------------------------------------------------------ KEYSTONE CUSTODIAN FUND, SERIES B-1 HIGH GRADE BOND FUND 200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034 CALL TOLL FREE 1-800-343-2898 Keystone Custodian Fund, Series B-1 (the "Fund") is a mutual fund whose goal is the highest possible income consistent with preservation of principal. The Fund invests primarily in high and investment grade corporate bonds, which possess a high degree of dependability of interest payments. 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 calendar 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 February , 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 .............................. 9 Financial Highlights ............................... 3 Distribution Plan .............................. 10 Fund Description ................................... 4 How to Redeem Shares ........................... 12 Fund Objective and Policies ........................ 4 Shareholder Services ........................... 14 Investment Restrictions ............................ 5 Performance Data ............................... 15 Pricing Shares ..................................... 6 Fund Shares .................................... 15 Dividends and Taxes ................................ 7 Additional Information ......................... 16 Fund Management and Expenses ....................... 7 Additional Investment Information ..............
(i) - ------------------------------------------------------------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------ FEE TABLE KEYSTONE CUSTODIAN FUND, SERIES B-1 HIGH GRADE BOND FUND 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 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 ......................................... 0.56% 12b-1 Fees\4/ ........................................... 0.97% Other Expenses .......................................... 0.33% ----- Total Fund Operating Expenses ........................... 1.86% ----- ----- 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 ..................... $59 $78 $101 $218 You would pay the following expenses on the same investment, assuming no redemption ............................. $19 $58 $101 $218 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 exchange fee for exchange orders received by the Fund over the Keystone Automated Response Line ("KARL") from an individual shareholder. (For a description of KARL, see "Shareholder Services.") \3/ Expense ratios are for the Fund's fiscal year ended October 31, 1994. \4/ Long-term shareholders may pay more than the economic equivalent of the maximum front end sales charge 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%. FINANCIAL HIGHLIGHTS KEYSTONE CUSTODIAN FUND, SERIES B-1 HIGH GRADE BOND FUND (For a share outstanding throughout the year) The following table contains important financial information with respect to 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.
YEAR ENDED OCTOBER 31, ------------------------------------------------------------------------------------------------------------ 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net asset value: Beginning of year .. $16.40 $15.92 $15.92 $15.11 $15.85 $15.71 $15.52 $17.30 $16.15 $15.45 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- INCOME FROM INVESTMENT OPERATIONS Investment income-- net ................ 0.76 0.96 1.04 1.08 1.11 1.21 1.19 1.20 1.50 1.63 Net gains (losses) on investments and foreign currency related transactions (1.76) 0.66 0.15 0.99 (0.53) 0.25 0.32 (1.59) 1.56 0.94 Net commissions paid on fund share sales........... 0 0 0 0 0 0 0 0 (0.20) (0.19) ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total from investment operations ......... (1.00) 1.62 1.19 2.07 0.58 1.46 1.51 (0.39) 2.86 2.38 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- LESS DISTRIBUTIONS FROM: Investment income-- net ................ (0.76) (0.96) (1.04) (1.08) (1.18) (1.32) (1.32) (1.39) (1.64) (1.68) In excess of investment income-- net............. (0.09) (0.18) (0.15) (0.18) (0.14) 0 0 0 0 0 Tax basis return of capital ............ (0.11) 0 0 0 0 0 0 0 0 0 Realized gains on investments and foreign currency related transactions--net .. 0 0 0 0 0 0 0 0 (0.07) 0 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total distributions . (0.96) (1.14) (1.19) (1.26) (1.32) (1.32) (1.32) (1.39) (1.71) (1.68) ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net asset value: End of year ............ $14.44 $16.40 $15.92 $15.92 $15.11 $15.85 $15.71 $15.52 $17.30 $16.15 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- TOTAL RETURN..... (6.27%) 10.50% 7.71% 14.09% 3.93% 9.82% 10.09% (2.44%) 18.13% 16.23% RATIOS/SUPPLEMENTAL DATA Ratios to average net assets: Operating and management expenses 1.86% 1.94% 2.01% 2.04% 1.95% 1.82% 1.64% 1.56% 1.00% 1.09% Investment income-- net ............. 5.05% 5.85% 6.40% 6.95% 7.45% 7.61% 7.49% 7.32% 8.37% 10.14% Portfolio turnover rate ............... 169% 190% 102% 158% 117% 116% 153% 127% 97% 48% Net assets, end of year (thousands) ... $327,276 $458,925 $456,912 $453,528 $408,330 $462,425 $447,454 $440,836 $348,107 $105,351 Prior to June 30, 1987, net commissions paid on new sales of shares under the Fund's Rule 12b-1 Distribution Plan have been treated for both financial statement and tax purposes as capital charges. On June 11, 1987, the Securities and Exchange Commission adopted a rule that required for financial statements for 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 October 31, 1987, the Fund's financial statements reflect 12b-1 Distribution Plan expenses (i.e., shareholder services fees plus commissions paid net of deferred sales charges received by the Fund) as a component of net investment income. Effective November 1, 1993, the Fund adopted Statement of Position 93-2: "Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies." As a result, distribution amounts exceeding book basis net investment income (or tax basis net income on a temporary basis) are presented as "Distributions in excess of investment income--net." Similarly, capital gain distributions in excess of book basis capital gains (or tax basis capital gains on a temporary basis) are presented as "Distributions in excess of realized capital gains." Prior to the date of adoption of the Statement of Position, distribution amounts exceeding book basis investment income--net were presented as "Distributions from paid-in capital." Without contingent deferred sales charge (CDSC).
- ------------------------------------------------------------------------------ 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 twenty-nine funds managed or advised by Keystone Custodian Funds, Inc. ("Keystone"), the Fund's investment adviser. Keystone and Keystone Management are from time to time also collectively referred to as "Keystone." - ------------------------------------------------------------------------------ FUND OBJECTIVE AND POLICIES - ------------------------------------------------------------------------------ The Fund's investment objective is to provide shareholders with the highest possible income consistent with preservation of principal. The Fund invests at least 65% of its assets in high grade bonds (bonds rated A or better by Moody's Investors Service, Inc. ("Moody's") or by Standard & Poor's Corporation ("S&P"). In addition the Fund invests in investment grade bonds and short-term money market instruments at such times and in such proportions as seem appropriate to best achieve this objective. Bonds will include obligations of the United States ("U.S.") government or its agencies (e.g., Government National Mortgage Association ("GNMA") certificates, U.S. Treasury securities and such other securities as are issued by or guaranteed as to principal and interest by the full faith and credit of the U.S. government) and other bond issues of high or good grade, including high grade municipal bonds. The Fund invests in municipal bonds when the spreads between municipal and taxable bonds have been narrowed. Such bonds possess a high degree of dependability of interest payments with price action affected almost exclusively by the trend and level of money rates. The Fund has a fundamental policy that allows it to invest up to 25% of its assets in investment grade convertible bonds. In addition, the Fund may invest a limited portion of its assets in bonds rated BAA by Moody's or BBB by S&P or, if unrated, are deemed to be of comparable quality by Keystone. These are the lowest rated bonds in which the Fund will invest. Bonds rated BAA by Moody's are considered to be 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 have speculative characteristics as well. Debt rated BBB by S&P is regarded as having an adequate capacity to pay interest and repay principal. While 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. Money market instruments in which the Fund may invest, which must mature within one year of their purchase, consist of U.S. government securities; instruments of banks having assets of at least $500 million, including U.S. branches of foreign banks and foreign branches of U.S. banks, such as certificates of deposit, demand and time deposits and bankers' acceptances; high grade commercial paper; and repurchase agreements secured by U.S. government securities. The Fund may invest up to 25% of its assets in foreign securities. In pursuing its objective, the Fund may invest in securities issued by companies of foreign countries, including certain countries with emerging markets. For this purpose, countries with emerging markets are generally those where the per capita income is in the low to middle ranges, as determined by the International Bank for Reconstruction and Development ("World Bank"). Investing in securities of issuers in emerging markets countries involves exposure to economic systems that are generally less mature and political systems that are generally less stable than those of developed countries. In addition, investing in companies in emerging markets countries may also involve exposure to national policies that may restrict investment by foreigners and undeveloped legal systems governing private and foreign investments and private property. The typically small size of the markets for securities issued by companies in emerging markets countries and the possibility of a low or nonexistent volume of trading in those securities may also result in a lack of liquidity and in price volatility of those securities. 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. 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 the investment on its books and (2) limiting its holdings of such securities to 15% of net assets. The Fund may write covered call options. The Fund may also purchase put and call 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 agreements 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. In addition to its other investment options, the Fund may invest in limited partnerships, including master limited partnerships. In addition to the options, futures contracts and forwards mentioned above, only if it is consistent with its investment objective and policies, the Fund may 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, option transactions and other complex or derivative securities involve certain risks. For further information about the types of investments and investment techniques available to the Fund, including the associated risks, see the section of this prospectus entitled "Additional Investment Information" and the statement of additional information. Of course, there can be no assurance that the Fund will achieve its investment objective since there is uncertainty in every investment. 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. - ------------------------------------------------------------------------------ INVESTMENT RESTRICTIONS - ------------------------------------------------------------------------------ The Fund has adopted the fundamental restrictions summarized below, which may not be changed without the approval of a majority of the Fund's outstanding shares. These restrictions and certain other fundamental restrictions are set forth in the statement of additional information. The Fund may not do the following: (1) invest more than 5% of its total assets, computed at market value, in the securities of any one issuer or invest in more than 10% of any class of securities of any one issuer, other than securities issued as guaranteed by the U.S. government, its agencies or instrumentalities; (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, provided that bank borrowings and reverse repurchase agreements, in aggregate, shall not exceed 10% of the value of the Fund's net assets; and (3) invest more than 25% of its total assets in securities of issuers in the same 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. 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 objective, 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. - ------------------------------------------------------------------------------ PRICING SHARES - ------------------------------------------------------------------------------ The net asset value of a Fund share is computed each day on which the New York Stock Exchange (the "Exchange") is open as of the close of trading on the Exchange (currently 4:00 p.m. eastern time for the purpose of pricing Fund shares) except on days when changes in the value of the Fund's securities do not affect the current net asset value of its shares. The Exchange is currently closed on 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 the money market instruments it purchases as follows: money market instruments purchased with maturities of sixty days or less are valued at amortized cost (original purchase price as adjusted for amortization of premium or accretion of discount), which, when combined with accrued interest, approximates market; money market instruments maturing in more than sixty days for which market quotations are readily available are valued at market value; and money market instruments maturing in more than sixty days when purchased that are held on the sixtieth day prior to maturity are valued at amortized cost (market value on the sixtieth day adjusted for amortization of premium or accretion of discount), which, when combined with accrued interest, approximates market; and in any case reflects fair value as determined by the Fund's Board of Trustees. All other investments are valued at market value or, where market quotations are not readily available, at fair value as determined in good faith by the Fund's 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 Fund's 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. - ------------------------------------------------------------------------------ DIVIDENDS AND TAXES - ------------------------------------------------------------------------------ The Fund has qualified and intends to qualify in the future as a regulated investment company under the Internal Revenue Code (the "Code"). The Fund qualifies if, among other things, it distributes to its shareholders at least 90% of its net investment income for its fiscal year. The Fund also intends to make timely distributions, if necessary, sufficient in amount to avoid the nondeductible 4% excise tax imposed on a regulated investment company to the extent that it fails to distribute, with respect to each calendar year, at least 98% of its ordinary income for such calendar year and 98% of its net capital gains for the one-year period ending on October 31 of such calendar year. Any taxable distribution would be (1) declared in October, November, or December to shareholders of record in such a month, (2) paid by the following January 31, and (3) includable in the taxable income of shareholders for the year in which such distributions were declared. If the Fund qualifies and if it distributes all of its net investment income and net capital gains, if any, to shareholders, it will be relieved of any federal income tax liability. The Fund will make distributions from its net investment income to its shareholders by the 15th day of each month and net capital gains, if any, at least annually. Currently, commissions paid by the Fund on new sales of shares under the Fund's Distribution Plan (see "Distribution Plan") and deferred sales charge receipts are treated as capital charges and capital credits, respectively, in determining net investment income for tax purposes. For financial statement purposes, however, these expenses and receipts are treated as operating expenses and expense offsets. As a result, the amount of dividend distributions required to satisfy the requirements of the Code might exceed net investment income for financial statement purposes. Total investment return is equally affected by both treatments. Recently, the Internal Revenue Service ("IRS") issued a ruling that will require the Fund effective April 1, 1995 to treat its 12b-1 fees as operating expenses instead of capital charges. The Fund intends to comply with the IRS ruling by that date. As a result, after April 1, 1995, dividend distributions are no longer expected to exceed net investment income for financial statement purposes. Total investment returns will not be affected. 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. Any income from tax free bonds is not expected to be tax-exempt to the shareholder. - ------------------------------------------------------------------------------ FUND MANAGEMENT AND EXPENSES - ------------------------------------------------------------------------------ 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. 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 Group of Mutual Funds. The Fund pays Keystone Management a fee for its services at the annual rate set forth below: ANNUAL AGGREGATE NET ASSET VALUE MANAGEMENT OF THE SHARES FEE INCOME OF THE FUND - ------------------------------------------------------------------------------ 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, 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, under which Keystone provides investment advisory and management services to the Fund. 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; (3) providing services to the Fund's shareholders in connection with federal and state taxation and distributions of income and capital gains; and (4) storing documents relating to the Fund's activities. Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, has provided investment advisory and management services to investment companies and private accounts since it was organized in 1932. Keystone is a wholly-owned subsidiary of Keystone Group, Inc. ("Keystone Group"), 200 Berkeley Street, Boston, Massachusetts 02116-5034. Keystone Group is a corporation predominantly owned by current and former members of management of Keystone and its affiliates. The shares of Keystone Group common stock beneficially owned by management are held in a number of voting trusts, the trustees of which are George S. Bissell, Albert H. Elfner, III, Roger T. Wickers, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Group provides accounting, bookkeeping, legal, personnel and general corporate services to Keystone Management, Keystone, their affiliates and the Keystone Group of Mutual Funds. Pursuant to the Investment Advisory Agreement, Keystone will receive for its services an annual fee representing 85% of the management fee received by Keystone Management under its Investment Management Agreement with the Fund. Keystone Management, Keystone and the Fund have each adopted a Code of Ethics incorporating policies on personal securities trading as recommended by the Investment Company Institute. FUND EXPENSES In addition to the investment advisory and management fees discussed above, the principal expenses 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 October 31, 1994, the Fund paid 1.86% of its average net assets in expenses. During the year ended October 31, 1994, the Fund paid or accrued to Keystone Management investment management fees and administrative fees of $2,193,546, which represented 0.56% of the Fund's average net assets on an annualized basis. Of such amount paid to Keystone Management, $1,864,514 was paid to Keystone for its services to the Fund. During the fiscal year ended October 31, 1994, the Fund paid or accrued to Keystone Group and Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and dividend disbursing agent, $22,036 for certain accounting services and $903,104 for transfer agent fees. KIRC is a wholly-owned subsidiary of Keystone. PORTFOLIO MANAGER Barbara A. McCue has been the Fund's portfolio manager since 1987. She is a Keystone Vice President and Senior Portfolio Manager with more than 19 years of investment experience. 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 October 31, 1994 and 1993 were 169% and 190%, respectively. High portfolio turnover may involve correspondingly greater brokerage commissions and other transaction costs, which would be borne directly by the Fund, as well as additional realized gains and/or losses to shareholders. For further information about brokerage and distributions, see the statement of additional information to this prospectus. - ------------------------------------------------------------------------------ HOW TO BUY SHARES - ------------------------------------------------------------------------------ Shares of the Fund may be purchased from any broker-dealer that has a selling agreement with Keystone Distributors, Inc. ("KDI"), the Fund's principal underwriter ("Principal Underwriter"). KDI, a wholly-owned subsidiary of Keystone, is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034. You may open an account for the purchase of shares of the Fund 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 the Fund's shares 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 the Fund 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 fourth calendar year after purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If imposed, the contingent deferred sales charge is deducted from the redemption proceeds otherwise payable to the shareholder. 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 NASD rules, paid to KDI. For the fiscal year ended October 31, 1994, the Fund recovered $98,756 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 exchanges of shares between Keystone funds that have adopted distribution plans pursuant to Rule 12b-1 under the 1940 Act. 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; or (5) automatic withdrawals under an automatic withdrawal plan of up to 1% per month of the shareholder's initial account balance. 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 deferred sales charge 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 KDI; and (3) a bank or trust company acting as trustee for a single account. - ------------------------------------------------------------------------------ DISTRIBUTION PLAN - ------------------------------------------------------------------------------ The Fund bears some of the costs of selling its shares under its Distribution Plan adopted on June 1, 1983 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 KDI). Payments under the Distribution Plan are currently made to KDI (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 to shares maintained by the recipients outstanding on the Fund's books for specified periods. Amounts paid or accrued to KDI under (1) and (2) in the aggregate may not exceed the annual limitations referred to above. KDI 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 outstanding on the books of the Fund for specified periods. If the Fund is unable to pay KDI a commission on a new sale because the annual maximum (0.75% of average daily net assets) has been reached, KDI intends, but is not obligated, to continue to accept new orders for the purchase of Fund shares and to pay or accrue commissions and maintenance fees to dealers in excess of the amount it currently receives from the Fund. While the Fund is under no contractual obligation to pay KDI such amounts that exceed the Distribution Plan limitation, KDI intends to seek full payment of such charges from the Fund (together with interest at the rate of prime plus one percent) at such time in the future as, and to the extent that, payment thereof by the Fund would be within permitted limits. KDI currently intends to seek payment of interest only on such charges paid or accrued by KDI subsequent to January 1, 1992. If the Fund's Independent Trustees authorize such payments, the effect would be to extend the period of time during which the Fund incurs the maximum amount of costs allowed by the Distribution Plan. If the Distribution Plan is terminated, KDI will ask the Independent Trustees to take whatever action they deem appropriate under the circumstances with respect to payment of such amounts. During the fiscal year ended October 31, 1994, the Fund recovered $98,756 in contingent deferred sales charges. During the same year, the Fund paid KDI $3,868,521 (1.00% of the Fund's average daily net asset value during the year) under the Distribution Plan. The amount paid by the Fund under its Distribution Plan, net of contingent deferred sales charges, was $3,769,765 (0.97% of the Fund's average daily net asset value during the year). During the year, KDI received $1,856,670 after payments of commissions on new sales and service fees to dealers and others of $2,011,851. At October 31, 1994, KDI's total unreimbursed Distribution Plan expenses amounted to $12,643,676 (3.86% of the Fund's net asset value as of October 31, 1994), of which $469,768 was incurred in such fiscal year. The right to certain portions of this amount, if and when receivable, was assigned by KDI in 1988 in connection with a financial transaction. As of October 31, 1994, $10,956,671 of the amount assigned remained outstanding. At each Trustees' 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 the remainder, and the times, conditions and amounts, 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. Upon written notice to dealers, KDI, 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. KDI may, at its own expense, pay concessions in addition to those described above to dealers which satisfy certain criteria established from time to time by KDI. These conditions relate to increasing sales of shares of the Keystone funds over specified periods and certain other factors. Such payments may, depending on the dealer's satisfaction of the required conditions, be up to .25% of the value of shares sold by such dealer. 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. - ------------------------------------------------------------------------------ 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., 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 may delay the mailing of a redemption check until good payment has been collected. This may take up to 15 days or more. Any delay 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. KDI, 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. KDI 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. KDI 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 when the account address of record has been the same for a minimum period of 30 days. The Fund and KIRC reserve the right to withdraw this waiver at any time. If the Fund receives a redemption 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. However, you must complete the Telephone Redemptions section of the application to enjoy the telephone redemption privileges. In order to insure that instructions received by KIRC are genuine when you initiate a telephone transaction, you will be asked to verify certain criteria specific to your account. At the conclusion of the transaction, you will be given a transaction number confirming your request, and written confirmation of your transaction will be mailed the next business day. Your telephone instructions will be recorded. Redemptions by telephone are allowed only if the address and bank account of record have been the same for a minimum period of 30 days. If the redemption proceeds are less than $2,500, they will be mailed by check. If they are $2,500 or more, they will be mailed, wired or sent by EFT to your previously designated bank account as you direct. If you do not specify how you wish your redemption proceeds to be sent, they will be mailed by check. If you cannot reach the Fund by telephone, you should follow the procedures for redeeming by mail or through a broker 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 has fallen below $1,000, the current minimum investment level, as a result of your redemptions (but not as a result of market action). You will be notified in writing and allowed 60 days to increase the value of your account to the minimum investment level. No 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 KDI assumes responsibility for the authenticity of any instructions received by any of them from a shareholder in writing, over the Keystone Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable procedures to confirm that instructions received over KARL or by telephone are genuine. Neither the Fund, KIRC nor KDI will be liable when following instructions received over KARL or by telephone that KIRC reasonably believes to be genuine. If for any reason, reasonable procedures are not followed, the Fund, KIRC or KDI may be liable for any losses due to unauthorized or fraudulent instructions. The Fund may temporarily suspend the right to redeem its shares when (1) the Exchange is closed, other than customary weekend and holiday closings; (2) trading on the Exchange is restricted; (3) 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. - ------------------------------------------------------------------------------ SHAREHOLDER SERVICES - ------------------------------------------------------------------------------ Details on all shareholder services may be obtained from KIRC by writing or by calling toll free 1-800-343-2898. KEYSTONE AUTOMATED RESPONSE LINE The Keystone Automated Response Line offers shareholders specific fund account information and price and yield quotations as well as the ability to do 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 any of the other seven Keystone Custodian Series Funds, 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 (provided the Telephone Exchanges section in the shareholder's application has been completed) or by writing KIRC at 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. There is a $10.00 service charge for each exchange, except that the 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 contingent 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 service charge 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 of the funds in a year or three in a calendar quarter. An exchange order must comply with the requirements for a redemption or repurchase order and must specify the dollar value or number of shares to be exchanged. Exchanges are subject to the minimum initial purchase requirements of the fund being acquired. An exchange constitutes a sale for federal income tax purposes. The exchange privilege is available only in states where shares of the fund being acquired may legally be sold. 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 KDI toll free at 1-800-247-4075 or write to KIRC. 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. - ------------------------------------------------------------------------------ PERFORMANCE DATA - ------------------------------------------------------------------------------ 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., CDS-Weisenberger and Value Line, or other industry publications. - ------------------------------------------------------------------------------ FUND SHARES - ------------------------------------------------------------------------------ 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 redeemable, transferable 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. - ------------------------------------------------------------------------------ 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. - ------------------------------------------------------------------------------ ADDITIONAL INVESTMENT INFORMATION - ------------------------------------------------------------------------------ DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES AVAILABLE TO THE FUND The Fund may engage in the following investment practices to the extent described in the prospectus and the statement of additional information. OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS The obligations of foreign branches of U.S. banks may be general obligations of the parent bank in addition to the issuing branch or may be limited by the terms of a specific obligation and by government regulation. Payment of interest and principal upon these obligations may also be affected by governmental action in the country of domicile of the branch (generally referred to as sovereign risk). In addition, evidences of ownership of such securities may be held outside the U.S., and the Fund may be subject to the risks associated with the holding of such property overseas. Examples of governmental actions would be the imposition of currency controls, interest limitations, withholding taxes, seizure of assets or the declaration of a moratorium. Various provisions of federal law governing domestic branches do not apply to foreign branches of domestic banks. OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS Obligations of U.S. branches of foreign banks may be general obligations of the parent bank in addition to the issuing branch or may be limited by the terms of a specific obligation and by federal and state regulation as well as by governmental action in the country in which the foreign bank has its head office. In addition, there may be less publicly available information about a U.S. branch of a foreign bank than about a domestic bank. MASTER DEMAND NOTES Master demand notes are unsecured obligations that permit the investment of fluctuating amounts by the Fund at varying rates of interest pursuant to direct arrangements between the Fund as lender and the issuer as borrower. 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 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 will be 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 notes arrangements, Keystone considers, under standards established by the Board of Trustees, earning power, cash flow and other liquidity ratios of the borrower and will monitor the ability of the borrower to pay principal and interest on demand. These notes are not typically rated by credit rating agencies. Unless rated, the Fund will invest in them only if at the time of an investment the issuer meets the criteria established for commercial paper discussed in the statement of additional information, which limit 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 credit-worthy. Such persons must be registered as U.S. government securities dealers with an appropriate regulatory organization. Under such agreements, the bank, primary dealer or other financial institution agrees, upon entering into the contract, to repurchase the security at a mutually agreed upon date and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period. Under a repurchase agreement, the seller must maintain the value of the securities subject to the agreement at not less than the repurchase price, such value being determined on a daily basis by marking the underlying securities to their market value. Although the securities subject to the repurchase agreement might bear maturities exceeding a year, the Fund 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 of the Fund 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 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 the Fund is obligated to repurchase may decline below the repurchase price. Borrowing and reverse repurchase agreements magnify the potential for gain or loss on the portfolio securities of the Fund and, therefore, increase the possibility of fluctuation in the Fund's net asset value. Such practices may constitute leveraging. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund's obligation to repurchase the securities, and the Fund's use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such determination. The staff of the Securities and Exchange Commission has taken the position that the 1940 Act treats reverse repurchase agreements as being included in the percentage limit on borrowings imposed on a fund. "WHEN ISSUED" AND "FORWARD COMMITMENT" TRANSACTIONS The Fund may also purchase securities and currencies on a when issued and delayed delivery basis and may purchase or sell securities on a forward commitment basis. When issued or delayed delivery transactions arise when securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of 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 herein in the section 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. No payment or delivery is made by the Fund, however, 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 transactions 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 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, particularly emerging market countries companies, than about a U.S. company, and foreign companies may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those applicable to U.S. companies. Securities of some foreign companies are less liquid or more volatile than securities of U.S. companies, and foreign brokerage commissions and custodian fees are generally higher than in the United States. Investments in foreign securities may also be subject to other risks different from those affecting U.S. investments, including local political or economic developments, 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 be made, however, 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 only use derivatives in a manner consistent with 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 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. With respect to the Fund, Keystone does not currently intend to aggressively use derivatives. 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, which may include preserving a return or spread on a particular investment or portion of its portfolio or protecting against an increase in the price of securities the Fund anticipates purchasing at a later date. The Fund does not 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 Association ("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") 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. READ CAREFULLY BEFORE FILLING OUT APPLICATION. APPLICATION INFORMATION Keystone offers a wide variety of options to help you manage your investments quickly and effortlessly. Please be sure to indicate only the services you desire. Automatic investments and redemptions are normally processed through Electronic Funds Transfer if your bank participates in the Automated Clearing House. If your bank does not have Electronic Funds Transfer, your investments or redemptions can be handled by check. Electronic Funds Transfer is generally faster than issuing checks which may result in delays. For you own protection, you may wish to inquire about your bank's standard procedures. For the protection of shareholders, regardless of the number of shares or amounts of money involved in a redemption or repurchase, 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 KIRCOs policies. KIRC may waive this requirement but may also require additional documents in certain cases. APPLICATION Keystone Custodian Funds _______________________________________________________________________________ Mail application and check(s) to Keystone Investor Resource Center, Inc. P.O. Box 2121, Boston, MA 02106-9970 _______________________________________________________________________________ INTERNAL USE ONLY _______________________________________________________________________________ Account Number _______________________ _______________________ _______________________ DN AT SC A. FUND SELECTION Initial Minimum $1,000 Except: Keystone Tax Exempt Trust $10,000. Make checks payable to fund(s) selected. (44) Series B-1 $______________ (49) Series S-1 $______________ (45) Series B-2 $______________ (50) Series S-3 $______________ (46) Series B-4 $______________ (51) Series S-4 $______________ (47) Series K-1 $______________ (52) Keystone (48) Series K-2 $______________ International $______________ (54) Keystone (30) Keystone Tax Precious Metals Exempt Trust $______________ Holdings $______________ Other $______________ _______________________________________________________________________________ B. YOUR INVESTMENT DEALER _______________________________________________________________________________ Broker/Dealer Firm Name _______________________________________________________________________________ Branch Location and Number _______________________________________________________________________________ Last Name First Name Rep # (____________)_________________________________________________________________ Area Code Telephone _______________________________________________________________________________ Investor's account # (if any) with dealer's firm _______________________________________________________________________________ C. SHAREHOLDER REGISTRATION (please print) Individual_____________________________________________________________________ First Name Middle Initial Last Name Social Security # Joint Tenant___________________________________________________________________ First Name Middle Initial Last Name Social Security # Other__________________________________________________________________________ Name of Corporation, Organization, Fiduciary Taxpayer I.D. # If trust give date of trust agreement:____________________ Uniform Gifts to Minors Act____________________________________________________ Custodian's Name Uniform Transfers to Minors Act________________________________________________ Custodian's Name As Custodian for__________________________________ Under the_______________ Act Minor's Name Social Security # State _______________________________________________________________________________ Street Address City State 9-digit Zip Code Daytime Telephone ( )_________________________________________________ Area Code NOTE: See reverse side for important tax information. ( ) Check here if any owner is a citizen or resident of the U.S. ( ) Check here if any owner is a foreign person not subject to U.S. tax reporting requirements. _____________________________ Indicate Country _______________________________________________________________________________ D. DISTRIBUTIONS Check appropriate box. If no choice indicated, all distributions will be reinvested. ( ) Reinvest all income dividends and capital gains distributions in additional shares. ( ) Pay all income dividends in cash; reinvest capital gains distributions. ( ) Pay all income dividends and capital gains distributions in cash. ( ) Invest all distributions in another Keystone Fund. _______________________________________________________________________________ Designate Fund Name _______________________________________________________________________________ E. OPTIONAL SERVICES Check appropriate box(es). Please read "Application Information" on front. 1. TELEPHONE EXCHANGES 1-800-343-2898 ( ) Subject to Prospectus provisions, I authorize Keystone to accept my telephone instructions to exchange my shares in any fund in the Keystone Custodian Family of Funds for shares of another fund in the Keystone Custodian Family of Funds. There is a $10.00 fee for each exchange; however, if the exchange is made through KARL by an individual investor there is no fee. ( ) Subject to Prospectus provisions, I authorize Keystone to accept telephone instructions from my financial adviser of record to exchange my shares in any fund in the Keystone Custodian Family of Funds for shares of another fund in the Keystone Custodian Family of Funds. There is a $10.00 fee for each exchange. Please refer to the Prospectus for a more complete description of telephone privileges. 2. ( ) TELEPHONE REDEMPTIONS 1-800-343-2898 Subject to Prospectus provisions, I authorize Keystone to accept my telephone instructions to redeem up to $50,000 (minimum $1,000) from my account. Only shares on deposit with Keystone can be redeemed by telephone. Redemptions by telephone are allowed only if the address and bank account of record have been the same for a minimum period of 30 days. Please provide bank information in Section F at left. Please refer to the Prospectus for a more complete description of telephone privileges. 3. ( ) AUTOMATIC INVESTMENT PLAN I authorize $_____________ ($100 minimum) amount to be automatically invested in_______________________ on the ( ) 5th or name of fund ( )20th day of each month. Please allow up to 30 days after application is received to begin this service. Provide bank information in Section F at left. 4. ( ) AUTOMATIC WITHDRAWAL PLAN ( ) MONTHLY OR ( ) QUARTERLY I authorize Keystone to withdraw $_____________________ (min. $100 to max. 1% per month or 3% per quarter of account assets) from my account on the first day of each period, beginning ___________________________ 1st, 19___, and month and to send the amount as follows: (check one) ( ) Deposit directly to my bank account shown in Section F at left. ( ) Mail a check to the registered shareholder's address. ( ) Mail check to other payee:__________________________________________ Payee Name ________________________________________________________________________ Street Address City State 9-Digit Zip Code Please allow up to 30 days after application is received to begin this service. Please provide bank information in Section F, at left. ________________________________________________________________________________ F. BANK INFORMATION For Optional Services 2, 3 and 4. If you elected to have funds deposited to or withdrawn from your bank, please attach a voided check or preprinted deposit slip for your bank account. Your Keystone account and your bank account must have one name in common. ________________________________________________________________________________ Name of Bank ________________________________________________________________________________ Bank Address ________________________________________________________________________________ Name on Bank Account ________________________________________________________________________________ Bank Account Number IMPORTANT: KEYSTONE PRESENTLY DOES NOT CHARGE FOR ELECTRONIC BANKING TRANSFERS. SOME BANKS, HOWEVER, MAY CHARGE FOR THESE SERVICES. ________________________________________________________________________________ G. SIGNATURES AND AUTHORIZATIONS Under penalties of perjury, you, the undersigned, certify that the number shown above is your correct taxpayer identification number and that you are not subject to backup withholding unless you have checked a box below. ( ) Check here if you are subject to backup withholding under the provisions of the Internal Revenue Code Section 3406(a)(1)(C). ( ) Check here if you do not have a Social Security or Taxpayer I.D. number but have applied for one. Your signature on this application serves to certify this, and that you understand that if you do not provide a number within 60 days, Keystone is required by law to withhold 31% of all your dividends, capital gains, redemptions, exchanges, and certain other payments. If by setting up your account without a properly certified Social Security or Taxpayer Identification Number Keystone incurs a penalty fine, we reserve the right to deduct such an amount from your account. APPLICANT(S) SIGNATURE I (we) am (are) of legal age and have read the prospectus(es) and agree to the terms. I/we authorize Keystone to provide information over the telephone to any person identifying him/herself as the registered shareholder or the shareholder's representative and understand that all telephone conversations may be recorded. IMPORTANT: If I (we) have elected any of the optional exchange, redemption, automatic investment or automatic withdrawal services described above: (i) I (we) hereby ratify any instructions received by Keystone in writing and I (we) agree that neither the Fund, KIRC nor KDI will be held responsible for the authenticity of such instructions; (ii) I (we) agree that neither the Fund, KIRC nor KDI will be held liable when following instructions received over KARL or by telephone which are reasonably believed to be genuine; and (iii) I (we) understand, that if such reasonable procedures are not followed, the Fund, KIRC or KDI may be liable for any losses due to unauthorized or fraudulent instructions. ________________________________________________________________________________ Signature Date ________________________________________________________________________________ Signature Date IMPORTANT TAX NOTICE BACKUP WITHHOLDING INFORMATION ________________________________________________________________________________ Federal tax law requires us to obtain your certification that: 1. The taxpayer identification number you provide is correct, and 2. That you are not subject to backup withholding. (For most individuals, the taxpayer identification number is the Social Security Number.) Nonresident aliens must certify that they qualify as foreign persons, exempt from U.S. tax reporting requirements. On joint accounts where an owner is a U.S. citizen or resident, that owner must certify that the taxpayer identification number provided is correct and is not subject to backup withholding. Certification of foreign status must be filed every three years. If you do not provide us with the above information on the application, we are required by law to withhold 31% of all your dividends, capital gains, redemptions, exchanges and certain other payments. The following are the other conditions under which you will be subject to backup withholding: 1. If you have received a notice from the Internal Revenue Service that you provided an incorrect taxpayer identification number. 2. If you have received a notice from the Internal Revenue Service that you underreported interest or dividend payments or did not file a return reporting such payments. DO NOT CHECK THE BOX INDICATING THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING UNLESS YOU HAVE RECEIVED A NOTICE FROM THE INTERNAL REVENUE SERVICE. If you fall within one of the following categories, you are exempt from backup withholding on ALL payments and should NOT check the box: * CORPORATION * FINANCIAL INSTITUTION * REGISTERED SECURITIES DEALER * COMMON TRUST FUND * COLLEGE, CHURCH OR CHARITABLE ORGANIZATION * RETIREMENT PLAN * OTHER ENTITY LISTED IN INTERNAL REVENUE CODE SEC. 3452. For further details, refer to Internal Revenue Service Form W-9. KEYSTONE CUSTODIAN FAMILY OF FUNDS B-1 High Grade Bond Fund B-2 Diversified Bond Fund B-4 High Income Bond Fund K-1 Balanced Income Fund K-2 Strategic Growth Fund S-1 Blue Chip Stock Fund S-3 Capital Growth Fund S-4 Small Company Growth Fund International Fund Precious Metals Holdings Tax Free Fund Tax Exempt Trust Liquid Trust KEYSTONE Distributors, Inc. 200 Berkeley Street Boston, Massachusetts 02116-5034 KEYSTONE B-1 HIGH GRADE BOND FUND PROSPECTUS AND APPLICATION KEYSTONE CUSTODIAN FUND, SERIES B-1 PART B STATEMENT OF ADDITIONAL INFORMATION STATEMENT OF ADDITIONAL INFORMATION KEYSTONE CUSTODIAN FUND, SERIES B-1 High Grade Bond Fund February ____, 1995 This statement of additional information is not a prospectus but relates to, and should be read in conjunction with, the prospectus of Keystone Custodian Fund, Series B-1 (the "Fund") dated February ____, 1995. A copy of the prospectus may be obtained from Keystone Distributors, Inc.("KDI"), the Fund's principal underwriter ("Principal Underwriter"), 200 Berkeley Street, Boston, Massachusetts 02116-5034 or your broker-dealer. TABLE OF CONTENTS 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 Redemptions in Kind 10 The Trust Agreement 10 Investment Manager 12 Investment Adviser 15 Trustees and Officers 16 Principal Underwriter 20 Brokerage 21 Standardized Total Return and Yield Quotations 23 Additional Information 24 Appendix A-1 Financial Statements F-1 Independent Auditors' Report F-12 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 the highest possible income consistent with preservation of principal. The Fund invests primarily in high and good grade bonds and short-term money market instruments at such times and in such proportions as seem appropriate to best achieve this objective. Bonds will include obligations of the United States ("U.S.") government or its agencies and other bond issues of high or good grade including high grade municipal bonds. Such bonds possess a high degree of dependability of interest payments with price action affected almost exclusively by the trend and level of money rates. The Fund invests primarily in the securities of domestic companies, but on October 31, 1994 it also owned foreign securities equal to approximately 5% of its net assets. 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 shall not do any of 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 U.S. government, its agencies or instrumentalities; (2) invest in more than 10% of any class of securities of any one issuer, other than securities issued or guaranteed by the U.S. government, its agencies or instrumentalities; (3) invest more than 5% of the value of its total assets in companies which have been in operation for less than three years; (4) borrow money, except that the Fund may 1) 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 2) enter into reverse repurchase agreements, provided that bank borrowings and reverse repurchase agreements, in aggregate, shall not exceed 10% of the value of the Fund's net assets; (5) 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"); (6) 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; (7) invest for the primary purpose of exercising control over or management of any one issuer; (8) make margin purchases or short sales of securities; (9) make loans, except that the Fund may purchase money market securities, enter into repurchase agreements, buy publicly and privately distributed debt securities and lend limited amounts of its portfolio securities to broker-dealers; all such investments must be consistent with the Fund's investment objective and policies; (10) 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 (11) 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, any officer, Trustee or Director of the Fund, Keystone Management, Inc. ("Keystone Management") or 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 intends to repay any borrowings made in accordance with the fourth investment restriction enumerated above before it makes any additional investments. 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. 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 the investment on its books; and (2) limiting its holdings of such securities to 15% of net assets. VALUATION OF SECURITIES Current value for the Fund's portfolio securities is determined in the following manner: Securities traded on the established exchanges 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. 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; money market instruments maturing in more than sixty days for which market quotations are readily available are valued at market value; and money market instruments maturing in more than sixty days when purchased that are held on the sixtieth day prior to maturity are valued at amortized cost (market value on the sixtieth day adjusted for amortization of premium or accretion of discount) which, when combined with accrued interest, approximates market and in any case reflects fair value as determined by the Fund's Board of Trustees. 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. 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 Fund's Board of Trustees. The Fund's 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 that 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. DISTRIBUTIONS AND TAXES The Fund ordinarily distributes its net capital gains 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. Account statements and/or checks as appropriate will be mailed to shareholders by the 15th of the appropriate month. Unless the Fund receives instructions to the contrary from a shareholder before the record date, it will assume that the shareholder wishes to receive both capital gains distributions 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 corporate 70% 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 was 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 and such dividends and distributions may also be subject to state and local taxes. When the Fund makes a distribution on behalf of the Fund, it intends to distribute only the Fund's net capital gains and such income as has been predetermined to the best of the Fund's ability to be taxable as ordinary income. Therefore, net investment income distributions will not be made on the basis of distributable income as computed on the books of the Fund but will be made on a federal income tax basis. Shareholders of the Fund will be advised annually of the federal tax status of distributions. SALES CHARGES In order to reimburse the Fund for certain expenses relating to the sale of its shares (see "Distribution Plan"), a 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 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 KDI. For the fiscal year ended October 31, 1994 the Fund recovered $98,756 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 illustrates the operation of the contingent deferred sales charge. Assume that an investor makes a purchase payment of $10,000 during the calendar year 1994 and on a given date in 1995 the value of the investor's account has grown through investment performance and reinvestment of distributions to $12,000. On such date in 1995 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 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 Group, Inc. ("Keystone Group"), Harbor Capital Management Company, Inc., their subsidiaries and KDI 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 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 Custodian Fund, 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 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. 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 on June 1, 1983 pursuant to Rule 12b-1. The Fund's Distribution Plan provides that the Fund may expend up to 0.3125% quarterly (approximately 1.25% annually) of 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 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 charge paid by shareholders to KDI). Amounts paid under the Distribution Plan are paid to the Fund's Principal Underwriter, currently KDI, (1) as commissions for Fund shares sold under the Distribution Plan, all or any part of which commissions may be reallowed by KDI to others for selling the Fund shares, and (2) to enable KDI to pay such others shareholder service fees in respect of shares maintained by such recipients outstanding on the Fund's books for specified periods. Amounts paid or accrued to KDI under (1) and (2) in the aggregate may not exceed the annual limitation referred to above. From the amounts received by KDI in connection with the Distribution Plan, and subject to the limitations discussed above, KDI generally pays brokers or others a commission equal to 4% 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. If the Fund is unable to pay KDI a commission on a new sale because the annual maximum (0.75% of average daily net assets) has been reached, KDI intends, but is not obligated, to continue to accept new orders for the purchase of 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 pay KDI such amounts that exceed the Distribution Plan limitation, KDI intends to seek full payment of such amounts from the Fund (together with interest at the rate of prime plus one percent) at such time in the future as, and to the extent that, payment thereof by the Fund would be within permitted limits. KDI currently intends to seek payment of interest only on such charges paid or accrued by KDI 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, KDI will ask the Independent Trustees to take whatever action they deem appropriate under the circumstances with respect to payment of such amounts. 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 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. For the fiscal year ended October 31, 1994, the Fund paid KDI $3,868,521 under the Distribution Plan. During said year, KDI received $1,856,670 after payments of commissions on new sales and service fees to dealers and others of $2,011,851. Whether any expenditure under the 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. REDEMPTIONS IN KIND If conditions arise that would make it undesirable for the Fund to pay for all redemptions in cash, the Fund's Board of Trustees may authorize payment to be made in portfolio securities or other Fund property. The Fund has obligated itself, however, under the 1940 Act to redeem for cash all shares presented for redemption by any one shareholder in any 90-day period up to the lesser of $250,000 or 1% of the Fund's net assets. Securities delivered in payment of redemptions would be valued at the same value assigned to them in computing the net asset value per share. Shareholders receiving such securities would incur brokerage costs when these securities are sold. THE TRUST AGREEMENT Trust Agreement The Fund is a Pennsylvania common law trust established under a Trust Agreement dated July 15, 1935, as amended and restated on December 19, 1989 (the "Restatement"). The Restatement restructured the Fund so that its operation would be substantially similar to that of most other mutual funds. The Restatement 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 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. Description of Shares The Restatement 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 the Fund, a Pennsylvania common law trust, could possibly be 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 (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, the Fund does not hold annual meetings. However, at meetings called for the initial election of Trustees or to consider other matters, shares are entitled to one vote per share. Shares generally vote together as one class on all matters. No amendment may be made to the Restatement, 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 a meeting as described above, no further meetings of shareholders for the purpose of electing Trustees will be held, unless required by law 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 a 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 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 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. 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 Custodian Series Funds and to certain other funds in the Keystone Group of Mutual Funds. Except as otherwise noted below, pursuant to an Investment Management Agreement with the Fund ("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 objectives 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 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 provisions 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 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; (3) providing services to the Fund's shareholders in connection with federal and state taxation and distributions of income and capital gains; and (4) storing documents relating to the Fund's activities. The Fund pays Keystone Management a fee for its services at the annual rate of: Annual Aggregate Net Asset Management Value of the Shares Fee Income 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 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 from year to year 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. 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 ("Advisory Agreement") with Keystone under which Keystone will provide 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 Group, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034. Keystone Group is a corporation predominately owned by current and former members of management and employees of Keystone and its affiliates. The shares of Keystone Group common stock beneficially owned by management are held in a number of voting trusts, the trustees of which are George S. Bissell, Albert H. Elfner, III, Roger T. Wickers, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Group provides accounting, bookkeeping, legal, personnel and general corporate services to Keystone Management, Keystone, their affiliates and the Keystone Group of Mutual 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 its Management Agreement with the Fund. Pursuant to its Advisory Agreement with Keystone Management, 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 objectives and restrictions. The Advisory Agreement stipulates that Keystone shall provide office space, all necessary office facilities, equipment and personnel in connection with its services 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 incurred in connection with the provision of its services. All charges and expenses other than those specifically referred to as being borne by Keystone will be paid by the Fund, including, but not limited to, custodian charges and expenses; bookkeeping and auditors' charges and expenses; transfer agent charges and expenses; fees of Independent Trustees; brokerage commissions, brokers' fees and expenses; issue and transfer taxes; costs and expenses under the Distribution 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 October 31, 1992, the Fund paid or accrued to Keystone Management investment management and administrative services fees of $2,651,959, which represented 0.58% of the Fund's average net assets on an annualized basis. Of such amount paid to Keystone Management, $2,254,165 was paid to Keystone for its services to the Fund. During the fiscal year ended October 31, 1993, the Fund paid or accrued to Keystone Management investment administrative services fees of $2,584,363, which represented 0.56% of the Fund's average net assets on an annualized basis. Of such amount paid to Keystone Management, $2,196,709 was paid to Keystone for its services to the Fund. For the fiscal year ended October 31, 1994, the Fund paid or accrued to Keystone Management investment management and administrative services fees of $2,193,546, which represented 0.56% of the Fund's average net assets on an annualized basis. Of such amount, $1,864,514 was paid to Keystone for its services to the Fund. TRUSTEES AND OFFICERS Trustees and officers of the Fund, their principal occupations and some of their affiliations over the last five years are as follows: *ALBERT H. ELFNER, III: President, Trustee and Chief Executive Officer of the Fund; Chairman of the Board, President, Director and Chief Executive Officer of Keystone Group, President and Trustee or Director of Keystone America Capital Preservation and Income Fund, Keystone America Intermediate Term Bond Fund, Keystone America Strategic Income Fund, Keystone America World Bond Fund, Keystone Tax Free Income Fund, Keystone America State Tax Free Fund, Keystone America State Tax Free Fund - Series II, Keystone America Fund for Total Return, Keystone America Global Opportunities Fund, Keystone America Hartwell Emerging Growth Fund, Inc., Keystone America Hartwell Growth Fund, Inc., Keystone America Omega Fund, Inc., Keystone Fund of the Americas-Luxembourg and Keystone Fund of the Americas - U.S., Keystone Strategic Development Fund (collectively, "Keystone America Funds"); Keystone Custodian Funds, Series B-2, B-4, K-1, K-2, S-1, S-3, and S-4; Keystone International Fund, Keystone Precious Metals Holdings, Inc., Keystone Tax Free Fund, Keystone Tax Exempt Trust, Keystone Liquid Trust (together with the Fund, collectively, "Keystone Custodian Funds"); Keystone Institutional Adjustable Rate Fund and Master Reserves Trust (all such funds, collectively, "Keystone Group Funds"); Director and Chairman of the Board, Chief Executive Officer and Vice Chairman of Keystone; Chairman of the Board and Director of Keystone Investment Management Corporation ("KIMCO") and Keystone Fixed Income Advisors ("KFIA"); Director, Chairman of the Board, Chief Executive Officer and President of Keystone Management, Keystone Software Inc. ("Keystone Software"); Director and President of Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"), Keystone Asset Corporation, Keystone Capital Corporation, and Keystone Trust Company; Director of KDI, Keystone Investor Resource Center, Inc. ("KIRC"), and Fiduciary Investment Company, Inc. ("FICO"); Director and Vice President of Robert Van Partners, Inc.; Director of Boston Children's Services Association; 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 Group Funds; Professor, Finance Department, George Washington University; President, Amling & Company (investment advice); Member, Board of Advisers, Credito Emilano (banking); and former Economics and Financial Consultant, Riggs National Bank. CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Investment Counselor to Appleton Partners, Inc.; former Managing Director, Seaward Management Corporation (investment advice) and former Director, Executive Vice President and Treasurer, State Street Research & Management Company (investment advice). *GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of Keystone Group; Chairman of the Board and Trustee or Director of all other Keystone Group Funds,; Director and Chairman of the Board of Hartwell Keystone; Chairman of the Board and Trustee of Anatolia College; Trustee of University Hospital (and Chairman of its Investment Committee); former Chairman of the Board and Chief Executive Officer of Keystone Group; and former Chief Executive Officer of the Fund. EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Executive Director, Coalition of Essential Schools, Brown University; Director and former Executive Vice President, National Alliance of Business; former Vice President, Educational Testing Services; and former Dean, School of Business, Adelphi University. CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; former Group Vice President, Textron Corp.; and former Director, Peoples Bank (Charlotte, N.C). LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Director of Phoenix Total Return Fund and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund and The Phoenix Big Edge Series Fund; and former President, Morehouse College. K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Chairman of the Board, Director and Executive Vice President, The London Harness Company; Managing Partner, Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher & Associates (environmental consulting); President, Oldways Preservation and Exchange Trust (education); and former Director, Keystone Group and Keystone. F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Of Counsel, Keyser, Crowley & Meub, P.C.; Member, Governor's (VT) Council of Economic Advisers; Chairman of the Board and Director, Central Vermont Public Service Corporation and Hitchcock Clinic; Director, Vermont Yankee Nuclear Power Corporation, Vermont Electric Power Company, Inc., Grand Trunk Corporation, Central Vermont Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual Fire Insurance Company, New England Guaranty Insurance Company, Inc. and the Investment Company Institute; former Governor of Vermont; former Director and President, Associated Industries of Vermont; former Chairman and President, Vermont Marble Company; former Director of Keystone; and former Director and Chairman of the Board, Green Mountain Bank. DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Executive Vice President, DHR International, Inc. (executive recruitment); former Senior Vice President, Boyden International Inc. (executive 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 Group Funds; Chairman, Environmental Warranty, Inc., and Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of Connecticut Natural Gas Corporation, Trust Company of Connecticut, Hartford Hospital, Old State House Association and Enhanced Financial Services, Inc.; Member, Georgetown College Board of Advisors; Chairman, Board of Trustees, Hartford Graduate Center; Trustee, Kingswood-Oxford School and Greater Hartford YMCA; former Director, Executive Vice President and Vice Chairman of The Travelers Corporation; and former Managing Director of Russell Miller, Inc. ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other Keystone Group Funds; Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano, P.C.; President, Nassau County Bar Association; former Associate Dean and Professor of Law, St. John's University School of Law. EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of all other Keystone Group Funds; Director, Senior Vice President, Chief Financial Officer and Treasurer of Keystone Group, KDI, Keystone Asset Corporation, Keystone Capital Corporation, Keystone Trust Company; Treasurer of KIMCO, Robert Van Partners, Inc., and FICO; Treasurer and Director of Keystone Management, Keystone Software, Inc., and Hartwell Keystone; Vice President and Treasurer of KFIA; and Director of KIRC. JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of all other Keystone Group Funds; and President of Keystone. CHRISTOPHER P. CONKEY: Vice President of the Fund and Vice President of Keystone. BARBARA McCUE: Vice President of the Fund and Vice President of Keystone. KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone Group Funds; Vice President of Keystone Group; Assistant Treasurer of FICO and Keystone; and former Vice President and Treasurer of KIRC. ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior Vice President and Secretary of all other Keystone Group Funds; Senior Vice President, General Counsel and Secretary of Keystone; Senior Vice President, General Counsel, Secretary and Director of KDI, Keystone Management and Keystone Software, Senior Vice President and General Counsel of KIMCO; Senior Vice President, General Counsel and Director of FICO and KIRC; Senior Vice President and Secretary of Hartwell Keystone and Robert Van Partners, Inc.; Vice President and Secretary of KFIA; Senior Vice President, General Counsel and Secretary of Keystone Group, Keystone Asset Corporation, Keystone Capital Corporation and Keystone Trust Company. * This Trustee may be considered an "interested person" within the meaning of the 1940 Act. Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their positions as officers and/or Directors of Keystone Group and several of its affiliates including Hartwell Keystone, KDI and KIRC. Mr. Elfner and Mr. Bissell own shares of Keystone Group. Mr. Elfner is Chairman of the Board, Chief Executive Officer and Director of Keystone Group. Mr. Bissell is a Director of Keystone Group. For the fiscal year ended October 31, 1994, the Directors and officers of Keystone received in aggregate $41,769 in direct remuneration from the Fund. On January 31, 1995, the Fund's Trustees, officers and former Advisory Board members beneficially owned less than 1% of the Fund's then outstanding shares. The address of all the Fund's Trustees and officers is 200 Berkeley Street, Boston, Massachusetts 02116-5034. PRINCIPAL UNDERWRITER Keystone Distributors, Inc., 200 Berkeley Street, Boston, Massachusetts 02116-5034, a Delaware corporation wholly owned by Keystone, acts as Principal Underwriter of the shares of the Fund under a Principal Underwriting Agreement ("Underwriting Agreement"). KDI, as agent, has agreed to use its best efforts to find purchasers for the Fund's shares. KDI 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 KDI will bear the expense of preparing, printing and distributing advertising and sales literature and prospectuses used by it. In its capacity as principal underwriter, KDI 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 Fund's Board of Trustees or by a vote of a majority of outstanding shares. The Underwriting Agreement will terminate automatically upon its "assignment" as that term is defined in the 1940 Act. From time to time, if in KDI's judgment it could benefit the sales of Fund shares, KDI may use its discretion in providing to selected dealers promotional materials and selling aids, including, but not limited to, personal computers, related software and Fund data files. During the fiscal years ended October 31, 1992 and 1993, KDI earned commissions of $709,505 and $719,609, respectively, after allowing commissions on new sales and service fees to dealers and others of $4,663,763 and $4,021,392, respectively. During the fiscal year ended October 31, 1994, KDI received $1,856,670 after payments of commissions on new sales and service fees to dealers and others of $2,011,851. BROKERAGE 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. Management weighs such considerations 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 that is fair and equitable to the Fund. 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 Management, Keystone, nor the Fund intend to place 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 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 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 which 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 October 31, 1992 and 1993, the Fund did not pay any brokerage commissions. For the fiscal year ended October 31, 1994, the Fund paid brokerage commissions of $8,000. In no instance are portfolio securities purchased from or sold to Keystone Management, Keystone, KDI or any of their affiliated persons, as defined in the 1940 Act and rules and regulations issued thereunder. The Fund does not intend to engage in short-term trading, but reserves the right to do so if circumstances warrant. Securities will be disposed of without regard to the length of time held in situations where the Fund believes that such securities are no longer appropriate investments. Since the Fund may in some instances sell securities without regard to the length of time they may have been held, the Fund may have substantial portfolio turnover. 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 which 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 October 31, 1994 were (8.91%), 32.29% and 114.23%, respectively. The compounded average rates of return for the five and ten year periods ended October 31, 1994 were 5.76% and 7.92%, 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 Fund's current yield for the 30-day period ended October 31, 1994 was 5.93%. ADDITIONAL INFORMATION To the best of the Fund's knowledge, as of January 31, 1995, the following was the only shareholder of record who owned 5% or more the Fund's outstanding shares: % of Fund Merrill Lynch Pierce Fenner & Smith 12.63% Attn: Book Entry 4800 Deer Lake Drive East, 3rd Floor Jacksonville, FL 32246-6484 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 United States. 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, One Boston Place, Boston, Massachusetts 02108, Certified Public Accountants, are the Fund's independent auditors. 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. Except as otherwise stated in its prospectus or required by law, the Fund reserves the right to change the terms of the offer stated in its prospectus without shareholder approval, including the right to impose or change fees for services provided. No dealer, salesman or other person is authorized to give any information or to make any representation not contained in the Fund's prospectus, 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 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. A-1 APPENDIX CORPORATE BOND RATINGS S&P Corporate Bond Ratings An S&P corporate bond rating is a current assessment of the creditworthiness of an obligor, including obligors outside the 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 BBB 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 a 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 A-2 adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. 4. BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. 5. BB, B, CCC, CC and C - Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Moody's Corporate Bond Ratings Moody's ratings are as follows: 1. Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. 2. Aa - Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long term risks appear somewhat larger than in Aaa securities. 3. A - Bonds that are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present that suggest a susceptibility to impairment sometime in the future. 4. Baa - Bonds that are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be A-3 lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. 5. Ba - Bonds that are rated Ba are judged to have speculative elements. Their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. 6. B - Bonds that are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. COMMON AND PREFERRED STOCK RATINGS S&P's Earnings and Dividend Rankings for Common Stocks Because the investment process involves assessment of various factors, such as product and industry position, corporate resources and financial policy, with results that make some common stocks more highly esteemed than others, S&P believes that earnings and dividend performance is the end result of the interplay of these factors and that, over the long run, the record of this performance has a considerable bearing on relative quality. S&P rankings, however, do not reflect all of the factors, tangible or intangible, that bear on stock quality. Growth and stability of earnings and dividends are deemed key elements in establishing S&P earnings and dividend rankings for common stocks, which capsulize the nature of this record in a single symbol. S&P has established a computerized scoring system based on per-share earnings and dividend records of the most recent ten years, a period deemed long enough to measure a company's performance under varying economic conditions. S&P measures growth, stability within the trend line and cyclicity. 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. A-4 The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample which is reviewed and sometimes modified with the following ladder of rankings: A+ Highest B+ Average C Lowest A High B Below Average D In Reorganization A- Above Average B- Lower S&P believes its rankings are not a forecast of future market price performance but are basically an appraisal of past performance of earnings and dividends and relative current standing. Moody's Common Stock Rankings Moody's presents a concise statement of the important characteristics of a company and an evaluation of the grade (quality) of its common stock. Data presented includes: (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 A-5 Moody's Preferred Stock Ratings Preferred stock ratings and their definitions are as follows: 1. aaa: An issue that is rated aaa is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks. 2. aa: An issue that is rated aa is considered a high-grade preferred stock. This rating indicates that there is a reasonable assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future. 3. a: An issue that is rated a is considered to be an upper- medium grade preferred stock. While risks are judged to be somewhat greater then in the aaa and aa classification, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels. 4. baa: An issue that is rated baa is considered to be a medium-grade preferred stock,neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time. 5. ba: An issue that is rated ba is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well-safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class. 6. b: An issue that is rated b generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small. 7. caa: An issue that is rated caa is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments. 8. ca: An issue that is rated ca is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments. 9. c: This is the lowest rated class of preferred or preference stock. Issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's applies numerical modifiers 1, 2 and 3 in each rating classification: the modifier 1 indicates that the security ranks in the higher end of its generic rating category, the A-6 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 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. MONEY MARKET INSTRUMENTS The Fund's investments in commercial paper are limited to those rated A-1 by Standard & Poor's Corporation, Prime-1 by Moody's Investors Service, Inc. or F-1 by Fitch Investors Service, Inc. These ratings and other money market instruments are described as follows: Commercial Paper Ratings Commercial paper rated A-1 by Standard & Poor's 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. A-7 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 that 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 United States 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 the United States ("U.S.") Government or its agencies or instrumentalities include direct obligations of the United States Treasury and securities issued or guaranteed by the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, 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 United States 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 United States; others, such as securities of Federal Home Loan Banks, by the right of the issuer A-8 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 United States 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. United States Government securities will not include international agencies or instrumentalities in which the United States 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. 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 United States banks, including their branches abroad, and of U.S. branches of foreign banks that are members of the Federal Reserve System or the Federal Deposit Insurance Corporation and have at least $1 billion in deposits as of the date of their most recently published financial statements. 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 deposits at the time of purchase in excess of $1 billion and must be payable in U.S. dollars. OPTIONS TRANSACTIONS The Fund is authorized to write (i.e., sell) covered call options and to purchase call options to close out covered call A-9 options previously written. A call option obligates a writer to sell, and gives a purchaser the right to buy, the underlying security at the stated exercise price at any time until the stated expiration date. The Fund will only write call options that are covered, which means that the Fund will own the underlying security (or other securities, such as convertible securities, that are acceptable for escrow) when it writes the call option and until the Fund's obligation to sell the underlying security is extinguished by exercise or expiration of the call option or the purchase of a call option covering the same underlying security and having the same exercise price and expiration date. The Fund will receive a premium for writing a call option, but will give up, until the expiration date, the opportunity to profit from an increase in the underlying security's price above the exercise price. The Fund will retain the risk of loss from a decrease in the price of the underlying security. The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of naked options which the Fund will not do) but capable of enhancing the Fund's total return. The premium received by the Fund for writing a covered call option will be recorded as a liability in the Fund's statement of assets and liabilities. This liability will be adjusted daily to the option's current market value, which will be the latest sale price at the time as of which the net asset value per share of the Fund is computed (the close of the New York Stock Exchange), or, in the absence of such sale, at the latest bid quotation. The liability will be extinguished upon expiration of the option, the purchase of an identical option in a closing transaction or delivery of the underlying security upon exercise of the option. Many options are traded on registered securities exchanges. Options traded on such exchanges are issued by the Options Clearing Corporation, a clearing corporation which assumes responsibility for the completion of options transactions. The Fund will purchase call options only to close out a covered call option it has written. When it appears that a covered call option written by the Fund is likely to be exercised, the Fund may consider it appropriate to avoid having to sell the underlying security. Or, the Fund may wish to extinguish a covered call option which it has written in order to be free to sell the underlying security to realize a profit on the previously written call option or to write another covered call option on the underlying security. In all such instances, the Fund can close out the previously written call option by purchasing a call option on the same underlying security with the same exercise price and expiration date. (The Fund may, under certain circumstances, also be able to transfer a previously written call option.) The Fund will realize a short-term capital gain if the amount paid to A-10 purchase the call option plus transaction costs is less than the premium received for writing the covered call option. The Fund will realize a short-term capital loss if the amount paid to purchase the call option plus transaction costs is greater than the premium received for writing the covered call option. A previously written call option can be closed out by purchasing an identical call option only in a secondary market for the call option. 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. If a substantial number of the call options written by the Fund are exercised, the Fund's rate of portfolio turnover may exceed historical levels. This would result in higher transaction costs, including brokerage commissions. The Fund will pay brokerage commissions in connection with the writing of covered call options and the purchase of call options to close out previously written options. Such brokerage commissions are normally higher than those applicable to purchases and sales of portfolio securities. In the past the Fund has qualified for, and elected to receive, the special tax treatment afforded regulated investment companies under Subchapter M of the Internal Revenue Code. Although the Fund intends to continue to qualify for such tax treatment, in order to do so it must, among other things, derive less than 30% of its gross income from gains from the sale or other disposition of securities held for less than three months. Because of this, the Fund may be restricted in the writing of call options where the underlying securities have been held less than three months, in the writing of covered call options that expire in less than three months, and in effecting closing purchases with respect to options that were written less than three months earlier. As a result, the Fund may elect to forego otherwise favorable investment opportunities and may elect to avoid or delay effecting closing purchases or selling portfolio securities, with the risk that a potential loss may be increased or a potential gain may be reduced or turned into a loss. Under the Internal Revenue Code of 1954, as amended, gain or loss attributable to a closing transaction and premiums received by the Fund for writing a covered call option that is not exercised may constitute short-term capital gain or loss. Under provisions of the Tax Reform Act of 1986, effective for taxable years A-11 beginning after October 22, 1986, a gain on an option transaction that qualifies as a "designated hedge" transaction under Treasury regulations may be offset by realized or unrealized losses on such designated transaction. The netting of gain against such losses could result in a reduction in gross income from options transactions for purposes of the 30 percent test. 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 that are related to commodity 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. A-12 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 that 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 United States 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, A-13 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. 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 indexes 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 A-14 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 the initial margin. The nature of the initial margin in futures transactions is different from that of a 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 a 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 A-15 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 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 A-16 futures contract. If an option is exercised on 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 commodity futures contracts is analogous to the purchase of protective puts on individual stocks, where an absolute level of protection is sought below which no additional economic loss would be incurred by the Fund. Put options may be purchased to hedge a portfolio of stocks or debt instruments or a position in the futures contract upon which the put option is based. Purchase of Call Options on Futures Contracts The purchase of a call option on a commodity futures contract 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 commodity 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 or 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 A-17 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 that 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. A-18 Risks of Futures Contracts Currency and other financial futures contracts prices are volatile and are influenced, among other things, by changes in stock prices, market conditions, prevailing interest rates and anticipation of future stock prices, market movements or interest rate changes, all of which in turn are affected by economic conditions, such as government fiscal and monetary policies and actions, and national and international political and economic events. At best, the correlation between changes in prices of futures contracts and of the securities being hedged can be only approximate. The degree of imperfection of correlation depends upon circumstances, such as variations in speculative market demand for futures contracts and for securities, including technical influences in futures contracts trading; differences between the securities being hedged and the financial instruments and indexes underlying the standard futures contracts available for trading, in such respects as interest rate levels, maturities and creditworthiness of issuers, or identities of securities comprising the index and those in the Fund's portfolio. A decision of whether, when and how to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected interest rate trends. Because of the low margin deposits required, futures trading 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 fluctuaion permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of A-19 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 contracts involves less potential risk to the Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). However, there may be circumstances when the use of an option on a futures contract would result in a loss to the Fund, even though the use of a futures contract would not, such as when there is no movement in the level of the futures contract. FOREIGN CURRENCY TRANSACTIONS The Fund may invest in securities of foreign issuers. When the Fund invests in foreign securities they usually will be denominated in foreign currencies and the Fund temporarily may hold funds in foreign currencies. Thus, the Fund's share value will be affected by changes in exchange rates. Forward Currency Contracts As one way of managing exchange rate risk, the Fund may engage in forward currency exchange contracts (agreements to purchase or sell currencies at a specified price and date). Under the contract, the exchange rate for the transaction (the amount of currency the Fund will deliver or receive when the contract is completed) is fixed when the Fund enters into the contract. The Fund usually will enter into these contracts to stabilize the U.S. dollar value of a security it has agreed to buy or sell. The Fund A-20 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 rate between foreign currencies and the U.S. dollar. The value of the Fund's investments denominated in foreign currencies will depend on the relative strength of those currencies and the U.S. dollar, and the Fund may be affected favorably or unfavorably by changes in the exchange rates or exchange control regulations between foreign currencies and the dollar. Changes in foreign currency exchange rates also may affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by the Fund. Currency Futures Contracts Currency futures contracts are bilateral agreements under which two parties agree to take or make delivery of a specified amount of a currency at a specified future time for a specified price. Trading of currency futures contracts in the United States 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 engage in currency futures contracts for hedging purposes, and not for speculation. The Fund may engage in currency futures contracts for other purposes if authorized to do so by the Board. The hedging strategies that will be used by the Fund in connection with foreign currency futures contracts are similar to those described above for forward foreign currency exchange contracts. Currently, currency futures contracts for the British Pound Sterling, Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss Franc and French Franc can be purchased or sold for U.S. dollars through the International Monetary Market. It is expected that futures contracts trading in additional currencies will be authorized. The standard contract sizes are L125,000 for the Pound, 125,000 for the Guilder, Mark, Swiss and French Francs, C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and 1,000,000 for the Peso. In contrast to Forward Currency Exchange Contracts which can be traded at any time, only four value dates per year are available, the third Wednesday of March, June, September and December. A-21 Foreign Currency Options Transactions Foreign currency options (as opposed to futures) are traded in a variety of currencies in both the United States and Europe. On the Philadelphia Stock Exchange, for example, contracts for half the size of the corresponding futures contracts on the Chicago Board Options Exchange are traded with up to nine months maturity in Marks, Sterling, Yen, Swiss francs and Canadian dollars. Options can be exercised at any time during the contract life and require a deposit subject to normal margin requirements. Since a futures contract must be exercised, the Fund must continually make up the margin balance. As a result, a wrong price move could result in the Fund losing more than the original investment as it cannot walk away from the futures contract as it can an option contract. The Fund will purchase call and put options and sell such options to terminate an existing position. Options on foreign currency are similar to options on stocks except that an option on an interest rate and/or index based futures contract gives the purchaser the right, in return for the premium paid, to purchase or sell foreign currency, rather than to purchase or sell stock, at a specified exercise price at any time during the period of the option. The Fund intends to use foreign currency option transactions in connection with hedging strategies. Purchase of Put Options on Foreign Currencies The purchase of protective put options on a foreign currency is analogous to the purchase of protective puts on individual stocks, where an absolute level of protection is sought below which no additional economic loss would be incurred by the Fund. Put options may be purchased to hedge a portfolio of foreign stocks or foreign debt instruments or a position in the foreign currency upon which the put option is based. Purchase of Call Options on Foreign Currencies The purchase of a call option on foreign currency represents a means of obtaining temporary exposure to market appreciation at limited risk. It is analogous to the purchase of a call option on an individual stock which can be used as a substitute for a position in the stock itself. Depending on the pricing of the option compared to either the foreign currency upon which it is based, or upon the price of the foreign stock or foreign debt instruments, the purchase of a call option may be less risky than the ownership of the foreign currency or the foreign securities. The Fund would purchase a call option on a foreign currency to hedge against an increase in the foreign currency or a foreign market advance when the Fund is not fully invested. A-22 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. A-23 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 A-24 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 tightened foreign exchange controls. Overall, many exchange markets are still heavily restricted. Several countries limit access to the forward market to companies financing documented export or import transactions in an effort to insulate the market from purely speculative activities. Some of these countries permit local traders to enter into forward contracts with residents but prohibit certain forward transactions with nonresidents. By comparison, other countries have strict controls on exchange transactions by residents, but permit free exchange transactions between local traders and non-residents. A few countries have established tiered markets, funneling commercial transactions through one market and financial transactions through another. Outside the major industrial countries, relatively free foreign exchange markets are rare and controls on foreign currency transactions are extensive. Another aspect of country risk has to do with the possibility that the Fund may be dealing with a foreign trader whose home country is facing a payments problem. Even though the foreign trader intends to perform on its foreign exchange contracts, the contracts are tied to other external liabilities the country has incurred. As a result performance may be delayed, and can result in unanticipated cost to the Fund. This aspect of country risk is a major element in the Fund's credit judgment as to with whom it will deal and in what amounts. A-25 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 seller 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. A-26 Securities Exchange. A securities exchange on which call and put options 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 listed 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 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 underlying 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 that 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. A-27 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 changes 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 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. Keystone B-1 High Grade Bond Fund (Keystone Custodian Fund, Series, B-1) SCHEDULE OF INVESTMENTS--October 31, 1994 See Notes to Schedule of Investments
Interest Maturity Par Market Rate Date Value Value FIXED INCOME (93.1%) ADJUSTABLE RATE MORTGAGE SECURITIES (4.1%) FHLMC, Cap 10.938%, Margin 2.175% + CMT, Resets every 4 months 5.688 2023 $ 8,703,980 $ 8,703,980 FNMA, Cap 10.684%, Margin 2.834% + CMT, Resets Semi-Annually 5.322 2023 4,719,592 4,791,849 TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (Cost--$13,819,075) 13,495,829 COLLATERALIZED MORTGAGE OBLIGATIONS (6.4%) Advanta Home Equity Loan (estimated maturity date 2004) (a), Series 1991-2A 8.800 2006 2,207,779 2,232,617 Merrill Lynch Mortgage Investors, Inc. (estimated maturity date 2001) (a), Series 1991-D Class A 9.000 2011 1,121 1,135 Merrill Lynch Mortgage Investors, Inc. (estimated maturity date 2001) (a), Series 1992-B Class B 8.500 2012 2,844,267 2,849,984 Merrill Lynch Mortgage Investors, Inc. (estimated maturity date 2004) (a), Series 1991-G Class B 9.150 2011 4,512,270 4,552,384 Merrill Lynch Mortgage Investors, Inc. (estimated maturity date 2004) (a), Series 1992-D Class B 8.500 2017 3,362,493 3,328,969 Paine Webber Mortgage Acceptance Corp. (estimated maturity date 2008) (a), Series 1993-5 Class A 3 6.875 2008 2,939,885 2,884,762 Sears Mortgage Securities Corp. (estimated maturity date 2021) (a), Series 1992-6 Class M 1 8.150 2022 859,570 786,506 Security Pacific Acceptance Corp. (estimated maturity date 2002) (a), Series 1992-1 Class B 9.150 2012 2,679,186 2,667,451 University Support Services, Inc. (estimated maturity date 2003) (a), Series 1992-D 9.000 2007 1,545,000 1,552,725 TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost--$21,135,740) 20,856,533 MORTGAGE PASS-THROUGH CERTIFICATES (20.6%) FHLMC PC Pool #303865 8.500 1997 195,220 195,747 FHLMC PC Pool #555218 9.000 2021 12,355,589 12,550,065 FNMA Pool #050926 6.000 2008 477,912 432,511 FNMA Pool #125306 8.000 2024 9,969,507 9,620,574 FNMA Pool #248519 6.000 2008 15,241,170 13,793,258 GNMA Pool #001849 8.500 2024 7,640,456 7,470,914 GNMA Pool #001886 9.000 2024 4,900,000 4,924,500 GNMA Pool #336169 7.500 2023 4,795,155 4,451,966 GNMA Pool #351171 7.500 2023 4,982,839 4,626,217 GNMA Pool #376042 7.500 2024 4,901,615 4,550,806 GNMA Pool #388262 7.500 2024 5,000,323 4,642,451 TOTAL MORTGAGE PASS-THROUGH CERTIFICATES (Cost--$71,053,536) 67,259,009 FOREIGN BONDS (U.S. DOLLARS) (4.7%) Kansallis Osake Pankki, New York, Subord. Notes 10.000 2002 $ 5,000,000 $ 5,378,950 See Notes to Schedule of Investments Interest Maturity Par Market Rate Date Value Value FOREIGN BONDS (U.S. DOLLARS)--continued Nova Scotia Province, Canada, Debenture 9.125 2021 $5,500,000 $ 5,417,610 Rolls Royce Capital, Gtd. Debenture 7.125 2003 5,000,000 4,571,050 TOTAL FOREIGN BONDS (Cost--$17,391,423) 15,367,610 CORPORATE BONDS (33.8%) Automotive (1.3%) Ford Holdings, Inc., Debenture 9.250 2000 4,000,000 4,185,520 BANKING (4.1%) Barnett Banks, Florida, Med. Term Notes 10.875 2003 4,500,000 5,129,955 Comerica Bank, Detroit, Michigan, Sr. Bank Notes 5.950 1997 3,000,000 2,885,340 NCNB Corp., North Carolina, Subord. Notes 10.200 2015 5,000,000 5,535,150 13,550,445 Consumer Goods (1.6%) Procter & Gamble, ESOP, Series A Debenture 9.360 2021 5,000,000 5,364,300 Finance (7.2%) Chrysler Financial Corp., Sr. Notes 9.500 1999 3,545,000 3,744,194 Discover Credit Corp., Med. Term Notes 8.350 1999 5,000,000 5,042,100 Ford Motor Credit, Med. Term Notes 6.125 1995 5,000,000 4,980,500 General Motors Acceptance Corp., Med. Term Notes 7.375 1999 5,000,000 4,852,350 Household Finance Corp., Notes 7.625 1999 5,000,000 4,925,800 23,544,944 Natural Gas (1.3%) Tennessee Gas Pipeline Co., Debenture 6.000 2011 5,500,000 4,071,760 Office & Business Equipment (1.2%) International Business Machines, Debenture 8.375 2019 4,000,000 3,791,680 Oil (2.9%) Atlantic Richfield Co., Debenture 9.875 2016 5,500,000 6,026,130 Chevron Corp. Profit Sharing Savings Plan, Amort. Notes 8.110 2004 3,500,000 3,491,985 9,518,115 Pharmaceutical (2.3%) Upjohn Co. ESOP, Sinking Fund Debenture 9.790 2004 7,000,000 7,401,310 Telecommunications (7.3%) Bell Atlantic Financial Services, Inc., Med. Term Notes 4.460 1996 7,300,000 7,112,171 Cincinnati Bell, Inc., Debenture 9.100 2000 7,000,000 7,253,750 GTE Northwest, Inc., Debenture 7.375 2001 3,000,000 2,892,930 GTE South, Inc., Debenture 7.250 2002 5,500,000 5,206,520 U S West Financial Services, Inc., Med. Term Notes 8.850 1999 1,500,000 1,544,100 24,009,471 Interest Maturity Par Market Rate Date Value Value Utilities (4.6%) Cincinnati Gas & Electric Co., First Mortgage Bond 10.200 2020 3,000,000 3,271,920 DQU II Funding Corp., Collateralized Lease Bond 8.700 2016 5,000,000 4,509,000 Texas Utilities Electric Co., First Mortgage Bond 9.750 2021 2,000,000 2,081,680 Texas Utilities Electric Co., First Mortgage Bond 7.875 2023 6,000,000 5,266,320 15,128,920 TOTAL CORPORATE BONDS (Cost--$117,221,703) 110,566,465 UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (23.5%) FHLMC, Debenture 7.830 2004 5,000,000 4,773,400 FHLMC, Debenture 8.350 2004 5,500,000 5,408,810 U.S. Treasury Notes 6.500 1997 12,000,000 11,857,440 U.S. Treasury Bonds 7.875 2021 30,550,000 29,743,174 U.S. Treasury Notes 8.000 1996 24,700,000 25,232,532 TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (Cost--$85,460,564) 77,015,356 TOTAL FIXED INCOME (Cost--$326,082,041) $304,560,802 Interest Maturity Maturity Market Rate Date Value Value SHORT-TERM INVESTMENTS (5.8%) REPURCHASE AGREEMENTS (5.8%) Prudential Bache, purchased 10/31/94 (Collateralized by $22,211,000 FHLMC, 5.392%, 09/01/23) 4.780 11/01/94 18,991,521 18,989,000 TOTAL SHORT-TERM INVESTMENTS (Cost--$18,989,000) 18,989,000 TOTAL INVESTMENTS (Cost--$345,071,041)(b) 323,549,802 OTHER ASSETS AND LIABILITIES--NET (1.1%) 3,725,734 NET ASSETS (100.0%) $327,275,536
Notes to Schedule of Investments: (a) 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. (b) The cost of investments for federal income tax purposes is identical. Gross unrealized appreciation and depreciation of investments based on identified tax cost, at October 31, 1994, are as follows: Gross unrealized appreciation $ 728,620 Gross unrealized depreciation (22,249,859) Net unrealized depreciation $(21,521,239) Legend of Portfolio Abbreviations: CMT--1, 3, or 5 year Constant Maturity Treasury Index. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period)
Year Ended October 31, 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 Net asset value: Beginning of year $ 16.40 $ 15.92 $ 15.92 $ 15.11 $ 15.85 $ 15.71 $ 15.52 $ 17.30 $ 16.15 $ 15.45 Income from investment operations Investment income--net 0.76 0.96 1.04 1.08 1.11 1.21 1.19 1.20 1.50 1.63 Net gains (losses) on investments and foreign currency related transactions (1.76) 0.66 0.15 0.99 (0.53) 0.25 0.32 (1.59) 1.56 0.94 Net commisions paid on fund share sales(a) 0 0 0 0 0 0 0 0 (0.20) (0.19) Total from investment operations (1.00) 1.62 1.19 2.07 0.58 1.46 1.51 (0.39) 2.86 2.38 Less distributions from: Investment income--net (0.76) (0.96) (1.04) (1.08) (1.18) (1.32) (1.32) (1.39) (1.64) (1.68) In excess of investment income-- net(b) (0.09) (0.18) (0.15) (0.18) (0.14) 0 0 0 0 0 Tax basis return of capital (0.11) 0 0 0 0 0 0 0 0 0 Realized gains on investments and foreign currency related transactions--net 0 0 0 0 0 0 0 0 (0.07) 0 Total distributions (0.96) (1.14) (1.19) (1.26) (1.32) (1.32) (1.32) (1.39) (1.71) (1.68) Net asset value: End of year $ 14.44 $ 16.40 $ 15.92 $ 15.92 $ 15.11 $ 15.85 $ 15.71 $ 15.52 $ 17.30 $ 16.15 Total return(c) (6.27%) 10.50% 7.71% 14.09% 3.93% 9.82% 10.09% (2.44%) 18.13% 16.23% Ratios/supplemental data Ratios to average net assets: Operating and management expenses 1.86% 1.94% 2.01% 2.04% 1.95% 1.82% 1.64% 1.56% 1.00% 1.09% Investment income--net 5.05% 5.85% 6.40% 6.95% 7.45% 7.61% 7.49% 7.32% 8.37% 10.14% Portfolio turnover rate 169% 190% 102% 158% 117% 116% 153% 127% 97% 48% Net assets, end of year (thousands) $327,276 $458,925 $456,912 $453,528 $408,330 $462,425 $447,454 $440,836 $348,107 $105,351 (a) Prior to June 30, 1987, net commissions paid on new sales of shares under the Fund's Rule 12b-1 Distribution Plan has 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 October 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) Effective November 1, 1993, the fund adopted Statement of Position 93-2: "Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies". As a result, distribution amounts exceeding book basis net investment income (or tax basis net income on a temporary basis) are presented as "Distributions in excess of investment income--net". Similarly, capital gain distributions in excess of book basis capital gains (or tax basis capital gains on a temporary basis) are presented as "Distributions in excess of realized capital gains". Prior to the date of adoption of the Statement of Position, distribution amounts exceeding book basis investment income--net were presented as "distributions from paid-in capital". (c) Without contingent deferred sales charge (CDSC).
See Notes to Financial Statements. Keystone B-1 High Grade Bond Fund (Keystone Custodian Fund, Series, B-1) STATEMENT OF ASSETS AND LIABILITIES-- October 31, 1994 Assets: Investments at market value (identified cost--$345,071,041) (Note 1) $323,549,802 Cash 451 Receivable for: Fund shares sold 4,915,662 Interest 5,424,748 Prepaid expenses 49,089 Total assets 333,939,752 Liabilities: Payable for: Fund shares redeemed 5,905,888 Income distribution 703,858 Other accrued expenses 54,470 Total liabilities 6,664,216 Net assets $327,275,536 Net assets represented by (Note 1): Paid-in capital $371,897,091 Accumulated distributions in excess of investment income--net (703,858) Accumulated realized gains (losses) on investments and foreign currency related transactions--net (22,396,458) Net unrealized appreciation (depreciation) on investments (21,521,239) Total net assets applicable to outstanding shares of beneficial interest ($14.44 a share on 22,658,079 shares outstanding) (Note 2) $327,275,536 See Notes to Financial Statements. STATEMENT OF OPERATIONS-- Year Ended October 31, 1994 Investment income (Note 1): Interest (net of withholding taxes of $63,493) $ 26,876,169 Expenses (Notes 2 and 4): Management fee $ 2,193,546 Transfer agent fees 903,104 Accounting, auditing, and legal 42,800 Custodian fees 171,960 Printing 21,369 Trustees' fees and expenses 41,769 Distribution Plan expenses 3,769,765 Registration fees 53,861 Miscellaneous expenses 26,024 Total expenses 7,224,198 Investment income--net 19,651,971 Net realized and unrealized gain (loss) on investments and forward foreign currency exchange related transactions (Notes 1 and 3): Net realized loss on: Investments (21,836,216) Foreign currency related transactions 1,198,568 Realized gain (loss) on investments and forward foreign currency related transactions--net (20,637,648) Net change in unrealized appreciation (depreciation) on investments: Beginning of year 3,395,279 End of year (21,521,239) Net change in unrealized appreciation or depreciation (24,916,518) Net loss on investments and foreign currency related transactions (45,554,166) Net decrease in net assets resulting from operations ($ 25,902,195) STATEMENTS OF CHANGES IN NET ASSETS
Year Ended October 31, 1994 1993 Operations: Investment income--net (Note 1) $ 19,651,971 $ 26,801,447 Realized gain (loss) on investments and foreign currency related transactions--net (Notes 1 and 3) (20,637,648) 18,724,375 Net change in unrealized appreciation or depreciation (24,916,518) 191,629 Net increase (decrease) in net assets resulting from operations (25,902,195) 45,717,451 Net equalization charges and credits (Note 1) -0- (9,641) Distributions to shareholders from (Notes 1 and 5): Investment income--net (19,651,971) (26,791,806) In excess of investment income--net (1,885,034) (5,390,591) Tax basis return of capital (2,544,603) -0- Total distributions to shareholders (24,081,608) (32,182,397) Capital share transactions (Note 2): Proceeds from shares sold 146,861,304 113,059,959 Payments for shares redeemed (243,065,758) (145,688,384) Net asset value of shares issued in reinvestment of distributions from net investment income--net and in excess of net investment income--net 14,538,531 21,116,007 Net increase (decrease) in net assets resulting from capital share transactions (81,665,923) (11,512,418) Total increase (decrease) in net assets (131,649,726) 2,012,995 Net assets: Beginning of year 458,925,262 456,912,267 End of year [Including undistributed investment income--net (distributions in excess of investment income--net) as follows: October 31, 1994--$(703,858) and October 31, 1993-- $(1,137,489)](Note 1) $ 327,275,536 $ 458,925,262
See Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS (1.) Significant Accounting Policies Keystone B-1 High Grade Bond Fund (the "Fund") is a common law trust for which Keystone Management, Inc. ("KMI") is the Investment Manager and 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 Group, Inc. ("KGI"), a Delaware corporation. KGI is privately owned by an investor group consisting of members of current management of Keystone. Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer agent. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles. A. Investments 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 determined in good faith, by or under the direction of the Board of Trustees, 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. Securities traded in foreign currency amounts are translated into United States dollars as follows: market value of investments, assets, and liabilities at the daily rate of exchanges; purchases and sales of investments, income, and expenses at the rate of exchange prevailing on the respective dates of such transactions. A futures contract is an agreement between two parties to buy and sell a specific amount of a commodity, security, financial instrument, or, in the case of a stock index, cash at a set price on a future date. Upon entering into a futures contract, the Fund is required to deposit with a broker an amount ("initial margin") equal to a certain percentage of the purchase price indicated in the futures contract. Subsequent payments ("variation margin") are made or received by the Fund each day, as the value of the underlying instrument or index fluctuates, and are recorded for book purposes as unrealized gains or losses by the Fund. For federal tax purposes, any futures contracts which remain open at fiscal year-end are marked-to-market and the resultant net gain or loss is included in federal taxable income. In addition to market risk, the Fund is subject to the credit risk that the other party will not complete the obligations of the contract. 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 repective 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 on the trade date. Realized gains and losses are recorded on the identified cost basis. Interest income is recorded on the accrual basis and dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded at the close of business on the ex-dividend 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 excise tax liability by making the required distributions under the Internal Revenue Code. D. For the year ended October 31, 1993, the Fund used the accounting practice known as equalization by which a portion of the proceeds from sales and the costs of redemptions of capital shares (equivalent on a per share basis to the amount of undistributed net investment income on the date of the transactions) was credited or charged to undistributed income. As a result, undistributed net investment income per share was not affected by sales or redemptions of shares. Effective November 1, 1993 the Fund discontinued equalization accounting. E. When the Fund enters into a repurchase agreement (a purchase of securities whereby the seller agrees to repurchase the securities at a mutually agreed upon date and price), the repurchase price of the securities will generally equal the amount paid by the Fund plus a negotiated interest amount. The seller under the repurchase agreement will be required to provide securities ("collateral") to the Fund whose value will be maintained at an amount not less than the repurchase price, and which generally will be maintained at 101% of the repurchase price. The Fund monitors the value of collateral on a daily basis, and if the value of 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. F. In connection with portfolio purchases and sales of securities denominated in a foreign currency, the Fund may enter into forward foreign currency exchange contracts ("contracts"). Additionally, from time to time, the Fund may enter into forward foreign currency exchange contracts 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. The Fund is subject to the credit risk that the other party will not complete the obligations of the contract. G. The Fund distributes net investment income to shareholders monthly and net capital gains annually. Distributions from net investment income are based on tax basis net income. Dividends from taxable net investment income can exceed the Fund's book basis net investment income. Effective November 1, 1993, the Fund adopted Statement of Position 93-2: Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies. As a result of this statement, the Fund changed the classification of distributions to shareholders to better disclose the differences between financial statement amounts available for distribution and amounts distributed to comply with income tax regulations. Accordingly, the following reclassifications have been made as of October 31, 1993: a decrease in paid-in capital of $2,034,650, a decrease in undistributed investment income--net of $1,137,489, and an increase in accumulated realized gains (losses) on investments and foreign currency related transactions--net of $3,172,139. Differences between book basis investment income--net available for distribution and tax basis investment income--net available for distribution are primarily attributable to differences in the treatment of 12b-1 Distribution Plan charges and foreign currency gains and losses. (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 October 31, 1994 1993 Shares sold 9,718,655 7,000,489 Shares redeemed (15,997,010) (9,024,427) Shares issued in reinvestment of distributions from investment income--net and distributions in excess of investment income--net 951,580 1,311,126 Net decrease (5,326,775) (712,812) 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 Distributors, Inc. ("KDI"), 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 KDI in connection with the Distribution Plan, and subject to the limitations discussed below, KDI generally pays brokers or others a commission equal to 4% 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 purchased prior to July 8, 1992, 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 4.0%, 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 KDI rather than to the Fund. During the year, KDI received $534,553 in contingent deferred sales charges. 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 quarter (approximately 1.25% annually) occurring 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 limits the aggregate amount which the Fund may pay for such distribution costs 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 the shareholders to KDI). The Fund has operated its Distribution Plan in accordance with both the Plan and the NASD Rule since July 8, 1992, except that until July 7, 1993, maximum annual payments with respect to Net Asset Value as represented by shares sold prior to January 1, 1992 remained at the current rate of 0.3125% quarterly (approximately 1.25% annually). KDI intends, but is not obligated, to continue to pay or accrue distribution charges which exceed current annual payments permitted to be received by KDI from the Fund. KDI intends to seek full payment of such charges from the Fund (together with annual interest thereon at the prime rate plus one percent) at such time in the future as, and to the extent that, payment thereof by the Fund would be within permitted limits. KDI currently intends to seek payment of interest only on such charges paid or accrued by KDI subsequent to January 1, 1992. During the year ended October 31, 1994, the Fund recovered $98,756 in contingent deferred sales charges. During the year, the Fund paid KDI $3,868,521 under the Distribution Plan. The amount paid by the Fund under its Distribution Plan, net of contingent deferred sales charges, was $3,769,765 (0.97% of the Fund's average daily net asset value during the year). For the year ended October 31, 1994, KDI received $1,856,670 after payments of commissions on new sales and service fees to dealers and others of $2,011,851. At October 31, 1994, KDI's total unreimbursed Distribution Plan expenses amounted to $12,643,676, of which $469,768 was incurred in the year ended October 31, 1994 (3.86% of the Fund's net asset value as of October 31, 1994). The right to certain portions of this amount, if and when receivable, was assigned by KDI in 1988 in connection with a financial transaction. As of October 31, 1994, $10,956,671 of the amount remained outstanding. (3.) Securities Transactions As of October 31, 1994, the Fund had a capital loss carryover for federal income tax purposes of approximately $22,396,000 which expires as follows: 1998--$2,251,000; 2002--$20,145,000. For the year ended October 31, 1994, purchases and sales of investment securities were as follows: Cost of Proceeds Purchases from Sales Investments (excluding U.S. Government obligations) $ 299,808,442 $ 327,583,553 U.S. Government obligations 320,056,931 377,135,753 Short-term investments 5,217,577,434 5,267,487,434 $5,837,442,807 $5,972,206,740 (4.) Investment Management and Transactions With Affiliates Under the terms of the Investment Management Agreement between KMI and the Fund, dated December 29, 1989, KMI provides investment management and administrative services to the Fund. In return, KMI is paid a management fee computed and paid daily. The management fee is calculated at a rate of 2.0% of the Fund's gross investment income plus an amount determined by applying percentage rates starting at 0.50% and declining 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, dated December 29, 1989, 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 October 31, 1994, the Fund paid or accrued to KMI investment management and administrative services fees of $2,193,546 which represented 0.56% of the Fund's average net assets on an annualized basis. Of such amount paid to KMI, $1,864,514 was paid to Keystone for its services to the Fund. During the year ended October 31, 1994, the Fund paid or accrued to KIRC and KGI $22,036 as reimbursement for certain accounting services and to KIRC $903,104 for transfer agent fees. (5.) Distributions to Shareholders A distribution of net investment income of $0.078 per share was declared payable by December 6, 1994 to shareholders of record November 21, 1994. This distribution is not reflected in the accompanying financial statements. Federal Tax Status--Fiscal 1994 Distributions (Unaudited) During the fiscal year ended October 31, 1994, the Fund paid or accrued income dividends of $0.96 per share. Of this amount, $0.11 per share is a non-taxable return of capital. The remaining $0.85 per share is taxable to shareholders as ordinary income in the year in which received by them or credited to their accounts and none are eligible for the corporate dividends received deduction. The above figures may differ from those cited in Note 5 and elsewhere in this report due to differences in the calculation of income and capital gains for accounting (book) purposes and Internal Revenue Service (tax) purposes. In January, 1995, we will send you complete information on the distributions paid during the calendar year to help you in completing your federal tax return. INDEPENDENT AUDITORS' REPORT The Trustees and Shareholders Keystone Custodian Fund, Series B-1 We have audited the accompanying statement of assets and liabilities of Keystone Custodian Fund, Series B-1, including the schedule of investments, as of October 31, 1994, 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 supplementary information 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 October 31, 1994, 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 Custodian Fund, Series B-1, as of October 31, 1994, 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 December 2, 1994 KEYSTONE CUSTODIAN FUND, SERIES B-1 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 October 31, 1994 Financial Highlights Years ended October 31, 1985 through 1994 Statement of Assets and Liabilities October 31, 1994 Statement of Operations Year ended October 31, 1994 Statement of Changes in Net Assets Two years ended October 31, 1994 Notes to Financial Statements Independent Auditors' Report dated December 2, 1994 Item 24(b) Exhibits (1) A copy of the form of Registrant's Restatement of Trust Agreement dated December 19, 1989 was filed with Post- Effective Amendment No. 85 to Registration Statement No. 2-10658/811-92 as Exhibit 24(b)(1) and is incorporated by reference herein. (2) A copy of the Registrant's form of the By-laws was filed with Post-Effective Amendment No. 85 to Registration Statement No. 2-10658/811-92 as Exhibit 24(b)(2) and is incorporated by reference herein. (3) Not applicable. (4) A specimen of the security issued by the Fund was filed with Post-Effective Amendment No. 30 to Registration Statement No. 2-10658/811-92 as Exhibit 24(b)(4) and is incorporated by reference herein. (5)(A) A copy of the form of Investment Management Agreement between the Registrant and Keystone Management, Inc. was filed with Post-Effective Amendment No. 92 to Registration Statement No. 2-10658/811-92 as Exhibit 24(b)(5)(A) and is incorporated by reference herein. (B) A copy of the form of Investment Advisory Agreement between Keystone Management, Inc. and Keystone Custodian Funds, Inc. was filed with Post-Effective Amendment No. 92 to Registration Statement No. 2- 10658/811-92 as Exhibit 24(b)(5)(B) and is incorporated by reference herein. (6) A copy of the form of Principal Underwriting Agreement between the Registrant and Keystone Distributors, Inc. was filed with Post-Effective Amendment No. 92 to Registration Statement No. 2-10658/811-92 as Exhibit 24(b)(6) and is incorporated by reference herein. A specimen of the proposed form of Dealer Agreement to be used by the Principal Underwriter was filed with Post- Effective Amendment No. 89 to Registration Statement No. 2-10658/811-92 as Exhibit 24(b)(6)(a) and is incorporated by reference herein. (7) Not applicable. (8) A copy of the form of Registrant's Custodian, Fund Accounting and Recordkeeping Agreement with State Street Bank and Trust Company was filed with Post- Effective Amendment No. 60 to Registration Statement No.2-10658/811-92 as Exhibit 24(b)(8) and is incorporated by reference herein. Copies of Amendments Item 24(b) Exhibits (continued). Nos. 1-7 to said Agreement were filed with Post- Effective Amendment No. 91 to Registration Statement No. 10658/811-92 as part of Exhibit 24(b)(8) and are incorporated by reference herein. (9) Not applicable. (10) An opinion and a consent of counsel as to the legality of securities registered were filed with Registrant's Rule 24f-2 Notice on December 26, 1994 and are incorporated by reference herein. (11) A consent as to use of the opinion in Independent Auditors' Report is filed herewith as Exhibit 24(b)(11). (12) Not applicable. (13) Not applicable. (14) Copies of model plans used in the establishment of retirement plans in connection with which the Registrant offers its securities were filed with Post- Effective Amendment No. 66 to Registration Statement No. 2-10527 of Keystone Custodian Fund, Series K-1 as Exhibit 24(b)(14) and are incorporated by reference herein. (15) A copy of the Registrant's Distribution Plan pursuant to Rule 12b-1 was filed with Post-Effective Amendment No. 87 to Registration Statement No. 2-10658/811-92 as Exhibit 24(b)(15) and is incorporated by reference herein. (16) Schedules for the computation of total return figures for the one, five and ten year periods ended October 31, 1994 and for the current yield are filed herewith as Exhibit 24(b)(16). (17) A financial data schedule is filed herewith as Exhibit 24(b)(17). (18) Powers of Attorney are filed herewith as Exhibit 24(b)(18). 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 January 31, 1995 --------------- ------------------------------ Shares of $1.00 16,750 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 which was filed with Post-Effective Amendment No. 85 to Registration Statement No. 2-10658/811-92 as Exhibit 24(b)(1) and is incorporated by reference herein. Provisions for the indemnification of Keystone Management, Inc. and Keystone Custodian Funds, Inc., investment manager and adviser, respectively, to the Registrant, are contained in Section 6 of the Investment Management Agreement between the Fund and Keystone Management, Inc. and Section 5 of the Investment Advisory Agreement between Keystone Management, Inc. and Keystone Custodian Funds, Inc., copies of which were filed with Post-Effective Amendment No. 92 to Registration Statement No. 2- 10658/811-92 as Exhibit 24(b)(5)(A) and is incorporated by reference herein. Item 28. Business and Other Connections of Investment Adviser The following tables lists the names of the various officers and directors of Keystone Management, Inc. and Keystone Custodian Funds, Inc., Registrant's investment manager and adviser, respectively, and their respective positions. For each named individual, the tables list, for the past two fiscal years, (i) any other organizations (for Keystone Custodian Funds, Inc., excluding investment advisory clients) with which the officer and/or director has had or has substantial involvement; and (ii) positions held with such organizations.
2/2/95 LIST OF OFFICERS AND DIRECTORS OF KEYSTONE MANAGEMENT, INC.
Position with Keystone Other Management, Business Name Inc. Affiliations Albert H. Chairman of Chairman of the Board, Elfner, III the Board, Chief Executive Officer, Chief Execu- President and Director: tive Officer, Keystone Group, Inc. President and Keystone Custodian Director Funds, Inc. Keystone Software, Inc. Keystone Asset Corporation Keystone Capital Corporation Keystone Group Funds Chairman of the Board and Director: Keystone Investment Management Corporation Keystone Fixed Income Advisers, Inc. President and Director: Keystone Trust Company Director or Trustee: Fiduciary Investment Company, Inc. Keystone Investor Resource Center, Inc. Robert Van Partners, Inc. Boston Children's Services Association Associate Fiduciary Investment Company, Inc. Middlesex School Middlebury College Keystone Distributors, Inc. Former Trustee or Director: Neworld Bank Position with Keystone Other Management, Business Name Inc. Affiliations Edward F. Godfrey Treasurer and Senior Vice President, Director Chief Financial Officer, Treasurer and Director: Keystone Group, Inc. Keystone Custodian Funds, Inc. Keystone Distributors, Inc. Treasurer: Keystone Investment Management Corporation Keystone Software, Inc. Fiduciary Investment Company, Inc. Treasurer and Director: Hartwell Keystone Advisers, Inc. Senior Vice President: Keystone Group Funds Ralph J. Director President and Director: Spuehler, Jr. Keystone Distributors, Inc. Director: Keystone Investor Resource Center, Inc. Keystone Custodian Funds, Inc. Senior Vice President and Director: Keystone Group, Inc. Treasurer: Hartwell Emerging Growth Fund Hartwell Growth Fund Former President: Keystone Management, Inc. Former Treasurer: Keystone Group, Inc. The Kent Funds Keystone Custodian Funds, Inc. Position with Keystone Other Management, Business Name Inc. Affiliations Rosemary D. Van Senior Vice Senior Vice President, Antwerp President, General Counsel and General Counsel Director: and Secretary Fiduciary Investment Company, Inc. Keystone Group, Inc. Keystone Investor Resource Center, Inc. Keystone Distributors, Inc. Keystone Software, Inc. Senior Vice President and General Counsel: Keystone Investment Management Corporation Senior Vice President and Secretary: Hartwell Keystone Advisers, Inc. Vice President and Secretary: Keystone Fixed Income Advisers, Inc. Former Assistant Secretary: The Kent Funds Kevin Morrissey Assistant Vice President: Treasurer Keystone Group, Inc. Assistant Treasurer: Fiduciary Investment Company, Inc. Former Assistant Treasurer: The Kent Funds J. Kevin Kenely Vice President Vice President and and Controller Controller: Keystone Group, Inc. Keystone Custodian Funds, Inc. Keystone Distributors, Inc. Keystone Investment Management Corporation Position with Keystone Other Management, Business Name Inc. Affiliations J. Kevin Kenely (con't) Hartwell Keystone Advisers, Inc. Fiduciary Investment Company, Inc. Keystone Software, Inc. Jean Susan Assistant Vice President and Loewenberg Secretary Counsel: Keystone Group, Inc. Vice President and Secretary: Keystone Trust Company Secretary: Keystone Investor Resource Center, Inc. Clerk: Keystone Investment Management Corporation Fiduciary Investment Company, Inc. Assistant Secretary: Keystone Asset Corporation Keystone Capital Corporation Keystone Fixed Income Advisers, Inc. Keystone Group Funds Hartwell Keystone Advisers, Inc. Keystone Software, Inc. Keystone Distributors, Inc. Keystone Custodian Funds, Inc. 1/26/95 LIST OF OFFICERS AND DIRECTORS OF KEYSTONE CUSTODIAN FUNDS, INC. Position with Keystone Other Custodian Business Name Funds, Inc. Affiliations Albert H. Chairman of Chairman of the Board, Elfner, III the Board, Chief Chief Executive Officer, Chief Executive President and Director: Officer, Vice Keystone Group, Inc. Chairman and Keystone Management, Director Inc. Keystone Software, Inc. Keystone Asset Corporation Keystone Capital Corp. Chairman of the Board and Director: Keystone Fixed Income Advisers, Inc. Keystone Investment Management Corporation President and Director: Keystone Trust Company Director or Trustee: Fiduciary Investment Company, Inc. Keystone Distributors, Inc. Keystone Investor Resource Center, Inc. Robert Van Partners, Inc. Boston Children's Services Associates Fiduciary Investment Company, Inc. Middlesex School Middlebury College Formerly Trustee: Neworld Bank Philip M. Byrne Director President and Director: Keystone Investment Management Corporation Senior Vice President: Keystone Group, Inc. Position with Keystone Custodian Name Funds, Inc. 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 Chief Financial President, Treasurer: Treasurer and Keystone Group, Inc. Chief Financial Keystone Officer Distributors,Inc. Treasurer: Keystone Investment Management Corporation Keystone Management, Inc. Keystone Software, Inc. Fiduciary Investment Company, Inc. Treasurer and Director: Hartwell Keystone Advisers, Inc. James R. McCall Director and None President Ralph J. Director President and Director: Spuehler, Jr. Keystone Distributors,Inc. Senior Vice President and Director: Keystone Group, Inc. Treasurer: Hartwell Emerging Growth Fund, Inc. Hartwell Growth Fund,Inc. Director: Keystone Investor Resource Center, Inc. Keystone Management, Inc. Position with Keystone Custodian Name Funds, Inc. Other Business Affiliations Ralph J. Formerly President: Spuehler, Jr. (con't) Keystone Management, Inc. Formerly Treasurer: The Kent Funds Keystone Group, Inc. Keystone Custodian Funds, Inc. Rosemary D. Senior Vice General Counsel, Senior Van Antwerp President, Vice President and General Counsel Secretary: and Secretary Keystone Group, Inc. Senior Vice President and General Counsel: Keystone Investment Management Corporation Senior Vice President, General Counsel and Director: Keystone Investor Resource Center, Inc. Fiduciary Investment Company, Inc. Keystone Distributors, Inc. Keystone Management, Inc. Keystone Software, Inc. Senior Vice President and Secretary: Hartwell Keystone Advisers, Inc. Vice President and Secretary: Keystone Fixed Income Advisers, Inc. Formerly Assistant Secretary: The Kent Funds Harry Barr Vice President None Robert K. Vice President None Baumback Position with Keystone Custodian Name Funds, Inc. Other Business Affiliations Betsy A. Blacher Vice President None Francis X. Claro Vice President None Kristine R. Vice President None Cloyes Christopher P. Vice President None Conkey Richard Cryan Vice President None Maureen E. Vice President None Cullinane George E. Dlugos Vice President None Antonio T. Docal Vice President None Christopher R. Vice President None Ely Roland Gillis Vice President None Robert L. Hockett Vice President None Sami J. Karam Vice President None Donald M. Keller Vice President None George J. Kimball Vice President None JoAnn L. Lydon Vice President None John C. Vice President None Madden, Jr. Stephen A. Marks Vice President None Eleanor H. Marsh Vice President None Walter T. Vice President None McCormick Barbara McCue Vice President None Position with Keystone Custodian Name Funds, Inc. Other Business Affiliations Stanley M. Niksa Vice President None Robert E. O'Brien Vice President None Margery C. Parker Vice President None William H. Vice President None Parsons Daniel A. Rabasco Vice President None David L. Smith Vice President None Kathy K. Wang Vice President None Judith A. Warners Vice President None Marcia Waterman Vice President None J. Kevin Kenely Vice President None Joseph J. Vice President None Decristofaro Jean Susan Assistant Vice President and Loewenberg Secretary Counsel: Keystone Group, Inc. Vice President and Secretary: Keystone Trust Company Secretary: Keystone Investor Resource Center, Inc. Assistant Secretary: Keystone Asset Corporation Keystone Capital Corporation Keystone Distributors, Inc. Keystone Fixed Income Advisers, Inc. Keystone Management, Inc. Keystone Software, Inc. Hartwell Keystone Advisers, Inc. Position with Keystone Custodian Name Funds, Inc. Other Business Affiliations Jean Susan Clerk: Loewenberg (con't) Keystone Investment Management Corporation Fiduciary Investment Company, Inc. Assistant Secretary: Hartwell Keystone Advisers, Inc. Keystone Distributors, Inc. Colleen L. Assistant Assistant Secretary: Mette Secretary Keystone Distributors, Inc. Keystone Group, Inc. Kevin J. Assistant Vice President: Morrissey Treasurer Keystone Group, Inc. Assistant Treasurer: Fiduciary Investment Company, Inc. Formerly Assistant Treasurer: The Kent Funds
Item 29. Principal Underwriter (a) Keystone Distributors, Inc., which acts as Registrant's principal underwriter, also acts as principal underwriter for the following entities: Keystone America Hartwell Emerging Growth Fund, Inc. Keystone America Hartwell Growth Fund, Inc. Keystone Custodian Fund, Series B-2 Keystone Custodian Fund, Series B-4 Keystone Custodian Fund, Series K-1 Keystone Custodian Fund, Series K-2 Keystone Custodian Fund, Series S-1 Keystone Custodian Fund, Series S-3 Keystone Custodian Fund, Series S-4 Keystone America Capital Preservation and Income Fund Keystone America Fund for Total Return Keystone America Global Opportunities Fund Keystone America Government Securities Fund Keystone America Intermediate Term Bond Fund Keystone America Omega Fund, Inc. Keystone America State Tax Free Fund Keystone America State Tax Free Fund, Series II Keystone America Strategic Income Fund Keystone America Tax Free Income Fund Keystone America World Bond Fund Keystone Fund of the Americas Keystone Tax Free Fund Keystone Tax Exempt Trust Keystone Liquid Trust Keystone International Fund Inc. Keystone Precious Metals Holdings, Inc. Keystone Strategic Development Fund (b) For information with respect to each officer and director of the principal underwriter, see the following pages. Item 29(b) (continued).
Position and Name and Principal Position and Offices with Offices with Business Address Keystone Distributors, Inc. the Fund Ralph J. Spuehler* Director, President None Edward F. Godfrey* Director, Senior Vice Senior Vice President, Treasurer President and Chief Financial Officer Rosemary D. Van Antwerp Director, Senior Vice Senior Vice President, General Counsel President and Secretary Albert H. Elfner, III* Director President Charles W. Carr* Senior Vice President None Peter M. Delehanty* Senior Vice President None J. Kevin Kenely* Vice President and None Controller Frank O. Gebhardt Divisional Vice None 2626 Hopeton President San Antonio, TX 78230 C. Kenneth Molander Divisional Vice None 8 King Edward Drive President Londenderry, NH 03053 David S. Ashe Regional Manager and None 32415 Beaconsfield Vice President Birmingham, MI 48025 David E. Achzet Regional Vice President None 60 Lawn Avenue - Greenway 27 Stamford, CT 06902 William L. Carey, Jr. Regional Manager and None 4 Treble Lane Vice President Malvern, PA 19355 John W. Crites Regional Manager and None 2769 Oakland Circle W. Vice President Aurora, CO 80014 Item 29(b) continued Position and Name and Principal Position and Offices with Offices with Business Address Keystone Distributors, Inc. the Fund Richard J. Fish Regional Vice President None 309 West 90th Street New York, NY 10024 Michael E. Gathings Regional Manager and None 245 Wicklawn Way Vice President Roswell, GA 30076 Robert G. Holz, Jr. Regional Manager and None 313 Meadowcrest Drive Vice President Richardson, Texas 75080 Todd L. Kobrin Regional Manager and None 20 Iron Gate Vice President Metuchen, NJ 08840 Ralph H. Johnson Regional Manager and None 345 Masters Court, #2 Vice President Walnut Creek, CA 94598 Paul J. McIntyre Regional Manager and None Vice President Dale M. Pelletier Regional Manager and None 464 Winnetka Ave. Vice President Winnetka, IL 60093 Juliana Perkins Regional Manager and None 2348 West Adrian Street Vice President Newbury Park, CA 91320 Matthew D. Twomey Regional Manager and None 9627 Sparrow Court Vice President Ellicott City, MD 21042 Mitchell I. Weiser Regional Manager and None 7031 Ventura Court Vice President Parkland, FL 33067 Welden L. Evans Regional Banking Officer None 490 Huntcliff Green and Vice President Atlanta, GA 30350 Russell A. Haskell* Vice President None Robert J. Matson* Vice President None Item 29(b) continued Position and Name and Principal Position and Offices with Offices with Business Address Keystone Distributors, Inc. the Fund John M. McAllister* Vice President None Gregg A. Mahalich Vice President None 14952 Richards Drive W. Minnetonka, MN 55345 Burton Robbins Vice President None 1586 Folkstone Terrace Westlake Village, CA 91361 Thomas E. Ryan, III* Vice President None Peter Willis* Vice President None Raymond P. Ajemian* Manager and Vice President None Joan M. Balchunas* Assistant Vice President None Thomas J. Gainey* Assistant Vice President None Eric S. Jeppson* Assistant Vice President None Julie A. Robinson* Assistant Vice President None Peter M. Sullivan Assistant Vice President None 21445 Southeast 35th Way Issaquah, WA 98027 Jean S. Loewenberg* Assistant Secretary Assistant Secretary Colleen L. Mette* Assistant Secretary Assistant Secretary Dorothy E. Bourassa* Assistant Secretary Assistant Secretary * Located at 200 Berkeley Street, Boston, Massachusetts 02116-5034
Item 29(c). - Not applicable Item 30. Location of Accounts and Records 200 Berkeley Street Boston, Massachusetts 02116-5034 Keystone Investor Resource Center, Inc. 101 Main Street Cambridge, Massachusetts 02142-1519 Data Vault Inc. 3431 Sharp Slot Road Swansea, Massachusetts 02277 State Street Bank and Trust Company 1776 Heritage Drive Quincy, Massachusetts 02171 Item 31. Management Services Not applicable. Item 32. Undertakings Registrant hereby undertakes to furnish each person to whom a copy of the Registrant's prospectus is delivered with a copy of the Registrant's latest annual report to shareholders upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all 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 22nd day of February, 1995. KEYSTONE CUSTODIAN FUND, SERIES B-1 By:/s/ George S. Bissell George S. Bissell* Chairman of the Board *By:/s/ James M. Wall James M. Wall** Attorney-in-Fact Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registrant's Registration Statement has been signed below by the following persons in the capacities indicated on the 22nd day of February, 1995. SIGNATURES TITLE /s/ George S. Bissell Chairman of the Board and Trustee George S. Bissell* /s/ Albert H. Elfner, III President, Chief Executive Officer Albert H. Elfner, III* and Trustee /s/ Kevin J. Morrissey Treasurer (Principal Accounting Kevin J. Morrissey* and Financial Officer) *By: /s/ James M. Wall James M. Wall** Attorney-in-Fact SIGNATURES TITLE /s/ Frederick Amling Trustee Frederick Amling* /s/ Charles A. Austin, III Trustee Charles A. Austin, III* /s/ Edwin D. Campbell Trustee Edwin D. Campbell* /s/ Charles F. Chapin Trustee Charles F. Chapin* /s/ K. Dun Gifford Trustee K. Dun Gifford* /s/ Leroy Keith, Jr. Trustee Leroy Keith, Jr.* /s/ F. Ray Keyser, Jr. Trustee F. Ray Keyser, Jr. /s/ David M. Richardson Trustee David M. Richardson* /s/ Richard J. Shima Trustee Richard J. Shima* /s/ Andrew J. Simons Trustee Andrew J. Simons* *By/s/ 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)(18). INDEX TO EXHIBITS Page Number In Sequential Exhibit Number Exhibit Numbering System 1 Restatement of Trust (4) 2 By-Laws (4) 4 Specimen Stock Certificate (1) 5 (A) Investment Management Agreement (8) (B) Investment Advisory Agreement (8) 6 (A) Principal Underwriting Agreement (8) Dealers Agreement (6) 8 Custodian, Fund Accounting and Recordkeeping Agreement (2) Amendments to Custody Agreement (7) 10 Opinion and Consent of Counsel (9) 11 Independent Auditors' Consent 14 Copies of Model Plans (3) 15 Distribution Plan (5) 16 Performance Data Schedules 18 Powers of Attorney 27 Financial Data Schedule - ---------------------------------- 1 Incorporated herein by reference to Post-Effective Amendment No. 30 to Registration Statement No. 2-10658/811-92. 2 Incorporated herein by reference to Post-Effective Amendment No. 60 to Registration Statement No. 2-10658/811-92. 3 Incorporated herein by reference to Post-Effective Amendment No. 66 to Registration Statement No. 2-10527/811-96. 4 Incorporated herein by reference to Post-Effective Amendment No. 85 to Registration Statement No. 2-10658/811-92. 5 Incorporated herein by reference to Post-Effective Amendment No. 87 to Registration Statement No. 2-10658/811-92. INDEX TO EXHIBITS continued. 6Incorporated herein by reference to Post-Effective Amendment No. 89 to Registration Statement No. 2-10658/811-92. 7Incorporated herein by reference to Post-Effective Amendment No. 91 to Registration Statement No. 2-10658/811-92. 8Incorporated herein by reference to Post-Effective Amendment No. 92 to Registration Statement No. 2-10658/811-92. 9Incorporated herein by reference to Registrant's Rule 24f-2 Notice filed on December 26, 1994. EX-99.B10OPIN 2 CONSENT OF EXPERTS AND COUNSEL Exhibit 99.24 (b) (11) CONSENT OF INDEPENDENT AUDITORS The Trustees and Shareholders Keystone Custodian Fund, Series B-1 We consent to the use of our report dated December 2, 1994 included herein and to the reference 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 Boston, Massachusetts February 28, 1995 #10160574 EX-99 3 INVESTMENT PERFORMANCE CHART Exhibit 99.24(b)(11)
KEYSTONE CUSTODIAN FUND B-1 03/31/81 - 10/31/94 NAV/ DIVS/ CUMM AMOUNT SHARE VALUE VALUE FROM TOTAL DATE REINVEST GAINS INVST INVST OF DIST BALANCE FROM INV DIVS/GAINS VALUE ________________________________________________________________________________________________________ 10,000 03/31/81 13.99 10,000 10,000 0 715 10,000 0 10,000 04/01/81 13.85 0.14 10,000 100 722 9,900 100 10,000 04/30/81 13.41 10,000 0 722 9,585 97 9,682 05/01/81 13.27 0.14 10,000 101 730 9,485 197 9,682 05/29/81 13.52 10,000 0 730 9,664 201 9,865 06/01/81 13.38 0.14 10,000 102 737 9,564 301 9,865 06/30/81 13.68 10,000 0 737 9,778 307 10,086 07/01/81 13.53 0.15 10,000 111 745 9,671 415 10,086 07/31/81 13.06 10,000 0 745 9,335 400 9,736 08/03/81 12.92 0.14 10,000 104 754 9,235 500 9,736 08/31/81 12.68 10,000 0 754 9,064 491 9,555 09/01/81 12.54 0.14 10,000 105 762 8,964 591 9,555 09/30/81 12.41 10,000 0 762 8,871 585 9,456 10/01/81 12.27 0.14 10,000 107 771 8,771 685 9,456 10/30/81 12.69 10,000 0 771 9,071 709 9,779 11/02/81 12.55 0.14 10,000 108 779 8,971 809 9,779 11/30/81 13.83 10,000 0 779 9,886 891 10,777 12/01/81 13.69 0.14 10,000 109 787 9,786 991 10,777 12/31/81 13.26 10,000 0 787 9,478 960 10,438 01/04/82 13.12 0.14 10,000 110 796 9,378 1,060 10,438 01/29/82 13.06 10,000 0 796 9,335 1,055 10,390 02/01/82 12.92 0.14 10,000 111 804 9,235 1,155 10,390 02/26/82 13.27 10,000 0 804 9,485 1,187 10,672 03/01/82 13.13 0.14 10,000 113 813 9,385 1,287 10,672 03/31/82 13.37 10,000 0 813 9,557 1,310 10,867 04/01/82 13.23 0.14 10,000 114 821 9,457 1,410 10,867 04/30/82 13.61 10,000 0 821 9,728 1,451 11,179 05/03/82 13.47 0.14 10,000 115 830 9,628 1,551 11,179 05/31/82 13.78 10,000 0 830 9,850 1,587 11,436 06/01/82 13.64 0.14 10,000 116 838 9,750 1,687 11,436 06/30/82 13.29 10,000 0 838 9,500 1,643 11,143 07/01/82 13.15 0.14 10,000 117 847 9,400 1,743 11,143 07/30/82 13.66 10,000 0 847 9,764 1,811 11,575 08/02/82 13.52 0.14 10,000 119 856 9,664 1,911 11,575 08/31/82 14.42 10,000 0 856 10,307 2,038 12,346 09/01/82 14.28 0.14 10,000 120 865 10,207 2,138 12,346 09/30/82 14.93 10,000 0 865 10,672 2,236 12,908 10/01/82 14.79 0.14 10,000 121 873 10,572 2,336 12,908 10/29/82 15.66 10,000 0 873 11,194 2,473 13,667 11/01/82 15.52 0.14 10,000 122 881 11,094 2,573 13,667 11/30/82 15.80 10,000 0 881 11,294 2,620 13,913 12/01/82 15.66 0.14 10,000 123 888 11,194 2,720 13,913 12/31/82 16.06 10,000 0 888 11,480 2,789 14,269 01/03/83 15.92 0.14 10,000 124 896 11,380 2,889 14,269 01/31/83 15.89 10,000 0 896 11,358 2,884 14,242 02/01/83 15.75 0.14 10,000 125 904 11,258 2,984 14,242 02/28/83 16.34 10,000 0 904 11,680 3,096 14,775 03/01/83 16.20 0.14 10,000 127 912 11,580 3,196 14,775 03/31/83 16.50 10,000 0 912 11,794 3,255 15,049 04/04/83 16.36 0.14 10,000 128 920 11,694 3,355 15,049 04/29/83 16.91 10,000 0 920 12,087 3,468 15,555 05/02/83 16.77 0.14 10,000 129 928 11,987 3,568 15,555 05/31/83 16.61 10,000 0 928 11,873 3,534 15,407 06/01/83 16.47 0.14 10,000 130 935 11,773 3,634 15,407 06/30/83 16.45 10,000 0 935 11,758 3,630 15,388 07/01/83 16.31 0.140 10,000 131 943 11,658 3,730 15,388 07/31/83 15.99 10,000 0 943 11,430 3,656 15,086 08/01/83 15.85 0.14 10,000 132 952 11,330 3,756 15,086 08/31/83 15.57 10,000 0 952 11,129 3,690 14,820 09/01/83 15.43 0.14 10,000 133 960 11,029 3,790 14,820 09/30/83 16.07 10,000 0 960 11,487 3,947 15,434 10/03/83 15.93 0.14 10,000 134 969 11,387 4,047 15,434 10/31/83 15.78 10,000 0 969 11,279 4,009 15,289 11/01/83 15.64 0.14 10,000 136 978 11,179 4,109 15,289 11/30/83 15.91 10,000 0 978 11,372 4,180 15,553 12/01/83 15.77 0.14 10,000 137 986 11,272 4,280 15,553 12/30/83 15.74 10,000 0 986 11,251 4,272 15,523 01/03/84 15.60 0.14 10,000 138 995 11,151 4,372 15,523 01/31/84 15.93 10,000 0 995 11,387 4,465 15,852 02/01/84 15.79 0.14 10,000 139 1,004 11,287 4,565 15,852 02/29/84 15.40 10,000 0 1,004 11,008 4,452 15,460 03/01/84 15.26 0.14 10,000 141 1,013 10,908 4,552 15,460 03/30/84 15.02 10,000 0 1,013 10,736 4,481 15,217 04/02/84 14.88 0.14 10,000 142 1,023 10,636 4,581 15,217 04/30/84 14.70 10,000 0 1,023 10,508 4,525 15,033 05/01/84 14.56 0.14 10,000 143 1,032 10,407 4,625 15,033 05/31/84 13.95 10,000 0 1,032 9,971 4,432 14,403 06/01/84 13.81 0.14 10,000 145 1,043 9,871 4,532 14,403 06/29/84 13.98 10,000 0 1,043 9,993 4,587 14,580 07/02/84 13.84 0.14 10,000 146 1,053 9,893 4,688 14,580 07/31/84 14.44 10,000 0 1,053 10,322 4,891 15,212 08/01/84 14.30 0.14 10,000 147 1,064 10,222 4,991 15,212 08/31/84 14.81 10,000 0 1,064 10,586 5,169 15,755 09/04/84 14.67 0.14 10,000 149 1,074 10,486 5,269 15,755 09/28/84 15.03 10,000 0 1,074 10,743 5,398 16,142 10/01/84 14.89 0.14 10,000 150 1,084 10,643 5,498 16,142 10/31/84 15.59 10,000 0 1,084 11,144 5,757 16,900 11/01/84 15.45 0.14 10,000 152 1,094 11,044 5,857 16,900 11/30/84 15.62 10,000 0 1,094 11,165 5,921 17,086 12/03/84 15.48 0.14 10,000 153 1,104 11,065 6,021 17,086 12/31/84 15.59 10,000 0 1,104 11,144 6,064 17,208 01/02/85 15.45 0.14 10,000 155 1,114 11,044 6,164 17,208 01/31/85 15.91 10,000 0 1,114 11,372 6,348 17,720 02/01/85 15.77 0.14 10,000 156 1,124 11,272 6,448 17,720 02/28/85 15.32 10,000 0 1,124 10,951 6,264 17,214 03/01/85 15.18 0.14 10,000 157 1,134 10,851 6,364 17,214 03/29/85 15.47 10,000 0 1,134 11,058 6,485 17,543 04/01/85 15.33 0.14 10,000 159 1,144 10,958 6,586 17,543 04/30/85 15.62 10,000 0 1,144 11,165 6,710 17,875 05/01/85 15.48 0.14 10,000 160 1,155 11,065 6,810 17,875 05/31/85 16.38 10,000 0 1,155 11,708 7,206 18,914 06/03/85 16.24 0.14 10,000 162 1,165 11,608 7,306 18,914 06/28/85 16.37 10,000 0 1,165 11,701 7,365 19,066 07/01/85 16.23 0.140 10,000 163 1,175 11,601 7,465 19,066 07/31/85 16.04 10,000 0 1,175 11,465 7,377 18,843 08/01/85 15.90 0.14 10,000 164 1,185 11,365 7,477 18,843 08/30/85 16.27 10,000 0 1,185 11,630 7,651 19,281 09/03/85 16.13 0.14 10,000 166 1,195 11,530 7,752 19,281 09/30/85 16.08 10,000 0 1,195 11,494 7,727 19,221 10/01/85 15.94 0.14 10,000 167 1,206 11,394 7,828 19,221 10/31/85 16.29 10,000 0 1,206 11,644 7,999 19,643 11/01/85 16.15 0.14 10,000 169 1,216 11,544 8,099 19,643 11/29/85 16.64 10,000 0 1,216 11,894 8,345 20,239 12/02/85 16.50 0.14 10,000 170 1,227 11,794 8,445 20,239 12/31/85 17.07 10,000 0 1,227 12,202 8,737 20,939 01/02/86 16.93 0.14 10,000 172 1,237 12,102 8,837 20,939 01/31/86 16.98 10,000 0 1,237 12,137 8,863 21,000 02/03/86 16.84 0.14 10,000 173 1,247 12,037 8,963 21,000 02/28/86 17.73 10,000 0 1,247 12,673 9,437 22,110 03/03/86 17.59 0.14 10,000 175 1,257 12,573 9,537 22,110 03/31/86 17.96 10,000 0 1,257 12,838 9,738 22,575 04/01/86 17.82 0.14 10,000 176 1,267 12,738 9,838 22,575 04/30/86 17.91 10,000 0 1,267 12,802 9,887 22,689 05/01/86 17.77 0.14 10,000 177 1,277 12,702 9,988 22,689 05/30/86 17.52 10,000 0 1,277 12,523 9,847 22,370 06/02/86 17.38 0.14 10,000 179 1,287 12,423 9,947 22,370 06/30/86 17.63 10,000 0 1,287 12,602 10,090 22,692 07/01/86 17.49 0.14 10,000 180 1,297 12,502 10,190 22,692 07/31/86 17.38 10,000 0 1,297 12,423 10,126 22,549 08/01/86 17.24 0.14 10,000 182 1,308 12,323 10,226 22,549 08/29/86 17.76 10,000 0 1,308 12,695 10,535 23,229 09/02/86 17.62 0.14 10,000 183 1,318 12,595 10,635 23,229 09/30/86 17.43 10,000 0 1,318 12,459 10,520 22,979 10/01/86 17.32 0.11 10,000 145 1,327 12,380 10,599 22,979 10/31/86 17.49 10,000 0 1,327 12,502 10,703 23,205 11/03/86 17.30 0.195 10,000 259 1,342 12,362 10,842 23,205 11/28/86 17.62 10,000 0 1,342 12,595 11,046 23,641 12/01/86 17.50 0.125 10,000 168 1,351 12,505 11,135 23,641 12/31/86 17.65 10,000 0 1,351 12,616 11,234 23,850 01/02/87 17.52 0.125 10,000 169 1,361 12,527 11,323 23,850 01/30/87 17.77 10,000 0 1,361 12,702 11,481 24,183 02/02/87 17.64 0.125 10,000 170 1,371 12,613 11,571 24,183 02/27/87 17.76 10,000 0 1,371 12,695 11,646 24,341 03/02/87 17.64 0.125 10,000 171 1,380 12,605 11,736 24,341 03/31/87 17.49 10,000 0 1,380 12,502 11,639 24,141 04/01/87 17.36 0.125 10,000 173 1,390 12,412 11,728 24,141 04/30/87 16.64 10,000 0 1,390 11,894 11,239 23,133 05/01/87 16.53 0.11 10,000 153 1,399 11,816 11,317 23,133 05/29/87 16.37 10,000 0 1,399 11,701 11,208 22,909 06/01/87 16.26 0.11 10,000 154 1,409 11,623 11,287 22,909 06/30/87 16.48 10,000 0 1,409 11,780 11,439 23,219 07/01/87 16.37 0.110 10,000 155 1,418 11,701 11,518 23,219 07/31/87 16.24 10,000 0 1,418 11,608 11,426 23,035 08/03/87 16.13 0.11 10,000 156 1,428 11,530 11,505 23,035 08/31/87 15.97 10,000 0 1,428 11,415 11,391 22,806 09/01/87 15.86 0.11 10,000 157 1,438 11,337 11,470 22,806 09/30/87 15.39 10,000 0 1,438 11,001 11,130 22,130 10/01/87 15.28 0.11 10,000 158 1,448 10,922 11,208 22,130 10/30/87 15.63 10,000 0 1,448 11,172 11,465 22,637 11/02/87 15.52 0.11 10,000 159 1,459 11,094 11,544 22,637 11/30/87 15.72 10,000 0 1,459 11,237 11,692 22,929 12/01/87 15.61 0.110 10,000 160 1,469 11,158 11,771 22,929 12/31/87 15.81 10,000 0 1,469 11,301 11,922 23,223 01/05/88 15.75 0.11 10,000 162 1,479 11,258 12,038 23,296 01/29/88 16.18 10,000 0 1,479 11,565 12,367 23,932 02/01/88 16.07 0.11 10,000 163 1,489 11,487 12,445 23,932 02/29/88 16.27 10,000 0 1,489 11,630 12,600 24,230 03/01/88 16.16 0.11 10,000 164 1,499 11,551 12,679 24,230 03/31/88 15.95 10,000 0 1,499 11,401 12,514 23,915 04/04/88 15.84 0.11 10,000 165 1,510 11,322 12,593 23,915 04/29/88 15.71 10,000 0 1,510 11,229 12,489 23,719 05/02/88 15.60 0.11 10,000 166 1,520 11,151 12,568 23,719 05/31/88 15.46 10,000 0 1,520 11,051 12,455 23,506 06/01/88 15.35 0.11 10,000 167 1,531 10,972 12,534 23,506 06/30/88 15.71 10,000 0 1,531 11,229 12,828 24,057 07/01/88 15.60 0.11 10,000 168 1,542 11,151 12,906 24,057 07/29/88 15.53 10,000 0 1,542 11,101 12,849 23,949 08/01/88 15.42 0.11 10,000 170 1,553 11,022 12,927 23,949 08/31/88 15.46 10,000 0 1,553 11,051 12,961 24,011 09/01/88 15.35 0.11 10,000 171 1,564 10,972 13,039 24,011 09/30/88 15.68 10,000 0 1,564 11,208 13,320 24,528 10/03/88 15.57 0.11 10,000 172 1,575 11,129 13,398 24,528 10/31/88 15.82 10,000 0 1,575 11,308 13,613 24,922 11/01/88 15.71 0.11 10,000 173 1,586 11,229 13,692 24,922 11/30/88 15.54 10,000 0 1,586 11,108 13,544 24,652 12/01/88 15.43 0.11 10,000 174 1,598 11,029 13,623 24,652 12/30/88 15.45 10,000 0 1,598 11,044 13,640 24,684 01/04/89 15.30 0.11 10,000 176 1,609 10,936 13,684 24,620 01/31/89 15.54 10,000 0 1,609 11,108 13,898 25,006 02/01/89 15.43 0.11 10,000 177 1,621 11,029 13,977 25,006 02/28/89 15.30 10,000 0 1,621 10,936 13,859 24,795 03/01/89 15.19 0.11 10,000 178 1,632 10,858 13,938 24,795 03/31/89 15.22 10,000 0 1,632 10,879 13,965 24,844 04/03/89 15.11 0.11 10,000 180 1,644 10,801 14,044 24,844 04/28/89 15.36 10,000 0 1,644 10,979 14,276 25,255 05/01/89 15.25 0.11 10,000 181 1,656 10,901 14,355 25,255 05/31/89 15.63 10,000 0 1,656 11,172 14,712 25,885 06/01/89 15.52 0.11 10,000 182 1,668 11,094 14,791 25,885 06/30/89 15.95 10,000 0 1,668 11,401 15,201 26,602 07/03/89 15.84 0.11 10,000 183 1,679 11,322 15,280 26,602 07/31/89 16.14 10,000 0 1,679 11,537 15,569 27,106 08/01/89 16.03 0.11 10,000 185 1,691 11,458 15,648 27,106 08/31/89 15.77 10,000 0 1,691 11,272 15,394 26,666 09/01/89 15.66 0.11 10,000 186 1,703 11,194 15,472 26,666 09/29/89 15.72 10,000 0 1,703 11,237 15,532 26,768 10/02/89 15.61 0.11 10,000 187 1,715 11,158 15,610 26,768 10/31/89 15.96 10,000 0 1,715 11,408 15,960 27,368 11/01/89 15.85 0.11 10,000 189 1,727 11,330 16,039 27,368 11/30/89 15.97 10,000 0 1,727 11,415 16,160 27,576 12/01/89 15.86 0.110 10,000 190 1,739 11,337 16,239 27,576 12/29/89 15.90 10,000 0 1,739 11,365 16,280 27,645 01/03/90 15.78 0.11 10,000 191 1,751 11,279 16,348 27,628 01/31/90 15.54 10,000 0 1,751 11,108 16,100 27,208 02/01/90 15.43 0.11 10,000 193 1,763 11,029 16,178 27,208 02/28/90 15.49 10,000 0 1,763 11,072 16,241 27,313 03/01/90 15.38 0.11 10,000 194 1,776 10,994 16,320 27,313 03/30/90 15.37 10,000 0 1,776 10,986 16,309 27,296 04/02/90 15.26 0.11 10,000 195 1,789 10,908 16,388 27,296 04/30/90 15.05 10,000 0 1,789 10,758 16,162 26,920 05/01/90 14.94 0.11 10,000 197 1,802 10,679 16,241 26,920 05/31/90 15.39 10,000 0 1,802 11,001 16,730 27,731 06/01/90 15.28 0.11 10,000 198 1,815 10,922 16,809 27,731 06/29/90 15.51 10,000 0 1,815 11,086 17,062 28,148 07/02/90 15.40 0.11 10,000 200 1,828 11,008 17,140 28,148 07/31/90 15.60 10,000 0 1,828 11,151 17,363 28,514 08/01/90 15.49 0.11 10,000 201 1,841 11,072 17,442 28,514 08/31/90 15.21 10,000 0 1,841 10,872 17,126 27,998 09/04/90 15.10 0.11 10,000 202 1,854 10,793 17,205 27,998 09/28/90 15.20 10,000 0 1,854 10,865 17,319 28,184 10/01/90 15.09 0.11 10,000 204 1,868 10,786 17,398 28,184 10/31/90 15.23 10,000 0 1,868 10,886 17,559 28,445 11/01/90 15.12 0.11 10,000 205 1,881 10,808 17,638 28,445 11/30/90 15.44 10,000 0 1,881 11,036 18,011 29,047 12/03/90 15.33 0.11 10,000 207 1,895 10,958 18,090 29,047 12/31/90 15.57 10,000 0 1,895 11,129 18,373 29,502 01/03/91 15.56 0.11 10,000 208 1,908 11,122 18,569 29,692 01/31/91 15.64 10,000 0 1,908 11,179 18,665 29,844 02/01/91 15.53 0.11 10,000 210 1,922 11,101 18,743 29,844 02/28/91 15.64 10,000 0 1,922 11,179 18,876 30,056 03/01/91 15.54 0.103 10,000 198 1,934 11,106 18,950 30,056 03/28/91 15.61 10,000 0 1,934 11,158 19,039 30,197 04/01/91 15.51 0.103 10,000 199 1,947 11,084 19,113 30,197 04/30/91 15.65 10,000 0 1,947 11,187 19,289 30,475 05/01/91 15.55 0.103 10,000 201 1,960 11,113 19,362 30,475 05/31/91 15.60 10,000 0 1,960 11,151 19,428 30,579 06/03/91 15.50 0.103 10,000 202 1,973 11,077 19,502 30,579 06/28/91 15.47 10,000 0 1,973 11,058 19,468 30,526 07/01/91 15.37 0.103 10,000 203 1,986 10,984 19,542 30,526 07/31/91 15.56 10,000 0 1,986 11,122 19,787 30,909 08/01/91 15.46 0.103 10,000 205 2,000 11,049 19,861 30,909 08/30/91 15.78 10,000 0 2,000 11,279 20,276 31,555 09/03/91 15.68 0.103 10,000 206 2,013 11,206 20,349 31,555 09/30/91 15.99 10,000 0 2,013 11,430 20,756 32,185 10/01/91 15.89 0.103 10,000 207 2,026 11,356 20,829 32,185 10/31/91 16.02 10,000 0 2,026 11,451 21,004 32,455 11/01/91 15.92 0.103 10,000 209 2,039 11,377 21,077 32,455 11/29/91 16.02 10,000 0 2,039 11,451 21,214 32,665 12/02/91 15.92 0.103 10,000 210 2,052 11,377 21,287 32,665 12/31/91 16.52 10,000 0 2,052 11,808 22,094 33,902 01/03/92 16.35 0.103 10,000 211 2,065 11,685 22,074 33,759 01/31/92 16.07 10,000 0 2,065 11,487 21,700 33,186 02/03/92 15.97 0.103 10,000 213 2,078 11,413 21,773 33,186 02/28/92 16.08 10,000 0 2,078 11,494 21,927 33,421 03/02/92 15.98 0.098 10,000 204 2,091 11,424 21,997 33,421 03/31/92 15.86 10,000 0 2,091 11,337 21,830 33,166 04/01/92 15.76 0.098 10,000 205 2,104 11,267 21,900 33,166 04/30/92 15.85 10,000 0 2,104 11,330 22,022 33,351 05/01/92 15.75 0.098 10,000 206 2,117 11,259 22,092 33,351 05/29/92 16.03 10,000 0 2,117 11,458 22,482 33,940 06/01/92 15.93 0.098 10,000 207 2,130 11,388 22,552 33,940 06/30/92 16.14 10,000 0 2,130 11,537 22,846 34,383 07/01/92 16.04 0.098 10,000 209 2,143 11,467 22,916 34,383 07/31/92 16.42 10,000 0 2,143 11,737 23,456 35,193 08/03/92 16.32 0.098 10,000 210 2,156 11,667 23,526 35,193 08/31/92 16.46 10,000 0 2,156 11,766 23,725 35,491 09/01/92 16.36 0.098 10,000 211 2,169 11,695 23,795 35,491 09/30/92 16.41 10,000 0 2,169 11,730 23,865 35,595 10/01/92 16.31 0.098 10,000 213 2,182 11,660 23,935 35,595 10/30/92 16.02 10,000 0 2,182 11,451 23,507 34,958 11/02/92 15.92 0.098 10,000 214 2,196 11,381 23,577 34,958 11/30/92 15.84 10,000 0 2,196 11,322 23,455 34,778 12/01/92 15.74 0.098 10,000 215 2,209 11,252 23,525 34,778 12/31/92 15.94 10,000 0 2,209 11,394 23,821 35,215 01/05/93 15.90 0.098 10,000 217 2,223 11,367 23,981 35,348 01/29/93 16.13 10,000 0 2,223 11,530 24,325 35,855 02/01/93 16.03 0.098 10,000 218 2,236 11,460 24,395 35,855 02/26/93 16.26 10,000 0 2,236 11,623 24,742 36,364 03/01/93 16.16 0.098 10,000 219 2,250 11,553 24,812 36,364 03/26/93 16.09 0.098 10,000 220 2,264 11,501 24,922 36,423 03/31/93 16.12 10,000 0 2,264 11,523 24,968 36,491 04/26/93 16.10 0.098 10,000 222 2,277 11,508 25,159 36,667 04/30/93 16.04 10,000 0 2,277 11,465 25,065 36,531 05/26/93 15.97 0.098 10,000 223 2,291 11,415 25,179 36,595 05/31/93 15.93 10,000 0 2,291 11,387 25,116 36,503 06/28/93 16.16 0.098 10,000 225 2,305 11,551 25,703 37,254 06/30/93 16.20 10,000 0 2,305 11,580 25,767 37,347 07/26/93 16.11 0.088 10,000 203 2,318 11,515 25,827 37,342 07/30/93 16.22 10,000 0 2,318 11,594 26,003 37,597 08/26/93 16.45 0.088 10,000 204 2,330 11,758 26,576 38,334 08/31/93 16.45 10,000 0 2,330 11,758 26,576 38,334 09/27/93 16.47 0.088 10,000 205 2,343 11,773 26,813 38,586 09/30/93 16.40 10,000 0 2,343 11,723 26,699 38,422 10/26/93 16.41 0.088 10,000 206 2,355 11,730 26,922 38,651 10/29/93 16.40 10,000 0 2,355 11,723 26,905 38,628 11/24/93 16.05 0.088 10,000 207 2,368 11,472 26,538 38,011 11/30/93 16.07 10,000 0 2,368 11,487 26,571 38,058 12/27/93 16.16 0.088 10,000 208 2,381 11,551 26,929 38,480 12/31/93 16.09 10,000 0 2,381 11,501 26,812 38,313 01/26/94 16.13 0.078 10,000 186 2,393 11,530 27,064 38,594 01/31/94 16.19 10,000 0 2,393 11,573 27,165 38,738 02/25/94 15.73 0.078 10,000 187 2,405 11,244 26,580 37,824 02/28/94 15.74 10,000 0 2,405 11,251 26,597 37,848 03/28/94 15.42 0.078 10,000 188 2,417 11,022 26,244 37,266 03/31/94 15.28 10,000 0 2,417 10,922 26,005 36,927 04/26/94 15.18 0.078 10,000 189 2,429 10,851 26,024 36,874 04/29/94 15.04 10,000 0 2,429 10,751 25,784 36,534 05/26/94 14.97 0.078 10,000 189 2,442 10,701 25,853 36,554 05/31/94 14.93 10,000 0 2,442 10,672 25,784 36,456 06/27/94 14.84 0.078 10,000 190 2,455 10,608 25,819 36,427 06/30/94 14.74 10,000 0 2,455 10,536 25,645 36,181 07/26/94 14.78 0.078 10,000 191 2,468 10,565 25,906 36,471 07/29/94 14.91 10,000 0 2,468 10,658 26,134 36,792 08/26/94 14.79 0.078 10,000 192 2,481 10,572 26,116 36,688 08/31/94 14.84 10,000 0 2,481 10,608 26,204 36,812 09/26/94 14.58 0.078 10,000 193 2,494 10,422 25,939 36,360 09/30/94 14.55 10,000 0 2,494 10,400 25,885 36,286 10/26/94 14.38 0.078 10,000 195 2,507 10,279 25,777 36,056 10/31/94 14.44 10,000 0 2,507 10,322 25,885 36,207
FUND #: 4201 SEC STANDARDIZED ADVERTISING YIELD FUND NAME:KEYSTONE SERIES B-1 PRICING DATE 26-Oct-94 ============= TOTAL INCOME FOR PERIOD 2,145,430.54 TOTAL EXPENSES FOR PERIOD 529,386.08 30 DAY YTM 5.93260% AVERAGE SHARES OUTSTANDING 23,010,973.215 ============= LAST PRICE DURING PERIOD 14.38 - -------------------------------------------------------------------------------------------------------- PRICE ZERO MORTGAGE PAYDOWN GAIN/LOSS ST FIXED ST VAR LONG TERM TOTAL DATE COUPON INCOME ADJ ADJ INCOME INCOME INCOME INCOME 0 679,459 0 (24,400) 54,721 0 1,435,652 2,145,431 0.00000% 2.51195% 0.00000% -0.09069% 0.20325% 0.00000% 5.27752% - -------------------------------------------------------------------------------------------------------- 26-Sep-94 0 27234.64 3557.48 39973.17 70,765.29 27-Sep-94 0 24909.42 1669.5 47852.3 74,431.22 28-Sep-94 0 24909.62 1595.86 46655.79 73,161.27 29-Sep-94 0 24910.86 1508.7 48126.91 74,546.47 30-Sep-94 0 24910.34 1513.52 48129.69 74,553.55 01-Oct-94 0 24910.34 1513.52 48129.69 74,553.55 02-Oct-94 0 24910.34 1513.52 48129.69 74,553.55 03-Oct-94 0 24895.01 1346.55 48272.87 74,514.43 04-Oct-94 0 24895.76 1523.61 47779.72 74,199.09 05-Oct-94 0 22279.78 1551.24 46839.26 70,670.28 06-Oct-94 0 22280.36 2045.55 48148.84 72,474.75 07-Oct-94 0 21783.9 1419.86 47975.76 71,179.52 08-Oct-94 0 21783.9 1419.86 47975.76 71,179.52 09-Oct-94 0 21783.9 1419.86 47975.76 71,179.52 10-Oct-94 0 21785.49 1419.86 47997.52 71,202.87 11-Oct-94 0 21781.48 2207.22 47867.86 71,856.56 12-Oct-94 0 21783.49 2148.21 48014.96 71,946.66 13-Oct-94 0 21782.91 2090.73 47879.99 71,753.63 14-Oct-94 0 21782.83 2001.83 47819.02 71,603.68 15-Oct-94 0 21782.83 2001.83 47819.02 71,603.68 16-Oct-94 0 21782.83 2001.83 47819.02 71,603.68 17-Oct-94 0 21676.44 2210.02 47722.94 71,609.40 18-Oct-94 0 21640.48 2759.66 47737.21 72,137.35 19-Oct-94 0 21819.97 1437.21 47889.5 71,146.68 20-Oct-94 0 21817.03 2076.86 46974.14 70,868.03 21-Oct-94 0 21816.53 1761.12 48103.16 71,680.81 22-Oct-94 0 21816.53 1761.12 48103.16 71,680.81 23-Oct-94 0 21816.53 1761.12 48103.16 47,280.39 24-Oct-94 0 21819.97 1954.97 48254.83 72,029.77 25-Oct-94 0 21794.41 2520.76 48306.55 72,621.72 26-Oct-94 0 21795.23 -24400.42 2565 47247.87 71,608.10
- -----------------------------------------------------------------------|| 30 DAY 30 DAY 30 DAY 12B-1 DAILY DAILY DAILY || ACCUMULATED ACCUMULATED ACCUMULATED EXPENSE CDSC EXPENSES SHARES PRICE || INCOME EXPENSES SHARES 206,230 (3,897) 529,386 23,010,973 -0.75300% - ---------------------------------------------------------------------------------------------------------------------- 22056.99 -25.24 40130.55 23729385.501 14.89 0.00 0.00 0.00 6945.6 -274.82 21223.32 23230744.714 14.56 74,431.22 21,223.32 23,230,744.71 6949.59 -32.66 18473.27 23233998.399 14.59 147,592.49 39,696.59 46,464,743.11 6963.95 -594.8 17859.32 23219665.442 14.54 222,138.96 57,555.91 69,684,408.56 6935.84 -397.98 18007.26 23287548.826 14.55 296,692.51 75,563.17 92,971,957.38 0 0 17242.24 23287548.826 14.55 371,246.06 92,805.41 116,259,506.21 0 0 17242.24 23287548.826 14.55 445,799.61 110,047.65 139,547,055.03 20887.17 -374.45 17242.24 23147191.707 14.53 520,314.04 127,289.89 162,694,246.74 6908.58 0 21407.1 23130470.283 14.52 594,513.13 148,696.99 185,824,717.02 6900.86 -33.76 18308.78 23174905.617 14.48 665,183.41 167,005.77 208,999,622.64 6893.44 -10.34 18301.36 23121725.942 14.47 737,658.16 185,307.13 232,121,348.58 6876.8 -91.3 18213.69 22984987.352 14.52 808,837.68 203,520.82 255,106,335.93 0 0 17237.5 22984987.352 14.52 880,017.20 220,758.32 278,091,323.29 0 0 17237.5 22984987.352 14.52 951,196.72 237,995.82 301,076,310.64 20567.13 0 17237.5 23079294.344 14.52 1,022,399.59 255,233.32 324,155,604.98 6887.75 -225.69 21097.89 22934747.53 14.56 1,094,256.15 276,331.21 347,090,352.51 6859.28 -189.95 18015.76 22927956.065 14.53 1,166,202.81 294,346.97 370,018,308.58 6844.85 -35.51 18108.81 22910383.768 14.57 1,237,956.44 312,455.78 392,928,692.35 6859.43 -38.07 18131.34 22870444.907 14.59 1,309,560.12 330,587.12 415,799,137.25 0 0 17137.54 22870444.907 14.59 1,381,163.80 347,724.66 438,669,582.16 0 0 17137.54 22870444.907 14.59 1,452,767.48 364,862.20 461,540,027.07 20564.61 -211.67 17137.54 23173197.292 14.59 1,524,376.88 381,999.74 484,713,224.36 6945.71 -90.84 21045.22 22793033.983 14.59 1,596,514.23 403,044.96 507,506,258.34 6832.2 -222.28 17896.66 22771737.108 14.56 1,667,660.91 420,941.62 530,277,995.45 6813.76 -3.42 18092.82 22764254.959 14.49 1,738,528.94 439,034.44 553,042,250.41 6777.55 -176.1 930.01 22743786.09 14.5 1,810,209.75 439,964.45 575,786,036.50 0 0 16895.14 22743786.09 14.5 1,881,890.56 456,859.59 598,529,822.59 0 0 16895.14 22743786.09 14.5 1,929,170.95 473,754.73 621,273,608.68 20322.69 -492.84 16895.14 23051845.074 14.47 2,001,200.72 490,649.87 644,325,453.75 6854.49 -63.42 20900.69 23010020.689 14.46 2,073,822.44 511,550.56 667,335,474.44 6838.51 -337.26 17835.52 22993721.996 14.38 2,145,430.54 529,386.08 690,329,196.44
EX-99.B18PWROFATTY 4 EXHIBIT 28(B)(18) POWER OF ATTORNEY Exhibit 99.24 (b) (18) POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/George S. Bissell George S. Bissell Director/Trustee, Chairman of the Board Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and/or Chief Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Albert H. Elfner, III Albert H. Elfner, III Director/Trustee, President and Chief Executive Officer POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director, Trustee or officer and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Kevin J. Morrissey Kevin J. Morrissey Treasurer Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Frederick Amling Frederick Amling Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Charles A. Austin III Charles A. Austin III Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Edwin D. Campbell Edwin D. Campbell Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Charles F. Chapin Charles F. Chapin Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ K. Dun Gifford K. Dun Gifford Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Leroy Keith, Jr. Leroy Keith, Jr. Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ F. Ray Keyser,Jr. F. Ray Keyser, Jr. Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ David M. Richardson David M. Richardson Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Richard J. Shima Richard J. Shima Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/Andrew J. Simons Andrew J. Simons Director/Trustee Dated: December 14, 1994 EX-27 5 FDS
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING RECORDS. 0000055611 KEYSTONE CUSTODIAN FUND, SERIES B-1 YEAR OCT-31-1994 OCT-31-1994 345071041 323549802 10340410 49540 0 333939752 6609746 0 6664216 6664216 0 371897091 22658079 27984854 0 (703858) (22396458) 0 (21521239) 327275536 0 26876169 0 (7224198) 19651971 (20637648) (24916518) (25902195) 0 (21537005) (2544603) 0 9718655 (15997010) 951580 (5326775) 0 (5423244) 0 0 (2193546) 0 (7224198) 411677987 16.40 0.76 (1.76) (0.85) 0 (0.11) 14.44 1.86 0 0
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