As filed with the Securities and Exchange Commission on November 20, 1995.
Registration No. 2-58699
811-2740
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre - Effective Amendment No. ____
Post - Effective Amendment No. 27
KEYSTONE TAX FREE FUND
----------------------
(Exact Name of Registrant as Specified in Charter)
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116
------------------------------------------------
(Address of Principal Executive Offices)
617-338-3200
(Area Code and Telephone Number)
Rosemary D. Van Antwerp, Esq.
Keystone Group, Inc.
200 Berkeley Street
Boston, Massachusetts 02116
---------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable
after this Registration Statement becomes effective.
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940; accordingly, no fee is payable herewith. Registrant's Rule 24f-2 Notice
for the fiscal year ended December 31, 1994 was filed with the Securities and
Exchange Commission on January 27, 1995.
It is proposed that this filing will become effective on December 20, 1995
pursuant to Rule 488.
#101F0251
<PAGE>
KEYSTONE TAX FREE FUND
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
The Cross-Reference Sheet
PART A
------
Letter to Shareholders
Notice of Special Meeting of Shareholders
Prospectus/Proxy Statement
PART B
------
Statement of Additional Information
Part C
------
Other Information
Indemnification
List of Exhibits
Undertakings
Signatures
Exhibits
<PAGE>
KEYSTONE TAX FREE FUND
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Prospectus/Proxy Statement
Form N-14 Item No. Caption
- ------------------ --------------------------
Part A
1 Beginning of Registration Cross-Reference Sheet; Front
Statement and Outside Front Cover
Cover Page of Prospectus
2 Beginning and Outside Back Table of Contents
Cover Page of Prospectus
3 Synopsis and Risk Factors Synopsis; Principal Risk
Factors; The Reorganization
4 Information About the Synopsis; The Reorganization
Transaction
5 Information About the Information About the Funds;
Registrant Additional Information About
the Funds
6 Information About the Information About the Funds;
Company Being Acquired Additional Information About
the Funds
7 Voting Information Inside Front Cover Page; The
Reorganization; Information
About the Funds
8 Interest of Certain Additional Information About
Persons and Experts the Funds
9 Additional Information Not Applicable
Required for Reoffering
by Persons Deemed to be
Underwriters
<PAGE>
Statement of Additional Information
Form N-14 Item No. Caption
- ------------------ -----------------------------------
Part B
10 Cover Page Cover Page
11 Table of Contents Cover Page
12 Additional Information Cover Page; Statement of
About the Registrant Additional Information of
Registrant
13 Additional Information Not Applicable
About the Company Being
Acquired
14 Financial Statements Financial Information
Other Information
Form N-14 Item No. Caption
- ------------------ -----------------
Part C
15 Indemnification Indemnification
16 Exhibits Exhibits
17 Undertakings Undertakings
<PAGE>
PART A
<PAGE>
January, 1996
Dear Shareholder:
We are writing to ask your support for a proposal which we expect will result
in reduced expenses for your Keystone investment in the Fund.
The proposal is for Keystone Tax Exempt Trust to be acquired by, or
effectively merged with, Keystone Tax Free Fund. This proposal is scheduled
to be voted upon at a shareholder meeting at Keystone Investments, 200
Berkeley Street, Boston, Massachusetts at 2 p.m. on February 20, 1996.
The merger will be a tax-free transaction for shareholders. We believe it
will result in one combined fund with lower management fees and the potential
for lower operating expenses and greater efficiencies than two separate
funds. This merger is not expected to affect the total value of your
investment. The investment objective, strategy, and portfolio manager of your
Fund also will remain the same.
Summary of Benefits
(bullet) Lower management fee and operating expenses
(bullet) Potential for greater operating efficiencies
The Fund's Trustees have very carefully reviewed this proposed reorganization
and believe it is in the best interests of shareholders. They recommend you
vote FOR the proposal, which is described in detail in the enclosed
Prospectus/Proxy Statement.
Voting Instructions
This package contains the materials you will need to vote. To vote by mail,
please sign the enclosed proxy card and return it in the postage-paid
envelope today. It is extremely important that you vote, no matter how many
shares you own. This is an opportunity to voice your opinion on an important
matter affecting your investment. Voting promptly helps to reduce the cost of
additional mailings.
If you have questions, please contact your adviser or call Keystone. Our
representatives will be happy to assist you.
Sincerely,
[signature of Albert H. Elfner, III] [signature of George S. Bissell]
Albert H. Elfner, III George S. Bissell
Chairman and President Chairman of the Board
Keystone Investments, Inc. Keystone Funds
<PAGE>
KEYSTONE TAX EXEMPT TRUST
200 Berkeley Street
Boston, Massachusetts 02116
Telephone Number (800) 343-2898 or (617) 621-6100
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on February 20, 1996
To the Shareholders:
A meeting of the shareholders of Keystone Tax Exempt Trust ("KTET") will
be held at the offices of Keystone Investment Management Company, 200
Berkeley Street, Boston, Massachusetts, on the 26th Floor, on Tuesday,
February 20, 1996 at 2:00 p.m. Eastern time for the following purposes:
1. To approve an Agreement and Plan of Reorganization whereby Keystone Tax
Free Fund ("KTFF") will acquire all of the assets of KTET in exchange
for Shares of KTFF and will assume the liabilities of KTET, as described
in the accompanying Prospectus/Proxy Statement.
2. To transact such other business as may properly come before the meeting
and any adjournments thereof.
Shareholders of record at the close of business as of December 20, 1995
are entitled to notice of and to vote at this meeting and any adjournments
thereof.
BY ORDER OF THE BOARD OF TRUSTEES,
[signature of Rosemary D. Van Antwerp]
Rosemary D. Van Antwerp
Secretary
January 2, 1996
Please complete, date and sign your proxy-NOW-and mail it-TODAY-in the
stamped envelope enclosed for your convenience. In order to avoid unnecessary
expense or delay, we ask your cooperation in mailing in your proxy. Thank
you.
<PAGE>
PROSPECTUS/PROXY STATEMENT
December 20, 1995
Acquisition of the Assets of
KEYSTONE TAX EXEMPT TRUST
200 Berkeley Street, Boston, Massachusetts 02116
Telephone Number (800) 343-2898 or (617) 621-6100
By and in exchange for Shares of
KEYSTONE TAX FREE FUND
200 Berkeley Street, Boston, Massachusetts 02116
Telephone Number (800) 343-2898 or (617) 621-6100
This Prospectus/Proxy Statement is being furnished to the shareholders of
Keystone Tax Exempt Trust ("KTET") in connection with a proposal for the tax-
free reorganization of the Fund into Keystone Tax Free Fund. It is proposed
that Keystone Tax Free Fund ("KTFF") acquire all of the assets of KTET in
exchange for Shares of KTFF and assume the liabilities of KTET. Immediately
following this transfer, Shares of KTFF will be distributed to the
shareholders of KTET in place of their Shares of KTET, and KTET will be
terminated and its Shares cancelled. As a result of the proposed transaction,
each shareholder of KTET will receive that number of full and fractional
Shares of KTFF having a total net asset value, on the effective date of the
proposed transaction, equal to the total net asset value of that
shareholder's Shares in KTET.
KTFF and KTET (individually, a "Fund," and collectively, the "Funds") are
open-end, diversified management investment companies. Keystone Management,
Inc. manages both Funds, and Keystone Investment Management Company advises
both Funds. Both Funds seek the highest possible current income, exempt from
federal income taxes, while preserving capital.
This Prospectus/Proxy Statement sets forth concisely the information about
KTFF that a prospective investor should know before investing and should be
retained for future reference. This Prospectus/Proxy Statement is accompanied
by the Prospectus of KTFF dated April 28, 1995, which has been filed with the
Securities and Exchange Commission (the "Commission") and is incorporated by
reference herein. Additional information about KTFF is contained in a
Statement of Additional Information ("SAI") dated April 28, 1995, and in a
SAI dated December 20, 1995 relating to the Reorganization, each of which has
been filed with the Commission and is incorporated by reference herein.
Copies of these SAIs may be obtained without charge by writing to KTFF at the
address or by calling the telephone numbers listed above. KTFF's most recent
Annual Report and most recent Semi-Annual Report, each of which has been
filed with the Commission,
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are incorporated by reference herein. Copies of KTFF's most recent Annual and
Semi-Annual Reports may be obtained without charge by writing to KTFF at the
address or by calling the telephone numbers listed above.
A Prospectus and SAI containing additional information about KTET, each
dated March 31, 1995, have been filed with the Commission and are
incorporated by reference herein. Copies of such Prospectus and SAI may be
obtained without charge by writing to KTET at the address listed above or by
calling the telephone numbers listed above.
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.
2
<PAGE>
KEYSTONE TAX EXEMPT TRUST
200 Berkeley Street
Boston, Massachusetts 02116
Special Meeting of Shareholders
To be Held February 20, 1996
This Prospectus/Proxy Statement is furnished to shareholders of Keystone
Tax Exempt Trust ("KTET") in connection with the solicitation of proxies by
the Board of Trustees to be used at a meeting of the shareholders (the
"Meeting") to be held at the offices of Keystone Investment Management
Company, 200 Berkeley Street, Boston, Massachusetts, on the 26th Floor, on
Tuesday, February 20, 1996, at 2:00 p.m. Eastern time.
Any proxy that is properly executed and returned in time to be voted at
the Meeting, the KTET Shares represented thereby will be voted in accordance
with the instructions thereon. In the absence of such instructions, the proxy
will be voted in favor of the approval of the Agreement and Plan of
Reorganization (the "Reorganization Agreement") and the transaction described
therein, whereby Keystone Tax Free Fund ("KTFF") will acquire all of the
assets of KTET in exchange for Shares of KTFF and assume the liabilities of
KTET. The individuals duly appointed as Proxies ("Proxies") may, in their
discretion, vote upon such other matters as may come before the meeting or
any adjournments thereof. Any shareholder may revoke his or her proxy at any
time before it is voted by delivering written notice of revocation or by
executing and delivering a later-dated proxy to Rosemary D. Van Antwerp,
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116, or by appearing in person at the meeting to vote his or
her Shares. Proxy material is expected to be mailed to KTET shareholders on
or about January 2, 1996.
When voting proxies on a proposal to adjourn, the Proxies will consider
what is in the best interest of all shareholders at that time. Each
shareholder will be entitled to one vote for each Share and a fractional vote
for each fractional Share held by such shareholder. Shareholders of KTET of
record at the close of business on December 20, 1995 (the "Record Date") will
be entitled to notice of and to vote at the Meeting or any adjournment
thereof. On the Record Date, there were 62,881,804 Shares of KTET
outstanding.
Vote Required
Approval of the Reorganization Agreement will require the affirmative vote
of the holders of (i) 67% of the Shares represented at the Meeting, if the
holders of more than 50% of the outstanding Shares of KTET are represented, or
(ii) more than 50% of KTET's outstanding Shares, whichever is less.
Shareholders of KTFF will not be voting on the approval of the Reorganization
Agreement since their approval is not required.
3
<PAGE>
IMPORTANT DEFINITIONS
"12b-1 Plan" A distribution plan adopted pursuant to
Rule 12b-1 under the Investment Company
Act of 1940, as amended.
"1933 Act" The Securities Act of 1933, as amended.
"1934 Act" The Securities Exchange Act of 1934, as
amended.
"1940 Act" The Investment Company Act of 1940, as
amended.
"Effective Date" The effective date of the Reorganization
contemplated by the Reorganization
Agreement.
"KTET" Keystone Tax Exempt Trust, 200 Berkeley
Street, Boston, Massachusetts 02116.
"KTFF" Keystone Tax Free Fund, 200 Berkeley
Street, Boston, Massachusetts 02116.
"Independent Trustees" Those members of the Board of Trustees of
KTET or KTFF who are not "interested
persons" of such Funds, as said term is
defined in the 1940 Act.
"Principal Underwriter" Keystone Investment Distributors Company
(formerly named Keystone Distributors,
Inc.), 200 Berkeley Street, Boston,
Massachusetts 02116, a wholly-owned
subsidiary of Keystone. The Principal
Underwriter is the principal underwriter
of KTET and KTFF and of each of the other
Keystone Investments Funds.
"Keystone" Keystone Investment Management Company
(formerly named Keystone Custodian Funds,
Inc.), 200 Berkeley Street, Boston,
Massachusetts 02116, a wholly-owned
subsidiary of Keystone Investments.
Keystone is the investment adviser of KTET
and KTFF and of each of the other Keystone
Investments Funds.
"Keystone Investments" Keystone Investments, Inc. (formerly named
Keystone Group, Inc.), 200 Berkeley
Street, Boston, Massachusetts 02116.
Keystone Investments owns all of the
outstanding shares of Keystone. Keystone
Investments is owned by an investor group
composed of current and former members of
management and certain employees of
Keystone Investments and its affiliates.
"Keystone Fund Family" A group of 13 mutual funds with different
investment objectives and policies that
hold themselves out to investors as being
related for purposes of
4
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investments, investor services and
exchange privileges.
"Keystone Investments A family of mutual funds with varying
Funds" investment objectives and policies,
managed, advised or administered by
Keystone and/or an affiliate of Keystone.
Currently, there are 30 Keystone
Investments Funds, including KTET and
KTFF.
"Keystone Management" Keystone Management, Inc., 200 Berkeley
Street, Boston, Massachusetts 02116, a
wholly-owned subsidiary of Keystone.
Keystone Management is the investment
manager of 20 Keystone Investments Funds,
including KTET and KTFF.
"KIRC" Keystone Investor Resource Center, Inc.,
101 Main Street, Cambridge, Massachusetts
02142, a wholly-owned subsidiary of
Keystone. KIRC is the transfer agent and
dividend disbursing agent for each of the
Keystone Investments Funds, including KTET
and KTFF.
"Meeting" The Special Meeting of KTET Shareholders
to be held on Tuesday, February 20, 1996.
"Reorganization" The proposed transaction contemplated by
the Reorganization Agreement.
"Reorganization The Agreement and Plan of Reorganization
Agreement" between KTET and KTFF, dated October 16,
1995, pursuant to which KTFF will acquire
all of the assets of KTET in exchange for
Shares of KTFF and will assume the
liabilities of KTET.
"Shares" The Shares of beneficial interest of KTFF,
KTET and the other Keystone Investments
Funds.
SYNOPSIS
Description of the Proposed Transaction
The Board of Trustees of each Fund, including each Fund's Independent
Trustees, have unanimously approved the Reorganization Agreement, which
provides for the transfer of all of the assets of KTET to KTFF in exchange
for Shares of KTFF as well as the assumption of KTET's liabilities by KTFF.
(The proposed transaction is hereinafter referred to as the
"Reorganization".)
The aggregate net asset value of KTFF Shares to be issued in exchange for
the assets of KTET will be equal to the net asset value of KTET on the
effective date of the Reorganization (the "Effective Date") (as defined in
"The Reorganization--Agreement on Transfer of Assets"). Immediately following
the
5
<PAGE>
transfer of assets and liabilities of KTET to KTFF, Shares of KTFF will be
distributed to the shareholders of KTET, then KTET will be dissolved. KTET
Shares will be cancelled, and KTET will be terminated. Each shareholder in
KTET will receive that percentage of the total number of KTFF Shares received
by KTET equal in amount to that shareholder's percentage interest in KTET on
the Effective Date.
The Reorganization will effectively combine the two nearly identical
Funds, each of which currently issues a single class of Shares, into a single
fund offering a single class of Shares.
For the reasons set forth below in "The Reorganization--Reasons for the
Proposed Transaction", the Board of Trustees of KTET, including the
Independent Trustees, has concluded that the Reorganization would be in the
best interests of the shareholders of KTET and has further determined that
the interests of the existing shareholders of KTET will not be diluted as a
result of the Reorganization. Accordingly, the Board recommends A VOTE FOR
the approval of the Reorganization.
Comparison of the Funds
Fee Table
The fee table set out below shows the current fees for each Fund and pro
forma fees for KTFF after giving effect to the proposed transaction. The
purpose of the fee table is to assist shareholders in understanding the costs
and expenses that he or she is exected to bear directly or in directly in
KTFF after giving effect to the proposed transaction.
KTFF
Shareholder Transaction Expenses KTFF KTET PRO FORMA
- ------------------------------------------- ---- ---- ---------
Contingent Deferred Sales Charge(1) 4.00% 4.00% 4.00%
(as a percentage of the lesser of total
cost or net asset value of shares
redeemed)
Exchange Fee(2) $10.00 $10.00 $10.00
(per exchange)
- ------------
(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 from
an individual shareholder over the Keystone Automated Response Line
("KARL").
6
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KTFF
Annual Fund Operating Expenses(3) KTFF KTET PRO FORMA
- ----------------------------------- ---- ---- ---------
(As a percentage of average net
assets)
Management Fees 0.43% 0.47% 0.42%
12b-1 Fees(4) 0.61% 1.00% 0.38%
Other Expenses 0.15% 0.18% 0.17%
---- ---- -----
Total Fund Operating Expenses 1.19% 1.65% 0.97%
==== ==== =====
Examples(5)
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and:
(1) redemption at the end of each period:
KTFF
KTFF KTET PRO FORMA
---- ---- ---------
1 year $ 52 $ 57 $ 50
3 years $ 58 $ 72 $ 51
5 years $ 65 $ 90 $ 54
10 years $144 $195 $119
(2) no redemption:
KTFF
KTFF KTET PRO FORMA
---- ---- ---------
1 year $ 12 $ 17 $ 10
3 years $ 38 $ 52 $ 31
5 years $ 65 $ 90 $ 54
10 years $144 $195 $119
- ------------
(3) To reflect current fees, expense ratios are estimated for KTFF's
fiscal year ending December 31, 1995. The estimated expense ratios
reflect certain actions taken by the Fund's Board of Trustees, in
connection with the reopening of KTFF on May 1, 1995, with respect to
the maximum annual expenditures permitted under KTFF's Distribution
Plan. Expense ratios are for KTET's fiscal year ended November 30,
1994.
(4) Long-term shareholders may pay more than the economic equivalent of
the maximum front end sales charge permitted by rules adopted by the
National Association of Securities Dealers, Inc. ("NASD"). See
"Distribution Plan."
(5) The Securities and Exchange Commission requires use of a 5% annual
return figure for purposes of this example. Actual return for the Fund
may be greater or less than 5%.
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.
7
<PAGE>
Investment Objectives and Policies
Each Fund's investment objective, policies and restrictions do not materially
differ. Each Fund seeks the highest possible current income, exempt from
federal income taxes, while preserving capital. Each Fund invests
substantially all and, under ordinary circumstances, at least 80% of its
assets in federally tax-exempt obligations, including municipal bonds and
notes and tax-exempt commercial paper (municipal bonds), which are
obligations issued by or on behalf of states, territories and possessions of
the United States ("U.S."), the District of Columbia and their political
subdivisions, agencies and instrumentalities, the interest from which is, in
the opinion of counsel to the issuers of such bonds, exempt from federal
income taxes, including the alternative minimum tax. Each Fund invests in
municipal bonds only if, at the date of investment, they are rated within the
four highest grades by Standard & Poor's Corporation ("S&P") (AAA, AA, A and
BBB), by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa A and Baa) or
by Fitch Investors Service, Inc.--Municipal Division ("Fitch") (AAA, AA, A
and BBB), or, if not rated, are of comparable quality to obligations so rated
as determined by Keystone. Keystone expects that under normal circumstances
at least 65% of the Fund's total assets will be invested in municipal bonds
within the three highest ratings of such services or, if not rated, will be
of comparable quality. In addition, in furtherance of their investment
objectives, both Funds may use certain derivative instruments, including
structured securities. In summary, both Funds are authorized to invest in the
same kinds of securities and to use the same types of investment techniques.
For further discussion of the Funds' investment objectives, policies,
restrictions, permitted investments and investment techniques, see
"Information About the Funds" and the Prospectuses of KTFF and KTET.
Performance Information
Discussions of the manner of calculation of total return and yield quotations
are contained in each Fund's Prospectus and Statement of additional
Information.
KTFF's cumulative total returns for the one, five and ten years ended
December 31, 1994 were (9.96)% (including contingent deferred sales charge),
30.92% and 124.42%, respectively. KTFF's average annual rotal returns for the
one, five and ten year periods ended December 31, 1994 were (9.96)%, 5.54%
and 8.42%, respectively.
KTET's cumulative total return for the period beginning October 7, 1985
(commencment of investment operations) through November 30, 1994 was 85.41%.
KTET's average annual total return for the one and five year periods ended
November 30, 1994 were (7.10)% and 26.79%, respectively. KTET's average
annual compounded rate of returns for the five year period ended November 30,
1994 and for the period beginning October 7, 1985 through November 30, 1994
were 4.86% and 6.98%, respectively.
Investment Advisory and Management Fees
Keystone Management serves as the investment manager to each of the Funds. As
compensation for investment management and other services and facili-
8
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ties provided by Keystone Management, each Fund pays Keystone Management at
the end of each calendar month a fee consisting of (1) an amount calculated
as follows:
Annual Aggregate Net Asset Value
Management Fee of the Shares of the Fund
- ---------------------------------------------------
2% of Gross Dividend and
Interest Income plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
and (2) an amount equal to the amount of reimbursable expenses of Keystone
Management accrued during such calendar month.
For the fiscal year ended November 30, 1994, KTET paid Keystone Management
fees of $3,641,696, which represented 0.47% of KTET's average daily net
assets, for Keystone Management's services under the Management Agreement
after any applicable expense limitations, plus reimbursable expenses of
$1,274,875, which represented 0.17% of KTET's average daily net assets. For
the fiscal year ended December 31, 1994, KTFF paid Keystone Management fees
of $5,941,545, which represented 0.43% of KTFF's average daily net assets,
for Keystone Management's services under the Management Agreement after any
applicable expense limitations, plus reimbursable expenses of $2,029,000,
which represented 0.14% of KTFF's average daily net assets.
Keystone serves as the investment adviser to each of the Funds. As
compensation for its investment advisory and other services in respect of
each Fund, Keystone receives a fee which is 85% of the management fee
received by Keystone Management under the Management Agreements. For the
fiscal year ended November 30, 1994, the fee paid by Keystone Management to
Keystone in respect of KTET was $3,095,441. For the fiscal year ended
December 31, 1994, the fee paid by Keystone Management to Keystone in respect
of KTFF was $5,050,313.
These investment advisory and investment management fees are separate from
and do not include the costs of custody, transfer agency and other expenses
paid by each Fund. See "Other Significant Fees and Expenses" below.
Other Significant Fees and Expenses
In addition to the investment advisory and management fees described above,
the principal expenses of each Fund include, but are not limited to, (i)
expenses of its transfer agent, custodian and independent auditors; (ii)
expenses under its 12b-1 Plan; (iii) fees of its Independent Trustees; (iv)
fees payable to government agencies; (v) expenses of preparing, printing and
mailing Fund prospectuses,
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<PAGE>
notices, reports and proxy material; and (vi) certain extraordinary expenses.
In addition to such expenses, each Fund pays its brokerage commissions,
interest charges and taxes.
On the second page of each Fund's Prospectus is a Fee Table that
summarizes the costs and expenses associated with an investment in the Fund.
Expense Ratios
For the fiscal year ended November 30, 1994, KTET paid 1.65% of its
average daily net assets in expenses. For the fiscal year ended December 31,
1994, KTFF paid 1.55% of its average daily net assets in expenses.
At asset levels as of the close of fiscal 1994, the combination of KTET
and KTFF would reduce KTET's and KTFF's nondistribution expenses by
approximately 10 basis points and 2 basis points, respectively. Distribution
expenses of the combined fund will vary in accordance with sales activity.
See "Distribution Procedures and Payments" below.
Purchase and Redemption Procedures, Deferred Sales Charges and Exchange
Rights
Shares of each Fund are sold at net asset value. There are no sales
charges on purchases of Shares of the Funds at the time of purchase. However,
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 third calendar year after the
year of purchase. No deferred sales charge is imposed on amounts redeemed
thereafter or on shares purchased through reinvestment of dividends and
distributions. If imposed, the contingent deferred sales charge is deducted
from the redemption proceeds otherwise payable to the shareholder.
Shares of KTET and of KTFF may be purchased in exactly the same manner.
See "How to Buy Shares" in the accompanying KTFF Prospectus.
KTFF Shares received by KTET shareholders as a result of the
Reorganization will not be subject to a deferred sales charge.
No deferred sales charge will be imposed on KTFF Shares issued pursuant to
the Reorganization that replace KTET Shares. For purposes of any future
contingent deferred sales charge on KTFF Shares issued pursuant to the
Reorganization, the calendar year of the purchase of those KTFF Shares will
be assumed to be the year the KTFF Shares issued pursuant to the
Reorganization were originally purchased. Redemptions for both Funds may be
made by submitting a redemption request to KIRC or the shareholder's
broker-dealer. See "How to Redeem Shares" in the accompanying KTFF
Prospectus.
KTET Shares and KTFF Shares have the same exchange rights. Such Shares may
be exchanged for Shares of any of the other twelve funds in the Keystone
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<PAGE>
Fund Family, on the basis of their respective net asset values. See
"Shareholder Services" in the accompanying KTFF Prospectus.
Distribution Procedures and Payments
KTET and KTFF have adopted substantially similar 12b-1 Plans, pursuant to
which they incur certain distribution related expenses. Each 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. A NASD rule limits such annual expenditures to 1%,
of which 0.75% may be used to pay such distribution costs and 0.25% may be
used to pay shareholder service fees. The aggregate amount that each Fund may
pay for such distribution costs is limited to 6.25% of gross share sales
since the inception of the Fund's Distribution Plan plus interest at the
prime rate plus 1% on unpaid amounts thereof (less any contingent deferred
sales charges paid by shareholders to the Principal Underwriter).
Payments under each Fund's Distribution Plan are currently made to the
Principal Underwriter, (which may reallow all or part to others, such as
dealers), (1) as commissions for Fund shares sold, and (2) as shareholder
service fees in respect of shares maintained by the recipients outstanding on
each of 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 quarterly limitation referred to above. The Principal Underwriter
generally allows to brokers or others a commission equal to 3% of the price
paid to each 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.
After the Reorganization, it is anticipated that the commission that the
Principal Underwriter will pay brokers or others for Fund share sales will be
equal to 4% of the price paid to the Fund for each sale of Fund shares. The
shareholder service fee will remain the same.
Dividends and Distributions
Each shareholder of KTET who becomes a shareholder of KTFF will be entitled
to dividends and distributions of KTFF. Each Fund (i) declares dividends from
net investment income daily and distributes to its shareholders such
dividends monthly, and (ii) declares and distributes all net realized
long-term capital gains annually.
Distributions are payable in shares of the relevant 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. Unless
a KTET shareholder instructs or has instructed otherwise, any distributions
paid after the Effective Date on the KTFF Shares he receives in the
Reorganization will be made in the same
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<PAGE>
manner that the shareholder receives dividends and distributions on his KTET
Shares. After the Reorganization, shareholders may elect, at any time, to
change the manner in which their dividends and distributions are paid. See
"Dividends and Taxes" in the accompanying KTFF Prospectus.
Tax Consequences
In the opinion of Sullivan & Worcester, legal counsel to KTET, the
Reorganization will constitute a tax free reorganization pursuant to Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"). No gain or loss will be recognized by KTET or its
shareholders as a result of the Reorganization. The tax basis and holding
period of the KTFF Shares received by KTET shareholders will be the same as
the tax basis and holding period of the KTET Shares surrendered therefor. In
addition, the tax basis and holding period of the assets of KTET in the hands
of KTFF will be the same as the tax basis and holding period of such assets
in the hands of KTET prior to the Reorganization. See "The
Reorganization--Federal Income Tax Consequences."
PRINCIPAL RISK FACTORS
As discussed above in the synopsis, the investment objectives, policies
and strategies of KTET and KTFF do not differ materially. Accordingly, the
investment risks for both Funds are substantially the same. The principal
risk factor of investing in either KTET or KTFF is that the net asset value
upon which the value of Shares is based will fluctuate in response to changes
in economic conditions, interest rates and the market's perception of the
underlying portfolio securities of the Fund. Specifically, the market value
of fixed income securities may vary inversely to changes in prevailing
interest rates. In addition, the ability of each Fund to achieve its
investment objective is dependent upon the continuing ability of issuers of
municipal bonds held in the Fund's portfolio to meet their continuing
obligation to pay interest and principal when due. Furthermore, from time to
time, proposals have been introduced before Congress for the purpose of
restricting or eliminating the federal income tax exemption for interest on
municipal bonds. Similar proposals may be introduced in the future, which if
enacted could materially affect the availability of municipal bonds for
investment by the Funds and the value of each Fund's portfolio.
Both Funds invest in securities with similar maturities, and both Funds
use substantially identical procedures for the valuation of portfolio
securities. Both Funds may enter into repurchase agreements and reverse
repurchase agreements, firm commitment agreements for securities and
currencies, options transactions, currency and other financial futures
contracts and related options transactions for hedging purposes, and, in
furtherance of their investment objectives, certain other types of derivative
instruments, including structured securities. Both Funds may also invest in
obligations denominated in foreign currencies which are exempt from federal
income tax. Each of these investment techniques involve certain
12
<PAGE>
investment risks. Each Fund's Prospectus contains a discussion of the Fund's
investment risks in the section entitled "Risk Factors." See also the
"Additional Investment Information" section at the back of the KTFF
Prospectus.
THE REORGANIZATION
Reasons for the Proposed Transaction
The Board of Trustees of KTET, including all of the Fund's Independent
Trustees, has determined that the tax-free Reorganization would be in the
best interests of the Fund, would not dilute the interests of the Fund's
shareholders, and would not impose an unfair burden on the Fund.
The Board of Trustees has proposed the transaction in the interest of
providing a cost effective investment alternative for KTET shareholders. As
KTFF shareholders, KTET shareholders can continue to pursue the highest
possible current income, exempt from federal income taxes, while preserving
capital. Continuity of investment management as well as all other investor
services (including exchange privileges with the other funds in the Keystone
Fund Family) currently provided to KTET will be maintained.
The combination of the two Funds should permit KTET shareholders, as
shareholders of KTFF, to pursue the same investment objective in a larger
fund with the following resulting advantages (although no assurance can be
given that these benefits will be obtained):
1. Economies of scale--The proposed reorganization is expected to reduce
operating expenses for KTET. Investment management and custodial fees are
reduced as the asset base reaches certain levels, thus decreasing as assets
increase. Fixed expenses such as accounting, legal and printing costs will be
spread over a larger asset base resulting in per share expense reductions or
economies of scale.
As of October 16, 1995, KTET's net assets were approximately $685 Million
and KTFF's net assets were approximately $1.2 billion.
2. Increased investment opportunities--It is expected that the combined
Fund will be more easily and efficiently managed. A larger single asset base
reduces transaction costs, might result in reduced portfolio turnover and
provides the opportunity to obtain a wider variety of investments.
3. Facilitate marketing and distribution efforts--It is expected that the
combined Fund will facilitate marketing and distribution efforts with a view
toward increasing the asset base which in turn will benefit shareholders as
described in (1) and (2) above.
The Board of Trustees of KTET based their decision to recommend the
Reorganization on a number of factors, including the following:
1. projected expense ratios and information regarding fees and expenses of
KTET and KTFF;
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<PAGE>
2. the terms and conditions of the Reorganization and whether it would
result in dilution of the interests of KTET shareholders;
3. the compatibility of KTET, its investment objective, policies and
restrictions with those of KTFF;
4. the costs to KTET of the Reorganization;
5. the tax consequences to KTET and its shareholders resulting from the
Reorganization;
6. the availability to KTFF shareholders of shareholder services identical
to those available to KTET shareholders; and
7. the possible investment benefits to be gained from a single larger
fund.
Agreement on Transfer of Assets
The terms and conditions under which the Reorganization may be consummated
are set forth in the Reorganization Agreement. Significant provisions of the
Reorganization Agreement are summarized below. This summary, however, is
qualified in its entirety by reference to the Reorganization Agreement, a
copy of which is attached hereto as Exhibit A.
The Reorganization Agreement provides that all of the assets of KTET will
be transferred to KTFF in exchange for Shares of KTFF and the liabilities of
KTET will be assumed by KTFF on the Effective Date (the later of (i) receipt
of all necessary regulatory approvals, (ii) final adjournment of the meeting
of the shareholders of KTET at which the Reorganization Agreement will be
considered so long as the Reorganization Agreement is approved by the
shareholders, or (iii) such later date as the parties to the Reorganization
Agreement may mutually agree upon).
The number of full and fractional KTFF Shares to be delivered to KTET
shareholders will be determined on the basis of the relative net asset values
of KTFF and KTET as of the close of business on the New York Stock Exchange
on the Effective Date. The net asset value of a KTFF Share will be determined
in the manner set forth in KTFF's Prospectus, a copy of which accompanies
this Prospectus/Proxy Statement, except that such computation will be made to
the nearest thousandth of a cent. The valuation practices of KTFF are
described under "Pricing Shares" in KTFF's Prospectus. The assets and
liabilities of KTET will be valued in the same manner as that used with
respect to the valuation of the assets and liabilities of KTFF. The valuation
procedures of both Funds are substantially identical. The value of the Shares
of KTET will be computed to the nearest thousandth of a cent.
Under the Reorganization Agreement, (i) all of the assets and liabilities
of KTET will be exchanged for Shares of KTFF; (ii) KTFF Shares will be
distributed to the shareholders of KTET as of the close of business on the
Effective Date; and
14
<PAGE>
(iii) KTET will be liquidated. The distribution of KTFF Shares will be
accomplished by the establishment of open accounts on the records of KTFF in
the name of each shareholder of KTET representing the respective pro rata
number of Shares of KTFF due such shareholder. Fractional Shares of KTFF will
be carried to the third decimal place. After the Effective Date, KTFF Share
certificates will be issued only upon written request, and such requests must
be accompanied by any Share certificates issued for KTET Shares held by the
investor.
The Board of Trustees of KTET, including all of the Independent Trustees,
has determined that the interests of the existing shareholders of KTET will
not be diluted as a result of the Reorganization, and that the Reorganization
is in the best interests of KTET shareholders. The Board of Trustees of KTFF,
including all of the Independent Trustees, has made the same determinations
with respect to the interests of the existing shareholders of KTFF.
The consummation of the Reorganization is subject to a number of
conditions set forth in the Reorganization Agreement. The Reorganization
Agreement may be terminated and the Reorganization abandoned at any time,
before or after approval by the shareholders of KTET, prior to the Effective
Date by either KTET or KTFF.
KTFF will pay the expenses (consisting primarily of legal, accounting,
custodian and transfer agents fees, as well as printing and mailing and other
expenses in connection with the registration of KTFF Shares under the 1933
Act) incurred by it in connection with the Reorganization. KTET will pay the
expenses of printing and mailing this Prospectus/Proxy Statement and other
material to KTET shareholders and conducting proxy solicitations.
Description of the Securities to be Issued
KTFF is an open-end, diversified management investment company, organized
as a Massachusetts business trust. KTFF currently issues one class of shares,
which participate equally in dividends and distributions and have equal
voting, liquidation and other rights, including rights of appraisal. When
issued and paid for, the shares will be fully paid and nonassessable by the
Fund. After the Reorganization, KTFF will publicly offer and issue this
class. KTFF Shares may be exchanged for Shares of any of the other twelve
funds in the Keystone Fund Family, but will have no other preference,
conversion, exchange or preemptive rights. Shares are redeemable,
transferable and freely assignable as collateral. There are no sinking fund
provisions.
Under Massachusetts law, the Fund is not required to hold annual meetings.
The Fund will hold special meetings from time to time as required under its
Declaration of Trust, By-Laws and the 1940 Act. A special meeting of
shareholders will be held when 10% of the outstanding shares request a
meeting for the purpose of removing a Trustee.
Under Massachusetts law it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. The Fund's Declaration of Trust
pro-
15
<PAGE>
vides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
Important financial information relating to KTFF is contained in KTFF's
Financial Highlights, attached hereto as Exhibit B. Important information
about KTFF is also contained in Management's Discussion of KTFF's
Performance, attached hereto as Exhibit C. This financial information appears
in KTFF's most recent Annual Report.
Federal Income Tax Consequences
The completion of the Reorganization is contingent upon the receipt by
KTET of an opinion from Sullivan & Worcester that, on the basis of the
existing provisions of the Internal Revenue Code, Treasury regulations,
current administrative rules, and court decisions, for federal income tax
purposes: (i) no gain or loss will be recognized by KTET or KTFF as a result
of the Reorganization; (ii) the basis of the assets of KTET in the hands of
KTFF will be the same as the basis of those assets in the hands of KTET
immediately prior to the Reorganization; (iii) the holding period of KTET's
assets in the hands of KTFF will include the period during which the assets
were held by KTET; (iv) no gain or loss will be recognized by shareholders of
KTET as a result of the Reorganization; (v) the basis of KTFF Shares received
by KTET shareholders will be the same as the basis of KTET Shares surrendered
therefor; and (vi) the holding period of KTFF Shares received by KTET
shareholders will include the holding period during which KTET Shares
surrendered in exchange therefor were held, provided that such Shares were
held as a capital asset in the hands of KTET shareholders on the date of the
Reorganization.
As of October 16, 1995, KTET had available, for federal income tax
purposes, unused capital loss carryforwards of $15,117,214 expiring in 2002.
As a result of the Reorganization, the unused capital loss carryforwards will
become tax attributes of KTFF, and the utilization of the carryforwards will
benefit all the shareholders of KTFF. If the Reorganization is consummated,
KTFF will be constrained, however, in the extent to which it can use the
capital loss carryforwards of KTET because of limitations imposed by the
Internal Revenue Code upon the occurrence of an "ownership change". KTFF
should be able to use in each year from 1996 through 2002, capital loss
carryforwards in an amount equal to the value of KTET on the date of the
Reorganization multiplied by a long-term tax-exempt rate calculated by the
Internal Revenue Service (currently about 6%). If the amount of such losses
is not used in one year, it may be added to the amount available for use in
the next year.
KTET shareholders should consult their tax advisers regarding the effect,
if any, of the proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion relates only to the federal
income tax consequences of the Reorganization, shareholders of KTET should
also consult their tax advisers as to the state and local tax consequences,
if any, of the Reorganization.
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<PAGE>
Capitalization
The following table shows the capitalization of KTFF and KTET as of
October 24, 1995 and on a pro forma basis as of that date after giving effect
to the proposed acquisition of assets of KTET at the then net asset value per
Share:
Pro Forma
KTFF KTET Combined
---------------- ---------------- ----------------
Total Net Assets $1,195,551,085 $680,003,189 $1,875,554,273
Net Asset Value per
Share $7.68 $10.69 $7.68
Total Shares
Outstanding $155,717,807.854 $63,593,569.799 $244,260,216.167
INFORMATION ABOUT THE FUNDS
KEYSTONE TAX FREE FUND
Information about KTFF is included in its Prospectus dated April 28, 1995,
which is incorporated by reference herein and a copy of which accompanies
this Prospectus/Proxy Statement. Information about KTFF is also included in
its most recent Annual Report and Semi-Annual Report, each of which is
incorporated by reference herein. Additional information about KTFF is
included in its SAI dated April 28, 1995, and in the SAI dated December 20,
1995, relating to the Reorganization, each of which is incorporated by
reference herein. Copies of KTFF's SAIs and Annual and Semi-Annual Reports
may be obtained without charge by writing to KTFF at the address listed at
the front of this Prospectus/Proxy Statement or by calling KTFF at (800)
343-2898 or (617) 621-6100.
KEYSTONE TAX EXEMPT TRUST
Information about KTET is included in its Prospectus and SAI each dated
March 31, 1995, each of which is incorporated by reference herein. Copies of
KTET's Prospectus and SAI may be obtained without charge by writing to KTET
at the address listed at the front of this Prospectus/Proxy Statement or by
calling KTET at (800) 343-2898 or (617) 621-6100.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Both KTFF and KTET are subject to the informational requirements of the
1934 Act and the 1940 Act, and, in accordance therewith, file reports, proxy
material and other information with the Commission.
Such reports, proxy material and other information can be inspected and
copied at the Public Reference Facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549 at prescribed rates.
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<PAGE>
Supplementary Solicitation
Supplementary solicitation will generally be made by mail, telephone,
facsimile, telegram or in person by officers of KTFF and KTET and by officers
or employees of KIRC, Keystone, Keystone Investments, the Principal
Underwriter or any of their subsidiaries.
The Fund may also arrange to have votes recorded by telephone. The
telephone voting procedure is designated to authenticate shareholders'
identities, to allow shareholders to authorize the voting of their shares in
accordance with their instructions and to confirm that their instructions
have been properly recorded. The Fund has been advised by counsel that these
procedures are consistent with the requirements of applicable law. If these
procedures were subject to a successful legal challenge, such votes would not
be counted at the meeting. The Fund is unaware of any such challenge at this
time. Shareholders voting by telephone will be called at the phone numbers
KIRC has in its records for accounts, will be asked to verify certain
criteria specific to their accounts intended to ensure the identity of the
shareholder, and will be given an opportunity to authorize proxies to vote
their shares at the meeting in accordance with their instructions. To ensure
that shareholders' instructions have been recorded correctly, shareholders
will receive a confirmation of their instructions in the mail. A toll-free
number will be available in case the information contained in the
confirmation is incorrect. Although shareholders' votes may be taken by
telephone, each shareholder will receive a copy of this Prospectus/Proxy
Statement and may vote by mail using the enclosed proxy card.
Substantial Shareholders
As of October 31, 1995, to the best knowledge of KTFF, the following
shareholder owned of record 5% or more of the outstanding Shares of KTFF:
Percentage
Shareholder Interest
- ------------------------------------ ------------------
Merrill Lynch Pierce Fenner & Smith 17.249%
Attn: Book Entry
4800 Deer Lake Dr. E, 3rd FL
Jacksonville, FL 32246-6484
On that date, the Trustees and officers of KTFF, as a group, beneficially
owned less than 1% of the outstanding Shares of KTFF.
As of October 31, 1995, to the best knowledge of KTET, the following
shareholders owned of record 5% or more of the outstanding Shares of KTET.
Percentage
Shareholder Interest
- ------------------------------------ ------------------
Merrill Lynch Pierce Fenner & Smith 8.509%
Attn: Book Entry
4800 Deer Lake Dr. E, 3rd FL
Jacksonville, FL 32246-6484
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<PAGE>
On that date, the Trustees and officers of KTET, as a group, beneficially
owned less than 1% of the outstanding Shares of KTET.
Interest of Certain Persons
The following entities receive payments from KTFF for services rendered
pursuant to contractual arrangements with KTFF: Keystone Management, as
investment manager, receives payments for its investment management services,
as described in the section above entitled "Investment Advisory and
Management Fees"; Keystone, as investment adviser, receives payments for its
investment advisory services, also as described in the section above entitled
"Investment Advisory and Management Fees"; the Principal Underwriter receives
payments pursuant to the 12b-1 Plan described in the section above entitled
"Distribution Procedures and Payments" as well as certain payments in respect
of contingent deferred sales charges; and KIRC is compensated for acting as
the transfer and dividend disbursing agent.
January 2, 1996
19
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered
into as of October 16, 1995, by and between Keystone Tax Free Fund ("KTFF"),
a Massachusetts business trust, and Keystone Tax Exempt Trust ("KTET"), a
Massachusetts business trust (each, a "Fund," and together, the "Funds"),
each Fund having its principal place of business at 200 Berkeley Street,
Boston, Massachusetts 02116.
WITNESSETH:
WHEREAS, each of KTFF and KTET is a diversified, open-end management
company registered under the Investment Company Act of 1940 (the "1940 Act")
and issues shares of beneficial interest;
WHEREAS, KTFF and KTET have agreed, subject to the receipt of the
approvals described in Section 3 below, to transfer all of the assets of KTET
to KTFF in exchange for shares of KTFF with KTFF assuming the liabilities of
KTET to the extent provided herein;
WHEREAS, following the reorganization, shares of KTFF will be distributed
to the shareholders of KTET in liquidation of KTET, and KTET will be
terminated;
WHEREAS, the reorganization described in this Agreement is intended to be
a reorganization within the meaning of Section 368 (a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the respective Boards of Trustees of KTET and KTFF, including
each Fund's Independent Trustees, have determined that participating in the
transactions contemplated by this Agreement is in the best interests of the
Funds;
NOW THEREFORE, in consideration of the premises set forth above and the
mutual covenants and agreements set forth below, the parties hereto agree as
follows:
SECTION 1.
EXCHANGE OF ASSETS FOR SHARES
1.1 Terms of Exchange.
(a) Upon the Effective Date (as defined in Subsection 1.2 below), KTET
will sell, transfer, and deliver to KTFF good and marketable title to all
of the then existing assets of KTET free and clear of all liens, claims,
charges, options, and encumbrances.
A-1
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(b) KTFF will assume and pay, to the extent that they exist on the
Effective Date, all the liabilities of KTET, whether absolute, accrued,
contingent, or otherwise.
(c) KTFF will deliver to KTET that number of full and fractional shares
of KTFF having an aggregate net asset value equal to the aggregate net
asset value of KTET, all determined as provided in Section 1.1(d) below.
(d) The following provisions shall apply to the determination of the
number of shares of KTFF to be delivered:
(i) The net asset value per share of KTFF shall be determined as of
the close of business on the New York Stock Exchange on the Effective
Date.
(ii) The net value of the assets and liabilities of KTET shall be
determined as of the close of business on the New York Stock Exchange on
the Effective Date.
(iii) The net asset value per share of KTET shall be determined as of
the close of business on the New York Stock Exchange on the Effective
Date.
(iv) The net asset value of KTFF shall be computed in the manner set
forth in KTFF's current Registration Statement under the Securities Act
of 1933 ("1933 Act") and the 1940 Act, except that such computation
shall be made to the nearest one-hundredth of a cent.
(v) The assets and liabilities of KTET shall be valued in the same
manner as that used with respect to the valuation of the assets and
liabilities of KTFF in the computation of the net asset value per share
of KTFF.
(vi) The net asset value per share of KTET shall be computed by
dividing the net value of the assets and liabilities of KTET, determined
as provided in (ii) and (v) above, by the number of shares of KTET
outstanding as of the close of business on the New York Stock Exchange
(the "Exchange") on the Effective Date; and such computation shall be
made to the nearest one-hundredth of a cent.
(vii) The net asset value per share of KTET determined as provided in
(vi) above shall be divided by the net asset value per share of KTFF
determined as provided in (i) and (iv) above; and the result of such
division shall be calculated to six decimal places (the "Conversion
Ratio").
(viii) The number of shares of KTET outstanding at the close of
business on the New York Stock Exchange on the Effective Date shall be
multiplied by the Conversion Ratio to determine the number of shares of
KTFF to be delivered.
A-2
<PAGE>
(ix) KPMG Peat Marwick LLP shall provide a written report to each of
KTFF and KTET on procedures they will have performed to determine the
accuracy of the computations required by this Section 1.1(d).
1.2 Closing and Effective Date. The closing shall be held at the offices of
Keystone Investment Management Company, investment adviser to KTFF, located at
200 Berkeley Street, Boston, Massachusetts 02116, and shall occur on the later
of (a) receipt of all necessary regulatory approvals; (b) the final
adjournment of the meeting of the shareholders of KTET at which this Agreement
will be considered so long as this Agreement and the transaction set forth
herein are approved by the shareholders of KTET at the meeting; or (c) such
later date as the parties may mutually agree (the "Effective Date").
1.3 KTET Share Sales and Transfers. KTET shall not issue, sell, or transfer
any of its shares after the Effective Date.
1.4 Transfer Books; Redemptions. The stock transfer books of KTET will be
permanently closed as of the close of business on the Effective Date and only
redemption requests relating to KTET received in proper form on or prior to
the close of trading on the New York Stock Exchange on the Effective Date
shall be accepted by KTET. Redemption requests relating to KTET thereafter
received shall be deemed to be redemption requests for shares of KTFF to be
distributed to the shareholders of KTET under this Agreement.
1.5 Treasury Shares. Any shares of KTET held in the treasury of KTET
immediately prior to the Effective Date shall be cancelled upon the Effective
Date without conversion into shares of KTFF.
1.6 Transfer Taxes. Any transfer taxes payable upon issuance of shares of
KTFF in a name other than the registered shareholder of KTET entitled to
receive the same shall be paid by the person to whom such shares are to be
issued as a condition of such transfer.
1.7 Contingent Deferred Sales Charge. KTET imposes a deferred sales charge
at rates ranging from a maximum of 4% of amounts redeemed during the same
calendar year of purchase to 1% of amounts redeemed during the third calendar
year after the year of purchase. No contingent deferred sales charge is
imposed on amounts redeemed thereafter. If imposed, the contingent deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the
contingent deferred sales charge is deducted from the redemption proceeds
otherwise payable to the shareholder. The shareholders of KTET may be subject
to such deferred sales charge with respect to those shares of KTFF received by
them under this Agreement in exchange for their shares of KTET if their shares
of KTET were subject to such deferred sales charge.
A-3
<PAGE>
SECTION 2.
LIQUIDATION OF KEYSTONE TAX EXEMPT TRUST
2.1 Plan of Liquidation. As soon as practicable after the Effective Date,
KTET will distribute pro rata to its shareholders of record as of the close
of business on the Effective Date, KTFF shares received by KTET pursuant to
Section 1 above. KTFF will establish an open account on its share records in
the name of each shareholder of KTET representing the respective number of
shares of KTFF due such shareholder. Fractional KTFF shares will be carried
to the third decimal place. No certificates representing KTFF shares will be
issued. Simultaneously with such crediting of KTFF shares to the shareholders
of record of KTET, the shares of KTET held by such shareholders shall be
cancelled.
2.2 Further Actions to Complete Dissolution. As soon as practicable after
the Effective Date, KTET shall take, in accordance with its Declaration of
Trust, Massachusetts law, and the rules and regulations of the Securities and
Exchange Commission (the "Commission"), all such other steps as shall be
necessary and proper to effect a complete liquidation and dissolution of
KTET.
SECTION 3.
APPROVAL OF TRANSACTIONS
3.1 Trustees of KTFF. A duly constituted meeting of the Board of Trustees
of KTFF was held on December 14, 1994, at which meeting this Agreement and
the transactions set forth herein were duly approved by the Trustees of KTFF.
3.2 Trustees of KTET. A duly constituted meeting of the Trustees of KTET
was held on December 14, 1994, at which meeting this Agreement and the
transactions set forth herein were duly approved by the Trustees of KTET,
subject to the approval of the shareholders of KTET as set forth in
Subsection 3.3 below.
3.3 Approval by Shareholders of KTET. A meeting of the shareholders of
KTET shall be called and held for the purpose of having the KTET shareholders
act upon this Agreement and the transactions set forth herein. KTFF shall
furnish to KTET such data and information relating to KTFF as shall be
reasonably requested by the Trustees and officers of KTET for inclusion in
the information to be furnished to the shareholders in connection with such
meeting.
SECTION 4.
REPRESENTATIONS AND WARRANTIES
OF KEYSTONE TAX FREE FUND
4.1 Organization, Existence, etc. KTFF is a business trust, duly
organized, validly existing, and in good standing under the laws of The
Commonwealth of Massachusetts and has the requisite power to carry on its
business as it is now being conducted. KTFF has all necessary federal, state,
and local authorization to own all of its properties and assets and to carry
on its business as now being conducted.
A-4
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4.2 Registration as Investment Company. KTFF is registered under the 1940
Act as an open-end, diversified investment company of the management type, and
such registration has not been revoked or rescinded and is in full force and
effect.
4.3 Financial Statements. The financial statements of KTFF for the fiscal
year ended December 31, 1994 and the fiscal period ended June 30, 1995,
previously delivered to KTET, fairly present the financial position of KTFF
as of December 31, 1994 and June 30, 1995, respectively, and the results of
its operations and changes in its net assets for the year and period,
respectively, then ended.
4.4 Shares to be Issued. The shares of KTFF to be issued in exchange for
the assets of KTET have been duly authorized and when delivered pursuant to
this Agreement will be validly issued, fully paid, and nonassessable by KTFF.
4.5 Authority Relative to this Agreement. KTFF has the power to enter into
this Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated herein have been duly authorized by the Board of Trustees of
KTFF and no other proceedings by KTFF are necessary to authorize KTFF's
officers to effectuate this Agreement and the transactions contemplated
herein. KTFF is not a party to, or obligated under, any charter, by-law,
indenture, or contract provision or any other commitment or obligation or
subject to any order or decree that would be violated by its executing and
carrying out this Agreement.
4.6 Liabilities. There are no liabilities of KTFF, whether or not
determined or determinable, other than liabilities disclosed or provided for
in its financial statements for the fiscal year ended December 31, 1994 and
for the fiscal period ended June 30, 1995, previously delivered as set forth
in Subsection 4.3, and liabilities incurred in the ordinary course of
business subsequent to June 30, 1995 or otherwise previously disclosed to
KTET, none of which has been materially adverse to the business, assets, or
results of operations of KTFF.
4.7 Litigation. There are no claims, actions, suits, or proceedings
pending or, to the knowledge of KTFF, threatened that would materially
adversely affect KTFF or its assets or business or prevent or hinder
consummation of the transactions contemplated hereby.
4.8 Contracts. Except for contracts and agreements previously disclosed to
KTET, under which no default exists, KTFF is not a party to or subject to any
material contract, debt, instrument, plan, lease, franchise, license, or
permit of any kind or nature whatsoever.
4.9 Taxes. The federal income tax returns of KTFF have been filed for all
taxable years prior to and including December 31, 1994, and all taxes payable
pursuant to such returns have been paid. KTFF has qualified as a regulated
investment company under the Code in respect to each taxable year of KTFF
since commencement of its operations.
A-5
<PAGE>
4.10 Registration/Proxy Statement. KTFF shall file with the Commission a
Registration/Proxy Statement (the "Registration/Proxy Statement") under the
1933 Act relating to the shares of KTFF issuable hereunder. At the time the
Registration/Proxy Statement becomes effective, the Registration/Proxy
Statement (a) will comply in all material respects with the provisions of the
1933 Act and the regulations of the Commission thereunder, and (b) will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading. In addition, at the time the Registration/Proxy
Statement becomes effective, at the time of the meeting of the shareholders
of KTET referred to in Subsection 3.3, and on the Effective Date, the proxy
statement (the "Proxy Statement"), the prospectus (the "Prospectus"), and
statement of additional information (the "Statement of Additional
Information") included in the Registration/Proxy Statement, as amended or
supplemented by any amendments or supplements filed by KTFF, will not contain
an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that none of
the representations and warranties in this Subsection shall apply to
statements in or omissions from the Registration/Proxy Statement or Proxy
Statement, Prospectus, and Statement of Additional Information made in
reliance upon and in conformity with information furnished by KTET for use in
the Registration/Proxy Statement, as provided in Subsection 5.10.
4.11 Capitalization. On September 29, 1995, 157,690,483 shares of KTFF
were duly and validly issued and outstanding, fully-paid and non-assessable
by KTFF. KTFF does not have any outstanding options, warrants, or other
rights to subscribe for or purchase any of its shares nor is there
outstanding any security convertible into any of its shares.
4.12 Prospectus. The prospectus and statement of additional information of
KTFF each dated April 28, 1995 ("KTFF Prospectus"), which have previously
been furnished to KTET, did not contain as of such date and do not as of this
date contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
SECTION 5.
REPRESENTATIONS AND WARRANTIES
OF KEYSTONE TAX EXEMPT TRUST
5.1 Organization, Existence etc. KTET is a business trust, duly organized,
validly existing, and in good standing under the laws of The Commonwealth of
Massachusetts and has the requisite power to carry on its business as it is
now being conducted. KTET has all necessary federal, state, and local
authorization to own all of its properties and assets and to carry on its
business as now being conducted.
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<PAGE>
5.2 Registration as Investment Company. KTET is registered under the 1940
Act as an open-end, diversified investment company of the management type and
such registration has not been revoked or rescinded and is in full force and
effect.
5.3 Financial Statements. The financial statements of KTET for the year
ended November 30, 1994 and the fiscal period ended May 31, 1995, previously
delivered to KTFF, fairly present the financial position of KTET as of
November 30, 1994 and May 31, 1995, respectively, and the results of its
operations and changes in its net assets for the year and period,
respectively, then ended.
5.4 Authority Relative to this Agreement. KTET has the requisite power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated herein have been duly authorized by the Board of
Trustees of KTET, and, except for the requisite approval by the shareholders
of KTET, no other proceedings on behalf of KTET are necessary to authorize
KTET's officers to effectuate this Agreement and the transactions
contemplated herein. KTET is not a party to or obligated under any charter,
by-law, indenture, or contract provisions or any other commitment or
obligation or subject to any order or decree that would be violated by its
executing and carrying out this Agreement.
5.5 Liabilities. There are no liabilities of KTET, whether or not
determined or determinable, other than liabilities disclosed or provided for
in the financial statements of KTET with respect to the year ended November
30, 1994 and the fiscal period ended May 31, 1995, previously delivered as
set forth in Subsection 5.3, and liabilities incurred in the ordinary course
of business subsequent to May 31, 1995 or otherwise previously disclosed to
KTFF, none of which has been materially adverse to the business assets or
results of operations of KTET.
5.6 Litigation. There are no claims, actions, suits or proceedings pending
or, to the knowledge of KTET, threatened that would materially adversely
affect KTET or its assets or business or prevent or hinder consummation of
the transactions contemplated hereby.
5.7 Contracts. Except for contracts and agreements previously disclosed to
KTFF, under which no default exists (all of which will be terminated as of
the Effective Date), KTET is not a party to or subject to any material
contract, debt, instrument, plan, lease, franchise, license, or permit of any
kind or nature whatsoever.
5.8 Portfolio Securities. All securities and other assets held as
investments by KTET as of the Effective Date will be owned by KTET free and
clear of any liens, claims, charges, options, and encumbrances, except as
otherwise indicated in a schedule to be delivered to KTFF prior to the
Effective Date. The assets of KTET do not include any assets not permitted
under the KTET Prospectus (as hereinafter defined). Except as disclosed to
KTFF prior to the Effective Date, none
A-7
<PAGE>
of such securities or other assets is, or, after the completion of the
transactions contemplated by this Agreement, will be subject to any
restrictions, legal or contractual, on the disposition thereof (including
restrictions as to the public offering or sale thereof under the 1933 Act),
and all such securities and other assets are or will be readily marketable.
5.9 Taxes. The federal income tax returns of KTET have been filed for all
taxable years prior to and including November 30, 1994, and all taxes payable
pursuant to such returns have been paid. KTET has qualified as a regulated
investment company under the Code in respect to each taxable year of KTET
since commencement of its operations.
5.10 Registration/Proxy Statement. In connection with the Registration/
Proxy Statement, KTET will cooperate with KTFF in the preparation of the
proxy statement portion of the Registration/Proxy Statement, and will furnish
to KTFF the information relating to KTET required by the 1933 Act and the
regulations thereunder to be set forth in the Registration/Proxy Statement
(including the Proxy Statement, Prospectus, and Statement of Additional
Information). At the time the Registration/Proxy Statement becomes effective,
the Registration/ Proxy Statement, insofar as it relates to KTET (a) will
comply in all material respects with the provisions of the 1933 Act and the
regulations thereunder, and (b) will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading. In addition, at
the time the Registration/Proxy Statement becomes effective, at the time of
the meeting of the shareholders of KTET referred to in Subsection 3.3, and on
the Effective Date, the Proxy Statement, the Prospectus, and Statement of
Additional Information, as amended or supplemented by any amendments or
supplements filed by KTFF insofar as they relate to KTET, will not contain an
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
5.11 Capitalization. On September 29, 1995, 64,028,095 shares of KTET were
duly and validly issued and outstanding, fully-paid, and non-assessable by
KTET. KTET does not have any outstanding options, warrants, or other rights
to subscribe for or purchase any shares of KTET, nor is there outstanding any
security convertible into any shares of KTET.
5.12 Prospectus. The prospectus and statement of additional information of
KTET each dated March 31, 1995 ("KTET Prospectus"), which have previously
been furnished to KTFF, did not contain as of such date and do not as of this
date contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
A-8
<PAGE>
SECTION 6.
CONDITIONS TO OBLIGATIONS
OF KEYSTONE TAX EXEMPT TRUST
The obligations of KTET hereunder with respect to the consummation of the
exchange of assets of KTET for shares of KTFF are subject to the satisfaction
of the conditions set forth below in this Section.
6.1 Shareholder Approval. This Agreement and the transactions set forth
herein with respect to KTET shall have been approved by the affirmative vote
of the holders of a majority (as defined in the 1940 Act) of the outstanding
voting shares of KTET.
6.2 Representations, Warranties and Agreements. KTFF shall have complied
with each of its agreements contained herein, each of the representations and
warranties of KTFF contained herein shall be true in all material respects as
of the Effective Date, and, except as otherwise indicated in any financial
statements of KTFF audited or certified by the Treasurer of KTFF, which may
be delivered to KTET on or prior to the last business day preceding the
Effective Date, as of the Effective Date, there shall have been no material
adverse change in the financial condition, results of operations, business,
properties or assets of KTFF since June 30, 1995. KTET shall have received a
certificate of the President of KTFF satisfactory in form and substance to
KTET so stating; provided, however, that a decline in net asset value shall
not constitute a material adverse change.
6.3 Regulatory Approval. The Registration/Proxy Statement shall have been
declared effective by the Commission and no stop order under the 1933 Act
pertaining thereto shall have been issued, and all approvals, registrations,
and exemptions under federal and state laws considered to be necessary shall
have been obtained.
6.4 Dividends. KTFF will declare to its shareholders of record on or prior
to the Effective Date a dividend or dividends, which, together with all
previous such dividends, shall have the effect of distributing to such
shareholders as of the Effective Date, that portion of KTFF's investment
company taxable income (computed without regard to any deduction for
dividends paid) and that portion of KTFF's net realized capital gains which
would have the effect of materially diluting the value of shares held by
shareholders of either fund.
6.5 Opinion of Counsel. KTET shall have received the opinion of Rosemary
D. Van Antwerp, General Counsel of Keystone Custodian Funds, Inc., dated the
Effective Date, addressed to and in form and substance satisfactory to KTET,
to the effect that (a) KTFF is a business trust duly organized and existing
and in good standing under the laws of The Commonwealth of Massachusetts; (b)
KTFF is an open-end, diversified investment company of the management type
registered under the 1940 Act; (c) this Agreement, the transactions provided
for herein and the execution of this Agreement have been duly authorized and
approved by all
A-9
<PAGE>
requisite action of KTFF, and this Agreement has been duly executed and
delivered by KTFF and is a valid and binding obligation of KTFF; (d) the
Registration/Proxy Statement has been declared effective by the Commission
and no stop order under the 1933 Act pertaining thereto has been issued, and
all approvals, registrations and exemptions under federal and state laws
considered to be necessary shall have been obtained; and (e) the shares of
KTFF to be issued in exchange for the assets of KTET shall have been duly
authorized and upon issuance thereof in accordance with this Agreement will
be validly issued, fully paid and nonassessable.
6.6 (a) Secretary's Certificate. KTET shall have received copies of the
resolutions adopted by the Board of Trustees of KTFF authorizing the
execution of this Agreement by KTFF and the transactions contemplated hereby,
certified by the Secretary or an Assistant Secretary of KTFF.
(b) KTET shall have received a certificate of the Secretary or an
Assistant Secretary of KTFF as to the signatures and incumbency of its
officers who executed this Agreement on behalf of KTFF and any other
documents delivered in connection with the transactions contemplated
hereby on behalf of KTFF.
6.7 Treasurer's Certificate. KTFF shall have furnished to KTET a statement
of KTFF's assets and liabilities with values determined as provided in
Section 1.1(d) of this Agreement, together with a list of the respective tax
cost of the assets certified by KTFF's Treasurer.
6.8 (a) Officer's Certificate. KTET shall have received a certificate of an
appropriate officer of KTFF as to the fulfillment of all agreements and
conditions on its part to be fulfilled hereunder on or prior to the Effective
Date, and to the effect that the representations and warranties of KTFF are
true and correct in all material respects at and as of the Effective Date as
if made at and as of such date.
(b) KTET shall have received a certificate of an appropriate officer of
KTFF that (i) material relating to KTFF included in the Proxy Statement
and in the KTFF Prospectus that accompanied such Proxy Statement, taken
together, is complete and correct and contained, as of the date of the
Proxy Statement and as of the Effective Date, no untrue statement of a
material fact and omitted no statement of a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading; (ii) the Registration/Proxy Statement insofar as it relates
to KTFF complied otherwise with the regulations of the Commission
applicable to the solicitation of proxies by registered investment
companies; and (iii) KTFF's Prospectus and Statement of Additional
Information dated April 28, 1995 complied with the requirements of the
1933 Act and the rules and regulations of the Commission thereunder.
6.9 Opinion of Tax Counsel. KTET shall have received an opinion of
Sullivan & Worcester that for federal income tax purposes (a) no gain or loss
will
A-10
<PAGE>
be recognized by KTET or KTFF upon receipt by KTFF of the assets transferred
pursuant to this Agreement; (b) the basis to KTFF of the assets will be the
same as the basis of the assets in the hands of KTET immediately before the
exchange; and (c) KTFF's holding periods with respect to the assets will
include the respective periods for which the assets were held by KTET.
6.10 KPMG Peat Marwick LLP Letter. KTET shall have received a letter of
KPMG Peat Marwick LLP reporting on procedures performed by them to determine
the accuracy of the computations required by Section 1.1(d) above.
SECTION 7.
CONDITIONS TO OBLIGATIONS OF KEYSTONE TAX FREE FUND.
The obligations of KTFF hereunder with respect to the consummation of the
exchange of its shares for the assets and liabilities of KTET are subject to
the satisfaction of the conditions set forth below in this Section.
7.1 Shareholder Approval. This Agreement and the transactions set forth
herein with respect to KTET shall have been approved by the affirmative vote
of the holders of a majority (as defined in the Act) of the outstanding
voting shares of KTET.
7.2 Representations, Warranties and Agreements. KTET shall have complied
with each of its agreements contained herein, each of the representations and
warranties of KTET contained herein shall be true in all material respects as
of the Effective Date, and, except as otherwise indicated in any financial
statements of KTET audited or certified by the Treasurer of KTET, which may
be delivered to KTET on or prior to the last business day preceding the
Effective Date, as of the Effective Date, there shall have been no material
adverse change in the financial condition, results of operations, business,
properties, or assets of KTET since May 31, 1995. KTFF shall have received a
certificate of the President of KTET satisfactory in form and substance to
KTFF so stating; provided, however, that a decline in net asset value shall
not constitute a material adverse change.
7.3 Regulatory Approval. The Registration/Proxy Statement shall have been
declared effective by the Commission and no stop order under the 1933 Act
pertaining thereto shall have been issued, and all approvals, registrations,
and exemptions under federal and state laws considered to be necessary shall
have been obtained.
7.4 Dividends. KTET will declare to its shareholders of record on or prior
to the Effective Date a dividend or dividends, which, together with all
previous such dividends, shall have the effect of distributing to such
shareholders, as of the Effective Date, that portion of KTET's investment
company taxable income (computed without regard to any deduction for
dividends paid) and that portion of KTET's net realized capital gains which
would have the effect of materially diluting the value of shares held by
shareholders of either Fund.
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<PAGE>
7.5 Opinion of Counsel. KTFF shall have received the opinion of Rosemary D.
Van Antwerp, General Counsel of Keystone Custodian Funds, Inc., dated the
Effective Date, addressed to and in form and substance satisfactory to KTFF,
to the effect that (a) KTET is a business trust duly organized and existing
and in good standing under the laws of The Commonwealth of Massachusetts; (b)
KTET is an open-end diversified investment company of the management type
registered under the 1940 Act; (c) all approvals, registrations and exemptions
under federal and state laws considered to be necessary have been obtained;
and (d) this Agreement, the transactions provided for herein and the execution
of this Agreement have been duly authorized and approved by all requisite
action of KTET, and this Agreement has been duly executed and delivered by
KTET and is a valid and binding obligation of KTET.
7.6 (a) Secretary's Certificate. KTFF shall have received copies of the
resolutions adopted by the Board of Trustees of KTET and its shareholders
authorizing the execution of this Agreement on behalf of KTET and the
transactions contemplated hereby, each certified by the Secretary or an
Assistant Secretary of KTET.
(b) KTFF shall have received a certificate of the Secretary or an
Assistant Secretary of KTET as to the signatures and incumbency of its
officers who executed this Agreement on behalf of KTET and any other
documents delivered in connection with the transactions contemplated
thereby on behalf of KTET.
7.7 Treasurer's Certificate. KTET shall have furnished to KTFF a statement
of KTET's assets and liabilities with values determined as provided in
Section 1.1(d) of this Agreement, together with a list of the respective tax
cost of the assets certified by KTET's Treasurer.
7.8 (a) Officer's Certificate. KTFF shall have received a certificate of an
appropriate officer of KTET as to the fulfillment of all agreements and
conditions on its part to be fulfilled hereunder on or prior to the Effective
Date, and to the effect that the representations and warranties of KTET are
true and correct in all material respects at and as of the Effective Date as
if made at and as of such date.
(b) KTFF shall have received such other documents, including an opinion
of Rosemary D. Van Antwerp, General Counsel to Keystone Custodian Funds,
Inc., as KTFF may reasonably request to show fulfillment of the purposes
and conditions of this Agreement.
7.9 Opinion of Tax Counsel. KTFF shall have received an opinion of
Sullivan & Worcester that for federal income tax purposes (a) no gain or loss
will be recognized by KTET or KTFF upon receipt by KTFF of the assets
transferred pursuant to this Agreement; (b) the basis to KTFF of the assets
will be the same as the basis of the assets in the hands of KTET immediately
before the exchange; and (c) KTFF's holding periods with respect to the
assets will include the respective periods for which the assets were held by
KTET.
A-12
<PAGE>
7.10 KPMG Peat Marwick LLP Letter. KTFF shall have received a letter of
KPMG Peat Marwick LLP reporting on procedures performed by them to determine
the accuracy of the computations required by Section 1.1(d) above.
7.11 Other Acts. KTET will, from time to time, as and when requested by
KTFF, execute and deliver or cause to be executed and delivered, all such
assignments and other instruments, and will take and cause to be taken such
further action, as KTFF may deem necessary or desirable in order to vest in
and confirm to KTFF title to and possession of all the assets to be sold,
assigned, transferred, and delivered hereunder and otherwise to carry out the
intent and purpose of this Agreement.
SECTION 8.
AMENDMENT.
By agreement in writing authorized by the Trustees of KTET and KTFF, the
parties hereto may amend this Agreement at any time before or after approval
hereof by the shareholders of KTET; provided, however, that after such
approval by the shareholders, no amendment shall be made that substantially
changes the terms hereof.
SECTION 9.
TERMINATION OF AGREEMENT.
This Agreement may be terminated at any time prior to the Effective Date
by either party hereto by written notice given to the other party hereto,
without liability on the part of either party hereto or its respective
Trustees, officers, or shareholders. In addition, unless the term of this
Agreement is extended by mutual consent of the parties hereto, this Agreement
shall be terminated without liability on the part of any of the foregoing as
of the close of business on June 30, 1996, if the Effective Date is not on or
prior to such date.
SECTION 10.
WAIVER OF REPRESENTATIONS AND CONDITIONS.
At any time prior to the Effective Date, either of the parties may by
written instrument signed by it (a) waive any inaccuracies in the
representations and warranties made to it contained herein; and (b) waive
compliance with any of the covenants or conditions made for its benefit
contained herein; but after approval by the shareholders, no waiver shall be
made that substantially impacts the transactions contemplated hereby.
SECTION 11.
EXPENSES.
(a) KTFF will pay or cause to be paid all fees and expenses that it incurs
in connection with the transaction contemplated by this Agreement, including,
but not limited to, legal, accounting, custodian and transfer agents fees, as
well as
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<PAGE>
printing, mailing and other expenses in connection with the registration of
its shares under the 1933 Act, and additional audit fees.
(b) KTET will pay or cause to be paid (i) all the costs of printing and
mailing the Prospectus/Proxy Statement and other materials to KTET
shareholders and conducting proxy solicitations; and (ii) all other fees and
expenses that it incurs in connection with the transaction contemplated by
this Agreement, including, but not limited to, legal, accounting, custodian
and transfer agents fees, and additional audit fees.
SECTION 12.
INDEMNIFICATION.
(a) KTFF agrees to indemnify and hold harmless KTET, its Trustees and
officers against any and all claims, to the extent such claims are based
upon, arise out of or relate to any untruthful or inaccurate representation,
any omission of a material fact necessary to make a statement not misleading
or any breach of any warranty or any failure to perform or comply with any of
its covenants, conditions, or agreements set forth in this Agreement and any
obligation or liability of KTET specifically assumed by KTFF pursuant to
Section 1.1(a);
(b) KTET agrees to indemnify and hold harmless KTFF, its Trustees and
officers against any and all claims, to the extent such claims are based
upon, arise out of or relate to any untruthful or inaccurate representation,
any omission of a material fact necessary to make a statement not misleading
or any breach of any warranty or any failure to perform or comply with any of
its covenants, conditions or agreements set forth in this Agreement and any
obligation or liability of KTET (other than obligations and liabilities
specifically assumed by KTFF pursuant to the provisions of Section 1.1(a))
accruing on or prior to, or existing on the Effective Date or thereafter
accrued.
(c) Any claim for indemnification under paragraphs (a) and (b) based upon
any untruthful or inaccurate representation or any breach of any warranty
must be asserted within three years from the Effective Date. As used in this
section, the word "claim" means any and all liabilities, obligations, losses,
damages, deficiencies, demands, claims, penalties, assessments, judgments,
actions, proceedings, and suits of whatever kind and nature and all costs and
expenses (including, without limitation, reasonable attorneys' fees).
SECTION 13.
SURVIVAL OF REPRESENTATIONS, ETC.
The representations, warranties, covenants, and indemnifications provided
for in this Agreement shall survive the Effective Date.
SECTION 14.
GENERAL.
14.1 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed to have been delivered when deposited in the
United States
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<PAGE>
mail, postage pre-paid, registered or certified mail, return receipt
requested addressed to the parties as set forth below:
To KTET: Albert H. Elfner, III
Chairman, President and Chief Executive Officer
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
With a copy to: Rosemary D. Van Antwerp
Senior Vice President and Secretary
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
To KTFF: Albert H. Elfner, III
Chairman, President and Chief Executive Officer
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
With a copy to: Rosemary D. Van Antwerp
Senior Vice President and Secretary
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
The address of any of the foregoing may be changed by notice given to the
other party in accordance with this Subsection.
14.2 Recourse Limited. Each of KTET and KTFF is a Massachusetts business
trust established under a Declaration of Trust, as amended from time to time.
The obligations of each of KTET and KTFF are not personally binding upon, nor
shall recourse be had against the private property of any of its Trustees,
shareholders, officers, employees, or agents, but only property of KTET or
KTFF, as the case may be, shall be bound.
14.3 Entire Agreement. This Agreement supersedes all prior agreements
between the parties whether written or oral, is intended as a complete and
exclusive statement of the terms of the Agreement between the parties, and
may not be changed or terminated orally.
14.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more counterparts have been executed
on behalf of KTET and KTFF and delivered to each of the parties hereto.
14.5 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation
of this Agreement.
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<PAGE>
14.6 No Third Party Rights. Nothing in this Agreement expressed or implied,
is intended to confer upon any other person any rights or remedies under or by
reason of this Agreement. In addition, the parties hereto represent and
warrant that they have not employed any broker, finder, or intermediary in
connection with this transaction who might be entitled to a finder's fee or
other similar fee or commission.
14.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts.
[THIS REST OF THIS PAGE IS LEFT INTENTIONALLY BLANK.]
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<PAGE>
In Witness Whereof, the undersigned have executed this Agreement as of the
date first above written.
KEYSTONE TAX EXEMPT TRUST
ATTEST: By:
-------------------------------
Albert H. Elfner, III
Chief Executive Officer and
President
- --------------------------
KEYSTONE TAX FREE FUND
ATTEST: By:
-------------------------------
Albert H. Elfner, III
Chief Executive Officer and
President
- --------------------------
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<PAGE>
EXHIBIT B
FINANCIAL HIGHLIGHTS
Keystone Tax Free Fund
(For a Share outstanding throughout the year)
The following table contains important financial informatiaon 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.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1994 1993 1992 1991 1990(d)
================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value:
Beginning of year $ 8.12 $ 8.04 $ 8.07 $ 7.90 $ 8.06
- ----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Investment income--net 0.37 0.39 0.46 0.46 0.52
Net gains (losses) on investments (0.96) 0.48 0.12 0.36 (0.01)
Net commissions paid on fund share
sales(b) -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations (0.59) 0.87 0.58 0.82 0.51
- ----------------------------------------------------------------------------------------------------------------
Less distributions from(a):
Investment income--net (0.37) (0.39) (0.46) (0.46) (0.52)
In excess of investment income--net (0.06) (0.06) (0.04) (0.07) (0.03)
Realized capital gains--net -0- (0.33) (0.11) (0.12) (0.12)
In excess of realized capital gains--net -0- (0.01) -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------
Total distributions (0.43) (0.79) (0.61) (0.65) (0.67)
- ----------------------------------------------------------------------------------------------------------------
Net asset value:
End of year $ 7.10 $ 8.12 $ 8.04 $ 8.07 $ 7.90
================================================================================================================
Total return(c) (7.34%) 11.15% 7.55% 10.80% 6.66%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses 1.55% 1.66% 1.38% 1.75% 1.18%
Investment income--net 4.92% 4.72% 5.71% 5.78% 6.54%
Portfolio turnover rate 84% 76% 78% 77% 64%
Net assets, end of year (thousands) $1,197,727 $1,548,503 $1,453,199 $1,146,185 $1,060,826
================================================================================================================
</TABLE>
B-1
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1989 1988 1987 1986 1985
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value:
Beginning of year $ 8.18 $ 8.09 $ 8.85 $ 8.31 $ 7.57
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Investment income--net 0.57 0.55 0.56 0.68 0.70
Net gains (losses) on investments 0.15 0.30 (0.58) 0.88 0.81
Net commissions paid on fund share
sales(b) -0- -0- -0- (0.08) (0.07)
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations 0.72 0.85 (0.02) 1.48 1.44
- ---------------------------------------------------------------------------------------------------------------
Less distributions from(a):
Investment income--net (0.60) (0.63) (0.64) (0.68) (0.70)
In excess of investment income--net -0- -0- -0- -0- -0-
Realized capital gains--net (0.24) (0.13) (0.10) (0.26) -0-
In excess of realized capital gains--net -0- -0- -0- -0- -0-
- ---------------------------------------------------------------------------------------------------------------
Total distributions (0.84) (0.76) (0.74) (0.94) (0.70)
- ---------------------------------------------------------------------------------------------------------------
Net asset value: End of year $ 8.06 $ 8.18 $ 8.09 $ 8.85 $ 8.31
===============================================================================================================
Total return(c) 9.11% 10.89% (0.14)% 18.26% 19.96%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses 1.23% 1.79% 1.70% 0.83% 0.92%
Investment income--net 6.94% 6.74% 6.80% 7.79% 8.65%
Portfolio turnover rate 69% 61% 43% 44% 55%
Net assets, end of year (thousands) $901,912 $903,132 $894,768 $1,025,084 $863,720
===============================================================================================================
</TABLE>
(a) Effective January 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis
investment income--net (or tax basis net income on a temporary basis) are
presented as "Distributions in excess of investment income--net."
Similarly, capital gain distributions in excess of book basis capital
gains (or tax basis capital gains on a temporary basis) are presented as
"Distributions in excess of realized capital gains." For the fiscal years
ended December 31, 1992, 1991, and 1990, distributions in excess of book
basis net income were presented as "distribution from paid-in capital".
(b) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both
financial statement and tax purposes as capital charges. On June 11,
1987, the Securities and Exchange Commission adopted a rule which
required for financial statements for the periods ended on or after June
30, 1987, that net commissions paid under Rule 12b-1 be treated as
operating expenses rather than capital charges. Accordingly, beginning
with the year ended December 31, 1987, the Fund's financial statements
reflect 12b-1 Distribution Plan expenses (i.e., shareholder servicing
fees plus commissions paid net of deferred sales charges received by the
Fund) as a component of net investment income.
(c) Excluding contingent deferred sales charges.
(d) Calculation based on average shares outstanding.
B-2
<PAGE>
EXHIBIT C
MANAGEMENT'S DISCUSSION OF KTFF'S PERFORMANCE
Keystone Tax Free Fund
Seeks high current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Dear Shareholder:
We are pleased to report to you on activities in Keystone Tax Free Fund
for the fiscal year which ended December 31, 1994.
Performance
Your Fund returned -7.34% for the twelve-month period.
It is only during unusual periods that high quality municipal bond funds
produce negative returns, and the past year was one of those exceptions. Your
Fund's returns were symptomatic of the municipal bond market's performance.
When the increases in short-term interest rates began in February, the bond
market reacted very strongly with rates rising and prices falling. As is
frequently the case during economic expansions, we believe the bond markets
may have over-reacted to these rate increases.
1994 was a year of transition for municipal bond investors, as interest
rates rose from historic lows to higher, and we believe, more sustainable
levels. However, we think most of the market turbulence is now behind us, and
believe there are many good reasons to maintain an investment in a broadly
diversified portfolio of municipal bonds:
(bullet) Share prices should stabilize over the coming months, because the
likelihood of major rate increases is much lower than it was at
the beginning of 1994.
(bullet) Yields are much higher than they were a year ago. The yield on a
Aa-rated electric bond on December 31, 1994 was 6.85% compared to
5.60% one year earlier.(1)
(bullet) Municipal bonds represent a very attractive value with yields
currently equal to 87% of a comparable US Treasury bond.(2)
(bullet) Tax-free bonds remain one of the few investments exempt from
federal income taxes,(3) allowing you to keep more of what you
earn.
- ---------------------------
(1)The yields on the Lehman Aa Electric Municipal Bond Index as of December
31, 1993 and December 31,1994. Source: Lehman Brothers, Inc.
(2)Source: Keystone Custodian Funds, Inc. Based on a random selection of
30-year Aa-rated municipal bonds versus the yield on the 30-year US Treasury
bond on December 31, 1994.
(3)For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
C-1
<PAGE>
We have taken steps to carefully position your Fund's holdings in the
context of this higher interest rate environment. We are currently
emphasizing higher coupon bonds which tend to provide more attractive income
and better price stability than comparable discount bonds. Throughout the
period, we maintained our commitment to better quality municipal bonds. At
the end of the period, the portfolio continued to maintain a Aa average
rating, the second best, and its average maturity was about 19 years. While
municipal bonds will fluctuate in price, we believe that better quality bonds
can provide more consistent income and improved price stability than lower
quality municipal bonds over the long term.
Outlook
While rates may inch higher in the coming months, we anticipate an improved
environment for municipal bond investors in 1995. The combination of lower
bond prices and higher yields should create more positive conditions for
investors seeking tax-free income. If inflation remains moderate as expected,
real after-tax returns are likely to be quite attractive.
We encourage you to maintain a long-term perspective about Keystone Tax
Free Fund. Over time, investment returns tend to even out, rewarding
investors who are able to tolerate short-term price fluctuations. As market
conditions change, we will continue to manage your Fund to seek valuable
tax-free income from a portfolio of quality municipal obligations.(3)
We appreciate your continued support of Keystone funds. If you have any
questions or comments, please feel free to call or write to us.
Sincerely,
[signature of George S. Bissell]
George S. Bissell
Chairman
[signature of Albert H. Elfner, III]
Albert H. Elfner, III
President
February 1995
C-2
<PAGE>
A Discussion With Your Fund Manager
Betsy A. Blacher is vice president and senior portfolio manager at
Keystone specializing in tax-free municipal bonds. A professional with 16
years of investment experience, Ms. Blacher is portfolio manager of Keystone
Tax Free Fund.
What does the Fund offer investors?
The Fund is designed for tax-sensitive investors. It seeks consistent,
attractive income that is exempt from federal income tax.(3) The Fund offers
professional management and diversification from a portfolio of quality
municipal bonds. We manage the Fund with careful attention to credit quality
and financial stability.
How did municipal bonds perform over the past year?
The past year has been a very difficult time for the bond market in
general. Since February 1994, interest rates have been climbing. There were
six increases in short- term interest rates totaling 2.25 percentage points.
When rates go up, bond prices tend to go down.
Portfolio Quality Summary as of December 31, 1994
Moody's Rating--Where Moody's ratings were not available, we have used
ratings from Standard & Poor's Corporation, Fitch Investor's Service, Inc. or
ratings assigned by another nationally recognized statistical rating
organization.
Aaa (38%); Aa (18%); A (24%); Baa (11%); Not rated (6%); Other (3%)--
Includes securities rated below Baa (1%), short-term obligations, and other
assets and liabilities.
How did the Fund perform?
Generally, the Fund generated returns that paralleled the performance of
the municipal bond market. The Fund continued to provide shareholders with
attractive tax-free income, but rising interest rates caused bond prices to
decline during this time period. A negative total return is relatively
unusual for municipal bonds, but was unavoidable under the prevailing market
conditions.
Should investors be concerned about this year's market activity?
Although shareholders may be concerned about the Fund's short-term
performance, understanding the cyclical nature of the bond market provides an
important perspective. Price declines are a normal market reaction to rising
interest rates. As interest rates level out, prices should also stabilize.
We're beginning to see evidence of this already. The market has begun to
adjust to the higher rates, and the most recent increases have had a more
limited effect on bond prices. In this type of market, it is especially
important to maintain a long-term outlook. Over time, price changes have
tended to even out, providing long-term investors with an opportunity for
improved returns.
What changes did you make in response to the interest rate increases?
As interest rates began to rise, we generally shortened the Fund's
maturity to reduce price volatility. We also emphasized higher coupon issues
and kept more cash on hand. While this strategy did not prevent price
declines, it did help reduce
C-3
<PAGE>
share price fluctuations. Between August and December, we became more fully
invested again, reducing the portfolio's cash position. We aimed for an
average maturity of about 19 years, emphasized non-callable bonds, and
continued to purchase higher coupon issues. While the portfolio is still
positioned somewhat defensively, it is now more fully invested in bonds to
take advantage of the higher yields currently available.
[BAR CHART]
Relatively Attractive
Municiple Bond Yields
as of December 31, 1994
Municple Bonds 6.85%
U.S. Treasury Bonds 7.87%
NOTE: FILL IN PLOT POINTS FROM MAC
Municipal bond yields recently equalled 87% of the yield on a comparable U.S.
Treasury bond.
Source: Keystone Custodian Funds, Inc.
Based on a random selection of 30-year Aa-rated municipal bonds versus the
yield on the 30-year US Treasury bond on December 31, 1994.
What is your outlook for the municipal bond market?
We are cautiously optimistic. We believe that the worst is now behind us,
and that today's market offers investors some good opportunities. The
combination of higher yields and relatively low inflation has resulted in
very attractive after-tax returns. We expect demand for municipal bonds to
increase, as the investment markets stabilize. The supply of new issues is
comparatively light, which could have a positive effect on the value of
existing bonds.
C-4
<PAGE>
What do you look for when selecting bonds for the Fund?
We are extremely selective about fund holdings. A strong credit rating,
generally A or better, is a good start, but it's only the beginning. The
health of the local economy, fiscal policy, tax receipt cash flows, and the
state legislative climate are all important factors. We consider the taxing
power of the issuer and the expected cash flows from the project. Overall, we
look for bond issues that have solid financial positions and are attractively
priced.
Lately, we've placed increasing emphasis on evaluating the current yield and
maturity of bonds in addition to our careful financial evaluation. As a
general rule, we prefer higher coupon bonds, because their higher income
makes them more resistant to market downturns. And finally, we evaluate how a
potential holding will fit with the existing composition of the portfolio. We
attempt to build a portfolio that is broadly diversified, both by geography
and by sector.
What sectors do you currently favor?
In today's changing market environment we're leaning toward stable, non-
cyclical sectors whenever possible, such as transportation, highways and
infrastructure issues. These bond issues tend to have defined and reliable
revenue sources. We're also exploring several alternative energy issues to
determine whether there is value in the new technology.
Is this a good time for investors to buy tax free funds?
Yes. We believe municipal bonds are more attractive than they have been in
four years. With bond yields up and an expectation for improved stability in
the markets, we think municipal bonds will provide attractive income over the
next six months or so. More importantly, we believe yields on municipal bonds
are very attractive, with yields equaling 87% of taxable bonds.
While it is impossible to know how the market will perform, share prices
have already reached attractive levels, and this may be an opportune time to
consider adding to tax-exempt holdings. Of course there is always risk
associated with investing, but Keystone Tax Free Fund will continue to offer
investors a diversified, professionally managed opportunity for income that
is exempt from federal taxation.(3)
C-5
<PAGE>
[GRAPH]
Your Fund's Performance
Growth of an investment in
Keystone Tax Free Fund
In Thousands
Reinvested Initial
Distributions Investment
12/84 9500 10000
12/85 8300 10294
12/86 9626 10731
12/88 12146 11231
12/89 11921 11936
12/90 13912 12293
12/91 15658 12667
12/92 17641 13006
12/93 17173 13336
12/94 22442 14217
A $10,000 investment in Keystone Tax Free Fund made on December 31, 1984 with
all distributions reinvested was worth $22,442 on December 31, 1994. Past
performance is no guarantee of future results.
The "if you redeemed" returns reflect the deduction of the 3% CDSC for
those investors who sold Fund shares after one calendar year. Investors who
retained their fund investment earned the returns reported in the second
column of the table.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
C-6
<PAGE>
Twelve-Month Performance as of December 31, 1994
- -------------------------------------------------------
Total return* -7.34%
Net asset value 12/31/93 $8.12
12/31/94 $7.10
Dividends $0.43
Capital gains None
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of December 31, 1994
- -------------------------------------------------------
If you If you did
Cumulative Total Return redeemed not redeem
1-year -9.96% -7.34%
5-year 30.92% 30.92%
10-year 124.42% 124.42%
Average Annual Total Return
1-year -9.96% -7.34%
5-year 5.54% 5.54%
10-year 8.42% 8.42%
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
C-7
<PAGE>
Growth of an Investment
Comparison of change in value of a $10,000 investment in Keystone Tax Free
Fund, the Lehman Municipal Bond Index, and the Consumer Price Index.
[CHART]
Comparisons of change in value of a $10,000 investment in Keystone Tax Free
Fund, the Lehman Municipal Bond Index, and the Consumer Price Index.
In Thousands
December 31, 1984 through December 31, 1994
Fund Average Annual Total Return
1 Year 5 Year 10 Year
- -9.96% 5.54% 8.42%
Fund LMBI CPI
---- ---- ---
12/84 9500 9999 10000
12/85 8300 8071 10294
12/86 9626 9918 10731
12/88 12146 12939 11231
12/89 11921 12468 11936
12/90 13912 15002 12293
12/91 15658 17778 12667
12/92 17641 19574 13006
12/93 17173 19780 13336
12/94 22442 24731 14217
Past performance is no guarantee of future results. The one-year return
reflects the deduction of the Fund's 3% contingent deferred sales charge for
shares held more than one year. Consumer Price Index is through November 30,
1994.
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated
value of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone Tax Free Fund
Your Fund seeks current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds. The return
is quoted after deducting sales charges (if applicable), fund expenses, and
transaction costs and assumes reinvestment of all distributions.
2. Lehman Municipal Bond Index (LMBI)
The LMBI is a broad-based, unmanaged market index of securities issued by
state and local governments. It represents the price change and coupon income
of
C-8
<PAGE>
several thousand securities with various maturities and qualities. Securities
are selected and compiled by Lehman Brothers, Inc. according to criteria that
may be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and
services produced in the U.S. The index contains factors such as prices of
services, housing, food, transportation and electricity which are compiled by
the U.S. Bureau of Labor Statistics. The CPI is generally considered a
valuable benchmark for investors who seek to outperform increases in the cost
of living.
The indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate the indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to
a well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance
over the same time frame and over a long period. Long-term performance is a
more reliable and useful measure of performance than measurements of
short-term returns or temporary swings in the market. Your financial adviser
can help you evaluate fund performance in conjunction with the other
important financial considerations such as safety, stability and consistency.
C-9
<PAGE>
TABLE OF CONTENTS
IMPORTANT DEFINITIONS........................................
SYNOPSIS.....................................................
PRINCIPAL RISK FACTORS.......................................
THE REORGANIZATION...........................................
INFORMATION ABOUT THE FUNDS..................................
ADDITIONAL INFORMATION ABOUT THE FUNDS.......................
<PAGE>
PART B
<PAGE>
Part B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
KEYSTONE TAX FREE FUND
Statement of Additional Information
December 20, 1995
This Statement of Additional Information contains or incorporates by
reference material which may be of interest to investors but which is not
included in the Prospectus/Proxy Statement ("Prospectus") of Keystone Tax Free
Fund dated December 20, 1995. This Statement is not a Prospectus and is
authorized for distribution only when it accompanies or follows delivery of the
above-referenced Prospectus. This Statement should be read in conjunction with
the Prospectus. Copies of the Prospectus can be obtained by writing to Keystone
Tax Free Fund, 200 Berkeley Street, Boston, Massachusetts 02116-5034, or calling
(800) 343-2898.
TABLE OF CONTENTS
This Statement of Additional Information contains or incorporates by
reference the following:
I. Statement of Additional Information of Keystone Tax Free Fund dated April
28, 1995, which is hereby incorporated by reference herein.
II. Annual Report of Keystone Tax Free Fund for the fiscal year ended December
31, 1994, which is hereby incorporated by reference herein.
III. Semi-Annual Report of Keystone Tax Free Fund for the fiscal period ended
June 30, 1995, which is hereby incorporated by reference herein.
IV. Statement of Additional Information of Keystone Tax Exempt Trust dated
March 31, 1995, which is hereby incorporated by reference herein.
V. Annual Report of Keystone Tax Exempt Trust for the fiscal year ended
November 30, 1994, which is hereby incorporated by reference herein.
<PAGE>
VI. Semi-Annual Report of Keystone Tax Exempt Trust for the fiscal period ended
May 31, 1995, which is hereby incorporated by reference herein.
VII. Pro Forma Combined Statement of Assets and Liabilities of Keystone Tax
Exempt Trust and Keystone Tax Free Fund as of June 30, 1995 and the
Combined Statement of Operations for (i) the fiscal year ended December 31,
1994 and (ii) the fiscal period ended June 30, 1995.
<PAGE>
PART C
<PAGE>
Part C
OTHER INFORMATION
Item 15. Indemnification
---------------
Provisions for indemnification of Registrant's Trustees and officers
are contained in Article VIII of Registrant's Amended and Restated
Declaration of Trust, a copy of which was filed with Post-Effective
Amendment No. 24 to Registration Statement No. 2-58699/811-2740 as
Exhibit 24(b)(1) and is incorporated by reference herein.
Provisions for this indemnification of Keystone Management, Inc. and
Keystone Investment Management Company, investment manger and
investment advisor to the Fund, respectively, are contained in Section
7 of the Investment Management Agreement between Registrant and
Keystone Management, Inc. and Section 6 of the Investment Advisory
Agreement between Keystone Management, Inc. and Keystone Investment
Management Company, copies of which were filed with Post-Effective
Amendment No. 24 to Registration Statement No. 2-58699/811-2740 as
Exhibits 24(b)(5)(A) and 24(b)(5)(B), respectively, and are
incorporated by reference herein.
Item 16. Exhibits
--------
1. A copy of the Registrant's Amended and Restated Declaration if Trust
dated July 27, 1993 was filed with Post-Effective Amendment No. 24 to
Registration Statement No. 2-58669/811-2740 as Exhibit 24(b)(1) and is
incorporated by reference herein.
2. A copy of the Registrant's By-laws was filed with Post-Effective
Amendment No. 2 to registration Statement No. 2-58699/811-2740 as
Exhibit 24(b)(2) and is incorporated by reference herein.
3. Not applicable.
4. Agreement and Plan of Reorganization constitutes Exhibit A included in
Part A hereof.
5. a. Registrant's Prospectus and Statement of Additional Information was
filed with Registrant's Post-Effective Amendment No. 24 to
Registration Statement No. 2-58699/811-2740 in Part A and is
incorporated by reference herein.
<PAGE>
b. Registrant's Restated Declaration of Trust, Articles III, V and
VI.
c. Registrant's By-Laws, Article 2, Section 2.5.
6. a. A copy of the Investment Management Agreement between Keystone
Management, Inc. and the Registrant dated August 19, 1993 was filed
with Post-Effective Amendment No. 24 to Registration Statement No.
2-58699/811-2740 as Exhibit 24(b)(5)(A) and is incorporated by
reference herein.
b. A copy of the Investment Advisory Agreement between Keystone
Management, Inc. and Keystone Investment Management Company
(formerly known as Keystone Custodian Funds, Inc.) dated August 19,
1993 was filed with Post-Effective Amendment No. 24 to Registration
Statement No. 2-58699/811-2740 as Exhibit 24(b)(5)(B) and is
incorporated by reference herein.
7. a. A copy of the Principal Underwriting Agreement between the
Registrant and Keystone Investment Distributors Company (formerly
known as Keystone Distributors, Inc.) dated August 19, 1993 was
filed with Post-Effective Amendment No. 24 to Registration
Statement No. 2-58699/811-2740 as part of Exhibit 24(b)(6) and is
incorporated by reference herein.
b. A specimen of the form of Dealer Agreement to be used by the
principal underwriter was filed with Post-Effective Amendment No.
20 to Registration Statement No. 2-58699/811-2740 as part of
Exhibit 24(b)(6) and is incorporated by reference herein.
8. Not applicable.
9. A copy of the Custodian Agreement between the Registrant and State
Street Bank and Trust Company was filed with Post-Effective Amendment
No. 2 to the Fund's Registration Statement as Exhibit 24(b)(8) and is
incorporated by reference herein. Copies of Amendments Nos. 1-6 to the
Custodian, Fund Accounting and Recordkeeping Agreement between the
Registrant and State Street Bank and Trust Company were filed with
Post-Effective Amendment No. 23 to Registration Statement No.
2-58699/811-2740 as part of Exhibit 24(b)(8) and are incorporated by
reference herein.
<PAGE>
Item 16. Exhibits (continued)
--------
10. A copy of the Registrant's Distribution Plan adopted pursuant to Rule
12b-1 was filed with Post-Effective Amendment No. 8 to Registration
Statement No. 2-58699/811-2740 as part of Exhibit 24(b)(15) is
incorporated by reference herein.
11. An Opinion and Consent of Counsel as to the legality of the securities
registered by Registrant is filed herewith as Exhibit 11.
12. Opinion and Consent of Counsel as to tax matters and consequences to
shareholders is filed herewith as Exhibit 12.
13. Not applicable.
14. Consent of Independent Auditors is filed herewith as Exhibit 14.
15. Not applicable.
16. Powers of Attorney are filed herewith as Exhibit 16.
17. a. Copies of Registrant's Declaration under Rule 24f-2 and an opinion
and consent of counsel dated January 25, 1995 as to the legality of
shares being registered are filed herewith as Exhibit 17(a).
b. Form of Proxy Card is filed herewith as Exhibit 17(b).
c. KTFF's prospectus dated April 28, 1995 is filed herewith as Exhibit
17(c).
<PAGE>
Item 17. Undertakings
------------
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is part of this registration statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act of 1933, the
reoffering prospectus will contain the information called for by
the applicable registration form for reofferings by persons who
may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an
amendment to the registration statement and will not be used
until the amendment is effective, and that, in determining any
liability under the 1933 Act, each post-effective amendment shall
be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on behalf of the Registrant, by the
undersigned, thereunto duly authorized, in the City of Boston, in The
Commonwealth of Massachusetts, on the 20th day of November, 1995.
KEYSTONE TAX EXEMPT TRUST
By: /s/ George S. Bissell
---------------------------
George S. Bissell*
Chairman of the Board
*By: /s/ Melina M.T. Murphy
---------------------------
Melina M.T. Murphy**
Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 20th day of November, 1995.
SIGNATURES TITLE
- ---------- -----
/s/ George S. Bissell Chairman of the Board and Trustee
- ---------------------------
George S. Bissell*
/s/ Albert H. Elfner, III Chief Executive Officer, President
- --------------------------- and Trustee
Albert H. Elfner, III*
/s/ Kevin J. Morrissey Treasurer (Principal Financial
- --------------------------- and Accounting Officer)
Kevin J. Morrissey*
*By: /s/ Melina M.T. Murphy
---------------------------
Melina M.T. Murphy**
Attorney-in-Fact
<PAGE>
SIGNATURES TITLE
- ---------- -----
/s/ Frederick Amling Trustee
- ---------------------------
Frederick Amling*
/s/ Charles A. Austin, III Trustee
- ---------------------------
Charles A. Austin, III*
/s/ Edwin D. Campbell Trustee
- ---------------------------
Edwin D. Campbell*
/s/ Charles F. Chapin Trustee
- ---------------------------
Charles F. Chapin*
/s/ K. Dun Gifford Trustee
- ---------------------------
K. Dun Gifford*
/s/ Leroy Keith, Jr. Trustee
- ---------------------------
Leroy Keith, Jr.*
/s/ F. Ray Keyser, Jr. Trustee
- ---------------------------
F. Ray Keyser, Jr.*
/s/ David M. Richardson Trustee
- ---------------------------
David M. Richardson*
/s/ Richard J. Shima Trustee
- ---------------------------
Richard J. Shima*
/s/ Andrew J. Simons Trustee
- ---------------------------
Andrew J. Simons*
*By: /s/ Melina M.T. Murphy
---------------------------
Melina M.T. Murphy**
Attorney-in-Fact
** Melina M.T. Murphy, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and attached hereto as Exhibit 24(b)(16).
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on behalf of the Registrant, by the
undersigned, thereunto duly authorized, in the City of Boston, in The
Commonwealth of Massachusetts, on the 20th day of November, 1995.
KEYSTONE TAX EXEMPT TRUST
By: /s/ George S. Bissell
---------------------------
George S. Bissell*
Chairman of the Board
*By:
---------------------------
Melina M.T. Murphy**
Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 20th day of November, 1995.
SIGNATURES TITLE
- ---------- -----
/s/ George S. Bissell Chairman of the Board and Trustee
- ---------------------------
George S. Bissell*
/s/ Albert H. Elfner, III Chief Executive Officer, President
- --------------------------- and Trustee
Albert H. Elfner, III*
/s/ Kevin J. Morrissey Treasurer (Principal Financial
- --------------------------- and Accountng Officer)
Kevin J. Morrissey*
*By:
---------------------------
Melina M.T. Murphy**
Attorney-in-Fact
<PAGE>
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:
---------------------------
Melina M.T. Murphy**
Attorney-in-Fact
** Melina M.T. Murphy, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and attached hereto as Exhibit 24(b)(16).
<PAGE>
KEYSTONE TAX FREE FUND
KEYSTONE TAX EXEMPT TRUST
PRO FORMA COMBINED FINANCIALS
1. STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1994 AND JUNE
30, 1995
2. STATEMENT OF OPERATIONS FOR THE PERIODS DECEMBER 31, 1994 AND JUNE 30,
1995 AND RELATED NOTES TO FINANCIALS
<PAGE>
KEYSTONE TAX FREE FUND
KEYSTONE TAX EXEMPT TRUST
PROFORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES -
JUNE 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Keystone Tax Keystone Tax Pro-forma
Free Fund Exempt Trust Combined
- --------------------------------------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C>
Assets:
Investments at market value (a) $ 1,214,346,403 $ 688,861,773 $ 1,903,208,176
Mark-to-market on futures contracts 9,663 (239) 9,424
Cash 273,344 102,381 375,725
Receivable for:
Investments sold -- 4,501,695 4,501,695
Fund shares sold 432,878 60,742 493,620
Interest 22,385,020 13,734,651 36,119,671
Other Assets 100,602 66,072 166,674
- --------------------------------------------------- --------------------- ---------------------- ---------------------
Total assets 1,237,547,910 707,327,075 1,944,874,985
- --------------------------------------------------- --------------------- ---------------------- ---------------------
Liabilities:
Payable for:
Distributions to shareholders 5,580,264 3,203,076 8,783,340
Investments purchased 10,935,867 12,515,014 23,450,881
Fund shares redeemed 7,358,335 875,460 8,233,795
Futures variation margin 111,836 26,719 138,555
Due to related parties 56,657 27,543 84,200
Other accrued expenses 11,733 47,073 58,806
- --------------------------------------------------- ---------------------- ---------------------- ---------------------
Total Liabilities 24,054,692 16,694,885 40,749,577
- --------------------------------------------------- ---------------------- ---------------------- ---------------------
Net assets $ 1,213,493,218 $ 690,632,190 $ 1,904,125,408
- --------------------------------------------------- ---------------------- ---------------------- ---------------------
Net assets represented by:
Paid-in capital $ 1,206,391,832 $ 680,933,549 $ 1,887,325,381
Accumulated distributions in excess of net
investment income (3,581,343) (3,255,715) (6,837,058)
Accumulated net realized gain (loss) on
investments and futures contracts (37,034,132) (15,665,743) (52,699,875)
Net unrealized appreciation (depreciation) on:
Investments 47,385,531 28,620,338 76,005,869
Future contracts 331,330 (239) 331,091
- --------------------------------------------------- ---------------------- ---------------------- ---------------------
Total net assets applicable to outstanding
shares of beneficial interest ($7.54,
$10.50 and $7.54 per share on 160,963,692,
65,745,122 and 252,559,473 shares
outstanding, respectively) (b) $ 1,213,493,218 $ 690,632,190 $ 1,904,125,408
- --------------------------------------------------- ---------------------- ---------------------- ---------------------
(a) Identified cost of investments:
Keystone Tax Free Fund $ 1,166,960,872
Keystone Tax Exempt Trust 660,241,435
----------------
Total Identified Cost of Investments $ 1,827,202,307
================
(b) Shares after the merger:
(KTET net assets/KTFF nav) + (KTFF shares o/s)
(KTET net assets/KTFF nav)
$ 690,632,190/ $7.54 = 91,608,595
add KTFF shares outstanding 160,963,692
-----------
252,572,287
===========
(c) Combined KTFF, Assets, Shares Outstanding
and Net Asset Value after the merger:
Assets: $1,904,125,408
Shares Outstanding: 252,572,287
NAV $7.54
</TABLE>
<PAGE>
KEYSTONE TAX FREE FUND
KEYSTONE TAX EXEMPT TRUST
PROFORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES -
DECEMBER 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Keystone Tax Keystone Tax Pro-forma
Free Fund Exempt Trust Combined
- --------------------------------------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C>
Assets:
Investments at market value (a) $ 1,181,945,518 $ 666,230,060 $ 1,848,175,578
Cash 217,202 3,201,152 3,418,354
Receivable for:
Investments sold 1,617,183 -- 1,617,183
Fund shares sold 283,803 385,804 669,607
Interest 24,738,850 14,350,585 39,089,435
Other Assets 100,602 70,152 170,754
- --------------------------------------------------- --------------------- ---------------------- ---------------------
Total assets 1,208,903,158 684,237,753 1,893,140,911
- --------------------------------------------------- --------------------- ---------------------- ---------------------
Liabilities:
Payable for:
Distributions to shareholders 6,314,436 3,215,706 9,530,142
Investments purchased 1,997,688 -- 1,997,688
Fund shares redeemed 2,777,855 1,243,069 4,020,924
Due to related parties 58,863 27,827 86,690
Other accrued expenses 27,420 24,753 52,173
- --------------------------------------------------- ---------------------- ---------------------- ---------------------
Total Liabilities 11,176,262 4,511,355 15,687,617
- --------------------------------------------------- ---------------------- ---------------------- ---------------------
Net assets $ 1,197,716,896 $ 679,726,398 $ 1,877,453,294
- --------------------------------------------------- ---------------------- ---------------------- ---------------------
Net assets represented by:
Paid-in capital $ 1,264,955,468 $ 712,694,828 $ 1,977,650,296
Accumulated distributions in excess of net
investment income (3,916,731) (2,585,326) (6,502,057)
Accumulated net realized gain (loss) on
investments and futures contracts (37,649,351) (18,309,670) (55,959,021)
Net unrealized appreciation (depreciation) on:
Investments (25,662,490) (12,073,434) (37,735,924)
- --------------------------------------------------- ---------------------- ---------------------- ---------------------
Total net assets applicable to outstanding
shares of beneficial interest ($7.10,
$9.88 and $7.10 per share on 168,806,043,
68,775,971 and 264,542,155 shares
outstanding) (b) $ 1,197,726,896 $ 679,726,398 $ 1,877,453,294
- --------------------------------------------------- ---------------------- ---------------------- ---------------------
(a) Identified cost of investments:
Keystone Tax Free Fund $ 1,207,608,008
Keystone Tax Exempt Trust 678,303,494
----------------
Total Identified Cost of Investments $ 1,885,911,502
================
(b) Shares after the merger:
(KTET net assets/KTFF nav) + (KTFF shares o/s)
(KTET net assets/KTFF nav)
$ 679,726,398/ $7.10 = 95,736,112
add KTFF shares outstanding 168,806,043
-----------
264,542,155
===========
(c) Combined KTFF, Assets, Shares Outstanding
and Net Asset Value after the merger:
Assets: $1,877,453,294
Shares Outstanding: 264,605,468
NAV $7.09
</TABLE>
<PAGE>
KEYSTONE TAX FREE FUND
KEYSTONE TAX EXEMPT TRUST
PROFORMA COMBINING STATEMENT OF OPERATIONS -
SIX MONTHS ENDED JUNE 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Keystone Tax Keystone Tax Pro-forma Pro-forma
Free Fund Exempt Trust Adjustments(1) Combined
- -------------------------------------- ---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income:
Interest $ 40,026,273 $ 22,674,776 $ -- $ 62,701,049
- -------------------------------------- ----------------- ----------------- ----------------- ------------------
Expenses:
Investment management fee and
administrative services 3,419,122 2,244,655 (427,408) 5,236,369
Accounting services 9,919 18,100 (12,019) 16,000
Trustees' fees and expenses 28,138 32,399 (27,527) 33,010
Distribution plan expenses 2,222,307 2,063,668 -- 4,285,975
- -------------------------------------- ----------------- ----------------- ----------------- ------------------
Total expenses 5,679,486 4,358,822 (466,954) 9,571,354
- -------------------------------------- ----------------- ----------------- ----------------- ------------------
Net investment income 34,346,787 18,315,954 466,954 53,129,695
- -------------------------------------- ----------------- ----------------- ----------------- ------------------
Net realized and unrealized gain
(loss) on investments and
futures contracts
Realized gain (loss) on:
Investments 3,356,801 3,638,837 -- 6,995,638
Closed futures contracts (2,741,582) (994,910) -- (3,736,492)
- -------------------------------------- ----------------- ----------------- ----------------- ------------------
Net realized gain (loss) on
investments and futures
contracts 615,219 2,643,927 -- 3,259,146
Net change in unrealized appreciation
(depreciation) on:
Investments 73,057,683 40,693,772 -- 113,751,455
Closed futures contracts 321,668 (239) -- 321,429
- -------------------------------------- ----------------- ----------------- ----------------- ------------------
Net gain (loss) on investments and
futures contracts 73,994,570 43,337,460 -- 117,332,030
- -------------------------------------- ----------------- ----------------- ----------------- ------------------
Net increase (decrease) in net assets
resulting from operations $ 108,341,357 $ 61,653,414 $ 466,954 $ 170,461,725
- -------------------------------------- ----------------- ----------------- ----------------- ------------------
</TABLE>
(1) See Note 3 to the Pro-Forma Combined Financial Statements
<PAGE>
KEYSTONE TAX FREE FUND
KEYSTONE TAX EXEMPT TRUST
PROFORMA COMBINING STATEMENT OF OPERATIONS -
YEAR ENDED DECEMBER 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Keystone Tax Keystone Tax Pro-forma Pro-forma
Free Fund Exempt Trust Adjustments(1) Combined
- -------------------------------------- ---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income:
Interest $ 88,670,484 $ 48,171,138 $ -- $ 136,841,622
- -------------------------------------- ----------------- ----------------- ----------------- -----------------
Expenses:
Investment management fee and
administrative services 7,970,545 4,883,373 (1,020,531) 11,833,387
Accounting services 23,917 4,550 3,533 32,000
Trustees' fees and expenses 56,308 12,848 (3,156) 66,000
Distribution plan expenses 13,226,327 7,451,547 -- 20,677,874
- -------------------------------------- ----------------- ----------------- ----------------- -----------------
Total expenses 21,277,097 12,352,318 (1,020,154) 32,609,261
- -------------------------------------- ----------------- ----------------- ----------------- -----------------
Net investment income 67,393,387 35,818,820 1,020,154 104,232,361
- -------------------------------------- ----------------- ----------------- ----------------- -----------------
Net realized and unrealized gain
(loss) on investments and
futures contracts
Realized gain (loss) on:
Investments (39,550,582) (17,862,512) -- (57,413,094)
Closed futures contracts 1,701,424 1,001,798 -- 2,703,222
- -------------------------------------- ----------------- ----------------- ----------------- -----------------
Net realized gain (loss) on
investments and futures
contracts (37,849,158) (16,860,714) -- (54,709,872)
Net change in unrealized appreciation
(depreciation) on:
Investments (139,738,811) (73,738,928) -- (213,477,739)
- -------------------------------------- ----------------- ----------------- ----------------- -----------------
Net gain (loss) on investments and
futures contracts (177,587,969) (90,599,642) -- (268,187,611)
- -------------------------------------- ----------------- ----------------- ----------------- -----------------
Net increase (decrease) in net assets
resulting from operations ($110,194,582) ($ 54,780,822) $ 1,020,154 ($163,955,250)
- -------------------------------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
(1) See Note 3 to the Pro-Forma Combined Financial Statements
<PAGE>
KEYSTONE TAX EXEMPT TRUST
PROPOSED MERGER WITH
KEYSTONE TAX FREE FUND
NOTES TO PRO-FORMA COMBINED
FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Combination. On October 16, 1995, Keystone Tax Exempt Trust (KTET)
and Keystone Tax Free Fund (KTFF) entered into an Agreement and Plan of
Reorganization whereby, subject to approval by the shareholders of KTET, KTFF
will acquire the assets and assume the liabilities of KTET in exchange for
shares of KTFF. This merger of the funds will be accounted for by the
pooling-of-interests method of accounting. The pro-forma combined statements of
assets and liabilities reflects the financial position of KTFF and KTET as of
June 30, 1995 and December 31, 1994 as though the merger occurred as of those
dates. The pro-forma combined statements of operations reflects the results of
operations of KTFF and KTET for the six-month period ended June 30, 1995 and
the year ended December 31, 1994 as though the merger occurred at the beginning
of each period presented.
The pro-forma combined financial statements reflect the estimated expenses of
both funds in carrying out their obligations under the Agreement and Plan of
Reorganization.
2. Capital Shares. The pro-forma net asset value per share assumes that
91,595,781 and 95,736,112 additional shares of beneficial interest were issued
in connection with the reorganization of KTET and KTFF as of June 30, 1995 and
December 31, 1994, respectively. The numbers of additional shares of KTFF
issued were calculated by dividing the net assets of KTET at June 30, 1995
and December 31, 1994 by the net asset value per share of KTFF as of June 30,
1995 and December 31, 1994 of $7.54 and $7.10, respectively. The pro-forma
combined number of KTFF shares outstanding of 252,559,473 and 264,542,155
consists of the 91,595,781 and 95,736,112 shares issuable to KTET in the merger
and the 160,963,692 and 168,806,043 shares of KTFF outstanding at June 30, 1995
and December 31, 1994, respectively.
3. Pro-forma Operating Expenses. Certain expenses have been adjusted in the
pro-forma combined statements of operations to reflect the estimated expenses of
the combined entity more closely. Pro-forma operating expenses include the
actual expenses of KTFF and KTET, adjusted for certain items which are factually
supportable. These adjustments relate to management fees and other operating
expense which have been recomputed using the rates and the combined average net
asset values of the funds existing during the year. The pro-forma combined
expenses are subject to Blue Sky state expense limitations. No adjustment has
been made for possible limitations during the periods presented. The combination
of the two funds will provide lower overall management fees. The portion of the
management fee which is based on assets will decline due to the combined entity
reaching asset level breakpoints which are built into the management fee
schedule. At current asset levels all of the assets of KTET once combined with
KTFF would be calculated at a rate of 0.25% which is the lowest rate of the
management fee schedule. Other expenses related to accounting services and
trustees fees which are charged on a per fund basis will also decrease as only
one fund will be in place.
<PAGE>
EXHIBIT 11
Legal Opinion
<PAGE>
November 20, 1995
Keystone Tax Free Fund
200 Berkeley Street
Boston, MA 02116-5034
Gentlemen:
I am a Senior Vice President of and General Counsel to Keystone Investment
Management Company (formerly named Keystone Custodian Funds, Inc.), investment
adviser to Keystone Tax Free Fund (the "Fund"), a Massachusetts business trust.
I have been asked to render an opinion with respect to the issuance of certain
shares of beneficial interest, without par value, of the Fund (the "Shares") in
connection with the proposed acquisition by the Fund of substantially all of the
assets of Keystone Tax Exempt Trust (the "Reorganization"). The offering of the
Shares pursuant to the Reorganization is the subject of a certain registration
statement (the "Registration Statement") on Form N-14, which is being filed by
the Fund with the Securities and Exchange Commission under the Securities Act of
1933, as amended.
I have examined originals, or copies, certified or otherwise identified to
my satisfaction, of such certificates, records and other documents as I have
deemed necessary or appropriate for the purposes of this opinion.
Based upon the foregoing, I am of the opinion that the Shares, when issued
and sold in accordance with the terms of the Registration Statement, will be
legally issued, fully paid and non-assessable by the Fund.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Sincerely yours,
Rosemary D. Van Antwerp
Senior Vice President and
General Counsel
<PAGE>
EXHIBIT 12
Sullivan & Worcester Tax Opinion
<PAGE>
[SULLIVAN & WORCESTER LETTERHEAD]
October 18, 1995
Keystone Tax Exempt Trust
Keystone Tax Free Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of Keystone Tax Exempt Trust
Ladies and Gentlemen:
You have asked for our opinion as to certain tax consequences of the
proposed acquisition of assets of Keystone Tax Exempt Trust ("Selling Fund"), a
Massachusetts business trust, by Keystone Tax Free Fund ("Acquiring Fund"), also
a Massachusetts business trust, in exchange for voting shares of Acquiring Fund
(the "Reorganization").
In rendering our opinion, we have reviewed and relied upon the draft
Prospectus/Proxy Statement dated October 16, 1995 and associated form of
Agreement and Plan of Reorganization (the "Reorganization Agreement") expected
to be filed with the Securities and Exchange Commission on or about October 27,
1995. We have relied, without independent verification, upon the factual
statements made therein, and assume that there will be no change in material
facts disclosed therein between the date of this letter and the date of closing
of the Reorganization. We further assume that the Reorganization will be carried
out in accordance with the Reorganization Agreement. We have also relied upon
the following representations, each of which has been made to us by officers of
Acquiring Fund or of Selling Fund:
A. The Reorganization will be consummated substantially as described
in the Reorganization Agreement.
B. Acquiring Fund will acquire from Selling Fund at least 90% of the fair
market value of the net assets and at least 70% of the fair market value of the
gross assets held by Selling Fund immediately prior to the Reorganization. For
purposes of this representation, assets of Selling Fund used to pay
reorganization expenses, cash retained to pay liabilities, and redemptions and
distributions (except for regular and normal distributions) made by Selling Fund
immediately preceding the transfer which are part of the plan of reorganization,
will be considered as assets held by Selling Fund immediately prior to the
transfer.
C. To the best of the knowledge of management of Selling Fund, there is no
plan or intention on the part of the shareholders of Selling Fund to sell,
exchange, or otherwise dispose of a number of Acquiring Fund shares received in
the Reorganization that would reduce the former Selling Fund shareholders'
ownership of Acquiring Fund shares to a number of shares having a value, as of
the date of the Reorganization (the "Closing Date"), of less than 50 percent of
the value of all of the formerly outstanding shares of Selling Fund as of the
same date. For purposes of this representation, Selling Fund shares exchanged
for cash or other property will be treated as outstanding Selling Fund shares on
the Closing Date. There are no dissenters' rights in the Reorganization, and no
cash will be exchanged for Selling Fund shares in lieu of fractional shares of
Acquiring Fund. Moreover, shares of Selling Fund and shares of Acquiring Fund
held by Selling Fund shareholders and otherwise sold, redeemed, or disposed of
prior or subsequent to the Reorganization will be considered in making this
representation, except for shares of Selling Fund or Acquiring Fund redeemed in
the ordinary course of business of Selling Fund or Acquiring Fund in accordance
with the requirements of section 22(e) of the Investment Company Act of 1940.
D. Selling Fund has not redeemed and will not redeem the shares of any of
its shareholders in connection with the Reorganization except to the extent
necessary to comply with its legal obligation to redeem its shares.
E. The management of Acquiring Fund has no plan or intention to redeem or
reacquire any of the Acquiring Fund shares to be received by Selling Fund
shareholders in connection with the Reorganization, except to the extent
necessary to comply with its legal obligation to redeem its shares.
F. The management of Acquiring Fund has no plan or intention to sell or
dispose of any of the assets of Selling Fund which will be acquired by Acquiring
Fund in the Reorganization, except for dispositions made in the ordinary course
of business, and to the extent necessary to enable Acquiring Fund to comply with
its legal obligation to redeem its shares.
G. Following the Reorganization, Acquiring Fund will continue the historic
business of Selling Fund in a substantially unchanged manner as part of the
regulated investment company business of Acquiring Fund, or will use a
significant portion of Selling Fund's historic business assets in a business.
H. There is no intercorporate indebtedness between Acquiring Fund
and Selling Fund.
I. Acquiring Fund does not own, directly or indirectly, and has not owned
in the last five years, directly or indirectly, any shares of Selling Fund.
Acquiring Fund will not acquire any shares of Selling Fund prior to the Closing
Date.
J. Acquiring Fund will not make any payment of cash or of property other
than shares to Selling Fund or to any shareholder of Selling Fund in connection
with the Reorganization.
K. Pursuant to the Reorganization Agreement, the shareholders of Selling
Fund will receive solely Acquiring Fund voting shares in exchange for their
voting shares of Selling Fund.
L. The fair market value of the Acquiring Fund shares to be received by
the Selling Fund shareholders will be approximately equal to the fair market
value of the Selling Fund shares surrendered in exchange therefor.
M. Subsequent to the transfer of Selling Fund's assets to Acquiring Fund
pursuant to the Reorganization Agreement, Selling Fund will distribute the
shares of Acquiring Fund, together with other assets it may have, in final
liquidation as expeditiously as possible.
N. Selling Fund is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of ss. 368(a)(3)(A) of the Internal
Revenue Code of 1986, as amended (the "Code").
O. Selling Fund is treated as a corporation for federal income tax
purposes and at all times in its existence has qualified as a regulated
investment company, as defined in ss. 851 of the Code.
P. Acquiring Fund is treated as a corporation for federal income tax
purposes and at all times in its existence has qualified as a regulated
investment company, as defined in ss. 851 of the Code.
Q. The sum of the liabilities of Selling Fund to be assumed by Acquiring
Fund and the expenses of the Reorganization does not exceed twenty percent of
the fair market value of the assets of Selling Fund.
R. The foregoing representations are true on the date of this letter
and will be true on the date of closing of the Reorganization.
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, it is our opinion that for federal
income tax purposes:
1. The acquisition by Acquiring Fund of substantially all of the assets of
Selling Fund solely in exchange for voting shares of Acquiring Fund followed by
the distribution by Selling Fund of said Acquiring Fund shares to the
shareholders of Selling Fund in exchange for their Selling Fund shares will
constitute a reorganization within the meaning of ss. 368(a)(1)(C) of the Code,
and Acquiring Fund and Selling Fund will each be "a party to a reorganization"
within the meaning of ss. 368(b) of the Code.
2. No gain or loss will be recognized to Selling Fund upon the transfer of
substantially all of its assets to Acquiring Fund solely in exchange for
Acquiring Fund voting shares and assumption by Acquiring Fund of certain
identified liabilities of Selling Fund, or upon the distribution of such
Acquiring Fund voting shares to the shareholders of Selling Fund in exchange for
all of their Selling Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the receipt
of the assets of Selling Fund (including any cash retained initially by Selling
Fund to pay liabilities but later transferred) solely in exchange for Acquiring
Fund voting shares and assumption by Acquiring Fund of certain identified
liabilities of Selling Fund.
4. The basis of the assets of Selling Fund acquired by Acquiring Fund will
be the same as the basis of those assets in the hands of Selling Fund
immediately prior to the transfer, and the holding period of the assets of
Selling Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Selling Fund.
5. The shareholders of Selling Fund will recognize no gain or loss upon
the exchange of all of their Selling Fund shares solely for Acquiring Fund
voting shares. Gain, if any, will be realized by Selling Fund shareholders who
in exchange for their Selling Fund shares receive other property or money in
addition to Acquiring Fund shares, and will be recognized, but not in excess of
the amount of cash and the value of such other property received. If the
exchange has the effect of the distribution of a dividend, then the amount of
gain recognized that is not in excess of the ratable share of undistributed
earnings and profits of Selling Fund will be treated as a dividend.
6. The basis of the Acquiring Fund voting shares to be received by the
Selling Fund shareholders will be the same as the basis of the Selling Fund
shares surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be received
by the Selling Fund shareholders will include the period during which the
Selling Fund shares surrendered in exchange therefor were held, provided the
Selling Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Paragraphs 6.9 and 7.9 of the Reorganization Agreement. We
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement on Form N-14 and to use of our name and any reference to our firm in
the Registration Statement or in the Prospectus/Proxy Statement constituting a
part thereof. In giving such consent, we do not thereby admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
SULLIVAN & WORCESTER
A Registered Limited Liability Partnership
TAXEXMPT.OPN
<PAGE>
EXHIBIT 14
Independent Auditor's Consent
<PAGE>
Exhibit 14
CONSENT OF INDEPENDENT AUDITORS
The Trustees
Keystone Tax Exempt Trust
Keystone Tax Free Fund
We consent to the use of our reports incorporated herein by reference.
KPMG Peat Marwick LLP
November 20, 1995
Boston, Massachusetts
<PAGE>
EXHIBIT 16
Powers of Attorney
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief
Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser
or Manager and registering from time to time the shares of such companies, and
generally to do all such things in my name and in my behalf to enable such
investment companies to comply with the provisions of the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
my said attorneys to any and all registration statements and amendments thereto.
/s/George S. Bissell
George S. Bissell
Director/Trustee,
Chairman of the Board
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chief Executive Officer and for
which Keystone Custodian Funds, Inc. serves as Adviser or Manager and
registering from time to time the shares of such companies, and generally to do
all such things in my name and in my behalf to enable such investment companies
to comply with the provisions of the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and all requirements and regulations
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by my said attorneys to any and all
registration statements and amendments thereto.
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Director/Trustee,
President and Chief
Executive Officer
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director, Trustee or officer and for which Keystone
Custodian Funds, Inc. serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and in my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Kevin J. Morrissey
Kevin J. Morrissey
Treasurer
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Frederick Amling
Frederick Amling
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles A. Austin III
Charles A. Austin III
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Edwin D. Campbell
Edwin D. Campbell
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles F. Chapin
Charles F. Chapin
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ K. Dun Gifford
K. Dun Gifford
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Leroy Keith, Jr.
Leroy Keith, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ F. Ray Keyser,Jr.
F. Ray Keyser, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ David M. Richardson
David M. Richardson
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Richard J. Shima
Richard J. Shima
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Andrew J. Simons
Andrew J. Simons
Director/Trustee
Dated: December 14, 1994
<PAGE>
EXHIBIT 17(a)
24f-2 Notice
<PAGE>
As filed with the Securities and Exchange Commission April 28, 1995.
File Nos. 2-58699
and 811-2740
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. 26 X
---- ----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25 X
---- ----
KEYSTONE TAX FREE FUND
----------------------
(Exact name of Registrant as specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
-----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
---------------------------------------------------
(617) 338-3677
Rosemary D. Van Antwerp, Esq., 200 Berkeley Street,
---------------------------------------------------
Boston, MA 02116-5034
---------------------
Name and Address of Agent for Service
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b) of Rule 485
- ---
- --- on (date) pursuant to paragraph (b) of Rule 485
- --- 60 days after filing pursuant to paragraph (a)(i) of Rule 485
- --- on (date) pursuant to paragraph (a)(i) of Rule 485
- --- 75 days after filing pursuant to paragraph (a)(ii) of Rule 485
- --- on (date) pursuant to paragraph (a)(ii) of Rule 485
The Registrant has filed a Declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940. A Rule 24f-2 Notice for Registrant's last fiscal
year was filed on January 27, 1995.
<PAGE>
January 25, 1995
Keystone Tax Free Fund
200 Berkeley Street
Boston, Massachusetts 02116-5034
Re: Notice Pursuant to Rule 24f-2 under the Investment
Company Act of 1940 (the "1940 Act")
--------------------------------------------------
Gentlemen:
I am a Senior Vice President of and General Counsel to Keystone Custodian
Funds, Inc., investment adviser to Keystone Tax Free Fund (the "Fund"). You have
asked for my opinion with respect to the issuance of 16,411,521 additional
shares of the Fund under the Fund's Declaration of Trust, as amended
("Declaration of Trust"), and pursuant to the Fund's indefinite registration of
such shares under Rule 24f-2 under the 1940 Act. The Fund is filing its Rule
24f-2 Notice to which this opinion is appended to make the issuance of such
shares definite in number for its fiscal year ended December 31, 1994.
To my knowledge, a Prospectus is on file with the Securities and Exchange
Commission as part of Post-Effective Amendment No. 24 to the Fund's Registration
Statement covering the public offering and sale of the Fund's shares for the
period during which such shares were issued.
In my opinion, such shares, if issued and sold in accordance with the
Fund's Declaration of Trust, By-Laws, as amended ("By-Laws"), and offering
Prospectus, were legally issued, fully paid, and nonassessable by the Fund,
entitling the holders thereof to the rights set forth in the Declaration of
Trust and By-Laws and subject to the limitations stated therein.
My opinion is based upon my examination of the Declaration of Trust; a review
of the minutes of the Fund's Board of Trustees authorizing the registration of
shares pursuant to Rule 24f-2 under the 1940 Act and 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.
<PAGE>
Securities and Exchange Commission
January 25, 1995
Page 2
I hereby consent to the use of this opinion in connection with the Fund's
Rule 24f-2 Notice making definite the number of such additional shares issued.
Sincerely yours,
Rosemary D. Van Antwerp
Senior Vice President and
General Counsel
<PAGE>
EXHIBIT 17(b)
Proxy Card
<PAGE>
KEYSTONE TAX EXEMPT TRUST
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1996
The undersigned, revoking all Proxies heretofore given, hereby appoints
Albert H. Elfner, III, Rosemary D. Van Antwerp and Melina M.T. Murphy or any of
them as Proxies of the undersigned, with full power of substitution, to vote on
behalf of the undersigned all shares of Keystone Tax Exempt Trust ("KTET") that
the undersigned is entitled to vote at the meeting of shareholders of KTET to be
held at 2:00 p.m. on Tuesday, February 20, 1996 at the offices of Keystone
Investment Management Company, 26th Floor, 200 Berkeley Street, Boston,
Massachusetts 02116 and at any adjournments thereof, as fully as the undersigned
would be entitled to vote if personally present, as follows:
To approve an Agreement and Plan of Reorganization whereby Keystone Tax
Free Fund ("KTFF") will acquire all of the assets of KTET in exchange for Shares
of KTFF and will assume the liabilities of KTET, as described in the
accompanying Prospectus/Proxy Statement.
____________ FOR ___________ AGAINST ___________ ABSTAIN
<PAGE>
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF KTET.
THE BOARD OF TRUSTEES OF KTET RECOMMENDS A VOTE FOR THE PROPOSAL.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR THE PROPOSAL IF
NO CHOICE IS INDICATED.
THE PROXIES ARE AUTHORIZED IN THEIR DISCRETION TO VOTE UPON SUCH OTHER MATTERS
AS MAY COME BEFORE THE MEETING OR ANY ADJOURNMENTS THEREOF.
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEAR ON THIS CARD.
Dated: ____________________, 1996
Signature(s):_______________________________
Signature (of joint
owner, if any):_____________________________
NOTE: When signing as attorney, executor, administrator, trustee, guardian, or
as custodian for a minor, please sign your name and give your full title as
such. If signing on behalf of a corporation, please sign full corporate name and
your name and indicate your title. If you are a partner signing for a
partnership, please sign the partnership name and your name. Joint owners should
each sign this proxy. Please sign, date and return.
