-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kk7ScntDCbWKg6WsW5L1TEgh3wngivxa2duYPdK51xdtdfzzYhrcRBro1F5642k2 60ZP+oeDD/xImCVrkb9BRg== 0000950156-96-000170.txt : 19960222 0000950156-96-000170.hdr.sgml : 19960222 ACCESSION NUMBER: 0000950156-96-000170 CONFORMED SUBMISSION TYPE: 485B24E PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19960221 EFFECTIVENESS DATE: 19960221 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE QUALITY BOND FUND B-1 CENTRAL INDEX KEY: 0000055611 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 042394419 FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485B24E SEC ACT: 1933 Act SEC FILE NUMBER: 002-10658 FILM NUMBER: 96523616 BUSINESS ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6173383200 MAIL ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02116 485B24E 1 KEYSTONE QUALITY BOND FUND (B-1) AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FEBRUARY 21, 1996. 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. 95 X and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ___ Amendment No. 28 X KEYSTONE QUALITY BOND FUND (B-1) (FORMERLY NAMED 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) ___ on (date) pursuant to paragraph (b) ___ 60 days after filing pursuant to paragraph (a)(i) ___ on (date) pursuant to paragraph (a)(i) ___ 75 days after filing pursuant to paragraph (a)(ii) ___ on (date) pursuant to paragraph (a)(ii) 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 28, 1995. CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 - ----------------------------------------------------------------- Proposed Proposed Title of Maximum Maximum Securities Amount Offering Aggregate Amount of Being Being Price Offering Registration Registered Registered Per Unit* Price** Fee - ----------------------------------------------------------------- Shares without Par Value 3,287,641 $15.62 289,995 $100 - ----------------------------------------------------------------- * Computed under Rule 457(d) on the basis of the offering price per share at the close of business on February 8, 1996. ** The calculation of the maximum aggregate offering price is made pursuant to Rule 24e-2 under the Investment Company Act of 1940. 8,523,861 shares of the Fund were redeemed during its fiscal year ended October 31, 1995. Of these shares, 3,269,076 of such shares are being used for a reduction in this filing. Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant has elected to register an indefinite number of shares under the Securities Act of 1933. A Form 24f-2 for Registrant's most recent fiscal year ended October 31, 1995 was filed on December 28, 1995. 1016077F KEYSTONE QUALITY BOND FUND (B-1) (FORMERLY NAMED KEYSTONE CUSTODIAN FUND, SERIES B-1) CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 95 to REGISTRATION STATEMENT This Post-Effective Amendment No. 95 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) 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 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 QUALITY BOND FUND (B-1) (FORMERLY NAMED KEYSTONE CUSTODIAN FUND, SERIES B-1) PART A PROSPECTUS - ------------------------------------------------------------------------------ PROSPECTUS FEBRUARY , 1996 - ------------------------------------------------------------------------------ KEYSTONE QUALITY BOND FUND (B-1) (FORMERLY KNOWN AS KEYSTONE CUSTODIAN FUND, SERIES B-1) 200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034 CALL TOLL FREE 1-800-343-2898 Keystone Quality Bond Fund (B-1) (the "Fund") is a mutual fund that seeks 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 con- tained in a statement of additional information dated February , 1996, which has been filed with the Securities and Exchange Commission and is incorporated by reference into this prospectus. For a free copy, or for other information about the Fund, write to the address or call the telephone number listed 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 .............................. 10 Financial Highlights ............................... 3 Distribution Plan .............................. 11 Fund Description ................................... 4 How to Redeem Shares ........................... 13 Investment Objective and Policies .................. 4 Shareholder Services ........................... 15 Investment Restrictions ............................ 5 Performance Data ............................... 16 Pricing Shares ..................................... 7 Fund Shares .................................... 17 Dividends and Taxes ................................ 8 Additional Information ......................... 17 Fund Management and Expenses ....................... 9 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 QUALITY BOND FUND (B-1) 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 ........................................ 0.60% 12b-1 Fees(4) .......................................... 1.00% Other Expenses ......................................... 0.36% ----- Total Fund Operating Expenses(5) ....................... 1.96% =====
EXAMPLE(6) 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 ................. $60 $82 $106 $229 You would pay the following expenses on the same investment, assuming no redemption ................... $20 $62 $106 $229 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, 1995. (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) Total Fund Operating Expenses include indirectly paid expenses. (6) 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 QUALITY BOND FUND (B-1) (For a share outstanding throughout the year) The following table contains important financial information relating to the Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent auditors. The table appears in the Fund's Annual Report and should be read in conjunction with the Fund's financial statements and related notes, which also appear, together with the independent auditors' report, in the Fund's Annual Report. The Fund's financial statements, related notes and independent auditors' report are included in the statement of additional information. Additional information about the Fund's performance is contained in its Annual Report, which will be made available upon request and without charge.
YEAR ENDED OCTOBER 31, --------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ NET ASSET VALUE, BEGINNING OF YEAR ..... $14.44 $16.40 $15.92 $15.92 $15.11 $15.85 $15.71 $15.52 $17.30 $16.15 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income .. 0.87 0.76 0.96 1.04 1.08 1.11 1.21 1.19 1.20 1.50 Net realized and unrealized gain (loss) on investments and closed futures contracts ............ 1.05 (1.76) 0.66 0.15 0.99 (0.53) 0.25 0.32 (1.59) 1.56 Net commissions paid on fund shares sales (a). 0 0 0 0 0 0 0 0 0 (0.20) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total from investment operations ........... 1.92 (1.00) 1.62 1.19 2.07 0.58 1.46 1.51 (0.39) 2.86 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ LESS DISTRIBUTIONS FROM: Net investment income . (0.87) (0.76) (0.96) (1.04) (1.08) (1.18) (1.32) (1.32) (1.39) (1.64) In excess of net investment income ..... (0.05) (0.09) (0.18) (0.15) (0.18) (0.14) 0 0 0 0 Tax basis return of capital ............... (0.02) (0.11) 0 0 0 0 0 0 0 0 Net realized gain on investments and closed futures contracts ..... 0 0 0 0 0 0 0 0 0 (0.07) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total distributions .... (0.94) (0.96) (1.14) (1.19) (1.26) (1.32) (1.32) (1.32) (1.39) (1.71) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ NET ASSET VALUE, END OF YEAR ................. $15.42 $14.44 $16.40 $15.92 $15.92 $15.11 $15.85 $15.71 $15.52 $17.30 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== TOTAL RETURN(B) ........ 13.69% (6.27%) 10.50% 7.71% 14.09% 3.93% 9.82% 10.09% (2.44%) 18.13% RATIOS/SUPPLEMENTAL DATA Ratios to average net assets: Total expenses ....... 1.96%(c) 1.86% 1.94% 2.01% 2.04% 1.95% 1.82% 1.64% 1.56% 1.00% Net investment income 5.86% 5.05% 5.85% 6.40% 6.95% 7.45% 7.61% 7.49% 7.32% 8.37% Portfolio turnover rate 244% 169% 190% 102% 158% 117% 116% 153% 127% 97% NET ASSETS, END OF YEAR (THOUSANDS) ........... $310,791 $327,276 $458,925 $456,912 $453,528 $408,330 $462,425 $447,454 $440,836 $348,107 - ---------- (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., transfer agent fees plus commissions paid net of deferred sales charges received by the Fund) as a component of net investment income. (b) Excluding applicable sales charges. (c) "Ratio of total expenses to average net assets" for the year ended October 31, 1995 includes indirectly paid expenses. Excluding indirectly paid expenses for the year ended October 31, 1995 the expense ratio would have been 1.94%.
- ------------------------------------------------------------------------------ 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 more than thirty funds managed or advised by Keystone Investment Management Company (formerly known as 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." - ------------------------------------------------------------------------------ INVESTMENT OBJECTIVE AND POLICIES - ------------------------------------------------------------------------------ INVESTMENT OBJECTIVE 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 ("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. 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. Of course, there can be no assurance that the Fund will achieve its investment objective since there is uncertainty in every investment. INVESTMENTS AND INVESTMENT POLICIES 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 investment 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 issued by issuers located in developing countries as well as 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"). 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 that may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the Fund has valued 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 and when-issued transactions for securities and currencies. In addition, the Fund may enter into currency and other financial futures contracts and related options transactions for hedging purposes and not for speculation and may employ new investment techniques with respect to such futures contracts and related options. 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, the Fund may also invest in certain other types of derivative instruments, including collateralized mortgage obligations, structured notes, interest rate swaps, index swaps, currency swaps and caps and floors. These basic vehicles can also be combined to create more complex products called hybrid derivatives or structured securities. Investments in foreign securities, 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 "Risk Factors," "Additional Investment Information" and the statement of additional information. - ------------------------------------------------------------------------------ INVESTMENT RESTRICTIONS - ------------------------------------------------------------------------------ The Fund has adopted the fundamental restrictions summarized below, which may not be changed without the approval of a majority (as defined in the 1940 Act) of the Fund's outstanding shares. These restrictions and certain other fundamental and non-fundamental restrictions are set forth in the statement of additional information. Generally, the Fund may not: (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) except that up to 25% of its total assets may be invested without regard to this limit; (2) borrow money, except that the Fund may borrow money from banks for temporary or emergency purposes in aggregate amounts up to 10% of the value of the Fund's net assets (computed at cost) or enter into reverse repurchase agreements, 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. RISK FACTORS Like any investment, your investment in the Fund involves an element of risk. Before you invest in the Fund, you should carefully evaluate your ability to assume the risks your investment in the Fund poses. You can lose money by investing in the Fund. Your investment is not guaranteed. A decrease in the value of the Fund's portfolio securities can result in a decrease in the value of your investment. Certain risks related to the Fund are discussed below. To the extent not discussed in this section, specific risks attendant to individual securities or investment practices are discussed in "Additional Investment Information." Should the Fund need to raise cash to meet a large number of redemptions, it might have to sell portfolio securities at a time when it would be disadvantageous to do so. By itself, the Fund does not constitute a balanced investment plan. You should take into account your own investment objectives as well as your other investments when considering an investment in the Fund. FIXED INCOME RISKS. The Fund stresses earning income by investing in fixed income securities, which are generally considered to be interest rate sensitive. This means that their value (and the Fund's share prices) will tend to decrease when interest rates rise and increase when interest rates fall. Specifically, the market value of traditional fixed income debt securities generally will vary inversely with changes in interest rates. For example, in the case of an investment in a traditional fixed income debt security, if interest rates increase after the security is purchased, the security, if sold prior to maturity, may return less than its cost. When choosing among bond funds, you should consider the anticipated yield together with potential changes in share price, as these two factors determine each fund's total return. Generally the yield and potential price changes of a fund depend on the quality and maturity of the obligations in its portfolio, as well as on market conditions. The Fund is for investors who seek the highest possible income, but want a portfolio of primarily high and investment grade bonds. Current yield levels should not be considered representative of yields for any future period of time. To the extent that investments are made in debt securities (other than U.S. government securities), derivatives or structured securities, such investments, despite favorable credit ratings, are subject to some risk of default. GOVERNMENT SECURITIES. While certain of the securities in which the Fund may invest are issued by or guaranteed as to principal and interest by the full faith and credit of the U.S. government, the market value of such securities is not guaranteed. DERIVATIVES. The market value of derivatives or structured securities may vary depending upon the manner in which the investments have been structured As a result, the value of such investments may change at a more rapid rate than that of traditional fixed income securities. See "Additional Investment Information". FOREIGN RISK. Investing in securities of foreign issuers generally involves greater risk than investing in securities of domestic issuers for the following reasons: (1) there may be less public information available about foreign companies than is available about U.S. companies; (2) foreign companies are not generally subject to the uniform accounting, auditing and financial reporting standards and practices applicable to U.S. companies; (3) foreign securities markets have less volume than the U.S. market, and the securities of some foreign companies are less liquid and more volatile than the securities of comparable U.S. companies; (4) foreign securities transactions may involve higher brokerage commissions; (5) there may be less government regulation of securities exchanges, brokers, listed companies and banks in foreign countries than in the U.S.; (6) the Fund may incur fees on currency exchanges when it changes investments from one country to another; (7) the Fund's foreign investments could be affected by expropriation, confiscatory taxation, nationalization, establishment of exchange controls, political or social instability or diplomatic developments; (8) foreign governments may withhold income on investments; and (9) fluctuations in foreign exchange rates will affect the value of the Fund's investments, the value of dividends and interest earned, gains and losses realized on the sale of securities, net investment income and unrealized appreciation or depreciation of investments. 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. Past performance should not be considered representative of results for any future period of time. - ------------------------------------------------------------------------------ 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; 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. If the Fund qualifies and if it distributes substantially all of its net investment income and net capital gains, if any, to shareholders, it will be relieved of any federal income tax liability. Any taxable dividend declared in October, November, or December to shareholders of record in such a month and paid by the following January 31 will be includable in the taxable income of the shareholders as if paid on December 31 of the year in which the dividend was declared. The Fund distributes its net investment income to its shareholders by the 15th day of each month and net capital gains, if any, at least annually. As of April 1, 1995, in compliance with a recent ruling by the Internal Revenue Service ("IRS"), the Fund treats its 12b-1 fees for tax purposes as operating expenses rather than capital charges. Distributions are payable in additional shares of the Fund or, at the shareholder's option (which must be exercised before the record date for the distribution), in cash. Fund distributions in the form of additional shares are made at net asset value without the imposition of a sales charge. 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 Fund's shares are held. If Fund shares held for less than six months are sold at a loss, however, such loss will be treated for tax purposes as a long-term capital loss to the extent of any long-term capital gains dividends received. 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. INVESTMENT MANAGER Keystone Management, organized in 1989, is a wholly-owned subsidiary of Keystone. Its directors and principal executive officers have been affiliated with Keystone, a seasoned investment adviser, for a number of years. Keystone Management also serves as investment manager to each of the other funds in the Keystone Fund Family and to certain other funds in the Keystone Investments Family of 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; and (3) providing services to the Fund's shareholders in connection with federal and state taxation and distributions of income and capital gains. INVESTMENT ADVISER Keystone, the Fund's investment adviser, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, has provided investment advisory and management services to investment companies and private accounts since it was organized in 1932. Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. (formerly known as Keystone Group, Inc.) ("Keystone Investments"), 200 Berkeley Street, Boston, Massachusetts 02116-5034. Keystone Investments is a private corporation predominantly owned by current and former members of management of Keystone and its affiliates. The shares of Keystone Investments common stock beneficially owned by management are held in a number of voting trusts, the trustees of which are George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Investments provides accounting, bookkeeping, legal, personnel and general corporate services to Keystone Management, Keystone, their affiliates and the Keystone Investments Family of Funds. Pursuant to the 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. During the year ended October 31, 1995, the Fund paid or accrued to Keystone Management investment management and administrative fees of $1,876,672, which represented 0.60% of the Fund's average net assets. Of such amount paid to Keystone Management, $1,595,171 was paid to Keystone for its services to the Fund. The Fund has adopted a Code of Ethics incorporating policies on personal securities trading as recommended by the Investment Company Institute. 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, 1995, the Fund paid 1.96% of its average net assets in expenses. During the fiscal year ended October 31, 1995, the Fund paid or accrued to Keystone Investments $25,306 for certain accounting services. For the same period the Fund paid or accrued to Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and dividend disbursing agent, $729,430 in 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 20 years of investment experience. SECURITIES TRANSACTIONS Under policies established by the Board of Trustees, Keystone selects broker-dealers to execute transactions subject to the receipt of best execution. When selecting broker-dealers to execute portfolio transactions for the Fund, Keystone may consider the number of shares of the Fund sold by such broker-dealers. In addition, broker-dealers executing portfolio transactions 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, 1995 and 1994 were 244% and 169%, 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. - ------------------------------------------------------------------------------ HOW TO BUY SHARES - ------------------------------------------------------------------------------ You may purchase shares of the Fund from any broker-dealer that has a selling agreement with Keystone Investment Distributors Company (formerly known as Keystone Distributors, Inc.), the Fund's principal underwriter (the "Principal Underwriter"). The Principal Underwriter, a wholly-owned subsidiary of Keystone, is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034. In addition, you may open an account for the purchase of shares of the Fund by mailing to the Fund, c/o Keystone Investor Resource Center, Inc., P.O. Box 2121, Boston, Massachusetts 02106-2121, a completed account application and a check payable to the Fund. 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 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 deferred sales charge is deducted from the redemption proceeds otherwise payable to the shareholder. To the extent permitted by NASD rules, the deferred sales charge is paid to the Principal Underwriter. The contingent deferred sales charge is a declining percentage of the lesser of (1) the net asset value of the shares redeemed or (2) the total cost of such shares. No deferred sales charge is imposed when a shareholder redeems amounts derived from (1) increases in the value of his account above the total cost of such shares due to increases in the net asset value per share of the Fund; (2) certain shares with respect to which the Fund did not pay a commission on issuance, including shares acquired through reinvestment of dividend income and capital gains distributions; or (3) shares held in all or part of more than four consecutive calendar years. In determining whether a contingent deferred sales charge is payable and, if so, the percentage charge applicable, it is assumed that shares held the longest are the first to be redeemed. No deferred sales charge is payable on permitted exchanges of shares between funds in the Keystone Fund Family that have adopted distribution plans pursuant to Rule 12b-1 under the 1940 Act. When shares of one such fund are exchanged for shares of another such fund, for purposes of any future contingent deferred sales charge, the calendar year of purchase of the shares being exchanged is deemed to be the year the shares being acquired by exchange were originally purchased. In addition, no contingent deferred sales charge is imposed on a redemption of shares of the Fund in the event of (1) death or disability of the shareholder; (2) a lump-sum distribution from a 401(k) plan or other benefit plan qualified under the Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of accounts having an aggregate net asset value of less than $1,000; (5) automatic withdrawals under an automatic withdrawal plan of up to 1% per month of the shareholder's initial account balance; (6) withdrawals consisting of loan proceeds to a retirement plan participant; (7) financial hardship withdrawals made by a retirement plan participant; or (8) withdrawals consisting of returns of excess contributions or excess deferral amounts made to a retirement plan participant. WAIVER OF DEFERRED SALES CHARGE Shares also may be sold, to the extent permitted by applicable law, at net asset value without the payment of commissions or the imposition of a 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 the Principal Underwriter; 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 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 limits the amount a Fund may pay annually in distribution costs for the sale of its shares and shareholder service fees. The NASD limits annual expenditures to 1%, of which 0.75% may be used to pay such distribution costs and 0.25% may be used to pay shareholder service fees. The NASD also limits the aggregate amount that the Fund may pay for such distribution costs to 6.25% of gross share sales since the inception of the Fund's Distribution Plan plus interest at the prime rate plus 1% per annum on such amounts (less any contingent deferred sales charges paid by shareholders to the Principal Underwriter) remaining unpaid from time to time. Payments under the Distribution Plan are currently made to the Principal Underwriter (which may reallow all or part to others, such as dealers) (1) as commissions for Fund shares sold and (2) as shareholder service fees in respect to shares maintained by the recipients on the Fund's books for specified periods. Amounts paid or accrued to the Principal Underwriter under (1) and (2) in the aggregate may not exceed the annual limitations referred to above. The Principal Underwriter generally reallows to brokers or others a commission equal to 4% of the price paid for each Fund share sold. In addition, the Principal Underwriter generally reallows to brokers or others a shareholder service fee at a rate of 0.25% per annum of the net asset value of shares maintained by such recipients on the books of the Fund for specified periods. If the Fund is unable to pay the Principal Underwriter a commission on a new sale because the annual maximum (0.75% of average daily net assets) has been reached, the Principal Underwriter intends, but is not obligated, to continue to accept new orders for the purchase of Fund shares and to pay or accrue commissions and service fees to dealers in excess of the amount it currently receives from the Fund. While the Fund is under no contractual obligation to pay the Principal Underwriter for advances made by the Principal Underwriter in excess of the Distribution Plan limitation, the Principal Underwriter intends to seek full payment of such charges from the Fund (together with interest at the rate of prime plus one percent) at such time in the future as, and to the extent that, payment thereof by the Fund would be within permitted limits. The Principal Underwriter currently intends to seek payment of interest only on such charges paid or accrued by the Principal Underwriter subsequent to July 7, 1992. If the Fund's Independent Trustees authorize such payments, the effect would be to extend the period of time during which the Fund incurs the maximum amount of costs allowed by the Distribution Plan. If the Distribution Plan is terminated, the Principal Underwriter will ask the Independent Trustees to take whatever action they deem appropriate under the circumstances with respect to payment of such amounts. During the fiscal year ended October 31, 1995, the Fund recovered $7,816 in contingent deferred sales charges. During the same year, the Fund paid the Principal Underwriter $3,107,302 under the Distribution Plan. The amount paid by the Fund under its Distribution Plan, net of contingent deferred sales charges, was $3,099,486 (1.00% of the Fund's average daily net asset value during the year). During the same year, the Principal Underwriter paid commissions on new sales and service fees to dealers and others of $1,215,015. At October 31, 1995, unpaid distribution costs amounted to $10,779,790 (3.47% of the Fund's net assets at October 31, 1995). The amounts and purposes of expenditures under the Distribution Plan must be reported to the Independent Trustees quarterly. The Independent Trustees may require or approve changes in the operation of the Distribution Plan, and may require that total expenditures by the Fund under the Distribution Plan be kept within limits lower than the maximum amount permitted by the Distribution Plan as stated above. If such costs are not limited by the Independent Trustees, such costs could, for some period of time, be higher than such costs permitted by most other plans presently adopted by other investment companies. The Distribution Plan may be terminated at any time by vote of the Fund's Independent Trustees, or by vote of a majority of the outstanding voting shares of the Fund. Any change in the Distribution Plan that would materially increase the distribution expenses of the Fund provided for in the Distribution Plan requires shareholder approval. Otherwise, the Distribution Plan may be amended by votes of the majority of both (1) the Fund's Trustees and (2) the Independent Trustees, cast in person at a meeting called for the purpose of voting on such amendment. While the Distribution Plan is in effect, the Fund is required to commit the selection and nomination of candidates for Independent Trustees to the discretion of the Independent Trustees. Whether any expenditure under the Distribution Plan is subject to a state expense limit depends upon the nature of the expenditure and the terms of the state law, regulation or order imposing the limit. A portion of the Fund's Distribution Plan expenses may be includable in the Fund's total operating expenses for purposes of determining compliance with state expense limits. ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS Upon written notice to dealers, the Principal Underwriter, at its own expense, may periodically sponsor programs that offer additional compensation in connection with sales of Fund shares. Participation in such programs may be available to all dealers or to selected dealers who have sold or are expected to sell significant amounts of shares. Additional compensation may also include financial assistance to dealers in connection with preapproved seminars, conferences and advertising. No such programs or additional compensation will be offered to the extent they are prohibited by the laws of any state or any self-regulatory agency, such as the NASD. The Principal Underwriter may, at its own expense, pay concessions in addition to those described above to dealers that satisfy certain criteria established from time to time by the Principal Underwriter. These conditions relate to increasing sales of shares of 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 0.25% of the value of shares sold by such dealer. The Principal Underwriter also may pay banks and other financial services firms that facilitate transations in shares of the Fund for their clients a transaction fee up to the level of payments made allowable to dealers for the sale of such shares, as described above. The Glass-Steagall Act currently limits the ability of a depository institution (such as a commercial bank or a savings and loan association) to become an underwriter or distributor of securities. In the event the Glass- Steagall Act is deemed to prohibit depository institutions from accepting payments under the arrangement described above, or should Congress relax current restrictions on depository institutions, the Board of Trustees will consider what action, if any, is appropriate. In addition, state securities laws on this issue may differ from the interpretations of federal law expressed herein, and banks and financial institutions may be required to register as dealers pursuant to state law. - ------------------------------------------------------------------------------ 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. REDEMPTION OF SHARES IN GENERAL At various times, the Fund may be requested to redeem shares for which it has not yet received good payment. In such a case, the Fund will mail the redemption proceeds upon clearance of the purchase check, which may take up to 15 days or more. Any delay may be avoided by purchasing shares 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, except as discussed herein. Shareholders also may redeem their shares through their broker-dealers. The Principal Underwriter, acting as agent for the Fund, stands ready to repurchase Fund shares upon orders from dealers as follows: redemption requests received by broker-dealers prior to that day's close of trading on the Exchange and transmitted to the Fund prior to its close of business that day will receive the net asset value per share computed at the close of trading on the Exchange on the same day. Redemption requests received by broker-dealers after that day's close of trading on the Exchange and transmitted to the Fund prior to the close of business on the next business day will receive the next business day's net asset value price. The Principal Underwriter will pay the redemption proceeds, less any applicable deferred sales charge, to the dealer placing the order within seven days thereafter, assuming it has received proper documentation. The Principal Underwriter charges no fees for this service, but the shareholder's broker-dealer may do so. For the protection of shareholders, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund and KIRC may waive this requirement, but may also require additional documents in certain cases. Currently, the requirement for a signature guarantee has been waived on redemptions of $50,000 or less 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. To engage in telephone transactions generally, you must complete the appropriate sections of the Fund's application. In order to insure that instructions received by KIRC are genuine when you initiate a telephone transaction, you will be asked to verify certain criteria specific to your account. At the conclusion of the transaction, you will be given a transaction number confirming your request. 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 the Principal Underwriter assumes responsibility for the authenticity of any instructions received by any of them from a shareholder in writing, over the Keystone Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable procedures to confirm that instructions received over KARL or by telephone are genuine. Neither the Fund, KIRC nor the Principal Underwriter will be liable when following instructions received over KARL or by telephone that KIRC reasonably believes to be genuine. The Fund may temporarily suspend the right to redeem its shares when (1) the Exchange is closed, other than customary weekend and holiday closings; (2) trading on the Exchange is restricted; (3) the Fund cannot dispose of its investments or fairly determine their value; or (4) the Securities and Exchange Commission, for the protection of shareholders, so orders. - ------------------------------------------------------------------------------ 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 other fund in the Keystone Fund Family 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 any of the funds in the Keystone Fund Family, other than Keystone Precious Metals Holdings, Inc. ("KPMH"), Keystone Tax Exempt Trust ("KTET") or Keystone Tax Free Fund ("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 Keystone Liquid Trust ("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 retirement plans available to investors, including: Individual Retirement Accounts ("IRAs"); Rollover IRAs; Simplified Employee Pension Plans ("SEPs"); Tax Sheltered Arrangements ("TSAs"); 403(b) Plans; 401 (k) Plans; Keogh Plans; Corporate Profit-Sharing Plans and Money Purchase Pension Plans. For details, including fees and application forms, call KIRC toll free at 1-800-247-4075 or write to KIRC at P.O. Box 2121, Boston, Massachusetts 02106-2121. AUTOMATIC INVESTMENT PLAN Shareholders may take advantage of investing on an automatic basis by establishing an automatic investment plan. Funds are drawn on a shareholder's checking account monthly and used to purchase Fund shares. AUTOMATIC WITHDRAWAL PLAN Under an Automatic Withdrawal Plan, shareholders may arrange for regular monthly or quarterly fixed withdrawal payments. Each payment must be at least $100 and may be as much as 1% per month or 3% per quarter of the total net asset value of the Fund shares in the shareholder's account when the Automatic Withdrawal Plan is opened. Fixed withdrawal payments are not subject to a deferred sales charge. Excessive withdrawals may decrease or deplete the value of a shareholder's account. OTHER SERVICES Under certain circumstances, shareholders may, within 30 days after a redemption, reinstate their accounts at current net asset value. - ------------------------------------------------------------------------------ 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 holders of the outstanding shares request a meeting for the purpose of removing a Trustee. The Fund is prepared to assist shareholders in communications with one another for the purpose of convening such a meeting as prescribed by Section 16(c) of the 1940 Act. Under Pennsylvania law, it is possible that a Fund shareholder may be held personally liable for the Fund's obligations. However, the Fund's Declaration of Trust provides that shareholders shall not be subject to any personal liability for the Fund's obligations and provides indemnification from Fund assets for any shareholder held personally liable for the Fund's obligations. Disclaimers of such liability are included in each Fund agreement. - ------------------------------------------------------------------------------ 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, reverse repurchase agreements that are not fully secured or collateralized are a form of leverage and, therefore, included in the percentage limit on borrowings imposed under the 1940 Act. The Funds intends to only invest in fully secured or collaterized reverse repurchase agreements. "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 in the section of the Exhibit entitled "Foreign Currency Transactions." When the Fund engages in these transactions, the Fund relies on the buyer or seller, as the case may be, to consummate the sale. Failure to do so may result in the Fund missing the opportunity to obtain a price or yield considered to be advantageous. When issued, delayed delivery and forward commitment transactions may be expected to occur a month or more before delivery is due. 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. 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, if consistent with its investment objective, the Fund may also invest in CMOs with rates that move inversely to market rates ("inverse floaters"). An inverse floater bears an interest 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. KEYSTONE FUND FAMILY Quality Bond Fund (B-1) Diversified Bond Fund (B-2) High Income Bond Fund (B-4) Balanced Fund (K-1) Strategic Growth Fund (K-2) Growth and Income Fund (S-1) Mid-Cap Growth Fund (S-3) Small Company Growth Fund (S-4) International Fund Precious Metals Holdings Tax Free Fund Tax Exempt Trust Liquid Trust [LOGO] KEYSTONE INVESTMENTS Keystone Investment Distributors Company 200 Berkeley Street Boston, Massachusetts 02116-5034 [recycle symbol] B1-P 2/95 KEYSTONE QUALITY BOND FUND (B-1) [LOGO] PROSPECTUS AND APPLICATION KEYSTONE QUALITY BOND FUND (B-1) (FORMERLY NAMED KEYSTONE CUSTODIAN FUND, SERIES B-1) PART B STATEMENT OF ADDITIONAL INFORMATION STATEMENT OF ADDITIONAL INFORMATION KEYSTONE QUALITY BOND FUND (B-1) (FORMERLY KNOWN AS KEYSTONE CUSTODIAN FUND, SERIES B-1) FEBRUARY __, 1996 This statement of additional information is not a prospectus but relates to, and should be read in conjunction with, the prospectus of Keystone Quality Bond Fund (B-1) (formerly known as Keystone Custodian Fund, Series B-1) (the "Fund") dated February 2_, 1996. A copy of the prospectus may be obtained from Keystone Investment Distributors Company (formerly known as Keystone Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal underwriter, 200 Berkeley Street, Boston, Massachusetts 02116-5034, or your broker-dealer. TABLE OF CONTENTS Page The Investment Objective and Policies 2 Investment Restrictions 2 Valuation of Securities 4 Distributions and Taxes 5 Sales Charges 6 Distribution Plan 8 The Trust Agreement 10 Investment Manager 12 Investment Adviser 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 INVESTMENT 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, 1995 it also owned foreign securities equal to approximately 5% of its net assets. - ------------------------------------------------------------------------------- INVESTMENT RESTRICTIONS - ------------------------------------------------------------------------------- The Fund has adopted the fundamental investment restrictions set forth below, which may not 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. Unless uotherwise stated, all references to Fund assets are in terms of current market value. 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, other than securities issued or guaranteed by the U.S. government, its agencies or instrumentalities; (2) invest more than 5% of the value of its total assets in companies which have been in operation for less than three years; (3) borrow money, except that the Fund may (a) borrow money from banks for temporary or emergency purposes in aggregate amounts up to 10% of the value of the Fund's net assets (computed at cost), or (b) enter into reverse repurchase agreements, provided that bank borrowings and reverse repurchase agreements, in aggregate, shall not exceed 10% of the value of the Fund's net assets; (4) underwrite securities, except that the Fund may purchase securities from issuers thereof or others and dispose of such securities in a manner consistent with its other investment policies; in the disposition of restricted securities the Fund may be deemed to be an underwriter, as defined in the Securities Act of 1933 (the "1933 Act"); (5) purchase or sell real estate or interests in real estate, except that it may purchase and sell securities secured by real estate and securities of companies which invest in real estate, and will not purchase or sell commodities or commodity contracts, except that the Fund may engage in currency or other financial futures contracts and related options transactions; (6) invest for the primary purpose of exercising control over or management of any one issuer; (7) make margin purchases or short sales of securities; (8) 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; (9) invest more than 25% of its assets in the securities of issuers in any single industry other than securities issued by banks and savings and loan associations or securities issued or guaranteed by the U.S. government, its agencies or instrumentalities; and (10) purchase the securities of any other investment company except in the open market and at customary brokerage rates and in no event more than 3% of the voting securities of any investment company. With respect to the first investment restriction above, said restriction applies to only 75% of the Fund's total assets. In addition, with respect to 75% of the Fund's total assets, the Fund will not invest in more than 10% of the outstanding voting securities of any one issuer, provided that this limitation does not apply to securities issued or guaranteed by the U.S. government or its agencies or instrumentalities. 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. Non-Fundamental Investment Restrictions The Fund intends to follow policies of the Securities and Exchange Commission as they are adopted from time to time with respect to illiquid securities, including, at this time, (1) treating as illiquid securities which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the Fund has valued such securities on its books and (2) limiting its holdings of such securities to 15% of its net assets. Although not fundamental restrictions or policies requiring a shareholders' vote to change, the Fund has undertaken to certain state securities authorities that 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 Investment Management Company (formerly known as 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 third 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. - ------------------------------------------------------------------------------- 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 income and net capital gains in shares of the Fund or, at the option of the shareholder, in cash. Distributions are taxable whether made in cash or in additional fund shares. Shareholders who receive distributions in additional fund shares are not subject to a deferred sales charge when such shares are redeemed. Shareholders who have not opted, prior to the record date for any distribution, to receive cash will have the number of distributed shares determined on the basis of the Fund's net per 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 capital gains distribution and an income distribution reinvestments. 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 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 the Fund's 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, it intends to distribute only its 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. To the extent permitted by the National Association of Securities Dealers, Inc. ("NASD"),the deferred sales charge is paid to the Principal Underwriter. During the fiscal year ended October 31, 1995 the Fund recovered $7,816 in contingent 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 contingent 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; (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 contingent 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 1995 and on a given date in 1996 the value of the investor's account has grown through investment performance and reinvestment of distributions to $12,000. On such date in 1996, the investor could redeem up to $2,000 ($12,000 minus $10,000) without incurring a deferred sales charge. If, on such date, the investor should redeem $3,000, a deferred sales charge would be imposed on $1,000 of the redemption (the amount by which the investor's account was reduced by the redemption below the amount of the initial purchase payment). The charge would be imposed at the rate of 3% (because the redemption is made during the calendar year after the calendar year of purchase) and would total $30. In determining whether a contingent deferred sales charge is payable and, if so, the percentage charge applicable, it is assumed that shares held the longest are the first to be redeemed. There is no deferred sales charge on permitted exchanges of shares between Funds in the Keystone Fund Family 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, the calendar year of the exchange, for purposes of any future deferred sales charge, is deemed 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 such shares to (1) officers, Directors, Trustees, full-time employees and sales representatives of Keystone Management, Keystone, Keystone Investments, Inc. (formerly known as Keystone Group, Inc.) ("Keystone Investments"), Harbor Capital Management Company, Inc., their subsidiaries and the Principal Underwriter who have been such for not less than ninety days; and (2) the pension and profit-sharing plans established by said companies, their subsidiaries and affiliates, for the benefit of their officers, Directors, Trustees, full-time employees and sales representatives, provided, however, that 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. No contingent deferred sales charge is imposed on a redemption of shares of the Fund purchased by a bank or trust company in a single account in the name of such bank or trust company as trustee if the initial investment in shares of the Fund, any other fund in the Keystone Fund Family, 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. 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 591/2 years old; (4) involuntary redemptions of accounts having an aggregate net asset value of less than $1,000; (5) automatic withdrawals under an automatic withdrawal plan of up to 11/2% per month of the shareholder's initial account balance; (6) withdrawals consisting of loan proceeds to a retirement plan participant; (7) financial hardship withdrawals made by a retirement plan participant; or (8) withdrawals consisting of returns of excess contributions or excess deferral amounts made to a retirement plan participant. - ------------------------------------------------------------------------------- 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 "Distribution Plan"). 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 the Principal Underwriter). Payments under the Distribution Plan are currently made to the Principal Underwriter (which may reallow all or part to others, such as dealers) (1) as commissions for Fund shares, and (2) as shareholder service fees in respect of shares maintained by the recipients and outstanding on the Fund's books for specific periods. Amounts paid or accrued to the Principal Underwriter under (1) and (2) in the aggregate may not exceed the annual limitation referred to above. The Principal Underwriter generally reallows 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 and outstanding on the books of the Fund for specified periods. If the Fund is unable to pay the Principal Underwriter a commission on a new sale because the annual maximum (0.75% of average daily net assets) has been reached, the Principal Underwriter intends, but is not obligated, to continue to accept new orders for the purchase of Fund shares and to pay or accrue commissions and service fees to dealers in excess of the amount it currently receives from the Fund. While the Fund is under no contractual obligation to reimburse the Principal Underwriter for advances made by the Principal Underwriter in excess of the Distribution Plan limitation, the Principal Underwriter intends to seek full payment of such amounts from the Fund (together with interest 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. The Principal Underwriter currently intends to seek payment of interest only on such charges paid or accrued by the Principal Underwriter subsequent to January 1, 1992. If the Fund's Independent Trustees (the "Independent Trustees") authorize such payments, the effect will be to extend the period of time during which the Fund incurs the maximum amount of costs allowed by the Distribution Plan. If the Distribution Plan is terminated, the Principal Underwriter will ask the Independent Trustees to take whatever action they deem appropriate under the circumstances with respect to payment of such amounts. 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 Independent Trustees quarterly. The Fund's Independent 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 Independent 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 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. During the year ended October 31, 1995, the Fund paid the Principal Underwriter $3,107,302 under the Distribution Plan. During the year ended October 31, 1995, the Principal Underwriter received $1,892,287 after payments of commissions on new sales and service fees to dealers and others of $1,215,015. 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. - ------------------------------------------------------------------------------- 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 held personally liable for the obligations of the Fund. The possibility of Fund shareholders incurring financial loss under such circumstances appears to be remote, however, because the Restatement (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 funds in the Keystone Fund Family and to certain other funds in the Keystone Investments Family of 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 objective and restrictions. The Management Agreement stipulates that Keystone Management shall provide office space, all necessary office facilities, equipment and personnel in connection with its services 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; and (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 set forth below: 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 provides investment advisory and management services to the Fund. Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, has provided investment advisory and management services to investment companies and private accounts since it was organized in 1932. Keystone is a wholly-owned subsidiary of Keystone Investments, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034. Keystone Investments is a private corporation predominantly owned by current and former members of management of Keystone and its affiliates. The shares of Keystone Investments common stock beneficially owned by management are held in a number of voting trusts, the trustees of which are George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Investments provides accounting, bookkeeping, legal, personnel and general corporate services to Keystone Management, Keystone, their affiliates and the Keystone Investments Family of Funds. Pursuant to the Advisory Agreement, Keystone receives for its services an annual fee representing 85% of the management fee received by Keystone Management under its Management Agreement with the Fund. Under the terms of the Advisory Agreement and subject to the supervision of the Fund's Board of Trustees, Keystone manages and administers the Fund's operation, and manages the investment and reinvestment of the Fund's assets in conformity with the Fund's investment 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 adviser 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, 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. During 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. During the fiscal year ended October 31, 1995, the Fund paid or accrued to Keystone Management investment management and administrative services fees of $1,876,672, which represented 0.60% of the Fund's average net assets on an annualized basis. Of such amount paid to Keystone Management, $1,595,171 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, Chief Executive Officer and Trustee of the Fund; Chairman of the Board, President and Chief Executive Officer of Keystone Investments, Keystone, Keystone Management and Keystone Software, Inc. ("Keystone Software"); President, Chief Executive Officer and Trustee or Director of all other funds in the Keystone Investments Family of Funds; Chairman of the Board and Director of Keystone Institutional Company, Inc. ("Keystone Institutional") (formerly named Keystone Investment Management Corporation) and Keystone Fixed Income Advisors ("KFIA"); Director and President of Keystone Asset Corporation, Keystone Capital Corporation and Keystone Trust Company; Director of the Principal Underwriter, KIRC and Fiduciary Investment Company, Inc. ("FICO"); Director of Boston Children's Services Association; Trustee of Anatolia College, Middlesex School, and Middlebury College; Member, Board of Governors, New England Medical Center; former Director and President of Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"); former Director and Vice President, Robert Van Partners, Inc. and former Trustee of Neworld Bank. FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of Funds; Professor, Finance Department, George Washington University; President, Amling & Company (investment advice); Member, Board of Advisers, Credito Emilano (banking); and former Economics and Financial Consultant, Riggs National Bank. CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of Funds; Investment Counselor to Appleton Partners, Inc.; former Managing Director, Seaward Management Corporation (investment advice) and former Director, Executive Vice President and Treasurer, State Street Research & Management Company (investment advice). *GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of Keystone Investments; Chairman of the Board and Trustee or Director of all other funds in the Keystone Investments Family of Funds; Chairman of the Board and Trustee of Anatolia College; Trustee of University Hospital (and Chairman of its Investment Committee); former Director and Chairman of the Board of Hartwell Keystone; former Chairman of the Board and Chief Executive Officer of Keystone Investments; and former Chief Executive Officer of the Fund. EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of Funds; 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 funds in the Keystone Investments Family of 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 funds in the Keystone Investments Family of Funds; Director of Phoenix Total Return Fund and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund and The Phoenix Big Edge Series Fund; and former President, Morehouse College. K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of Funds; Chairman of the Board, Director and Executive Vice President, The London Harness Company; Managing Partner, Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher & Associates (environmental consulting); President, Oldways Preservation and Exchange Trust (education); and former Director, Keystone Investments and Keystone. F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of Funds; Of Counsel, Keyser, Crowley & Meub, P.C.; Member, Governor's (VT) Council of Economic Advisers; Chairman of the Board and Director, Central Vermont Public Service Corporation and Hitchcock Clinic; Director, Vermont Yankee Nuclear Power Corporation, Vermont Electric Power Company, Inc., Grand Trunk Corporation, Central Vermont Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual Fire Insurance Company, New England Guaranty Insurance Company, Inc. and the Investment Company Institute; former Governor of Vermont; former Director and President, Associated Industries of Vermont; former Chairman and President, Vermont Marble Company; former Director of Keystone; and former Director and Chairman of the Board, Green Mountain Bank. DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of Funds; Executive Vice President, DHR International, Inc. (executive recruitment); former Senior Vice President, Boyden International Inc. (executive recruitment); and Director, Commerce and Industry Association of New Jersey, 411 International, Inc. and J & M Cumming Paper Co. RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other funds in the Keystone Investments Family of Funds; Chairman, Environmental Warranty, Inc., and Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of Connecticut Natural Gas Corporation, Trust Company of Connecticut, Hartford Hospital, Old State House Association and 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 funds in the Keystone Investments Family of 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 funds in the Keystone Investments Family of Funds; Director, Senior Vice President, Chief Financial Officer and Treasurer of Keystone Investments, the Principal Underwriter, Keystone Asset Corporation, Keystone Capital Corporation, Keystone Trust Company; Treasurer of Keystone Institutional and FICO; Treasurer and Director of Keystone Management, Keystone Software; Vice President and Treasurer of KFIA; Director of KIRC; former Treasurer and Director of Hartwell Keystone; former Treasurer of Robert Van Partners, Inc. JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of all other funds in the Keystone Investments Family of Funds; and President of Keystone. J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other funds in the Keystone Investments Family of Funds; Vice President of Keystone Investments, Keystone, the Principal Underwriter, FICO and Keystone Software. BETSY A. BLACHER: Vice President of the Fund; Vice President of certain other Keystone Investments Funds; and Senior Vice President of Keystone. CHRISTOPHER P. CONKEY: Vice President of the Fund; Vice President of certain other Keystone Investments Funds; and Senior Vice President of Keystone. ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior Vice President and Secretary of all other funds in the Keystone Investments Family of Funds; Senior Vice President, General Counsel and Secretary of Keystone; Senior Vice President, General Counsel, Secretary and Director of the Principal Underwriter, Keystone Management and Keystone Software; Senior Vice President and General Counsel of Keystone Institutional; Senior Vice President, General Counsel and Director of FICO and KIRC;Vice President and Secretary of KFIA; Senior Vice President, General Counsel and Secretary of Keystone Investments, Keystone Asset Corporation, Keystone Capital Corporation and Keystone Trust Company; former Senior Vice President and Secretary of Hartwell Keystone and Robert Van Partners, Inc. * This Trustee may be considered an "interested person" within the meaning of the 1940 Act. Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their positions as officers and/or Directors of Keystone Investments and several of its affiliates including Hartwell Keystone, KDI and KIRC. Mr. Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is Chairman of the Board, Chief Executive Officer and Director of Keystone Group. Mr. Bissell is a Director of Keystone Investments. For the fiscal year ended October 31, 1995, the Directors and officers of Keystone received in aggregate $29,898 in direct remuneration from the Fund. On January 31, 1996, the Fund's Trustees and officers beneficially owned less than 1% of the Fund's then outstanding shares. For the calendar year ended December 31, 1995, aggregate compensation received by Independent Trustees on a fund complex wide basis (including approximately 30 mutual funds) was $585,990. The address of all the Fund's Trustees and officers is 200 Berkeley Street, Boston, Massachusetts 02116-5034. - ------------------------------------------------------------------------------- PRINCIPAL UNDERWRITER - ------------------------------------------------------------------------------- Pursuant to a Principal Underwriting Agreement with the Fund (the "Underwriting Agreement"), Keystone Investment Distributors Company acts as the Fund's principal underwriter. The Principal Underwriter, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, is a Delaware corporation wholly-owned by Keystone. The Principal Underwriter, as agent, has agreed to use its best efforts to find purchasers for the shares. The Principal Underwriter may retain and employ representatives to promote distribution of the shares and may obtain orders from brokers, dealers and others, acting as principals, for sales of shares to them. The Underwriting Agreement provides that the Principal Underwriter will bear the expense of preparing, printing and distributing advertising and sales literature and prospectuses used by it. In its capacity as principal underwriter, the Principal Underwriter may receive payments from the Fund pursuant to the Fund's Distribution Plan. The Underwriting Agreement provides that it will remain in effect as long as its terms and continuance are approved by a majority of the Fund's Independent Trustees at least annually cast in person 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 the Principal Underwriter's judgment it could benefit the sales of Fund shares, the Principal Underwriter may use its discretion in providing to selected dealers promotional materials and selling aids, including, but not limited to, personal computers, related software and Fund data files. During the fiscal year ended October 31, 1993, the Principal Underwriter earned commissions of $719,609 after allowing commissions on new sales and service fees to dealers and others of $4,021,392. During the fiscal year ended October 31, 1994, the Principal Underwriter received $1,856,670 after payments of commissions on new sales and service fees to dealers and others of $2,011,851. During the fiscal year ended October 31, 1995, the Principal Underwriter received $1,892,287 after payments of commissions on new sales and services fees to dealers and others of $1,215,015. - ------------------------------------------------------------------------------- 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 the Management Agreement or Keystone under the Advisory Agreement. The cost, value and specific application of such information are indeterminable and cannot be practically allocated among the Fund and other clients of Keystone 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 expects that purchases and sales of bonds and money market instruments usually will be principal transactions. Bonds and money market instruments are normally purchased directly from the issuer or from an underwriter or market maker for the securities. There usually will be no brokerage commissions paid by the Fund for such purchases. Purchases from underwriters will include the underwriting commission or concession and purchases from dealers serving as market makers will include the spread between the bid and asked prices. Where transactions are made in the over-the-counter market, the Fund will deal with primary market makers unless more favorable prices are otherwise obtainable. The Fund may participate, if and when practicable, in group bidding for the purchase directly from an issuer of certain securities for the Fund's portfolio in order to take advantage of the lower purchase price available to members of such a group. Neither Keystone 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 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, 1993 and 1995, respectively, 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, the Principal Underwriter 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, 1995 were 10.69% (including contingent deferred sales charge), 44.71% and 109.55%, respectively. The compounded average annual rates of return for the one, five and ten year periods ended October 31, 1995 were 10.69%, 7.67% and 7.68%, 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 26, 1995 was 4.95%. - ------------------------------------------------------------------------------- ADDITIONAL INFORMATION - ------------------------------------------------------------------------------- To the best of the Fund's knowledge, as of January 31, 1996, 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 12.75% 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, 99 High Street, Boston, Massachusetts 02110, 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. - ------------------------------------------------------------------------------- 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 A may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. Bond ratings are as follows: 1. AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. 2. AA - Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. 3. A - Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. 4. BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. 5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. MOODY'S CORPORATE BOND RATINGS Moody's ratings are as follows: 1. Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. 2. Aa - Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities. 3. A - Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. 4. Baa - Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. 5. Ba - Bonds which are rated Ba are judged to have speculative elements. Their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. 6. B - Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. 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. 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 MOODY'S PREFERRED STOCK RATINGS Preferred stock ratings and their definitions are as follows: 1. aaa: An issue which is rated aaa is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks. 2. aa: An issue which is rated aa is considered a high-grade preferred stock. This rating indicates that there is a reasonable assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future. 3. a: An issue which is rated a is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater then in the AAA and AA classification, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels. 4. baa: An issue which is rated baa is considered to be a medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time. 5. ba: An issue which is rated ba is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well-safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class. 6. b: An issue which is rated b generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small. 7. caa: An issue which is rated caa is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments. 8. ca: An issue which is rated ca is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments. 9. c: This is the lowest rated class of preferred or preference stock. Issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's applies numerical modifiers 1, 2 and 3 in each rating classification: the modifier 1 indicates 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. LIMITED PARTNERSHIPS The Fund may invest in limited and master limited partner ships. 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. The rating PRIME-1 is the highest commercial paper rating assigned by Moody's. Among the factors considered by Moody's in assigning ratings are the following: (1) evaluation of the management of the issuer; (2) economic evaluation of the issuer's industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; (3) evaluation of the issuer's products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationships which exist with the issuer; and (8) recognition by the management of obligations which may be present or may arise as a result of public preparations to meet such obligations. Relative strength or weakness of the above factors determines how the issuer's commercial paper is rated within various categories. The rating F-1 is the highest rating assigned by Fitch. Among the factors considered by Fitch in assigning this rating are: (1) the issuer's liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its ability to service its debt; (5) its profitability; (6) its return on equity; (7) its alternative sources of financing; and (8) its ability to access the capital markets. Analysis of the relative strength or weakness of these factors and others determines whether an issuer's commercial paper is rated F-1. UNITED STATES GOVERNMENT SECURITIES Securities issued or guaranteed by the 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 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 which 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 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 which are covered, which means that the Fund will own the underlying security (or other securities, such as convertible securities, which 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 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 which expire in less than three months, and in effecting closing purchases with respect to options which 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 which is not exercised may constitute short-term capital gain or loss. Under provisions of the Tax Reform Act of 1986, effective for taxable years beginning after October 22, 1986, a gain on an option transaction which 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 which 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. FUTURES CONTRACTS Futures contracts are transactions in the commodities markets rather than in the securities markets. A futures contract creates an obligation by the seller to deliver to the buyer the commodity specified in the contract at a specified future time for a specified price. The futures contract creates an obligation by the buyer to accept delivery from the seller of the commodity specified at the specified future time for the specified price. In contrast, a spot transaction creates an immediate obligation for the seller to deliver and the buyer to accept delivery of and pay for an identified commodity. In general, futures contracts involve transactions in fungible goods such as wheat, coffee and soybeans. However, in the last decade an increasing number of futures contracts have been developed which specify currencies, financial instruments or financially based indexes as the underlying commodity. U.S. futures contracts are traded only on national futures exchanges and are standardized as to maturity date and underlying financial instrument. The principal financial futures exchanges in the 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, Government National Mortgage Association (GNMA) certificates, 90-day domestic bank certificates of deposit, 90-day commercial paper, and 90-day Eurodollar certificates of deposit. It is expected that futures contracts trading in additional financial instruments will be authorized. The standard contract size is $100,000 for futures contracts in U.S. Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills and U.S. Treasury notes are backed by the full faith and credit of the U.S. government and GNMA certificates are guaranteed by a U.S. government agency, the futures contracts in U.S. government securities are not obligations of the U.S. Treasury. INDEX BASED FUTURES CONTRACTS STOCK INDEX FUTURES CONTRACTS A stock index assigns relative values to the common stocks included in the index. The index fluctuates with changes in the market values of the common stocks so included. A stock index futures contract is a bilateral agreement by which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the closing value of the stock index on the expiration date of the contract and the price at which the futures contract is originally made. No physical delivery of the underlying stocks in the index is made. Currently, stock index futures contracts can be purchased or sold on the Standard and Poor's Corporation (S&P) Index of 500 Stocks, the S&P Index of 100 Stocks, the New York Stock Exchange Composite Index, the Value Line Index and the Major Market Index. It is expected that futures contracts trading in additional stock indices will be authorized. The standard contract size is $500 times the value of the index. The Fund does not believe that differences between existing stock indices will create any differences in the price movements of the stock index futures contracts in relation to the movements in such indices. However, such differences in the indices may result in differences in correlation of the futures with movements in the value of the securities being hedged. OTHER INDEX BASED FUTURES CONTRACTS It is expected that bond index and other financially based index futures contracts will be developed in the future. It is anticipated that such index based futures contracts will be structured in the same way as stock index futures contracts but will be measured by changes in interest rates, related 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 hedge against changes which are expected to affect the Fund's portfolio. The purchase or sale of a futures contract differs from the purchase or sale of a security, in that no price or premium is paid or received. Instead, to initiate trading an amount of cash, cash equivalents, money market instruments, or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract amount must be deposited by the Fund with the Broker. This amount is known as initial margin. The nature of initial margin in futures transactions is different from that of margin in security transactions. Futures contract margin does not involve the borrowing of funds by the customer to finance the transactions. Rather, the initial margin is in the nature of a performance bond or good faith deposit on the contract which is returned to the Fund upon termination of the futures contract assuming all contractual obligations have been satisfied. The margin required for a particular futures contract is set by the exchange on which the contract is traded, and may be significantly modified from time to time by the exchange during the term of the contract. Subsequent payments, called variation margin, to the Broker and from the Broker, are made on a daily basis as the value of the underlying instrument or index fluctuates making the long and short positions in the futures contract more or less valuable, a process known as mark-to-market. For example, when the Fund has purchased a futures contract and the price of the underlying financial instrument or index has risen, that position will have increased in value and the Fund will receive from the Broker a variation margin payment equal to that increase in value. Conversely, where the Fund has purchased a futures contract and the price of the underlying financial instrument or index has declined, the position would be less valuable and the Fund would be required to make a variation margin payment to the Broker. At any time prior to expiration of the futures contract, the Fund may elect to close the position. A final determination of variation margin is then made, additional cash is required to be paid to or released by the Broker, and the Fund realizes a loss or gain. The Fund intends to enter into arrangements with its custodian and with Brokers to enable its initial margin and any variation margin to be held in a segregated account by its custodian on behalf of the Broker. Although interest rate futures contracts by their terms call for actual delivery or acceptance of financial instruments, and index based futures contracts call for the delivery of cash equal to the difference between the closing value of the index on the expiration date of the contract and the price at which the futures contract is originally made, in most cases such futures contracts are closed out before the settlement date without the making or taking of delivery. Closing out a futures contract sale is effected by an offsetting transaction in which the Fund enters into a futures contract purchase for the same aggregate amount of the specific type of financial instrument or index and same delivery date. If the price in the sale exceeds the price in the offsetting purchase, the Fund is paid the difference and thus realizes a gain. If the offsetting purchase price exceeds the sale price, the Fund pays the difference and realizes a loss. Similarly, the closing out of a futures contract purchase is effected by an offsetting transaction in which the Fund enters into a futures contract sale. If the offsetting sale price exceeds the purchase price, the Fund realizes a gain. If the purchase price exceeds the offsetting sale price the Fund realizes a loss. The amount of the Fund's gain or loss on any transaction is reduced or increased, respectively, by the amount of any transaction costs incurred by the Fund. As an example of an offsetting transaction, the contractual obligations arising from the sale of one contract of September U.S. Treasury bills on an exchange may be fulfilled at any time before delivery of the contract is required (i.e., on a specified date in September, the "delivery month") by the purchase of one contract of September U.S. Treasury bills on the same exchange. In such instance the difference between the price at which the futures contract was sold and the price paid for the offsetting purchase after allowance for transaction costs represents the profit or loss to the Fund. There can be no assurance, however, that the Fund will be able to enter into an offsetting transaction with respect to a particular contract at a particular time. If the Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain the margin deposits on the contract and to complete the contract according to its terms. OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES The Fund intends to purchase call and put options on currency and other financial futures contracts and sell such options to terminate an existing position. Options on currency and other financial futures contracts are similar to options on stocks except that an option on a currency or other financial futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) rather than to purchase or sell stock, currency or other financial instruments at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account. This amount represents the amount by which the market price of the futures contract at exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. If an option is exercised the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and value of the futures contract. The Fund intends to use options on currency and other financial futures contracts in connection with hedging strategies. In the future the Fund may use such options for other purposes. PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS The purchase of protective put options on 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 market value at the time of entering into the contract) would be committed to margin deposits on such futures contracts. The Fund intends that its futures contracts and related options transactions will be entered into for traditional hedging purposes. That is, futures contracts will be sold to protect against a decline in the price of securities that the Fund owns or futures contracts will be purchased to protect the Fund against an increase in the price of securities it intends to purchase. The Fund does not intend to enter into futures contracts for speculation. In instances involving the purchase of futures contracts by the Fund, an amount of cash and cash equivalents, equal to the market value of the futures contracts will be deposited in a segregated account with the Fund's Custodian and/or in a margin account with a Broker to collateralize the position and thereby insure that the use of such futures is unleveraged. FEDERAL INCOME TAX TREATMENT For federal income tax purposes, the Fund is required to recognize as income for each taxable year its net unrealized gains and losses on futures contracts as of the end of the year as well as those actually realized during the year. Any gain or loss recognized with respect to a futures contract is considered to be 60% long term and 40% short term, without regard to the holding period of the contract. In the case of a futures transaction classified as a "mixed straddle," the recognition of losses may be deferred to a later taxable year. The federal income tax treatment of gains or losses from transactions in options on futures is unclear. In order for the Fund to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income. Any net gain realized from the closing out of futures contracts, for purposes of the 90% requirement, will be qualifying income. In addition, gains realized on the sale or other disposition of securities held for less than three months must be limited to less than 30% of the Fund's annual gross income. The 1986 Tax Act added a provision which effectively treats both positions in certain hedging transactions as a single transaction for the purpose of the 30% requirement. The provision provides that, in the case of any "designated hedge," increases and decreases in the value of positions of the hedge are to be netted for the purposes of the 30% requirement. However, in certain situations, in order to avoid realizing a gain within a three month period, the Fund may be required to defer the closing out of a contract beyond the time when it would otherwise be advantageous to do so. RISKS OF FUTURES CONTRACTS Currency and other financial futures contracts prices are volatile and are influenced, among other things, by changes in stock prices, market conditions, prevailing interest rates and anticipation of future stock prices, market movements or interest rate changes, all of which in turn are affected by economic conditions, such as government fiscal and monetary policies and actions, and national and international political and economic events. At best, the correlation between changes in prices of fu- tures 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 fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses. RISKS OF OPTIONS ON FUTURES CONTRACTS In addition to the risks described above for currency and other financial futures contracts, there are several special risks relating to options on futures contracts. The ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid secondary market. There is no assurance that a liquid secondary market will exist for any particular contract or at any particular time. The Fund will not purchase options on any futures contract unless and until it believes that the market for such options has developed sufficiently that the risks in connection with such options are not greater than the risks in connection with the futures contracts. Compared to the use of futures contracts, the purchase of options on such futures 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 en- gage in forward currency exchange contracts (agreements to purchase or sell currencies at a specified price and date). Under the contract, the exchange rate for the transaction (the amount of currency the Fund will deliver or receive when the contract is completed) is fixed when the Fund enters into the contract. The Fund usually will enter into these contracts to stabilize the U.S. dollar value of a security it has agreed to buy or sell. The Fund also may use these contracts to hedge the U.S. dollar value of a security it already owns, particularly if the Fund expects a decrease in the value of the currency in which the foreign security is denominated. Although the Fund will attempt to benefit from using forward contracts, the success of its hedging strategy will depend on Keystone's ability to predict accurately the future exchange 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 which will be used by the Fund in connection with foreign currency futures contracts are similar to those described above for forward foreign currency exchange contracts. Currently, currency futures contracts for the British Pound Sterling, Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss Franc and French Franc can be purchased or sold for U.S. dollars through the International Monetary Market. It is expected that futures contracts trading in additional currencies will be authorized. The standard contract sizes are L125,000 for the Pound, 125,000 for the Guilder, Mark, Swiss and French Francs, C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and 1,000,000 for the Peso. In contrast to Forward Currency Exchange Contracts which can be traded at any time, only four value dates per year are available, the third Wednesday of March, June, September and December. FOREIGN CURRENCY OPTIONS TRANSACTIONS Foreign currency options (as opposed to futures) are traded in a variety of currencies in both the 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. The Fund may employ new investment techniques involving for- ward foreign currency exchange contracts, foreign currency futures contracts and options on foreign currencies in order to take advantage of new techniques in these areas which may be developed from time to time and which are consistent with the Fund's investment objective. The Fund believes that no additional techniques have been identified for employment by the Fund in the foreseeable future other than those described above. CURRENCY TRADING RISKS Currency exchange trading may involve significant risks. The four major types of risk the Fund faces are exchange rate risk, interest rate risk, credit risk and country risk. EXCHANGE RATE RISK Exchange rate risk results from the movement up and down of foreign currency values in response to shifting market supply and demand. When the Fund buys or sells a foreign currency, an exposure called an open position is created. Until the time that position can be "covered" by selling or buying an equivalent amount of the same currency, the Fund is exposed to the risk that the exchange rate might move against it. Since exchange rate changes can readily move in one direction, a position carried overnight or over a number of days involves greater risk than one carried a few minutes or hours. Techniques such as foreign currency forward and futures contracts and options on foreign currency are intended to be used by the Fund to reduce exchange rate risk. MATURITY GAPS AND INTEREST RATE RISK Interest rate risk arises whenever there are mismatches or gaps in the maturity structure of the Fund's foreign exchange currency holdings, which is the total of its outstanding spot and forward or futures contracts. Foreign currency transactions often involve borrowing short term and lending longer term to benefit from the normal tendency of interest rates to be higher for longer maturities. However in foreign exchange trading, while the maturity pattern of interest rates for one currency is important, it is the differential between interest rates for two currencies that is decisive. CREDIT RISK Whenever the Fund enters into a foreign exchange contract, it faces a risk, however small, that the counterparty will not perform under the contract. As a result there is a credit risk, although no extension of "credit" is intended. To limit credit risk, the Fund intends to evaluate the creditworthiness of each other party. The Fund does not intend to trade more than 5% of its net assets under foreign exchange contracts with one party. Credit risk exists because the Fund's counterparty may be unable or unwilling to fulfill its contractual obligations as a result of bankruptcy or insolvency or when foreign exchange controls prohibit payment. In any foreign exchange transaction, each party agrees to deliver a certain amount of currency to the other on a particular date. In establishing its hedges a Fund relies on each contract being completed. If the contract is not performed, then the Fund's hedge is eliminated, and the Fund is exposed to any changes in exchange rates since the contract was originated. To put itself in the same position it would have been in had the contract been performed, the Fund must arrange a new transaction. However, the new transaction may have to be arranged at an adverse exchange rate. The trustee for a bankrupt company may elect to perform those contracts which are advantageous to the company but disclaim those contracts which are disadvantageous, resulting in losses to the Fund. Another form of credit risk stems from the time zone differences between the U.S. and foreign nations. If the Fund sells sterling it generally must pay pounds to a counterparty earlier in the day than it will be credited with dollars in New York. In the intervening hours, the buyer can go into bankruptcy or can be declared insolvent. Thus, the dollars may never be credited to the Fund. COUNTRY RISK At one time or another, virtually every country has inter- fered with international transactions in its currency. Interference has taken the form of regulation of the local exchange market, restrictions on foreign investment by residents or limits on inflows of investment funds from abroad. Governments take such measures for example to improve control over the domestic banking system or to influence the pattern of receipts and payments between residents and foreigners. In those cases, restrictions on the exchange market or on international transactions are intended to affect the level or movement of the exchange rate. Occasionally a serious foreign exchange shortage may lead to payment interruptions or debt servicing delays, as well as interference in the exchange market. It has become increasingly difficult to distinguish foreign exchange or credit risk from country risk. Changes in regulations or restrictions usually do have an important exchange market impact. Most disruptive are changes in rules which interfere with the normal payments mechanism. If government regulations change and a counterparty is either forbidden to perform or is required to do something extra, then the Fund might be left with an unintended open position or an unintended maturity mismatch. Dealing with such unintended long or short positions could result in unanticipated costs to the Fund. Other changes in official regulations influence international investment transactions. If one of the factors affecting the buying or selling of a currency changes, the exchange rate is likely to respond. Changes in such controls often are unpredictable and can create a significant exchange rate response. Many major countries have moved toward liberalization of exchange and payments restrictions in recent years or accepted the principle that restrictions should be relaxed. A few industrial countries have moved in the other direction. Important liberalizations were carried out by Switzerland, the United Kingdom and Japan. They dismantled mechanisms for restricting either foreign exchange inflows (Switzerland), outflows (Britain) or elements of both (Japan). By contrast, France and Mexico have 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. PAGE 8 - ------------------------------------------------------------------------------- Keystone Quality Bond Fund (B-1) (formerly Keystone Custodian Fund, Series B-1) SCHEDULE OF INVESTMENTS--October 31, 1995
Interest Maturity Par Market Rate Date Value Value ================================================================================================================================ FIXED INCOME (95.8%) CORPORATE BONDS & NOTES (17.5%) BANK & FINANCE (5.6%) Barnett Banks, Inc. Med. Term Notes 10.875% 2003 $4,500,000 $ 5,566,410 Donaldson Lufkin & Jenrette, Inc. Sr. Notes 6.875 2005 1,000,000 993,930 Finova Cap Corp. Notes 6.375 2000 3,000,000 2,994,030 General Motors Acceptance Corp. Notes 6.625 2002 1,550,000 1,551,457 Morgan Stanley Group, Inc. Med. Term Notes 7.790 1997 3,000,000 3,067,230 Society Corp. Notes (Subord.) 8.125 2002 2,850,000 3,089,941 - --------------------------------------------------------------------------------------------------------------------------------- 17,262,998 - --------------------------------------------------------------------------------------------------------------------------------- CONSUMER GOODS (2.0%) Procter & Gamble, ESOP Series A Deb. 9.360 2021 5,000,000 6,252,350 - --------------------------------------------------------------------------------------------------------------------------------- DIVERSIFIED COMPANIES (1.5%) General Electric Capital Corp. Deb. 8.750 2007 4,000,000 4,676,800 - --------------------------------------------------------------------------------------------------------------------------------- OIL (1.7%) Atlantic Richfield Co. Deb. 9.875 2016 4,000,000 5,188,440 - --------------------------------------------------------------------------------------------------------------------------------- PHARMACEUTICAL (2.5%) Upjohn Co., ESOP Sinking Fund Deb. 9.790 2004 6,994,909 7,865,286 - --------------------------------------------------------------------------------------------------------------------------------- RETAIL (1.3%) Dayton Hudson Corp. Deb. 9.750 2002 3,500,000 4,094,895 - --------------------------------------------------------------------------------------------------------------------------------- TELECOMMUNICATIONS (2.9%) Ameritech Capital Funding Corp. Deb. 7.500 2005 4,000,000 4,283,320 Southwestern Bell Telephone Co. Deb. 7.000 2015 3,000,000 3,045,960 U.S. West Financial Services, Inc. Med. Term Notes 8.850 1999 1,500,000 1,628,490 - --------------------------------------------------------------------------------------------------------------------------------- 8,957,770 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL CORPORATE BONDS & NOTES (Cost--$52,709,774) 54,298,539 - --------------------------------------------------------------------------------------------------------------------------------- FOREIGN BONDS (U.S. DOLLARS) (4.8%) Dresdner Bank A.G. Yankee Deb. (Subord.) 7.250 2015 1,500,000 1,532,700 International Bank for Reconstruction & Development Unsecd. Eurodollar Deb. 8.250 2016 5,000,000 5,804,750 Ireland (Republic of) Yankee Deb. (Subord.) 7.875 2001 5,000,000 5,398,700 Wharf Capital International Gtd. Sr. Notes 8.875 2004 2,000,000 2,114,540 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL FOREIGN BONDS (U.S. DOLLARS) (Cost--$13,981,044) 14,850,690 - ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Schedule of Investments Page 9 - ------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS--October 31, 1995
Interest Maturity Par Market Rate Date Value Value ================================================================================================================================ COLLATERALIZED MORTGAGE OBLIGATIONS (12.2%) FNMA (Est. Mat. 2001) (a) Series 1991-141 Class PH 7.500% 2019 $5,000,000 $ 5,041,400 FNMA (Est. Mat. 2005) (a) Series 1992-181 Class PK 2021 4,000,000 3,837,800 FNMA (Est. Mat. 2007) (a) Series 1993-38 Class L 5.000 2022 2,500,000 2,111,925 Fleet Financial Home Equity Trust (Est. Mat. 1996) (a) Series 1990-1 Class AS 6.700 2006 4,701,326 4,728,265 Merrill Lynch Mortgage Investors, Inc. (Est. Mat. 1997) (a) Series 1991-D Class A 9.000 2011 786 809 Merrill Lynch Mortgage Investors, Inc. (Est. Mat. 1998) (a) Series 1992-B Class B 8.500 2012 2,373,761 2,455,418 Merrill Lynch Mortgage Investors, Inc. (Est. Mat. 1999) (a) Series 1992-D Class B 8.500 2017 2,818,590 2,930,657 Merrill Lynch Mortgage Investors, Inc. (Est. Mat. 1999) (a) Series 1991-G Class B 9.150 2011 3,863,981 4,070,124 Paine Webber Mortgage Acceptance Corp. IV (Est. Mat. 1996) (a) Series 1993-5 Class A3 6.875 2008 2,430,994 2,435,552 Residential Funding Mortgage Security I Series 1993-S45 Class (Est. Mat. 2001) (a) A11 6.000 2023 5,000,000 4,834,350 Residential Funding Corp. (Est. Mat. 1997) (a) Series 1994-S15 Class A1 7.750 2024 4,093,951 4,150,243 University Support Services, Inc. (Est. Mat. 1998) (a) Series 1992-D 9.166 2007 1,215,000 1,218,037 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost--$36,759,641) 37,814,580 - --------------------------------------------------------------------------------------------------------------------------------- MORTGAGE PASS-THROUGH CERTIFICATES (7.7%) FHLMC Pool #303865 8.500 1997 100,537 103,240 FHLMC Pool #555218 9.000 2021 5,836,899 6,136,507 FHLMC Pool #B00366 8.000 2002 5,432,165 5,591,707 GNMA Pool #001849 8.500 2024 7,291,619 7,546,826 GNMA Pool #351171 7.500 2023 4,646,115 4,707,072 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL MORTGAGE PASS-THROUGH CERTIFICATES (Cost--$23,697,118) 24,085,352 - --------------------------------------------------------------------------------------------------------------------------------- ASSET-BACKED SECURITIES (5.2%) Chemical Master Credit Card Trust 1 Series 1995-2 Class A 6.230 2003 4,000,000 4,020,160 Crimmi Mae Financial Corp. Series 1 Class A 7.000 2033 1,000,000 980,000 First Security Auto Grantor Trust Series 1995-A Class A 6.250 2001 3,452,632 3,465,131 Old Kent Auto Receivable Trust Series 1995-A Class A 6.200 2001 3,709,038 3,717,866 Olympic Automobile Receivable Trust Series 1995-C Class CTFS 6.200 2002 4,000,000 4,005,760 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSET-BACKED SECURITIES (Cost--$16,119,727) 16,188,917 - ---------------------------------------------------------------------------------------------------------------------------------
(continued on next page) PAGE 10 - ------------------------------------------------------------------------------- Keystone Quality Bond Fund (B-1) (formerly Keystone Custodian Fund, Series B-1) SCHEDULE OF INVESTMENTS--October 31, 1995
Interest Maturity Par Market Rate Date Value Value ======================================================================================================================== UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (48.4%) FNMA Deb. 8.550% 2004 $ 5,000,000 $ 5,221,850 FHLMC Deb. 7.830 2004 2,000,000 2,039,020 FHLB Deb. 8.700 2005 1,000,000 1,053,440 FHLB Deb. 9.120 2005 2,000,000 2,015,320 U.S. Treasury Bonds 9.250 2016 20,500,000 27,123,960 U.S. Treasury Bonds 7.875 2021 16,800,000 19,776,792 U.S. Treasury Bonds 7.625 2025 2,000,000 2,321,880 U.S. Treasury Notes 7.500 2002 1,500,000 1,629,615 U.S. Treasury Notes 6.375 2002 2,000,000 2,051,560 U.S. Treasury Notes 5.125 1998 41,000,000 40,295,210 U.S. Treasury Notes 8.500 1997 10,000,000 10,395,300 U.S. Treasury Notes 7.750 2000 13,000,000 13,932,360 U.S. Treasury Notes 7.875 2004 20,000,000 22,540,600 - ------------------------------------------------------------------------------------------------------------------------- TOTAL UNITED STATES GOVERNMENT (AND AGENCY) ISSUES (Cost--$147,603,794) 150,396,907 - ------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED INCOME (Cost--$290,871,098) 297,634,985 - ------------------------------------------------------------------------------------------------------------------------- Maturity Value - ------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT (1.1%) Keystone Joint Repurchase Agreement (Investments in repurchase agreements, in a joint trading account, purchased 10/31/95) (b) (Cost--$3,617,000) 5.872 11/01/95 $ 3,617,590 3,617,000 - ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (Cost--$294,488,098) (c) 301,251,985 - ------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES--NET (3.1%) 9,539,503 - ------------------------------------------------------------------------------------------------------------------------- NET ASSETS (100.0%) $310,791,488 =========================================================================================================================
NOTES TO SCHEDULE OF INVESTMENTS: (a) The estimated maturity of a Collateralized Mortgage Obligation ("CMO") is based on current and projected prepayment rates. Changes in interest rates can cause the estimated maturity to differ from the listed date. (b) The repurchase agreements are fully collateralized by U.S. government and/or agency obligations based on market prices at October 31, 1995. (c) The cost of investments for federal income tax purposes is $294,987,787. Gross unrealized appreciation and depreciation of investments based on identified tax cost at October 31,1995 are as follows: Gross unrealized appreciation $ 7,568,213 Gross unrealized depreciation (1,304,015) ---------- Net unrealized appreciation $ 6,264,198 =========== Legend of Portfolio Abbreviations FHLB--Federal Home Loan Bank FHLMC--Federal Home Loan Mortgage Corporation FNMA--Federal National Mortgage Association GNMA--Government National Mortgage Association See Notes to Financial Statements PAGE 11 - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (For a share outstanding throughout the year)
Year Ended October 31, 1995 1994 1993 1992 1991 ================================================================================================================================= Net asset value beginning of year $ 14.44 $ 16.40 $ 15.92 $ 15.92 $ 15.11 - --------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.87 0.76 0.96 1.04 1.08 Net realized and unrealized gain (loss) on investments and closed futures contracts 1.05 (1.76) 0.66 0.15 0.99 Net commissions paid on fund share sales (a) 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.92 (1.00) 1.62 1.19 2.07 --------------------------------------------------------------------------------------------------------------------------------- Less distributions from: Net investment income (0.87) (0.76) (0.96) (1.04) (1.08) In excess of net investment income (0.05) (0.09) (0.18) (0.15) (0.18) Tax basis return of capital (0.02) (0.11) 0 0 0 Net realized gain (loss) on investments and closed futures contracts 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------------------------------- Total distributions (0.94) (0.96) (1.14) (1.19) (1.26) - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value end of year $ 15.42 $ 14.44 $ 16.40 $ 15.92 $ 15.92 ================================================================================================================================== Total return (b) 13.69% (6.27%) 10.50% 7.71% 14.09% Ratios/supplemental data Ratios to average net assets: Total expenses 1.96%(c) 1.86% 1.94% 2.01% 2.04% Net investment income 5.86% 5.05% 5.85% 6.40% 6.95% Portfolio turnover rate 244% 169% 190% 102% 158% - ---------------------------------------------------------------------------------------------------------------------------------- Net assets end of year (thousands) $310,791 $327,276 $458,925 $456,912 $453,528 ================================================================================================================================== Year Ended October 31, 1990 1989 1988 1987 1986 ================================================================================================================================= Net asset value beginning of year $ 15.85 $ 15.71 $ 15.52 $ 17.30 $ 16.15 - --------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income 1.11 1.21 1.19 1.20 1.50 Net realized and unrealized gain (loss) on investments and closed futures contracts (0.53) 0.25 0.32 (1.59) 1.56 Net commissions paid on fund share sales (a) 0 0 0 0 (0.20) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.58 1.46 1.51 (0.39) 2.86 - --------------------------------------------------------------------------------------------------------------------------------- Less distributions from: Net investment income (1.18) (1.32) (1.32) (1.39) (1.64) In excess of net investment income (0.14) 0 0 0 0 Tax basis return of capital 0 0 0 0 0 Net realized gain (loss) on investments and closed futures contracts 0 0 0 0 (0.07) - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (1.32) (1.32) (1.32) (1.39) (1.71) - -------------------------------------------------------------------------------------------------------------------------------- Net asset value end of year $ 15.11 $ 15.85 $ 15.71 $ 15.52 $ 17.30 =============================================================================================================================== Total return (b) 3.93% 9.82% 10.09% (2.44%) 18.13% Ratios/supplemental data Ratios to average net assets: Total expenses 1.95% 1.82% 1.64% 1.56% 1.00% Net investment income 7.45% 7.61% 7.49% 7.32% 8.37% Portfolio turnover rate 117% 116% 153% 127% 97% - -------------------------------------------------------------------------------------------------------------------------------- Net assets end of year (thousands) $408,330 $462,425 $447,454 $440,836 $348,107 ================================================================================================================================
(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., transfer agent fees plus commissions paid net of deferred sales charges received by the Fund) as a component of net investment income. (b) Excluding applicable sales charges (c) "Ratio of total expenses to average net assets" for the year ended October 31, 1995 includes indirectly paid expenses. Excluding indirectly paid expenses for the year ended October 31, 1995 the expense ratio would have been 1.94%. See Notes to Financial Statements. PAGE 12 - ------------------------------------------------------------------------------- Keystone Quality Bond Fund (B-1) (formerly Keystone Custodian Fund, Series B-1) STATEMENT OF ASSETS AND LIABILITIES-- October 31, 1995 =========================================================== Assets (Note 1): Investments at market value (identified cost-- $294,488,098) $301,251,985 Cash 153 Receivable for: Investments sold 3,964,170 Interest 4,966,981 Fund shares sold 6,723,763 Prepaid expenses and other assets 50,938 - ----------------------------------------------------------- Total assets 316,957,990 - ----------------------------------------------------------- Liabilities (Notes 2 and 4): Payable for: Investments purchased 5,305,553 Fund shares redeemed 205,861 Distributions to shareholders 575,212 Other accrued expenses 79,876 - ----------------------------------------------------------- Total liabilities 6,166,502 - ----------------------------------------------------------- Net assets $310,791,488 =========================================================== Net assets represented by (Note 1): Paid-in capital $333,652,241 Accumulated distributions in excess of net investment income (575,212) Accumulated net realized gain (loss) on investments and closed futures contracts (29,049,428) Net unrealized appreciation (depreciation) on investments 6,763,887 - ----------------------------------------------------------- Total net assets applicable to outstanding shares of beneficial interest ($15.42 a share on 20,148,901 shares outstanding) (Note 2) $310,791,488 ============================================================ STATEMENT OF OPERATIONS-- Year Ended October 31, 1995 ============================================================================ Investment income (Note 1): Interest $24,281,142 - ---------------------------------------------------------------------------- Expenses (Notes 2 and 4): Management fee $ 1,876,672 Transfer agent fees 729,430 Accounting, auditing and legal 65,692 Custodian fees 181,299 Printing 27,934 Trustees' fees and expenses 29,898 Distribution Plan expenses 3,099,486 Registration fees 50,264 Miscellaneous expenses 27,379 - ---------------------------------------------------------------------------- Total expenses 6,088,054 Less: Expenses paid indirectly (Note 4) (44,099) - ---------------------------------------------------------------------------- Net expenses 6,043,955 - ---------------------------------------------------------------------------- Net investment income 18,237,187 - ---------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments and closed futures contracts (Notes 1 and 3): Net realized gain (loss) on: Investments (6,457,397) Closed futures contract (292,580) - ----------------------------------------------------------------------------- Net realized gain (loss) on investments and closed futures contracts (6,749,977) - ----------------------------------------------------------------------------- Net change in unrealized appreciation (depreciation) on investments 28,285,126 - ----------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments and closed futures contracts 21,535,149 - ----------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $39,772,336 ============================================================================= See Notes to Financial Statements. PAGE 13 - ------------------------------------------------------------------------------ STATEMENTS OF CHANGES IN NET ASSETS Year Ended October 31, 1995 1994 =============================================================================== Operations: Net investment income $ 18,237,187 $ 19,651,971 Net realized gain (loss) on investments and closed futures contracts (6,749,977) (20,637,648) Net change in unrealized appreciation (depreciation) on investments 28,285,126 (24,916,518) - ------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 39,772,336 (25,902,195) - ------------------------------------------------------------------------------- Distributions to shareholders from (Note 1): Net investment income (18,237,187) (19,651,971) In excess of net investment income (763,245) (1,885,034) Tax basis return of capital (472,154) (2,544,603) - ------------------------------------------------------------------------------- Total distributions to shareholders (19,472,586) (24,081,608) - ------------------------------------------------------------------------------- Capital share transactions (Note 2): Proceeds from shares sold 78,243,761 146,861,304 Payments for shares redeemed (126,927,895) (243,065,758) Net asset value of shares issued in reinvestment of dividends and distributions 11,900,336 14,538,531 - ------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from capital share transactions (36,783,798) (81,665,923) - ------------------------------------------------------------------------------- Total increase (decrease) in net assets (16,484,048) (131,649,726) - ------------------------------------------------------------------------------- Net assets: Beginning of year 327,275,536 458,925,262 - ------------------------------------------------------------------------------- End of year [Accumulated distributions in excess of net investment income as follows: October 31, 1995--($575,212) and October 31, 1994-- ($703,858)] (Note 1) $ 310,791,488 $ 327,275,536 =============================================================================== See Notes to Financial Statements. PAGE 14 - ------------------------------------------------------------------------------ Keystone Quality Bond Fund (B-1) (formerly Keystone Custodian Fund, Series B-1) NOTES TO FINANCIAL STATEMENTS (1.) Significant Accounting Policies Keystone Quality Bond Fund (B-1) (formerly, Keystone Custodian Fund, Series B-1) (the "Fund") is a common law trust for which Keystone Management, Inc. ("KMI") is the Investment Manager and Keystone Investment Management Company (formerly Keystone Custodian Funds, Inc.) ("Keystone") is the Investment Adviser. The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end investment company. Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. (formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is privately owned by an investor group consisting of current and former members of management of Keystone and its affiliates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles. A. Investments are usually valued at the closing sales price, or in the absence of sales and for over-the-counter securities, the mean of bid and asked quotations. Management values the following securities at prices it deems in good faith to be fair: (a) securities (including restricted securities) for which complete quotations are not readily available and (b) listed securities if, in the opinion of management, the last sales price does not reflect a current value, or if no sale occurred. Short-term investments maturing in sixty days or less are valued at amortized cost (original purchase cost as adjusted for amortization of premium or accretion of discount) which, when combined with accrued interest, approximates market. Short-term investments maturing in more than sixty days for which market quotations are readily available are valued at current market value. Short-term investments maturing in more than sixty days when purchased which are held on the sixtieth day prior to maturity are valued at amortized cost (market value on the sixtieth day adjusted for amortization of premium or accretion of discount), which when combined with accrued interest, approximates market. Investments denominated in a foreign currency are adjusted daily to reflect changes in exchange rates. Market quotations are not considered to be readily available for long-term corporate bonds and notes; such investments are stated at fair value on the basis of valuations furnished by a pricing service, approved by the Trustees, which determines valuations for normal, institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. 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. B. 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 PAGE 15 - ----------------------------------------------------------------------------- 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 the market risk, the Fund is subject to the credit risk that the other party will not be able to complete the obligations of the contract. C. 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. Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with certain other Keystone funds, may transfer uninvested cash balances into a joint trading account. These balances are invested in one or more repurchase agreements that are fully collateralized by U.S. Treasury and/or Federal Agency obligations. D. The Fund may enter into forward foreign currency exchange contracts ("contracts") to settle portfolio purchases and sales of securities denominated in a foreign currency and to hedge certain foreign currency assets. Contracts are recorded at market value and 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. E. Foreign currency amounts are translated into United States dollars as follows: market value of investments, assets and liabilities at the daily rate of exchanges, purchase and sales of investments, income and expenses at the rate of exchange prevailing on the respective dates of such transactions. Net unrealized foreign exchange gain (loss) is a component of unrealized appreciation (depreciation) of investments. F. Securities transactions are accounted for no later than one business day after the trade date. Realized gains and losses are recorded on the identified cost basis. Interest income is recorded on the accrual basis and dividend income is recorded on the ex-dividend date. All discounts are amortized for both financial reporting and federal income tax purposes. Distributions to shareholders are recorded at the close of business on the ex-dividend date. G. 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 dis- PAGE 16 - ----------------------------------------------------------------------------- Keystone Quality Bond Fund (B-1) (formerly Keystone Custodian Fund, Series B-1) tributing all of its net taxable investment income and net taxable capital gains, if any, to its shareholders. The Fund intends to avoid any excise tax liability by making the required distributions under the Internal Revenue Code. H. The Fund distributes net investment income monthly and capital gains, if any, annually. Distributions are determined in accordance with income tax regulations. The significant differences between financial statement amounts available for distribution and distributions made in accordance with income tax regulations are primarily due to the different treatment of 12b-1 expenses prior to April 1995, differences in the treatment of paydown losses and the deferral of losses for income tax purposes that have been recognized for financial statement purposes. (2.) Capital Share Transactions The Trust Agreement authorizes the issuance of an unlimited number of shares of beneficial interest with a par value of $1.00. Transactions in shares of the Fund were as follows: Year Ended October 31, 1995 1994 - ---------------------------------------------------------------------- Shares sold 5,215,666 9,718,655 Shares redeemed (8,523,861) (15,997,010) Shares issued in reinvestment of dividends and distributions 799,017 951,580 - ---------------------------------------------------------------------- Net increase (decrease) (2,509,178) (5,326,775) ======================================================================= The Fund bears some of the costs of selling its shares under a Distribution Plan adopted pursuant to Rule 12b-1 under the 1940 Act. Under the Distribution Plan, the Fund pays Keystone Investment Distributors Company (formerly Keystone Distributors, Inc.) ("KIDC"), the principal underwriter and a wholly-owned subsidiary of Keystone, amounts which in total may not exceed the Distribution Plan maximum. In connection with the Distribution Plan and subject to the limitations discussed below, Fund shares are offered for sale at net asset value without any initial sales charge. From the amounts received by KIDC in connection with the Distribution Plan, and subject to the limitations discussed below, KIDC generally pays brokers or others a commission equal to 4.00% of the price paid to the Fund for each sale of Fund shares as well as a shareholder service fee at a rate of 0.25% per annum of the net asset value of shares sold by such brokers or others and remaining outstanding on the books of the Fund for specified periods. To the extent Fund shares purchased prior to January 1, 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 4.00%, applied to the lesser of the net asset value of shares redeemed or the total cost of such shares. 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 1.00% 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 PAGE 17 - ---------------------------------------------------------------------------- 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 1.00% on unpaid amounts thereof (less any contingent deferred sales charges paid by the shareholders to KIDC). Since July 8, 1992, contingent deferred sales charges applicable to shares of the Fund issued after January 1, 1992 have, to the extent permitted by the NASD Rule, been paid to KIDC rather than to the Fund. During the year, KIDC received $379,967 in deferred sales charges. KIDC intends, but is not obligated, to continue to pay or accrue distribution charges which exceed current annual payments permitted to be received by KIDC from the Fund. KIDC intends to seek full payment of such charges from the Fund (together with annual interest thereon at the prime rate plus 1.00%) at such time in the future as, and to the extent that, payment thereof by the Fund would be within permitted limits. KIDC currently intends to seek payment of interest only on such charges paid or accrued by KIDC since January 1, 1992. During the year ended October 31, 1995, the Fund recovered $7,816 in contingent deferred sales charges. During the year ended October 31, 1995, the Fund paid KIDC $3,107,302 under the Distribution Plan. The amount paid by the Fund under its Distribution Plan, net of deferred sales charges, was $3,099,486 (1.00% of the Fund's average daily net assets). During the year ended October 31, 1995, KIDC received $1,892,287 after payments of commissions on new sales and service fees to dealers and others of $1,215,015. Under the NASD Rule, the maximum uncollected amount for which KIDC may seek payment from the Fund under its Distribution Plan is $10,779,790 as of October 31, 1995 (3.47% of the Fund's net assets at October 31, 1995). (3.) Securities Transactions As of October 31, 1995, the Fund had a capital loss carryover for federal income tax purposes of approximately $28,549,000 which expires as follows: 1998--$2,251,000; 2002--$20,145,000; 2003--$6,153,000. For the year ended October 31, 1995, purchases and sales of investment securities (excluding short-term securities) were as follows: Cost of Proceeds Purchases from Sales - --------------------------------------------------------------------- Investments (excluding U.S. Government obligations) $246,215,525 $288,216,383 U.S Government obligations 477,415,023 464,241,618 ===================================================================== (4.) Investment Management Agreement and Other Transactions Under the terms of the Investment Management Agreement between KMI and the Fund, 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 an annual 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 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. PAGE 18 - ------------------------------------------ Keystone Quality Bond Fund (B-1) (formerly Keystone Custodian Fund, Series B-1) During the year ended October 31, 1995, the Fund paid or accrued to KMI investment management and administrative services fees of $1,876,672 which represented 0.60% of the Fund's average net assets. Of such amount paid to KMI, $1,595,171 was paid to Keystone for its services to the Fund. During the year ended October 31, 1995, the Fund paid or accrued $25,306 to KII for certain accounting services. Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, serves as the Fund's transfer agent. For the year ended October 31, 1995 the Fund paid or accrued $729,430 to KIRC for transfer agent fees. The Fund has entered into an expense offset arrangement with its custodian. For the year ended October 31, 1995, the Fund paid custody fees in the amount of $137,200 and received a credit of $44,099 pursuant to the expense offset arrangement, resulting in a total expense of $181,299. The assets deposited with the custodian under the expense offset arrangement could have been invested in income-producing assets. Certain officers and/or Directors of Keystone are also officers and/or Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no compensation directly from the Fund. (5.) Distributions to Shareholders A distribution of net investment income of $0.078 per share was declared payable by December 6, 1995 to shareholders of record November 24, 1995. This distribution is not reflected in the accompanying financial statements. ============================================================================= Federal Tax Status--Fiscal 1995 Distributions (Unaudited) For the fiscal year ended October 31, 1995, dividends of $0.94 per share were paid. These dividends are taxable to shareholders as ordinary income in the year in which received by them or credited to their accounts and are not eligible for the corporate dividend received deduction. In January 1996, we will send you complete information on the distributions paid during the calendar year to help you in completing your federal tax return. PAGE 19 - ---------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT The Trustees and Shareholders Keystone Quality Bond Fund (B-1) We have audited the accompanying statement of assets and liabilities of Keystone Quality Bond Fund (B-1) (formerly Keystone Custodian Fund, Series B-1), including the schedule of investments, as of October 31, 1995 and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the ten-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 1995 by correspondence with the custodian and brokers. An audit 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 Quality Bond Fund (B-1) as of October 31, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the ten-year period then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts December 8, 1995 KEYSTONE QUALITY BOND FUND (B-1) (Formerly Named 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, 1995 Financial Highlights For the fiscal years ended October 31, 1986 through October 31, 1995 Statement of Assets and Liabilities October 31, 1995 Statement of Operations Fiscal year ended October 31, 1995 Statement of Changes in Net Assets Two years ended October 31, 1995 Notes to Financial Statements Independent Auditors' Report dated December 8, 1995 All other schedules are omitted as the required information is inapplicable. Item 24(b). Exhibits (1) A copy of Registrant's Restatement of Trust Agreement dated December 19, 1989, as amended May 1, 1995 is filed herewith as Exhibit 24(b)(1). (2) A copy of Registrant's By-Laws is filed herewith as Exhibit 24(b)(2). (3) Not applicable. (4) A copy of the form of Registrant's Share Certificate was filed with Post-Effective Amendment No. 30 to the Registrant's Registration Statement as Exhibit 24(b)(4) and is incorporated by reference herein. (5) (A) A copy of the Investment Management Agreement between Registrant and Keystone Management, Inc. dated August 19, 1993 is filed herewith as Exhibit 24(b)(5)(A). (B) A copy of the Investment Advisory Agreement between Keystone Management, Inc. and Keystone Investment Management Company (formerly named Keystone Custodian Funds, Inc.) dated August 19, 1993 is filed herewith as Exhibit 24(b)(5)(B). (6) (A) A copy of the Principal Underwriting Agreement between Registrant and Keystone Investment Distributors Company (formerly named Keystone Distributors, Inc.) is filed herewith as Exhibit 24(b)(6)(A). (B) A copy of the form of Dealer Agreement used by Keystone Investment Distributors Company (formerly named Keystone Distributors, Inc.) was filed with Post-Effective Amendment No. 89 to the Registrant's Registration Statement as Exhibit 24(b)(6)(A) and is incorporated by reference herein. (7) Not applicable. (8) A copy of the Custodian, Fund Accounting and Recordkeeping Agreement between Registrant and State Street Bank and Trust Company is filed herewith as Exhibit 24(b)(8). Copies of Amendment Nos. 1-7 to said Agreement are filed herewith as Exhibit 24(b)(8). (9) Not applicable. Item 24(b) Exhibits (continued). (10) An opinion and consent of counsel with respect to the registration of 3,287,641 additional shares of the Fund pursuant to Section 24(e)(1) of the 1940 Act is filed herewith as part of Exhibit 24(b)(10). (11) Consent as to use of opinion of the Independent Auditors Report is filed herewith. (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 the Registration Statement No. 2-10527/811-93 for Keystone Diversified Bond Fund (B-2) as Exhibit 24(b)(14) and are incorporated by reference herein. (15) A copy of Registrant's Distribution Plan adopted pursuant to Rule 12b-1 is filed herewith as Exhibit 24(b)(15). (16) Schedule for computation of total return and current yield is filed herewith as Exhibit 24(b)(16). (17) A financial data schedule is filed herewith as Exhibit 24(b)(17). (18) Not applicable. (19) Powers of Attorney are filed herewith as Exhibit 24(b)(19). Item 25. Persons Controlled by or under Common Control with Registrant Not applicable. Item 26. Number of Holders of Securities Number of Record Title of Class Holders as of January 31, 1996 -------------- ------------------------------- Shares of $1.00 Par Value 14,253 Item 27. Indemnification Provisions for the indemnification of Registrant's Trustees and officers are contained in Article VIII of Registrant's Restatement of Trust Agreement, a copy of which is filed herewith as Exhibit 24(b)(1). Provisions for the indemnification of Keystone Investment Distributors Company (formerly named Keystone Distributors, Inc.), Registrant's Principal Underwriter, are contained in Section 9 of the Principal Underwriting Agreement between Registrant and Keystone Investment Distributors Company, a copy of which is filed herewith as Exhibit 24(b)(6). Provisions for the indemnification of Keystone Investment Management Company (formerly named Keystone Custodian Funds, Inc.) and Keystone Management, Inc., Registrant's investment adviser and manager, respectively, are contained in Section 5 of the Investment Advisory Agreement between Keystone Management, Inc. and Keystone Investment Management Company and Section 6 of the Investment Management Agreement Inc. between Keystone Management, Inc. and Registrant, copies of which are filed herewith as Exhibit 24(b)(5)(A) and 24(b)(5)(B), respectively. Item 28. Business and other Connections of Investment Advisers The following tables list the names of the various officers and directors of Keystone Management, Inc. and Keystone Investment Management Company, Registrant's investment manager and adviser, respectively, and their respective positions. For each named individual, the tables list, for at least the past two years, (i) any other organizations (for Keystone Investment Management Company, excluding investment advisory clients) with which the officer and/or director has had or has substantial involvement; and (ii) positions held with such organizations. LIST OF OFFICERS AND DIRECTORS OF KEYSTONE MANAGEMENT, INC. Position with Keystone Other Management, Business Name Inc. Affiliations - ---- ------------- ------------ Albert H. Elfner, III Chairman of Chairman of the Board, the Board, Chief Executive Officer, Chief Executive President and Director: Officer, President Keystone Investments, and Director Inc. Keystone Software, Inc. Keystone Asset Corporation Keystone Capital Corporation Keystone Investments Family of Funds Chairman of the Board and Director: Keystone Investment Management Company Keystone Institutional Company, Inc. Keystone Fixed Income Advisers, Inc. President and Director: Keystone Trust Company Director or Trustee: Fiduciary Investment Company, Inc. Keystone Investor Resource Center, Inc. Boston Children's Services Association Middlesex School Middlebury College Former Trustee or Director: Neworld Bank Robert Van Partners, Inc. 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 Investments, Inc. Keystone Investment Management Company Keystone Investment Distributors Company Treasurer: Keystone Institutional Company, Inc. Keystone Software, Inc. Fiduciary Investment Company, Inc. Former Treasurer and Director: Hartwell Keystone Advisers, Inc. Senior Vice President: Keystone Investments Family of Funds Ralph J. Spuehler, Jr. Director President and Director: Keystone Investment Distributors Company Chairman and Director: Keystone Investor Resource Center, Inc. Keystone Investment Management Company Senior Vice President and Director: Keystone Investments, Inc. Treasurer: Hartwell Emerging Growth Fund Hartwell Growth Fund Former President: Keystone Management, Inc. Former Treasurer: Keystone Investments, Inc. Keystone Investment Management Company Position with Keystone Other Management, Business Name Inc. Affiliations - ---- ------------- ------------ Rosemary D. Van Antwerp Senior Vice General Counsel, Senior President, Vice President and General Counsel Secretary: and Secretary Keystone Investments, Inc. Senior Vice President and General Counsel: Keystone Institutional Company, Inc. Senior Vice President, General Counsel and Director: Keystone Investor Resource, Center, Inc. Fiduciary Investment Company, Inc. Keystone Investment Distributors Company Senior Vice President, General Counsel, Director and Secretary: Keystone Management, Inc. Keystone Software, Inc. Formerly Senior Vice President and Secretary: Hartwell Keystone Advisers, Inc. Vice President and Secretary: Keystone Fixed Income Advisers, Inc. J. Kevin Kenely Vice President Vice President: Keystone Investments, Inc. Keystone Investment Management Company Keystone Investment Distributors Company Keystone Institutional Company, Inc. Fiduciary Investment Company, Inc. Keystone Software, Inc. Formerly Controller: Keystone Investments, Inc. Keystone Investment Management Company Keystone Investment Distributors Company Keystone Software, Inc. Fiduciary Investment Company, Inc. John D. Rogol Vice President Vice President and and Controller Controller: Keystone Investments, Inc. Keystone Investment Management Company Keystone Investment Distributors Company Keystone Institutional Company, Inc. Fiduciary Investment Company, Inc. Keystone Software, Inc. LIST OF OFFICERS AND DIRECTORS OF KEYSTONE INVESTMENT MANAGEMENT COMPANY Position with Keystone Investment Name Management Company Other Business Affiliations - ---- ------------------ --------------------------- Michael A. Thomas Vice President Vice President: Keystone Investments, Inc. Albert H. Elfner, III Chairman of Chairman of the Board, the Board, Chief Executive Officer, Chief Executive President and Director: Officer,and Keystone Investments, Inc. Director Keystone Management, Inc. Keystone Software, Inc. Keystone Asset Corporation Keystone Capital Corporation Chairman of the Board and Director: Keystone Fixed Income Advisers, Inc. Keystone Institutional Company, Inc. President and Director: Keystone Trust Company Director or Trustee: Fiduciary Investment Company, Inc. Keystone Investment Distributors Company Keystone Investor Resource Center, Inc. Boston Children's Services Associates Middlesex School Middlebury College Former Trustee or Director: Neworld Bank Robert Van Partners, Inc. Philip M. Byrne Director President and Director: Keystone Institutional Company, Inc. Senior Vice President: Keystone Investments, Inc. Position with Keystone Investment Name Management Company Other Business Affiliations - ---- ------------------ --------------------------- Herbert L. Bishop, Jr. Senior Vice None President Donald C. Dates Senior Vice None President Gilman Gunn Senior Vice None President Edward F. Godfrey Director, Director, Senior Vice Senior Vice President President, Chief Financial Officer and Treasurer and Treasurer: Chief Financial Keystone Investments, Inc. Officer Keystone Investment Distributors Company Treasurer: Keystone Institutional Company, Inc. Keystone Management, Inc. Keystone Software, Inc. Fiduciary Investment Company, Inc. Former Treasurer and Director: Hartwell Keystone Advisers, Inc. James R. McCall Director and None President Ralph J. Spuehler, Jr. Director President and Director: Keystone Investment Distributors Company Senior Vice President and Director: Keystone Investments, Inc. Chairman and Director: Keystone Investor Resource Center, Inc. Keystone Management, Inc. Formerly President: Keystone Management, Inc. Formerly Treasurer: The Kent Funds Keystone Investments, Inc. Keystone Investment Management Company Position with Keystone Investment Name Management Company Other Business Affiliations - ---- ------------------ --------------------------- Rosemary D. Van Antwerp Senior Vice General Counsel, Senior President, Vice President and General Counsel Secretary: and Secretary Keystone Investments, Inc. Senior Vice President and General Counsel: Keystone Institutional Company, Inc. Senior Vice President, General Counsel and Director: Keystone Investor Resource Center, Inc. Fiduciary Investment Company, Inc. Keystone Investment Distributors Company Senior Vice President, General Counsel, Director and Secretary: Keystone Management, Inc. Keystone Software, Inc. Former Senior Vice President and Secretary: Hartwell Keystone Advisers, Inc. Vice President and Secretary: Keystone Fixed Income Advisers, Inc. Robert K. Baumback Vice President None Betsy A. Blacher Senior Vice None President Francis X. Claro Vice President None Kristine R. Cloyes Vice President None Position with Keystone Investment Name Management Company Other Business Affiliations - ---- ------------------ --------------------------- Christopher P. Conkey Senior Vice None President Richard Cryan Senior Vice None President Maureen E. Cullinane Senior Vice None President George E. Dlugos Vice President None Antonio T. Docal Vice President None Christopher R. Ely Senior Vice None President Robert L. Hockett Vice President None Sami J. Karam Vice President None Donald M. Keller Senior Vice None President J. Kevin Kenely Vice President Vice President: Keystone Investments, Inc. Keystone Investment Distributors Company Keystone Institutional Company, Inc. Keystone Management, Inc. Keystone Software, Inc. Fiduciary Investment Company, Inc. Formerly Controller: Keystone Investments, Inc. Keystone Management, Inc. Keystone Investment Distributors Company Keystone Software, Inc. Fiduciary Investment Company, Inc. George J. Kimball Vice President None JoAnn L. Lyndon Vice President None John C. Madden, Jr. Vice President None Stephen A. Marks Vice President None Eleanor H. Marsh Vice President None Walter T. McCormick Senior Vice None President Barbara McCue Vice President None Stanley M. Niksa Vice President None Robert E. O'Brien Vice President None Margery C. Parker Vice President None Position with Keystone Investment Name Management Company Other Business Affiliations - ---- ------------------ --------------------------- William H. Parsons Vice President None Daniel A. Rabasco Vice President None David L. Smith Vice President None Kathy K. Wang Vice President None Judith A. Warners Vice President None John D. Rogol Vice President Vice President and and Controller Controller: Keystone Investments, Inc. Keystone Investment Distributors Company Keystone Institutional Company, Inc. Fiduciary Investment Company, Inc. Keystone Software, Inc. Joseph J. Decristofaro Asst. Vice President None Item 29. Principal Underwriter (a) Keystone Investment Distributors Company (formerly named Keystone Distributors, Inc.), which acts as Registrant's principal underwriter, also acts as principal underwriter for the following entities: Keystone Diversified Bond Fund (B-2) Keystone High Income Bond Fund (B-4) Keystone Balanced Fund (K-1) Keystone Growth and Income Fund (S-1) Keystone Mid-Cap Growth Fund (S-3) Keystone Small Company Growth Fund (S-4) Keystone Capital Preservation and Income Fund Keystone Fund for Total Return Keystone Global Opportunities Fund Keystone Government Securities Fund Keystone America Hartwell Emerging Growth Fund, Inc. Keystone Hartwell Growth Fund Keystone Intermediate Term Bond Fund Keystone Omega Fund Keystone State Tax Free Fund Keystone State Tax Free Fund - Series II Keystone Strategic Income Fund Keystone Tax Free Income Fund Keystone World Bond Fund Keystone Fund of the Americas Keystone Institutional Adjustable Rate Fund Keystone International Fund Inc. Keystone Liquid Trust Keystone Precious Metals Holdings, Inc. Keystone Strategic Development Fund Keystone Tax Free Fund Keystone Tax Exempt Trust Master Reserves Trust Keystone Strategic Growth Fund (K-2) (b) For information with respect to each officer and director of Registrant's principal underwriter, see the following pages. Item 29(b) (continued). Position and Offices with Position and Name and Principal Keystone Investment Offices with Business Address Distributors Company the Fund - ------------------ ------------------------- ------------ Ralph J. Spuehler* Director, President None Edward F. Godfrey* Director, Senior Vice Senior Vice President, Treasurer President and Chief Financial Officer Rosemary D. Van Antwerp* Director, Senior Vice Senior Vice President, General Counsel President and Secretary Albert H. Elfner, III* Director President Charles W. Carr* Senior Vice President None Peter M. Delehanty* Senior Vice President None J. Kevin Kenely Vice President Treasurer John D. Rogol* Vice President and None Controller Frank O. Gebhardt Divisional Vice None 2626 Hopeton President San Antonio, TX 78230 C. Kenneth Molander Divisional Vice None 8 King Edward Drive President Londonderry, NH 03053 David S. Ashe Regional Manager and None 32415 Beaconsfield Vice President Birmingham, MI 48025 David E. Achzet Regional Vice President None 60 Lawn Avenue - Greenway 27 Stamford, CT 06902 William L. Carey, Jr. Regional Manager and None 4 Treble Lane Vice President Malvern, PA 19355 John W. Crites Regional Manager and None 2769 Oakland Circle W. Vice President Aurora, CO 80014 Item 29(b) (continued) Position and Offices with Position and Name and Principal Keystone Investment Offices with Business Address Distributors Company the Fund - ------------------ ------------------------- ------------ Richard J. Fish Regional Vice President None 309 West 90th Street New York, NY 10024 Michael E. Gathings Regional Manager and None 245 Wicklawn Way Vice President Roswell, GA 30076 Robert G. Holz, Jr. Regional Manager and None 313 Meadowcrest Drive Vice President Richardson, Texas 75080 Todd L. Kobrin Regional Manager and None 20 Iron Gate Vice President Metuchen, NJ 08840 Ralph H. Johnson Regional Manager and None 345 Masters Court, #2 Vice President Walnut Creek, CA 94598 Paul J. McIntyre Regional Manager and None Vice President Dale M. Pelletier Regional Manager and None 464 Winnetka Ave. Vice President Winnetka, IL 60093 Juliana Perkins Regional Manager and None 2348 West Adrian Street Vice President Newbury Park, CA 91320 Matthew D. Twomey Regional Manager and None 9627 Sparrow Court Vice President Ellicott City, MD 21042 Mitchell I. Weiser Regional Manager and None 7031 Ventura Court Vice President Parkland, FL 33067 Welden L. Evans Regional Banking Officer None 490 Huntcliff Green and Vice President Atlanta, GA 30350 Russell A. Haskell* Vice President None Robert J. Matson* Vice President None Item 29(b) (continued) Position and Offices with Position and Name and Principal Keystone Investment Offices with Business Address Distributors Company the Fund - ------------------ ------------------------- ------------ John M. McAllister* Vice President None Gregg A. Mahalich Vice President None 14952 Richards Drive W. Minnetonka, MN 55345 Burton Robbins Vice President None 1586 Folkstone Terrace Westlake Village, CA 91361 Thomas E. Ryan, III* Vice President None Peter Willis* Vice President None Raymond P. Ajemian* Manager and Vice President None Joan M. Balchunas* Assistant Vice President None Thomas J. Gainey* Assistant Vice President None Eric S. Jeppson* Assistant Vice President None Julie A. Robinson* Assistant Vice President None Peter M. Sullivan Assistant Vice President None 21445 Southeast 35th Way Issaquah, WA 98027 Jean S. Loewenberg* Assistant Secretary Assistant Secretary Colleen L. Mette* Assistant Secretary Assistant Secretary Dorothy E. Bourassa* Assistant Secretary Assistant Secretary * Located at 200 Berkeley Street, Boston, Massachusetts 02116-5034 Item 29(c). - Not applicable Item 30. Location of Accounts and Records 200 Berkeley Street Boston, Massachusetts 02116-5034 Keystone Investor Resource Center, Inc. 101 Main Street Cambridge, Massachusetts 02142-1519 State Street Bank and Trust Company 1776 Heritage Drive Quincy, Massachusetts 02171 Data Vault Inc. 3431 Sharpslot Road Swansea, Massachusetts 02277 Item 31. Management Services Not applicable. Item 32. Undertakings Upon request and without charge, Registrant hereby undertakes to furnish to each person to whom a copy of the Registrant's prospectus is delivered with a copy of the Registrant's latest annual report to shareholders. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for the effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, in The Commonwealth of Massachusetts, on the 20th day of February, 1996. KEYSTONE QUALITY BOND FUND (B-1) By: /s/ Rosemary D. Van Antwerp ----------------------------- Rosemary D. Van Antwerp Senior Vice President and Secretary Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registrant's Registration Statement has been signed below by the following persons in the capacities indicated on the 20th day of February, 1996. SIGNATURES TITLE - ---------- ----- /s/ George S. Bissell Chairman of the Board, and Trustee - ------------------------- George S. Bissell* Chief Executive Officer, President /s/ Albert H. Elfner, III and Trustee - ------------------------- Albert H. Elfner, III* Treasurer (Principal Financial /s/ J. Kevin Kenely and Accounting Officer) - ------------------------- J. Kevin Kenely* *By /s/ 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)(19). INDEX TO EXHIBITS Page Number In Sequential Exhibit Number Exhibit Numbering System 1 Restatement of Trust Agreement, as amended 2 By-Laws 4 Specimen Share Certificate(1) 5 (A) Investment Management Agreement (B) Investment Advisory Agreement 6 (A) Principal Underwriting Agreement (B) Dealers Agreement(2) 8 Custodian, Fund Accounting and Recordkeeping Agreement Amendments to Custody Agreement 10 Opinion and Consent of Counsel 11 Independent Auditors' Consent 14 Model Retirement Plans(3) 15 Distribution Plan 16 Performance Data Schedules 17 Financial Data Schedule 19 Powers of Attorney - ---------------------------------- (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. 89 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. EX-99.1 2 RESTATEMENT OF TRUST AGREEMENT EXHIBIT 99.1 KEYSTONE CUSTODIAN FUND, SERIES B-1 FIRST AMENDMENT TO RESTATEMENT OF TRUST AGREEMENT EFFECTIVE MAY 1, 1995 FIRST AMENDMENT dated March 15, 1995 made by George S. Bissell, Albert H. Elfner, III, Frederick Amling, Charles A. Austin, III, Edwin D. Campbell, Charles F. Chapin, K. Dun Gifford, Leroy Keith, Jr., F. Ray Keyser, Jr., David M. Richardson, Richard J. Shima and Andrew J. Simons (hereinafter with their successors referred to as the "Trustees") to RESTATEMENT OF TRUST AGREEMENT, dated December 19, 1989. WHEREAS, the Trustees have determined to change the name of the Trust and to change the designation of its principal office to 200 Berkeley Street Boston Massachusetts 02116. NOW, THEREFORE, the Trustees hereby declare that they will amend the Restatement of Trust Agreement as hereinafter set forth: ARTICLE I, Name and Definitions, Section 1. Name., is hereby amended to read as follows: "This Trust shall be known as the "Keystone Quality Bond Fund (B-1)" and the Trustees shall conduct the business of this Trust under that name or any other name as they may from time to time determine." This Amendment shall become effective as of May 1, 1995. All other provisions of the Restatement of Trust Agreement shall continue as originally stated. IN WITNESS WHEREOF, the undersigned, being all of the Trustees of the Trust, have caused this First Amendment to Restatement of Trust Agreement to be executed on the 15th day of March, 1995. /s/ George S. Bissell - -------------------------------------- George S. Bissell, Trustee /s/ Albert H. Elfner, III - -------------------------------------- Albert H. Elfner, III, Trustee /s/ Frederick Amling - -------------------------------------- Frederick Amling, Trustee /s/ Charles A. Austin, III - -------------------------------------- Charles A. Austin, III, Trustee /s/ Edwin D. Campbell - -------------------------------------- Edwin D. Campbell, Trustee /s/ Charles F. Chapin - -------------------------------------- Charles F. Chapin, Trustee /s/ K. Dun Gifford - -------------------------------------- K. Dun Gifford, Trustee /s/ Leroy Keith, Jr. - -------------------------------------- Leroy Keith, Jr., Trustee /s/ F. Ray Keyser, Jr. - -------------------------------------- F. Ray Keyser, Jr., Trustee /s/ David M. Richardson - -------------------------------------- David M. Richardson, Trustee /s/ Richard J. Shima - -------------------------------------- Richard J. Shima, Trustee /s/ Andrew J. Simons - -------------------------------------- Andrew J. Simons, Trustee KEYSTONE CUSTODIAN FUND, SERIES B-1 RESTATEMENT OF TRUST AGREEMENT Dated December 19, 1989 This RESTATEMENT of TRUST AGREEMENT amending in its entirety the Trust Agreement of Keystone Custodian Fund, Series B-1 (the "Fund"), dated July 15, 1935, as heretofore amended, made at Boston, Massachusetts on December 19, 1989 by and between Keystone Custodian Funds, Inc., a Delaware Corporation (the "Corporate Trustee"), such persons who may be elected or appointed to the office of Trustee pursuant to Article IV of this Restatement (hereinafter with their successors referred to as the "Individual Trustees" and together with the Corporate Trustee, as appropriate, the "Trustees"), and such persons, trusts, estates, corporations and other legal entities as have or may become parties hereto by the acquisition of shares of the Fund issued hereunder. WHEREAS, the Trustees have agreed to manage all property received by them as Trustees in accordance with the provisions hereinafter set forth. NOW, THEREFORE, the Trustees hereby declare that they will hold all cash, securities and other assets which they may from time to time acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the following terms and conditions for the pro rata benefit of the holders from time to time of Shares in this Trust as hereinafter set forth; provided, however, that, notwithstanding any provision herein to the contrary, until such time as the Corporate Trustee shall resign or shall be removed by action of a majority of the Individual Trustees (after which resignation or removal there shall no longer be any Corporate Trustee), the Corporate Trustee shall remain in office and, subject to the approval, direction and control of a majority of the Individual Trustees, shall continue to exercise all the powers and functions of the Trustees and to manage the business and affairs of the Fund and to provide investment and other services to the Fund in the same manner, to the same extent, for the same consideration and upon the same terms and conditions as are provided for in said Trust Agreement as it existed on the date hereof prior to this Restatement thereof, the terms of which Trust Agreement are hereby incorporated herein by this reference for the purposes of this provision. ARTICLE I NAME AND DEFINITIONS Section 1. Name. This Trust shall be known as the Keystone Custodian Fund, Series B-1 and the Trustees shall conduct the business of this Trust under that name or any other name as they may from time to time determine. Section 2. Definitions. Whenever used herein, unless otherwise required by the context or specifically provided (a) The terms "Affiliated Person", "Assignment", "Commission", "Interested Person" and "Principal Underwriter" shall have the meanings given them in the 1940 Act; (b) The "Trust" refers to the Pennsylvania common law trust established under a Trust Agreement, dated July 15, 1935, as amended from time to time and restated by this Restatement of Trust Agreement; (c) "Trust Agreement" shall mean this Restatement of Trust Agreement as amended or restated from time to time; (d) "Net Asset Value Per Share" means the net asset value per share of the Trust determined in the manner provided or authorized in Article VI, Section 4; (e) "Shareholder" means a record owner of Shares of the Trust; (f) "Shares" means the equal proportionate units of interest into which the beneficial interest in the Trust shall be divided from time to time or, if more than one series ("Series") or more than one class ("Class") OF a series of shares is authorized by the Trustees, the equal proportionate units into which each such Series or Class of Shares shall be divided from time to time, and includes where appropriate fractions of a Share as well as a whole Share, unless the Trustees provide that there shall be no fractions of any particular Shares. (g) "Trustees" refers to the Trustee or Trustees of the Trust who become such in accordance with Article IV and where appropriate means a majority or other portion of them acting in accordance with this Trust Agreement or the By-laws of the Trust; and (h) The "1940 Act" refers to the Investment Company Act of 1940 and the Rules and Regulations thereunder, all as amended from time to time. ARTICLE II PURPOSE OF TRUST The purpose of the Trust is to provide investors a continuous source of managed investments. ARTICLE III BENEFICIAL INTEREST Section 1. Shares of Beneficial Interest. The beneficial interest in the Trust shall at all times be divided into transferable Shares, $1.00 par value, each of which shall represent an equal proportionate interest in the Trust with each other Share outstanding, none having priority or preference over another, except to the extent modified by the Trustees under the provisions of this Section. The number of Shares which may be issued is unlimited. The Trustees may from time to time divide or combine the outstanding Shares into a greater or lesser number without thereby changing the proportionate beneficial interests in the Trust. Contributions to the Trust may be accepted for, and Shares shall be redeemed as, whole Shares and/or fractions. From time to time, as they deem appropriate, the Trustees may create additional Series and/or Classes of Series of Shares, in addition to the Shares initially created under this instrument ("Original Series"). References in this Trust Agreement to Shares of the Trust shall apply, as appropriate, to each such Series of Shares and to each such Class of Shares. Any additional Series of Shares created hereunder shall represent the beneficial interest in the assets (and related liabilities) allocated by the Trustees to such Series of Shares and acquired by the Trust only after creation of the respective Series of Shares and only on account of such Series. If the Trustees create any additional Series of Shares hereunder, then the Original Series shall be deemed a separate Series of Shares. Upon creation of each Series of Shares, the Trustees may designate it appropriately and determine the investment policies with respect to the assets allocated to such Series of Shares, redemption rights, dividend policies, conversion rights, liquidation rights, voting rights, and such other rights and restrictions as the Trustees deem appropriate, to the extent not inconsistent with the provisions of this Trust Agreement. The Trustees may divide any Series (including the Original Series) into more than one Class of Shares. Upon creation of each additional Class of Shares the Trustees may designate it appropriately and determine its rights and restrictions (including without limitation such redemption rights, dividend rights, conversion rights, liquidation rights, voting rights, and other rights and restrictions as the Trustees deem appropriate). Section 2. Ownership of Shares. The ownership of Shares shall be recorded in the books of the Trust or a transfer agent or a similar agent. The Trustees may make such rules as they consider appropriate for the transfer of Shares and similar matters. The record books of the Trust as kept by the Trust or any transfer agent or similar agent, as the case may be, shall be conclusive as to who are the holders of Shares of each Series or Class and as to the number of Shares of each Series or Class held from time to time by each. Section 3. Investments in the Trust. The Trustees shall accept investments in the Trust from such persons and on such terms and, subject to any requirements of law, for such consideration as the Trustees from time to time authorize and may cease offering Shares to the public at any time. After such acceptance, the number of Shares of the appropriate Series or Class to represent the contribution may in the Trustees' discretion be considered as outstanding and the amount receivable by the Trustees on account of the contribution may be treated as an asset of the Series or Class. Section 4. No Preemptive Rights. Shareholders shall have no preemptive or other right to subscribe to any additional Shares or other securities issued by the Trust. Section 5. Provisions Relating to Series or Classes of Shares. Whenever no Shares of a Series or Class are outstanding, then the Trustees may abolish such Series or Class. Whenever more than one Series or Class of Shares is outstanding, then the following provisions shall apply: (a) Assets Belonging to Each Series or Class. All consideration received by the Trust for the issue or sale of Shares of a particular Series or Class, together with all assets in which such consideration is invested or reinvested, all income, earnings and proceeds thereof, and any funds derived from any reinvestment of such proceeds, shall, except to the extent specifically otherwise provided in the provisions adopted by the Board of Trustees establishing the Series or Class, irrevocably belong to that Series or Class for all purposes, subject only to the rights of creditors, and shall be so recorded upon the books of the Trust. In the event there are assets, income, earnings, and proceeds thereof which are not readily identifiable as belonging to a particular Series or Class, then the Trustees shall allocate such items to the various Series or Classes then existing, in such manner and on such basis as they, in their sole discretion, deem fair and equitable. The amount of each such item allocated to a particular Series or Class by the Trustees shall then belong to that Series or Class, and each such allocation shall be conclusive and binding upon the Shareholders of all Series and Classes for all purposes. (b) Liabilities Belonging to Each Series or Class. The assets belonging to each particular Series or Class shall, except to the extent specifically otherwise provided in the provisions adopted by the Board of Trustees establishing the Series or Class, be charged with the liabilities, expenses, costs and reserves of the Trust attributable to that Series or Class; and any general liabilities, expenses, costs and reserves of the Trust which are not readily identifiable as attributable to a particular Series or Class shall be allocated by the Trustees to the various Series and Classes then existing, in such manner and on such basis as they, in their sole discretion, deem fair and equitable. Each such allocation shall be conclusive and binding upon the Shareholders of all Series and Classes for all purposes. (c) Series or Class Shares, Dividends and Liquidation. Each Share of each respective Class or Series shall, except to the extent specifically otherwise provided in the provisions adopted by the Board of Trustees establishing the Series or Class, have the same rights and pro rata beneficial interest in the assets and liabilities of the Series or Class as any other such Share. Any dividends paid on the Shares of any Series or Class shall, except to the extent specifically otherwise provided in the provisions adopted by the Board of Trustees establishing the Series or Class, only be payable from and to the extent of the assets (net of liabilities) belonging to that respective Series or Class. In the event of liquidation of a Series or Class, only the assets (less provision for liabilities) of that Series or Class shall be distributed to the holders of the Shares of that Series or Class. (d) Voting by Series or Class. Except as provided in this Section or as limited by the rights and restrictions of any Series or Class, each Share of the Trust may vote with and in the same manner as any other Share on matters submitted to a vote of the Shareholders entitled to vote thereon, without differentiation among votes from the separate Series or Classes; provided, however, that (i) as to any matter with respect to which a separate vote of any Series or Class is required by the 1940 Act, or otherwise by applicable law, such requirement as to a separate vote shall apply in lieu of the voting described above; (ii) in the event that the separate vote requirements referred to in (i) above apply with respect to one or more Series or Classes, then, subject to (iii) below, the Shares of all other Series or Classes shall vote without differentiation among their votes; and (iii) as to any matter which does not affect the interest of any particular Series or Class, only the holders of Shares of the one or more affected Series or Classes shall be entitled to vote. Section 6. Limitation of Personal Liability. The Trustees shall have no power to bind any Shareholder personally or to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time personally agree to pay by way of subscription to any Shares or otherwise. Every note, bond, contract or other undertaking issued by or on behalf of the Trust or the Trustees relating to the Trust shall include a recitation limiting the obligation represented thereby to the Trust and its assets (but the omission of such a recitation shall not operate to bind any Shareholder). ARTICLE IV THE TRUSTEES Section 1. Number of Trustees. The number of Individual Trustees shall initially be such number as shall be elected as such by a vote of the shareholders of the Trust, and thereafter shall be such number as shall be fixed from time to time by action of a majority of the Trustees. Section 2. Election or Appointment and Term. The initial Individual Trustees shall be the individuals who shall have been previously elected as such by a vote of the shareholders of the Trust. Thereafter, subject to Section 16(a) of the 1940 Act, the Trustees may elect themselves or their successors at such regular intervals, if any, as they deem proper, and may appoint Trustees to fill vacancies as provided in Section 4 hereof; provided, that Trustees shall be elected by the vote of a majority of shares voting thereon at such time or times as the Trustees shall determine that such action is advisable. Subject to Section 3 hereof, the Trustees shall have the power to set and alter the terms of office of the Trustees, and they may at any time lengthen or shorten their own terms or make their terms of unlimited duration; provided, that the term of office of any incumbent Trustee shall continue until terminated as provided in Section 4 hereof, or, if not so terminated, until the election of such Trustee's successor in office has become effective in accordance with this Section 2. Section 3. Resignation and Removal. Any Trustee may resign his trust (without need for prior or subsequent accounting) by an instrument in writing signed by him and delivered to the other Trustees, and such resignation shall be effective upon such delivery or at any later date according to the terms of the instrument. Any Trustee may be removed by the action of two-thirds of the remaining Trustees. Upon the resignation or removal of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute and deliver such documents as the remaining Trustees shall require for the purpose of conveying to the Trust or the remaining Trustees any Trust property held in his name. Upon the incapacity or death of any Trustee, his legal representative shall execute and deliver on his behalf such documents as the remaining Trustees shall require as provided in the preceding sentence. However, the execution and delivery of such documents by a former Trustee or his legal representative shall not be requisite to the vesting of title to the Trust property in the remaining Trustees. Section 4. Vacancies. The term of office of a Trustee shall terminate and a vacancy shall occur in the event of such Trustee's death, resignation, removal, bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office of Trustee. No such vacancy shall operate to annul this Trust Agreement or to revoke any existing agency created pursuant to the terms of this Trust Agreement. In the case of an existing vacancy, including a vacancy existing by reason of an increase in the number of Trustees, subject to applicable law, the remaining Trustees, or, if only one Trustee shall then remain in office, the sole remaining Trustee, shall appoint such individual to fill such vacancy as they or he, in their or his discretion, shall see fit. An appointment of a Trustee may be made in anticipation of a vacancy to occur at a later date by reason of retirement or resignation of a Trustee or an increase in the number of Trustees; provided, that such appointment shall not become effective prior to such retirement or resignation or such increase in the number of Trustees. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in this Section 4, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Trust Agreement in the manner provided by this Trust Agreement. A written instrument certifying the existence of such vacancy signed by a majority of the Trustees shall be conclusive evidence of the existence of such vacancy. Section 5. Management of the Trust. Subject to the provisions of this Trust Agreement, the business and affairs of the Trust shall be managed by the Trustees, and they shall have all powers necessary and desirable to carry out that responsibility. Action by the Trustees may be taken by majority vote of the Trustees at a meeting at which a quorum (which shall be a majority of the Trustees then in office) shall be present, or by a consent in writing signed by a majority of the Trustees in office. Without limiting the foregoing, the Trustees may adopt By-Laws not inconsistent with this Trust Agreement providing for the conduct of the business of the Trust and may amend and repeal them to the extent that they do not reserve that right to any Shareholders; they may elect and remove such officers and appoint and terminate such agents as they consider appropriate; they may appoint from their own number and terminate any one or more committees; they may employ one or more custodians of the assets of the Trust and may authorize such custodians to employ subcustodians and to deposit all or any part of such assets in a system or systems for the central handling of securities, retain a transfer agent or a Shareholder servicing agent, or both, provide for the distribution of Shares by the Trust, through one or more principal underwriters or otherwise, set, or otherwise provide for the setting of, record dates, and in general delegate such authority to do any or all things which the Trustees may do in the operation of the business of the Trust as they consider desirable to any officers of the Trust and committees of the Trustees and to any agent or employee, custodian or underwriter. Any action relating to the operation of the Trust provided for herein to be taken by the Trustees may be taken by any other person under authority granted by the Trustees whether or not specifically as stated, and unless specifically so stated to the contrary. A specific statement indicating that the Trustees may delegate any authority shall not give rise to any contrary implication with respect to any provision of this Trust Agreement. Without limiting the foregoing, the Trustees in addition to all powers granted by law shall have power and authority: (a) To invest and reinvest cash, and to hold cash uninvested, without in anywise being bound or limited by any present or future law or custom in regard to investments by trustees; (b) To sell, exchange, lend, pledge, mortgage, hypothecate or lease any or all of the assets of the Trust; (c) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property, and to execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper; (d) To exercise powers and rights of subscription or otherwise which in any manner arise out of ownership of securities; (e) To hold any security or property in a form not indicating any trust, whether in bearer, unregistered or other negotiable form, or in its own name or in the name of a custodian or subcustodian or a nominee or nominees or otherwise; (f) To consent to or participate in any plan for the reorganization, consolidation or merger of any corporation or concern, any security of which is held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or concern, and to pay calls or subscriptions with respect to any security held in the Trust; (g) To join with other security holders in acting through a committee, depository, voting Trustee or otherwise, and in that connection to deposit any security with, or transfer any security to, any such committee, depository or Trustee, and to delegate to them such power and authority with relation to any security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such committee, depository or Trustee as the Trustees shall deem proper; (h) To compromise, arbitrate, or otherwise adjust claims in favor of or against the Trust for any matter in controversy, including, but not limited to, claims for taxes; and (i) To borrow funds. The Trustees shall not be required to obtain any court order to deal with any assets of the Trust or take any other action hereunder. Section 6. Ownership of Assets of the Trust. The assets of the Trust shall be held separate and apart from any assets now or hereafter held in any capacity other than as Trustee hereunder by the Trustees or by any successor Trustees. All of the assets of the Trust shall at all times be considered as vested in the Trustees. No Shareholder shall be deemed to have a severable ownership in any individual asset of the Trust or any right of partition or possession thereof, but each Shareholder shall have a proportionate undivided beneficial interest in the assets of the Series or Class of Shares of which he is a holder, subject to any rights or restrictions applicable to any Series or Class of Shares of which he is a holder. Section 7. Payment of Expenses. The Trustees shall pay or cause to be paid out of the principal or income of the Trust, or partly out of principal and partly out of income, as they deem fair, all expenses, charges, taxes and liabilities incurred or arising in connection with the Trust, or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses and charges for the services of the Trust's investment adviser or manager, administrator, auditor, counsel, custodian, transfer agent, Shareholder servicing agent, and such other agents or independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur. Section 8. Investment Management and Other Services. Without limiting the generality of the powers of the Trustees, subject to applicable law, the Trustees may enter into a contract with any person or persons, including any firm, corporation, trust or association in which any Trustee, Shareholder or officer of the Trust may be interested, to act as investment advisers and/or managers of the Trust and to provide such investment advice and/or management as the Trustees may from time to time consider appropriate (the "Adviser"). Any such contract may authorize the Adviser to determine from time to time what securities shall be acquired, held or disposed of by the Trust and what portion of assets of the Trust shall be held uninvested and to take, on behalf of the Trust, actions which the Adviser deems necessary to implement the investment policies of the Trust, including the placement of all orders for the purchase, sale or loan of portfolio securities for the Trust's account with brokers or dealers or others selected by the Adviser and the giving of instructions to the custodian of the Trust's assets as to deliveries of securities and payments of cash for the account of the Trust. Without limiting the generality of the powers of the Trustees, subject to applicable law, the Adviser may enter into an agreement to retain at its own expense any person or persons, including any firm, corporation, trust or association in which any Trustee, Shareholder or officer of the Trust may be interested, to provide the Trust investment advice and/or management and any person or persons so retained may be granted all authority which has been granted to the Adviser under the contract which the Adviser entered into pursuant to the preceding paragraph. Without limiting the generality of the powers of the Trustees, the Trustees may enter into a contract with any person or persons, including any firm, corporation, trust or association in which any Trustee, Shareholder or officer of the Trust may be interested, to act as principal underwriter for the Shares. Section 9. Affiliations of Trustees or Officers, Etc. The fact that (i) any of the Shareholders, Trustees or officers of the Trust is a Shareholder, Director, officer, partner, Trustee, employee, manager, adviser or distributor of or for any partnership, corporation, trust, association or other organization or for any parent or affiliate of any organization with which any contract including, without limitation, contracts for services as manager, investment adviser, distributor, principal underwriter, custodian, transfer agent or disbursing agent or for related services may have been or may hereafter be made, or that any such organization, or any parent or affiliate thereof, is a Shareholder of or has an interest in the Trust, or that (ii) any partnership, corporation, trust, association or other organization with which a contract referred to in (i) above may have been or may hereafter be made also has any one or more of such contracts with one or more other partnerships, corporations, trusts, associations or other organizations, or has other business or interests, shall not affect the validity of any such contract or disqualify any Shareholder, Trustee or officer of the Trust from voting upon or executing the same or create any liability or accountability to the Trust or its Shareholders. ARTICLE V SHAREHOLDERS' VOTING POWERS AND MEETINGS Section 1. Voting Powers. The Shareholders shall have power to vote only (i) for the election of Trustees as provided in Section 2 of Article IV hereof and the removal of Trustees to the extent provided in Section 16(c) of the 1940 Act, (ii) with respect to approval or termination in accordance with the 1940 Act of any investment advisory, management or underwriting agreement described in Article IV hereof, (iii) with respect to any amendment of this Trust Agreement to the extent and as provided in Section 7 of Article IX hereof, (iv) as to whether or not a court action, proceeding or claim should be brought or maintained derivatively or as a class action on behalf of the Trust or its Shareholders: and (v) with respect to such additional matters relating to the Trust as may be required by this Trust Agreement or the By-Laws, or as to which the Trustees in their discretion shall determine such Shareholder vote to be required by law or otherwise to be necessary, appropriate or advisable. Each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote. There shall be no cumulative voting in the election of Trustees. Shares may be voted in person or by proxy. A proxy with respect to Shares held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. until shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, this Trust Agreement or any By-Laws of the Trust to be taken by Shareholders. Section 2. Meetings. Meetings of Shareholders shall be held at such times at the principal office of the Trust or such other place as the Trustees may designate. Meetings of the Shareholders may be called by the Trustees or such other person or persons as may be specified in the By-laws. Shareholders shall be entitled to at least seven days' notice of any meeting. Section 3. Quorum and Required Vote. Except as otherwise provided by law, to constitute a quorum for the transaction of business at a Shareholders' meeting there must be present, in person or by proxy, holders of a majority of the total number of Shares of the Trust then outstanding and entitled to vote at the meeting, but any lesser number shall be sufficient for adjournment, and any adjourned session or sessions may be held within 90 days after the date set for the original meeting without the necessity of further notice. Subject to any applicable requirements of law, a majority of the Shares present and entitled to vote on a question or election shall decide such question or election, except when a larger vote is required by any provision of this Trust Agreement, the By-Laws of the Trust or any applicable provision of law. Section 4. Action by Written Consent. Except as otherwise required by law, any action required or permitted to be taken at any meeting may be taken without a meeting if a consent in writing setting forth such action is signed by the Shareholders entitled to vote on the subject matter thereof holding a majority of the Shares entitled to vote thereon. Section 5. Additional Provisions. The By-Laws may include further provisions for Shareholders' votes and meetings and related matters. ARTICLE VI DISTRIBUTIONS AND REDEMPTIONS Section 1. Distributions. The Trustees may, but need not, each year distribute to the Shareholders of each Series or Class such income and gains as the Trustees may determine, after providing for actual and accrued expenses and liabilities (including such reserves as the Trustees may establish) determined in accordance with generally accepted accounting practices. The Trustees shall have full discretion to determine which items shall be treated as income and which items as capital and their determination shall be binding upon the Shareholders. Distributions of each year's income of each Series or Class, if any be made, may be made in one or more payments, which shall be in Shares, in cash or otherwise and on a date or dates and as of a record date or dates determined by or under the authority of the Trustees. At any time and from time to time in their discretion the Trustees may distribute to the Shareholders of any one or more Series or Classes as of a record date or dates determined by or under the authority of the Trustees, in Shares, in cash or otherwise, all or part of any gain realized on the sale or disposition of property of the Trust or otherwise, or all or part of any other principal of the Trust. Each distribution pursuant to this Section 1 shall be made ratably according to the number of Shares of the Series or Class held by the several Shareholders on the applicable record case thereof, provided that no distribution need be made on Shares purchased pursuant to orders received or for which payment is made after such time or times as may be determined by or under the authority of the Trustees. Any such distribution paid in Shares will be paid at the net asset value thereof as determined in accordance with Section 4 hereof. Section 2. Redemptions. Upon offer by any Shareholder of all or part of the Shares held by the Shareholder for redemption hereunder, in accordance with such methods, upon such terms and subject to such conditions as from time to time may be determined by or under the authority of the Trustees, the Trust shall redeem the Shares so offered by distributing to the Shareholder the Net Asset Value Per Share thereof determined as of a time fixed by or under the authority of the Trustees. The Trust shall have the right at its option and at any time to redeem the Shares of any Shareholder for their Net Asset Value Per Share if the Shareholder owns Shares of a Series or Class having an aggregate net asset value of less than such minimum amount as may from time to time be prescribed by or under the authority of the Trustees or if ownership of such Shares by the Shareholder could create adverse tax consequences for the Trust or any Series or Class thereof. With respect to all Shares or any Series or Class of Shares, the right to redemption or the date for payment may, however, be delayed or suspended by the Trustees if there is an extraordinary closing or restriction of trading on the New York Stock Exchange as determined under rules and regulations of the Commission, or an emergency exists as a result of which it is not reasonably practicable for the Trust to dispose of securities or fairly to determine the value of its net assets, or as the Commission may permit. The completion of such distribution on redemption of Shares shall constitute a full discharge of the Trust and Trustees with respect to such Shares, and the Trustees may require that any certificate or certificates issued by the Trust to evidence the ownership of the Shares shall be surrendered to the Trustees for cancellation or notation. Shares so redeemed shall be cancelled or held by the Trust for reissue, as the Trustees may from time to time determine. Section 3. Payment in Kind. Subject to any generally applicable limitation imposed by the Trustees, any distribution on redemption may, if authorized by the Trustees, be made wholly or partly in kind, instead of in cash. Such distribution in kind shall be made by distributing investments constituting, in the opinion of the Trustees, a fair representation of the various types of securities then held by the Series or Class of Shares being redeemed (but not necessarily including a portion of each particular investment) and in each case having an aggregate value equal to the amount of cash instead of which such distribution in kind is made. Section 4. Determination of Net Asset Value Per Share. Subject to applicable law, the Net Asset Value Per Share of each Series or Class shall be computed as of such times as may be determined by or under authority of the Trustees by determining the value of all the investments of such Series or Class in such manner as may be determined by or under authority of the Trustees, adding any other assets of such Series or Class, subtracting all liabilities of such Series or Class and dividing the result by the number of Shares of such Series or Class outstanding. Determination of Net Asset Value Per Share so made in good faith and pursuant to the provisions of the 1940 Act shall be binding on all parties concerned. Section 5. Automatic Redemption from Small Accounts. The Trustees shall have the power to redeem shares at a redemption price determined in accordance with Section 4 of this Article if at any time the total investment in such account does not have a value of at least $1,000 or such other minimum amount as the Trustees may from time to time determine. Before redeeming such Shares, the Shareholder will be notified that the value of his account is less than the required minimum amount and be allowed 60 days or such period as is permitted by law to make an additional investment to bring the total value of such account to such amount or more. Section 6. Power to Modify Foregoing Procedures. Notwithstanding any of the foregoing provisions of this Article VI, the Trustees may prescribe, in their absolute discretion, such other bases and times for the declaration and payment of dividends and distributions as they may deem desirable or necessary to enable the Trust to comply with any provision of the 1940 Act, including any rule or regulation adopted by the Commission or any securities association registered under the Securities Exchange Act of 1934, or any order of exemption issued by the Commission, all as in effect now or as hereafter amended or modified. ARTICLE VII COMPENSATION AND LIMITATION OF LIABILITY OF TRUSTEES Section 1. Compensation. The Trustees shall be entitled to reasonable compensation from the Trust; they may fix the amount of their compensation. Section 2. Limitation of Liability. Provided they have exercised reasonable care in their selection, the Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any officer, agent, employee or Adviser of the Trust nor shall any Trustee be responsible for the act or omission of any other Trustee, but nothing herein contained shall protect any Trustee against any liability to which he would otherwise be subject by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Every note, bond, contract, instrument, certificate, share or undertaking and every other act or thing whatsoever executed or done by or on behalf of the Trust or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been executed or done only in their or his capacity as Trustees or Trustee, and such Trustees or Trustee shall not be personally liable thereon. The Trustees shall use their best efforts to ensure that every note, bond, contract, instrument, certificate or undertaking made or issued by the Trustees or by any officers shall give notice of the existence of this Trust Agreement and shall recite to the effect that the same was executed or made by or on behalf of the Trust or by them as Trustees or officers, and not individually, and is not binding upon any of them or the Shareholders individually, but is binding only upon the Trust property, or the assets of the particular Series or Class in question, as the case may be, but the omission thereof shall not operate to bind any Trustee or officer or Shareholder individually, or to subject the assets of any Series or Class to the obligations of any other Series or Class. ARTICLE VIII INDEMNIFICATION Section 1. Trustees, Officers, etc. The Trust shall indemnify each of its present and former Trustees and officers and may indemnify any of its present or former employees or agents, and shall indemnify any persons who serve or have served at the Trust's request as Directors, officers or Trustees of another organization, and may indemnify persons who serve or have served at the Trust's request as employees or agents of another organization, in which the Trust has any interest as a shareholder, creditor or otherwise (hereinafter referred to as a "Covered Person") against all liabilities and expenses, including, but not limited to, amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees reasonably incurred by any such Covered Person in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body, in which such Covered Person may be or may have been involved as a party or otherwise or with which such person may be or may have been threatened, while in office, employed or acting as agent thereafter, by reason of being or having been such a Trustee, officer, Director, employee or agent, except with respect to any matter as to which such Covered Person shall have been finally adjudicated in any such action, suit or other proceeding not to have acted in good faith in the reasonable belief that such Covered Person's action was in the best interest of the Trust and except that no person shall be indemnified against any liability to the Trust or its Shareholders to which such Covered Person shall otherwise be subject by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Expenses, including counsel fees so incurred by any Covered Person, may in the discretion of the Trustees be paid from time to time by the Trust in advance of the final disposition of any such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Covered Person to repay amounts so paid to the Trust if it is ultimately determined that indemnification against such expenses is not authorized under this Article. Except as otherwise provided by law, the Trust shall have power to purchase and maintain insurance on behalf of a Covered Person against any liability asserted against him and incurred by him in his capacity as a Covered Person, or arising out of his status as such, whether or not the Trust would have the power to indemnify him against the liability under the provisions of this Section. Section 2. Compromise Payment. As to any matter disposed of by a compromise payment by any Covered Person referred to in Section 1 above, pursuant to a consent decree or otherwise, no such indemnification either for such payment or for any other expenses shall be provided unless such compromise shall be approved as in the best interests of the Trust, after notice that it involved such indemnification, (a) by a disinterested majority of the Trustees then in office; or (b) by a majority of the disinterested Trustees then in office; or (c) by any disinterested person or persons to whom the question may be referred by the Trustees, provided that in the case of approval pursuant to clause (b) or (c) there has been obtained an opinion in writing of independent legal counsel to the effect that such Covered Person appears to have acted in good faith in the reasonable belief that his action was in the best interests of the Trust and that such indemnification would not protect such person against any liability to the Trust to which such person would otherwise be subject by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office; or (d) by the vote of a majority of the Shares voting thereon, exclusive of any Shares beneficially owned by any interested Covered Person. Approval by the Trustees pursuant to clause (a) or (b) or any disinterested person or persons pursuant to clause (c) of this Section shall not prevent the recovery from any Covered Person of any amount paid to such Covered Person in accordance with any such clause as indemnification if such Covered Person is subsequently adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that such person's action was in the best interests of the Trust or to have been liable to the Trust or its Shareholders by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Section 3. Indemnification Not Exclusive. The right of indemnification hereby provided shall not be exclusive or affect any other rights to which any such Covered Person may be entitled. As used in this Article VIII, the term "Covered Person" shall include such person's heirs, executors and administrators. An "interested Covered Person" is one against whom the action, suit or other proceeding in question or another action, suit or other proceeding on the same or similar grounds is then or has been pending, and a "disinterested person" is a person against whom none of such actions, suits or other proceedings or another action, suit or other proceeding on the same or similar grounds is then or has been pending. Nothing contained in this Article shall affect any rights to indemnification to which personnel of the Trust other than Trustees and officers or other persons may be entitled by contract or otherwise under law. Section 4. Shareholders. In case any Shareholder or former Shareholder shall be held to be personally liable solely by reason of his being or having been a Shareholder and not because of his acts or omissions or for some other reason, the Shareholder or former Shareholder (or his heirs, executors, administrators or other legal representatives or in the case of a corporation or other entity, its corporate or other successor) shall be entitled out of the assets of the Trust to be held harmless from and indemnified against all loss and expense arising from such liability. ARTICLE IX MISCELLANEOUS Section 1. Trust Not a Partnership. It is hereby expressly declared that a trust and not a partnership is created hereby. Neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust shall have any power to bind personally either the Trust's Trustees or officers or any Shareholders. All persons extending credit to, contracting with or having any claim against the Trust shall look only to the assets of the Trust for payment under such credit, contract or claim, and neither the Shareholders nor the Trustees, nor any of the Trust's officers, employees or agents, whether past, present or future, shall be personally liable therefor. Nothing in this Trust Agreement shall protect any Trustee against any liability to which such Trustee would otherwise be subject by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee hereunder. Section 2. Trustee's Good Faith Action, Expert Advice, No Bond or Surety. The exercise by the Trustees of their powers and discretions hereunder in good faith and with reasonable care under the circumstances then prevailing shall be binding upon everyone interested. Subject to the provisions of Section 1 of this Article IX, a Trustee shall be liable for his own wilful defaults, and for nothing else, and shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Trust Agreement, and subject to the provisions of said Section 1 shall be under no liability for any act or omission in accordance with such advice or for failing to follow such advice. The Trustees shall not be required to give any bond as such, nor any surety if a bond is required. Section 3. Liability of Third Persons Dealing with Trustees. No person dealing with the Trustees shall be bound to make any inquiry concerning the validity of any transaction made or to be made by the Trustees pursuant hereto or to see to the application of any payments made or property transferred to the Trust or upon its order. Section 4. Duration; Termination of Trust; Amendments; Mergers, etc. (a) This Trust shall continue without limitation of time but subject to the provisions of this Section 4. (b) The Trust (as used in this Section 4 the term "Trust" specifically also means any Series or Class) may be terminated by action of the Trustees. Upon the termination of the Trust: (i) The Trust shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Trust Agreement shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust property to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities, and to do all other acts appropriate to liquidate its business. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Trustees shall distribute the remaining Trust property, in cash or in kind or partly each, among the Shareholders according to their respective rights and interests. (c) After termination of the Trust and distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall thereupon cease. (d) Upon completion of the distribution of the remaining proceeds or the remaining assets as provided in paragraph (b), the Trust shall terminate and the Trustees shall be discharged of any and all further liabilities and duties hereunder and the right, title and interest of all parties shall be canceled and discharged. Section 5. Filing of Copies, References, Headings. The original or a copy of this instrument and of each Trust Agreement supplemental hereto or Amendment hereof shall be kept at the office of the Trust where it may be inspected by any Shareholder. Anyone dealing with the Trust may rely on a certificate by an officer of the Trust as to whether or not any Supplemental Trust Agreement or Amendments have been made and as to any matters in connection with the trust hereunder; and, with the same effect as if it were the original, may rely on a copy certified by an officer of the Trust to be a copy of this instrument or of any such Supplemental Trust Agreement or Amendment. In this instrument or in any such Amendment or Supplemental Trust Agreement, references to this instrument, and all expressions such as "herein," "hereof," and "hereunder," shall be deemed to refer to this instrument as amended or affected by any such Supplemental Trust Agreement or Amendment. Headings are placed herein for convenience of reference only and in case of any conflict, the text of this instrument, rather than the headings, shall control. This instrument may be executed in any number of counterparts each of which shall be deemed an original. Section 6. Applicable Law. The Trust set forth in this instrument is made in The Commonwealth of Pennsylvania, and it is created under and is to be governed by and construed and administered according to the laws of such Commonwealth. The Trust shall be of the type commonly called a Pennsylvania common law trust, and, without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a Trust. Section 7. Amendments. (a) This Trust Agreement may be amended by a vote or written consent of the Trustees. However, if such amendment adversely affects the rights of any Shares of any Series or any Class thereof with respect to matters to which such amendment is applicable, such amendment shall be subject to approval by holders of a majority of the Shares of such Series or Class. An amendment or other action which provides for an additional Series of Shares (and/or Class thereof), which Series may vote together with Shares of other Series (and/or Classes thereof) and makes other provisions with respect to such series (and/or class thereof) and its relation to existing Series (and/or Classes thereof), shall not be deemed to adversely affect the rights of any other Series of Shares or Class thereof. The Trustees may also amend this Trust Agreement without any Shareholder approval to change the name of the Trust, to supply any omission, to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof, or, if they deem it necessary, to conform this Trust Agreement to the requirements of applicable federal laws or regulations or the requirements of the Internal Revenue Code, or to eliminate or reduce any federal, state or local taxes which are or may be payable by the Trust or the Shareholders, but the Trustees shall not be liable for failing to do so. (b) Nothing contained in this Trust Agreement shall permit the amendment of this Trust Agreement to impair the exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessments upon Shareholders. (c) A certificate signed by a majority of the Trustees or by the Secretary or any Assistant Secretary of the Trust, setting forth an amendment by reciting that it was duly adopted by the Shareholders or by the Trustees as aforesaid, or a copy of the Trust Agreement as amended, and executed by a majority of the Trustees or certified by the Secretary or any Assistant Secretary of the Trust, shall be conclusive evidence of such amendment when lodged among the records of the Trust. Section 8. Merger, Consolidation and Sale of Assets. The Trust may merge into or consolidate with any other corporation, association, trust or other organization or may sell, lease or exchange all or substantially all of the Trust property, including its good will, upon such terms and conditions and for such consideration when and as authorized by the Trustees. Section 9. Incorporation. The Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction or any other trust, partnership, association or other organization to take over all the Trust property or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer the Trust property to any such corporation, trust, partnership, association or organization in exchange for the shares or securities thereof or otherwise, and to lend money to, subscribe for the shares or securities of, and enter into any contracts with any such corporation, trust, partnership, association or organization in which the Trust holds or is about to acquire shares or any other interest. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any corporation, trust, partnership, association or other organization if and to the extent permitted by law, as provided under the law then in effect. Nothing contained herein shall be construed as requiring approval of Shareholders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations and selling, conveying or transferring the Trust property to such organizations or entities. IN WITNESS WHEREOF, the undersigned has hereunto set its hand and seal in the City of Boston, Massachusetts, for itself and its assigns, as of the day and year first above written. KEYSTONE CUSTODIAN FUNDS, INC. By: Albert H. Elfner, III --------------------------- President EX-99.2 3 BY-LAWS EXHIBIT 99.2 BY-LAWS KEYSTONE QUALITY BOND FUND (B-1) ARTICLE 1. Restatement of Trust Agreement and Principal Office 1.1 Restatement of Trust Agreement. These By-laws are adopted pursuant to and are subject to the terms of the Restatement of Trust Agreement ("Trust Agreement") of Keystone Quality Bond Fund (B-1) ("Fund"). 1.2 Principal Office of the Fund. The principal office of the Fund shall be located in Boston, Massachusetts, or such other place as the Trustees may designate from time to time. ARTICLE 2. Meetings of Shareholders 2.1 Meetings. Meetings may be called by the Trustees or by the President or by any other officers designated for the purpose by the Trustees. 2.2 Business to be Transacted. At any meeting of shareholders, such business may be transacted as is referred to in the notice of the meeting, and any other business considered appropriate by or under authority of the Trustees. 2.3 Notice. A written notice of each meeting of the shareholders, specifying the time, place and purposes thereof, shall be given as hereinafter provided by the Secretary of the Fund or any Assistant Secretary or by a person or persons designated by either of them, to each shareholder who is entitled to vote thereat at least seven (7) days (including Sundays and holidays) before such meeting. Notice of a meeting need not be given to any shareholder if a written waiver of notice, executed by the shareholder or his attorney thereunto duly authorized before or after the meeting, is filed with the records of the meeting, or to any shareholder who attends the meeting either in person or by proxy without protesting, prior thereto or at its commencement, the lack of notice to such shareholder. Every notice to any shareholder required or provided for herein may be given to him personally or by mailing it to him postage prepaid, addressed to him at his address specified in the records of the Trust. Notice shall be deemed to have been given at the time when it is so mailed. In respect of any share held jointly by several persons notice so given to any one of them shall be sufficient notice to all of them. Any notice so sent to the address of any shareholder shall be deemed to have been duly sent in respect of any such share whether held by him solely or jointly with others, notwithstanding he be then deceased or be bankrupt or insolvent or legally incompetent, and whether or not the Trustees or any person sending such notice have knowledge of his death, bankruptcy or insolvency or legal incompetence, until some other person or persons shall be registered as holders. The certificate of the person or persons giving such notice shall be sufficient evidence thereof, and shall protect all persons acting in good faith in reliance on such certificate. 2.5 Voting. Shares may be voted in person by the shareholder or by proxy in form reasonably acceptable to the Trust. If the holder of any share is a minor or a person of unsound mind, or subject to guardianship or to the legal control of any other person as regards the charge or management of such share, he may vote by his guardian or such other person appointed or having such control, and such vote may be given in person or by proxy. 2.6 Record Dates. For the purpose of determining the shareholders who are entitled to vote or act at any meeting or any adjournment thereof, or who are entitled to receive payment of any dividend or of any other distribution, the Trustees may from time to time fix or authorize the fixing by others of a time as the record date for determining the shareholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution, and in such case only shareholders of record on such record date shall have such right, notwithstanding any transfer of shares on the books of the Fund after the record date; or without fixing such record date the Trustees may for any of such purposes close the register or transfer books for all or any part of such period. ARTICLE 3. Meetings of Trustees 3.1 Regular Meetings. Regular meetings of the Trustees may be held without call or notice at such places and at such times as the Trustees may from time to time determine. 3.2 Special Meetings. Special meetings of the Trustees may be held at any time and at any place designated in the call of the meeting when called by the Chairman, the President or the Treasurer, or by any other officer authorized by the Trustees to do so, or by two or more Trustees, sufficient notice thereof being given to each Trustee by the Secretary or an Assistant Secretary or by the officer or one of the Trustees calling the meeting. 3.3 Notice. It shall be sufficient notice to a Trustee of a special meeting to send notice by mail at least forty-eight hours or by telegram at least twenty-four hours before the meeting addressed to him at his usual or last known business or residence address or to give notice to him in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any Trustee if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any Trustee who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. 3.4 Quorum. At any meeting of the Trustees a majority of the Trustees then in office shall constitute a quorum. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present and the meeting may be held as adjourned without further notice. 3.5 Action by Vote. When a quorum is present at any meeting, a majority of the Trustees present may take any action, except when a larger vote is required by the Trust Agreement or any applicable law. 3.6 Participation by Conference Telephone. The Trustees may participate in a meeting of the Trustees by means of conference telephone or similar communications equipment. Participation by such means shall constitute presence in person at a meeting. 3.7 Action by Writing. The Trustees may act without a meeting and the action of a majority of the Trustees then in office evidenced by a writing signed by such a majority shall be valid and binding as the action of the Trustees. ARTICLE 4. Trustees 4.1 Term. A Trustee shall serve until his death, Retirement, resignation or removal from office or until his successor is elected and qualifies. ARTICLE 5. Officers 5.1 Election. The President, the Treasurer and the Secretary shall be elected annually by the Trustees and shall serve until their successors are elected and qualified or until their earlier death, resignation or removal. Other officers, if any, including if desired a Controller, may be elected or appointed by the Trustees at the meeting or at any other time. A Chairman of the Board may be elected or appointed by the Trustees at the meeting or at any other time. Vacancies in any office may be filled at any time by the Trustees. 5.2 Tenure. Each officer and each agent shall hold office at the pleasure of the Trustees. 5.3 Powers. Subject to law and to the other provisions of these By-laws, each officer shall have, in addition to any duties and powers set forth herein and in the Trust Agreement, such duties and powers as are commonly incident to the office occupied by him as if the Fund were organized as a Pennsylvania business corporation and such other duties and powers as the Trustees may from time to time designate. 5.4 President. Unless the Trustees otherwise provide, the President shall preside at all meetings of shareholders and of the Trustees and the President shall be the chief executive officer. 5.5 Treasurer. The Treasurer shall be the chief financial officer of the Fund. In the absence of the Treasurer, or if there is then no person serving in such office, the Controller of the Fund shall be the chief financial officer of the Fund. He shall, subject to the provisions of the Trust Agreement and subject to any arrangement made by the Trustees with a bank or other trust company or organization as custodian, be in charge of valuable papers, books of account and accounting records, and shall have such other duties and powers as may be designated from time to time by the Trustees or by the President. 5.6 Secretary. The Secretary shall record all proceedings of the shareholders and Trustees in books to be kept therefor, which books shall be kept at the principal office of the Fund. In the absence of the Secretary, an Assistant Secretary, or if there be none or if he is absent, a temporary Secretary chosen by the shareholders or the Trustees, as the case may be, shall record the proceedings in the aforesaid books. 5.7 Resignation and Removals. Any Trustee or officer may resign at any time by written instrument signed by him and deposited with the Trustees by delivering such resignation to the President or the Secretary or to a meeting of the Trustees. Such resignation shall be effective upon receipt unless specified to be effective at some other time. The Trustees may remove any officer elected by them with or without cause by vote of a majority of the Trustees then in office. Except to the extent expressly provided in a written agreement with the Fund, no Trustee or officer resigning and no officer removed shall have any right to compensation for any period following his resignation or removal, or any right to damages on account of such removal. ARTICLE 6. Committees 6.1 General. The Trustees may appoint from their number an executive committee to serve during their pleasure. The executive committee may, when the Trustees are not in session at a meeting, exercise such of the powers and authority of the Trustees as may be conferred from time to time by the Trustees. Rules governing the actions of the executive committee may be adopted by the Trustees from time to time as they deem appropriate. The Trustees may appoint from their number such other committees from time to time as they deem appropriate. The number composing such committees, the powers and authority conferred upon such committees and the rules governing the actions of such committees shall be determined by the Trustees at their discretion. 6.2 Quorum; Voting. A majority of the members of any committee of the Trustees shall constitute a quorum for the transaction of business, and any action of such a committee may be taken at a meeting by a vote of a majority of the members present (a quorum being present) or evidenced by one or more writings signed by such a majority. Members of a committee may participate in a meeting of such committee by means of conference telephone or similar communications equipment. Participation by such means shall constitute presence in person at a meeting. ARTICLE 7. Fiscal Year and Seal 7.1 Fiscal Year. The fiscal year of the Fund shall end on the last day of October in each year. 7.2 Seal. The seal of the Fund shall consist of a flat-faced die with the name of the Fund and 1932 cut or engraved thereon. ARTICLE 8. Amendments 8.1 Amendment by Trustees. These By-laws may also be altered, amended or repealed by the Trustees, except with respect to any provision which by law, the Trust Agreement or these By-laws requires action by the shareholders. EX-99.5(A) 4 INVESTMENT MANAGEMENT AGREEMENT EXHIBIT 99.5(A) INVESTMENT MANAGEMENT AGREEMENT AGREEMENT made the 19th day of August, 1993, by and between KEYSTONE CUSTODIAN FUND, SERIES B-1, a Pennsylvania common law trust (the "Fund"), and KEYSTONE MANAGEMENT, INC., a Nevada corporation (the "Manager"). WHEREAS, the Fund and the Manager wish to enter into an Agreement setting forth the terms on which the Manager will perform certain services for the Fund. THEREFORE, in consideration of the promises and the mutual agreements hereinafter contained, the Fund and the Manager agree as follows: 1. The Fund hereby employs the Manager to manage and administer the operation of the Fund, to supervise the provision of services to the Fund by others, and to manage the investment and reinvestment of the assets of the Fund in conformity with the Fund's investment objectives and restrictions as may be set forth from time to time in the Fund's then current prospectus and statement of additional information, if any, and other governing documents, all subject to the supervision of the Board of Trustees of the Fund, for the period and on the terms set forth in this Agreement. The Manager hereby accepts such employment and agrees during such period, at its own expense, to render the services and to assume the obligations set forth herein, for the compensation provided herein. The Manager shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund. 2. The Manager shall place all orders for the purchase and sale of portfolio securities for the account of the Fund with broker-dealers selected by the Manager. In executing portfolio transactions and selecting broker- dealers, the Manager will use its best efforts to seek best execution on behalf of the Fund. In assessing the best execution available for any transaction, the Manager shall consider all factors it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker- dealer, and the reasonableness of the commission, if any (all for the specific transaction and on a continuing basis). In evaluating the best execution available, and in selecting the broker-dealer to execute a particular transaction, the Manager may also consider the brokerage and research services (as those terms are used in Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act") provided to the Fund and/or other accounts over which the Manager or an affiliate of the Manager exercises investment discretion. The Manager is authorized to pay a broker-dealer who provides such brokerage and research services a commission for executing a portfolio transaction for the Fund which is in excess of the amount of commission another broker-dealer would have charged for effecting that transaction if, but only if, the Manager determines in good faith that such commission was reasonable in relation to the value of the brokerage and research services provided by such broker- dealer viewed in terms of that particular transaction or in terms of all of the accounts over which investment discretion is so exercised. 3. The Manager, at its own expense, shall furnish to the Fund office space in the offices of the Manager or in such other place as may be agreed upon by the parties from time to time, all necessary office facilities, equipment and personnel in connection with its services hereunder, and shall arrange, if desired by the Fund, for members of the Manager's organization to serve without salaries from the Fund as officers or, as may be agreed from time to time, as agents of the Fund. The Manager assumes and shall pay or reimburse the Fund for: (1) the compensation (if any) of the Trustees of the Fund who are affiliated with the Manager or with its affiliates, or with any adviser retained by the Manager, and of all officers of the Fund as such, and (2) all expenses of the Manager incurred in connection with its services hereunder. The Fund assumes and shall pay all other expenses of the Fund, including, without limitation: (1) all charges and expenses of any custodian or depository appointed by the Fund for the safekeeping of its cash, securities and other property; (2) all charges and expenses for bookkeeping and auditors; (3) all charges and expenses of any transfer agents and registrars appointed by the Fund; (4) all fees of all Trustees of the Fund who are not affiliated with the Manager or any of its affiliates, or with any adviser retained by the Manager; (5) all broker's fees, expenses and commissions and issue and transfer taxes chargeable to the Fund in connection with transactions involving securities and other property to which the Fund is a party; (6) all costs and expenses of distribution of its shares incurred pursuant to a Plan of Distribution adopted under Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act"); (7) all taxes and trust fees payable by the Fund to Federal, state or other governmental agencies; (8) all costs of certificates representing shares of the Fund; (9) all fees and expenses involved in registering and maintaining registrations of the Fund and of its shares with the Securities and Exchange Commission (the "Commission") and registering or qualifying its shares under state or other securities laws, including, without limitation, the preparation and printing of registration statements, prospectuses and statements of additional information for filing with the Commission and other authorities; (10) expenses of preparing, printing and mailing prospectuses and statements of additional information to shareholders of the Fund; (11) all expenses of shareholders' and Trustees' meetings and of preparing, printing and mailing notices, reports and proxy materials to shareholders of the Fund; (12) all charges and expenses of legal counsel for the Fund and for Trustees of the Fund in connection with legal matters relating to the Fund, including, without limitation, legal services rendered in connection with the Fund's existence, trust and financial structure and relations with its shareholders, registrations and qualifications of securities under Federal, state and other laws, issues of securities, expenses which the Fund has herein assumed, whether customary or not, and extraordinary matters, including, without limitation, any litigation involving the Fund, its Trustees, officers, employees or agents; (13) all charges and expenses of filing annual and other reports with the Commission and other authorities; and (14) all extraordinary expenses and charges of the Fund. In the event that the Manager provides any of these services or pays any of these expenses, the Fund will promptly reimburse the Manager therefor. The services of the Manager to the Fund hereunder are not to be deemed exclusive, and the Manager shall be free to render similar services to others. 4. As compensation for the Manager's services to the Fund during the period of this Agreement, the Fund will pay to the Manager a fee at the annual rate of: FOR B-1, B-2, B-4: MANAGEMENT AGGREGATE NET ASSET VALUE FEE OF THE SHARES OF THE FUND - ------------------------------------------------------------------------------ 2.0% of Gross Dividend and Interest Income Plus 0.50% of the first $100,000,000, plus 0.45% of the next $100,000,000, plus 0.40% of the next $100,000,000, plus 0.35% of the next $100,000,000, plus 0.30% of the next $100,000,000, plus 0.25% of amounts over $500,000,000 - ------------------------------------------------------------------------------ computed as of the close of business on each business day. FOR K-1: MANAGEMENT AGGREGATE NET ASSET VALUE FEE OF THE SHARES OF THE FUND - ------------------------------------------------------------------------------ 1.5% of Gross Dividend and Interest Income Plus 0.60% of the first $ 100,000,000, plus 0.55% of the next $ 100,000,000, plus 0.50% of the next $ 100,000,000, plus 0.45% of the next $ 100,000,000, plus 0.40% of the next $ 100,000,000, plus 0.35% of the next $ 500,000,000, plus 0.30% of amounts over $1,000,000,000 - ------------------------------------------------------------------------------ computed as of the close of business on each business day. FOR K-2, S-1, S-3 AND S-4: MANAGEMENT AGGREGATE NET ASSET VALUE FEE OF THE SHARES OF THE FUND - ------------------------------------------------------------------------------ 0.70% of the first $ 100,000,000, plus 0.65% of the next $ 100,000,000, plus 0.60% of the next $ 100,000,000, plus 0.55% of the next $ 100,000,000, plus 0.50% of the next $ 100,000,000, plus 0.45% of the next $ 500,000,000, plus 0.40% of the next $ 500,000,000, plus 0.35% of amounts over $1,500,000,000 - ------------------------------------------------------------------------------ computed as of the close of business on each business day. A pro rata portion of the fee shall be payable in arrears at the end of each day or calendar month as the Manager may from time to time specify to the Fund. If and when this Agreement terminates, any compensation payable hereunder for the period ending with the date of such termination shall be payable upon such termination. Amounts payable hereunder shall be promptly paid when due. 5. The Manager may enter into an agreement to retain, at its own expense, Keystone Custodian Funds, Inc. or any other firm or firms ("Adviser") to provide the Fund all of the services to be provided by the Manager hereunder, if such agreement is approved as required by law. Such agreement may delegate to such Adviser all of Manager's rights, obligations and duties hereunder. 6. The Manager shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the performance of this Agreement, except a loss resulting from the Manager's willful misfeasance, bad faith, gross negligence or from reckless disregard by it of its obligations and duties under this Agreement. Any person, even though also an officer, Director, partner, employee, or agent of the Manager, who may be or become an officer, Trustee, employee or agent of the Fund, shall be deemed, when rendering services to the Fund or acting on any business of the Fund (other than services or business in connection with the Manager's duties hereunder), to be rendering such services to or acting solely for the Fund and not as an officer, Director, partner, employee, or agent or one under the control or direction of the Manager even though paid by it. The Fund agrees to indemnify and hold the Manager harmless from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, liabilities arising under the Securities Act of 1933, the 1934 Act, the 1940 Act, and any state and foreign securities and blue sky laws, as amended from time to time) and expenses, including (without limitation) attorneys' fees and disbursements, arising directly or indirectly from any action or thing which the Manager takes or does or omits to take or do hereunder provided that the Manager shall not be indemnified against any liability to the Fund or to its shareholders (or any expenses incident to such liability) arising out of a breach of fiduciary duty with respect to the receipt of compensation for services, willful misfeasance, bad faith, or gross negligence on the part of the Manager in the performance of its duties, or from reckless disregard by it of its obligations and duties under this Agreement. 7. The Fund shall cause its books and accounts to be audited at least once each year by a reputable independent public accountant or organization of public accountants who shall render a report to the Fund. 8. Subject to and in accordance with the Trust Agreement of the Fund, the Articles of Incorporation of the Manager and the governing documents of any Adviser, it is understood that Trustees, Directors, officers, agents and shareholders of the Fund or any Adviser are or may be interested in the Manager (or any successor thereof) as Directors and officers of the Manager or its affiliates, as stockholders of Keystone Group, Inc. or otherwise; that Directors, officers and agents of the Manager and its affiliates or stockholders of Keystone Group, Inc. are or may be interested in the Fund or any Adviser as Trustees, Directors, officers, shareholders or otherwise; that the Manager (or any such successor) is or may be interested in the Fund or any Adviser as shareholder, or otherwise; and that the effect of any such adverse interests shall be governed by said Trust Agreement of the Fund, Articles of Incorporation of the Manager and governing documents of any Adviser. 9. This Agreement shall continue in effect after July 1, 1994 only so long as (1) such continuance is specifically approved at least annually by the Board of Trustees of the Fund or by a vote of a majority of the outstanding voting securities of the Fund, and (2) such renewal has been approved by the vote of a majority of Trustees of the Fund who are not interested persons, as that term is defined in the 1940 Act, of the Manager or of the Fund, cast in person at a meeting called for the purpose of voting on such approval. 10. On sixty days' written notice to the Manager, this Agreement may be terminated at any time without the payment of any penalty by the Board of Trustees of the Fund or by vote of the holders of a majority of the outstanding voting securities of the Fund; and on sixty days' written notice to the Fund, this Agreement may be terminated at any time without the payment of any penalty by the Manager. This Agreement shall automatically terminate upon its assignment (as that term is defined in the 1940 Act). Any notice under this Agreement shall be given in writing, addressed and delivered, or mailed postage prepaid, to the other party at the main office of such party. 11. This Agreement may be amended at any time by an instrument in writing executed by both parties hereto or their respective successors, provided that with regard to amendments of substance such execution by the Fund shall have been first approved by the vote of the holders of a majority of the outstanding voting securities of the Fund and by the vote of a majority of Trustees of the Fund who are not interested persons (as that term is defined in the 1940 Act) of the Manager, any predecessor of the Manager, or of the Fund, cast in person at a meeting called for the purpose of voting on such approval. A "majority of the outstanding voting securities of the Fund" shall have, for all purposes of this Agreement, the meaning provided therefor in the 1940 Act. 12. Any compensation payable to the Manager hereunder for any period other than a full year shall be proportionately adjusted. 13. The provisions of this Agreement shall be governed, construed and enforced in accordance with the laws of The Commonwealth of Massachusetts. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the day and year first above written. KEYSTONE CUSTODIAN FUND, SERIES B-1 Ralph J. Spuehler, Jr. By: ----------------------------------------------------------- Title: Treasurer KEYSTONE MANAGEMENT, INC. Edward F. Godfrey By: ----------------------------------------------------------- Title: Treasurer EX-99.5(B) 5 INVESTMENT ADVISORY AGREEMENT EXHIBIT 99.5(B) INVESTMENT ADVISORY AGREEMENT AGREEMENT made the 19th day of August, 1993, by and between KEYSTONE MANAGEMENT, INC., a Nevada corporation (the "Manager"), and KEYSTONE CUSTODIAN FUNDS, INC., a Delaware corporation (the "Adviser"). WHEREAS, the Manager and the Adviser wish to enter into an Agreement setting forth the terms on which the Adviser will perform certain services for the Manager and KEYSTONE CUSTODIAN FUND, SERIES B-1 (the "Fund"). THEREFORE, in consideration of the promises and the mutual agreements hereinafter contained, the Manager and the Adviser agree as follows: 1. The Manager hereby employs the Adviser to manage and administer the operation of the Fund (with the exception of certain managerial and administrative services to be provided by the Manager), to supervise the provision of services to the Fund by others, and to manage the investment and reinvestment of the assets of the Fund in conformity with the Fund's investment objectives and restrictions as may be set forth from time to time in the Fund's then current prospectus and statement of additional information, if any, and other governing documents, all subject to the supervision of the Manager and Board of Trustees of the Fund, for the period and on the terms set forth in this Agreement. The Adviser hereby accepts such employment and agrees during such period, at its own expense, to render the services and to assume the obligations set forth herein, for the compensation provided herein. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Manager or the Fund in any way or otherwise be deemed an agent of the Manager or the Fund. 2. The Adviser shall place all orders for the purchase and sale of portfolio securities for the account of the Fund with broker-dealers selected by the Adviser. In executing portfolio transactions and selecting broker- dealers, the Adviser will use its best efforts to seek best execution on behalf of the Fund. In assessing the best execution available for any transaction, the Adviser shall consider all factors it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker- dealer, and the reasonableness of the commission, if any (all for the specific transaction and on a continuing basis). In evaluating the best execution available, and in selecting the broker-dealer to execute a particular transaction, the Adviser may also consider the brokerage and research services (as those terms are used in Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act") provided to the Fund and/or other accounts over which the Adviser or an affiliate of the Adviser exercises investment discretion. The Adviser is authorized to pay a broker-dealer who provides such brokerage and research services a commission for executing a portfolio transaction for the Fund which is in excess of the amount of commission another broker-dealer would have charged for effecting that transaction if, but only if, the Adviser determines in good faith that such commission was reasonable in relation to the value of the brokerage and research services provided by such broker- dealer viewed in terms of that particular transaction or in terms of all of the accounts over which investment discretion is so exercised. 3. The Adviser, at its own expense, shall furnish to the Fund office space in the offices of the Adviser or in such other place as may be agreed upon by the parties and the Fund from time to time, all necessary office facilities, equipment and personnel in connection with its services hereunder, and shall arrange, if desired by the Fund, for members of the Adviser's organization to serve without salaries from the Fund as officers or, as may be agreed from time to time, as agents of the Fund. The Adviser assumes and shall pay or reimburse the Manager or the Fund, as the case may be, for: (1) the compensation (if any) of the Trustees of the Fund who are affiliated with the Adviser, any of its affiliates, or the Manager, and of all officers of the Fund as such, and (2) all expenses of the Adviser incurred in connection with its services hereunder. The Manager represents and warrants that the Fund has assumed and has agreed to pay all other expenses of the Fund, including, without limitation: (1) all charges and expenses of any custodian or depository appointed by the Fund for the safekeeping of its cash, securities and other property; (2) all charges and expenses for bookkeeping and auditors; (3) all charges and expenses of any transfer agents and registrars appointed by the Fund; (4) all fees of all Trustees of the Fund who are not affiliated with the Adviser, any of its affiliates, or the Manager; (5) all broker's fees, expenses and commissions and issue and transfer taxes chargeable to the Fund in connection with transactions involving securities and other property to which the Fund is a party; (6) all costs and expenses of distribution of its shares incurred pursuant to a Plan of Distribution adopted under Rule 12b- 1 under the Investment Company Act of 1940 ("1940 Act"); (7) all taxes and trust fees payable by the Fund to Federal, state or other governmental agencies; (8) all costs of certificates representing shares of the Fund; (9) all fees and expenses involved in registering and maintaining registrations of the Fund and of its shares with the Securities and Exchange Commission (the "Commission") and registering or qualifying its shares under state or other securities laws, including, without limitation, the preparation and printing of registration statements, prospectuses and statements of additional information for filing with the Commission and other authorities; (10) expenses of preparing, printing and mailing prospectuses and statements of additional information to shareholders of the Fund; (11) all expenses of shareholders' and Trustees' meetings and of preparing, printing and mailing notices, reports and proxy materials to shareholders of the Fund; (12) all charges and expenses of legal counsel for the Fund and for Trustees of the Fund in connection with legal matters relating to the Fund, including, without limitation, legal services rendered in connection with the Fund's existence, trust and financial structure and relations with its shareholders, registrations and qualifications of securities under Federal, state and other laws, issues of securities, expenses which the Fund has herein assumed, whether customary or not, and extraordinary matters, including, without limitation, any litigation involving the Fund, its Trustees, officers, employees or agents; (13) all charges and expenses of filing annual and other reports with the Commission and other authorities; (14) all charges and expenses of any manager appointed by the Fund; and (15) all extraordinary expenses and charges of the Fund; and that in the event that the Adviser provides any of these services or pays any of these expenses, the Fund will promptly reimburse the Adviser therefor. The services of the Adviser to the Fund and the Manager hereunder are not to be deemed exclusive, and the Adviser shall be free to render similar services to others. 4. As compensation for the Adviser's services to the Fund during the period of this Agreement, the Manager will pay to the Adviser a fee at the annual rate of 85% of the management fee paid by the Fund to the Manager. A pro rata portion of the fee shall be payable in arrears at the end of each day or calendar month as the Adviser may from time to time specify to the Manager. If and when this Agreement terminates, any compensation payable hereunder for the period ending with the date of such termination shall be payable upon such termination. Amounts payable hereunder shall be promptly paid when due. 5. The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund or the Manager in connection with the performance of this Agreement, except a loss resulting from the Adviser's willful misfeasance, bad faith, gross negligence or from reckless disregard by it of its obligations and duties under this Agreement. Any person, even though also an officer, Director, partner, employee, or agent of the Adviser, who may be or become an officer, Trustee, Director, employee or agent of the Fund or the Manager, shall be deemed, when rendering services to the Fund or the Manager or acting on any business of the Fund or the Manager, (other than services or business in connection with the Adviser's duties hereunder), to be rendering such services to or acting solely for the Fund or the Manager, as the case may be, and not as an officer, Director, partner, employee, or agent or one under the control or direction of the Adviser even though paid by it. The Manager agrees to indemnify and hold the Adviser harmless from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, liabilities arising under the Securities Act of 1933, the 1934 Act, the 1940 Act, and any state and foreign securities and blue sky laws, as amended from time to time) and expenses, including (without limitation) attorneys' fees and disbursements, arising directly or indirectly from any action or thing which the Adviser takes or does or omits to take or do hereunder; provided that the Adviser shall not be indemnified against any liability to the Fund or to its shareholders (or any expenses incident to such liability) arising out of a breach of fiduciary duty with respect to the receipt of compensation for services, willful misfeasance, bad faith, or gross negligence on the part of the Adviser in the performance of its duties, or from reckless disregard by it of its obligations and duties under this Agreement. 6. The Manager represents and warrants that the Fund has agreed to cause its books and accounts to be audited at least once each year by a reputable independent public accountant or organization of public accountants who shall render a report to the Fund. 7. Subject to and in accordance with the Trust Agreement of the Fund, the Certificate of Incorporation of the Adviser and Articles of Incorporation of the Manager, respectively, it is understood that Trustees, Directors, officers, agents and shareholders of the Fund or the Manager are or may be interested in the Adviser (or any successor thereof) as Directors and officers of the Adviser or its affiliates, as stockholders of Keystone Group, Inc. or otherwise; that Directors, officers and agents of the Adviser and its affiliates or stockholders of Keystone Group, Inc. are or may be interested in the Fund or the Manager as Trustees, Directors, officers, shareholders or otherwise; that the Adviser (or any such successor) is or may be interested in the Fund or the Manager as shareholder or otherwise; and that the effect of any such adverse interests shall be governed by said Trust Agreement of the Fund, Certificate of Incorporation of the Adviser, and Articles of Incorporation of the Manager. 8. This Agreement shall continue in effect after July 1, 1994 only so long as (1) such continuance is specifically approved at least annually by the Board of Trustees of the Fund or by a vote of a majority of the outstanding voting securities of the Fund, and (2) such renewal has been approved by the vote of a majority of Trustees of the Fund who are not interested persons, as that term is defined in the 1940 Act, of the Adviser, the Manager or of the Fund, cast in person at a meeting called for the purpose of voting on such approval. 9. On sixty days' written notice to the Adviser, this Agreement may be terminated at any time without the payment of any penalty by the Manager, by the Board of Trustees of the Fund or by vote of the holders of a majority of the outstanding voting securities of the Fund; and on sixty days' written notice to the Manager and the Fund, this Agreement may be terminated at any time without the payment of any penalty by the Adviser. This Agreement shall automatically terminate upon its assignment (as that term is defined in the 1940 Act). Any notice under this Agreement shall be given in writing, addressed and delivered, or mailed postage prepaid, to the other party at the main office of such party. 10. This Agreement may be amended at any time by an instrument in writing executed by both parties hereto or their respective successors, provided that with regard to amendments of substance such execution shall have been first approved by the vote of the holders of a majority of the outstanding voting securities of the Fund and by the vote of a majority of Trustees of the Fund who are not interested persons (as that term is defined in the 1940 Act) of the Adviser, the Manager, or of any predecessor of either, or of the Fund, cast in person at a meeting called for the purpose of voting on such approval. A "majority of the outstanding voting securities of the Fund" shall have, for all purposes of this Agreement, the meaning provided therefor in the 1940 Act. 11. Any compensation payable to the Adviser hereunder for any period other than a full year shall be proportionately adjusted. 12. The provisions of this Agreement shall be governed, construed and enforced in accordance with the laws of The Commonwealth of Massachusetts. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the day and year first above written. KEYSTONE MANAGEMENT, INC. Edward F. Godfrey By: ----------------------------------------------------------- Title: Treasurer KEYSTONE CUSTODIAN FUNDS, INC. Edward F. Godfrey By: ----------------------------------------------------------- Title: Sr. Vice President EX-99.6(A) 6 PRINCIPAL UNDERWRITING AGREEMENT EXHIBIT 99.6(A) PRINCIPAL UNDERWRITING AGREEMENT AGREEMENT made as of the 19th day of August by and between KEYSTONE CUSTODIAN FUND, SERIES B-1 (the "Fund"), and KEYSTONE DISTRIBUTORS, INC., a Delaware corporation (the "Principal Underwriter"). It is hereby mutually agreed as follows: 1. The Fund hereby appoints Principal Underwriter a Principal Underwriter pursuant to the terms of the 12b-1 Plan most recently adopted by the Fund ("12b-1 Plan") and a Principal Underwriter of the shares of beneficial interest of the Fund (the "Shares") as an independent contractor upon the terms and conditions hereinafter set forth. Except as the Fund may from time to time agree, Principal Underwriter will act as agent for the Fund and not as principal. 2. Principal Underwriter will use its best efforts to find purchasers for the Shares and in so doing may retain and employ representatives to promote distribution of the Shares and may obtain orders from brokers, dealers or others for sales of Shares to them. No such representative, dealer or broker shall have any authority to act as agent for the Fund; such dealer or broker shall act only as principal in the sale of Shares. 3. All sales of Shares by Principal Underwriter shall be at the applicable public offering price determined in the manner set forth in the prospectus and/or statement of additional information of the Fund current at the time of the Fund's acceptance of the order for Shares. All orders shall be subject to acceptance by the Fund and the Fund reserves the right in its sole discretion to reject any order received. The Fund shall not be liable to anyone for failure to accept any order. 4. On all sales of Shares, the Fund shall receive the current net asset value and Principal Underwriter shall be entitled to the commissions and maintenance and of the fees provided under the 12b-1 Plan ("12b-1 commissions") and as set forth in the then current prospectus and/or statement of additional information of the Fund. Principal Underwriter may reallow all or a part of the 12b-1 commissions to such of its representatives, or to such brokers or dealers, as Principal Underwriter may determine. 5. Payment for Shares shall be in New York or Boston Clearing House Funds received by Principal Underwriter within ten (10) business days after notice of acceptance of the purchase order and notice of the amount of the applicable public offering price has been given to the purchaser. If such payment is not received within such ten-day period, the Fund reserves the right, without further notice, forthwith to cancel its acceptance of any such order. The Fund shall pay such issue taxes as may be required by law in connection with the issue of the Shares. 6. Principal Underwriter shall not make, or permit any representative, broker or dealer to make, in connection with any sale or solicitation of a sale of the Shares, any representations concerning the Shares except those contained in the then current prospectus and/or statement of additional information covering the Shares and in printed information approved by the Fund as information supplemental to such prospectus and/or statement of additional information. Copies of the then current prospectus and/or statement of additional information and any such printed supplemental information will be supplied by the Fund to Principal Underwriter in reasonable quantities upon request. 7. Principal Underwriter agrees to comply with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. 8. The Fund appoints Principal Underwriter as its agent to accept orders for redemptions and repurchases of Shares at values and in the manner determined in accordance with the then current prospectus of the Fund. 9. Principal Underwriter covenants and agrees that it will in all respects duly conform with all state and federal laws and regulations applicable to the sale of the Shares and will indemnify and hold harmless the Fund and each person who has been, is or may hereafter be a Trustee or officer of the Fund against expenses reasonably incurred by any of them in connection with any claim or in connection with any action, suit or proceeding to which any of them may be a party, which arises out of or is alleged to arise out of any misrepresentation or omission to state a material fact on the part of Principal Underwriter or any other person for whose acts Principal Underwriter is responsible, or is alleged to be responsible unless such misrepresentation or omission was made in reliance upon written information furnished by the Fund. The term "expenses" includes amounts paid in satisfaction of judgments or in settlement. The foregoing right of indemnification shall be in addition to any other rights to which the Fund or any such Trustee or officer may be entitled as a matter of law. 10. The Fund agrees to execute such papers and to do such acts and things as shall from time to time be reasonably requested by Principal Underwriter for the purpose of qualifying the Shares for sale under the so-called "blue sky" laws of any state or for registering and maintaining the registration of the Fund and of the Shares under the federal Securities Act of 1933, as amended ("1933 Act"), and the federal Investment Company Act of 1940, as amended ("1940 Act"). Principal Underwriter shall bear the expense of preparing, printing and distributing advertising and sales literature and prospectuses and statements of additional information used by it (but not the expenses of registering Shares under the 1933 Act and the 1940 Act, qualifying Shares for sale under the so-called "blue sky" laws of any state and the preparation and printing of prospectuses and statements of additional information and reports required to be filed with the Securities and Exchange Commission by said Acts and the direct expenses of the issue of Shares.) 11. The Principal Underwriter shall provide to the Board of Trustees of the Fund in connection with the 12b-1 Plan, not less than quarterly, a written report of the amounts expended pursuant to such 12b-1 Plan and the purpose for which such expenditures were made. 12. Unless sooner terminated or continued as provided below, the term of this agreement shall begin on the date hereof, and expire after one year. This agreement shall continue in effect after said term if its continuance is specifically approved by a majority of the Trustees of the Fund and a majority of the 12b-1 Trustees referred to in the 12b-1 Plan of the Fund ("Rule 12b-1 Trustees") at least annually in accordance with the 1940 Act and the rules and regulations thereunder. This agreement may be terminated at any time, without payment of any penalty, by the vote of a majority of the Rule 12b-1 Trustees or by a vote of a majority of the Fund's outstanding shares on not more than sixty days' written notice to any other party to the agreement; and shall terminate automatically in the event of its assignment (as defined in the 1940 Act). 13. This agreement shall be construed in accordance with the laws of The Commonwealth of Massachusetts. All sales hereunder are to be made, and title to the Shares shall pass, in Boston, Massachusetts. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed by their respective officers thereunto duly authorized at Boston, Massachusetts, on the day and year first written above. KEYSTONE CUSTODIAN FUND, SERIES B-1 By: Roger Wickers ------------------------------- Office: Vice President KEYSTONE DISTRIBUTORS, INC. By: Edward Godfrey ------------------------------- Office: Senior Vice President EX-99.8 7 CUSTODIAN AGREEMENT EXHIBIT 99.8 SEVENTH AMENDMENT TO CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT BY AND BETWEEN KEYSTONE CUSTODIAN FUND, SERIES B-1 AND STATE STREET BANK AND TRUST COMPANY This Seventh Amendment to the Custodian, Fund Accounting and Recordkeeping Agreement by and between KEYSTONE CUSTODIAN FUND, SERIES B-1, a Pennsylvania common law trust organized and existing under the laws of the state of Pennsylvania and having a principal place of business at 99 High Street, Boston, Massachusetts 02110 (hereinafter called the "Fund"), and State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston, Massachusetts 02110 (hereinafter called the "Custodian"). WHEREAS: The Fund and the Custodian are parties to a Custodian, Fund Accounting and Recordkeeping Agreement dated December 31, 1979, as most recently amended January 1, 1989 (the "Custodian Contract"); WHEREAS: The Fund desires that the Custodian issue a letter of credit (the "Letter of Credit") on behalf of the Fund for the benefit of ICI Mutual Insurance Company (the "Company") in accordance with the Continuing Letter of Credit and Security Agreement and that the Fund's obligations to the Custodian with respect to the Letter of Credit shall be fully collateralized at all times while the Letter of Credit is outstanding by, among other things, segregated assets of the Fund equal to 100% of the Fund's proportionate share of the face amount of the Letter of Credit; WHEREAS: the Custodian Contract provides for the establishment of segregated accounts for proper Fund purposes upon Proper Instructions (as defined in the Custodian Contract); and WHEREAS: The Fund and the Custodian desire to establish a segregated account to hold the collateral for the Fund's obligations to the Custodian with respect to the Letter of Credit and to amend the Custodian Contract to provide for the establishment and maintenance thereof: WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto hereby amend the Custodian Contract as follows: 1. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Custodian Contract. 2. The Fund hereby instructs the Custodian to establish and maintain a segregated account (the "Letter of Credit Custody Account") for and on behalf of the Fund as contemplated by [Section II, Paragraph 3N (iv) of the Custodian Contract] for the purpose of collateralizing the Fund's obligations under this Amendment to the Custodian Contract. 3. The Fund shall deposit with the Custodian and the Custodian shall hold in the Letter of Credit Custody Account cash, certificates of deposit, U.S. government securities or other high-grade debt securities owned by the Fund acceptable to the Custodian (collectively "Collateral Securities") equal to 100% of the Fund's proportionate share of the face amount which the Company may draw under the Letter of Credit. Upon receipt of such Collateral Securities in the Letter of Credit Custody Account, the Custodian shall issue the Letter of Credit to the Company. 4. The Fund hereby grants to the Custodian a security interest in the Collateral Securities from time to time in the Letter of Credit Custody Account (the "Collateral") to secure the performance of the Fund's obligations to the Custodian with respect to the Letter of Credit, including, without limitation, under Section 5-144(3) of the Uniform Commercial Code. The Fund shall register the pledge of Collateral and execute and deliver to the Custodian such powers and instruments of assignment as may be requested by the Custodian to evidence and perfect the limited interest in the Collateral granted hereby. 5. The Collateral Securities in the Letter of Credit Custody Account may be substituted or exchanged (including substitutions or exchanges which increase or decrease the aggregate value of the Collateral) only pursuant to Proper Instructions from the Fund after the Fund notifies the Custodian of the contemplated substitution or exchange and the Custodian agrees that such substitution or exchange is acceptable to the Custodian. 6. Upon any payment made pursuant to the Letter of Credit by the Custodian to the Company, the Custodian may withdraw from the Letter of Credit Custody Account Collateral Securities in an amount equal in value to the amount actually so paid. The Custodian shall have with respect to the Collateral so withdrawn all of the rights of a secured creditor under the Uniform Commercial Code as adopted in the Commonwealth of Massachusetts at the time of such withdrawal and all other rights granted or permitted to it under law. 7. The Custodian will transfer upon receipt all income earned on the Collateral to the Fund custody account unless the Custodian receives Proper Instructions from the Fund to the contrary. 8. Upon the drawing by the Company of all amounts which may become payable to it under the Letter of Credit and the withdrawal of all Collateral Securities with respect thereto by the Custodian pursuant to Section 6 hereof, or upon the termination of the Letter of Credit by the Fund with the written consent of the Company, the Custodian shall transfer any Collateral Securities then remaining in the Letter of Credit Custody Account to another fund custody account. 9. Collateral held in the Letter of Credit Custody Account shall be released only in accordance with the provisions of this Amendment to Custodian Contract. The Collateral shall at all times until withdrawn pursuant to Section 6 hereof remain the property of the Fund, subject only to the extent of the interest granted herein to the Custodian. 10. Notwithstanding any other termination of the Custodian Contract, the Custodian Contract shall remain in full force and effect with respect to the Letter of Credit Custody Account until transfer of all Collateral Securities pursuant to Section 8 hereof. 11. The Custodian shall be entitled to reasonable compensation for its issuance of the Letter of Credit and for its services in connection with the Letter of Credit Custody Account as agreed upon from time to time between the Fund and the Custodian. 12. The Custodian Contract as amended hereby shall be governed by, and construed and interpreted under, the laws of the Commonwealth of Massachusetts. 13. The parties agree to execute and deliver all such further documents and instruments and to take such further action as may be required to carry out the purposes of the Custodian Contract, as amended hereby. 14. Except as provided in this Amendment, the Custodian Contract shall remain in full force and effect, without amendment or modification, and all applicable provisions of the Custodian Contract, as amended hereby, shall govern the Letter of Credit Custody Account and the rights and obligations of the Fund and the Custodian under this Amendment to Custodian Contract. No provision of this Amendment to Custodian Contract shall be deemed to constitute a waiver of any rights of the Custodian under the Custodian Contract or under law. IN WITNESS WHEREOF, each of the parties has caused this Amendment to Custodian Contract to be executed in its name and behalf by its duly authorized representatives and its seal to be hereunder affixed as of the 8th day of February, 1990. ATTEST: KEYSTONE CUSTODIAN FUND, SERIES B-1 By: Mary E. Couillard By: Thomas Drumm ------------------------ ------------------------------- ATTEST: STATE STREET BANK AND TRUST COMPANY By: Louis Abruzzi, Jr. By: Kate Donelin ------------------------ ------------------------------- Assistant Secretary Vice President SIXTH AMENDMENT TO CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT BY AND BETWEEN KEYSTONE CUSTODIAN FUND, SERIES B-1 AND STATE STREET BANK AND TRUST COMPANY This Sixth Amendment to the Custodian, Fund Accounting and Recordkeeping Agreement by and between KEYSTONE CUSTODIAN FUND, SERIES B-1 ("Fund") and STATE STREET BANK AND TRUST COMPANY ("State Street"), dated December 31, 1979 and amended through January 1, 1989 ("Agreement"), is made by and between the Fund and State Street as of February 8, 1990. In consideration of the mutual agreements contained herein, State Street and the Fund hereby agree to amend the Agreement as follows: 1. Section II is amended by deleting Paragraph 8 and by inserting the following as Paragraph 7A: "7A. The Fund shall pay State Street for its services as Custodian such compensation as specified in the existing Schedule A. Such compensation shall remain fixed until March 31, 1990 unless this Agreement is terminated as provided in Paragraph 8A." 2. In all other respects the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by a duly authorized officer as of the day and year first above written. ATTEST: KEYSTONE CUSTODIAN FUND, SERIES B-1 /s/ Mary E. Couillard By: T. Drumm ------------------------ ------------------------------- ATTEST: STATE STREET BANK AND TRUST COMPANY /s/ J. Medorf By: Kate Donelin ------------------------ ------------------------------- Vice President FIFTH AMENDMENT TO CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT BY AND BETWEEN KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE OF KEYSTONE CUSTODIAN FUND, SERIES B-1 AND STATE STREET BANK AND TRUST COMPANY This Fifth Amendment to the Custodian, Fund Accounting and Recordkeeping Agreement by and between KEYSTONE CUSTODIAN FUND, INC. AS TRUSTEE OF KEYSTONE CUSTODIAN FUND, SERIES B-1, ("Fund") and STATE STREET BANK AND TRUST COMPANY ("State Street"), dated December 31, 1979 and amended through September 1, 1988 ("Agreement") is made by and between the Fund and State Street as of January 1, 1989. In consideration of the mutual agreements contained herein, State Street and the Fund hereby agree to amend the Agreement as follows: 1. Section 3-D of Section II entitled, Purchases is amended by concluding the first sentence of such paragraph with the following: "or, upon receipt by State Street of a facsimile copy of a letter of understanding with respect to a time deposit account of the Fund signed by any bank, whether domestic or foreign, and pursuant to Proper Instructions from the Fund as defined in Section 5-A, for transfer to the time deposit account of the Fund in such bank; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank." 2. Section II is amended by deleting existing Paragraph 7 and by inserting the following as Paragraph 7: "7. The Fund shall pay State Street for its services as Custodian such compensation as shall be specified in the attached Exhibit A. Such compensation shall remain fixed until December 31, 1989, unless thi Agreement is terminated as provided in Section 8A." 3. In all other respects the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by a duly authorized officer as of the day and year first above written. ATTEST: KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE OF KEYSTONE CUSTODIAN FUND, SERIES K-2 /s/ Rosemary D. Van Antwerp By: Albert H. Elfner, III ------------------------ ------------------------------- President ATTEST: STATE STREET BANK AND TRUST COMPANY /s/ J. Medorf By: Kate Donelin ------------------------ ------------------------------- Vice President FOURTH AMENDMENT TO CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT BY AND BETWEEN KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE OF KEYSTONE CUSTODIAN FUND, SERIES B-1 AND STATE STREET BANK AND TRUST COMPANY This Fourth Amendment to the Custodian, Fund Accounting and Recordkeeping Agreement by and between KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE OF KEYSTONE CUSTODIAN FUND, SERIES B-1 ("Fund") and STATE STREET BANK AND TRUST COMPANY ("State Street"), dated December 31, 1979 and amended through December 31, 1984 ("Agreement") is made by and between the Fund and State Street as of September 1, 1988. In consideration of the mutual agreements contained herein, State Street and the Fund hereby agree to amend the Agreement as follows: 1. Section II, Paragraph 3(K) is amended by inserting the following language after Paragraph 3(J) and by renumbering existing Paragraph 3(K) as Paragraph 3(L): "K. Compliance with Applicable Rules and Regulations of The Options Clearing Corporation and National Securities or Commodities Exchanges or Commissions. Upon receipt of proper instructions, deliver securities in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 ("Exchange Act") and a member of the National Association of Securities Dealers, Inc.("NASD"), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund; or, upon receipt of proper instructions, deliver securities in accordance with the provisions of any agreement among the Fund, the Custodian, and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund." 2. Existing Section II, Paragraph 3(L) is renumbered as Paragraph 3(M). 3. The following language is inserted after new Section II, Paragraph 3(M) as Paragraph 3(N): "N. Segregated Account. The Custodian shall upon receipt of proper instructions, establish and maintain a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Paragraph 3(B) hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of segregating cash or government securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchased or sold by the Fund, (iii) for the purposes of compliance by the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the Securities and Exchange Commission relating to the maintenance of segregated accounts by registered investment companies and (iv), for other proper corporate purposes, but only, in the case of clause (iv), upon receipt of, in addition to proper instructions, a certified copy of a resolution of the Board of Trustees signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper corporate purposes." 4. Existing Section II, Paragraphs 3(M) and 3(N) are renumbered as Paragraphs 3(O) and 3(Q). 5. The following language in inserted after new Section II, Paragraph 3(O) as Paragraph 3(P): P. Property of the Fund Held Outside of the United States 1) Appointment of Foreign Subcustodians. State Street is authorized and instructed to employ as Subcustodians for the Fund's securities and other assets maintained outside of the United States the foreign banking institutions and foreign securities depositories designated on Schedule C hereto ("Foreign Subcustodians"). Upon receipt of proper instructions, together with a certified resolution of the Fund's Board of Trustees, State Street and the Fund may agree to amend Schedule C hereto from time to time to designate additional foreign banking institutions and foreign securities depositories to act as Foreign Subcustodians. Upon receipt of proper instructions from the Fund, State Street shall cease the employment of any one or more of such Subcustodians for maintaining custody of the Fund's assets. (2) Assets to be Held. State Street shall limit the securities and other assets maintained in the custody of the Foreign Subcustodians to: (a) "foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940 (1940 Act), and (b) cash and cash equivalents in such amounts as State Street or the Fund may determine to be reasonably necessary to effect the Fund s foreign securities transactions. (3) Foreign Securities Depositories. Except as may otherwise be agreed upon in writing by State Street and the Fund, assets of the Fund shall be maintained in foreign securities depositories only through arrangements implemented by the foreign banking institutions serving as Foreign Subcustodians pursuant to the terms hereof. (4) Segregation of Securities. State Street shall identify on its books as belonging to the Fund, the foreign securities of the Fund held by each Foreign Subcustodian. Each agreement pursuant to which State Street employs a foreign banking institution shall require that such institution establish a custody account for State Street on behalf of the Fund, and physically segregate in that account, securities and other assets of the Fund, and, in the event that such institution deposits the Fund's securities in a foreign securities depository, that it shall identify on its books as belonging to State Street, as agent for the Fund, the securities so deposited (all collectively referred to as the "account"). (5) Agreements with Foreign Banking Institutions. Each agreement with a foreign banking institution shall be substantially in the form set forth in Schedule D hereto and shall provide that: (a) the Fund's assets will not be subject to any right, charge,security interest, lien or claim of any kind in favor of the foreign banking institution or its creditors or agent, except a claim of payment for their safe custody or administration; (b) the Foreign Subcustodian shall maintain insurance covering the Fund's assets,(c) beneficial ownership for the Fund's assets will be freely transferable without the payment of money or value other than for custody or administration; (d) adequate records will be maintained identifying the assets as belonging to the Fund; (e) officers of or auditors employed by, or other representatives of State Street, including to the extent permitted under applicable law the independent public accountants for the Fund, will be given access to the books and records of the foreign banking institution relating to its actions under its agreement with State Street; (f)assets of the Fund held by the Foreign Subcustodian will be subject only to the instructions of State Street or its agents; and (g)the Foreign Subcustodian will provide periodic reports with respect to the safekeeping of the Fund's assets, including notification of any transfer to or from the Fund's account; (6) Access of Independent Accountants of the Fund. Upon request of the Fund, State Street will use its best efforts to arrange for the independent accountants of the Fund to be afforded access to the books and records of any foreign banking institution employed as a Foreign Subcustodian insofar as such books and records relate to the performance of such foreign banking institutions under its agreement with State Street. (7) Reports by State Street. State Street will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the securities and other assets of the Fund held by Foreign Subcustodians, including but not limited to an identification of entities having possession of the Fund's securities and other assets and advices or notifications of any transfers of securities of or from each custodial account maintained by a foreign banking institution for State Street on behalf of the Fund indicating, as to securities acquired for the Fund, the identity of the entity having physical possession of such securities. (8) Transactions in Foreign Custody Account. (a) Upon receipt of proper instructions, which may be continuing instructions when deemed appropriate by the parties, State Street shall make or cause its Foreign Subcustodian to transfer, exchange or deliver foreign securities owned by the Fund, but, except to the extent explicitly provided in this Section II(3)(P), only in any of the cases specified in this Agreement; (b) upon receipt of proper instructions, which may be continuing instructions when deemed appropriate by the parties, State Street shall pay out or cause its Foreign Subcustodians to pay out monies of the Fund, but, except to the extent explicitly provided in this Section II(3)(P), only in any of the cases specified in this Agreement; (c) notwithstanding any provision of this Agreement to the contrary, settlement and payment for securities received for the account of the Fund and delivery of securities maintained for the account of the Fund may be effected in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer; (d) securities maintained in the custody of a Foreign Subcustodian may be maintained in the name of such entity's nominee to the same extent as set forth in Section II, Paragraphs (2) and (3)(P) of this Agreement and the Fund agrees to hold any such nominee harmless from any liability as a holder of record of such securities. (9) Liability of Foreign Subcustodians. Each agreement pursuant to which State Street employs a foreign banking institution as a Foreign Subcustodian shall require the institution to exercise reasonable care in the performance of its duties and to indemnify, and hold harmless, State Street and Fund from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the institution's performance of such obligations. At the election of the Fund, it shall be entitled to be subrogated to the rights of State Street with respect to any claims against a foreign banking institution as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Fund has not been made whole for any such loss, damage, cost, expense, liability or claim. (10) Liability of State Street. State Street shall be liable to the Fund for the acts or omissions of a foreign banking institution appointed pursuant to these provisions to the same extent that such foreign banking institution is liable to State Street as provided under Section 3(P)(9); provided however that State Street shall not be liable to the Fund for any loss resulting from or caused by nationalization, expropriation, currency restrictions, acts of war or terrorism or other similar events or acts. (11) Monitoring Responsibilities. State Street shall furnish annually to the Fund, during the month of June, information concerning the Foreign Subcustodians employed by State Street. Such information shall be similar in kind and scope to that furnished to the Fund in connection with the initial approval of this Agreement. In addition, State Street will promptly inform the Fund in the event that State Street learns of a material adverse change in the financial condition of a Foreign Subcustodian or any material loss in the assets of the Fund, or is notified by a foreign banking institution employed as a Foreign Subcustodian that there appears to be a substantial likelihood that its shareholders' equity will decline below $200 million (U.S. dollars or the equivalent thereof) or that its shareholders equity has declined below $200 million (in each case computed in accordance with generally accepted U.S. accounting principles.) (12) Branches of U.S. Banks. Except as otherwise set forth in this Agreement, the provisions hereof shall not apply where the custody of the Fund assets maintained in a foreign branch of a banking institution which is a "bank" as defined by Section 2(a)-(5) of the 1940 Act which meets the qualifications set forth in Section 26(a) of the 1940 Act. The appointment of any such branch as a subcustodian shall be governed by Paragraph 6-C of Section II of this Agreement." 10. In all other respects the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by a duly authorized officer as of the day and year first above written. ATTEST: KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE OF KEYSTONE CUSTODIAN FUND, SERIES B-1 /s/ Rosemary D. Van Antwerp Albert H. Elfner III - --------------------------- By: --------------------------- President ATTEST: STATE STREET BANK AND TRUST COMPANY /s/ Eric Greene K. Donelin - --------------------------- By: --------------------------- Vice President THIRD AMENDMENT TO CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT BY AND BETWEEN KEYSTONE CUSTODIAN FUND, SERIES B-1 AND STATE STREET BANK AND TRUST COMPANY This Third Amendment to the Custodian, Fund Accounting and Recordkeeping Agreement by and between KEYSTONE CUSTODIAN FUNDS, INC., AS TRUSTEE OF KEYSTONE CUSTODIAN FUND, SERIES B-1 (the "Fund") and STATE STREET BANK AND TRUST COMPANY ("State Street"), dated December 31, 1979, amended January 1, 1982, and December 31, 1982 ("Agreement") is made by and between the Fund and State Street as of December 31, 1984. In consideration of the mutual agreements contained herein, State Street and the Fund hereby agree to amend the Agreement by replacing each of Section II, Paragraph 6(B), and Section II, Paragraph 7 with the following provisions: "6. B. Expense Reimbursement. State Street shall be entitled to receive from the Fund on demand reimbursement for its cash disbursements, expenses and charges, excluding salaries and usual overhead expenses, as set forth on the attached Schedule D. "7. The Fund shall pay State Street for its services as Custodian such compensation as shall be as specified in the attached Schedule D. Such compensation shall remain as provided in Schedule D until December 31, 1986, unless this Agreement is terminated as provided in Section 8A; provided, however, that in the event either party terminates this Agreement as provided in Section 8A State Street hereby guarantees and agrees that no new agreement entered into between the parties shall require payment during such period of compensation greater than that specified herein." IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to the Agreement to be executed in its name and on its behalf by a duly authorized officer as of the day and year first written above. ATTEST: KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE OF CUSTODIAN FUND, SERIES B-1 /s/ Rosemary D. Van Antwerp By: /s/ Ralph J. Spuehler, Jr. - --------------------------- ---------------------------------- Treasurer ATTEST: STATE STREET BANK AND TRUST COMPANY /s/ illegible By: /s/ B. Weidlich - --------------------------- ---------------------------------- Vice President Schedule D STATE STREET BANK AND TRUST COMPANY Custodian Fee Schedule KEYSTONE CUSTODIAN FUND, SERIES B-1 (Effective 1/1/85 ) I. Administration Custodian, Portfolio and Fund Accounting Service - Maintain custody of Fund assets. Settle portfolio purchases and sales. Report buy and sell fails. Determine and collect portfolio income. Make cash disbursements and report cash transactions. Maintain investment ledgers, provide selected portfolio transactions, position and income reports. Maintain general ledger and capital stock accounts. Prepare daily trial balance. Calculate net asset value daily. Provide selected general ledger reports. Securities yield or market value quotations will be provided to State Street from a source designated by the Fund. The administration fee shown below is an annual charge, billed and payable monthly, based on average net assets and calculated in the same manner as the Fund management fee. Annual Fee Fund Net Assets First $35 million 1/15 of 1% Next $65 million 1/30 of 1% Excess 1/100 of 1% No minimum II. Portfolio Trades - For each line item processed a) Depository Trust Company and Federal Reserve Book Entry System $12.25 b) Physical delivery, options and all other trades $16.00 III. Holdings & Appraisal Charge For each issue maintained - monthly charge $5.00 IV. Out-of Pocket Expenses A billing for the recovery of applicable out-of-pocket expenses will be made as of the end of each month. Out-of-pocket expenses include, but are not limited to the following: Telephone Wire charges ($3.85 per wire in and $3.60 out) Postage and insurance Courier service Legal fees Supplies related to Fund records Rush transfer - $8.00 each Duplicating DTC eligibility books Transfer fees Sub-custodian charges Price Waterhouse audit letter Check writing ($.50 per check) V. Additional Accounting and Reporting Functions $150 per month This fee schedule will terminate 12/31/86 SECOND AMENDMENT TO CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT BY AND BETWEEN KEYSTONE CUSTODIAN FUNDS, SERIES B-1 AND STATE STREET BANK AND TRUST COMPANY This Second Amendment to the Custodian, Fund Accounting and Recordkeeping Agreement by and between KEYSTONE CUSTODIAN FUNDS, INC. ("KCF") as Trustee of KEYSTONE CUSTODIAN FUNDS, SERIES B-1 (the "Fund") and STATE STREET BANK AND TRUST COMPANY ("State Street"), dated December 31, 1979 and amended January 1, 1982 (the "Agreement") is made by and between the Fund and State Street as of December 31, 1982. In consideration of the mutual agreements contained herein, State Street and the Fund hereby agree to amend the Agreement by replacing each of Section II, Paragraph 4(G), Section II, Paragraph 6(B), and Section II, Paragraph 7 with the following provisions: "4. G. Disbursements. Upon receipt of proper instructions, make or cause to be made, insofar as cash is available for the purpose, disbursements for the payment on behalf of the Fund of its costs and expenses or reimbursement to State Street or Keystone Custodian Funds, Inc. for their payment of any such costs and expenses including the management fee of the Fund as provided by the Fund's Trust Agreement, as amended." "6. B. Expense Reimbursement. State Street shall be entitled to receive from the Fund on demand reimbursement for its cash disbursements, expenses and charges, excluding salaries and usual overhead expenses, as set forth on the attached Schedule C." "7. The Fund shall pay State Street for its services as Custodian such compensation as shall be as specified in the attached Schedule C. Such compensation shall remain as provided in Schedule C until December 31, 1984, unless this Agreement is terminated as provided in section 8A; provided, however, that in the event either party terminates this Agreement as provided in section 8A State Street hereby guarantees and agrees that no new Agreement entered into between the parties shall require payment of compensation greater than that specified herein during such period." IN WITNESS WHEREOF, each of the parties hereto has caused this SECOND Amendment to the Agreement to be executed in its name and on its behalf by a duly authorized officer as of the day and year first written above. KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE FOR KEYSTONE CUSTODIAN FUNDS, SERIES B-1 By: Ralph J. Spuehler, Jr. ----------------------------- Treasurer Attest: /s/ R. Van Antwerp - ----------------------------- STATE STREET BANK AND TRUST COMPANY By: B. Weidlich ----------------------------- Vice President Attest: [illegible] - ----------------------------- Schedule C STATE STREET BANK AND TRUST COMPANY Custodian Fee Schedule KEYSTONE B-1 (Effective 1/1/83 ) I. Administration Custody, Portfolio and Fund Accounting Service - Maintain custody of fund assets. Settle portfolio purchases and sales. Report buy and sell fails. Determine and collect portfolio income. Make cash disbursements and report cash transactions. Maintain investment ledgers, provide selected portfolio transactions, position and income reports. Maintain general ledger and capital stock accounts. Prepare daily trial balance. Calculate net asset value daily. Provide selected general ledger reports. Securities yield or market value quotations will be provided to State Street from a source designated by the Fund. The administration fee shown below is an annual charge, billed and payable monthly, based on average net assets and calculated in the same manner as the fund management fee. Annual Fee Fund Net Assets First $35 million 1/15 of 1% Next $65 million 1/30 of 1% Excess 1/100 of 1% No Minimum II. Portfolio Trades - For each line item processed All Trades $ 10.00 III. Holdings & Appraisal Charge For each issue maintained - monthly charge $ 5,00 IV. Out-of-Pocket Expenses A billing for the recovery of applicable out-of-pocket expenses will be made as of the end of each month. Out-of-pocket expenses include, but are not limited to the following: Telephone Wire charges ($3.65 per wire in and $3.50 out) Postage and insurance Courier service Legal fees Supplies related to fund records Rush transfer - $8 each Duplicating DTC Eligibility Books Transfer fees Sub-custodian charges Price Waterhouse Audit Letter Check writing ($.50 per check) This fee schedule will terminate 12/31/83 FIRST AMENDMENT TO CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT BY AND BETWEEN KEYSTONE CUSTODIAN FUNDS, SERIES B-1 AND STATE STREET BANK AND TRUST COMPANY This First Amendment to the Custodian, Fund Accounting and Recordkeeping Agreement by and between Keystone Custodian Funds, Inc. ("KCF") as Trustee of Keystone Custodian Funds, Series B-1 (the "Fund") and State Street Bank and Trust Company ("State Street"), dated December 31, 1979 (the "Agreement") is made by and between the Fund and State Street as of January 1, 1982. In consideration of the mutual agreements contained herein, State Street and the Fund hereby agree to amend the Agreement by replacing all of Section II, Paragraph 3(B) with the following provisions: "B. Deposit of Fund Assets in Securities Systems. Notwithstanding any other provision of this Agreement, State Street may deposit and/or maintain securities owned by the Fund in Depository Trust Company, a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934, which acts as a securities depository, or in the book-entry system authorized by the U.S. Department of the Treasury and certain federal agencies, collectively referred to herein as "Securities System(s)" in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions: 1. State Street may keep securities of the Fund in a Securities System provided that such securities are deposited in an account ("Account") of State Street in the Securities System which shall not include any assets of State Street other than assets held as a fiduciary, custodian or otherwise for customers; 2. The records of State Street with respect to securities of the Fund which are maintained in a Securities System shall identify by bookentry those securities belonging to the Fund; 3. State Street shall pay for securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of State Street to reflect such payment and transfer for the account of the Fund. State Street shall transfer securities sold for the account of the Fund upon (i) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of State Street to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of securities for the account of the Fund shall identify the Fund, be maintained for the Fund by State Street and be provided to the Fund at its request. State Street shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund on the next business day; 4. State Street shall promptly provide the Fund with any report obtained by State Street on the Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities System. State Street shall promptly provide the Fund any report on State Street's accounting system, internal accounting control and procedures for safeguarding securities deposited with State Street which is reasonably requested by the Fund; 5. Anything to the contrary in this Agreement notwithstanding, State Street shall be liable to the Fund for any claim, loss, liability, damage or expense to the Fund, including attorney's fees, resulting from use of a Securities System by reason of any negligence, misfeasance or misconduct of State Street or any of its agents or of any of its or their employees or from failure of State Street or any such agent to enforce effectively such rights as it may have against a Securities System. At the election of the Fund, it shall be entitled to be subrogated to the rights of State Street or its agents with respect to any claim against the Securities System or any other person which State Street or its agents may have as a consequence of any such claim, loss, liability, damage or expense if and to the extent that the Fund has not been made whole for any such loss or damage." "BB. State Street's Records The records of State Street (and its agents) with respect to its services for the Fund shall at all times during the regular business hours of State Street (or its agents) be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission." IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by a duly authorized officer as of the day and year first written above. KEYSTONE CUSTODIAN FUNDS, INC. AS TRUSTEE FOR KEYSTONE CUSTODIAN FUNDS, SERIES B-1 By: William W. Hennig ----------------------------- Attest: [illegible] - ---------------------------- STATE STREET BANK AND TRUST By: B. Weidlich ------------------------------ Vice President Attest: [illegible] - ---------------------------- Assistant Secretary CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT by and between KEYSTONE CUSTODIAN FUND, SERIES B-1 and STATE STREET BANK AND TRUST COMPANY Agreement made as of this 31st day of December 1979 by and between Keystone Custodian Fund, Inc., a Delaware business corporation ("KCF"), as trustee of Keystone Custodian Fund, Series B-1 a Pennsylvania common law trust having, its principal place of business at 99 High Street, Boston, Massachusetts 02110, (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking corporation, having its principal place of business at 225 Franklin Street, Boston, Massachusetts 02110 ("State Street"). WITNESSETH THAT: In consideration of the mutual agreements herein contained, the Fund and State Street agree as follows: I. DEPOSITORY. The Fund hereby appoints State Street as its Depository subject to the provisions hereof. The Fund shall deliver to State Street certified or authenticated copies of its Trust Agreement, all amendments thereto, a certified copy of the resolution of KCF's board of directors appointing State Street to act in the capacities covered by this Agreement and authorizing the signing of this Agreement and copies of such resolutions of KCF's board of directors, contracts and other documents as may be reasonably required by State Street in the performance of its duties hereunder. II. CUSTODIAN. 1. The Fund appoints State Street as its Custodian, subject to the provisions hereof. State Street hereby accepts such appointment as Custodian. As such Custodian, State Street shall retain all securities, cash and other assets now owned or hereafter acquired by the Fund, and the Fund shall deliver and pay or cause to be delivered and paid to State Street, as Custodian, all securities, cash and other assets now owned or hereafter acquired by the Fund during the period of this Agreement. 2. All securities delivered to State Street (other than in bearer form) shall be properly endorsed and in proper form for transfer into or in the name of the Fund, of a nominee of State Street for the exclusive use of the Fund or of such other nominee as may be mutually agreed upon by State Street and the Fund. 3. As Custodian, State Street shall promptly: A. Safekeeping. Keep safely in a separate account the securities of the Fund, including without limitation all securities in bearer form, and on behalf of the Fund, receive delivery of certificates, including without limitation all securities in bearer form, for safekeeping and keep such certificates physically segregated at all times from those of any other person. State Street shall maintain records of all receipts, deliveries and locations of such securities, together with a current inventory thereof and shall conduct periodic physical inspections of certificates representing bonds and other securities held by it under this Agreement at least annually in such manner as State Street shall determine from time to time to be advisable in order to verify the accuracy of such inventory. State Street shall provide the Fund with copies of any reports of its internal count or other verification of the securities of the Fund held in its custody, including reports on its own system of internal accounting control. In addition, if and when independent certified public accounts retained by State Street shall count or otherwise verify the securities of the Fund held in State Street's custody, State Street shall provide the Fund with a copy of the report of such accountants. With respect to securities held by any agent appointed pursuant to paragraph 6-C of section II hereof, State Street may rely upon certificates from such agent as to the holdings of such agent, it being understood that such reliance in no way releases State Street of its responsibilities or liabilities under this Agreement. State Street shall promptly report to the Fund the results of such inspections, indicating any shortages or discrepancies uncovered thereby, and take appropriate action to remedy any such shortages or discrepancies. B. Use of a System for the Central Handling of Securities. Not withstanding any other provision of this Agreement, if in the best interest of the Fund, deposit all or any part of the securities owned by the Fund in the bookentry system of the Federal Reserve Banks (hereinafter called the "system") and to use the facilities of such system, all as provided under the provisions of Rule 17f-4 of the Investment Company Act of 1940, as amended. Without limiting the generality of such use, the following provisions shall apply thereto: 1) State Street may keep securities of the Fund in the system provided that such securities are represented in an account ("Account") of State Street's (or its agent) in the system which shall not include any assets of State Street (or such agent) other than assets held as fiduciary, custodian or otherwise for customers. The records of State Street (and such agents) shall at all times during the regular business hours of State Street (or such agents) be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission. 2) State Street shall send to the Fund a confirmation of all transfers to or from the System for the account of the Fund. Where securities are transferred to the Fund's account, State Street shall, by book-entry or otherwise, identify as belonging to the Fund a quantity of securities in a fungible bulk of securities (i) registered in the name of State Street or its nominee or (ii) shown on State Street's account on the books of the appropriate Federal Reserve Bank. For this purpose, the term "confirmation" means advice or notice of transaction; it is not intended to require preparation by State Street of the confirmation required of broker-dealers under the Securities Exchange Act of 1934. 3) State Street shall promptly send to the Fund any report it receives from the appropriate Federal Reserve Bank on its system of internal accounting control. 4) Anything to the contrary in this Agreement notwithstanding, State Street shall be liable to the Fund for any claim, liability, loss or expense, including attorney's fees, resulting to such Fund from use of the system by reason of any negligence, misfeasance or misconduct of State Street (or any of its agents) or of any of its (or their) employees or from any failure of State Street (or any such agent) to enforce effectively such rights as it (or they) may have against the system. At the election of the Fund, it shall be entitled to be subrogated to State Street or its agents in any claim against the system or any other person which State Street, its agents may have as a consequence of any such claim, liability, loss or expense if and to the extent that the Fund has not been made whole for such claim, liability, loss or expense. C. Registered Name, Nominee. Register securities of the Fund held by State Street in the name of the Fund, of a nominee of State Street for the exclusive use of the Fund, of such other nominee as may be mutually agreed upon, or of any mutually acceptable nominee of any agent appointed pursuant to paragraph 6-C of section II hereof. D. Purchases. Upon receipt of proper instructions (as defined in paragraph 5-A of section II hereof; hereafter "proper instructions") and insofar as cash is available for the purpose, pay for and receive all securities purchased for the account of the Fund, payment being made only upon receipt of the securities by State Street (or any bank, banking firm, responsible commercial agent or trust company doing business in the United States and appointed pursuant to paragraph 6-C of section II hereof as State Street's agent for this purpose) registered as provided in paragraph 3-C of section II hereof or in form for transfer satisfactory to State Street, or, in the case of repurchase agreements entered into between the Fund and bank or a dealer, delivery of the securities either in certificate form or through an entry crediting State Street's account at the Federal Reserve Bank with such securities. All securities accepted by State Street shall be accompanied by payment of, or a "due bill" for, any dividends, interest or other distributions of the issuer, due the purchaser. In any and every case of a purchase of securities for the account of the Fund where payment is made by State Street in advance of receipt of the securities purchased, State Street shall be absolutely liable to the Fund for such securities to the same extent as if the securities had been received by State Street except that in the case of repurchase agreements entered into by the Fund with a bank which is a member of the Federal Reserve System, State Street may transfer funds to the account of such bank prior to the receipt of written evidence that the securities subject to such repurchase agreement have been transferred by book-entry into a segregated nonproprietary account of State Street maintained with the Federal Reserve Bank of Boston, provided, that such securities have in fact been so transferred by book-entry; provided, further, however, that State Street and the Fund agree to use their best efforts to insure receipt by State Street of copies of documentation for each such transaction as promptly as possible. E. Exchanges. Upon receipt of proper instruction, exchange securities, interim receipts or temporary securities held by it or by any agent appointed by it pursuant to paragraph 6-C of section II hereof for the account of the Fund for other securities alone or for other securities and cash, and expend cash insofar as cash is available in connection with any merger, consolidation, reorganization, recapitalization, split-up of shares, changes of par value, conversion or in connection with the exercise of warrants, subscription or purchase rights, or otherwise, and deliver securities to the designated depository or other receiving agent in response to tender offers or similar offers to purchase received in writing; provided that in any such case the securities and/or cash to be received as a result of any such exchange, expenditure or delivery are to be delivered to State Street or its agents. State Street shall give notice as provided under paragraph 6-F of section II hereof to the Fund in connection with any transaction specified in this paragraph and at the same time shall specify to the Fund whether such notice relates to securities held by an agent appointed pursuant to paragraph 6-C of section II hereof, so that the Fund may issue to State Street proper instructions for State Street to act thereon prior to any expiration date (which shall be presumed to be two business days prior to such date unless State Street has previously advised the Fund of a different period). The Fund shall give to State Street full details of the time and method of submitting securities in response to any tender or similar offer, exercising any subscription or purchase right or making any exchange pursuant to this paragraph. When such securities are in the possession of an agent appointed by State Street pursuant to paragraph 6-C of section II hereof, the proper instructions referred to in the preceding sentence must be received by State Street in timely enough fashion (which shall be presumed to be three business days unless State Street has advised the Fund in writing of a different period) for State Street to notify the agent in sufficient time to permit such agent to act prior to any expiration date. F. Sales. Upon receipt of proper instructions and upon receipt of full payment therefor, release and deliver securities which have been sold for the account of the Fund. At the time of delivery all such payments are to be made in cash, by a certified check upon or a treasurer's or cashier's check of a bank, by effective bank wire transfer through the Federal Reserve Wire System or, if appropriate, outside of the Federal Reserve Wire System and subsequent credit to the Fund's Custodian account, or, in case of delivery through a stock clearing company, by book-entry credit by the stock clearing company in accordance with the then current "street" custom. G. Purchases by Issuer. Upon receipt of proper instructions, release and deliver securities owned by the Fund to the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that in any such case, the cash or other consideration is to be delivered to State Street. H. Changes of Name and Denomination. Upon receipt of proper instructions, release and deliver securities owned by the Fund to the issuer thereof or its agent for transfer into the name of the Fund or of a nominee of State Street or of the Fund for the exclusive use of the Fund or for exchange for a different number of bonds, certificates, or other evidence representing the same aggregate face amount or number of units bearing the same interest rate, maturity date and call provisions if any; provided that in any such case, the new securities are to be delivered to State Street. I. Street Delivery. In connection with delivery in New York City and upon receipt of proper instructions, which in the case of registered securities may be standing instructions, release securities owned by the Fund upon receipt of a written receipt for such securities to the broker selling the same for examination in accordance with the existing "street delivery" custom. In every instance either payment in full for such securities shall be made or such securities shall be returned to the Custodian that same day. In the event existing "street delivery" custom is modified, State Street shall obtain authorization from the board of directors of KCF prior to any use of such modified "street delivery" custom. J. Release of Securities for Use as Collateral. Upon receipt Of proper instructions and subject to section 3(b) of Article III of the Trust Agreement, release securities belonging to the Fund to any bank or trust company for the purpose of pledge, mortgage or hypothecation to secure any loan incurred by the Fund; provided, however, that securities shall be released only upon payment to State Street of the monies borrowed, except that in cases where additional collateral is required to secure a borrowing already made, subject to proper prior authorization from the Fund, further securities may be released for that purpose. Upon receipt of proper instructions, pay such loan upon redelivery to it of the securities pledged or hypothecated therefore and upon surrender of the note or notes evidencing the loan. K. Release or Delivery of Securities for Other Purposes. Upon receipt of proper instructions, release or deliver any securities held by it for the account of the Fund for any other purpose (in addition to those specified in paragraphs 3-E, 3-F, 3-G, 3-H, 3-I and 3-J of section II hereof) which the Fund declares is a proper corporate purpose pursuant to proper instructions. L. Proxies, Notices, Etc. State Street shall promptly forward upon receipt to the Fund all forms of proxies and all notices of meetings and any other notices or announcements affecting or relating to the securities, including without limitation notices relating to class action claims and bankruptcy claims, and upon receipt of proper instructions execute and deliver or cause its nominee to execute and deliver such proxies or other authorizations as may be required. State Street, its nominee or its agents shall not vote upon any of the securities or execute any proxy to vote thereon or give any consent or take any other action with respect thereto (except as otherwise herein provided) unless ordered to do so by proper instructions. State Street shall require its agents and sub-custodians appointed pursuant to paragraph 6-C of section II hereof to forward any such announcements and notices to State Street upon receipt. M. Miscellaneous. In general, attend to all nondiscretionary details in connection with the sale, exchange, substitution, purchase, transfer or other dealing with such securities or property of the Fund, except as otherwise directed by the Fund pursuant to proper instructions. State Street shall render to the Fund daily a report of all monies received or paid on behalf of the Fund, an itemized statement of the securities and cash for which it is accountable to the Fund under this Agreement and itemized statement of security transactions which settled the day before and shall render to the Fund weekly an itemized statement of security transactions which failed to settle as scheduled. At the end of each week State Street shall provide a list of all security transactions that remain unsettled at such time. 4. Additionally, as Custodian, State Street shall promptly: A. Bank Account. Retain safely all cash of the Fund, other than cash maintained by the Fund in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940, as amended, in the banking department of State Street in a separate account or accounts in the name of the Fund, subject only to draft or order by State Street acting pursuant to the terms of this Agreement. If and when authorized by proper instructions in accordance with a vote of the board of directors of KCF, State Street may open and maintain an additional account or accounts in such other bank or trust companies as may be designated by such instructions, such account or accounts, however, to be solely in the name of State Street in its capacity as Custodian and subject only to its draft or order in accordance with the terms of this Agreement. State Street shall furnish the Fund, not later than thirty (30) calendar days after the last business day of each month, a statement reflecting the current status of its internal reconciliation of the closing balance as of that day in all accounts described in this paragraph to the balance shown on the daily cash report for that day rendered to the Fund. B. Collections. Unless otherwise instructed by receipt of proper instructions, collect, receive and deposit in the bank account or accounts maintained pursuant to paragraph 4-A of section II hereof all income and other payments with respect to the securities held hereunder, execute ownership and other certificates and affidavits for all Federal and State tax purposes in connection with the collection of bond and note coupons, do all other things necessary or proper in connection with the collection of such income, and without waiving the generality of the foregoing: (1) Present for payment on the date of payment all coupons and other income items requiring presentation; (2) present for payment all securities which may mature or be called, redeemed, retired or otherwise become payable on the date such securities become payable; (3) endorse and deposit for collection, in the name of the Fund, checks, drafts or other negotiable instruments on the same day as received. In any case in which State Street does not receive any such due and unpaid income within a reasonable time after it has made proper demands for the same (which shall be presumed to consist of at least three demand letters and at least one telephonic demand), it shall so notify the Fund in writing, including copies of all demand letters, any written responses thereto, and memoranda of all oral responses thereto and to telephonic demands, and await proper instruction; the Custodian shall not be obliged to take legal action for collection unless and until reasonably indemnified to its satisfaction for the reasonable costs of such legal action for collection. It shall also notify the Fund as soon as reasonably practicable whenever income due on securities is not collected in due course. C. Sale of shares of the Fund. Make such arrangements with the Transfer Agent of the Fund as will enable State Street to make certain it receives the cash consideration due to the Fund for shares of the Fund as may be issued or sold from time to time by the Fund, all in accordance with the Fund's Trust Agreement, as amended. D. Dividends and Distributions. Upon receipt of proper instructions, release or otherwise apply cash insofar as cash is available for the purpose for the payment of dividends or other distributions to shareholders of the Fund. E. Redemption of Shares of the Fund. From such funds as may be available for the purpose, but subject to the limitation of the Fund's Trust Agreement as amended, and applicable resolutions of the board of directors of KCF pursuant thereto, make funds available to shareholders who have delivered to the Transfer Agent a request for redemption of their shares by the Fund pursuant to said Trust Agreement, as amended. In connection with the redemption of shares of the Fund pursuant to the Fund's Trust Agreement, as amended, State Street is authorized and directed upon receipt of proper instructions from the Transfer Agent for the Fund to make funds available for transfer through the Federal Reserve Wire system or by other bank wire to a commercial bank account designated by the redeeming shareholder. F. Stock Dividends, Rights, Etc. Receive and collect all stock dividends, rights and other items of like nature; and deal with the same pursuant to proper instructions relative thereto. G. Disbursements. Upon receipt of proper instructions, make or cause to be made, insofar as cash is available for the purpose, disbursements for the payment on behalf of the Fund of taxes or reimbursement to State Street or Keystone Custodian Funds, Inc. for their payment of any such taxes and of the management fee and recurring charge as provided by Article I, section 3 of the Fund's Trust Agreement, as amended. H. Other Proper Corporate Purposes. Upon receipt of proper instructions, make or cause to be made, insofar as cash is available for the purpose, disbursements for any other purpose (in addition to the purposes specified in paragraphs 3-D, 3-E, 4-D, 4-E, and 4-G of this Agreement) which the Fund declares is a proper corporate purpose. I. Records. Create, maintain and retain all records a) relating to its activities and obligations under this Agreement in such manner as shall meet the obligations of the Fund under the Investment Company Act of 1940, as amended, particularly Section 31 thereof and Rules 31a-1 and 31a-2 thereunder, under applicable Federal and State tax laws and under any other law or administrative rules or procedures which may be applicable to the Fund, b) necessary to comply with the representations of Part I - Fund Custodian Services and Part II - Portfolio Pricing and Accounting of State Street's Response, dated May 1, 1979, as amended, to Keystone Custodian Funds, Inc.'s and the Massachusetts Companies, Inc.'s Request for Proposal, dated March 19, 1979, as amended, (amendments after June 22, 1979 are set forth in Exhibit B) ("Parts I and II"), insofar as such representations relate to the creation, maintenance and retention of records for the Fund or c) as reasonably requested from time to time by the Fund. All records maintained by State Street in connection with the performance of its duties under this Agreement shall remain the property of the Fund and in the event of termination of this Agreement shall be delivered in accordance with the terms of paragraph 8 below. J. Miscellaneous. Assist generally in the preparation of routine reports to holders of shares of the Fund, to the Securities and Exchange Commission, including forms N1-R and N-1Q, to State "Blue Sky" authorities, to others in the auditing of accounts and in other matters of like nature, as required to comply with the representations of Parts I and II insofar as such representations relate to the preparation of reports for the Fund and as otherwise reasonably requested by the Fund. K. Fund Accounting and Net Asset Value Computation. State Street shall maintain the general ledger and all other books of account of the Fund, including the accounting for the Fund's portfolio. In addition, upon receipt of proper instructions, which may be deemed to be continuing instructions, State Street shall daily compute the net asset value of the Shares of the Fund and the total net asset value of the Fund. State Street shall, in addition, perform such other services incidental to its duties hereunder as may be reasonably requested from time to time by the Fund. L. Services under Parts I and Part II. In addition to the services specified herein, State Street shall perform those services set forth in Parts I and II, including without limitation general ledger accounting, daily Fund portfolio pricing and custodian services to the extent such services relate to the Fund; provided, however, that in the event that Parts I and II as they relate to the Fund are in conflict with the terms of this Agreement, the terms of this Agreement shall govern. 5. State Street and the Fund further agree as follows: A. Proper Instructions. State Street shall be deemed to have received proper instructions upon receipt of written instructions signed by KCF's board of directors or by one or more person or persons as KCF's board of directors shall have from time to time authorized to give the particular class of instructions for different purposes. A copy of a resolution or action of the board of directors certified by the secretary or an assistant secretary of KCF may be received and accepted by State Street as conclusive evidence of the instruction of KCF's board of directors and/or the authority of any person or persons to act on behalf of the Fund and may be considered as in full force and effect until receipt of written notice to the contrary. Such instruction may be general or specific in terms. Oral instructions will be considered proper instructions if the Custodian reasonably believes them to have been by a person authorized by the board of directors to give such oral instructions with respect to the class of instruction in question. The Fund shall cause all oral instructions to be confirmed in writing. B. Investments, Limitations. In performing its duties generally, and more particularly in connection with the purchase, sale and exchange of securities made by or for the Fund, State Street may take cognizance of the provisions of the Trust Agreement of the Fund, as amended; provided, however, that except as otherwise expressly provided herein, State Street may assume unless and until notified in writing to the contrary that instructions purporting to be proper instructions received by it are not in conflict with or in any way contrary to any provision of the Trust Agreement of the Fund, as amended, or resolutions or proceedings of the board of directors of KCF. 6. State Street and the Fund further agree as follows: A. Indemnification. State Street, as Depository and Custodian, shall be entitled to receive and act upon advice of counsel (who may be counsel for the Fund) and shall be without liability for any action reasonably taken or thing reasonably done pursuant to such advice; provided that such action is not in violation of applicable Federal or State laws or regulations or contrary to written instructions received from the Fund, and shall be indemnified by the Fund and without liability for any action taken or thing done by it in carrying out the terms and provisions of this Agreement in good faith and without negligence, misfeasance or misconduct. In order that the indemnification provision contained in this paragraph shall apply, however, if the Fund is asked to indemnify or save State Street harmless, the Fund shall be fully and promptly advised of all pertinent facts concerning the situation in question, and State Street shall use all reasonable care to identify and notify the Fund fully and promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the Fund. The Fund shall have the option to defend State Street against any claim which may be the subject of this indemnification, and thereupon the Fund shall take over complete defense of the claim, and State Street shall initiate no further legal or other expenses for which it shall seek indemnification under this paragraph. State Street shall in no case confess any claim or make any compromise in any case in which the Fund will be asked to indemnify State Street except with the Fund's prior written consent. B. Expenses Reimbursement. State Street shall be entitled to receive from the Fund on demand reimbursement for its cash disbursements, expenses and charges, excluding salaries and usual overhead expenses, as set forth on Schedule A. C. Appointment of Agent. State Street, as Custodian, may appoint (and may remove) any other bank, trust company or responsible commercial agent as its agent to carry out such of the provisions of this Agreement as State Street may from time to time direct; provided, however, that the appointment of any such agent shall not relieve State Street of any of its responsibilities under this Agreement. D. Reliance on Documents. So long as and to the extent that it is in good faith and in the exercise of reasonable care, State Street, as Depository and Custodian, shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Agreement, shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper reasonably believed by it to be genuine and to constitute proper instructions under this Agreement and shall, except as otherwise specifically provided in this Agreement, be entitled to receive as conclusive proof of any fact or matter required to be ascertained by it hereunder a certificate signed by KCF's board of directors, the secretary or an assistant secretary of the Fund or any other person expressly authorized by the board of directors of KCF. E. Access to Records. Subject to security requirements of State Street applicable to its own employees having access to similar records within State Street and such regulations as to the conduct of such monitors as may be reasonably imposed by State Street after prior consultation with an authorized officer of the Fund, books and records of State Street pertaining to its actions under this Agreement shall be open to inspection and audit at reasonable times by the directors of, attorneys for, auditors employed by the Fund or any other person as KCF's board of directors shall direct. G. Record-Keeping. State Street shall maintain such records as shall enable the Fund to comply with the requirements of all Federal and State laws and regulations applicable to the Fund with respect to the matters covered by this Agreement and shall comply with the representations of Parts I and II as such representations relate to maintaining records of the Fund. 7. The Fund shall pay State Street for its services as Custodian such compensation as shall be as specified in the attached Exhibit A. Such compensation shall remain fixed for two years from the date hereof, unless this Agreement is terminated as provided in section 8A, and shall remain fixed for an additional year in the event the Fund decides to continue this Agreement for such period; provided, however, that in the event either party terminates this Agreement as provided in section 8A State Street hereby guarantees and agrees that no new Agreement entered into between the parties shall require payment of compensation greater than that specified herein during such three year period. 8. State Street and the Fund further agree as follows: A. Effective Period, Termination, Amendment and Interpretive and Additional Provisions. This Agreement shall become effective as of the date of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid, to the other party, such termination to take effect sixty (60) days after the date of such delivery or mailing; and further provided, that the Fund may by action of KCF's board of directors substitute another bank or trust company for State Street by giving notice as provided above to State Street. The Fund or State Street shall not amend or terminate this Agreement in contravention of any applicable Federal or State laws or regulations, or any provision of the Trust Agreement of the Fund, as amended, and provided, that prior to three years from the date hereof State Street shall not terminate this Agreement except in the event of the Fund's substantial default hereunder which default continues uncorrected after notice to the Fund of such default for thirty (30) days, such termination to take effect as provided above; provided, however, that in the event of such termination State Street shall remain as Custodian hereunder for a reasonable period thereafter if the Fund after using its best efforts is unable to find a Successor Custodian. In connection with the operation of this Agreement, State Street and the Fund may agree from time to time on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement, any such interpretive or additional provision to be signed by both parties and annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable Federal or State laws or regulations, or any provision of the Fund's Trust Agreement as amended. No interpretive provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Agreement. B. Successor Custodian. Upon termination hereof or the inability of the Custodian to continue to serve hereunder, the Fund shall pay to State Street such compensation as may be due for services through the date of such termination and shall likewise reimburse State Street for its costs, expenses and disbursements incurred prior to such termination in accordance with paragraph 6-B of section II hereof and such reasonable costs, expenses and disbursements as may be incurred by State Street in connection with such termination. If a Successor Custodian is appointed by the board of directors of KCF in accordance with section l(b) of Article V of the Fund's Trust Agreement, as amended, State Street shall, upon termination, deliver to such Successor Custodian at the office of State Street, properly endorsed and in proper form for transfer, all securities then held hereunder, all cash and other assets of the Fund deposited with or held by it hereunder. If no such Successor Custodian is appointed, State Street shall, in like manner at its office, upon receipt of a certified copy of a resolution of the shareholders pursuant to section l(b) of Article V of the Fund's Trust Agreement, as amended, deliver such securities, cash and other properties in accordance with such resolutions. In the event that no written order designating a Successor Custodian or certified copy of a resolution of the shareholders shall have been delivered to State Street on or before the date when such termination shall become effective, then State Street shall have the right to deliver to a bank or trust company doing business in Boston, Massachusetts of its own selection, having an aggregate capital, surplus and undivided profits, as shown by its last published report, of not less than $5,000,000, all securities, cash and other properties held by State Street and all instruments held by State Street and all instruments held by it relative thereto and all other property held by it under this Agreement. Thereafter, such bank or trust company shall be the Successor of State Street under this Agreement and subject to the restrictions, limitations and other requirements of the Fund's Trust Agreement and By-Laws, both as amended. In the event that securities, funds, and other properties remain in the possession of State Street after the date of termination hereof owing to failure of the Fund to procure the certified copy above referred to, or of KCF's board of directors to appoint a Successor Custodian, State Street shall be entitled to fair compensation for its services during such period and the provisions of this Agreement relating to the duties and obligations of State Street shall remain in full force and effect. C. Duplicate Records and Backup Facilities. State Street shall not be liable for loss of data, occurring by reason of circumstances beyond its control, including but not limited to acts of civil or military authority, national emergencies, fire, flood or catastrophe, acts of God, insurrection, war, riots, or failure of transportation, communication or power supply. However, State Street shall keep in a separate and safe place additional copies of all records required to be maintained pursuant to this Agreement or additional tapes, disks or other sources of information necessary to reproduce all such records. Furthermore, at all times during this Agreement, State Street shall maintain a contractual arrangement whereby State Street will have a back-up computer facility available for its use in providing the services required hereunder in the event circumstances beyond State Street's control result in State Street not being able to process the necessary work at its principal computer facility, State Street shall, from time to time, upon request from the Fund provide written evidence and details of its arrangement for obtaining the use of such a back-up computer facility. State Street shall use its best efforts to minimize the likelihood of all damage, loss of data, delays and errors resulting from an uncontrollable event, and should such damage, loss of data, delays or errors occur, State Street shall use its best efforts to mitigate the effects of such occurrence. Representatives of the Fund shall be entitled to inspect the State Street premises and operating capabilities within reasonable business hours upon reasonable notice to State Street, and, upon request of such representative or representatives, State Street shall from time to time as appropriate, furnish to the Fund a letter setting forth the insurance coverage thereon, any changes in such coverage which may occur and any claim relating to the Fund which State Street may have made under such insurance. D. Confidentiality. State Street agrees to treat all records and other information relative to the Fund confidentially and State Street on behalf of itself and its officers, employees and agents agrees to keep confidential all such information, except after prior notification to and approval by the Fund (which approval shall not be unreasonably withheld and may not be withheld where State Street may be exposed to civil or criminal contempt proceedings), when requested to divulge such information by duly constituted authorities or when so requested by a properly authorized person. (a) State Street and the Fund agree that they, their officers, employees and agents shall maintain all information disclosed to them by the other in connection with this agreement in confidence and will not disclose any such information to any other person, nor use such information for their own benefit or for the benefit of third parties without the consent in writing of the other; provided, however, that each party shall have the right to use any such information for its own necessary internal purposes while this Agreement is in effect. The provisions of the paragraph shall not apply to information which (i) is in or becomes part of the public domain, or (ii) is demonstrably known previously to the party to whom it is disclosed, or (iii) is independently developed outside this Agreement by the party to whom it is disclosed or (iv) is rightfully obtained from third parties by the party to whom it is disclosed. 9. The Fund shall not circulate any printed matter which contains any reference to State Street without the prior written approval of State Street, excepting solely such printed matter as merely identifies State Street as Depository or Custodian. The Fund will submit printed matter requiring approval to State Street in draft form, allowing sufficient time for review by State Street and its counsel prior to any deadline for printing. 10. In the event of a reorganization of the Fund through a merger, consolidation, sale of assets or other reorganization, State Street; at the request of the Fund, shall act as Custodian for shares of any investment company or other company obtained in any such reorganization by the Fund for distribution to those Fund shareholders whose shares are represented by certificates. The Fund shall give notice to each such shareholder of his or her right to exchange his or her Fund shares represented by certificates for shares held by the Custodian upon surrender to the Custodian of his or her certificates representing such Fund shares properly endorsed and in proper form for transfer. Upon the surrender of such Fund certificates State Street will issue a certificate or certificates to the surrendering shareholder for an approximate number of shares held by State Street, unless such shareholder establishes an Open Account Plan or other similar account at that time in which case such shares will be credited to his or her account. State Street shall not be required to issue certificates for any fractional shares held by it. Instead, fractional interests in such shares shall be distributed to the shareholder in cash at their then current market value or, if the fractional share represents an interest in an investment company, it shall be redeemed by State Street at the then current redemption price for such shares and the proceeds of such redemption shall be distributed to such shareholder in cash. The Custodian shall not release to any shareholder any such shares held by it until such shareholder has properly surrendered for exchange his or her Fund shares represented by certificates. 11. This Agreement is executed and delivered in the Commonwealth of Massachusetts and shall be subject to and be construed in accordance with the laws of said Commonwealth. 12. Notices and other writings delivered or mailed postage prepaid to the Fund, c/o Keystone Custodian Funds, Inc., 99 High Street, 32nd Floor, Boston, Massachusetts 02110 or to State Street at 225 Franklin Street, Boston, Massachusetts 02110 or to such other address as the Fund or State Street may hereafter specify, shall be deemed to have been properly delivered or given hereunder to the respective address. 13. It is understood and is expressly stipulated that neither the holders of shares in the Fund nor KCF's board of directors, officers or employees shall be personally liable hereunder, but only the assets of the Fund shall be bound. 14. This Agreement shall be binding on and shall inure to the benefit of the Fund and State Street and their respective successors or assigns. 15. State Street and the Fund hereby agree that the Custodian Agreement, dated August 1, 1963 between them shall terminate upon the effectiveness of this Agreement. 16. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by a duly authorized officer as of the day and year first above written. ATTEST: KEYSTONE CUSTODIAN FUNDS, INC., as Trustee for Keystone Custodian Fund, Series B-1 /s/ R. D. Van Antwerp By: /s/ George S. Bissell - ------------------------ ------------------------------ Chief Executive Officer ATTEST: STATE STREET BANK AND TRUST COMPANY /s/ Paul F. Lorenz /s/ J.R. Towers - ------------------------- -------------------------------- Vice President SCHEDULE A Keystone Custodian Fund, Series B-1 State Street Bank and Trust Company Custodian, Fund Accounting and Records Keeping Fee Schedule I. Annual Fee $6,000 II. Out-of-Pocket Expenses A billing for the recovery of applicable out-of-pocket expenses will be made as of the end of each month. Out-of-pocket expenses include the following: Telephone Postage and insurance Courier service Legal fees Supplies related to Fund records Duplicating Transfer fees Sub-Custodian charges Wire Service ($2.00 in or out) III. Additional Services Any modifications, innovations, improvements or other changes made by State Street in the services and reports which it provides to other customers receiving its custodial, portfolio accounting and recordskeeping services without additional charges or fees shall be provided to the Fund at its request for no additional charge or fee. SCHEDULE B I. Operating Plan - Fund Custodian Services 1. Page 1 a) Trade instructions by tape input compatible with the SPARK system will not be given. b) System 34 terminals will not be provided for trade input. 2. Page 2 a) Distributions will be charged against the custodian account and credited to the disbursement account on the payable date. b) Reports - improved or new SPARK Reports will be made available to the Fund at its request for no additional cost, if made available at no additional cost to other customers of State Street. II. Fund Custodian Services A. Page 1 1) The Fund will receive Custody and Full Accounting Services. B. Page 2 1) Polaris Fund Inc. is now Keystone International Fund Inc. III. I. Custodian Reports A. Page 1 2) Analytics - Spark information reports - the Funds will receive none of these. IV. KM - SSB Reports Comparison A. Page 1 - MASSCO Report 1) (9) Different form with similar content to be prepared for Keystone Tax Free Fund (Massachusetts Fund for Tax Exempt Income) rather than Master Reserves Trust (MRT) 2) (12) To be prepared for all Funds. 3) (13) Trade Settlement Authorizations and all other reports as provided to the Keystone Funds will be provided MassCo Funds. 4) (26) Initial instructions in memo from Mr. Joseph Naples. Instructions may be changed from time to time by proper instructions. 5) (30) Letter to be supplied by Bradford Trust Company. 6) (31) Report to be supplied by Bradford Trust Company. B. Keystone Reports 1) (3) Information to be supplied by Open Order System. 2) (16) Will be prepared manually by State Street. Calculations to be based on initial instructions provided under (4)(26) memo. 3) (18) To be prepared by State Street. 4) (30) New SPARK Report to be provided the Funds. 5) (31) Pricing Quotes for foreign issues, restricted securities and private placements not otherwise available to State Street to be supplied by the Fund. 6) (46) KIMCO Reports unnecessary. 7) (58) State Street to prepare manually. 8) (57) Keystone to provide. 9) (70) New SPARK Report to be provided the Funds. 10) (73) SPARK Report to be provided the Funds. 11) (74) New SPARK Report and hard copy tape to be provided the Funds. 12) (75) State Street to provide weekly report of fails for each Fund. 13) All new SPARK reports must be reviewed and accepted by the Funds before they will be considered to comply with State Street's Custodian, Portfolio Accounting and Recordskeeping Agreements with the Funds, such acceptance not to be unreasonably withheld. VI. Responses I. Fund Custodian Services a) Page 2 Checkwriting privilege is $.35 per check - charged only for American Liquid Trust at this time. Other Fund agreements to be amended to include this charge if such privilege is ever offered to shareholders of other Funds. b) Page 3 (6) Individuals responsible for Fund services may change as long as the quality of the personnel is maintained. c) Page 6 (11) State Street is liable for the acts of its sub-custodians to the same extent that it is liable for the acts of its agents. II. Exhibits 1. Exhibit 1-2 a) (6) Notices of corporate actions shall include, without limitation notices of class actions and bankruptcy actions in connection with issues held by the Funds. EX-99.10 8 OPINION AND CONSENT OF COUNSEL Exhibit 99.10 February 20, 1996 Keystone Quality Bond Fund (B-1) 200 Berkeley Street Boston, Massachusetts 02116-5034 Gentlemen: I am a Senior Vice President of and General Counsel to Keystone Investment Management Company (formerly named Keystone Custodian Funds, Inc.), the investment adviser to Keystone Quality Bond Fund (B-1) (the "Fund"). You have asked for my opinion with respect to the proposed issuance of 3,287,641 additional shares of the Fund. To my knowledge, a Prospectus is being filed with the Securities and Exchange Commission (the "Commission") as part of this Post-Effective Amendment No. 95 to the Fund's Registration Statement, which will cover the public offering and sale of the Fund shares currently registered with the Commission. In my opinion, such additional shares, if issued and sold in accordance with the Fund's Declaration of Trust, as amended, and offering Prospectus, will be legally issued, fully paid, and nonassessable by the Fund, entitling the holders thereof to the rights set forth in the Declaration of Trust and subject to the limitations set forth therein. My opinion is based upon my examination of the Fund's Declaration of Trust, as amended, and By-Laws; a review of the minutes of the Fund's Board of Trustees authorizing the issuance of such additional shares; and the Fund's Prospectus. In my examination of such documents, I have assumed the genuineness of all signatures and the conformity of copies to originals. I hereby consent to the use of this opinion in connection with Post-Effective Amendment No. 95 to the Fund's Registration Statement, which covers the registration of such additional shares. Very truly yours, /s/ Rosemary D. Van Antwerp Rosemary D. Van Antwerp Senior Vice President and General Counsel 10160780 EX-99.11 9 INDEPENDENT AUDITORS' CONSENT EXHIBIT 99.11 CONSENT OF INDEPENDENT AUDITORS The Trustees Keystone Quality Bond Fund (B-1) (formerly Keystone Custodian Fund Series B-1) We consent to the use of our report dated December 8, 1995, included herein and to the references to our firm under the captions "FINANCIAL HIGHLIGHTS" in the prospectus and "ADDITIONAL INFORMATION" in the statement of additional information. KPMG Peat Marwick LLP Boston, Massachusetts February 21, 1996 EX-99.15 10 DISTRIBUTION PLAN EXHIBIT 99.15 APPENDIX A DISTRIBUTION PLAN OF KEYSTONE CUSTODIAN FUND SERIES B-1 Section 1. Keystone Custodian Fund, Series B-1 (the "Fund") may act as the distributor of securities of which it is the issuer, pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") according to the terms of this Distribution Plan (the "Plan"). Section 2. Amounts, not exceeding in the aggregate a maximum amount equal to .3125% of the averages of the daily net asset values of the Fund during each fiscal quarter of the Fund elapsed after the inception of the Plan (i.e., the first time that shares of the Fund are generally offered to the public at a price equal to their net asset value) may be paid by the Fund to the Distributor at any time after the inception of the Plan in order: (i) to pay to the Distributor commissions in respect of shares of the Fund previously sold at any time after the inception of the Plan, all or any part of which may be or may have been reallowed or otherwise paid to others by the Distributor in respect of or in furtherance of sales of shares of the Fund after the inception of the Plan; and (ii) to enable the Distributor to pay or to have paid to others who sell Fund shares a maintenance or other fee, at such intervals as the Distributor may determine, in respect of Fund shares previously sold by any such others at any time after the inception of the Plan and remaining outstanding during the period in respect of which such fee is or has been paid. Section 3. This Plan shall not take effect until it has been approved by a vote of at least a majority (as defined in the Act) of the outstanding shares of the Fund. Section 4. This Plan shall not take effect until it has been approved together with any related agreements of the Fund by votes of the majority of both (a) the Board of Directors of the Fund's Trustee, Keystone Custodian Funds, Inc. ("Trustee") and (b) those independent Directors of the Trustee who have no direct or indirect financial interest in the operation of this Plan or any, agreements of the Fund or any other person related to this Plan (the "Rule 12b-1 Directors"), cast in person at a meeting called for the purpose of voting on this Plan or such agreements. Section 5. Unless sooner terminated pursuant to Section 8, this Plan shall continue in effect for a period of one year from the date it takes effect and thereafter shall continue in effect so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in Section 4. Section 6. any person authorized to direct the disposition of monies paid or payable by the Fund pursuant to this Plan or any related agreement shall provide to the Trustee's Board and the Board shall review at least quarterly a written report of the amounts so expended and the purposes for which such expenditures were made. Section 7. This Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Directors, or by vote of a majority of the Fund's outstanding shares. Section 8. Any agreement of the Fund related to this Plan shall be in writing, and shall provide: A. That such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the Rule 12b-1 Directors or by a vote of a majority of the Fund's outstanding shares on not more than sixty days written notice to any other party to the agreement; and B. That such agreement shall terminate automatically in the event of its assignment. Section 9. This Plan may not be amended to increase materially the amount of distribution expenses provided for in Section 2 hereof unless such amendment is approved in the manner provided in Section 3 hereof and no material amendment to the Plan shall be made unless approved in the manner provided for in Section 4 hereof. EX-99.16 11 PERFORMANCE DATA SCHEDULES Exhibit 99.16
B-1 MTD YTD ONE YEAR THREE YEAR THREE YEAR FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR 31-Oct-95 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED with cdsc N/A 10.16% 10.69% 16.79% 5.31% 44.71% 7.67% 109.55% 7.68% W/O CDSC 1.36% 13.16% 13.69% 17.75% 5.60% 44.71% 7.67% 109.55% 7.68% Beg dates 29-Sep-95 30-Dec-94 31-Oct-94 30-Oct-92 30-Oct-92 31-Oct-90 31-Oct-90 31-Oct-85 31-Oct-85 Beg Value (no load) 40,609 36,374 36,207 34,958 34,958 28,445 28,445 19,643 19,643 End Value (W/O CDSC) 41,162 41,162 41,162 41,162 41,162 41,162 41,162 41,162 41,162 End Value (with cdsc) 40,071 40,076 40,826 40,826 41,162 41,162 41,162 41,162 beg nav 15.29 14.35 14.44 16.02 16.02 15.23 15.23 16.29 16.29 end nav 15.42 15.42 15.42 15.42 15.42 15.42 15.42 15.42 15.42 shares originally purhased 2,655.93 2,534.76 2,507.38 2,182.13 2,182.13 1,867.72 1,867.72 1,205.86 1,205.86 3 5 10 FUND #: 4201 SEC STANDARDIZED ADVERTISING YIELD FUND NAME: KEYSTONE SERIES B-1 PRICING DATE 26-Oct-95 ============= 30 DAY YTM 4.95087% ============= - ------------------------------------------------------------------------------------------------- PRICE ZERO MORTGAGE PAYDOWN GAIN/LOSS ST FIXED ST VAR LONG TERM DATE COUPON INCOME ADJ ADJ INCOME INCOME INCOME 0 498,322 0 (9,507) 42,019 0 1,165,764 0.00000% 1.99693% 0.00000% -0.03826% 0.16901% 0.00000% 4.64614% - ------------------------------------------------------------------------------------------------- 27-Sep-95 0 16743.62 $3,367.35 $37,824.04 28-Sep-95 0 16743.62 $3,429.10 $37,828.23 29-Sep-95 0 16743.62 $3,102.04 $38,154.65 30-Sep-95 0 16743.62 $3,102.04 $38,154.65 01-Oct-95 0 16743.62 $3,102.04 $38,154.65 02-Oct-95 0 16743.62 $2,874.78 $38,117.46 03-Oct-95 0 16743.62 $2,096.38 $38,808.09 04-Oct-95 0 16743.62 $1,687.08 $39,101.64 05-Oct-95 0 16743.62 $1,115.48 $39,035.90 06-Oct-95 0 16743.62 $1,425.58 $39,029.21 07-Oct-95 0 16743.62 $1,425.58 $39,029.21 08-Oct-95 0 16743.62 $1,425.58 $39,029.21 09-Oct-95 0 16743.62 $1,425.58 $39,034.02 10-Oct-95 0 16705.22 $1,549.87 $38,190.16 11-Oct-95 0 16899.66 $985.94 $38,757.68 12-Oct-95 0 16899.66 $965.76 $38,495.26 13-Oct-95 0 16889.40 $745.88 $38,879.09 14-Oct-95 0 16889.40 $745.88 $38,879.09 15-Oct-95 0 16889.40 $745.88 $38,879.09 16-Oct-95 0 16869.56 $606.50 $38,777.88 17-Oct-95 0 16796.58 $834.67 $39,349.56 18-Oct-95 0 16789.09 $400.21 $39,297.98 19-Oct-95 0 16786.87 $382.25 $39,660.95 20-Oct-95 0 15675.76 $373.75 $39,317.51 21-Oct-95 0 15675.76 $373.75 $39,317.51 22-Oct-95 0 15675.76 $373.75 $39,317.51 23-Oct-95 0 15663.39 $859.51 $40,205.49 24-Oct-95 0 16538.35 $832.63 $39,116.20 25-Oct-95 0 16538.35 $784.45 $38,965.97 26-Oct-95 0 16472.75 -9506.91 $879.28 $39,055.67 TOTAL INCOME FOR PERIOD 1,696,597.24 TOTAL EXPENSES FOR PERIOD 453,795.32 AVERAGE SHARES OUTSTANDING 19,774,180.515 LAST PRICE DURING PERIOD 15.39 - ---------- || --------------------------------------------------------------- || TOTAL || 12B-1+SER.FEE CDSC DAILY DAILY DAILY || ACCUMULATED ACCUMULATED ACCUMULATED INCOME || EXPENSE EXPENSES SHARES PRICE || INCOME EXPENSES SHARES 1,696,597 250,090 0 453,795 19,774,181 -1.00834% - ----------------------------------------------------------------------------------------------------------------------------- 57,935.01 $8,233.62 0.00 $12,931.41 19,803,776.257 15.20 57,935.01 12,931.41 19,803,776.26 58,000.95 $8,245.95 0.00 $15,426.12 19,815,319.995 15.21 115,935.96 28,357.53 39,619,096.25 58,000.31 $24,769.83 0.00 $14,639.36 19,788,631.865 15.29 173,936.27 42,996.89 59,407,728.12 58,000.31 $0.00 0.00 $14,639.36 19,788,631.865 15.29 231,936.58 57,636.25 79,196,359.98 58,000.31 $0.00 0.00 $14,639.36 19,788,631.865 15.29 289,936.89 72,275.61 98,984,991.85 57,735.86 $8,288.08 0.00 $17,909.99 19,786,054.665 15.30 347,672.75 90,185.60 118,771,046.51 57,648.09 $8,295.73 0.00 $15,496.21 19,763,625.226 15.33 405,320.84 105,681.81 138,534,671.74 57,532.34 $8,299.60 0.00 $15,502.49 19,772,344.563 15.36 462,853.18 121,184.30 158,307,016.30 56,895.00 $8,320.36 0.00 $15,529.70 19,765,720.872 15.38 519,748.18 136,714.00 178,072,737.17 57,198.41 $24,979.29 0.00 $14,733.56 19,753,246.688 15.39 576,946.59 151,447.56 197,825,983.86 57,198.41 $0.00 0.00 $14,733.56 19,753,246.688 15.39 634,145.00 166,181.12 217,579,230.55 57,198.41 $0.00 0.00 $14,733.56 19,753,246.688 15.39 691,343.41 180,914.68 237,332,477.24 57,203.22 $8,327.11 0.00 $17,930.27 19,739,251.052 15.39 748,546.63 198,844.95 257,071,728.29 56,445.25 $8,323.51 0.00 $15,527.75 19,779,463.690 15.39 804,991.88 214,372.70 276,851,191.98 56,643.28 $8,340.37 0.00 $15,528.33 19,820,249.564 15.38 861,635.16 229,901.03 296,671,441.54 56,360.68 $8,352.79 0.00 $15,568.21 19,817,030.393 15.41 917,995.84 245,469.24 316,488,471.94 56,514.37 $25,102.23 0.00 $14,787.57 19,804,814.354 15.50 974,510.21 260,256.81 336,293,286.29 56,514.37 $0.00 0.00 $14,787.57 19,804,814.354 15.50 1,031,024.58 275,044.38 356,098,100.64 56,514.37 $0.00 0.00 $14,787.57 19,804,814.354 15.50 1,087,538.95 289,831.95 375,902,915.00 56,253.94 $8,408.35 0.00 $18,049.68 19,798,656.481 15.49 1,143,792.89 307,881.63 395,701,571.48 56,980.81 $8,401.15 0.00 $15,614.90 19,777,840.364 15.50 1,200,773.70 323,496.53 415,479,411.84 56,487.28 $8,398.52 0.00 $15,624.06 19,770,910.953 15.48 1,257,260.98 339,120.59 435,250,322.80 56,830.07 $8,385.65 0.00 $15,614.14 19,772,930.152 15.50 1,314,091.05 354,734.73 455,023,252.95 55,367.02 $25,182.15 0.00 $14,822.94 19,771,915.676 15.45 1,369,458.07 369,557.67 474,795,168.62 55,367.02 $0.00 0.00 $14,822.94 19,771,915.676 15.45 1,424,825.09 384,380.61 494,567,084.30 55,367.02 $0.00 0.00 $14,822.94 19,771,915.676 15.45 1,480,192.11 399,203.55 514,338,999.98 56,728.39 $8,371.59 0.00 $17,985.94 19,739,078.761 15.44 1,536,920.50 417,189.49 534,078,078.74 56,487.18 $8,350.17 0.00 $15,529.16 19,681,743.258 15.49 1,593,407.68 432,718.65 553,759,822.00 56,288.77 $8,353.16 0.00 $15,544.19 19,682,311.100 15.51 1,649,696.45 448,262.84 573,442,133.10 46,900.79 $8,361.23 0.00 $15,563.48 19,783,282.366 15.39 1,696,597.24 463,826.32 593,225,415.46
EX-99.19 12 POWERS OF ATTORNEY EXHIBIT 99.19 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ George S. Bissell George S. Bissell Director/Trustee, Chairman of the Board Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and/or Chief Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Albert H. Elfner, III Albert H. Elfner, III Director/Trustee, President and Chief Executive Officer Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director, Trustee or officer and for which Keystone Investment Management Company serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ J. Kevin Kenely J. Kevin Kenely Treasurer Dated: December 15, 1995 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Frederick Amling Frederick Amling Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Charles A. Austin III Charles A. Austin III Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Edwin D. Campbell Edwin D. Campbell Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Charles F. Chapin Charles F. Chapin Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ K. Dun Gifford K. Dun Gifford Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Leroy Keith, Jr. Leroy Keith, Jr. Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ F. Ray Keyser,Jr. F. Ray Keyser, Jr. Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ David M. Richardson David M. Richardson Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Richard J. Shima Richard J. Shima Director/Trustee Dated: December 14, 1994 POWER OF ATTORNEY I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of them singly, my true and lawful attorneys, with full power to them and each of them to sign for me and in my name in the capacity indicated below any and all registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all amendments thereto to be filed with the Securities and Exchange Commission for the purpose of registering from time to time all investment companies of which I am now or hereafter a Director or Trustee and for which Keystone Custodian Funds, Inc. serves as Adviser or Manager and registering from time to time the shares of such companies, and generally to do all such things in my name and in my behalf to enable such investment companies to comply with the provisions of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and all requirements and regulations of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by my said attorneys to any and all registration statements and amendments thereto. /s/ Andrew J. Simons Andrew J. Simons Director/Trustee Dated: December 14, 1994 EX-27 13 FDS
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING RECORDS. 101 KEYSTONE QUALITY BOND FUND (B-1) CLASS A 12-MOS OCT-31-1995 NOV-01-1994 OCT-31-1995 294,488,098 301,251,985 15,654,914 51,091 0 316,957,990 5,305,553 0 860,949 6,166,502 0 333,652,241 20,148,901 22,658,079 0 (575,212) (29,049,428) 0 6,763,887 310,791,488 0 24,281,142 0 (6,043,955) 18,237,187 (6,749,977) 28,285,126 39,772,336 0 (19,000,432) 0 (472,154) 5,215,666 (8,523,861) 799,017 (16,484,048) 0 0 (703,858) (22,396,458) (1,876,672) 0 (6,088,054) 311,131,278 14.44 0.87 1.05 (0.87) 0.00 (0.07) 15.42 1.96 0 0
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