<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION APRIL 3, 1996.
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. [27] [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. [26] [X]
KEYSTONE TAX FREE FUND
----------------------
(Exact name of Registrant as specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
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(617) 338-3677
Rosemary D. Van Antwerp, Esq., 200 Berkeley Street,
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Boston, MA 02116-5034
---------------------
Name and Address of Agent for Service
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on April 12, 1996 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 February 28, 1996.
<PAGE>
KEYSTONE TAX FREE FUND
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 27
to
REGISTRATION STATEMENT
This Post-Effective Amendment No. 27 to
Registration Statement No. 2-58699/811-2740 consists of
the following pages, items of information, and documents:
The Facing Sheet
The Contents Page
The Cross-Reference Sheet
PART A
------
Prospectus
PART B
------
Statement of Additional Information
PART C
------
PART C - OTHER INFORMATION - ITEM 24(a) and (b)
Financial Statements
Independent Auditors' Report
Listing of Exhibits
PART C - OTHER INFORMATION - ITEMS 25-32 - AND SIGNATURE PAGES
Number of Holders of Securities
Indemnification
Business and Other Connections
Principal Underwriter
Location of Accounts and Records
Signatures
Exhibits (including Powers of Attorney)
<PAGE>
KEYSTONE TAX FREE FUND
Cross-Reference Sheet pursuant to Rules 404 and 495 under the Securities Act of
1933.
Items in Part A
of Form N-1A Prospectus Caption
- --------------- ------------------
1 Cover Page
2 Fee Table
3 Financial Highlights
Performance Data
4 Cover Page
Fund Description
Fund Objective and Policies
Investment Restrictions
Risk Factors
5 Fund Management and Expenses
Additional Information
5A Not applicable
6 Fund Description
Dividends and Taxes
Fund Shares
Pricing Shares
Shareholder Services
7 How to Buy Shares
Distribution Plan
Shareholder Services
8 How to Redeem Shares
9 Not applicable
<PAGE>
Items in Part B
of Form N-1A Statement of Additional Information Caption
- --------------- -------------------------------------------
10 Cover Page
11 Table of Contents
12 Not applicable
13 The Fund's Objective and Policies
Investment Restrictions
Brokerage
Appendix
14 Trustees and Officers
15 Additional Information
16 Sales Charges
Distribution Plan
Investment Adviser
Investment Manager
Principal Underwriter
Additional Information
17 Brokerage
18 The Fund's Objective and Policies
Declaration of Trust
19 Valuation of Securities
Sales Charges
Distribution Plan
20 Not applicable
21 Principal Underwriter
22 Standardized Total Return and Yield
Calculations
23 Financial Statements
<PAGE>
KEYSTONE TAX FREE FUND
PART A
PROSPECTUS
<PAGE>
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PROSPECTUS APRIL 12, 1996
- ------------------------------------------------------------------------------
KEYSTONE TAX FREE FUND
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
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Keystone Tax Free Fund (the "Fund") is a mutual fund that seeks the highest
possible current income, exempt from federal income taxes, while preserving
capital.
The Fund invests primarily in municipal bonds. The Fund's net asset value
per share will fluctuate in response to changes in the market value of its
portfolio securities.
Your purchase payment is fully invested. There is no sales charge when you
buy the Fund's shares. The Fund may impose a deferred sales charge, which
declines from 4% to 1%, if you redeem your shares within four years of purchase.
The Fund has adopted a Distribution Plan (the "Distribution Plan") pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act") under
which it bears some of the costs of selling its shares to the public.
This prospectus sets forth concisely the information about the Fund that
you should know before investing. Please read it and retain it for future
reference.
Additional information about the Fund is contained in a statement of
additional information dated April 12, 1996, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, or for other information about the Fund, write to
the address or call the telephone number listed above.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
<TABLE>
<CAPTION>
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TABLE OF CONTENTS
- --------------------------------------------------------------------------------------------------------------
Page Page
<S> <C> <C>
Fee Table .......................................... 2 How to Buy Shares .............................. 10
Financial Highlights ............................... 3 Distribution Plan .............................. 12
Fund Description ................................... 4 How to Redeem Shares ........................... 13
Investment Objective and Policies .................. 4 Shareholder Services ........................... 15
Investment Restrictions ............................ 6 Performance Data ............................... 16
Risk Factors ....................................... 6 Fund Shares .................................... 17
Pricing Shares ..................................... 7 Additional Information ......................... 17
Dividends and Taxes ................................ 7 Additional Investment Information............... (i)
Fund Management and Expenses ....................... 9
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</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
<PAGE>
FEE TABLE
KEYSTONE TAX FREE FUND
The purpose of the fee table is to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and
Expenses;'" "How to Buy Shares;'" "Distribution Plan;'" and "Shareholder
Services."
SHAREHOLDER TRANSACTION EXPENSES
Contingent Deferred Sales Charge\1/ .................. 4.00%
(as a percentage of the lesser of total cost
or net asset value of shares redeemed)
Exchange Fee\2/ ..................................... $10.00
(per exchange)
ANNUAL FUND OPERATING EXPENSES\3/
(as a percentage of average net assets)
Management Fees ...................................... 0.44%
12b-1 Fees\4/ ........................................ 0.33%
Other Expenses ....................................... 0.18%
-----
Total Fund Operating Expenses ........................ 0.95%
=====
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
EXAMPLE\5/ ------ ------- ------- --------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each period: .............................................. $50 $50 $53 $117
You would pay the following expenses on the same investment,
assuming no redemption: ...................................... $10 $30 $53 $117
</TABLE>
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ----------
(1) 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").
(For a description of KARL, see "Shareholder Services.")
(3) Expense ratios shown above are for the Fund's fiscal year ended December 31,
1995.
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum front end sales charge permitted by rules adopted by the National
Association of Securities Dealers, Inc. ("NASD"). 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%.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE TAX FREE FUND
(For a share outstanding throughout the year)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990(B) 1989 1988 1987 1986
---- ---- ---- ---- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR......... $ 7.10 $ 8.12 $ 8.04 $ 8.07 $ 7.90 $ 8.06 $ 8.18 $ 8.09 $ 8.85 $ 8.31
Income From Investment
Operations
Net investment income ..... 0.41 0.37 0.39 0.46 0.46 0.52 0.57 0.55 0.56 0.68
Net realized and
unrealized gain
(loss) on investments ..... 0.74 (0.96) 0.48 0.12 0.36 (0.01) 0.15 0.30 (0.58) 0.88
Net commissions paid on
fund share sales (a) ..... -0- -0- -0- -0- -0- -0- -0- -0- -0- (0.08)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations ............ 1.15 (0.59) 0.87 0.58 0.82 0.51 0.72 0.85 (0.02) 1.48
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less distributions from:
Net investment income ..... (0.39) (0.37) (0.39) (0.46) (0.46) (0.52) (0.60) (0.63) (0.64) (0.68)
In excess of net
investment income ........ -0- (0.06) (0.06) (0.04) (0.07) (0.03) -0- -0- -0- -0-
Net realized capital
gain on investments ...... -0- -0- (0.33) (0.11) (0.12) (0.12) (0.24) (0.13) (0.10) (0.26)
In excess of net
realized gain on
investments .............. -0- -0- (0.01) -0- -0- -0- -0- -0- -0- -0-
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.39) (0.43) (0.79) (0.61) (0.65) (0.67) (0.84) (0.76) (0.74) (0.94)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, END
OF YEAR .................. $ 7.86 $ 7.10 $ 8.12 $ 8.04 $ 8.07 $ 7.90 $ 8.06 $ 8.18 $ 8.09 $ 8.85
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN(c) ...... 16.61% (7.34%) 11.15% 7.55% 10.80% 6.66% 9.11% 10.89% (0.14%) 18.26%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses .......... .95%(d) 1.55% 1.66% 1.38% 1.75% 1.18% 1.23% 1.79% 1.70% 0.83%
Net investment
income ................. 5.41% 4.92% 4.72% 5.71% 5.78% 6.54% 6.94% 6.74% 6.80% 7.79%
Portfolio turnover
rate ..................... 56% 84% 76% 78% 77% 64% 69% 61% 43% 44%
Net Assets, End of Year
(thousands) ........... $1,204,468 $1,197,727 $1,548,503 $1,453,199 $1,146,185 $1,060,826 $901,912 $903,132 $894,768 $1,025,084
</TABLE>
(a) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both financial
statement and tax purposes as capital charges.
(b) Calculation based on average shares outstanding.
(c) Excluding contingent deferred sales charges.
(d) "Ratio of total expenses to average net assets" for the year ended December
31, 1995 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended December 31, 1995, the expense ratio would have
been 0.94%.
<PAGE>
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FUND DESCRIPTION
- ------------------------------------------------------------------------------
The Fund is an open-end, diversified, management investment company,
commonly known as a mutual fund. The Fund has been operating continuously since
April 12, 1977 when it was created under Massachusetts law as a Massachusetts
business trust. The Fund is one of twenty funds managed by Keystone Management,
Inc. ("Keystone Management"), the Fund's investment manager, and is one of more
than thirty funds managed or advised by Keystone Investment Management Company
(formerly Keystone Custodian Funds, Inc.) ("Keystone"), the Fund's investment
adviser. Keystone and Keystone Management are, from time to time, collectively
referred to as "Keystone."
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide shareholders with the highest
possible current income, exempt from federal income taxes, while preserving
capital.
Since the Fund considers preservation of capital as well as the level of
tax exempt income, the Fund may realize less income than a fund willing to
expose shareholders' capital to greater risk.
The investment objective of the Fund is fundamental and may not be changed
without the vote of a majority of the Fund's outstanding shares (as defined in
the 1940 Act).
There can be no assurance that the Fund will achieve its investment
objective since there is uncertainty in every investment.
PRINCIPAL INVESTMENTS AND INVESTMENT POLICIES
Under ordinary circumstances, the Fund invests substantially all and at
least 80% of its assets in federally tax-exempt obligations. These obligations
include municipal bonds and notes and tax-exempt commercial paper obligations,
that are 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.
Municipal bonds include debt obligations issued by or on behalf of a
political subdivision of the U.S. or any agency or instrumentality thereof to
obtain funds for various public purposes. In addition, municipal bonds include
certain types of industrial development bonds issued by or on behalf of public
authorities to finance privately operated facilities.
The two principal classifications of municipal bonds are "general
obligation" and "limited obligation" or "revenue" bonds.
General obligation bonds involve the credit of an issuer possessing taxing
power and are payable from the issuer's general unrestricted revenues and not
from any particular fund a revenue source. Their payment may be dependent upon
an appropriation by the issuer's legislative body and may be subject to
quantitative limitations on the issuer's taxing power. Limited obligation or
revenue bonds are payable only from the revenues of a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source, such as the user of the facility.
The Tax Reform Act of 1986 made significant changes in the federal tax
status of certain obligations that previously were fully federally tax-exempt.
As a result, three categories of such obligations issued after August 7, 1986
now exist: (1) "public purpose" bonds, the income from which remains fully
exempt from federal income taxes; (2) qualified "private activity" industrial
development bonds, the income from which, while exempt from federal income taxes
under Section 103 of the Internal Revenue Code ("the Code"), is includable in
the calculation of the federal alternative minimum tax; and (3) "private
activity" (private purpose) bonds, the income from which is not exempt from
federal income taxes. The Fund's policies limit its investments in qualified
"private activity" industrial development bonds to no more than 20% of the
Fund's total assets. The Fund currently will not invest in "private activity"
(private purpose) bonds.
The 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 ("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.
However, Keystone expects that under normal circumstances at least 65% of
the Fund's total assets invested in municipal bonds will be within the three
highest ratings of such services or, if not rated, will be of comparable
quality.
Debt rated BBB by S&P is regarded as having an adequate capacity to pay
interest and repay principal. While it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are generally
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in high rated categories.
Bonds rated Baa by Moody's are considered to be medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and have
speculative characteristics as well.
Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligator's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
OTHER ELIGIBLE SECURITIES
The Fund also may invest in securities that pay interest that is not exempt
from federal income taxes, such as corporate and bank obligations, obligations
issued or guaranteed by the U.S. government or by any of its agencies or
instrumentalities, commercial paper and repurchase agreements. Such securities
must be rated at least BBB by S&P or Baa by Moody's or, if not rated, must be
determined by Keystone to be of comparable quality. The Fund will not invest
more than 20% of its total assets under ordinary circumstances and up to 100% of
its total assets for temporary or defensive purposes in such securities.
The Fund also may enter into reverse repurchase agreements and firm
commitment agreements for securities and currencies. The Fund may enter into
options transactions and may write covered call and put options, purchase call
and put options, including purchasing call and put options to close out existing
positions, and purchase call options to fix the interest rates of obligations
held by it. The Fund may also employ new investment techniques involving such
options. In addition, the Fund may enter into currency and other financial
futures contracts and related options transactions for hedging purposes and not
for speculation and may employ new investment techniques with respect to such
futures contracts and related options. In addition, the Fund may invest in
obligations denominated in foreign currencies that are exempt from federal
income tax.
In addition to the options and futures contracts mentioned above, only if
it is consistent with its investment objective, the Fund may also invest in
certain other types of "derivative instruments," including structured
securities.
In addition, the Fund may, notwithstanding any other investment policy or
restriction, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objective, policies and restrictions as the Fund. The Fund does not currently
intend to implement this policy and would do so only if the Trustees were to
determine such action to be in the best interest of the Fund and its
shareholders. In the event of such implementation, the Fund will comply with
such requirements as to written notice to shareholders as are then in effect.
For further information about the types of investments and investment
techniques available to the Fund, including the associated risks, see "Risk
Factors" and "Additional Investment Information" in this prospectus and see the
statement of additional information.
- ------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- ------------------------------------------------------------------------------
The Fund has adopted the fundamental restrictions summarized below, which
may not be changed without the approval of a majority of the Fund's outstanding
shares (as defined in the 1940 Act). These restrictions and certain other
fundamental and nonfundamental restrictions are set forth in detail in the
statement of additional information.
Generally, the Fund may not: (1) invest more than 5% of its total assets in
the securities of any one issuer; (2) borrow money, except that the Fund may
borrow money from banks for emergency or extraordinary purposes in aggregate
amounts up to one-third of its net assets and enter into reverse repurchase
agreements; and (3) pledge more than 15% of its total assets to secure
borrowings.
- ------------------------------------------------------------------------------
RISK FACTORS
- ------------------------------------------------------------------------------
GENERAL
Like any investment, your investment in the Fund involves an element of
risk. Before you invest in the Fund, you should carefully evaluate your ability
to assume the risks your investment in the Fund poses.
Certain risks related to the Fund are discussed below. To the extent not
discussed in this section, specific risks attendant to individual securities or
investment practices are discussed in "Additional Investment Information."
FUND RISKS
Investing in the Fund involves the risk common to investing in any
security, that is the value of the securities held by the Fund will fluctuate in
response to changes in economic conditions or public expectations about those
securities. For example, the market value of fixed income securities in which
the Fund may invest are likely to vary inversely to changes in prevailing
interest rates. In addition the net asset value of the Fund's shares will change
according to the market's perception of the underlying portfolio securities of
the Fund.
Should the Fund need to raise cash to meet a large number of redemptions,
it might have to sell portfolio securities at a time when it would be
disadvantageous to do so.
MUNICIPAL OBLIGATIONS
The Fund's ability to achieve its objective depends partially on the prompt
payment by issuers of the interest on and principal of the municipal bonds held
by the Fund. A moratorium, default, or other nonpayment of interest or principal
when due on any municipal bond, in addition to affecting the market value and
liquidity of that particular security, could affect the market value and
liquidity of other municipal bonds held by the Fund. In addition, the market for
municipal bonds is often thin and can be temporarily affected by large purchases
and sales, including those by the Fund.
From time to time, proposals have been introduced before the U.S. Congress
for the purpose of restricting or eliminating the federal income tax exemption
for interest on municipal bonds, and similar proposals may be introduced in the
future. The enactment of such a proposal could materially affect the
availability of municipal bonds for investment by the Fund and the value of the
Fund's portfolio. In the event of such legislation, the Fund would re-evaluate
its investment objective and policies and consider changes in the structure of
the Fund or dissolution.
OTHER CONSIDERATIONS
By itself, the Fund does not constitute a balanced investment program and
is not designed for investors seeking capital appreciation or maximum tax-exempt
income irrespective of fluctuations in principal or marketability. Shares of the
Fund would not be suitable for tax-exempt institutions and may not be suitable
for certain retirement plans that are unable to benefit from the Fund's
tax-exempt dividends. In addition, the Fund may not be an appropriate investment
for entities that are "substantial users" of facilities financed by industrial
development bonds or related persons thereof.
- ------------------------------------------------------------------------------
PRICING SHARES
- ------------------------------------------------------------------------------
The net asset value of a Fund share is computed each day on which the New
York Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. eastern time for the purpose of pricing Fund
shares) except on days when changes in the value of the Fund's securities do not
affect the current net asset value of its shares. The Exchange currently is
closed on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share is arrived at by determining the value of all of the Fund's
assets, subtracting all liabilities and dividing the result by the number of
shares outstanding.
The Fund values municipal bonds on the basis of valuations provided by a
pricing service, which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The Fund's
pricing service has been approved by its Board of Trustees.
The Fund values short-term instruments with maturities of sixty days or
less at amortized cost (original purchase cost as adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market. Short-term instruments maturing in more than sixty days for
which market quotations are readily available are valued at current market
value. Short-term instruments maturing in more than sixty days when purchased
that are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest, approximates
market and which, in any case, reflects fair value as determined by the Fund's
Board of Trustees. All other investments are valued at market value or, where
market quotations are not readily available, at fair value as determined in good
faith using methods prescribed by the Fund's Board of Trustees.
- ------------------------------------------------------------------------------
DIVIDENDS AND TAXES
- ------------------------------------------------------------------------------
The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Code. The Fund qualifies if, among other things, it
distributes to its shareholders at least 90% of its net investment income for
its fiscal year. The Fund also intends to make timely distributions, if
necessary, sufficient in amount to avoid the nondeductible 4% excise tax imposed
on a regulated investment company to the extent that it fails to distribute,
with respect to each calendar year, at least 98% of its ordinary income for such
calendar year and 98% of its net capital gains for the one-year period ending on
October 31 of such calendar year.
If the Fund qualifies and if it distributes substantially all of its net
investment income and net capital gains, if any, to shareholders, it will be
relieved of any federal income tax liability.
The Fund distributes its net investment income to shareholders daily and
net realized long-term capital gains annually. Distributions are payable in
shares 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.
Any taxable dividend declared in October, November, or December to
shareholders of record in such a month and paid by the following January 31 will
be includable in the taxable income of the shareholders as if paid on December
31 of the year in which the dividend was declared.
The Fund expects that substantially all of its dividends will be "exempt
interest dividends," which should be treated as excludable from federal gross
income. In order for distributions to qualify as exempt interest dividends, at
least 50% of the value of the Fund's assets must consist of federally tax-exempt
obligations at the close of each quarter. An exempt interest dividend is any
dividend or part thereof (other than a capital gain dividend) paid by the Fund
with respect to its net federally excludable municipal bond interest and
designated as an exempt interest dividend in a written notice mailed to
shareholders not later than 60 days after the close of its taxable year. The
percentage of the total dividends paid by the Fund with respect to any taxable
year that qualifies as exempt interest dividends will be the same for all
shareholders receiving dividends with respect to such year. If a shareholder
receives an exempt interest dividend with respect to any share and such share is
held for six months or less, any loss on the sale or exchange of such share will
be disallowed to the extent of the exempt interest dividend amount.
Any shareholder who may be a "substantial user" of a facility financed with
an issue of tax-exempt obligations or a "related person" to such a user should
consult his or her tax adviser concerning his or her qualification to receive
exempt interest dividends should the Fund hold obligations financing such
facility.
Interest on certain "private activity bonds" issued after August 7, 1986,
although otherwise tax-exempt, is treated as a tax preference item for
alternative minimum tax purposes. Under regulations to be promulgated, the
Fund's exempt interest dividends will be treated the same way to the extent
attributable to interest paid on such private activity bonds. Corporate
shareholders should also be aware that the receipt of exempt interest dividends
could subject them to alternative minimum tax under the provisions of Section
56(g) of the Code relating to "adjusted current earnings".
Some or all of the Fund's exempt interest dividends may be subject to state
income taxes. The Fund will report to shareholders on a state by state basis the
sources of its exempt interest dividends. Under particularly unusual
circumstances, such as when the Fund is in a prolonged defensive investment
position, it is possible that no portion of the Fund's distributions of income
to its shareholders for a fiscal year would be exempt from federal income tax;
however, the Fund does not presently anticipate that such unusual circumstances
will occur.
Since none of the Fund's income will consist of corporate dividends, no
distributions will qualify for the 70% corporate dividends received deduction.
The Fund intends to distribute its net capital gains as capital gain
dividends; such dividends are treated by shareholders as long-term capital
gains. Such distributions will be designated as capital gain dividends by a
written notice mailed to each shareholder no later than 60 days after the close
of the Fund's taxable year. If a shareholder receives a capital gain dividend
and holds his shares for six months or less, then any allowable loss on
disposition of such shares will be treated as a long-term capital loss to the
extent of such capital gain dividend.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Fund will not be deductible for federal income tax
purposes to the extent of the portion of the interest expense relating to exempt
interest dividends; that portion is determined by multiplying the total amount
of interest paid or accrued on the indebtedness by a fraction, the numerator of
which is the exempt interest dividends received by a shareholder in his taxable
year and the denominator of which is the sum of the exempt interest dividends
and the taxable distributions out of the Fund's investment income and short-term
capital gains received by the shareholder.
The foregoing is only a summary of some of the important tax considerations
generally affecting the Fund and its shareholders. No attempt is made to present
a detailed explanation of the federal income tax treatment of the Fund or its
shareholders, and this discussion is not intended as a substitute for careful
tax planning. Accordingly, potential investors in the Fund are urged to consult
their tax advisers with specific reference to their own tax situations.
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FUND MANAGEMENT AND EXPENSES
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FUND MANAGEMENT
Subject to the general supervision of the Fund's Board of Trustees,
Keystone Management, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, serves as investment manager to the Fund and is responsible for the
overall management of the Fund's business and affairs.
INVESTMENT MANAGER
Keystone Management, organized in 1989, is a wholly-owned subsidiary of
Keystone. Its directors and principal executive officers have been affiliated
with Keystone, a seasoned investment adviser, for a number of years. Keystone
Management also serves as investment manager to to each of the other funds in
the Keystone Fund Family and to certain other funds in the Keystone Investments
Family of Funds.
The Fund pays Keystone Management at the end of each calendar month a fee
for its services consisting of (1) an amount calculated as set forth below:
Annual Aggregate Net Asset Value
Management of the Shares
Fee Income of the Fund
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2.0% of
Gross Dividend and
Interest Income
Plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000;
and (2) an amount equal to the amount of reimbursable expenses of Keystone
Management accrued during such calendar month.
Pursuant to its Investment Management Agreement with the Fund (the
"Management Agreement"), Keystone Management has delegated its investment
management functions, except for certain administrative and management services,
to Keystone and has entered into an Investment Advisory Agreement with Keystone
(the "Investment Advisory Agreement"), under which Keystone provides investment
advisory and management services to the Fund. Services performed by Keystone
Management generally include (1) performing research and planning with respect
to (a) the Fund's qualification as a regulated investment company under
Subchapter M of the Code, (b) tax treatment of the Fund's portfolio investments,
(c) tax treatment of special corporate actions (such as reorganizations), (d)
state tax matters affecting the Fund, and (e) the Fund's distributions of income
and capital gains; (2) preparing the Fund's federal and state tax returns; and
(3) providing services to the Fund's shareholders in connection with federal and
state taxation and distributions of income and capital gains.
INVESTMENT ADVISER
Keystone, the Fund's investment adviser, located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034, has provided investment advisory and
management services to investment companies and private accounts since it was
organized in 1932. Keystone is a wholly-owned subsidiary of Keystone
Investments, Inc. (formerly known as Keystone Group, Inc.) ("Keystone
Investments"), 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a private corporation predominantly owned by
current and former members of management of Keystone and its affiliates. The
shares of Keystone Investments common stock beneficially owned by management are
held in a number of voting trusts, the trustees of which are George S. Bissell,
Albert H. Elfner, III, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone
Investments provides accounting, bookkeeping, legal, personnel and general
corporate services to Keystone Management, Keystone, their affiliates and the
Keystone Investments Family of Funds.
Pursuant to the Investment Advisory Agreement, Keystone receives for its
services an annual fee representing 85% of the management fee received by
Keystone Management under the Management Agreement.
For the fiscal year ended December 31, 1995, the Fund paid or accrued to
Keystone Management investment management fees of $5,327,202, which represented
0.44% of the Fund's average net assets. Of such amount paid to Keystone
Management, $4,528,122 was paid to Keystone for its services to the Fund. In
addition, the Fund reimbursed Keystone Management $736,118, which represented
0.06% of the Fund's average net assets, in connection with reimbursable expenses
paid by Keystone Management on behalf of the Fund under the Management
Agreement. For the fiscal year ended December 31, 1995, the total fee paid to
Keystone Management by the Fund for investment management and administrative
services fees was $6,063,320, which represented 0.50% of the Fund's average net
assets.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
FUND EXPENSES
In addition to the investment advisory and management fees discussed above,
the principal expenses that the Fund is expected to pay include, but are not
limited to, expenses of its transfer agent, its custodian and its independent
auditors; expenses under its Distribution Plan; fees of its Independent
Trustees; expenses of shareholders' and Trustees' meetings; fees payable to
government agencies, including registration and qualification fees of the Fund
and its shares under federal and state securities laws; expenses of preparing,
printing and mailing Fund prospectuses, notices, reports and proxy material; and
certain extraordinary expenses. In addition to such expenses, the Fund pays its
brokerage commissions, interest charges and taxes. For the fiscal year ended
December 31, 1995, the Fund paid 0.95% of its average net assets in expenses.
During the fiscal year ended December 31, 1995, the Fund paid or accrued to
Keystone Investments $21,661 for certain accounting services and to Keystone
Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and dividend
disbursing agent, $1,433,700 for certain shareholder services.
PORTFOLIO MANAGER
Betsy A. Blacher has been the Fund's Portfolio Manager since 1991. She is a
Keystone Senior Vice President and Senior Portfolio Manager and has more than 17
years of investment experience.
SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for the Fund,
Keystone may consider the number of shares of the Fund sold by such
broker-dealers. In addition, broker-dealers executing portfolio transactions
may, from time to time, be affiliated with the Fund, Keystone Management,
Keystone, the Fund's principal underwriter or their affiliates.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rates for the fiscal years ended December 31,
1995 and 1994 were 56% and 84%, respectively. For further information about
brokerage and distributions, see the statement of additional information.
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HOW TO BUY SHARES
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You may purchase shares of the Fund from any broker-dealer that has a
selling agreement with Keystone Investment Distributors Company (formerly
Keystone Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal
underwriter. The Principal Underwriter, a wholly-owned subsidiary of Keystone,
is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of the Fund
by mailing to the Fund, c/o Keystone Investor Resource Center, Inc., P.O. Box
2121, Boston, Massachusetts 02106-2121, a completed account application and a
check payable to the Fund. Or you may telephone 1-800-343-2898 to obtain the
number of an account to which you can wire or electronically transfer funds and
then send in a completed account application. Subsequent investment in the
Fund's shares in any amount may be made by check, by wiring federal funds or by
an electronic funds transfer ("EFT").
The Fund's shares are sold at the net asset value per share next computed
after the Fund receives the purchase order. The initial purchase must be at
least $1,000. There is no minimum for subsequent purchases. Purchase payments
are fully invested at net asset value. There are no sales charges on purchases
of Fund shares at the time of purchase.
CONTINGENT DEFERRED SALES CHARGE
With certain exceptions, when shares are redeemed within four calendar
years after their purchase, a deferred sales charge may be imposed at rates
ranging from a maximum of 4% of amounts redeemed during the 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 deferred sales charge is deducted from the redemption proceeds
otherwise payable to the shareholder. To the extent permitted by NASD rules, the
deferred sales charge is paid to the Principal Underwriter.
The contingent deferred sales charge is a declining percentage of the
lesser of (1) the net asset value of the shares redeemed or (2) the total cost
of such shares. No deferred sales charge is imposed when a shareholder redeems
amounts derived from (1) increases in the value of his account above the total
cost of such shares due to increases in the net asset value per share of the
Fund; (2) certain shares with respect to which the Fund did not pay a commission
on issuance, including shares acquired through reinvestment of dividend income
and capital gains distributions; or (3) shares held in all or part of more than
four consecutive calendar years.
In determining whether a contingent deferred sales charge is payable and,
if so, the percentage charge applicable, it is assumed that shares held the
longest are the first to be redeemed. There is no deferred sales charge imposed
on permitted exchanges of shares between funds in the Keystone Fund Family that
have adopted distribution plans pursuant to Rule 12b-1 under the 1940 Act. When
shares of one such fund have been exchanged for shares of another such fund, for
purposes of any future contingent deferred sales charge, the calendar year of
purchase of the shares being exchanged is deemed to be the year shares being
acquired by exchange were originally purchased.
In addition, no contingent deferred sales charge is imposed on a redemption
of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security Act of 1974
("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at
least 59 1/2 years old; (4) involuntary redemptions of accounts having an
aggregate net asset value of less than $1,000; (5) automatic withdrawals under
an automatic withdrawal plan of up to 1 1/2% per month of the shareholder's
initial account balance; (6) withdrawals consisting of loan proceeds to a
retirement plan participant; (7) financial hardship withdrawals made by a
retirement plan participant; or (8) withdrawals consisting of returns of excess
contributions or excess deferral amounts made to a retirement plan participant.
WAIVER OF DEFERRED SALES CHARGE
Shares also may be sold, to the extent permitted by applicable law, at net
asset value without the payment of commissions or the imposition of a deferred
sales charge to (1) certain officers, Directors, Trustees and employees of the
Fund, Keystone Management, Keystone and certain of their affiliates; (2)
registered representatives of firms with dealer agreements with the Principal
Underwriter; and (3) a bank or trust company acting as trustee for a single
account. For more details, see the statement of additional information.
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DISTRIBUTION PLAN
- ------------------------------------------------------------------------------
The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted pursuant to Rule 12b-1 under the 1940 Act. The Fund's Distribution
Plan provides that the Fund may expend up to 0.3125% quarterly (approximately
1.25% annually) of the average daily net asset value of its shares to pay
distribution costs for sales of its shares and to pay shareholder service fees.
The NASD currently limits such annual expenditures to 1%, of which 0.75% may be
used to pay such distribution costs and 0.25% may be used to pay shareholder
service fees. The NASD also limits the aggregate amount that the Fund may pay
for such distribution costs to 6.25% of gross share sales since the inception of
the Fund's Distribution Plan, plus interest at the prime rate plus 1% on such
amounts (less any contingent deferred sales charges paid by shareholders to the
Principal Underwriter) remaining unpaid from time to time.
Payments under the Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as dealers) (1) as
commissions for Fund shares sold and (2) as shareholder service fees in respect
to shares maintained by the recipients on the Fund's books for specified
periods. Amounts paid or accrued to the Principal Underwriter under (1) and (2)
in the aggregate may not exceed the annual limitations referred to above. The
Principal Underwriter generally reallows to brokers or others a commission equal
to 4% of the price paid for each Fund share sold. In addition, the Principal
Underwriter generally reallows to brokers or others a shareholder service fee at
a rate of 0.25% per annum of the net asset value of shares maintained by such
recipients on the books of the Fund for specified periods.
If the Fund is unable to pay the Principal Underwriter a commission on a
new sale because the annual maximum (0.75% of average daily net assets) has been
reached, the Principal Underwriter intends, but is not obligated, to continue to
accept new orders for the purchase of Fund shares and to pay or accrue
commissions and service fees to dealers in excess of the amount it currently
receives from the Fund. While the Fund is under no contractual obligation to pay
the Principal Underwriter for advances made by the Principal Underwriter in
excess of the Distribution Plan limitation, the Principal Underwriter intends to
seek full payment of such charges from the Fund (together with interest at the
rate of prime plus 1%) at such time in the future as, and to the extent that,
payment thereof by the Fund would be within permitted limits. The Principal
Underwriter currently intends to seek payment of interest only on such charges
paid or accrued by the Principal Underwriter subsequent to July 7, 1992. If the
Fund's Independent Trustees authorize such payments, the effect would be to
extend the period of time during which the Fund incurs the maximum amount of
costs allowed by the Distribution Plan. If the Distribution Plan is terminated,
the Principal Underwriter will ask the Independent Trustees to take whatever
action they deem appropriate under the circumstances with respect to payment of
such amounts.
During the fiscal year ended December 31, 1995, the Fund recovered $684,386
in contingentdeferred sales charges. During the same year, the Fund paid the
Principal Underwriter $4,719,697 under the Distribution Plan. The amount paid by
the Fund under its Distribution Plan, net of contingent deferred sales charges,
was $4,035,311. During the same year, the Principal Underwriter paid commissions
on new sales and service fees to dealers and others of $3,962,258.
The amounts and purposes of expenditures under the Distribution Plan must
be reported to the Independent Trustees quarterly. The Independent Trustees may
require or approve changes in the operation of the Distribution Plan and may
require that total expenditures by the Fund under the Distribution Plan be kept
within limits lower than the maximum amount permitted by the Distribution Plan
as stated above. If such costs are not limited by the Independent Trustees, such
costs could, for some period of time, be higher than such costs permitted by
most other plans presently adopted by other investment companies.
The Distribution Plan may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the Fund. Any change in the Distribution Plan that would materially increase
the distribution expenses of the Fund provided for in the Distribution Plan
requires shareholder approval. Otherwise, the Distribution Plan may be amended
by votes of the majority of both (1) the Fund's Trustees and (2) the Independent
Trustees cast in person at a meeting called for the purpose of voting on such
amendment.
While the Distribution Plan is in effect, the Fund is required to commit
the selection and nomination of candidates for Independent Trustees to the
discretion of the Independent Trustees.
Whether any expenditure under the Distribution Plan is subject to a state
expense limit depends upon the nature of the expenditure and the terms of the
state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be includable in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
Upon written notice to dealers, the Principal Underwriter, at its own
expense, may periodically sponsor programs which offer additional compensation
in connection with sales of Fund shares. Participation in such programs may be
available to all dealers or to selected dealers who have sold or are expected to
sell significant amounts of shares. Additional compensation may also include
financial assistance to dealers in connection with preapproved seminars,
conferences and advertising. No such programs or additional compensation will be
offered to the extent they are prohibited by the laws of any state or any
self-regulatory agency, such as the NASD.
The Principal Underwriter may, at its own expense, pay concessions in
addition to those described above to dealers that satisfy certain criteria
established from time to time by the Principal Underwriter. These conditions
relate to increasing sales of shares of the Keystone funds over specified
periods and certain other factors. Such payments may, depending on the dealer's
satisfaction of the required conditions, be periodic and may be up to 0.25% of
the value of shares sold by such dealer.
The Principal Underwriter may also pay banks and other financial service
firms that facilitate transactions in shares of the Fund for their clients a
transaction fee up to the level of payments made allowable to dealers for the
sale of such shares, as described above.
The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein, and banks and financial
institutions may be required to register as dealers pursuant to state law.
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HOW TO REDEEM SHARES
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REDEMPTION OF SHARES IN GENERAL
Fund shares may be redeemed for cash at the redemption value upon written
order by the shareholder(s) to the Fund, c/o Keystone Investor Resource Center,
Inc., Box 2121, Boston, Massachusetts 02106-2121, and presentation to the Fund
of a properly endorsed share certificate, if certificates have been issued.
The redemption value equals the net asset value adjusted for fractions of a
cent and may be more or less than the shareholder's cost depending upon changes
in the value of the Fund's portfolio securities between purchase and redemption.
The Fund computes the redemption value at the close of the Exchange at the end
of the day on which it has received all proper documentation from the
shareholder. Payment of the amount due on redemption, less any applicable
deferred sales charge, will be made within seven days thereafter, except as
discussed herein.
The Fund may impose a deferred sales charge at the time of redemption of
certain shares as explained in "How to Buy Shares." If imposed, the Fund deducts
the deferred sales charge from the redemption proceeds otherwise payable to the
shareholder.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from dealers and will calculate the net asset value on the
same terms as orders for the purchase of shares received from broker dealers and
described under "How to Buy Shares." If the Principal Underwriter has received
proper documentation, it will pay the redemption proceeds, less any applicable
deferred sales charge, to the broker-dealer placing the order within seven days
thereafter. The Principal Underwriter charges no fees for this service.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. In such a case the Fund will mail the
redemption proceeds upon clearance of the purchase check, which may take up to
15 days or more. Any delay may be avoided by purchasing shares either with a
certified check drawn on a U.S. bank or by bank wire of funds. Although the
mailing of a redemption check or the wiring of redemption proceeds may be
delayed, the redemption value will be determined and the redemption processed in
the ordinary course of business upon receipt of proper documentation. In such a
case, after redemption and prior to the release of the proceeds, no appreciation
or depreciation will occur in the value of the redeemed shares, and no interest
will be paid on the redemption proceeds. If the mailing of a redemption check
has been delayed, the check will be mailed promptly after good payment has been
collected.
If the Fund receives a redemption or repurchase order, but the shareholder
has not clearly indicated the amount of money or number of shares involved, the
Fund cannot execute the order. In such cases, the Fund will request the missing
information from the shareholder and process the order the day it receives such
information.
For the protection of shareholders, SIGNATURES ON CERTIFICATES, STOCK
POWERS AND ALL WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S.
STOCK EXCHANGE MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES
UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund and KIRC
may not only waive this requirement, but may also require additional documents
in certain cases. Currently, the requirement for a signature guarantee has been
waived on redemptions of $50,000 or less where the account address of record has
been the same for a minimum period of 30 days. The Fund and KIRC reserve the
right to withdraw this waiver at any time.
TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your
account by telephone by calling toll free 1-800-343-2898. To engage in telephone
transactions generally, you must complete the appropriate sections of the Fund's
application.
In order to insure that instructions received by KIRC are genuine, you will
be asked to verify certain criteria specific to your account when you initiate a
telephone transaction. At the conclusion of the transaction, you will be given a
transaction number confirming your request, and written confirmation of your
transaction will be mailed the next business day. Your telephone instructions
will be recorded. Redemptions by telephone are allowed only if the address and
bank account of record have been the same for a minimum period of 30 days.
If the redemption proceeds are less than $2,500, they will be mailed by
check. If they are $2,500 or more, they will be mailed, wired or sent by EFT to
your previously designated bank account as you direct. If you do not specify how
you wish your redemptions proceeds to be sent, they will be mailed by check.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth above.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves
the right to redeem your account if its value has fallen below $1,000, the
current minimum investment level, as a result of your redemptions (but not as a
result of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No
contingent deferred sales charges are applied to such redemptions.
GENERAL
The Fund reserves the right, at any time, to terminate, suspend or change
the terms of any redemption method described in this prospectus, except
redemption by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over KARL or by
telephone. KIRC will employ reasonable procedures to confirm that instructions
received over KARL or by telephone are genuine. Neither the Fund, KIRC nor the
Principal Underwriter will be liable when following instructions received over
KARL or by telephone that KIRC reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1)
the Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) the Fund cannot dispose of its
investments or fairly determine their value; or (4) the Securities and Exchange
Commission, for the protection of shareholders, so orders.
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SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
Details on all shareholder services may be obtained from KIRC, by writing
or by calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers shareholders specific fund account information and price and
yield quotations as well as the ability to effect account transactions,
including investments, exchanges and redemptions. You may access KARL by dialing
toll-free 1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days
a week.
EXCHANGES
A shareholder who has obtained the appropriate prospectus may exchange
shares of the Fund for shares of any of the other funds in the Keystone Fund
Family, on the basis of their respective net asset values by calling toll free
1-800-343-2898 or by writing KIRC at Box 2121, Boston, Massachusetts 02106-
2121. (See "How to Redeem Shares" for additional information on telephone
transactions.)
Fund shares purchased by check may be exchanged for shares of any fund in
the Keystone Fund Family other than Keystone Precious Metal Holdings, Inc.
("KPMH"), after 15 days, provided good payment for the purchase of Fund shares
has been collected. In order to exchange Fund shares for shares of KPMH, a
shareholder must have held Fund shares for a period of at least six months. You
may exchange your shares for another Keystone fund for a $10 fee by calling or
writing to Keystone. The exchange fee will be waived for individual investors
who make an exchange using KARL. If the shares being tendered for exchange have
been held for less than four years and are still subject to a deferred sales
charge, such charge will carry over to the shares being acquired in the exchange
transaction. The Fund reserves the right, after 60 days' notice to shareholders,
to terminate this exchange offer or to change its terms, including the right to
change the fee for any exchange.
Orders to exchange shares of the Fund for shares of Keystone Liquid Trust
("KLT") will be executed by redeeming the shares of the Fund and purchasing
shares of KLT at the net asset value of KLT shares determined after the proceeds
from such redemption become available, which may be up to seven days after such
redemption. In all other cases, orders for exchanges received by the Fund prior
to 4:00 p.m. eastern time on any day the funds are open for business will be
executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after 4:00 p.m. eastern time on
any business day will be executed at the respective net asset values determined
at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
AUTOMATIC INVESTMENT PLAN
Shareholders may take advantage of investing on an automatic basis by
establishing an automatic investment plan. Funds are drawn on a shareholder's
checking account monthly and used to purchase Fund shares.
SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, shareholders may arrange for regular
monthly or quarterly fixed withdrawal payments. Each payment must be at least
$100 and may be as much as 1% per month or 3% per quarter of the total net asset
value of the Fund shares in the shareholder's account when the Systematic Income
Plan is opened. Fixed withdrawal payments are not subject to a deferred sales
charge. Excessive withdrawals may decrease or deplete the value of a
shareholder's account.
OTHER SERVICES
Under certain circumstances shareholders may, within 30 days after a
redemption, reinstate their accounts at current net asset value.
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PERFORMANCE DATA
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise "total return," "current yield"
and "tax equivalent yield." ALL FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE
NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Total return refers to the Fund's
average annual compounded rates of return over specified periods determined by
comparing the initial amount invested to the ending redeemable value of that
amount. The resulting equation assumes reinvestment of all dividends and
distributions and deduction of all recurring charges, if any, applicable to all
shareholder accounts. The deduction of the contingent deferred sales charge is
reflected in the applicable years. The exchange fee is not included in the
calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
Tax equivalent yield is, in general, the current yield divided by a factor
equal to one minus a stated income tax rate and reflects the yield a taxable
investment would have to achieve in order to equal on an after-tax basis a tax
exempt yield.
The Fund may include comparative performance information in advertising or
marketing the Fund's shares, such as data from Lipper Analytical Services, Inc.,
Morningstar, Inc., CDS-Weisenberger and Value Line or other financial and
industry publications.
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FUND SHARES
- ------------------------------------------------------------------------------
The Fund currently issues one class of shares, which participate equally in
dividends and distributions and have equal voting, liquidation and other rights.
When issued and paid for, the shares will be fully paid and nonassessable by the
Fund. Shares may be exchanged as explained under "Shareholder Services," but
will have no other preference, conversion, exchange or preemptive rights.
Shareholders of the Fund are entitled to one vote for each full share owned and
fractional votes for fractional shares. Shares are redeemable, transferable and
freely assignable as collateral. There are no sinking fund provisions. The Fund
may establish additional classes or series of shares.
The Fund does not have annual meetings. The Fund will have special meetings
from time to time as required under its Declaration of Trust and under the 1940
Act. As provided in the Fund's Declaration of Trust, shareholders have the right
to remove Trustees by an affirmative vote of two-thirds of the outstanding
shares. A special meeting of the shareholders will be held when holders of 10%
of the outstanding shares request a meeting for the purpose of removing a
Trustee. The Fund is prepared to assist shareholders in communications with one
another for the purpose of convening such a meeting as prescribed by Section
16(c) of the 1940 Act.
Under Massachusetts law it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. However, the Fund's Declaration of
Trust provides that shareholders shall not be subject to any personal liability
for the Fund's obligations and provides indemnification from Fund assets for any
shareholder held personally liable for the Fund's obligations. Disclaimers of
such liability are included in each Fund agreement.
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ADDITIONAL INFORMATION
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KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1515, is a
wholly owned subsidiary of Keystone and serves as the Fund's transfer agent and
dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon written notice to those shareholders the Fund intends, when an
annual report or semi-annual report of the Fund is required to be furnished, to
mail one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating. The following criteria are used in making that assessment:
1. amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note); and
2. source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 -- Strong capacity to pay principal and interest. Those issues
determined to possess a very strong capacity to pay debt service are
given a plus (+) designation.
2. SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the terms
of the notes.
3. SP-3 -- Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as part
of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example, "SP
- -- 1+/A-1+").
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
1. likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. nature of and provisions of the obligation; and
3. protection afforded by and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the successful
completion of the project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon, failure of such
completion.
D. BOND RATINGS
Bond ratings are as follows:
1. AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
2. AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
3. A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
A Moody's rating for municipal short-term obligations will be designated
Moody's Investment Grade or ("MIG"). These ratings recognize the difference
between short-term credit risk and long-term risk. Factors affecting the
liquidity of the borrower and the short-term cyclical elements are critical in
short-term ratings.
A short-term rating may also be assigned on issues with a demand feature --
variable rate demand obligation ("VRDO"). Such ratings will be designated as
VMIG. Short-term ratings on issues with demand features are differentiated by
the use of the VMIG symbol to reflect such characteristics as payment upon
periodic demand rather than fixed maturity dates and payment relying on the
external liquidity.
The note ratings are as follows:
1. MIG1/VMIG1 This designation denotes the best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
2. MIG2/VMIG2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
3. MIG3/VMIG3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
4. MIG4/VMIG4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
B. CORPORATE AND MUNICIPAL BOND RATINGS
1. Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt-
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
2. Aa -- Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long term risks appear somewhat larger than in Aaa securities.
3. A -- Bonds rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
4. Baa -- Bonds rated Baa are considered to be medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Con. (--) -- Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (1) earnings of projects under
construction, (2) earnings of projects unseasoned in operation experience, (3)
rentals that begin when facilities are completed, or (4) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the Aa, A, and Baa groups that Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, and Baa 1.
FITCH CORPORATE AND MUNICIPAL RATINGS
A. MUNICIPAL NOTES
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally three years or less. These
include commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes. The short-term rating places greater emphasis on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
The note ratings are as follows:
1. F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
2. F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-
1+.
3. F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned the two higher ratings.
4. F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near-term adverse changes could cause these securities to be
rated below investment grade.
B. CORPORATE AND MUNICIPAL BOND RATINGS
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
PLUS (+) OR MINUS (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA category.
A CONDITIONAL rating is premised on the successful completion of a project
or the occurrence of a specific event.
Debt rated BB, B, CCC, CC and C by S&P is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Debt rated C1 by S&P is debt (income bonds) on which no interest is being paid.
Debt rated D by S&P is in default and payment of interest and/ or repayment of
principal is in arrears. Bonds that are rated CAA by Moody's are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds that are rated Ca by Moody's
represent obligations that are speculative in a high degree. Such issues are
often in default or have other market shortcomings. Bonds that are rated C by
Moody's are the lowest rated bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Debt rated BB, B, CCC, CC, and C by Fitch is regarded as speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
represents the highest degree of speculation. Debt rated DDD, DD, and D are in
default on interest and/or principal payments.
DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
AVAILABLE TO THE FUND
The Fund may engage in the following investment practices to the extent
described in the prospectus and statement of additional information.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by government regulation.
Payment of interest and principal upon these obligations may also be affected by
governmental action in the country of domicile of the branch (generally referred
to as sovereign risk). In addition, evidences of ownership of such securities
may be held outside the U.S. and the Fund may be subject to the risks associated
with the holding of such property overseas. Examples of governmental actions
would be the imposition of currency controls, interest limitations, withholding
taxes, seizure of assets or the declaration of a moratorium. Various provisions
of federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. The Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement,
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes acquired by the Fund permit the Fund to demand
payment of principal and accrued interest at any time (on not more than seven
days' notice). Notes acquired by the Fund may have maturities of more than one
year, provided that (1) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days notice, and (2) the rate of interest on
such notes is adjusted automatically at periodic intervals which normally will
not exceed 31 days, but may extend up to one year. The notes will be deemed to
have a maturity equal to the longer of the period remaining to the next interest
rate adjustment or the demand notice period. Because these types of notes are
direct lending arrangements between the lender and borrower, such instruments
are not normally traded and there is no secondary market for these notes,
although they are redeemable and thus repayable by the borrower at face value
plus accrued interest at any time. Accordingly, the Fund's right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. In connection with master demand note arrangements, Keystone considers,
under standards established by the Board of Trustees, earning power, cash flow
and other liquidity ratios of the borrower and will monitor the ability of the
borrower to pay principal and interest on demand. These notes are not typically
rated by credit rating agencies. Unless rated, the Fund may invest in them only
if at the time of an investment the issuer meets the criteria established for
commercial paper discussed in the statement of additional information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. government securities or other financial institutions believed by Keystone
to be creditworthy. Such persons must be registered as U.S. government
securities dealers with appropriate regulatory organizations. Under such
agreements, the bank, primary dealer or other financial institution agrees upon
entering into the contract to repurchase the security at a mutually agreed upon
date and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations during
such period. Under a repurchase agreement, the seller must maintain the value of
the securities subject to the agreement at not less than the repurchase price,
such value being determined on a daily basis by marking the underlying
securities to their market value. Although the securities subject to the
repurchase agreement might bear maturities exceeding a year, the Fund only
intends to enter into repurchase agreements that provide for settlement within a
year and usually within seven days. Securities subject to repurchase agreements
will be held by the Fund's custodian or in the Federal Reserve book entry
system. The Fund does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under its repurchase obligation.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
securities and losses, including (1) possible declines in the value of the
underlying securities during the period while the Fund seeks to enforce its
rights thereto; (2) possible subnormal levels of income and lack of access to
income during this period; and (3) expenses of enforcing its rights. The Board
of Trustees has established procedures to evaluate the creditworthiness of each
party with whom the Fund enters into repurchase agreements by setting guidelines
and standards of review for Keystone and monitoring Keystone's actions with
regard to repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and
agree to repurchase them at a mutually agreed upon date and price. The Fund
intends to enter into reverse repurchase agreements to avoid otherwise having to
sell securities during unfavorable market conditions in order to meet
redemptions. At the time the Fund enters into a reverse repurchase agreement, it
will establish a segregated account with the Fund's custodian containing liquid
assets such as U.S. government securities or other high grade debt securities
having a value not less than the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities that the Fund is obligated to repurchase may decline below the
repurchase price. Borrowing and reverse repurchase agreements magnify the
potential for gain or loss on the portfolio securities of the Fund and,
therefore, increase the possibility of fluctuation in the Fund's net asset
value. Such practices may constitute leveraging. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Fund's obligation to repurchase the
securities and the Fund's use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such determination. The staff of
the Securities and Exchange Commission ("SEC") has taken the position that a
fully secured or collateralized reverse repurchase agreement is not subject to
the percentage limit on borrowings imposed under Section 18 of the 1940 Act.
"WHEN ISSUED" SECURITIES
The Fund may also purchase and sell securities and currencies on a when
issued and delayed delivery basis. When issued or delayed delivery transactions
arise when securities or currencies are purchased or sold by the Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. When the Fund engages in when issued and delayed
delivery transactions, the Fund relies on the buyer or seller, as the case may
be, to consummate the sale. Failure to do so may result in the Fund missing the
opportunity to obtain a price or yield considered to be advantageous. When
issued and delayed delivery transactions may be expected to occur a month or
more before delivery is due. However, no payment or delivery is made by the Fund
until it receives payment or delivery from the other party to the transaction. A
separate account of liquid assets equal to the value of such purchase
commitments will be maintained until payment is made. When issued and delayed
delivery agreements are subject to risks from changes in value based upon
changes in the level of interest rates, currency rates and other market factors,
both before and after delivery. The Fund does not accrue any income on such
securities or currencies prior to their delivery. To the extent the Fund engages
in when issued and delayed delivery transactions, it will do so consistent with
its investment objective and policies and not for the purpose of investment
leverage.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to brokers and dealers pursuant to agreements
requiring that the loans be continuously secured by cash or securities of the
U.S. government, its agencies or instrumentalities, or any combination of cash
and such securities, as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to the Fund if as a result the aggregate of all outstanding
securities loans exceeds 15% of the value of the Fund's total assets taken at
their current value. The Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other
high-grade, short-term obligations or interest bearing cash equivalents.
Although voting rights attendant to securities loaned pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted by the Fund if, in the opinion of the Fund, a material event affecting the
investment is to occur. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. Loans may
only be made to borrowers deemed to be of good standing, under standards
approved by the Board of Trustees, when the income to be earned from the loan
justifies the attendant risks.
DERIVATIVES
The Fund may use derivatives in furtherance of its investment objective.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates,
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices. Derivatives can be used
to earn income or protect against risk, or both. For example, one party with
unwanted risk may agree to pass that risk to another party who is willing to
accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Fund to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. The Fund is permitted to use derivatives for one
or more of these purposes. Each of these uses entails greater risk than if
derivatives were used solely for hedging purposes. The Fund uses futures
contracts and related options for hedging purposes. Derivatives are a valuable
tool which, when used properly, can provide significant benefit to Fund
shareholders. Keystone is not an aggressive user of derivatives with respect to
the Fund. However, the Fund may take positions in those derivatives that are
within its investment policies if, in Keystone's judgement, this represents an
effective response to current or anticipated market conditions. Keystone's use
of derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options,
futures, forwards and swaps -- from which virtually any type of derivative
transaction can be created. Further information regarding options and futures,
is provided later in this section and is provided in the Fund's statement of
additional information.
Debt instruments that incorporate one or more of these building blocks for
the purpose of determining the principal amount of and/or rate of interest
payable on the debt instruments are often referred to as "structured
securities." An example of this type of structured security is indexed
commercial paper. The term is also used to describe certain securities issued in
connection with the restructuring of certain foreign obligations. See
"Structured Securities" below. The term "derivative" is also sometimes used to
describe securities involving rights to a portion of the cash flows from an
underlying pool of mortgages or other assets from which payments are passed
through to the owner of, or that collateralize, the securities.
While the judicious use of derivatives by experienced investment managers
such as Keystone can be beneficial, derivatives also involve risks different
from, and, in certain cases, greater than, the risks presented by more
traditional investments. Following is a general discussion of important risk
factors and issues concerning the use of derivatives that investors should
understand before investing in the Fund.
* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to the Fund's interest.
* Management Risk -- Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to the Fund's portfolio and the ability to forecast price,
interest rate or currency exchange rate movements correctly.
* Credit Risk -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to as
a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
* Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risks -- Other risks in using derivatives include the risk of mispricing
or improper valuation and the inability of derivatives to correlate perfectly
with underlying assets, rates and indices. Many derivatives, in particular
privately negotiated derivatives, are complex and often valued subjectively.
Improper valuations can result in increased cash payment requirements to
counterparties or a loss of value to a Fund. Derivatives do not always
perfectly or even highly correlate or track the value of the assets, rates or
indices they are designed to closely track. Consequently, the Fund's use of
derivatives may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Fund's investment objective.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. The Fund may write (i.e., sell) covered call and
put options. By writing a call option, the Fund becomes obligated during the
term of the option to deliver the securities underlying the option upon payment
of the exercise price. By writing a put option, the Fund becomes obligated
during the term of the option to purchase the securities underlying the option
at the exercise price if the option is exercised. The Fund also may write
straddles (combinations of covered puts and calls on the same underlying
security).
The Fund may only write "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
the Fund has written options against all of its securities which are available
for writing options, the Fund may be unable to write additional options unless
it sells a portion of its portfolio holdings to obtain new securities against
which it can write options. If this were to occur, higher portfolio turnover and
correspondingly greater brokerage commissions and other transaction costs may
result. However, the Fund does not expect that this will occur.
The Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains with its custodian in a segregated account liquid assets
having a value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through
a receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS. The Fund may purchase put or call options, including
purchasing put or call options for the purpose of offsetting previously
written put or call options of the same series.
If the Fund is unable to effect a closing purchase transaction with respect
to covered options it has written, the Fund will not be able to sell the
underlying security or dispose of assets held in a segregated account until the
options expire or are exercised.
An option position may be closed out only in a secondary market for an
option of the same series. Although the Fund generally will write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any particular time, and for some options no secondary market may exist. In such
event, it might not be possible to effect a closing transaction in a particular
option.
Options on some securities are relatively new, and it is impossible to
predict the amount of trading interest that will exist in such options. There
can be no assurance that viable markets will develop or continue. The failure of
such markets to develop or continue could significantly impair the Fund's
ability to use such options to achieve its investment objective.
OPTIONS TRADING MARKETS. Options in which the Fund will trade generally are
listed on national securities exchanges. Exchanges on which such options
currently are traded include the Chicago Board Options Exchange and the New
York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any Exchange, but traded in the over-the-counter
market. Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions could fail to
meet their obligations to the Fund. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on its use of options
discussed herein, the Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.
The staff of the SEC is of the view that the premiums that the Fund pays
for the purchase of unlisted options, and the value of securities used to cover
unlisted options written by the Fund, are considered to be invested in illiquid
securities or assets for the purpose of calculating whether the Fund is in
compliance with its investment restriction relating to illiquid investments.
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and
write options on such contracts. The Fund intends to enter into such contracts
and related options for hedging purposes. The Fund will enter into futures on
securities or currencies or index-based futures contracts in order to hedge
against changes in interest or exchange rates or securities prices. A futures
contract on securities or currencies is an agreement to buy or sell securities
or currencies at a specified price during a designated month. A futures contract
on a securities index does not involve the actual delivery of securities, but
merely requires the payment of a cash settlement based on changes in the
securities index. The Fund does not make payment or deliver securities upon
entering into a futures contract. Instead, it puts down a margin deposit, which
is adjusted to reflect changes in the value of the contract and which continues
until the contract is terminated.
The Fund may sell or purchase futures contracts. When a futures contract is
sold by the Fund, the value of the contract will tend to rise when the value of
the underlying securities or currencies declines and to fall when the value of
such securities or currencies increases. Thus, the Fund sells futures contracts
in order to offset a possible decline in the value of its securities or
currencies. If a futures contract is purchased by the Fund, the value of the
contract will tend to rise when the value of the underlying securities or
currencies increases and to fall when the value of such securities or currencies
declines. The Fund intends to purchase futures contracts in order to establish
what is believed by Keystone to be a favorable price and rate of return for
securities or favorable exchange rate for currencies the Fund intends to
purchase.
The Fund also intends to purchase put and call options on futures contracts
for hedging purposes. A put option purchased by the Fund would give it the right
to assume a position as the seller of a futures contract. A call option
purchased by the Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires the Fund to pay a premium. In exchange for the premium, the Fund
becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. The Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that the Fund will be able to enter into an offsetting transaction
with respect to a particular contract at a particular time. If the Fund is not
able to enter into an offsetting transaction, the Fund will continue to be
required to maintain the margin deposits on the contract and to complete the
contract according to its terms, in which case it would continue to bear market
risk on the transaction.
Although futures and options transactions are intended to enable the Fund
to manage market, interest rate or exchange rate risk, unanticipated changes in
interest rates, exchange rates or market prices could result in poorer
performance than if it had not entered into these transactions. Even if Keystone
correctly predicts interest or exchange rate movements, a hedge could be
unsuccessful if changes in the value of the Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between the Fund's futures and securities or currencies positions may be caused
by differences between the futures and securities or currencies markets or by
differences between the securities or currencies underlying the Fund's futures
position and the securities or currencies held by or to be purchased for the
Fund. Keystone will attempt to minimize these risks through careful selection
and monitoring of the Fund's futures and options positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The Fund has the ability to write options on futures, but intends to
write such options only to close out options purchased by the Fund. The Fund
will not change these policies without supplementing the information in its
prospectus and statement of additional information.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, if permitted by its investment policies, the Fund may
invest in securities of foreign issuers. When the Fund invests in foreign
securities they usually will be denominated in foreign currencies, and the Fund
temporarily may hold funds in foreign currencies. Thus, the value of Fund shares
will be affected by changes in exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency the Fund
will deliver or receive when the contract is completed) is fixed when the Fund
enters into the contract. The Fund usually will enter into these contracts to
stabilize the U.S. dollar value of a security it has agreed to buy or sell. The
Fund intends to use these contracts to hedge the U.S. dollar value of a security
it already owns, particularly if the Fund expects a decrease in the value of the
currency in which the foreign security is denominated. Although the Fund will
attempt to benefit from using forward contracts, the success of its hedging
strategy will depend on Keystone's ability to predict accurately the future
exchange rates between foreign currencies and the U.S. dollar. The value of the
Fund's investments denominated in foreign currencies will depend on the relative
strength of those currencies and the U.S. dollar, and the Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by the Fund. The
Fund may also purchase and sell options related to foreign currencies in
connection with hedging strategies.
VARIABLE AND FLOATING RATE INSTRUMENTS. Fixed-income securities may have fixed,
variable or floating rates of interest. Variable and floating rate securities
pay interest at rates that are adjusted periodically, according to a specified
formula. A "variable" interest rate adjusts at predetermined intervals (e.g.,
daily, weekly or monthly), while a "floating" interest rate adjusts whenever a
specified benchmark rate (such as the bank prime lending rate) changes.
If permitted by its investment policies, the Fund may invest in
fixed-income securities that pay interest at a coupon rate equal to a base rate,
plus additional interest for a certain period of time if short-term interest
rates rise above a predetermined level or "cap." The amount of such an
additional interest payment typically is calculated under a formula based on a
short-term interest rate index multiplied by a designated factor.
INVERSE FLOATING RATE SECURITIES. If permitted by its investment policies, the
Fund may also invest in securities with rates that move inversely to market
rates ("inverse floaters"). An inverse floater bears an interest rate that
resets in the opposite direction of the change in a specified interest rate
index. As market interest rates rise, the interest rate on the inverse floater
goes down, and vice versa. Inverse floaters tend to exhibit greater price
volatility than fixed-rate bonds of similar maturity and credit quality. The
interest rates on inverse floaters may be significantly reduced, even to zero,
if interest rates rise. Moreover, the secondary market for inverse floaters may
be limited in rising interest rate environments.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in market value.
STRUCTURED SECURITIES. Structured securities generally represent interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of structured securities backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
securities to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured securities is dependent
on the extent of the cash flow on the underlying instruments. Because structured
securities typically involve no credit enhancement, their credit risk generally
will be equivalent to that of the underlying instruments. Structured securities
of a given class may be either subordinated or unsubordinated to the right of
payment of another class. Subordinated structured securities typically have
higher yields and present greater risks than unsubordinated structured
securities.
<PAGE>
KEYSTONE
FUND FAMILY
**
Quality Bond Fund (B-1)
Diversified Bond Fund (B-2)
High Income bond Fund (B-4)
Balanced Fund (K-1)
Strategic Growth Fund (K-2)
Growth and Income Fund (S-1)
Mid-Cap Growth Fund (S-3)
Small Company Growth Fund (S-4)
International Fund
Precious Metals Holdings
Tax Free Fund
Liquid Trust
[LOGO] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
[RECYCLE LOGO]
KTFF-P 4/96
8.1M
KEYSTONE
TAX FREE
FUND
[LOGO]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE TAX FREE FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
KEYSTONE TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 12, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Tax Free Fund dated April 12, 1996. A copy of the prospectus may be obtained
from Keystone Investment Distributors Company (formerly known as Keystone
Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal
underwriter, 200 Berkeley Street, Boston, Massachusetts 02116-5034 or your
broker-dealer.
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TABLE OF CONTENTS
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Page
The Fund's Objective and Policies 2
Investment Restrictions 2
Valuation of Securities 5
Sales Charges 5
Distribution Plan 8
The Declaration of Trust 10
Investment Manager 11
Investment Adviser 14
Trustees and Officers 16
Principal Underwriter 20
Brokerage 21
Standardized Total Return and Yield Quotations 23
Additional Information 24
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-22
<PAGE>
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THE FUND'S OBJECTIVE AND POLICIES
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The Fund is an open-end diversified management investment company. The
Fund's investment objective is to provide shareholders with the highest possible
current income, exempt from federal income taxes, while preserving capital. The
Fund invests primarily in municipal bonds, but also may invest in certain other
securities as described in the Appendix hereto and the "Additional Investment
Information" section of the Fund's prospectus.
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INVESTMENT RESTRICTIONS
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None of the restrictions enumerated in this paragraph may be changed
without a vote of the holders of a majority of the Fund's outstanding shares (as
defined in the Investment Company Act of 1940 (the "1940 Act")).
The Fund shall not do the following:
(1) purchase securities on margin, but the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities;
(2) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or of securities which without payment of any further consideration
are convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short;
(3) borrow money, except that the Fund may (a) borrow money from banks
for emergency or extraordinary purposes in aggregate amounts up to one-third of
its net assets, and (b) enter into reverse repurchase agreements;
(4) pledge, mortgage or hypothecate its assets except to secure
indebtedness permitted by subparagraph (3) above, with pledged assets to be no
more than 15% of its total assets; the Fund understands that pledges in excess
of approximately 6% of its net assets would result in its inability to sell
additional shares in one state; however, the Fund has no present intention of
exceeding this limit;
(5) purchase any security other than United States ("U.S.") government
securities of any issuer if as a result more than 25% of its total assets would
be invested in a single industry, including industrial development bonds from
the same facility or similar types of facilities; governmental issuers of
municipal bonds are not regarded as members of an industry and the Fund may
invest more than 25% of its assets in industrial development bonds;
(6) purchase any security, other than U.S. government securities, if as
a result more than 5% of the Fund's total assets would be invested in securities
of the issuer, or the Fund would hold more than 10% of the voting securities of
the issuer;
(7) invest for the purpose of exercising control over or management of
any company;
(8) invest in securities of other investment companies, except as part
of a merger, consolidation, purchase of assets or similar transaction approved
by the Fund's shareholders;
(9) purchase or sell commodities or commodity contracts or real estate,
except that it may purchase and sell securities secured by real estate and
securities of companies which invest in real estate, and may engage in currency
or other financial futures and related options transactions;
(10) act as an underwriter except to the extent that, in connection
with the disposition of its portfolio investments, it may be deemed to be an
underwriter under federal securities laws; or purchase securities which are not
readily marketable except for repurchase agreements;
(11) purchase or retain securities of an issuer if, to the knowledge of
the Fund, an officer, Trustee or Director of the Fund or Keystone owns
beneficially more than 1/2 of 1% of the shares or securities of such issuer and
all such officers, Trustees and Directors owning more than 1/2 of 1% of such
shares or securities together own more than 5% of such shares or securities;
(12) purchase securities of any issuer if the person responsible for
payment, together with any predecessor, has been in operation for less than
three years if, as a result, the aggregate of such investments would exceed 5%
of the Fund's total assets; provided, however, that this restriction shall not
apply to U.S. government securities or to any obligation the payment of which
involves the credit and taxing power of any person authorized to issue municipal
bonds;
(13) invest in interests in oil, gas or other mineral exploration or
development programs;
(14) make loans, except to the extent that the purchase of debt
instruments or repurchase agreements may be deemed to be loans; repurchase
agreements maturing in more than seven days will not exceed 10% of the Fund's
total assets; and
(15) purchase securities of foreign issuers.
The foregoing percentage restrictions will apply at the time of the
purchase of a security and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of a purchase of
such security. For the purpose of limitations (5) and (6), the Fund will treat
each state, territory and possession of the U.S., the District of Columbia and,
if its assets and revenues are separate from those of the entity or entities
creating it, each political subdivision, agency and instrumentality of any one
(or more, as in the case of a multistate authority or agency) of the foregoing
as an issuer of all securities that are backed primarily by its assets or
revenues; each company as an issuer of all securities that are backed primarily
by its assets or revenues; and each of the foregoing entities as an issuer of
all securities that it guarantees; provided, however, that for the purpose of
limitation (6) no entity shall be deemed to be an issuer of a security that it
guarantees so long as no more than 10% of the Fund's total assets (taken at
current value) are invested in securities guaranteed by the entity and
securities of which it is otherwise deemed to be an issuer.
The Fund does not presently intend to invest more than 25% of its total
assets in (1) municipal bonds of a single state and its subdivisions, agencies
and instrumentalities; of a single territory or possession of the U.S. and its
subdivisions, agencies or instrumentalities; or of the District of Columbia and
any subdivision, agency or instrumentality thereof; or (2) municipal bonds the
payment of which depends on revenues derived from a single facility or similar
types of facilities. Since certain municipal bonds may be related in such a way
that an economic, business or political development or change affecting one such
security could likewise affect the other securities, a change in this policy
could result in increased investment risk, but no change is presently
contemplated. The Fund may invest more than 25% of its total assets in
industrial development bonds.
Notwithstanding the eighth investment restriction enumerated above or
any of the other limitations above, the Fund may invest all of its assets in the
securities of a single open-end management investment company with substantially
the same fundamental investment objectives, policies, and restrictions as the
Fund. See "Fund Objective and Policies" in the prospectus.
Although not a fundamental restriction or policy requiring a
shareholders' vote to change, the Fund has undertaken to a state securities
authority that the Fund will not invest more than 15% of its total assets in the
securities of issuers, which together with any predecessors, have a record of
less than three years continuous operation or securities of issuers which are
restricted as to disposition.
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VALUATION OF SECURITIES
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The Fund believes that reliable market quotations generally are not
readily available for purposes of valuing municipal bonds. As a result,
depending on the particular municipal bonds owned by the Fund, it is likely that
most of the valuations for such bonds will be based upon their fair value
determined under procedures that have been approved by the Fund's Board of
Trustees. The Fund's Board of Trustees has authorized the use of a pricing
service to determine the fair value of its municipal bonds and other securities.
Non-tax exempt securities for which market quotations are readily
available are valued on a consistent basis at that price quoted that, in the
opinion of the Board of Trustees or the person designated by the Board of
Trustees to make the determination, most nearly represents the market value of
the particular security. Short-term investments that are purchased with
maturities of sixty days or less are valued at amortized cost (original purchase
cost as adjusted for amortization of premium or accretion of discount), which,
when combined with accrued interest, approximates market; short-term investments
maturing in more than sixty days for which market quotations are readily
available are valued at current market value; and short-term investments
maturing in more than sixty days when purchased that are held on the sixtieth
day prior to maturity are valued at amortized cost (market value on the sixtieth
day adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market and which, in any case,
reflects fair value as determined by the Board of Trustees. Any securities for
which market quotations are not readily available are valued on a consistent
basis at fair value as determined in good faith using methods prescribed by the
Fund's Board of Trustees.
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SALES CHARGES
- --------------------------------------------------------------------------------
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (see "Distribution Plan"), a deferred sales charge may be
imposed at the time of redemption of certain Fund shares within four calendar
years after their purchase. If imposed, the deferred sales charge is deducted
from the redemption proceeds otherwise payable to the shareholder. To the extent
permitted by National Association of Securities Dealers, Inc. ("NASD") rules,
the deferred sales charge attributable is paid to the Principal Underwriter.
Accordingly, for the fiscal year ended December 31, 1995, the Fund retained
$684,386 and the Principal Underwriter received $95,377 in deferred sales
charges.
The contingent deferred sales charge is a declining percentage of the
lesser of (1) the net asset value of the shares redeemed or (2) the total cost
of such shares. No contingent deferred sales charge is imposed when the
shareholder redeems amounts derived from (1) increases in the value of his
account above the total cost of such shares due to increases in the net asset
value per share of the Fund; (2) certain shares with respect to which the Fund
did not pay a commission on issuance, including shares acquired through
reinvestment of dividend income and capital gains distributions; or (3) shares
held in all or part of more than four consecutive calendar years.
Subject to the limitations stated above, the Fund imposes the
contingent deferred sales charge according to the following schedule: 4% of
amounts redeemed during the calendar year of purchase; 3% of amounts redeemed
during the calendar year after the year of purchase; 2% of amounts redeemed
during the second calendar year after the year of purchase; and 1% of amounts
redeemed during the third calendar year after the year of purchase. No
contingent deferred sales charge is imposed on amounts redeemed thereafter.
The following example illustrates the operation of the contingent
deferred sales charge. Assume that an investor makes a purchase payment of
$10,000 during the calendar year 1996 and on a given date in 1997 the value of
the investor's account has grown through investment performance and reinvestment
of distributions to $12,000. On such date in 1997, the investor could redeem up
to $2,000 ($12,000 minus $10,000) without incurring a deferred sales charge. If,
on such date, the investor should redeem $3,000, a deferred sales charge would
be imposed on $1,000 of the redemption (the amount by which the investor's
account was reduced by the redemption below the amount of the initial purchase
payment). The charge would be imposed at the rate of 3% because the redemption
is made during the calendar year after the calendar year of purchase, for a
total deferred sales charge of $30.
In determining whether a contingent deferred sales charge is payable
and, if so, the percentage charge applicable, it is assumed that shares held the
longest are the first to be redeemed. There is no contingent deferred sales
charge on exchanges of shares between funds in the Keystone Fund Family that
have adopted distribution plans pursuant to Rule 12b-1 under the 1940 Act.
Moreover, when shares of one such fund have been exchanged for shares of another
such fund, the calendar year of purchase of the shares being exchanged, for
purposes of calculating any future deferred sales charges, is deemed to be the
year shares being acquired by exchange were originally purchased.
Shares also may be sold, to the extent permitted by applicable law,
regulations, interpretations or exemptions, at net asset value without the
imposition of a deferred sales charge upon redemption of shares by (1) officers,
Directors, Trustees, full-time employees and sales representatives of the
Keystone Management, Inc. ("Keystone Management"), Keystone Investment
Management Company (formerly known as Keystone Custodian Funds, Inc.)
("Keystone"), Keystone Investments, Inc. (formerly known as Keystone Group,
Inc.) ("Keystone Investments"), their subsidiaries and the Principal Underwriter
who have been such for not less than ninety days; and (2) the pension and
profit-sharing plans established by such companies, their subsidiaries and
affiliates, for the benefit of their officers, Directors, Trustees, full-time
employees and sales representatives, provided, however, that all such sales are
made upon the written assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be resold except through
redemption by the Fund.
No contingent deferred sales charge is imposed on a redemption of
shares of the Fund purchased by a bank or trust company in a single account in
the name of such bank or trust company as trustee, if the initial investment in
shares of the Fund, any other fund in the Keystone Fund Family, Keystone
Precious Metals Holdings, Inc., Keystone International Fund Inc., Keystone
Liquid Trust and/or any Keystone America Fund is at least $500,000 and any
commission paid by the Fund and such other funds at the time of such purchase is
not more than 1% of the amount invested.
In addition, no contingent deferred sales charge is imposed on a
redemption of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security Act of 1974
("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder is at
least 591/2 years old; (4) involuntary redemptions of accounts having an
aggregate net asset value of less than $1,000; (5) automatic withdrawals under
an automatic withdrawal plan of up to 11/2% per month of the shareholder's
initial account balance; (6) withdrawals consisting of loan proceeds to a
retirement plan participant; (7) financial hardship withdrawals made by a
retirement plan participant; or (8) withdrawals consisting of returns of excess
contributions or excess deferral amounts made to a retirement plan participant.
REDEMPTION OF SHARES
The fund has obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption in any 90 day period by any one shareholder up
to the lesser of $250,000 or 1% of the Fund's assets.
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DISTRIBUTION PLAN
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Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund to use their assets to bear the expenses of distributing their shares, if
they comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1. The Fund bears some of
the costs of selling its shares under a Distribution Plan adopted on June 1,
1983 pursuant to Rule 12b-1 (the "Distribution Plan").
The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (approximately 1.25% annually) of the average daily net asset
value of its shares to pay distribution costs for sales of its shares and to pay
shareholder service fees. The NASD currently limits such annual expenditures to
1%, of which 0.75% may be used to pay such distribution costs and 0.25% may be
used to pay shareholder service fees. The NASD also limits the aggregate amount
that the Fund may pay for such distribution costs to 6.25% of gross share sales
since the inception of the Fund's Distribution Plan plus interest at the prime
rate plus 1% on unpaid amounts thereof (less any contingent deferred sales
charge paid by shareholders to the Principal Underwriter).
Payments under the Distribution Plan are currently made to the
Principal Underwriter (which may reallow all or part to others, such as dealers)
(1) as commissions for Fund shares sold and (2) as shareholder service fees in
respect to shares maintained by the recipients and outstanding on the Fund's
books for specified periods. Amounts paid or accrued to the Principal
Underwriter under (1) and (2) in the aggregate may not exceed the annual
limitations referred to above. The Principal Underwriter generally reallows to
brokers or others a commission equal to 4% of the price paid for each Fund share
sold as well as a shareholder service fee at a rate of 0.25% per annum of the
net asset value of shares maintained by such recipients and outstanding on the
books of the Fund for specified periods.
If the Fund is unable to pay the Principal Underwriter a commission on
a new sale because the annual maximum (0.75% of average daily net assets) has
been reached, the Principal Underwriter intends, but is not obligated, to
continue to accept new orders for the purchase of Fund shares and to pay
commissions and service fees to dealers in excess of the amount it currently
receives from the Fund. While the Fund is under no contractual obligation to
reimburse the Principal Underwriter for advances made by the Principal
Underwriter in excess of the Distribution Plan limitation, the Principal
Underwriter intends to seek full payment of such amounts from the Fund (together
with interest at the prime rate plus one percent) at such time in the future as,
and to the extent that, payment thereof by the Fund would be within permitted
limits. The Principal Underwriter currently intends to seek payment of interest
only on such charges paid or accrued by the Principal Underwriter subsequent to
July 7, 1992. If the Fund's Independent Trustees authorize such payments, the
effect will be to extend the period of time during which the Fund incurs the
maximum amount of costs allowed by the Distribution Plan. If the Distribution
Plan is terminated, the Principal Underwriter will ask the Independent Trustees
to take whatever action they deem appropriate under the circumstances with
respect to payment of such amounts.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above. In addition, the
amounts and purposes of expenditures under the Distribution Plan must be
reported to the Fund's Independent Trustees quarterly. The Fund's Independent
Trustees may require or approve changes in the implementation or operation of
the Distribution Plan, and may also require that total expenditures by the Fund
under the Distribution Plan be kept within limits lower than the maximum amount
permitted by the Distribution Plan as stated above. If such costs are not
limited by the Independent Trustees, such costs could, for some period of time,
be higher than such costs permitted by most other plans presently adopted by
other investment companies.
The Distribution Plan may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
securities of the Fund. Any change in the Distribution Plan that would
materially increase the distribution expenses of the Fund provided for in the
Distribution Plan requires shareholder approval. Otherwise, the Distribution
Plan may be amended by the votes of the majority of both (1) the Fund's Trustees
and (2) the Independent Trustees, cast in person at a meeting called for the
purpose of voting on such amendment.
While the Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
During the fiscal year ended December 31, 1995, the Fund paid the
Principal Underwriter $4,719,697 under the Distribution Plan. For the same year,
the Principal Underwriter received $757,439, after payments of commissions on
new sales and service fees to dealers and others of $3,962,258.
Whether any expenditure under the Distribution Plan is subject to a
state expense limit will depend upon the nature of the expenditure and the terms
of the state law, regulation or order imposing the limit. A portion of the
Fund's Distribution Plan expenses may be includable in the Fund's total
operating expenses for purposes of determining compliance with state expense
limits.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plan have
benefited the Fund.
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DECLARATION OF TRUST
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The Fund is a Massachusetts business trust originally established under
a Declaration of Trust dated April 12, 1977, as amended and restated on July 27,
1993 (the "Declaration of Trust"). The Fund is similar in most respects to a
business corporation. The principal distinction between the Fund and a
corporation relates to the shareholder liability described below. This summary
is qualified in its entirety by reference to the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest and the creation of additional series and/or
classes of series of Fund shares. Each share represents an equal proportionate
interest in the Fund with each other share of that class. Upon litigation,
shares are entitled to a pro rata share in the net assets of their class of Fund
shares. Shareholders shall have no preemptive or conversion rights. Shares are
transferable. The Fund currently intends to issue only one class of shares.
SHAREHOLDER LIABILITY
Pursuant to court decisions or other theories of law, shareholders of a
Massachusetts business trust could possibly be held personally liable as
partners for the obligations of the Fund. The possibility of Fund shareholders
incurring financial loss for that reason appears remote, however, because the
Declaration of Trust (1) contains an express disclaimer of shareholder liability
for obligations of the Fund and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the Fund
or the Trustees; and (2) provides for indemnification out of Fund property for
any shareholder held personally liable for the obligations of the Fund.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matters, shares are entitled to one vote per share. Shares
generally vote together as one class on all matters. No amendment may be made to
the Declaration of Trust that adversely affects any class of shares without the
approval of a majority of the shares of that class. There shall be no cumulative
voting in the election of Trustees.
After meeting as described above, no further meetings of shareholders
for the purpose of electing Trustees will be held, unless required by law or
until such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time, the Trustees then in office will call a
shareholder's meeting for the election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely unless otherwise required by law and may appoint successor
Trustees. A Trustee may cease to hold office or may be removed from office (as
the case may be) (1) at any time by a two-thirds vote of the remaining Trustees;
(2) when such Trustee becomes mentally or physically incapacitated; or (3) at a
special meeting of shareholders by a two-thirds vote of the outstanding shares.
Any Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by any reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
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INVESTMENT MANAGER
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Subject to the general supervision of the Fund's Board of Trustees,
Keystone Management, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, serves as investment manager to the Fund. As investment manager,
Keystone Management is responsible for the overall management of the Fund's
business and affairs. Keystone Management, organized in 1989, is a wholly-owned
subsidiary of Keystone and its directors and principal executive officers have
been affiliated with Keystone, a seasoned investment adviser, for a number of
years. Keystone Management also serves as investment manager to each of the
other funds in the Keystone Fund Family and to certain other funds in the
Keystone Investments Family of Funds.
Except as otherwise noted below, pursuant to an Investment Management
Agreement with the Fund (the "Management Agreement") and subject to the
supervision of the Fund's Board of Trustees, Keystone Management manages and
administers the operation of the Fund and manages the investment and
reinvestment of the Fund's assets in conformity with the Fund's investment
objectives and restrictions. The Management Agreement stipulates that Keystone
Management shall provide office space and all necessary office facilities,
equipment and personnel in connection with its services under the Management
Agreement. The Management Agreement also stipulates that Keystone Management
shall pay or reimburse the Fund for the compensation of Fund officers and
Trustees who are affiliated with the investment manager as well as pay all
expenses of Keystone Management incurred in connection with the provision of its
services. All charges and expenses other than those specifically referred to as
being borne by Keystone Management will be paid by the Fund, including, but not
limited to, custodian charges and expenses; bookkeeping and auditors' charges
and expenses; transfer agent charges and expenses; fees of the Independent
Trustees; brokerage commissions, brokers' fees and expenses; issue and transfer
taxes; costs and expenses under the Distribution Plan; taxes and trust fees
payable to governmental agencies; the cost of share certificates; fees and
expenses of the registration and qualification of the Fund and its shares with
the Securities and Exchange Commission (sometimes referred to herein as the
"SEC" or the "Commission") or under state or other securities laws; expenses of
preparing, printing and mailing prospectuses, statements of additional
information, notices, reports and proxy materials to shareholders of the Fund;
expenses of shareholders' and Trustees' meetings; charges and expenses of legal
counsel for the Fund and for its Independent Trustees on matters relating to the
Fund; charges and expenses of filing annual and other reports with the SEC and
other authorities; and all extraordinary charges and expenses of the Fund;
provided, however, that Keystone Management pays all charges and expenses
relating to these items subject to reimbursement by the Fund.
The Management Agreement permits Keystone Management to enter into an
agreement with Keystone or another investment adviser, under which Keystone or
such other investment adviser, as investment adviser, will provide substantially
all the services to be provided by Keystone Management under the Management
Agreement. The Management Agreement also permits Keystone Management to delegate
to Keystone or another investment adviser substantially all of the investment
manager's rights, duties and obligations under the Management Agreement.
Services performed by Keystone Management include (1) performing
research and planning with respect to (a) the Fund's qualification as a
regulated investment company under Subchapter M of the Internal Revenue Code,
(b) tax treatment of the Fund's portfolio investments, (c) tax treatment of
special corporate actions (such as reorganizations), (d) state tax matters
affecting the Fund, and (e) the Fund's distributions of income and capital
gains; (2) preparing the Fund's federal and state tax returns; (3) providing
services to the Fund's shareholders in connection with federal and state
taxation and distributions of income and capital gains; and (4) storing
documents relating to the Fund's activities.
The Fund pays Keystone Management at the end of each calendar month a
fee for its services consisting of (1) an amount calculated as set forth below:
ANNUAL AGGREGATE NET
MANAGEMENT ASSET VALUE OF THE
FEE INCOME SHARES OF THE FUND
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2.0% of Gross Dividend
and Interest Income
Plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000; and
(2) an amount equal to Keystone Management's reimbursable expenses accrued
during such calendar month.
The Fund is subject to certain state annual expense limitations, the
most restrictive of which is as follows:
2.5% of the first $30 million of Fund average net assets;
2.0% of the next $70 million of Fund average net assets; and
1.5% of Fund average net assets over $100 million.
Capital charges and certain expenses, including a portion of the Fund's
Distribution Plan expenses, are not included in the calculation of the state
expense limitations. This limitation may be modified or eliminated in the
future.
As a continuing condition of registration of shares in a state,
Keystone Management has agreed to reimburse the Fund annually for certain
operating expenses incurred by the Fund in excess of certain percentages of the
Fund's average daily net assets. However, Keystone Management is not required to
make such reimbursements to an extent which would result in the Fund's inability
to qualify as a regulated investment company under provisions of the Internal
Revenue Code. This condition may be modified or eliminated in the future.
The Management Agreement continues in effect only if approved at least
annually by the Fund's Board of Trustees or by a vote of a majority of the
outstanding shares, and such renewal has been approved by the vote of a majority
of the Independent Trustees cast in person at a meeting called for the purpose
of voting on such approval. The Management Agreement may be terminated, without
penalty, by the Fund's Board of Trustees or by a vote of a majority of
outstanding shares on 60 days' written notice to Keystone, and by Keystone on 90
days' written notice to the Fund. The Management Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
For additional discussion of fees paid to Keystone Management, see
"Investment Adviser" below.
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INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Pursuant to the Management Agreement, Keystone Management has delegated
its investment management functions, except for certain administrative and
management services, to Keystone and has entered into an Investment Advisory
Agreement with Keystone (the "Advisory Agreement") under which Keystone provides
investment advisory and management services to the Fund.
Keystone, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Investments, 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a private corporation predominantly owned by
current and former members of Keystone's management and its affiliates. The
shares of Keystone Investments common stock beneficially owned by management are
held in a number of voting trusts, the trustees of which are George S. Bissell,
Albert H. Elfner, III, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone
Investments provides accounting, bookkeeping, legal, personnel and general
corporate services to Keystone Management, Keystone, their affiliates and the
Keystone Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone receives for its services
an annual fee representing 85% of the management fee received by Keystone
Management under the Management Agreement.
Under the terms of the Advisory Agreement and subject to the
supervision of the Fund's Board of Trustees, Keystone manages and administers
the operation of the Fund, and manages the investment and reinvestment of the
Fund's assets in conformity with the Fund's investment objective and
restrictions. The Advisory Agreement stipulates that Keystone shall provide
office space and all necessary office facilities, equipment and personnel in
connection with its services under the Advisory Agreement and pay or reimburse
the Fund for the compensation of Fund officers and Trustees who are affiliated
with the investment manager. The Advisory Agreement also stipulates that
Keystone shall pay all expenses of Keystone incurred in connection with the
provision of its services. All charges and expenses other than those
specifically referred to as being borne by Keystone will be paid by the Fund,
including, but not limited to, custodian charges and expenses; bookkeeping and
auditors' charges and expenses; transfer agent charges and expenses; fees of
Independent Trustees; brokerage commissions, brokers' fees and expenses; issue
and transfer taxes; costs and expenses under the Distribution Plan; taxes and
trust fees payable to governmental agencies; the cost of share certificates,
fees and expenses of the registration and qualification of the Fund and its
shares with the SEC or under state or other securities laws; expenses of
preparing, printing and mailing prospectuses, statements of additional
information, notices, reports and proxy materials to shareholders of the Fund;
expenses of shareholders' and Trustees' meetings; charges and expenses of legal
counsel for the Fund and for the Independent Trustees of the Fund on matters
relating to the Fund; charges and expenses of filing annual and other reports
with the SEC and other authorities; and all extraordinary charges and expenses
of the Fund.
During the fiscal year ended December 31, 1993, the Fund paid or
accrued to Keystone Management investment management fees of $6,507,055, which
represented 0.43% of the Fund's average net assets. Of such amount paid to
Keystone Management, $5,530,997 was paid to Keystone for its services to the
Fund. In addition, the Fund reimbursed Keystone Management $2,488,890, which
represented 0.16% of the Fund's average net assets, in connection with
reimbursable expenses paid by Keystone Management on behalf of the Fund. For the
fiscal year ended December 31, 1993, the total fee paid to Keystone Management
by the Fund for investment management and administrative services fees was
$8,995,945, which represented 0.59% of the Fund's average net assets.
During the fiscal year ended December 31, 1994, the Fund paid or
accrued to Keystone Management investment management fees of $5,941,545, which
represented 0.43% of the Fund's average net assets. Of such amount paid to
Keystone Management, $5,050,313 was paid to Keystone for its services to the
Fund. In addition, the Fund reimbursed Keystone Management $2,029,000, which
represented 0.15% of the Fund's average net assets, in connection with
reimbursable expenses paid by Keystone Management on behalf of the Fund. For the
fiscal year ended December 31, 1994, the total fee paid to Keystone Management
by the Fund for investment management and administrative services fees was
$7,970,545, which represented 0.58% of the Fund's average net assets.
During the fiscal year ended December 31, 1995, the Fund paid or
accrued to Keystone Management investment management fees of $5,327,202, which
represented 0.44% of the Fund's average net assets. Of such amount paid to
Keystone Management, $4,528,122 was paid to Keystone for its services to the
Fund. In addition, the Fund reimbursed Keystone Management $736,118, which
represented 0.06% of the Fund's average net assets, in connection with
reimbursable expenses paid by Keystone Management on behalf of the Fund. For the
fiscal year ended December 31, 1995, the total fee paid to Keystone Management
by the Fund for investment management and administrative services was
$6,063,320, which represented 0.50% of the Fund's average net assets.
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TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees of the Fund, their principal occupations and some of their
affiliations over the last five years, and the officers of the Fund are as
follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustees of the
Fund; Chairman of the Board, President and Chief Executive Officer of
Keystone Investments; President, Chief Executive Officer and Trustee or
Director of all other funds in the Keystone Investments Family of Funds;
Director, Chairman of the Board, and Chief Executive Officer of Keystone;
Chairman of the Board and Director of Keystone Institutional Company, Inc.
("Keystone Institutional") and Keystone Fixed Income Advisors ("KFIA");
Director, Chairman of the Board, Chief Executive Officer and President of
Keystone Management and Keystone Software Inc. ("Keystone Software");
Director and President of Keystone Asset Corporation, Keystone Capital
Corporation, and Keystone Trust Company; Director of the Principal
Underwriter, Keystone Investor Resource Center, Inc. ("KIRC"), and
Fiduciary Investment Company, Inc. ("FICO"); Director of Boston Children's
Services Association; Trustee of Anatolia College, Middlesex School, and
Middlebury College; Member, Board of Governors of New England Medical
Center; former Director and President of Hartwell Keystone Advisers, Inc.
("Hartwell Keystone"); former Director and Vice President of Robert Van
Partners, Inc. and former Trustee of Neworld Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Professor, Finance Department,
George Washington University; President, Amling & Company (investment
advice); Member, Board of Advisers, Credito Emilano (banking); and former
Economics and Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Investment Counselor to
Appleton Partners, Inc.; former Managing Director, Seaward Management
Corporation (investment advice); and former Director, Executive Vice
President and Treasurer, State Street Research & Management Company
(investment advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of all
other funds in the Keystone Investments Family of Funds; Director and
Chairman of the Board of Hartwell Keystone; Chairman of the Board and
Trustee of Anatolia College; Trustee of University Hospital (and Chairman
of its Investment Committee); former Chairman of the Board and Chief
Executive Officer of Keystone Investments; and former Chief Executive
Officer of the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds;, Brown University; Director
and former Executive Vice President, National Alliance of Business; former
Vice President, Educational Testing Services; former Executive Director,
Coalition of Essential Schools and former Dean, School of Business, Adelphi
University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; former Group Vice President,
Textron Corp.; and former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Director of Phoenix Total Return
Fund and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Chairman of the Board, Director
and Executive Vice President, The London Harness Company; Managing Partner,
Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine; Chief Executive Officer,
Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher & Associates
(environmental consulting); President, Oldways Preservation and Exchange
Trust (education); and former Director, Keystone Investments and Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Of Counsel, Keyser,
Crowley & Meub, P.C.; Member, Governor's (VT) Council of Economic Advisers;
Chairman of the Board and Director, Central Vermont Public Service
Corporation and Hitchcock Clinic; Director, Vermont Yankee Nuclear Power
Corporation, Vermont Electric Power Company, Inc., Grand Trunk Corporation,
Central Vermont Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union
Mutual Fire Insurance Company, New England Guaranty Insurance Company, Inc.
and the Investment Company Institute; former Governor of Vermont; former
Director and President, Associated Industries of Vermont; former Chairman
and President, Vermont Marble Company; former Director of Keystone; and
former Director and Chairman of the Board, Green Mountain Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Executive Vice President, DHR
International, Inc. (executive recruitment); former Senior Vice President,
Boyden International Inc. (executive recruitment); and Director, Commerce
and Industry Association of New Jersey, 411 International, Inc. and J & M
Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Chairman, Environmental Warranty,
Inc., and Consultant, Drake Beam Morin, Inc. (executive outplacement);
Director of Connecticut Natural Gas Corporation, Trust Company of
Connecticut, Hartford Hospital, Old State House Association and Enhanced
Financial Services, Inc.; Chairman, Board of Trustees, Hartford Graduate
Center; Trustee, Kingswood-Oxford School and Greater Hartford YMCA; former
Director, Executive Vice President and Vice Chairman of The Travelers
Corporation; and former Managing Director of Russell Miller, Inc. and
former Member, Georgetown College Board of Advisors.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Partner, Farrell, Fritz,
Caemmerer, Cleary, Barnosky & Armentano, P.C.; President, Nassau County Bar
Association; former Associate Dean and Professor of Law, St. John's
University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other funds in the Keystone Investments Family of Funds; Director,
Senior Vice President, Chief Financial Officer and Treasurer of Keystone
Investments, the Principal Underwriter, Keystone Asset Corporation,
Keystone Capital Corporation, Keystone Trust Company; Treasurer of Keystone
Institutional and FICO; Treasurer and Director of Keystone Management and
Keystone Software; Vice President and Treasurer of KFIA; Director of KIRC;
former Treasurer and Director of Hartwell Keystone; former Treasurer of
Robert Van Partners.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of all
other funds in the Keystone Investments Family of Funds; and President of
Keystone.
CHRISTOPHER P. CONKEY: Vice President of the Fund; Vice President of certain
other Funds in the Keystone Investments Family of Funds; and Senior Vice
President of Keystone.
BETSY A. BLACHER: Vice President of the Fund; Vice President of certain other
funds in the Keystone Investments Family of Funds; and Senior Vice
President of Keystone.
J. KEVIN KENELY: Treasurer of the Fund; Treasurer of all other funds in the
Keystone Investments Family of Funds; Vice President of Keystone
Investments, Keystone, the Principal Underwriter, FICO and Keystone
Software.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other funds in the Keystone Investments
Family of Funds; Senior Vice President, General Counsel and Secretary of
Keystone; Senior Vice President, General Counsel, Secretary and Director of
the Principal Underwriter, Keystone Management and Keystone Software;
Senior Vice President and General Counsel of Keystone Institutional; Senior
Vice President, General Counsel and Director of FICO and KIRC; Vice
President and Secretary of KFIA; and Senior Vice President, General Counsel
and Secretary of Keystone Investments, Keystone Asset Corporation, Keystone
Capital Corporation and Keystone Trust Company; former Senior Vice
President and Secretary of Hartwell Keystone and Robert Van Partners, Inc.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Hartwell Keystone, the Principal Underwriter and KIRC.
Mr. Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
For the fiscal year ended December 31, 1995, none of the affiliated or
Independent Trustees and officers of the Fund received any direct remuneration
from the Fund. For the year ending December 31, 1995, fees paid to Independent
Trustees on a fund complex wide basis (which included approximately 32 mutual
funds) were approximately $450,716. On March 29, 1996, the Trustees and officers
of the Fund, as a group, beneficially owned less than 1% of the Fund's then
outstanding shares.
The address of all the Fund's Trustees and officers is 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
Pursuant to a Principal Underwriting Agreement (the "Underwriting
Agreement"), Keystone Investment Distributors Company acts as the Fund's
principal underwriter. The Principal Underwriter, located at 200 Berkeley
Street, Boston, Massachusetts 02116-5034, is a Delaware corporation wholly-owned
by Keystone.
The Principal Underwriter, as agent, has agreed to use its best efforts
to find purchasers for the Fund's shares. The Principal Underwriter may retain
and employ representatives to promote distribution of the Fund's shares and may
obtain orders from brokers, dealers and others, acting as principals, for sales
of shares to them. The Underwriting Agreement provides that the Principal
Underwriter will bear the expense of preparing, printing and distributing
advertising, sales literature and prospectuses used by it. In its capacity as
principal underwriter, the Principal Underwriter may receive payments from the
Fund pursuant to the Fund's Distribution Plan.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved by (1) a majority of the Fund's
Independent Trustees at least annually at a meeting called for that purpose and
(2) by vote of a majority of Trustees or by vote of a majority of the
outstanding shares.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its "assignment" as that term is defined in the 1940 Act.
From time to time, if, in the Principal Underwriter's judgment, it
could benefit the sales of Fund shares, the Principal Underwriter may provide to
selected dealers promotional materials and selling aids, including, but not
limited to, personal computers, related software and Fund data files.
For the fiscal year ended December 31, 1993 the Principal Underwriter
earned commissions of $4,969,409 (amount represents commissions earned during
the fiscal year ended December 31, 1993 and excludes recapture by the Principal
Underwriter during said fiscal year of $4,272,087 in advances made during
previous fiscal years) after paying commissions of $3,705,342 (amount represents
sales commissions only and excludes $3,661,327 in maintenance fees paid during
the fiscal year to retail dealers under the Distribution Plan.
For the fiscal year ended December 31, 1994 the Principal Underwriter
earned commissions of $9,126,418 after paying commissions of $4,197,774 to
retail dealers under the Distribution Plan.
During the fiscal year ended December 31, 1995, the Fund paid the
Principal Underwriter $4,719,697 under the Distribution Plan. The amount paid by
the Fund under its Distribution Plan, net of deferred sales charges, was
$4,035,311 (0.33% of the Fund's average daily net asset value during the
period). During the year, the Principal Underwriter received $757,439 after
payments of commissions on new sales and service fees to dealers and others of
$3,962,258. See the "Distribution Plan."
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BROKERAGE
- --------------------------------------------------------------------------------
It is the policy of the Fund, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net economic result to the
Fund, involving both price paid or received and any commissions and other costs
paid, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Management
weighs such considerations in determining the overall reasonableness of
brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund, Keystone Management or Keystone is
considered to be in addition to and not in lieu of services required to be
performed by Keystone Management under the Management Agreement or Keystone
under the Advisory Agreement. The cost, value and specific application of such
information are indeterminable and cannot be practicably allocated among the
Fund and other clients of Keystone Management or Keystone who may indirectly
benefit from the availability of such information. Similarly, the Fund may
indirectly benefit from information made available as a result of transactions
effected for such other clients. Under the Management Agreement and the Advisory
Agreement, Keystone Management and Keystone are permitted to pay higher
brokerage commissions for brokerage and research services in accordance with
Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone
Management and Keystone do follow such a practice, they will do so on a basis
that is fair and equitable to the Fund.
The Fund's securities transactions are generally principal transactions
with the issuer of the security or with major underwriters and dealers for
municipal bonds. Accordingly, the Fund does not pay significant brokerage
commissions. The cost of securities purchased from underwriters includes an
underwriting commission or concession and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
Purchases from underwriters will include the underwriting commission or
concession and purchases from dealers serving as market makers will include the
spread between the bid and asked prices. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the purchase directly from an issuer of certain securities for the Fund's
portfolio in order to take advantage of the lower purchase price available to
members of such a group.
Neither Keystone Management, Keystone nor the Fund intend to place
securities transactions with any particular broker-dealer or group thereof.
However, the Fund's Board of Trustees has determined that the Fund may consider
sales of shares as a factor in the selection of broker-dealers to execute
portfolio transactions, subject to the requirements of best execution, including
best price, described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently by Keystone
Management or Keystone from those of the other funds and investment accounts
managed by Keystone Management or Keystone. It may frequently develop that the
same investment decision is made for more than one fund. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more funds or
accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula that is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.
In no instance are portfolio securities purchased from or sold to
Keystone Management, Keystone, the Principal Underwriter or any of their
affiliated persons, as defined in the 1940 Act and rules and regulations issued
thereunder.
For the fiscal years ended December 31, 1993, 1994 and 1995, the Fund
did not pay any brokerage commissions for securities transactions.
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for the Fund as they may appear from time to
time in advertisements are calculated by finding the average annual compounded
rates of return over the one, five and ten year periods on a hypothetical $1,000
investment that would equate the initial amount invested to the ending
redeemable value. To the initial investment all dividends and distributions are
added, and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the one,
five or ten year periods.
The cumulative total returns of the Fund for the one, five and ten
years ended December 31, 1995 were 13.61% (including contingent deferred sales
charge), 43.13% and 118.15%, respectively. The average annual total returns for
the one, five and ten year periods ended December 31, 1995 were 13.61%, 7.44%
and 8.11%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The current yield for the
30-day period ended December 31, 1995 was 5.00%.
Tax equivalent yield is, in general, the current yield divided by a
factor equal to one minus a stated income tax rate and reflects the yield a
taxable investment would have to achieve in order to equal on an after tax-basis
a tax exempt yield. The tax equivalent yield for an investor in the 31% federal
tax bracket for the 30-day period ended December 31, 1995 was 7.25%.
Any given yield or total return quotation should not be considered
representative of the Fund's yield or total return for any future period.
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ADDITIONAL INFORMATION
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State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian (the "Custodian") of all securities and
cash of the Fund. The Custodian performs no investment management functions for
the Fund, but, in addition to its custodial services, is responsible for
accounting and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the independent auditors for the Fund.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142, is a
wholly-owned subsidiary of Keystone, and acts as transfer agent and dividend
disbursing agent for the Fund.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
As of March 29, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr. E., 3rd Floor, Jacksonville, FL 32246-6484 owned of
record 3.56% of the Fund's outstanding shares.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this statement of additional information, or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
For information on taxes, particularly with respect to dividends and
the Fund's qualifications as a registered investment company, please refer to
the section of your prospectus entitled "Dividends and Taxes."
The Fund's prospectus and this statement of additional information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office in Washington, D.C. upon payment of the fee prescribed by the
rules and regulations promulgated by the Commission.
<PAGE>
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APPENDIX
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MUNICIPAL BONDS
Municipal bonds include debt obligations issued by or on behalf of a
state, a territory, or a possession of the United States, the District of
Columbia or any political subdivision, agency or instrumentality thereof (for
example, counties, cities, towns, villages, districts, authorities) to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which municipal bonds may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to lend to public or private institutions for the construction
of facilities such as educational, hospital and housing facilities. In addition,
certain types of industrial development bonds have been or may be issued by or
on behalf of public authorities to finance certain privately operated facilities
and certain local facilities for water supply, gas, electricity or sewage or
solid waste disposal. Such obligations are included within the term municipal
bonds if the interest paid thereon qualifies as exempt from federal income tax.
The income of certain types of industrial development bonds used to finance
certain privately operated facilities (qualified "private activity" bonds)
issued after August 7, 1986, while exempt from federal income tax, is includable
for purposes of the calculation of the alterative minimum tax. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute municipal bonds, although the current
federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of municipal bonds are "general
obligation" and "limited obligation" or "revenue" bonds. General obligation
bonds are obligations involving the credit of an issuer possessing taxing power
and are payable from the issuer's general unrestricted revenues and not from any
particular fund or revenue source. Their payment may be dependent upon an
appropriation by the issuer's legislative body and may be subject to
quantitative limitations on the issuer's taxing power. The characteristics and
methods of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer. Limited obligation or revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, such as the user of the facility. Industrial
development bonds that are municipal bonds are in most cases revenue bonds and
generally are not payable from the unrestricted revenues of the issuer. The
credit quality of industrial development revenue bonds is usually directly
related to the credit standing of the owner or user of the facilities. There
are, of course, variations in the security of municipal bonds, both within a
particular classification and between classifications, depending on numerous
factors.
The yields on municipal bonds are dependent on a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, size of a particular
offering, the maturity of the obligation and rating of the issue. The ratings of
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") and Fitch Investor Services, Inc. ("Fitch"), as described herein and in
the prospectus, represent their opinions as to the quality of the municipal
bonds that they undertake to rate. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
municipal bonds with the same maturity, interest rate and rating may have
different yields while municipal bonds of the same maturity and interest rate
with different ratings may have the same yield. It should also be noted that the
standards of disclosure applicable to and the amount of information relating to
the financial condition of issuers of municipal bonds are not as extensive as
those generally relating to corporations.
Subsequent to its purchase by the Fund, an issue of municipal bonds or
other investment may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but Keystone will
consider such an event in its determination of whether the Fund should continue
to hold such obligation in its portfolio.
The ability of the Fund to achieve its investment objective is
dependent upon the continuing ability of issuers of municipal bonds to meet
their obligations to pay interest and principal when due. Obligations of issuers
of municipal bonds, including municipal bonds issued by them, are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal Bankruptcy Act, and laws, if any,
that may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations. There is also the possibility that as a result
of litigation or other conditions, the power or ability of any one or more
issuers to pay, when due, principal of and interest on its or their municipal
bonds may be materially affected. In addition the market for municipal bonds is
often thin and can be temporarily affected by large purchases and sales
including those by the Fund.
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, and similar proposals may well be introduced in the
future. If such a proposal were enacted, the availability of municipal bonds for
investment by the Fund and the value of the Fund's portfolio could be materially
affected; in which event, the Fund would reevaluate its investment objective and
policies and consider changes in the structure of the Fund or dissolution.
DESCRIPTION OF BOND RATINGS
The Tax Reform Act of 1986 made significant changes in the federal tax
status of certain obligations that were previously fully federally tax exempt.
As a result, three categories of such obligations issued after August 7, 1986
now exist: (1) "public purpose" bonds, the income of which remains fully exempt
from federal income tax; (2) qualified "private activity" industrial development
bonds, the income of which, while exempt from federal income tax under Section
103 of the Internal Revenue Code, as amended (the "Code") is includable in the
calculation of the federal alternative minimum tax; and (3) "private activity"
(private purpose) bonds, the income of which is not exempt from federal income
tax. The Fund will not invest in private activity (private purpose) bonds, and,
except as described under "Other Eligible Securities," will not invest in
qualified "private activity" industrial development bonds.
CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long term debt
rating. The following criteria are used in making that assessment:
a. Amortization schedule (the larger the final maturity relative to
other maturities the more likely it will be treated as a note); and
b. Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
2. SP-2 Satisfactory capacity to pay principal and interest.
3. SP-3 Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as
part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+").
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of
the creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees. Ratings of foreign obligors
do not take into account currency exchange and related uncertainties. The
ratings are based on current information furnished by the issuer or obtained by
S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" TO "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the
successful completion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long-term risks appear somewhat larger than in Aaa securities.
3. A - Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present that suggest a susceptibility to impairment sometime in the
future.
4. Baa - Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Con. (---) - Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals that begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the Aa, A, and Baa groups that Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa 1, A 1, and Baa 1.
MONEY MARKET INSTRUMENTS
The Fund's investments in commercial paper are limited to those rated
A-1 by S&P, Prime-1 by Moody's, or F-1 by Fitch. These ratings and other money
market instruments are described as follows:
COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P has the following characteristics.
Liquidity ratios are adequate to meet cash requirements. The issuer's long-term
senior debt is rated "A" or better, although in some cases "BBB" credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry.
Commercial paper rated A-2 by S&P has the same characteristics as that
rated A-1 except that the relative degree of safety is not as overwhelming.
Commercial paper rated A-3 has a satisfactory capacity for timely
payment. However, it is somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations rated A-1 or A-2.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships that exist with the issuer; and (8) recognition by the management
of obligations that may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
Commercial paper rated Prime-2 by Moody's is considered somewhat lower
than the best commercial paper because margins of protection may not be as large
or because fluctuations of protective elements over the near or intermediate
term may be of greater amplitude.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance. Treasury bills have maturities of one year or
less. Treasury notes have maturities of one to ten years and Treasury bonds
generally have maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities include direct obligations of the U.S. Treasury and
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the U.S., Small Business
Administration, Government National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Banks, Federal
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Maritime Administration, The Tennessee Valley Authority, District of
Columbia Armory Board and Federal National Mortgage Association.
Some obligations of U.S. Government agencies and instrumentalities,
such as Treasury bills and Government National Mortgage Association ("GNMA")
pass-through certificates, are supported by the full faith and credit of the
U.S.; others, such as securities of Federal Home Loan Banks, by the right of the
issuer to borrow from the Treasury; still others, such as bonds issued by the
Federal National Mortgage Association, a private corporation, are supported only
by the credit of the instrumentality. Because the U.S. Government is not
obligated by law to provide support to an instrumentality it sponsors, the Fund
will invest in the securities issued by such an instrumentality only when
Keystone determines that the credit risk with respect to the instrumentality
does not make its securities unsuitable investments. U.S. Government securities
will not include international agencies or instrumentalities in which the U.S.
Government, its agencies or instrumentalities participate, such as the
International Bank for Reconstruction and Development (the "World Bank"), the
Asian Development Bank or the Inter-American Development Bank, or issues insured
by the Federal Deposit Insurance Corporation.
CERTIFICATES OF DEPOSITS
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks (including their branches abroad) and of U.S.
branches of foreign banks that are members of the Federal Reserve System or the
Federal Deposit Insurance Corporation, and have at least $1 billion in deposits
as of the date of their most recently published financial statements.
The Fund will not acquire time deposits or obligations issued by the
World Bank, the Asian Development Bank or the Inter-American Development Bank.
Additionally, the Fund does not currently intend to purchase foreign securities
(except to the extent that certificates of deposit of foreign branches of U.S.
banks may be deemed foreign securities) or purchase certificates of deposit,
bankers' acceptances or other similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
OPTIONS TRANSACTIONS
The Fund may enter into options transactions. Any premium paid by the
Fund in connection with an option transaction may be forfeited if the option
expires unexercised.
WRITING COVERED OPTIONS. The Fund writes only covered options. Options
written by the Fund will normally have expiration dates of not more than nine
months from the date written. The exercise price of the options may be below,
equal to, or above the current market values of the underlying securities at the
times the options are written.
Unless the option has been exercised, the Fund may close out an option
it has written by effecting a closing purchase transaction, whereby it purchases
an option covering the same underlying security and having the same exercise
price and expiration date (of the same series) as the one it has written. If the
Fund desires to sell a particular security on which it has written a call
option, it will effect a closing purchase transaction prior to or concurrently
with the sale of the security. If the Fund is able to enter into a closing
purchase transaction, the Fund will realize a profit (or loss) from such
transaction if the cost of such transaction is less (or more) than the premium
received from the writing of the option.
An option position may be closed out only in a secondary market for an
option of the same series. Although the Fund will generally write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any particular time, and for some options no secondary market may exist. In such
event it might not be possible to effect a closing purchase transaction in a
particular option. If the Fund as a covered call option writer is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying securities until the option expires or it delivers the underlying
securities upon exercise.
Because the Fund intends to qualify as a regulated investment company
under the Code, the extent to which the Fund may write covered call options and
enter into so-called "straddle" transactions involving put and call options may
be limited.
Many options are traded on registered securities exchanges. Options
traded on such exchanges are issued by the Options Clearing Corporation ("OCC"),
a clearing corporation that assumes responsibility for the completion of options
transactions.
PURCHASING PUT AND CALL OPTIONS. The Fund can close out a put option it
has purchased by effecting a closing sale transaction; for example, the Fund may
close out a put option it has purchased by selling a put option. If, however, a
secondary market does not exist at a time the Fund wishes to effect a closing
sale transaction, the Fund will have to exercise the option to realize any
profit. In addition, in a transaction in which the Fund does not own the
security underlying a put option it has purchased, the Fund would be required,
in the absence of a secondary market, to purchase the underlying security before
it could exercise the option. In each such instance, the Fund would incur
additional transaction costs.
The Fund may purchase call options for the purpose of offsetting
previously written call options of the same series. The Fund also may purchase
call options to fix the interest rates of obligations held by it.
The Fund will not purchase a put option if, as a result of such
purchase, more than 10% of its total assets would be invested in premiums for
such options. The Fund's ability to purchase put and call options may be limited
by the Code's requirements for qualification as a regulated investment company.
OPTION WRITING AND RELATED RISKS
The Fund may write covered call and put options. A call option gives
the purchaser of the option the right to buy, and the writer the obligation to
sell, the underlying security at the exercise price during the option period.
Conversely, a put option gives the purchaser the right to sell, and the writer
the obligation to buy, the underlying security at the exercise price during the
option period.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time as the writer effects a closing purchase
transaction by purchasing an option of the same series as the one previously
sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. For options traded on national securities exchanges
("Exchanges"), to secure the obligation to deliver the underlying security in
the case of a call option, the writer of the option is required to deposit in
escrow the underlying security or other assets in accordance with the rules of
the OCC, an institution created to interpose itself between buyers and sellers
of options. Technically, the OCC assumes the order side of every purchase and
sale transaction on an Exchange and, by doing so, gives its guarantee to the
transaction.
The principal reason for writing options on a securities portfolio is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone. In return for the premium,
the covered call option writer has given up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
the option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of a premium, so long as the price of the underlying security remains above the
exercise price, but must purchase the underlying security from the buyer of the
put option at the exercise price, even though the price of the security may fall
below the exercise price, at any time during the option period. If an option
expires, the writer realizes a gain in the amount of the premium. Such a gain
may, in the case of a covered call option, be offset by a decline in the market
value of the underlying security during the option period. If a call option is
exercised, the writer realizes a gain or loss from the sale of the underlying
security. If a put option is exercised, the writer must fulfill his obligation
to purchase the underlying security at the exercise price, which will usually
exceed the then market value of the underlying security. In addition, the
premium paid for the put effectively increases the cost of the underlying
security, thus reducing the yield otherwise available from such securities.
Because the Fund can write only covered options, it may at times be
unable to write additional options unless it sells a portion of its portfolio
holdings to obtain new securities against which it can write options. This may
result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
To the extent that a secondary market is available, the covered option
writer may close out options it has written prior to the assignment of an
exercise notice by purchasing, in a closing purchase transaction, an option of
the same series as the option previously written. If the cost of such a closing
purchase plus transaction costs is greater than the premium received upon
writing the original option, the writer will incur a loss in the transaction.
OPTIONS TRADING MARKETS
Options that the Fund will trade are generally listed on national
securities exchanges. Exchanges on which such options currently are traded are
the Chicago Board Options Exchange and the New York, American, Pacific, and
Philadelphia Stock Exchanges. Options on some securities may not be listed on
any Exchange but traded in the over-the-counter market. Options traded in the
over-the-counter market involve the additional risk that securities dealers
participating in such transactions would fail to meet their obligations to the
Fund. The use of options traded in the over-the-counter market may be subject to
limitations imposed by certain state securities authorities. In addition to the
limits on its use of options discussed herein, the Fund is subject to the
investment restrictions described in the prospectus and statement of additional
information.
The staff of the Securities and Exchange Commission ("Commission")
currently is of the view that the premiums that the Fund pays for the purchase
of unlisted options, and the value of securities used to cover unlisted options
written by the Fund, are considered to be invested in illiquid securities or
assets for the purpose of calculating whether the Fund is in compliance with its
investment restrictions pertaining to illiquid assets and securities.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in U.S. Treasury
bonds and notes tends to center on most recently auctioned issues, new series of
options with expirations to replace expiring options on particular issues will
not be introduced indefinitely. Instead, the expirations introduced at the
commencement of options trading on a particular issue will be allowed to run
their course, with the possible addition of a limited number of new expirations
as the original ones expire. Options trading on each series of bonds or notes
will thus be phased out as new options are listed on the more recent issues, and
a full range of expiration dates will not ordinarily be available for every
series on which options are traded.
ON TREASURY BILLS. Because the deliverable U.S. Treasury bill changes
from week to week, writers of U.S. Treasury bills call options cannot provide in
advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Fund holds a long position in
U.S. Treasury bills with a principal amount corresponding to the option contract
size, the Fund may be hedged from a risk standpoint. In addition, the Fund will
maintain in a segregated account with its custodian able in the event of an
assignment of an exercise notice to ensure that it can meet its open option
obligations.
ON GNMA CERTIFICATES. Options on GNMA certificates are not currently
traded on any Exchange. However, the Fund may purchase and write such options in
the over the counter market, or should they commence trading, on any Exchange.
Since the remaining principal balance of GNMA certificates declines
each month as a result of mortgage payments, the Fund, as a writer of a covered
GNMA call holding GNMA certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA certificates from the same pool (if
obtainable) or replacement GNMA certificates in the cash market in order to
remain covered.
A GNMA certificate held by the Fund to cover an option position in any
but the nearest expiration month may cease to present cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA certificate with a certificate
which represents cover. When the Fund closes its position or replaces the GNMA
certificate, it may realize an unanticipated loss and incur transaction costs.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be
closed out only in a secondary market for an option of the same series. Although
the Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular option at any particular time,
and for some options no secondary market may exist. In such event, it might not
be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize any
profit and might incur transaction costs in connection therewith. If the Fund as
a covered call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market include the
following: (i) insufficient trading interest in certain options; (ii)
restrictions imposed on transactions; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an Exchange
or by a broker; (v) inadequacy of the facilities of an Exchange, the OCC or a
broker to handle current trading volume; or (vi) a decision by one or more
Exchanges or a broker to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market in that class
or series of options would cease to exist, although outstanding options that had
been issued as a result of trades would generally continue to be exercisable in
accordance with their terms.
The hours of trading for options on U.S. government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired by the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
For example, a fund anticipates a significant market or market sector
advance, it will purchase a stock index futures contract as a hedge against not
participating in such advance at a time when the fund is not fully invested. The
purchase of a futures contract serves as a temporary substitute for the purchase
of individual securities, which may then be purchased in an orderly fashion. As
such purchases are made, an equivalent amount of index based futures contracts
would be terminated by offsetting sales. In contrast, a fund would sell stock
index futures contracts in anticipation of or in a general market or market
sector decline that may adversely affect the market value of the fund's
portfolio. To the extent that the Fund's portfolio changes in value in
correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by so doing, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Fund intends to engage in options transactions that are related to
commodity futures contracts for hedging purposes and in connection with the
hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. The Fund does not intend to take
delivery of the instruments underlying futures contracts it holds and does not
intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods, such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed that specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the U.S. are The Board of Trade of
the City of Chicago, the Chicago Mercantile Exchange, the International Monetary
Market (a division of the Chicago Mercantile Exchange), the New York Futures
Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
the Fund, as seller, to deliver the type of financial instrument specified in
the contract at a specified future time for a specified price. The purchase of
an interest rate futures contract creates an obligation by the Fund, as
purchaser, to accept delivery of the type of financial instrument specified at a
specified future time for a specified price. The specific securities delivered
or accepted, respectively, at settlement date, are not determined until at or
near that date. The determination is in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Currently, interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, certificates, and 90-day Eurodollar
certificates of deposit. It is expected that futures contracts trading in
additional financial instruments will be authorized. The standard contract size
is $100,000 for futures contracts in U.S. Treasury bonds and U.S. Treasury
notes, and $1,000,000 for the other designated contracts. While U.S. Treasury
bonds, U.S. Treasury bills and U.S. Treasury notes are backed by the full faith
and credit of the U.S. government, the futures contracts in U.S. government
securities are not obligations of the U.S. Treasury.
INDEX BASED FUTURES CONTRACTS
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts, but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed, the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded, and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from
the Broker, are made on a daily basis as the value of the underlying instrument
or index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price, the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e., on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance, the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase after allowance for
transaction costs represents the profit or loss to the Fund.
There can be no assurance, however, that the Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the contract and to complete the contract according to its terms.
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options to terminate an existing
position. Options on currency and other financial futures contracts are similar
to options on stocks except that an option on a currency or other financial
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) rather than to purchase or
sell stock, currency or other financial instruments at a specified exercise
price at any time during the period of the option. Upon exercise of the option,
the delivery of the futures position by the writer of the option to the holder
of the option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account. This amount represents the amount by which the
market price of the futures contract at exercise exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. If an option is exercised the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and value of
the futures contract.
The Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on a currency or other financial
futures contract is analogous to the purchase of protective puts on individual
stocks, where an absolute level of protection is sought below which no
additional economic loss would be incurred by the Fund. Put options may be
purchased to hedge a portfolio of stocks or debt instruments or a position in
the futures contract upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of a call option on a currency or other financial futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, the purchase of a call option may be less
risky than the ownership of the interest rate or index based futures contract or
the underlying securities. Call options on currency and other financial futures
contracts may be purchased to hedge against an interest rate increase or a
market advance when the Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING COMMODITY FUTURES CONTRACTS OR
RELATED OPTIONS
The Fund may employ new investment techniques involving currency and
other financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas that may be developed from time to
time and that are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund will not enter into a futures contract if, as a result
thereof, more than 5% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to margin deposits on
such futures contracts.
The Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that the Fund owns or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
The Fund does not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by the Fund,
an amount of cash and cash equivalents equal to the market value of the futures
contracts will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing again within a three month period, the Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
RISKS OF FUTURES CONTRACTS
Currency and other financial futures contracts prices are volatile and
are influenced, among other things, by changes in stock prices, market
conditions, prevailing interest rates and anticipation of future stock prices,
market movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; and differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in the Fund's portfolio. A decision of
whether, when and how to hedge involves the exercise of skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
will establish a segregated account in connection with its futures contracts
which will hold cash or cash equivalents equal in value to the current value of
the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for currency and other
financial futures contracts, there are several special risks relating to options
on futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. The Fund will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities denominated in foreign currencies,
and the Fund temporarily may hold funds in foreign currencies. Thus, the Fund's
share value will be affected by changes in exchange rates.
FORWARD CURRENCY CONTRACTS
As one way of managing exchange rate risk, the Fund may engage in
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell. The Fund also may use these contracts to
hedge the U.S. dollar value of a security it already owns, particularly if the
Fund expects a decrease in the value of the currency in which the foreign
security is denominated. Although the Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on Keystone's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rate or exchange control regulations between foreign
currencies and the dollar. Changes in foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund.
CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two
parties agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the United States is regulated under the Commodity Exchange Act by
the CFTC and NFA. Currently the only national futures exchange on which currency
futures are traded is the International Monetary Market of the Chicago
Mercantile Exchange. Foreign currency futures trading is conducted in the same
manner and subject to the same regulations as trading in interest rate and index
based futures. The Fund intends to only engage in currency futures contracts for
hedging purposes, and not for speculation. The Fund may engage in currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies that will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.
Currently, currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark and Swiss Francs,
C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and 1,000,000 for
the Peso. In contrast to Forward Currency Exchange Contracts, which can be
traded at any time, only four value dates per year are available, the third
Wednesday of March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a
variety of currencies in both the United States and Europe. On the Philadelphia
Stock Exchange, for example, contracts for half the size of the corresponding
futures contracts on the Chicago Board Options Exchange are traded with up to
nine months maturity in Marks, Sterling, Yen, Swiss Francs and Canadian Dollars.
Options can be exercised at any time during the contract life and require a
deposit subject to normal margin requirements. Since a futures contract must be
exercised, the Fund must continually make up the margin balance. As a result, a
wrong price move could result in the Fund losing more than the original
investment as it cannot walk away from the futures contract as it can an option
contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in
connection with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is
analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by the Fund. Put options may be purchased to hedge a portfolio
of foreign stocks or foreign debt instruments or a position in the foreign
currency upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments, the
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Fund would purchase a call option on a
foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Fund is not fully invested.
The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
that may be developed from time to time and that are consistent with the Fund's
investment objective. The Fund believes that no additional techniques have been
identified for employment by the Fund in the foreseeable future other than those
described above.
CURRENCY TRADING RISKS
Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.
EXCHANGE RATE RISK
Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the Fund
buys or sells a foreign currency, an exposure called an open position is
created. Until the time that position can be "covered" by selling or buying an
equivalent amount of the same currency, the Fund is exposed to the risk that the
exchange rate might move against it. Since exchange rate changes can readily
move in one direction, a position carried overnight or over a number of days
involves greater risk than one carried a few minutes or hours. Techniques such
as foreign currency forward and futures contracts and options on foreign
currency are intended to be used by the Fund to reduce exchange rate risk.
MATURITY GAPS AND INTEREST RATE RISK
Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Fund's foreign exchange currency holdings, which is
the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short term and
lending longer term to benefit from the normal tendency of interest rates to be
higher for longer maturities. However in foreign exchange trading, while the
maturity pattern of interest rates for one currency is important, it is the
differential between interest rates for two currencies that is decisive.
CREDIT RISK
Whenever the Fund enters into a foreign exchange contract, it faces a
risk, however small, that the counterparty will not perform under the contract.
As a result there is a credit risk, although no extension of "credit" is
intended. To limit credit risk, the Fund intends to evaluate the
creditworthiness of each other party. The Fund does not intend to trade more
than 5% of its net assets under foreign exchange contracts with one party.
Credit risk exists because the Fund's counterparty may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges the Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts that are advantageous to the company but disclaim those contracts that
are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone differences
between the U.S. and foreign nations. If the Fund sells sterling it generally
must pay pounds to a counterparty earlier in the day than it will be credited
with dollars in New York. In the intervening hours, the buyer can go into
bankruptcy or can be declared insolvent. Thus, the dollars may never be credited
to the Fund.
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents or limits on inflows of investment funds from abroad. Governments take
such measures for example to improve control over the domestic banking system or
to influence the pattern of receipts and payments between residents and
foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payment interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules that interfere with
the normal payments mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Fund might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Fund.
Other changes in official regulations influence international
investment transactions. If one of the factors affecting the buying or selling
of a currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain) or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and controls on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the
Fund may be dealing with a foreign trader whose home country is facing a
payments problem. Even though the foreign trader intends to perform on its
foreign exchange contracts, the contracts are tied to other external liabilities
the country has incurred. As a result performance may be delayed, and can result
in unanticipated cost to the Fund. This aspect of country risk is a major
element in the Fund's credit judgment as to with whom it will deal and in what
amounts.
<PAGE>
PAGE 10
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.7%)
ALABAMA
Alabama Agricultural and Mechanic University (MBIA) 6.500% 11/01/2025 $ 2,035,000 $ 2,241,756
Mobile, Alabama, Industrial Development Board, Solid Waste
Disposal, Mobile Energy Services Co. Project 6.950 01/01/2020 500,000 532,420
ALASKA
Alaska Energy Authority, Utilities Revenue (FGIC) 6.600 07/01/2015 13,500,000 15,248,790
Alaska State Housing Finance Corp., Series 1993 A 5.400 12/01/2023 5,000,000 4,867,550
North Slope Borough, Alaska, General Obligation, Series A
(MBIA) 5.900 06/30/2003 3,000,000 3,232,050
North Slope Borough, Alaska, General Obligation, Series G
(ETM) 8.350 06/30/1998 2,000,000 2,184,800
ARIZONA
Arizona University Resh Park Development Revenue (MBIA) 5.000 07/01/2021 625,000 595,638
Chandler, Arizona, Water and Sewer (FGIC) 6.750 07/01/2006 850,000 931,651
Maricopa County, Arizona, University School District (MBIA) 8.125 01/01/2010 6,000,000 7,098,240
Phoenix, Arizona, Street and Highway User, Series 1992 A
(FGIC) (effective yield 6.55%) (b) 0.000 07/01/2013 2,500,000 966,275
Pima County, Arizona, Industrial Development Authority,
Health Care Corp. Revenue 8.000 07/01/2013 3,015,000 3,349,122
Pima County, Arizona, Industrial Development Authority,
Health Care Corp. Revenue (MBIA) 8.000 07/01/2013 370,000 409,416
Pima County, Arizona, Industrial Development Authority,
Irvington Project (FSA) 7.250 07/15/2010 10,000,000 10,935,700
ARKANSAS
Arkansas State Development Finance Authority, Single Family
Mortgage Revenue Refunding 8.000 08/15/2011 1,645,000 1,791,306
CALIFORNIA
California Health Facilities Financing, St. Francis Medical
Center, Series A 5.500 10/01/2009 200,000 213,700
California State Public Works Board, Lease Department
Correctional State Prison, Series E 5.500 06/01/2015 3,700,000 3,690,787
California State Public Works Board, Various University
California Projects, Series B 5.500 06/01/2019 350,000 342,325
Contra Costa, California, Water District Revenue, Series G 5.000 10/01/2026 2,000,000 1,900,980
Eden Township, California, Hospital District Revenue 7.400 11/01/2019 5,615,000 5,800,800
Los Angeles, California, Convention and Exhibition Center
Authority Lease (MBIA) 5.125 08/15/2013 600,000 582,600
Los Angeles, California, Metropolitan Transportation
Authority, Proposition C, Series A (AMBAC) 5.500 07/01/2017 4,500,000 4,544,010
Los Angeles, California, Metropolitan Transportation
Authority, Proposition C, Series A (AMBAC) 5.000 07/01/2025 5,650,000 5,375,297
Los Angeles, California, Transportation Commission, Series
A (MBIA) 6.250 07/01/2013 6,500,000 6,900,530
Los Angeles, California, Water System, Series A (MBIA) 5.875 06/01/2024 680,000 700,747
Oakland, California, Pensions, Series A (FGIC) 7.600 08/01/2021 2,265,000 2,490,526
San Diego County, California, Water Authority, Water
Revenue 5.681 04/23/2008 1,650,000 1,739,232
</TABLE>
<PAGE>
PAGE 11
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA (CONTINUED)
San Joaquin Hills, California, Transportation Corridor
Agency, Toll Road Revenue 7.000% 01/01/2030 $ 5,705,000 $ 6,070,462
San Joaquin Hills, California, Transportation Corridor
Agency, Toll Road Revenue 6.750 01/01/2032 5,000,000 5,234,500
San Jose, California, Redevelopment Tax Allocation (MBIA) 6.000 08/01/2015 250,000 273,408
Suisun City, California, Redevelopment Agency, Tax
Allocation 5.500 10/01/2023 1,000,000 995,830
Walnut Creek, California, John Muir Medical Center (MBIA) 5.000 02/15/2016 350,000 331,671
Walnut Valley, California, Unified School District, Series
A (MBIA) 6.000 08/01/2014 190,000 206,057
COLORADO
City and County of Denver, Colorado, Airport System, Series A 7.000 11/15/1999 2,000,000 2,135,180
City and County of Denver, Colorado, Airport System, Series A 7.500 11/15/2023 5,625,000 6,253,369
City and County of Denver, Colorado, Airport System, Series A 8.500 11/15/2023 1,750,000 1,995,088
City and County of Denver, Colorado, Airport System, Series A 8.750 11/15/2023 16,380,000 19,397,032
City and County of Denver, Colorado, Airport System, Series A 8.000 11/15/2025 525,000 589,040
City and County of Denver, Colorado, Airport System, Series
A (MBIA) 5.600 11/15/2020 6,000,000 6,038,580
City and County of Denver, Colorado, Airport System, Series
A (MBIA) 5.700 11/15/2025 3,000,000 3,037,350
City and County of Denver, Colorado, Airport System, Series C 6.650 11/15/2005 5,980,000 6,425,331
City and County of Denver, Colorado, Airport System, Series C 6.000 12/01/2025 3,000,000 3,073,590
City and County of Denver, Colorado, Airport System, Series D 7.750 11/15/2021 12,250,000 13,705,178
Colorado Health Facilities Authority, Rocky Mountain
Adventist Health Care 6.625 02/01/2022 3,000,000 3,050,610
Colorado Health Facilities Authority, Sisters Charity
Health Care, Series A (MBIA) 6.250 05/15/2009 1,880,000 2,096,764
Larimer County, Colorado, School District (MBIA) 7.000 12/15/2016 2,250,000 2,744,258
CONNECTICUT
Connecticut Special Tax Obligation, Series B 6.500 10/01/2012 1,600,000 1,836,208
DELAWARE
Delaware State Health Facilities Authority, Medical Center
of Delaware (MBIA) 6.250 10/01/2006 6,000,000 6,749,820
FLORIDA
Broward County, Florida, Resource Recovery, South Project 7.950 12/01/2008 4,080,000 4,579,800
Broward County, Florida, Water and Sewer Utility 5.000 10/01/2018 2,000,000 1,910,980
Escambia County, Florida, Pollution Control, Champion
International Corp. Project 6.900 08/01/2022 600,000 642,234
Florida State Board of Education, Capital Outlay 5.800 06/01/2019 2,000,000 2,051,540
Florida State Board of Education, Capital Outlay 5.875 06/01/2024 8,000,000 8,221,280
Florida State, Department of Transportation 5.800 07/01/2018 13,400,000 13,748,266
Florida State, Jacksonville Transportation Authority 9.200 01/01/2015 2,000,000 2,833,080
Florida State Turnpike Authority, Series A (FGIC) 5.625 07/01/2025 3,000,000 3,045,990
Hillsborough County, Florida, Housing Finance Agency,
Single Family Mortgage Revenue 7.300 04/01/2022 495,000 518,602
</TABLE>
(continued on next page)
<PAGE>
PAGE 12
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FLORIDA (CONTINUED)
Jacksonville, Florida, Health Facilities Authority, New
Children's Hospital (MBIA) 7.000% 06/01/2021 $1,800,000 $ 2,013,570
Lee County, Florida, School Board, Certificates of
Participation, Series A (FSA) 7.750 08/01/2005 3,490,000 4,068,572
Orange County, Florida, Health Facilities Authority,
Adventist Health System (AMBAC) 5.250 11/15/2020 2,500,000 2,432,575
Orlando-Orange County, Florida, Expressway Authority (FGIC) 8.250 07/01/2015 2,960,000 4,032,467
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project 6.850 02/15/2021 2,500,000 2,548,325
Palm Beach County, Florida, Solid Waste, Osceola Power
Project, Series A 6.950 01/01/2022 3,800,000 3,908,224
Polk County, Florida, Housing Finance Authority 7.875 09/01/2022 385,000 407,357
Reedy Creek, Florida, District Utilities Improvement,
Series 1 (MBIA) 5.000 10/01/2019 8,500,000 8,158,045
St. Petersburg, Florida, Health Facilities Authority (MBIA) 7.000 12/01/2015 3,250,000 3,689,075
St. Petersburg, Florida, Professional Sports Facility,
Sales Tax Revenue (MBIA) 5.625 10/01/2020 3,500,000 3,568,775
Tampa, Florida, Subordinate Guaranteed Entitlement, Series
B (Pre-refunded) 8.500 10/01/2018 1,825,000 2,031,043
GEORGIA
Atlanta, Georgia, General Obligation, Series A 6.000 12/01/2015 1,790,000 1,883,671
Georgia State, General Obligation, Series B 6.800 03/01/2011 6,000,000 7,073,280
Georgia State, General Obligation, Series C 5.250 04/01/2011 9,200,000 9,399,732
Metropolitan Atlanta Rapid Transit Authority, Georgia,
Sales Tax (AMBAC) 6.250 07/01/2011 4,255,000 4,769,344
HAWAII
Hawaii State Department of Budget and Finance, Special
Purpose Revenue, Hawaii Electric Co. (MBIA) 7.375 12/01/2020 8,000,000 9,000,080
IDAHO
Idaho Housing Finance Authority, Single Family Mortgage
Bonds, Series D-1 8.000 01/01/2020 1,275,000 1,387,506
ILLINOIS
Chicago, Illinois, Gas Supply Revenue, People's Gas Light
and Coke Co., Series A 8.100 05/01/2020 6,740,000 7,657,516
Cook County, Illinois, General Obligation, District Number
508, Lease Certificates, Series C (MBIA) 7.700 12/01/2005 5,970,000 7,272,356
Illinois Development Finance Authority, Pollution Control
Revenue Refunding, Commonwealth Edison Co. Project,
Series D 6.750 03/01/2015 4,000,000 4,420,640
Illinois State, Sales Tax, Series P 6.500 06/15/2022 9,000,000 10,546,920
Kankakee, Illinois, Sewer Revenue (FGIC) 6.875 05/01/2011 2,965,000 3,279,942
Metropolitan Fair and Exposition Authority, Illinois,
Dedicated State Tax Revenue (MBIA) 5.000 06/01/2015 2,000,000 1,860,940
Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue (effective yield 6.60%) (b) 0.000 06/15/2013 5,625,000 2,135,306
</TABLE>
<PAGE>
PAGE 13
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ILLINOIS (CONTINUED)
Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue (effective yield 6.70%) (b) 0.000% 06/15/2015 $19,440,000 $ 6,541,560
Metropolitan Pier and Exposition Authority, McCormick Place
Expansion Project 7.250 06/15/2005 5,500,000 6,467,835
Robbins, Illinois, Robbins Resources Recovery, Partners A 9.250 08/15/2014 6,000,000 6,437,760
INDIANA
Indianapolis, Indiana, Local Public Improvement Bond Bank,
Series 1992D 6.750 02/01/2020 2,000,000 2,121,700
KANSAS
Kansas City, Kansas, Utility Systems, Refunding and
Improvement (FGIC) 6.375 09/01/2023 7,150,000 7,832,897
KENTUCKY
Carroll County, Kentucky, Kentucky Utility Company, Series
A 7.450 09/15/2016 5,000,000 5,773,550
Jefferson County, Kentucky, Hospital Revenue (MBIA) 6.435 10/23/2014 6,000,000 6,465,420
Kentucky Housing Corp., Housing Revenue Bond, Series C 7.900 01/01/2021 5,570,000 5,952,659
Trimble County, Kentucky, Pollution Control, Louisville Gas
and Electric Co. 7.625 11/01/2020 2,725,000 3,088,052
Trimble County, Kentucky, Pollution Control, Louisville Gas
and Electric Co., Series A (Pre-refunded) 7.625 11/01/2020 545,000 628,156
LOUISIANA
Louisiana Public Facilities Authority, Health and
Educational Facilities, Our Lady of the Lake Hospital 8.200 12/01/2015 7,250,000 8,142,910
Louisiana State, Series B (MBIA) 5.625 08/01/2013 3,000,000 3,116,940
New Orleans, Louisiana, Capital Appreciation (AMBAC)
(effective yield 7.05%) (b) 0.000 09/01/2011 5,000,000 2,141,150
New Orleans, Louisiana, Capital Appreciation (AMBAC)
(effective yield 7.05%) (b) 0.000 09/01/2012 1,000,000 403,760
Orleans Parish, Louisiana, School Board (ETM) 9.050 02/01/2010 5,175,000 7,145,744
MAINE
Regional Waste System, Maine 8.150 07/01/2011 2,500,000 2,781,000
MARYLAND
Maryland State Community Development Administration,
Multi-Family Housing 8.750 05/15/2012 3,345,000 3,398,855
MASSACHUSETTS
Boston, Massachusetts, Boston City Hospital 5.750 02/15/2023 735,000 731,105
Massachusetts Bay Transportation Authority, Series A 7.000 03/01/2011 3,610,000 4,247,021
Massachusetts Bay Transportation Authority, Series A 6.250 03/01/2012 4,000,000 4,417,160
Massachusetts Bay Transportation Authority, Series B 6.200 03/01/2016 1,500,000 1,650,255
Massachusetts Industrial Finance Agency, Harvard Community
Health Plan, Inc. 8.125 10/01/2017 11,750,000 12,807,618
Massachusetts Industrial Finance Agency, Solid Waste
Disposal 9.000 08/01/2016 4,100,000 4,111,726
Massachusetts Municipal Wholesale Electric, Power Supply
Systems 5.100 07/01/2007 5,000,000 5,056,250
</TABLE>
(continued on next page)
<PAGE>
PAGE 14
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MASSACHUSETTS (CONTINUED)
Massachusetts Municipal Wholesale Electric, Power Supply
Systems 6.750% 07/01/2008 $ 4,000,000 $ 4,408,840
Massachusetts State Health and Educational Facilities
Authority, Brigham & Womens Hospital (MBIA) 6.750 07/01/2024 2,000,000 2,186,700
Massachusetts State Health and Educational Facilities
Authority, Cape Islands Rehabilitation Hospital, Series A 7.875 08/15/2024 1,500,000 1,539,045
Massachusetts State Health and Educational Facilities
Authority, Childrens' Hospital 6.200 10/01/2016 2,640,000 2,767,486
Massachusetts State Health and Educational Facilities
Authority, Dana Farber Cancer Project, Series G-1 5.500 12/01/2027 375,000 355,684
Massachusetts State Health and Educational Facilities
Authority (MBIA) 7.300 10/01/2018 2,000,000 2,254,420
Massachusetts State Health and Educational Facilities
Authority, Massachusetts General Hospital, Series F
(AMBAC) 6.250 07/01/2012 1,000,000 1,116,360
Massachusetts State Health and Educational Facilities
Authority, Massachusetts General Hospital, Series F
(AMBAC) 6.250 07/01/2020 3,000,000 3,186,780
Massachusetts State Health and Educational Facilities
Authority, New England Deaconness Hospital (AMBAC) 6.875 04/01/2022 2,980,000 3,283,662
Massachusetts State, General Obligation, Consolidated Loan,
Series C (FGIC) 6.600 11/01/2008 8,000,000 9,058,240
Massachusetts State, Water Pollution, Abatement Trust
Pooled Loan Program, Series 2 6.125 02/01/2008 85,000 94,931
Massachusetts State, Water Pollution, Abatement Trust Water
Pollution Abatement Revenue (MWRA Loan Program), Series A 5.000 08/01/2014 150,000 144,686
Massachusetts State Water Resources Authority, Series A
(MBIA) 6.000 08/01/2014 1,500,000 1,574,130
Massachusetts State Water Resources Authority, Series B 4.000 12/01/2018 10,275,000 8,488,897
Quincy, Massachusetts, Quincy Hospital (FSA) 5.250 01/15/2016 100,000 97,328
MICHIGAN
Monroe County, Michigan, Economic Development Corp.,
Detroit Edison Co. (FGIC) 6.950 09/01/2022 6,000,000 7,406,580
Okemos, Michigan, Public School District, Series I
(effective yield
7.35%) (b) 0.000 05/01/2021 51,525,000 10,688,861
Romulus, Michigan, Community Schools, Capital Appreciation,
Series I (effective yield 8.02%) (b) 0.000 05/01/2017 39,490,000 10,809,993
West Ottawa, Michigan, Public School District, Capital
Appreciation (effective yield 7.55%) (b) 0.000 05/01/2015 35,490,000 11,092,754
MINNESOTA
Dakota County, Minnesota, Housing and Redevelopment
Authority, Single Family Mortgage (FGIC) 9.375 05/01/2018 20,000 21,919
MISSISSIPPI
Mississippi Hospital Equipment and Facilities Authority
(Connie Lee) 6.400 01/01/2007 1,000,000 1,075,620
MISSOURI
Kansas City, Missouri, Municipal Assistance Corp. Revenue 6.000 04/15/2020 500,000 517,825
</TABLE>
<PAGE>
PAGE 15
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MISSOURI (CONTINUED)
Missouri State Health and Educational Facilities Authority,
Barnes Jewish Hospital (MBIA) 5.150% 05/15/2010 $ 4,500,000 $ 4,581,180
Missouri State Health and Educational Facilities Authority,
Barnes Jewish Hospital 5.250 05/15/2021 2,200,000 2,096,446
Phelps County, Missouri, Phelps County Regional Medical
Center (Connie Lee) 6.000 05/15/2013 125,000 127,514
NEBRASKA
Nebraska Higher Education Loan Program 6.200 06/01/2013 5,300,000 5,516,770
NEVADA
Clark County, Nevada, School District, Series A (MBIA) 6.750 03/01/2007 3,000,000 3,273,150
Clark County, Nevada, Series A (AMBAC) 7.500 06/01/2009 4,000,000 4,870,160
NEW JERSEY
New Jersey Health Care Facilities Financing Authority,
Jersey Shore Medical Center (AMBAC) 6.125 07/01/2012 1,000,000 1,065,730
New Jersey Health Care Facilities Financing Authority,
Jersey Shore Medical Center (AMBAC) 6.250 07/01/2016 2,000,000 2,159,780
New Jersey Health Care Facilities Financing Authority,
Kimball Medical Center, Series C 8.000 07/01/2013 3,000,000 3,209,130
New Jersey Health Care Facilities Financing Authority, St.
Elizabeth's Hospital, Series B 7.750 07/01/1998 1,100,000 1,145,727
New Jersey State Transportation Authority, Transportation
System, Series A (MBIA) 5.500 06/15/2013 2,000,000 2,046,200
NEW MEXICO
City of Albuquerque, New Mexico, Hospital System, Series A
(MBIA) 6.375 08/01/2007 1,500,000 1,630,560
NEW YORK
Battery Park City Authority, New York, Refunding Bonds 5.250 11/01/2017 1,000,000 950,010
Battery Park City Authority, New York, Refunding Bonds,
Series A 5.000 11/01/2013 3,715,000 3,468,027
New York City, New York, General Obligation 7.750 08/15/2014 5,460,000 6,236,084
New York City, New York, General Obligation, Fiscal 1992,
Series A 7.750 08/15/2008 6,000,000 6,774,180
New York City, New York, General Obligation, Fiscal 1992,
Series A 7.750 08/15/2015 3,250,000 3,689,725
New York City, New York, General Obligation, Series D
(MBIA) 6.000 08/01/2006 285,000 295,816
New York City, New York, Industrial Special Facility,
Terminal One Group Association Project 6.000 01/01/2015 2,500,000 2,534,350
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System (FGIC) 7.000 06/15/2015 6,000,000 6,707,316
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System, Series A 6.000 06/15/2025 18,000,000 18,854,100
New York Energy Research and Development Authority,
Consolidated Edison Project 7.750 01/01/2024 2,900,000 3,123,184
New York State Dormitory Authority Revenue, State
University Educational Facilities, Series B 7.500 05/15/2011 7,000,000 8,421,280
</TABLE>
(continued on next page)
<PAGE>
PAGE 16
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
New York State Medical Care Facilities, Finance Agency
Revenue, Mental Health Services Facilities 6.150% 02/15/2015 $ 5,000,000 $ 5,272,650
New York State Medical Care Facilities, Finance Agency
Revenue, Mental Health Services Facilities 6.000 08/15/2015 2,000,000 2,103,500
New York State Urban Development Corp., Revenue Refunding,
Correctional Facilities, Series A (FSA) 6.500 01/01/2010 3,000,000 3,402,480
New York State Urban Development Corp., Revenue Refunding,
Correctional Facilities, Series A 5.500 01/01/2014 2,500,000 2,468,400
New York State Care Facilities, New York Hospital, Series A 6.800 08/15/2024 3,800,000 4,246,994
New York State Dormitory Authority, City University
Educational Facilities (FGIC) 7.000 07/01/2009 3,780,000 4,489,468
New York State Dormitory Authority, City University
Educational Facilities (AMBAC) 6.250 07/01/2016 3,000,000 3,230,850
New York State Dormitory Authority, State University
Educational Facilities, Series A 5.500 05/15/2019 2,000,000 1,958,740
New York State Energy Research and Development Authority,
Consolidated Edison Co. New York, Series A (AMBAC) 6.100 08/15/2020 5,000,000 5,247,300
New York State Environmental Facilities Corp., State Water
Pollution Control (New York City Water Finance
Authority) Series E 6.875 06/15/2010 5,000,000 5,633,850
New York State Housing Finance Agency, Service Contract,
Series A 5.500 09/15/2022 8,860,000 8,420,633
New York State Local Government Assistance Corp., Series C 5.500 04/01/2017 2,000,000 2,019,900
New York State Local Government Assistance Corp., Series D 6.750 04/01/2021 900,000 1,030,635
New York State Medical Care Facilities Finance (FGIC) 6.375 08/15/2014 2,900,000 3,110,192
New York State Mortgage Agency 6.900 04/01/2015 4,500,000 4,829,400
New York State Throughway Authority, Highway & Bridge Fund,
Series B (MBIA) 5.125 04/01/2015 2,000,000 1,943,660
New York State Urban Development Corp., Refunding
Correctional Facilities, Series A 6.500 01/01/2010 13,920,000 15,202,728
New York Urban Development Corp., Correctional Facilities,
Series A 7.500 04/01/2011 8,000,000 9,296,720
New York Urban Development Corp., State Facilities 5.750 04/01/2012 5,250,000 5,336,468
Triborough Bridge and Tunnel Authority, New York, Series Q 5.000 01/01/2017 3,820,000 3,661,737
Triborough Bridge and Tunnel Authority, New York, Special
Obligation 6.625 01/01/2012 8,500,000 9,763,525
NORTH DAKOTA
North Dakota State Housing Finance Agency, Single Family
Mortgage 8.375 07/01/2021 580,000 608,188
OHIO
Bedford, Ohio, City School District (MBIA) 6.250 12/01/2013 1,000,000 1,067,130
Cleveland, Ohio, Public Power Systems, First Mortgage,
Series A (MBIA) 7.000 11/15/2016 4,000,000 4,632,280
Cleveland, Ohio, Public Power Systems, First Mortgage,
Series A (MBIA) 7.000 11/15/2024 1,000,000 1,131,770
Columbus, Ohio, General Obligation 12.375 02/15/2006 1,285,000 2,044,641
Ohio Housing Finance Agency, Single Family Mortgage
Revenue, Series C (GNMA) 9.000 09/01/2018 10,000,000 11,382,800
Ohio State Higher Educational Facility Commission (MBIA) 6.125 11/15/2017 1,000,000 1,068,710
Ohio State Water Development Authority (Pre-refunded) 9.250 12/01/2012 75,000 78,897
</TABLE>
<PAGE>
PAGE 17
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OHIO (CONTINUED)
Ohio State Water Development Authority (AMBAC) 9.375% 12/01/2018 $ 400,000 $ 417,932
OREGON
Oregon State, Department of Administrative Services, Series
A (MBIA) 5.375 11/01/2016 2,000,000 1,983,700
PENNSYLVANIA
Allegheny County, Pennsylvania, Industrial Development
Authority Revenue 5.700 09/01/2030 2,000,000 1,991,820
Allegheny County, Pennsylvania, Sewer Revenue Refunding
(FGIC) (effective yield 6.10%) (b) 0.000 06/01/2015 2,500,000 859,225
Beaver County, Pennsylvania, Ohio Edison (FGIC) 7.000 06/01/2021 4,390,000 4,799,499
Chester County, Pennsylvania, Health and Education
Facilities Authority, Mainline Health System 5.500 05/15/2015 6,240,000 6,143,467
Delaware County, Pennsylvania, Hospital Authority, Delaware
County Memorial Hospital (MBIA) 5.500 08/15/2019 5,000,000 5,044,750
Delaware County, Pennsylvania, Hospital Revenue, Crozier
Chester Medical Center (Pre-refunded) 7.500 12/15/2020 2,545,000 2,951,793
Delaware County, Pennsylvania, Industrial Development
Authority, Resource Recovery Project, Series A (LOC
Security Pacific) 8.100 12/01/2013 4,000,000 4,187,920
Lancaster County, Pennsylvania, Hospital Authority, Mesonic
Homes Health Center Project, (AMBAC) 5.000 11/15/2020 3,200,000 2,984,448
North Penn, Pennsylvania, Water Authority (FGIC) 6.875 11/01/2019 2,500,000 2,925,250
Northumberland County, Pennsylvania, Authority Prisons
Lease (Pre-refunded) 7.750 10/15/2004 2,110,000 2,472,983
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project, Series D 7.050 12/01/2010 3,000,000 3,221,850
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project, Series D 7.125 12/01/2015 1,000,000 1,075,720
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project, Series D 7.150 12/01/2018 2,500,000 2,683,925
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project 6.400 01/01/2009 4,000,000 3,944,880
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project 6.500 01/01/2013 5,500,000 5,441,590
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project 6.600 01/01/2019 1,300,000 1,292,161
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series T 7.750 10/01/2009 4,000,000 4,245,240
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Section 8 8.200 07/01/2024 6,000,000 6,537,300
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series 34 A 6.850 04/01/2016 500,000 529,005
Pennsylvania Intergovernmental Cooperative Authority,
Philadelphia Funding (FGIC) 6.750 06/15/2021 1,910,000 2,150,641
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Albert Einstein Medical Center 7.000 10/01/2021 3,055,000 3,277,160
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Community College, Series B (MBIA) 6.500 05/01/2007 280,000 312,777
</TABLE>
(continued on next page)
<PAGE>
PAGE 18
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Graduate Health System Education Facilities
Authority 7.250% 07/01/2018 $ 2,500,000 $ 2,648,075
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Temple University Authority 6.625 11/15/2023 1,725,000 1,780,442
Philadelphia, Pennsylvania, Hospital and Higher Education,
Chestnut Hill Hospital 6.500 11/15/2022 5,000,000 5,198,800
Philadelphia, Pennsylvania, Municipal Development
Authority, Criminal Justice Center, Series A (MBIA) 7.100 11/15/2006 4,095,000 4,612,239
Philadelphia, Pennsylvania, Water and Wastewater (FGIC) 10.000 06/15/2005 7,000,000 9,810,850
Philadelphia, Pennsylvania, Water and Wastewater, Series A 6.250 08/01/2012 3,000,000 3,353,850
Pittsburgh, Pennsylvania, Urban Redevelopment Authority,
Multi-Family Housing Mortgage, 1985 Series A 9.250 12/01/2027 3,185,000 3,358,105
Ridley Park, Pennsylvania, Hospital Authority Revenue 6.125 12/01/2020 2,500,000 2,314,850
Sayre, Pennsylvania, Health Care Facilities Authority,
Guthrie Healthcare, Series A 7.100 03/01/2017 1,250,000 1,367,200
PUERTO RICO
Puerto Rico Commonwealth, Refunding (Capital Guarantee) 6.450 07/01/2017 2,000,000 2,141,120
Puerto Rico Commonwealth, General Obligation 7.000 07/01/2010 9,750,000 11,612,738
Puerto Rico Commonwealth, General Obligation (MBIA) 5.375 07/01/2022 5,035,000 5,018,838
Puerto Rico Electric Power Authority, Series X 5.500 07/01/2025 1,000,000 985,810
Puerto Rico Electric Power Authority, Series Y (MBIA) 6.500 07/01/2006 2,000,000 2,272,680
Puerto Rico Public Buildings Authority, Guaranteed Public
Education and Health Facilities, Series M 5.700 07/01/2009 1,000,000 1,038,910
Puerto Rico Public Buildings Authority, Guaranteed Public
Education and Health Facilities, Series M 3.750 07/01/2016 6,250,000 5,986,563
Puerto Rico Telephone Authority (MBIA) 5.250 01/01/2005 16,900,000 17,520,230
RHODE ISLAND
Rhode Island State Health and Educational Building Corp.,
Hospital Financing Revenue, Roger Williams General
Hospital 9.500 07/01/2016 4,210,000 4,336,889
SOUTH CAROLINA
South Carolina State Public Services Authority 6.250 01/01/2022 20,500,000 21,755,625
South Carolina State Public Services Authority, Fixed
Option Bonds 5.342 06/30/2006 8,400,000 8,708,784
TENNESSEE
Bristol, Tennessee, Health and Education Authority, Bristol
Memorial Hospital (FGIC) 6.750 09/01/2010 4,200,000 4,889,430
Knox County, Tennessee, Health and Educational Facilities,
Fort Sanders Hospital Alliance, Series B (MBIA) 5.250 01/01/2015 3,500,000 3,466,540
Knox County, Tennessee, Health and Educational Facilities,
Fort Sanders Hospital Alliance, Series C (MBIA) 7.250 01/01/2010 3,000,000 3,649,320
Metro Government, Nashville & Davidson Counties, Tennessee
(FGIC) (effective yield 4.26%) (b) 0.000 01/01/2012 6,000,000 6,328,320
Tennessee Housing Development Authority, Home Ownership
Program, Issue H 7.825 07/01/2015 4,520,000 4,680,415
</TABLE>
<PAGE>
PAGE 19
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TEXAS
Austin, Texas, Utility Systems Capital Appreciation (AMBAC)
(effective yield 6.80%) (b) 0.000% 11/15/2011 $12,000,000 $ 5,130,240
Austin, Texas, Utility Systems Capital Appreciation (AMBAC)
(effective yield 6.80%) (b) 0.000 11/15/2012 12,200,000 4,911,354
Bexar, Texas, Metropolitan Water District Waterworks
Systems (AMBAC) 6.625 05/01/2014 1,850,000 2,096,308
Brownsville, Texas, Utilities System Revenue (AMBAC) 5.250 09/01/2020 5,750,000 5,602,628
Copperas Cove, Texas, Health Facilities, Adventist Health
Systems (MBIA) 5.500 11/15/2017 2,000,000 1,997,340
Cypress-Fairbanks, Texas, Independent School
District,Capital Appreciation, Series A
(effective yield 6.03%) (b) 0.000 02/15/2013 4,000,000 1,572,840
Fort Bend County, Texas, Levee Improvement (MBIA) 6.900 09/01/2020 1,165,000 1,286,661
Grapevine-Colleyville, Texas, Independent School District 5.125 08/15/2022 3,000,000 2,844,060
Harris County, Texas, Flood Control District (effective
yield 7.20%) (b) 0.000 10/01/2006 4,500,000 2,338,560
Harris County, Texas, Health Facilities Development Corp. 6.600 06/01/2014 5,000,000 5,300,450
Harris County, Texas, Health Facilities Development Corp.,
Hermann Hospital Project (MBIA) 6.375 10/01/2017 2,480,000 2,653,550
Harris County, Texas, Health Facilities Development Corp.,
Hermann Hospital Project (MBIA) 6.375 10/01/2024 7,300,000 7,784,574
Harris County, Texas, Senior Lien, Toll Road, Series A
(MBIA) 6.375 08/15/2024 4,000,000 4,294,960
Houston, Texas, Airport System Revenue, Senior Lien 8.200 07/01/2017 1,840,000 2,030,716
Houston, Texas, General Obligation 7.000 03/01/2008 14,675,000 17,419,959
Houston, Texas, Water & Sewer System, Junior Lien, Series A
(MBIA) 6.200 12/01/2023 10,000,000 10,610,300
Midland County, Texas, Hospital District, Midland Memorial
Hospital 7.500 06/01/2016 600,000 632,502
Northwest Texas, Independent School District, Capital
Appreciation (AMBAC) (effective yield 7.28%) (b) 0.000 08/15/2010 2,500,000 1,131,225
Port of Corpus Christi, Texas, Industrial Development
Corp., Valero Refining and Marketing Co. Project, Series A 10.250 06/01/2017 11,050,000 12,179,421
Rio Grande Valley, Texas, Health Facilities Corp., Hospital
Revenue, Baptist Medical Center Project (MBIA) 8.000 08/01/2017 1,085,000 1,192,578
Rio Grande Valley, Texas, Health Facilities Corp., Hospital
Revenue, Baptist Medical Center Project (Pre-refunded) 8.000 08/01/2017 5,915,000 6,579,550
Tarrant County, Texas, Housing Finance Corp., Series A
(MBIA) (effective yield 11.00%) (b) 0.000 09/15/2016 6,415,000 1,925,462
Texas Housing Agency, Residential Development 8.400 01/01/2021 2,680,000 2,832,304
Texas Municipal Power Agency Revenue (effective yield
6.10%) (b) 0.000 09/01/2013 12,100,000 4,634,663
Texas Municipal Power Agency, Refunding Bonds (MBIA) 5.250 09/01/2012 175,000 174,382
Texas National Research Lab, Super Conducting, Super
Collider 6.950 12/01/2012 9,500,000 11,164,970
Texas State, General Obligation 6.200 09/30/2011 3,000,000 3,352,740
Texas State Public Finance Authority Building Revenue,
Series A (AMBAC) 5.750 02/01/2015 250,000 257,515
Texas State, Veterans Housing Assistance 6.050 12/01/2012 2,480,000 2,539,520
Texas State, Veterans Housing Assistance, Series B1 5.700 12/01/2014 250,000 245,103
Titus County, Texas, Water District #1, Southwest Electric
Power 8.200 08/01/2011 5,500,000 6,469,650
Tomball, Texas, Hospital Authority, Tomball Regional
Hospital 6.100 07/01/2008 1,860,000 1,839,317
Tomball, Texas, Hospital Authority, Tomball Regional
Hospital 6.125 07/01/2023 7,350,000 6,980,516
</TABLE>
(continued on next page)
<PAGE>
PAGE 20
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXAS (CONTINUED)
Travis County, Texas Health Facilities, Daughters Of
Charity 6.000% 11/15/2022 $ 2,000,000 $ 2,053,300
University of Texas, University Revenue, Series B 6.750 08/15/2013 2,000,000 2,219,620
UTAH
Intermountain Power Agency, Utah, Power Supply 7.750 07/01/2020 19,250,000 21,067,970
Intermountain Power Agency, Utah, Power Supply, Series A
(effective yield 7.10%) (b) 0.000 07/01/2004 8,000,000 5,422,560
Intermountain Power Agency, Utah, Power Supply, Series C
(effective yield 21.28%) (b) 0.000 07/01/2020 3,000,000 459,000
Intermountain Power Agency, Utah, Power Supply, Series G
(effective yield 7.65%) (b) 0.000 07/01/2012 20,350,000 19,648,129
Intermountain Power Agency, Utah, Special Obligation 7.875 07/01/2014 4,210,000 4,371,159
Utah State Housing Finance Agency, Single Family Mortgage 10.750 07/01/2008 5,000 5,128
Utah State Housing Finance Agency, Single Family Mortgage,
Series C 2 7.950 07/01/2010 475,000 512,991
VIRGINIA
Fairfax County, Virginia, Economic Development Authority 5.500 05/15/2018 4,000,000 3,989,680
Hanover County, Virginia, Industrial Development Authority,
Memorial Regional Medical Center Project (MBIA) 5.500 08/15/2025 3,625,000 3,609,703
Norfolk, Virginia, Water Revenue (MBIA) 5.875 11/01/2020 5,000,000 5,207,750
Pittsylvania County, Virginia, Industrial Development
Authority, Series A 7.300 01/01/2004 3,200,000 3,429,920
Pittsylvania County, Virginia, Industrial Development
Authority, Series A 7.500 01/01/2014 1,000,000 1,074,350
Pittsylvania County, Virginia, Industrial Development
Authority, Series A 7.550 01/01/2019 3,100,000 3,304,848
Virginia State Housing Development Authority, Residential
Mortgage, Series B (effective yield 10.62%) (b) 0.000 09/01/2014 590,000 86,642
WASHINGTON
Washington State Health Care Facilities Authority,
Multi-Care Medical Center of Tacoma (FGIC) 7.875 08/15/2011 1,300,000 1,425,021
WISCONSIN
Wisconsin Health and Education Facilities Authority, Bellin
Memorial Hospital, Inc. (Pre-refunded) 7.625 04/01/2019 5,000,000 5,600,850
Wisconsin Housing and Economic Development Authority, Home
Ownership 8.000 03/01/2021 1,960,000 2,077,384
WYOMING
Wyoming Community Development Authority, Single Family
Mortgage, Series B 8.125 06/01/2021 1,475,000 1,567,646
----------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (COST--$1,088,958,150) 1,176,546,324
================================================================================================================
TEMPORARY TAX-EXEMPT INVESTMENTS (1.9%)
Anaheim, California, Certificate of Participation (AMBAC) (a) 5.300 08/01/2019 1,175,000 1,175,000
Dade County, Florida, Water & Sewer System Revenue (FGIC) (a) 4.900 10/05/2022 2,785,000 2,785,000
Jackson County, Mississippi, Pollution Control, Chevron USA
Inc. Project (a) 5.900 06/01/2023 1,600,000 1,600,000
Kansas City, Missouri, Industrial Development Hospital,
Resh Health Services System (MBIA) (a) 5.900 04/15/2015 3,000,000 3,000,000
</TABLE>
<PAGE>
PAGE 21
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEMPORARY TAX-EXEMPT INVESTMENTS (CONTINUED)
New York City, New York, General Obligation, Series A (a) 5.900% 08/01/2015 $2,715,000 $ 2,715,000
New York City, New York, General Obligation, Series A (a) 5.900 08/01/2016 1,300,000 1,300,000
New York City, New York, General Obligation, Series B
(MBIA) (a) 5.900 08/15/2003 200,000 200,000
New York City, New York, General Obligation, Series B
(MBIA) (a) 5.900 08/15/2023 500,000 500,000
New York City, New York, Municipal Water Finance Authority,
Series C (FGIC) (a) 5.900 06/15/2022 2,700,000 2,700,000
New York City, New York, Municipal Water Finance Authority,
Series G (FGIC) (a) 5.900 06/15/2024 1,200,000 1,200,000
Texas Hospital Equipment Financing Council (MBIA) (a) 5.450 04/07/2005 439,000 439,000
Uinta County, Wyoming, Pollution Control, Chevron USA Inc.
Project (a) 5.900 08/15/2020 2,700,000 2,700,000
West Feliciana Parish, Louisiana, Pollution Control, Series
D (a) 5.900 12/01/2015 600,000 600,000
West Feliciana Parish, Louisiana, Pollution Control, Series
D (a) 5.900 12/01/2020 1,700,000 1,700,000
----------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (COST--$22,614,000) 22,614,000
================================================================================================================
TOTAL INVESTMENTS (COST--$1,111,572,150) (c) 1,199,160,324
----------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (0.4%) 5,307,718
================================================================================================================
NET ASSETS (100.0%) $1,204,468,042
==============================================================================================================
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Security is a variable or floating rate instrument with periodic demand
features. The Fund is entitled to full payment of principal and accrued
interest upon surrendering the security to the issuing agent.
(b) Effective yield (calculated at date of purchase) is the annual yield at
which the bond accretes until its maturity date.
(c) The cost of investments for federal income tax purposes amounted to
$1,111,726,488. Gross unrealized appreciation and unrealized depreciation
of investments, based on identified tax cost, at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $88,363,597
Gross unrealized depreciation (929,761)
----------
Net unrealized appreciation $87,433,836
==========
</TABLE>
Legend of Portfolio Abbreviations:
AMBAC--American Municipal Bond Assurance Corp.
ETM--Escrowed to Maturity
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assurance
GNMA--Government National Mortgage Association
LOC--Line of Credit
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
PAGE 22
Keystone Tax Free Fund
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)See Notes to Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
========================== ========= ========= ========= ========= ===========
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $7.10 $8.12 $8.04 $8.07 $7.90
- -------------------------- ------- ------- ------- ------- ---------
Income from investment
operations:
Net investment income 0.41 0.37 0.39 0.46 0.46
Net realized and
unrealized gain (loss)
on investments 0.74 (0.96) 0.48 0.12 0.36
Net commissions paid on
fund share sales (a) 0.00 0.00 0.00 0.00 0.00
- -------------------------- ------- ------- ------- ------- ---------
Total from investment
operations 1.15 (0.59) 0.87 0.58 0.82
- -------------------------- ------- ------- ------- ------- ---------
Less distributions from:
Net investment income (0.39) (0.37) (0.39) (0.46) (0.46)
In excess of net
investment income 0.00 (0.06) (0.06) (0.04) (0.07)
Net realized gain on
investments 0.00 0.00 (0.33) (0.11) (0.12)
In excess of net realized
gain on investments 0.00 0.00 (0.01) 0.00 0.00
- -------------------------- ------- ------- ------- ------- ---------
Total distributions (0.39) (0.43) (0.79) (0.61) (0.65)
- -------------------------- ------- ------- ------- ------- ---------
Net asset value,
end of year $7.86 $7.10 $8.12 $8.04 $8.07
========================== ======= ======= ======= ======= =========
Total Return (c) 16.61% (7.34%) 11.15% 7.55% 10.80%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.95%(d) 1.55% 1.66% 1.38% 1.75%
Net investment income 5.41% 4.92% 4.72% 5.71% 5.78%
Portfolio turnover rate 56% 84% 76% 78% 77%
- -------------------------- ------- ------- ------- ------- ---------
Net assets, end of year
(thousands) $1,204,468 $1,197,727 $1,548,503 $1,453,199 $1,146,185
========================== ======= ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1990(b) 1989 1988 1987 1986
========================== ========= ========= ========= ========= ===========
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $8.06 $8.18 $8.09 $8.85 $8.31
- -------------------------- ------- ------- ------- ------- ---------
Income from investment
operations:
Net investment income 0.52 0.57 0.55 0.56 0.68
Net realized and
unrealized gain (loss)
on investments (0.01) 0.15 0.30 (0.58) 0.88
Net commissions paid on
fund share sales (a) 0.00 0.00 0.00 0.00 (0.08)
- -------------------------- ------- ------- ------- ------- ---------
Total from investment
operations 0.51 0.72 0.85 (0.02) 1.48
- -------------------------- ------- ------- ------- ------- ---------
Less distributions from:
Net investment income (0.52) (0.60) (0.63) (0.64) (0.68)
In excess of net
investment income (0.03) 0.00 0.00 0.00 0.00
Net realized gain on
investments (0.12) (0.24) (0.13) (0.10) (0.26)
In excess of net realized
gain on investments 0.00 0.00 0.00 0.00 0.00
- -------------------------- ------- ------- ------- ------- ---------
Total distributions (0.67) (0.84) (0.76) (0.74) (0.94)
- -------------------------- ------- ------- ------- ------- ---------
Net asset value,
end of year $7.90 $8.06 $8.18 $8.09 $8.85
========================== ======= ======= ======= ======= =========
Total Return (c) 6.66% 9.11% 10.89% (0.14%) 18.26%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.18% 1.23% 1.79% 1.70% 0.83%
Net investment income 6.54% 6.94% 6.74% 6.80% 7.79%
Portfolio turnover rate 64% 69% 61% 43% 44%
- -------------------------- ------- ------- ------- ------- ---------
Net assets, end of year
(thousands) $1,060,826 $901,912 $903,132 $894,768 $1,025,084
========================== ======= ======= ======= ======= =========
</TABLE>
(a) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both
financial statement and tax purposes as capital charges.
(b) Calculation based on average shares outstanding.
(c) Excluding applicable sales charges.
(d) "Ratio of total expenses to average net assets" for the year ended
December 31, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses for the year ended December 31, 1995, the expense ratio
would have been 0.94%.
See Notes to Financial Statements.
<PAGE>
PAGE 23
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
=============================================================================
<TABLE>
<CAPTION>
Assets (Note 1)
<S> <C>
Investments at market value (identified cost--
$1,111,572,150) $1,199,160,324
Cash 226,289
Receivable for:
Investments sold 5,143,753
Fund shares sold 181,716
Interest 20,318,672
Prepaid expenses 100,306
-------------------------------------------------- --------
Total assets 1,225,131,060
-------------------------------------------------- --------
Liabilities (Notes 2 and 4)
Payable for:
Investments purchased 14,001,422
Fund shares redeemed 1,450,612
Distributions to shareholders 4,934,817
Accrued Trustees' fees 16,832
Other accrued expenses 259,335
-------------------------------------------------- --------
Total liabilities 20,663,018
-------------------------------------------------- --------
Net assets $1,204,468,042
-------------------------------------------------- --------
Net assets represented by (Notes 1 and 2)
Paid-in capital $1,147,477,232
Accumulated distributions in excess of net
investment income (1,663,086)
Accumulated net realized loss on investments and
closed futures contracts (28,934,278)
Net unrealized appreciation on investments 87,588,174
-------------------------------------------------- --------
Total net assets $1,204,468,042
================================================== ========
Net asset value per share (Note 2)
Net asset value of $1,204,468,042 / 153,295,044
outstanding shares of beneficial interest $ 7.86
================================================== ========
</TABLE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
=============================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income (Note 1)
Interest $ 77,382,761
----------------------------------- ------ -------
Expenses (Notes 2 and 4)
Investment management fee $ 5,327,202
Other administrative service fees 736,118
Shareholder service fees 1,433,700
Accounting 21,661
Trustees' fees and expenses 55,248
Distribution Plan expenses 4,035,311
----------------------------------- ------ -------
Total expenses 11,609,240
Less: Expenses paid indirectly
(Note 4) (148,151)
----------------------------------- ------ -------
Net expenses 11,461,089
----------------------------------- ------ -------
Net investment income 65,921,672
----------------------------------- ------ -------
Net realized and unrealized gain on
investments and closed futures
contracts (Notes 1 and 3)
Net realized gain (loss) on:
Investments 11,953,543
Closed futures contracts (3,022,778)
----------------------------------- ------ -------
Net realized gain on investments
and closed futures contracts 8,930,765
Net change in unrealized
appreciation on investments 113,250,664
----------------------------------- ------ -------
Net realized and unrealized gain on
investments and closed futures
contracts 122,181,429
----------------------------------- ------ -------
Net increase in net assets
resulting from operations $188,103,101
=================================== ====== =======
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 24
Keystone Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
========================================================================== =========== ==============
<S> <C> <C>
Operations
Net investment income $ 65,921,672 $ 67,393,387
Net realized gain (loss) on investments and closed futures contracts 8,930,765 (37,849,158)
Net change in unrealized appreciation (depreciation) on investments 113,250,664 (139,738,811)
------------------------------------------------------------------------ ------- ---------
Net increase (decrease) in net assets resulting from operations 188,103,101 (110,194,582)
------------------------------------------------------------------------ ------- ---------
Distributions to shareholders from (Note 1)
Net investment income (63,827,615) (68,740,949)
In excess of net investment income 0 (10,297,613)
------------------------------------------------------------------------ ------- ---------
Total distributions to shareholders (63,827,615) (79,038,562)
------------------------------------------------------------------------ ------- ---------
Capital share transactions (Note 2)
Proceeds from shares sold 133,114,586 126,813,101
Payment for shares redeemed (283,907,474) (326,066,785)
Net asset value of shares issued in reinvestment dividends and
distributions 33,258,548 37,710,385
------------------------------------------------------------------------ ------- ---------
Net decrease in net assets resulting from capital share transactions (117,534,340) (161,543,299)
------------------------------------------------------------------------ ------- ---------
Total increase (decrease) in net assets 6,741,146 (350,776,443)
------------------------------------------------------------------------ ------- ---------
Net assets:
Beginning of year 1,197,726,896 1,548,503,339
------------------------------------------------------------------------ ------- ---------
End of year [Including accumulated distributions in excess of net
investment income as follows: 1995--($1,663,086) and 1994--
($3,916,731)](Note 1) $1,204,468,042 $1,197,726,896
======================================================================== ======= =========
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 25
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Tax Free Fund (the "Fund") is a Massachusetts business trust for
which Keystone Management, Inc. ("KMI") is the Investment Manager and
Keystone Investment Management Company (formerly Keystone Custodian Funds,
Inc.) ("Keystone") is the Investment Adviser. The Fund is registered under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
seeks current income, exempt from federal income taxes, while preserving
capital by investing in high quality municipal bonds.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. (formerly
Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is privately owned
by an investor group consisting of current and former members of management
of Keystone and its affiliates. KMI is a wholly-owned subsidiary of Keystone.
Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary
of Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
which requires management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. Tax-exempt bonds are stated on the basis of valuations provided by a
pricing service, approved by the Board of Trustees, that uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Non-tax-exempt securities for which market
quotations are readily available are valued at the price quoted which, in the
opinion of the Board of Trustees or their representative, most nearly
represents their market value.
Short-term investments maturing in sixty days or less are valued at amortized
cost (original purchase cost as adjusted for amortization of premium or
accretion of discount) which, when combined with accrued interest,
approximates market. Short-term investments maturing in more than sixty days
for which market quotations are readily available are valued at current
market value. Short-term investments maturing in more than sixty days when
purchased which are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount) which, when combined with accrued interest,
approximates market. All other securities and other assets are valued at fair
value as determined in good faith using methods prescribed by the Board of
Trustees.
B. The Fund may enter into futures contracts. A futures contract is an
agreement between two parties to buy and sell a specific amount of a
commodity, security, financial instrument, or, in the case of a stock index,
cash at a set price on a future date. Upon entering into a futures contract,
the Fund is required to deposit with a broker an amount ("initial margin")
equal to a certain percentage of the purchase price indicated in the futures
contract. Subsequent payments ("variation margin") are made or received by
the Fund each day, as the value of the underlying instrument or index
fluctuates, and are recorded for book purposes as unrealized gains or losses
by the Fund. For federal tax purposes, any futures contracts which remain
open at fiscal year-end are marked-to-market and the resultant net gain or
loss is included in federal taxable income. In addition to the market risk,
the Fund is subject to
<PAGE>
PAGE 26
Keystone Tax Free Fund
the credit risk that the other party will not be able to complete the
obligations of the contract.
C. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price), the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of collateral falls below required levels, the
Fund intends to seek additional collateral from the seller or terminate the
repurchase agreement. If the seller defaults, the Fund would suffer a loss to
the extent that the proceeds from the sale of the underlying securities were
less than the repurchase price. Any such loss would be increased by any cost
incurred on disposing of such securities. If bankruptcy proceedings are
commenced against the seller under the repurchase agreement, the realization
on the collateral may be delayed or limited. Repurchase agreements entered
into by the Fund will be limited to transactions with dealers or domestic
banks believed to present minimal credit risks, and the Fund will take
constructive receipt of all securities underlying repurchase agreements until
such agreements expire.
D. Securities transactions are accounted for no later than the day following
the trade date. Realized gains and losses are recorded on the identified cost
basis. Interest income is recorded on the accrual basis. All premiums and
original issue discounts are amortized/ accreted for both financial reporting
and federal income tax purposes.
E. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, the Fund expects to be relieved of
any federal income tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The Fund intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.
F. The Fund distributes net investment income monthly and capital gains, if
any, annually. Distributions are determined in accordance with income tax
regulations. The significant differences between financial statement amounts
available for distribution and distributions made in accordance with income
tax regulations are the differences in treatment of 12b-1 Distribution Plan
charges for financial statement and federal tax purposes.
(2.) Capital Share Transactions
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest with no par value. Transactions in shares of
the Fund were as follows:
<TABLE>
<CAPTION>
Year Ended
12/31/95 12/31/94
============================ =========== =============
<S> <C> <C>
Sales 17,669,831 16,871,171
Redemptions (37,618,182) (43,806,889)
Reinvestment of dividends
and distributions 4,437,352 5,031,307
- ---------------------------- --------- -----------
Net decrease (15,510,999) (21,904,411)
- ---------------------------- --------- -----------
</TABLE>
The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted pursuant to Rule 12b-1 under the 1940 Act. Under the
Distribution Plan, the Fund pays Keystone Investment Distributors Company
(formerly Keystone Distributors, Inc.) ("KIDC"),
PAGE 27
the principal underwriter and a wholly-owned subsidiary of Keystone, amounts
which in total may not exceed the Distribution Plan maximum.
In connection with the Distribution Plan and subject to the limitations
discussed below, Fund shares are offered for sale at net asset value without
any initial sales charge. From the amounts received by KIDC in connection
with the Distribution Plan, and subject to the limitations discussed below,
KIDC generally pays brokers or others a commission equal to 3.00% of the
price paid to the Fund for each sale of Fund shares as well as a shareholder
service fee at a rate of 0.25% per annum of the net asset value of shares
sold by such brokers or others and remaining outstanding on the books of the
Fund for specified periods.
To the extent Fund shares purchased prior to July 8, 1992 are redeemed within
four calendar years of original issuance, the Fund may be eligible to receive
a deferred sales charge from the investor as partial reimbursement for sales
commissions previously paid on those shares. This charge is based on
declining rates, which begin at 4.00%, applied to the lesser of the net asset
value of shares redeemed or the total cost of such shares.
The Distribution Plan provides that the Fund may incur certain expenses which
may not exceed a maximum amount equal to 0.3125% of the Fund's average daily
net assets for any calendar quarter (approximately 1.25% annually) occurring
after the inception of the Distribution Plan. A rule of the National
Association of Securities Dealers, Inc. ("NASD Rule") limits the annual
expenditures which the Fund may incur under the Distribution Plan to 1.00% of
which 0.75% may be used to pay such distribution expenses and 0.25% may be
used to pay shareholder service fees. The NASD Rule also limits the aggregate
amount which the Fund may pay for such distribution costs to 6.25% of gross
share sales since the inception of the Fund's Distribution Plan, plus
interest at the prime rate plus 1.00% on unpaid amounts thereof (less any
contingent deferred sales charges paid by the shareholders to KIDC).
Since July 8, 1992, contingent deferred sales charges applicable to shares of
the Fund issued after January 1, 1992 have, to the extent permitted by the
NASD Rule, been paid to KIDC rather than to the Fund. During the year, KIDC
received $95,377 in deferred sales charges.
KIDC intends, but is not obligated, to continue to pay or accrue distribution
charges which exceed current annual payments permitted to be received by KIDC
from the Fund. KIDC intends to seek full payment of such charges from the
Fund (together with annual interest thereon at the prime rate plus 1.00%) at
such time in the future as, and to the extent that, payment thereof by the
Fund would be within permitted limits. KIDC currently intends to seek payment
of interest only on such charges paid or accrued by KIDC since January 1,
1992.
During the year ended December 31, 1995, the Fund recovered $684,386 in
contingent deferred sales charges. During the year ended December 31, 1995,
the Fund paid KIDC $4,719,697 under the Distribution Plan. The amount paid by
the Fund under its Distribution Plan, net of deferred sales charges, was
$4,035,311 (1.00% of the Fund's average daily net assets). During the year
ended December 31, 1995, KIDC received $757,439, after payments of
commissions on new sales and service fees to dealers and others of
$3,962,258.
(3.) Securities Transactions
As of December 31, 1995, the Fund had a capital loss carryover for federal
income tax purposes of approxi-
<PAGE>
PAGE 28
Keystone Tax Free Fund
mately $28,660,000 which expires as follows: $25,307,000 in 2002 and
$3,353,000 in 2003.
For the year ended December 31, 1995, cost of purchases and proceeds from
sales of investment securities (excluding short-term securities) were
$657,975,531 and $789,712,237, respectively.
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily. The
management fee is calculated at an annual rate of 2.0% of the Fund's gross
investment income plus an amount determined by applying percentage rates,
starting at 0.50% and declining as net assets increase to 0.25% per annum, to
the net asset value of the Fund.
KMI has entered into an Investment Advisory Agreement with Keystone under
which Keystone provides investment advisory and management services to the
Fund and receives for its services an annual fee representing 85% of the
management fee received by KMI.
During the year ended December 31, 1995, the Fund paid or accrued a
management fee of $5,327,202 which represented 0.44% of the Fund's average
net assets. Of such amount paid to KMI, $4,528,122 was paid to Keystone for
its services to the Fund.
Included in the administrative services fee paid by the Fund were the
following amounts incurred by KMI (and reimbursed by the Fund) in providing
or obtaining for the Fund additional operating services, facilities and
supplies: audit and legal--$77,500, custodian fees--$503,476, printing and
supplies-- $94,700, registration fees--$54,450, and other-- $5,992. In
addition during the year ended December 31, 1995, the Fund paid to KIRC
$1,433,700 for shareholder services. This amount for shareholder services is
included in the payments made by KMI.
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended December 31, 1995, the Fund paid custody fees in the
amount of $355,325 and received a credit of $148,151 pursuant to the expense
offset arrangement, resulting in a total expense of $503,476. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in income-producing assets.
For the year ended December 31, 1995, the Fund paid to KII $21,661 for
certain accounting services.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund.
<PAGE>
PAGE 29
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Tax Free Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Tax Free Fund, including the schedule of investments, as of December
31, 1995, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
ten-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation
of securities owned as of December 31, 1995 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Tax Free Fund as of December 31, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the years
in the two-year period then ended, and the financial highlights for each of
the years in the ten-year period then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 2, 1996
<PAGE>
KEYSTONE TAX FREE FUND
PART C
OTHER INFORMATION
-----------------
Item 24. Financial Statements and Exhibits
Item 24(a). Financial Statements
Schedule of Investments December 31, 1995
Financial Highlights For the fiscal years
ended December 31, 1986
through 1995
Statement of Assets and Liabilities December 31, 1995
Statement of Operations December 31, 1995
Statement of Changes in Net Assets ` Fiscal years ended
December 31, 1994 and 1995
Notes to Financial Statements
Independent Auditors' Report February 2, 1996
Item 24(b). Exhibits
(1) A copy of the Registrant's Amended and Restated Declaration of Trust
dated July 27, 1993 is filed herewith.
(2) A copy of the Registrant's By-laws was filed with Post-Effective
Amendment No. 2 to Registrant's Registration Statement as Exhibit
24(b)(2) and is incorporated by reference herein.
(3) Not applicable.
(4)(a) Registrant's Amended and Restated Declaration of Trust, Article III, V
and VI as filed herewith as Exhibit 24(b)(1) and is incorporated by
reference herein.
(b) Registrant's By-laws, Article 2, as filed with Post-Effective
Amendment No. 2 to Registrant's Registration Statement as Exhibit
24(b)(2) and is incorporated by reference herein.
(5)(a) A copy of the Investment Management Agreement between Keystone
Management, Inc. and the Registrant dated August 19, 1993 is filed
herewith.
(b) A copy of the Investment Advisory Agreement between Keystone
Management, Inc. and Keystone Investment Management Company (formerly
named Keystone Custodian Funds, Inc.) dated August 19, 1993 is filed
herewith.
(6)(a) A copy of the Principal Underwriting Agreement between the Registrant
and Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc.) dated August 19, 1993 is filed herewith.
(b) A copy of the form of Dealer Agreement to be used by Keystone
Investment Distributors Company (formerly named Keystone Distributors,
Inc.) was filed with Post-Effective Amendment No. 20 to Registrant's
Registration Statement as part of Exhibit 24(b)(6) and is incorporated
by reference herein.
(7) Not applicable.
(8) A copy of the Custodian, Fund Accounting and Recordkeeping Agreement,
as amended, between the Registrant and State Street Bank and Trust
Company is filed herewith.
(9) Not applicable.
(10) An opinion and consent of counsel as to the legality of securities
being registered was filed with the Registrant's Rule 24f-2 Notice on
February 28, 1996 and is incorporated by reference herein.
(11) Consent as to use of the opinion of Registrant's Independent Auditors
is filed as Exhibit 24(b)(11) herewith.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) A copy of the Registrant's Distribution Plan adopted pursuant to Rule
12b-1 is filed herewith.
(16) Schedules for computation of total return, current yield and tax
equivalent yield are filed herewith.
(17) A financial data schedule is filed herewith as Exhibit 24(b)(17).
(18) Not applicable.
(19) Powers of Attorney are filed herewith as Exhibit 24(b)(19).
Item 25. Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities
Number of Record
Title of Class Holders as of March 29, 1996
-------------- ----------------------------
Shares of beneficial 39,366
interest, without
par value
Item 27. Indemnification
Provisions for the 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 is filed herewith and is
incorporated by reference herein.
Provisions for the indemnification of Keystone Investment Distributors
Company, Registrant's principal underwriter, are contained in Se tion 9
of the Principal Underwriting Agreement between Registrant and Keystone
Investment Distributors Company, a copy of which is filed herewith and
incorporated by reference herein.
Provisions for the indemnification of Keystone Management, Inc. and
Keystone Investm&ent Management Company, investment manager and
investment adviser 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 are filed herewith and are
incorporated by reference herein.
Item 28. Business and other Connections of Investment Advisers
The following tables list the names of the various officers and
directors of Keystone Management, Inc. and Keystone Investment
Management Company, Registrant's investment manager and adviser,
respectively, and their respective positions. For each named
individual, the tables list, for the past two years, (i) any other
organizations (excluding investment advisory clients) with which the
officer and/or director has had or has substantial involvement; and
(ii) positions held with such organizations.
<PAGE>
LIST OF OFFICERS AND DIRECTORS OF KEYSTONE MANAGEMENT, INC.
Position with
Keystone Other
Management, Business
Name Inc. Affiliations
- ---- ------------- ------------
Albert H. Elfner, III Chairman of Chairman of the Board,
the Board, Chief Executive Officer,
Chief Executive President and Director:
Officer, President Keystone Investments,
and Director Inc.
Keystone Software, Inc.
Keystone Asset
Corporation
Keystone Capital
Corporation
Keystone Investments
Family of Funds
Chairman of the Board
and Director:
Keystone Investment
Management Company
Keystone Institutional
Company, Inc.
Keystone Fixed Income
Advisers, Inc.
President and Director:
Keystone Trust Company
Director or Trustee:
Fiduciary Investment
Company, Inc.
Keystone Investor
Resource Center, Inc.
Boston Children's
Services Association
Middlesex School
Middlebury College
Former Trustee or
Director:
Neworld Bank
Robert Van Partners,
Inc.
<PAGE>
Position with
Keystone Other
Management, Business
Name Inc. Affiliations
- ---- ------------- ------------
Edward F. Godfrey Treasurer and Senior Vice President,
Director Chief Financial Officer,
Treasurer and Director:
Keystone Investments,
Inc.
Keystone Investment
Management Company
Keystone Investment
Distributors Company
Treasurer:
Keystone Institutional
Company, Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Former Treasurer and
Director:
Hartwell Keystone
Advisers, Inc.
Senior Vice President:
Keystone Investments
Family of Funds
Ralph J. Spuehler, Jr. Director President and Director:
Keystone Investment
Distributors Company
Chairman and Director:
Keystone Investor
Resource Center, Inc.
Keystone Investment
Management Company
Senior Vice President and
Director:
Keystone Investments,
Inc.
Treasurer:
Hartwell Emerging Growth
Fund
Hartwell Growth Fund
Former President:
Keystone Management,
Inc.
Former Treasurer:
Keystone Investments,
Inc.
Keystone Investment
Management Company
<PAGE>
Position with
Keystone Other
Management, Business
Name Inc. Affiliations
- ---- ------------- ------------
Rosemary D. Van Antwerp Senior Vice General Counsel, Senior
President, Vice President and
General Counsel Secretary:
and Secretary Keystone Investments,
Inc.
Senior Vice President and
General Counsel:
Keystone Institutional
Company, Inc.
Senior Vice President,
General Counsel and
Director:
Keystone Investor
Resource, Center, Inc.
Fiduciary Investment
Company, Inc.
Keystone Investment
Distributors Company
Senior Vice President,
General Counsel, Director
and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Formerly Senior Vice
President and Secretary:
Hartwell Keystone
Advisers, Inc.
Vice President and
Secretary:
Keystone Fixed Income
Advisers, Inc.
J. Kevin Kenely Vice President Vice President:
Keystone Investments, Inc.
Keystone Investment
Management Company
Keystone Institutional
Company, Inc.
Keystone Investment
Distributors Company
Fiduciary Investment
Company, Inc.
Keystone Software, Inc.
Formerly Controller:
Keystone Investments, Inc.
Keystone Investment
Management Company
Keystone Investment
Distributors Company
Keystone Institutional
Company, Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
John D. Rogol Vice President Vice President and
and Controller Controller:
Keystone Investments,
Inc.
Keystone Investment
Management Company
Keystone Investment
Distributors Company
Keystone Institutional
Company, Inc.
Fiduciary Investment
Company, Inc.
Keystone Software, Inc.
Controller:
Keystone Asset Corporation
Keystone Capital
Corporation
Michael A. Thomas Vice President Vice President:
Keystone Investments, Inc.
<PAGE>
LIST OF OFFICERS AND DIRECTORS OF
KEYSTONE INVESTMENT MANAGEMENT COMPANY
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
Albert H. Elfner, III Chairman of Chairman of the Board,
the Board, Chief Executive Officer,
Chief Executive President and Director:
Officer,and Keystone Investments, Inc.
Director Keystone Management, Inc.
Keystone Software, Inc.
Keystone Asset Corporation
Keystone Capital Corporation
Chairman of the Board and
Director:
Keystone Fixed Income
Advisers, Inc.
Keystone Institutional
Company, Inc.
President and Director:
Keystone Trust Company
Director or Trustee:
Fiduciary Investment
Company, Inc.
Keystone Investment
Distributors Company
Keystone Investor
Resource Center, Inc.
Boston Children's
Services Associates
Middlesex School
Middlebury College
Former Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.
Philip M. Byrne Director President and Director:
Keystone Institutional
Company, Inc.
Senior Vice President:
Keystone Investments, Inc.
<PAGE>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
Herbert L. Bishop, Jr. Senior Vice None
President
Donald C. Dates Senior Vice None
President
Gilman Gunn Senior Vice None
President
Edward F. Godfrey Director, Director, Senior Vice
Senior Vice President
President, Chief Financial Officer and
Treasurer and Treasurer:
Chief Financial Keystone Investments, Inc.
Officer Keystone Investment
Distributors Company
Treasurer:
Keystone Institutional
Company, Inc.
Keystone Management,
Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Former Treasurer and
Director:
Hartwell Keystone Advisers,
Inc.
Former Treasurer:
Robert Van Partners, Inc.
James R. McCall Director and None
President
Ralph J. Spuehler, Jr. Director President and Director:
Keystone Investment
Distributors Company
Senior Vice President and
Director:
Keystone Investments, Inc.
Chairman and Director:
Keystone Investor
Resource Center, Inc.
Keystone Management, Inc.
Formerly President:
Keystone Management, Inc.
Formerly Treasurer:
The Kent Funds
Keystone Investments, Inc.
Keystone Investment
Management Company
<PAGE>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
Rosemary D. Van Antwerp Senior Vice General Counsel, Senior
President, Vice President and
General Counsel Secretary:
and Secretary Keystone Investments, Inc.
Senior Vice President and
General Counsel:
Keystone Institutional
Company, Inc.
Senior Vice President,
General Counsel and
Director:
Keystone Investor
Resource Center, Inc.
Fiduciary Investment
Company, Inc.
Keystone Investment
Distributors Company
Senior Vice President,
General Counsel, Director
and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Former Senior Vice
President and Secretary:
Hartwell Keystone
Advisers, Inc.
Robert Van Partners, Inc.
Vice President and
Secretary:
Keystone Fixed Income
Advisers, Inc.
Robert K. Baumback Vice President None
Betsy A. Blacher Senior Vice None
President
Francis X. Claro Vice President None
Kristine R. Cloyes Vice President None
<PAGE>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
Christopher P. Conkey Senior Vice None
President
Richard Cryan Senior Vice None
President
Maureen E. Cullinane Senior Vice None
President
George E. Dlugos Vice President None
Antonio T. Docal Vice President None
Christopher R. Ely Senior Vice None
President
Robert L. Hockett Vice President None
Sami J. Karam Vice President None
Donald M. Keller Senior Vice None
President
J. Kevin Kenely Vice President Vice President:
Keystone Investments, Inc.
Keystone Investment
Distributors Company
Keystone Institutional
Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Formerly Controller:
Keystone Investments, Inc.
Keystone Management, Inc.
Keystone Investment
Distributors Company
Keystone Software, Inc.
Fiduciary Investment
Company, Inc.
Keystone Institutional
Company, Inc.
George J. Kimball Vice President None
JoAnn L. Lyndon Vice President None
John C. Madden, Jr. Vice President None
Stephen A. Marks Vice President None
Eleanor H. Marsh Vice President None
Walter T. McCormick Senior Vice None
President
Barbara McCue Vice President None
Stanley M. Niksa Vice President None
Robert E. O'Brien Vice President None
Margery C. Parker Vice President None
<PAGE>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
William H. Parsons Vice President None
Daniel A. Rabasco Vice President None
David L. Smith Vice President None
Kathy K. Wang Vice President None
Judith A. Warners Vice President None
John D. Rogol Vice President Vice President and
and Controller Controller:
Keystone Investments,
Inc.
Keystone Investment
Distributors Company
Keystone Institutional
Company, Inc.
Fiduciary Investment
Company, Inc.
Keystone Software, Inc.
Keystone Management, Inc.
Controller:
Keystone Asset Corporation
Keystone Capital
Corporation
Joseph J. Decristofaro Asst. Vice President None
<PAGE>
Item 29. Principal Underwriter
(a) Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc.), which acts as Registrant's principal
underwriter, also acts as principal underwriter for the following
entities:
Keystone Quality Bond Fund (B-1)
Keystone Diversified Bond Fund (B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Growth and Income Fund (S-1)
Keystone Mid-Cap Growth Fund (S-3)
Keystone Small Company Growth Fund (S-4)
Keystone Capital Preservation and Income Fund
Keystone Fund for Total Return
Keystone Global Opportunities Fund
Keystone Government Securities Fund
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Hartwell Growth Fund
Keystone Intermediate Term Bond Fund
Keystone Omega Fund
Keystone State Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Strategic Income Fund
Keystone Tax Free Income Fund
Keystone World Bond Fund
Keystone Fund of the Americas
Keystone Institutional Adjustable Rate Fund
Keystone International Fund Inc.
Keystone Liquid Trust
Keystone Precious Metals Holdings, Inc.
Keystone Strategic Development Fund
Master Reserves Trust
Keystone Strategic Growth Fund (K-2)
Keystone Small Company Growth Fund II
Keystone Emerging Markets Fund
(b) For information with respect to each officer and director of
Registrant's principal underwriter, see the following pages.
<PAGE>
Item 29(b) (continued).
Position and Offices with Position and
Name and Principal Keystone Investment Offices with
Business Address Distributors Company the Fund
- ------------------ ------------------------- ------------
Ralph J. Spuehler* Director, President None
Edward F. Godfrey* Director, Senior Vice Senior Vice
President, Treasurer President
and Chief Financial
Officer
Rosemary D. Van Antwerp* Director, Senior Vice Senior Vice
President, General Counsel President
and Secretary
Albert H. Elfner, III* Director President
Charles W. Carr* Senior Vice President None
Peter M. Delehanty* Senior Vice President None
J. Kevin Kenely Vice President Treasurer
John D. Rogol* Vice President and None
Controller
Gregg A. Mahalich Divisional Vice None
4952 Richards Drive W. President
Minnetonka, MN 55345
C. Kenneth Molander Divisional Vice None
8 King Edward Drive President
Londonderry, NH 03053
William L. Carey, Jr. Regional Manager and None
4 Treble Lane Vice President
Malvern, PA 19355
John W. Crites Regional Manager and None
2769 Oakland Circle W. Vice President
Aurora, CO 80014
<PAGE>
Item 29(b) (continued)
Position and Offices with Position and
Name and Principal Keystone Investment Offices with
Business Address Distributors Company the Fund
- ------------------ ------------------------- ------------
Richard J. Fish Regional Vice President None
309 West 90th Street
New York, NY 10024
Michael E. Gathings Regional Manager and None
245 Wicklawn Way Vice President
Roswell, GA 30076
Paul D. Graffy Regional Manager and None
15509 Janas Drive Vice President
Lockport, IL 60441
Robert G. Holz, Jr. Regional Manager and None
313 Meadowcrest Drive Vice President
Richardson, Texas 75080
Todd L. Kobrin Regional Manager and None
20 Iron Gate Vice President
Metuchen, NJ 08840
Ralph H. Johnson Regional Manager and None
345 Masters Court, #2 Vice President
Walnut Creek, CA 94598
Robert P. Matson Regional Manager and None
4557 N. O'Connor Blvd., No. 1286 Vice President
Irving, TX 75062
Paul J. McIntyre Regional Manager and None
118 Main Centre, #203 Vice President
Northville, MI 48167
Thomas O. Meloy Regional Manager and None
2808 McKinney Ave., No. 141 Vice President
Dallas, TX 75204
Alan V. Niemi Regional Manager and None
3511 Grant Street Vice President
Lees Summit, MO 64064
Ronald L. Noble Regional Manager and None
428 N. Adventure Trail Vice President
Virginia Beach, VA 23454
Juliana Perkins Regional Manager and None
2348 West Adrian Street Vice President
Newbury Park, CA 91320
Matthew D. Twomey Regional Manager and None
9627 Sparrow Court Vice President
Ellicott City, MD 21042
Mitchell I. Weiser Regional Manager and None
7031 Ventura Court Vice President
Parkland, FL 33067
Welden L. Evans Regional Banking Officer None
490 Huntcliff Green and Vice President
Atlanta, GA 30350
Russell A. Haskell* Vice President None
Jonathan I. Cohen* Vice President None
Michael S. Festa* Vice President None
<PAGE>
Item 29(b) (continued)
Position and Offices with Position and
Name and Principal Keystone Investment Offices with
Business Address Distributors Company the Fund
- ------------------ ------------------------- ------------
John M. McAllister* Vice President None
Burton Robbins Regional Manager and None
1586 Folkstone Terrace Vice President
Westlake Village, CA
91361
Thomas E. Ryan, III* Vice President None
Jeffrey M. Landes Vice President None
Raymond P. Ajemian* Manager and Vice President None
Joan M. Balchunas* Assistant Vice President None
Jody R. Baum* Assistant Vice President None
Thomas J. Gainey* Assistant Vice President None
Lyman Jackson* Assistant Vice President None
Eric S. Jeppson* Assistant Vice President None
Mark J. Minnucci* Assistant Vice President None
Julie A. Robinson* Assistant Vice President None
Peter M. Sullivan Assistant Vice President None
21445 Southeast 35th Way
Issaquah, WA 98027
Jean S. Loewenberg* Assistant Secretary Assistant
Secretary
Colleen L. Mette* Assistant Secretary Assistant
Secretary
Dorothy E. Bourassa* Assistant Secretary Assistant
Secretary
* Located at 200 Berkeley Street, Boston, Massachusetts 02116-5034
Item 29(c). - Not applicable
<PAGE>
Item 30. Location of Accounts and Records
200 Berkeley Street
Boston, Massachusetts 02116-5034
Keystone Investor Resource Center, Inc.
101 Main Street
Cambridge, Massachusetts 02142-1519
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, MA 02171
Data Vault Inc.
3431 Sharp Slot Road
Swansea, Massachusetts 02277
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant hereby undertakes to furnish to each person to whom a copy
of Registrant's prospectus is delivered with a copy of the registrants
latest annual report to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for the effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) and the Securities Act of 1933 and has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston, in The
Commonwealth of Massachusetts, on the 3rd day of April, 1996.
KEYSTONE TAX FREE FUND
By:/s/ Rosemary D. Van Antwerp
---------------------------
Rosemary D. Van Antwerp
Senior Vice President
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities indicated on the 3rd day of April, 1996.
SIGNATURES TITLE
- ---------- -----
/s/ George S. Bissell Trustee, Chairman of the Board and
- ------------------------- Chief Executive Officer
George S. Bissell*
/s/ Albert H. Elfner, III President and Trustee
- -------------------------
Albert H. Elfner, III*
/s/ J. Kevin Kenely Treasurer (Principal Financial
- ------------------------- and Accounting Officer)
J. Kevin Kenely*
*By:/s/ James M. Wall
----------------------
James M. Wall**
Attorney-in-Fact
<PAGE>
SIGNATURES TITLE
- ---------- -----
/s/ Frederick Amling Trustee
- --------------------------
Frederick Amling*
/s/ Charles A. Austin, III Trustee
- --------------------------
Charles A. Austin, III*
/s/ Edwin D. Campbell Trustee
- --------------------------
Edwin D. Campbell*
/s/ Charles F. Chapin Trustee
- --------------------------
Charles F. Chapin*
/s/ K. Dun Gifford Trustee
- --------------------------
K. Dun Gifford*
/s/ Leroy Keith, Jr. Trustee
- --------------------------
Leroy Keith, Jr.*
/s/ F. Ray Keyser, Jr. Trustee
- --------------------------
F. Ray Keyser, Jr.*
/s/ David M. Richardson Trustee
- --------------------------
David M. Richardson*
/s/ Richard J. Shima Trustee
- --------------------------
Richard J. Shima*
/s/ Andrew J. Simons Trustee
- --------------------------
Andrew J. Simons*
*By:/s/ James M. Wall
----------------------
James M. Wall**
Attorney-in-Fact
**James M. Wall, by signing his name hereto, does hereby sign this document on
behalf of each of the above-named individuals pursuant to powers of attorney
duly executed by such persons and attached hereto as Exhibit 24(b)(17).
<PAGE>
INDEX TO EXHIBITS
Page Number
in Sequential
Exhibit Number Exhibit Numbering System
- -------------- ------- ----------------
1 Amended and Restated
Declaration of Trust
2 By-Laws(1)
5 (A) Investment Management Agreement
(B) Investment Advisory Agreement
6 (A) Principal Underwriting Agreement
(B) Dealer Agreement(2)
8 Custodian, Fund Accounting
Recordkeeping Agreement
Amendments to Custody Agreement
10 Opinion and Consent of Counsel(3)
11 Independent Auditors' Consent
15 Distribution Plan
16 Performance Data Schedules
17 Financial Data Schedule
19 Powers of Attorney
(1) Incorporated by reference herein to Post-Effective Amendment No. 2 to
the Registrant's Registration Statement.
(2) Incorporated by reference herein to Post-Effective Amendment No. 20 to
the Registrant's Registration Statement.
(3) Incorporated by reference herein to Registrant's Rule 24f-2 Notice filed
on February 28, 1996.
<PAGE>
EXHIBIT 99.1
AMENDED AND RESTATED DECLARATION OF TRUST
This AMENDED AND RESTATED DECLARATION OF TRUST of Keystone Tax Free Fund,
made at Boston, Massachusetts on July 27, 1993 by Frederick Amling, Charles A.
Austin, III, George S. Bissell, Edwin D. Campbell, Charles F. Chapin, Albert
H. Elfner, III, K. Dun Gifford, Leroy Keith, Jr., F. Ray Keyser, Jr., David M.
Richardson, Richard J. Shima and Andrew J. Simons (hereinafter with their
successors referred to as the "Trustees").
WITNESSETH:
WHEREAS the Trustees have agreed to manage all property received by them
as Trustees in accordance with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash,
securities and other assets which they may from time to time acquire in any
manner as Trustees hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the pro rata benefit of the holders
from time to time of Shares in this Trust as hereinafter set forth.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as Keystone Tax Free Fund and
the Trustees shall conduct the business of this Trust under that name or any
other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required by
the context or specifically provided
(a) The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person" and "Principal Underwriter" shall have the meanings
given them in the 1940 Act;
(b) The "Trust" refers to the Massachusetts business trust established
by and under this Declaration of Trust;
(c) "Declaration of Trust" shall mean this Declaration of Trust as
amended or restated from time to time;
(d) "Net Asset Value Per Share" means the net asset value per share of
the Trust determined in the manner provided or authorized in Article VI,
Section 4;
(e) "Shareholder" means a record owner of Shares of the Trust;
(f) "Shares" means the equal proportionate units of interest into
which the beneficial interest in the Trust shall be divided from time to
time or, if more than one series ("Series") or more than one class
("Class") of Shares is authorized by the Trustees, the equal proportionate
units into which each such Series or Class of Shares shall be divided from
time to time, and includes where appropriate fractions of a Share as well
as a whole Share, unless the Trustees provide that there shall be no
fractions of any particular Shares.
(g) "Trustees" refers to the Trustee or Trustees of the Trust who
become such in accordance with Article IV and where appropriate means a
majority or other portion of them acting in accordance with this
Declaration of Trust or the By-laws of the Trust; and
(h) The "1940 Act" refers to the Investment Company Act of 1940 and
the Rules and Regulations thereunder, all as amended from time to time.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to provide investors a continuous source of
managed investments.
ARTICLE III
Beneficial Interest
Section 1. Shares of Beneficial Interest. The beneficial interest in the
Trust shall at all times be divided into transferable Shares, without par
value, each of which shall represent an equal proportionate interest in the
Trust with each other Share outstanding, none having priority or preference
over another, except to the extent modified by the Trustees under the
provisions of this Section. The number of Shares which may be issued is
unlimited. The Trustees may from time to time divide or combine the
outstanding Shares into a greater or lesser number without thereby changing
the proportionate beneficial interests in the Trust. Contributions to the
Trust may be accepted for, and Shares shall be redeemed as, whole Shares and/
or fractions.
From time to time, as they deem appropriate, the Trustees may create
additional Series and/or Classes of Shares, in addition to the Shares
initially created under this instrument ("Original Series"). References in
this Declaration of Trust to Shares of the Trust shall apply, as appropriate,
to each such Series of Shares and to each such Class of Shares.
Any additional Series of Shares created hereunder shall represent the
beneficial interest in the assets (and related liabilities) allocated by the
Trustees to such Series of Shares and acquired by the Trust only after
creation of the respective Series of Shares and only on account of such
Series. If the Trustees create any additional Series of Shares hereunder, then
the Original Series shall be deemed a separate Series of Shares. Upon creation
of each Series of Shares, the Trustees may designate it appropriately and
determine the investment policies with respect to the assets allocated to such
Series of Shares, redemption rights, dividend policies, conversion rights,
liquidation rights, voting rights, and such other rights and restrictions as
the Trustees deem appropriate, to the extent not inconsistent with the
provisions of this Declaration of Trust.
The Trustees may divide any Series (including the Original Series) into
more than one Class of Shares. Upon creation of each additional Class of
Shares the Trustees may designate it appropriately and determine its rights
and restrictions (including without limitation such redemption rights,
dividend rights, conversion rights, liquidation rights, voting rights, and
such other rights and restrictions as the Trustees deem appropriate).
Section 2. Ownership of Shares. The ownership of Shares shall be recorded
in the books of the Trust or a transfer agent or a similar agent. The Trustees
may make such rules as they consider appropriate for the transfer of Shares
and similar matters. The record books of the Trust as kept by the Trust or any
transfer agent or similar agent, as the case may be, shall be conclusive as to
who are the holders of Shares of each Series or Class and as to the number of
Shares of each Series or Class held from time to time by each.
Section 3. Investments in the Trust. The Trustees shall accept investments
in the Trust from such persons and on such terms and, subject to any
requirements of law, for such consideration as the Trustees from time to time
authorize and may cease offering Shares to the public at any time. After such
acceptance, the number of Shares of the appropriate Series or Class to
represent the contribution may in the Trustees' discretion be considered as
outstanding and the amount receivable by the Trustees on account of the
contribution may be treated as an asset of the Series or Class.
Section 4. No Preemptive Rights. Shareholders shall have no preemptive or
other right to subscribe to any additional Shares or other securities issued
by the Trust.
Section 5. Provisions Relating to Series or Classes of Shares. Whenever no
Shares of a Series or Class are outstanding, then the Trustees may abolish
such Series or Class. Whenever more than one Series or Class of Shares is
outstanding, then the following provisions shall apply:
(a) Assets Belonging to Each Series or Class. All consideration
received by the Trust for the issue or sale of Shares of a particular
Series or Class, together with all assets in which such consideration is
invested or reinvested, all income, earnings and proceeds thereof, and any
funds derived from any reinvestment of such proceeds, shall, except to the
extent specifically otherwise provided in the provisions adopted by the
Board of Trustees establishing the Series or Class, irrevocably belong to
that Series or Class for all purposes, subject only to the rights of
creditors, and shall be so recorded upon the books of the Trust. In the
event there are assets, income, earnings, and proceeds thereof which are
not readily identifiable as belonging to a particular Series or Class,
then the Trustees shall allocate such items to the various Series or
Classes then existing, in such manner and on such basis as they, in their
sole discretion, deem fair and equitable. The amount of each such item
allocated to a particular Series or Class by the Trustees shall then
belong to that Series or Class, and each such allocation shall be
conclusive and binding upon the Shareholders of all Series or Classes for
all purposes.
(b) Liabilities Belonging to Each Series or Class. The assets
belonging to each particular Series or Class shall, except to the extent
specifically otherwise provided in the provisions adopted by the Board of
Trustees establishing the Series or Class, be charged with the
liabilities, expenses, costs and reserves of the Trust attributable to
that Series or Class; and any general liabilities, expenses, costs and
reserves of the Trust which are not readily identifiable as attributable
to a particular Series or Class shall be allocated by the Trustees to the
various Series or Classes then existing, in such manner and on such basis
as they, in their sole discretion, deem fair and equitable. Each such
allocation shall be conclusive and binding upon the Shareholders of all
Series or Classes for all purposes.
(c) Series or Classes of Shares, Dividends and Liquidation. Each Share
of each respective Class or Series shall, except to the extent
specifically otherwise provided in the provisions adopted by the Board of
Trustees establishing the Series or Class, have the same rights and pro
rata beneficial interest in the assets and liabilities of the Series or
Class as any other such Share. Any dividends paid on the Shares of any
Series or Class shall, except to the extent specifically otherwise
provided in the provisions adopted by the Board of Trustees establishing
the Series or Class, only be payable from and to the extent of the assets
(net of liabilities) belonging to that Series or Class. In the event of
liquidation of a Series or Class, only the assets (less provision for
liabilities) of that Series or Class shall be distributed to the holders
of the Shares of that Series or Class.
(d) Voting by Series or Class. Except as provided in this Section or
as limited by the rights and restrictions of any Series or Class, each
Share of the Trust may vote with and in the same manner as any other Share
on matters submitted to a vote of the Shareholders entitled to vote
thereon, without differentiation among votes from the separate Series or
Classes; provided, however, that (i) as to any matter with respect to
which a separate vote of any Series or Class is required by the 1940 Act,
or otherwise by applicable law, such requirement as to a separate vote
shall apply in lieu of the voting described above; (ii) in the event that
the separate vote requirements referred to in (i) above apply with respect
to one or more Series or Classes, then, subject to (iii) below, the Shares
of all other Series or Classes shall vote without differentiation among
their votes; and (iii) as to any matter which does not affect the interest
of any particular Series or Class, only the holders of Shares of the one
or more affected Series or Classes shall be entitled to vote.
Section 6. Limitation of Personal Liability. The Trustees shall have no
power to bind any Shareholder personally or to call upon any Shareholder for
the payment of any sum of money or assessment whatsoever other than such as
the Shareholder may at any time personally agree to pay by way of subscription
to any Shares or otherwise. Every note, bond, contract or other undertaking
issued by or on behalf of the Trust or the Trustees relating to the Trust
shall include a recitation limiting the obligation represented thereby to the
Trust and its assets (but the omission of such a recitation shall not operate
to bind any Shareholder).
ARTICLE IV
The Trustees
Section 1. Number of Trustees. The number of Trustees shall initially be
such number as shall be elected as such by a vote of the shareholders of the
Trust and thereafter shall be such number as shall be fixed from time to time
by action of a majority of the Trustees.
Section 2. Election or Appointment and Term. The initial Trustees shall be
the individuals signing this Declaration in that capacity, who shall have been
previously elected by a vote of the shareholders of the Trust. Thereafter,
subject to Section 16(a) of the 1940 Act, the Trustees may elect themselves or
their successors at such intervals, as they deem proper, and may appoint
Trustees to fill vacancies as provided in Section 4 hereof; provided, that
Trustees shall be elected by vote of a majority of Shares voting thereon at
such time or times as the Trustees shall determine that such action is
advisable. Subject to Section 3 hereof, the Trustees shall have the power to
set and alter the terms of office of the Trustees, and they may at any time
lengthen or shorten their own terms or make their terms of unlimited duration;
provided, that the term of office of any incumbent Trustee shall continue
until terminated, as provided in Section 4 hereof or, if not so terminated,
until the election of such Trustee's successor in office has become effective
in accordance with this Section 2.
Section 3. Resignation and Removal. Any Trustee may resign his trust
(without need for prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees, and such resignation shall
be effective upon such delivery or at any later date according to the terms of
the instrument. Any Trustee may be removed by the action of two-thirds of the
remaining Trustees. Upon the resignation or removal of a Trustee, or his
otherwise ceasing to be a Trustee, he shall execute and deliver such documents
as the remaining Trustees shall require for the purpose of conveying to the
Trust or the remaining Trustees any Trust property held in his name. Upon the
incapacity or death of any Trustee, his legal representative shall execute and
deliver on his behalf such documents as the remaining Trustees shall require
as provided in the preceding sentence. However, the execution and delivery of
such documents by a former Trustee or his legal representative shall not be
requisite to the vesting of title to the Trust property in the remaining
Trustees.
Section 4. Vacancies. The term of office of a Trustee shall terminate and
a vacancy shall occur in the event of such Trustee's death, resignation,
removal, bankruptcy, adjudicated incompetence or other incapacity to perform
the duties of the office of Trustee. No such vacancy shall operate to annul
this Declaration of Trust or to revoke any existing agency created pursuant to
the terms of this Declaration of Trust. In the case of an existing vacancy,
including a vacancy existing by reason of an increase in the number of
Trustees, subject to applicable law, the remaining Trustees or, if only one
Trustee shall then remain in office, the sole remaining Trustee, shall appoint
such individual to fill such vacancy as they or he, in their or his
discretion, shall see fit. An appointment of a Trustee may be made in
anticipation of a vacancy to occur at a later date by reason of retirement or
resignation of a Trustee or an increase in the number of Trustees; provided,
that such appointment shall not become effective prior to such retirement or
resignation or such increase in the number of Trustees. Whenever a vacancy in
the number of Trustees shall occur, until such vacancy is filled as provided
in this Section 4, the Trustees in office, regardless of their number, shall
have all the powers granted to the Trustees and shall discharge all the duties
imposed upon the Trustees by this Declaration of Trust in the manner provided
by this Declaration of Trust. A written instrument certifying the existence of
such vacancy signed by a majority of the Trustees shall be conclusive evidence
of the existence of such vacancy.
Section 5. Management of the Trust. Subject to the provisions of this
Declaration of Trust, the business and affairs of the Trust shall be managed
by the Trustees, and they shall have all powers necessary and desirable to
carry out that responsibility. Action by the Trustees may be taken by majority
vote of the Trustees at a meeting at which a quorum (which shall be a majority
of the Trustees then in office) shall be present, or by a writing signed by a
majority of the Trustees in office.
Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with this Declaration of Trust providing for the conduct of the
business of the Trust and may amend and repeal them to the extent that they do
not reserve that right to any Shareholders; they may elect and remove such
officers and appoint and terminate such agents as they consider appropriate;
they may appoint from their own number and terminate any one or more
committees; they may employ one or more custodians of the assets of the Trust
and may authorize such custodians to employ subcustodians and to deposit all
or any part of such assets in a system or systems for the central handling of
securities, retain a transfer agent or a Shareholder servicing agent, or both,
provide for the distribution of Shares by the Trust, through one or more
principal underwriters or otherwise, set, or otherwise provide for the setting
of, record dates, and in general delegate such authority to do any or all
things which the Trustees may do in the operation of the business of the Trust
as they consider desirable to any officers of the Trust and committees of the
Trustees and to any agent or employee, custodian or underwriter. Any action
relating to the operation of the Trust provided for herein to be taken by the
Trustees may be taken by any other person under authority granted by the
Trustees whether or not specifically so stated, and unless specifically so
stated to the contrary. A specific statement indicating that the Trustees may
delegate any authority shall not give rise to any contrary implication with
respect to any provision of this Declaration of Trust.
Without limiting the foregoing, the Trustees in addition to all powers
granted by law shall have power and authority:
(a) To invest and reinvest cash, and to hold cash uninvested, without
in anyway being bound or limited by any present or future law or custom in
regard to investments by trustees;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate or lease
any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property, and to execute and
deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power
and discretion with relation to securities or property as the Trustees
shall deem proper;
(d) To exercise powers and rights of subscription or otherwise which
in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, or in the
Trust's own name or in the name of a custodian or subcustodian or a
nominee or nominees or otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of
which is held in the Trust; to consent to any contract, lease, mortgage,
purchase or sale of property by such corporation or concern, and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depository, voting trustee or otherwise, and in that connection to deposit
any security with, or transfer any security to, any such committee,
depository or trustee, and to delegate to them such power and authority
with relation to any security (whether or not so deposited or transferred)
as the Trustees shall deem proper, and to agree to pay, and to pay, such
portion of the expenses and compensation of such committee, depository or
trustee as the Trustees shall deem proper;
(h) To compromise, arbitrate, or otherwise adjust claims in favor of
or against the Trust for any matter in controversy, including but not
limited to claims for taxes; and
(i) To borrow funds.
The Trustees shall not be required to obtain any court order to deal with
any assets of the Trust or take any other action hereunder.
Section 6. Ownership of Assets of the Trust. The assets of the Trust shall
be held separate and apart from any assets now or hereafter held in any capacity
other than as Trustee hereunder by the Trustees or by any successor Trustees.
All of the assets of the Trust shall at all times be considered as vested in the
Trustees. No Shareholder shall be deemed to have a severable ownership in any
individual asset of the Trust or any right of partition or possession thereof,
but each Shareholder shall have a proportionate undivided beneficial interest in
the assets of the Series or Class of Shares of which he is a holder, subject to
any rights or restrictions applicable to any Series or Class of Shares of which
he is a holder.
Section 7. Payment of Expenses. The Trustees shall pay or cause to be paid
out of the principal or income of the Trust, or partly out of principal and
partly out of income, as they deem fair, all expenses, charges, taxes and
liabilities incurred or arising in connection with the Trust, or in connection
with the management thereof, including but not limited to the Trustees'
compensation and such expenses and charges for the services of the Trust's
investment adviser or manager, administrator, auditor, counsel, custodian,
transfer agent, Shareholder servicing agent, and such other agents or
independent contractors and such other expenses and charges as the Trustees may
deem necessary or proper to incur.
Section 8. Investment Management and Other Services. Without limiting the
generality of the powers of the Trustees, subject to applicable law, the
Trustees may enter into a contract with any person or persons, including any
firm, corporation, trust or association in which any Trustee, Shareholder or
officer of the Trust may be interested, to act as investment advisers and/or
managers of the Trust and to provide such investment advice and/or management as
the Trustees may from time to time consider appropriate ("Adviser"). Any such
contract may authorize the Adviser to determine from time to time what
securities shall be acquired, held or disposed of by the Trust and what portion
of assets of the Trust shall be held uninvested and to take, on behalf of the
Trust, actions which the Adviser deems necessary to implement the investment
policies of the Trust, including the placement of all orders for the purchase,
sale or loan of portfolio securities for the Trust's account with brokers or
dealers or others selected by the Adviser and the giving of instructions to the
custodian of the Trust's assets as to deliveries of securities and payments of
cash for the account of the Trust.
Without limiting the generality of the powers of the Trustees, subject to
applicable law, the Adviser may enter into an agreement to retain at its own
expense any person or persons, including any firm, corporation, trust or
association in which any Trustee, Shareholder or officer of the Trust may be
interested, to provide the Trust investment advice and/or management and any
person or persons so retained may be granted all authority which has been
granted to the Adviser under the contract which the Adviser entered into
pursuant to the preceding paragraph.
Without limiting the generality of the powers of the Trustees, the Trustees
may enter into a contract with any person or persons, including any firm,
corporation, trust or association in which any Trustee, Shareholder or officer
of the Trust may be interested, to act as principal underwriter for the Shares.
Section 9. Affiliations of Trustees or Officers, Etc. The fact that (i) any
of the Shareholders, Trustees or officers of the Trust is a shareholder,
Director, officer, partner, Trustee, employee, manager, adviser or distributor
of or for any partnership, corporation, trust, association or other organization
or for any parent or affiliate of any organization, with which any contract
including, without limitation, contracts for services as manager, investment
adviser, distributor, principal underwriter, custodian, transfer agent or
dividend disbursing agent or for related services may have been or may hereafter
be made, or that any such organization, or any parent or affiliate thereof, is a
Shareholder of or has an interest in the Trust, or that (ii) any partnership,
corporation, trust, association or other organization with which a contract
referred to in (i) above may have been or may hereafter be made also has any one
or more of such contracts with one or more other partnerships, corporations,
trusts, associations or other organizations, or has other business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. The Shareholders shall have power to vote only (i)
for the election of Trustees as provided in Section 2 of Article IV hereof and
the removal of Trustees to the extent provided in Section 16 (c) of the 1940
Act, (ii) with respect to approval or termination in accordance with the 1940
Act of any investment advisory or management agreement described in Article IV
hereof, (iii) with respect to any amendment of this Declaration of Trust to the
extent and as provided in Section 7 of Article IX hereof, (iv) to the same
extent as the stockholders of a Massachusetts corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
and (v) with respect to such additional matters relating to the Trust as may be
required by this Declaration of Trust or the By-Laws, or as to which the
Trustees in their discretion shall determine such Shareholder vote to be
required by law or otherwise to be necessary, appropriate or advisable.
Each whole Share shall be entitled to one vote as to any matter on which it
is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. Until Shares are issued, the Trustees
may exercise all rights of Shareholders and may take any action required by law,
this Declaration of Trust or any By-Laws of the Trust to be taken by
Shareholders.
Section 2. Meetings. Meetings of Shareholders shall be held at such times at
the principal office of the Trust or such other place as the Trustees may
designate. Meetings of the Shareholders may be called by the Trustees or such
other person or persons as may be specified in the By- laws. Shareholders shall
be entitled to at least seven days' notice of any meeting.
Section 3. Quorum and Required Vote. Except as otherwise provided by law, to
constitute a quorum for the transaction of business at a Shareholders' meeting
there must be present, in person or by proxy, holders of a majority of the total
number of Shares of the Trust then outstanding and entitled to vote at the
meeting, but any lesser number shall be sufficient for adjournment, and any
adjourned session or sessions may be held within 90 days after the date set for
the original meeting without the necessity of further notice. Subject to any
applicable requirements of law, a majority of the Shares present and entitled to
vote on a question or election shall decide such question or election, except
when a larger vote is required by any provision of this Declaration of Trust,
the By-Laws of the Trust or any applicable provision of law.
Section 4. Action by Written Consent. Except as otherwise required by law,
any action required or permitted to be taken at any meeting may be taken without
a meeting if a consent in writing setting forth such action is signed by the
Shareholders entitled to vote on the subject matter thereof holding a majority
of the Shares entitled to vote thereon.
Section 5. Additional Provisions. The By-Laws may include further provisions
for Shareholders' votes and meetings and related matters.
ARTICLE VI
Distributions and Redemptions
Section 1. Distributions. The Trustees may, but need not, each year
distribute to the Shareholders of each Series or Class such income and gains as
the Trustees may determine, after providing for actual and accrued expenses and
liabilities (including such reserves as the Trustees may establish) determined
in accordance with generally accepted accounting practices. The Trustees shall
have full discretion to determine which items shall be treated as income and
which items as capital and their determination shall be binding upon the
Shareholders. Distributions of each year's income of each Series or Class, if
any be made, may be made in one or more payments, which shall be in Shares, in
cash or otherwise and on a date or dates and as of a record date or dates
determined by or under the authority of the Trustees. At any time and from time
to time in their discretion the Trustees may distribute to the Shareholders of
any one or more Series or Class as of a record date or dates determined by or
under the authority of the Trustees, in Shares, in cash or otherwise, all or
part of any gain realized on the sale or disposition of property of the Trust or
otherwise, or all or part of any other principal of the Trust. Each distribution
pursuant to this Section 1 shall be made ratably according to the number of
Shares of the Series or Class held by the several Shareholders on the applicable
record date thereof, provided that no distribution need be made on Shares
purchased pursuant to orders received or for which payment is made after such
time or times as may be determined by or under the authority of the Trustees.
Any such distribution paid in Shares will be paid at the net asset value thereof
as determined in accordance with Section 4 hereof.
Section 2. Redemptions. Upon offer by any Shareholder of all or part of the
Shares held by the Shareholder for redemption hereunder, in accordance with such
methods, upon such terms and subject to such conditions as from time to time may
be determined by or under the authority of the Trustees, the Trust shall redeem
the Shares so offered by distributing to the Shareholder the Net Asset Value per
Share thereof determined as of a time fixed by or under the authority of the
Trustees. The Trust shall have the right at its option and at any time to redeem
the Shares of any Shareholder for their Net Asset Value per Share if the
Shareholder owns Shares of a Series or Class having an aggregate net asset value
of less than such minimum amount as may from time to time be prescribed by or
under the authority of the Trustees or if ownership of such Shares by the
Shareholder could create adverse tax consequences for the Trust or any Series or
Class thereof. With respect to all Shares or any Series or Class of Shares, the
right to redemption or the date for payment may, however, be delayed or
suspended by the Trustees if there is an extraordinary closing or restriction of
trading on the New York Stock Exchange as determined under rules and regulations
of the Commission, or an emergency exists as a result of which it is not
reasonably practicable for the Trust to dispose of securities or fairly to
determine the value of its net assets, or as the Commission may permit. The
completion of such distribution on redemption of Shares shall constitute a full
discharge of the Trust and Trustees with respect to such Shares, and the
Trustees may require that any certificate or certificates issued by the Trust to
evidence the ownership of the Shares shall be surrendered to the Trustees for
cancellation or notation. Shares so redeemed shall be cancelled or held by the
Trust for reissue, as the Trustees may from time to time determine.
Section 3. Payment in Kind. Subject to any generally applicable limitation
imposed by the Trustees, any distribution on redemption may, if authorized by
the Trustees, be made wholly or partly in kind, instead of in cash. Such
distribution in kind shall be made by distributing investments constituting, in
the opinion of the Trustees, a fair representation of the various types of
securities then held by the Series or Class of Shares being redeemed (but not
necessarily including a portion of each particular investment) and in each case
having an aggregate value equal to the amount of cash instead of which such
distribution in kind is made.
Section 4. Determination of Net Asset Value per Share. Subject to applicable
law, the Net Asset Value per Share of each Series or Class shall be computed as
of such times as may be determined by or under authority of the Trustees by
determining the value of all the investments of such Series or Class in such
manner as may be determined by or under authority of the Trustees, adding any
other assets of such Series or Class, subtracting all liabilities of such Series
or Class and dividing the result by the number of Shares of such Series or Class
outstanding. Determination of Net Asset Value per Share so made in good faith
and pursuant to the provisions of the 1940 Act shall be binding on all parties
concerned.
Section 5. Automatic Redemption from Small Accounts. The Trustees shall have
the power to redeem shares at a redemption price determined in accordance with
Section 4 of this Article if at any time the total investment in an account does
not have a value of at least $1,000 or such other minimum amount as the Trustees
may from time to time determine. Before redeeming such Shares, the Shareholder
will be notified that the value of his account is less than the required minimum
amount and be allowed 60 days or such period as is permitted by law to make an
additional investment to bring the total value of such account to such amount or
more.
Section 6. Power to Modify Foregoing Procedures. Notwithstanding any of the
foregoing provisions of this Article VI, the Trustees may prescribe, in their
absolute discretion, such other bases and times for the declaration and payment
of dividends and distributions as they may deem desirable or necessary to enable
the Trust to comply with any provision of the 1940 Act or the Internal Revenue
Code, including any rule or regulation adopted by the Commission or any
securities association registered under the Securities Exchange Act of 1934, or
any order of exemption issued by the Commission or any rule or regulation issued
under the Internal Revenue Code, all as in effect now or as hereafter amended or
modified.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Section 2. Limitation of Liability. Provided they have exercised reasonable
care in their selection, the Trustees shall not be responsible or liable in any
event for any neglect or wrongdoing of any officer, agent, employee or Adviser
of the Trust nor shall any Trustee be responsible for the act or omission of any
other Trustee, but nothing herein contained shall protect any Trustee against
any liability to which he would otherwise be subject by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Every note, bond, contract, instrument, certificate, share or undertaking
and every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only in their or his capacity
as Trustees or Trustee, and such Trustees or Trustee shall not be personally
liable thereon.
The Trustees shall use their best efforts to ensure that every note, bond,
contract, instrument, certificate or undertaking made or issued by the Trustees
or by any officers shall give notice of the existence of this Declaration of
Trust and shall recite to the effect that the same was executed or made by or on
behalf of the Trust or by them as Trustees or officers, and not individually,
and is not binding upon any of them or the Shareholders individually, but is
binding only upon the Trust property, or the assets of the particular Series or
Class in question, as the case may be, but the omission thereof shall not
operate to bind any Trustee or officer or Shareholder individually, or to
subject the assets of any Series or Class to the obligations of any other Series
or Class.
ARTICLE VIII
Indemnification
Section 1. Trustees, Officers, etc. The Trust shall indemnify each of its
present and former Trustees and officers and may indemnify any of its present or
former employees or agents, and shall indemnify any persons who serve or have
served at the Trust's request as Directors, officers or Trustees of another
organization, and may indemnify persons who serve or have served at the Trust's
request as employees or agents of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise (hereinafter referred to as
a "Covered Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by any such Covered Person
in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or may have been
threatened, while in office, employed or acting as agent, or thereafter, by
reason of being or having been such a Trustee, officer, Director, employee or
agent, except with respect to any matter as to which such Covered Person shall
have been finally adjudicated in any such action, suit or other proceeding not
to have acted in good faith in the reasonable belief that such Covered Person's
action was in the best interest of the Trust and except that no person shall be
indemnified against any liability to the Trust or its Shareholders to which such
Covered Person shall otherwise be subject by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office. Expenses, including counsel fees so incurred by any
Covered Person, may in the discretion of the Trustees be paid from time to time
by the Trust in advance of the final disposition of any such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such Covered Person
to repay amounts so paid to the Trust if it is ultimately determined that
indemnification against such expenses is not authorized under this Article.
Except as otherwise provided by law, the Trust shall have power to purchase
and maintain insurance on behalf of a Covered Person against any liability
asserted against him and incurred by him in his capacity as a Covered Person, or
arising out of his status as such, whether or not the Trust would have the power
to indemnify him against the liability under the provisions of this Section.
Section 2. Compromise Payment. As to any matter disposed of by a compromise
payment by any Covered Person referred to in Section 1 above, pursuant to a
consent decree or otherwise, no such indemnification either for such payment or
for any other expenses shall be provided unless such compromise shall be
approved as in the best interests of the Trust, after notice that it involved
such indemnification, (a) by a disinterested majority of the Trustees then in
office; or (b) by a majority of the disinterested Trustees then in office; or
(c) by any disinterested person or persons to whom the question may be referred
by the Trustees, provided that in the case of approval pursuant to clause (b) or
(c) there has been obtained an opinion in writing of independent legal counsel
to the effect that such Covered Person appears to have acted in good faith in
the reasonable belief that his action was in the best interests of the Trust and
that such indemnification would not protect such person against any liability to
the Trust to which such person would otherwise be subject by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office; or (d) by vote of a majority of the
Shares voting thereon, exclusive of any Shares beneficially owned by any
interested Covered Person. Approval by the Trustees pursuant to clause (a) or
(b) or any disinterested person or persons pursuant to clause (c) of this
Section shall not prevent the recovery from any Covered Person of any amount
paid to such Covered Person in accordance with any such clauses as
indemnification if such Covered Person is subsequently adjudicated by a court of
competent jurisdiction not to have acted in good faith in the reasonable belief
that such person's action was in the best interests of the Trust or to have been
liable to the Trust or its Shareholders by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
Section 3. Indemnification Not Exclusive. The right of indemnification
hereby provided shall not be exclusive or affect any other rights to which any
such Covered Person may be entitled. As used in this Article VIII, the term
"Covered Person" shall include such person's heirs, executors and
administrators. An "interested Covered Person" is one against whom the action,
suit or other proceeding in question or another action, suit or other proceeding
on the same or similar grounds is then or has been pending, and a "disinterested
person" is a person against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust other than
Trustees and officers or other persons may be entitled by contract or otherwise
under law.
Section 4. Shareholders. In case any Shareholder or former Shareholder shall
be held to be personally liable solely by reason of his being or having been a
Shareholder and not because of his acts or omissions or for some other reason,
the Shareholder or former Shareholder (or his heirs, executors, administrators
or other legal representatives or in the case of a corporation or other entity,
its corporate or other successor) shall be entitled out of the assets of the
Trust to be held harmless from and indemnified against all loss and expense
arising from such liability.
ARTICLE IX
Miscellaneous
Section 1. Trust Not a Partnership. It is hereby expressly declared that a
trust and not a partnership is created hereby. Neither the Trust nor the
Trustees, nor any officer, employee or agent of the Trust shall have any power
to bind personally either the Trust's Trustees or officers or any Shareholders.
All persons extending credit to, contracting with or having any claim against
the Trust shall look only to the assets of the Trust for payment under such
credit, contract or claim, and neither the Shareholders nor the Trustees, nor
any of the Trust's officers, employees or agents, whether past, present or
future, shall be personally liable therefor. Nothing in this Declaration of
Trust shall protect any Trustee against any liability to which such Trustee
would otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee hereunder.
Section 2. Trustee's Good Faith Action, Expert Advice, No Bond or Surety.
The exercise by the Trustees of their powers and discretions hereunder in good
faith and with reasonable care under the circumstances then prevailing shall be
binding upon everyone interested. Subject to the provisions of Section 1 of this
Article IX, a Trustee shall be liable for his own wilful defaults, and for
nothing else, and shall not be liable for errors of judgment or mistakes of fact
or law. The Trustees may take advice of counsel or other experts with respect to
the meaning and operation of this Declaration of Trust, and subject to the
provisions of said Section 1 shall be under no liability for any act or omission
in accordance with such advice or for failing to follow such advice. The
Trustees shall not be required to give any bond as such, nor any surety if a
bond is required.
Section 3. Liability of Third Persons Dealing with Trustees. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees pursuant hereto
or to see to the application of any payments made or property transferred to the
Trust or upon its order.
Section 4. Duration; Termination of Trust; Amendments; Mergers, etc.
(a) This Trust shall continue without limitation of time but subject to
the provisions of this Section 4.
(b) The Trust (as used in this Section 4 the term "Trust" specifically
also means any Series or Class) may be terminated by action of the Trustees.
(c) Upon the termination of the Trust:
(i) The Trust shall carry on no business except for the purpose of
winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust and all of the powers of the Trustees under this Declaration of
Trust shall continue until the affairs of the Trust shall have been
wound up, including the power to fulfill or discharge the contracts of
the Trust, collect its assets, sell, convey, assign, exchange,
transfer or otherwise dispose of all or any part of the remaining
Trust property to one or more persons at public or private sale for
consideration which may consist in whole or in part of cash,
securities or other property of any kind, discharge or pay its
liabilities, and to do all other acts appropriate to liquidate its
business.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the
Trustees shall distribute the remaining Trust property, in cash or in
kind or partly each, among the Shareholders according to their
respective rights and interests.
(d) After termination of the Trust and distribution to the Shareholders
as herein provided, a majority of the Trustees shall execute and lodge among
the records of the Trust an instrument in writing setting forth the fact of
such termination, and the Trustees shall thereupon be discharged from all
further liabilities and duties hereunder, and the rights and interests of
all Shareholders shall thereupon cease.
(e) Upon completion of the distribution of the remaining proceeds or the
remaining assets as provided in paragraphs (c) and (d), the Trust shall
terminate and the Trustees shall be discharged of any and all further
liabilities and duties hereunder and the right, title and interest of all
parties shall be canceled and discharged.
Section 5. Filing of Copies, References, Headings. The original or a copy of
this instrument and of each Declaration of Trust supplemental hereto or
Amendment hereof shall be kept at the office of the Trust where it may be
inspected by any Shareholder. Anyone dealing with the Trust may rely on a
certificate by an officer of the Trust as to whether or not any Supplemental
Declaration of Trust or Amendments have been made and as to any matters in
connection with the trust hereunder; and, with the same effect as if it were the
original, may rely on a copy certified by an officer of the Trust to be a copy
of this instrument or of any such Supplemental Declaration of Trust or
Amendment. In this instrument or in any such Amendment or Supplemental
Declaration of Trust, references to this instrument, and all expressions such as
"herein," "hereof," and "hereunder," shall be deemed to refer to this instrument
as amended or affected by any such Supplemental Declaration of Trust or
Amendment. Headings are placed herein for convenience of reference only and in
case of any conflict, the text of this instrument, rather than the headings,
shall control. This instrument may be executed in any number of counterparts
each of which shall be deemed an original.
Section 6. Applicable Law. The Trust set forth in this instrument is made in
The Commonwealth of Massachusetts, and it is created under and is to be governed
by and construed and administered according to the laws of such Commonwealth.
The Trust shall be of the type commonly called a Massachusetts business trust,
and, without limiting the provisions hereof, the Trust may exercise all powers
which are ordinarily exercised by such a trust.
Section 7. Amendments. (a) This Declaration of Trust may be amended by a
vote or written consent of the Trustees. However, if such amendment adversely
affects the rights of any Shares of any Series or any Class with respect to
matters to which such amendment is applicable, such amendment shall be subject
to approval by holders of a majority of the Shares of such Series or Class. An
amendment or other action which provides for an additional Series of Shares
(and/or Class thereof), which Series may vote together with Shares of other
Series (and/or Classes thereof) and makes other provisions with respect to such
Series (and/or Class thereof) and its relation to existing Series (and/or
Classes thereof), shall not be deemed to adversely affect the rights of any
other Series of Shares or Class thereof. The Trustees may also amend this
Declaration of Trust without any Shareholder approval to change the name of the
Trust, to supply any omission, to cure, correct or supplement any ambiguous,
defective or inconsistent provision hereof, or, if they deem it necessary, to
conform this Declaration of Trust to the requirements of applicable federal laws
or regulations or the requirements of the Internal Revenue Code, or to eliminate
or reduce any federal, state or local taxes which are or may be payable by the
Trust or the Shareholders, but the Trustees shall not be liable for failing to
do so.
(b) Nothing contained in this Declaration of Trust shall permit the
amendment of this Declaration of Trust to impair the exemption from personal
liability of the Shareholders, Trustees, officers, employees and agents of the
Trust or to permit assessments upon Shareholders.
(c) A certificate signed by a majority of the Trustees or by the Secretary
or any Assistant Secretary of the Trust, setting forth an amendment by reciting
that it was duly adopted by the Shareholders or by the Trustees as aforesaid, or
a copy of the Declaration of Trust as amended, and executed by a majority of the
Trustees or certified by the Secretary or any Assistant Secretary of the Trust,
shall be conclusive evidence of such amendment when lodged among the records of
the Trust.
Section 8. Merger, Consolidation and Sale of Assets. The Trust may merge
into or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust property, including its good will, upon such terms and conditions and for
such consideration when and as authorized by the Trustees.
Section 9. Incorporation. The Trustees may cause to be organized or assist
in organizing a corporation or corporations under the laws of any jurisdiction
or any other trust, partnership, association or other organization to take over
all the Trust property or to carry on any business in which the Trust shall
directly or indirectly have any interest, and to sell, convey and transfer the
Trust property to any such corporation, trust, partnership, association or
organization in exchange for the shares or securities thereof or otherwise, and
to lend money to, subscribe for the shares or securities of, and enter into any
contracts with any such corporation, trust, partnership, association or
organization in which the Trust holds or is about to acquire shares or any other
interest. The Trustees may also cause a merger or consolidation between the
Trust or any successor thereto and any corporation, trust, partnership,
association or other organization if and to the extent permitted by law, as
provided under the law then in effect. Nothing contained herein shall be
construed as requiring approval of Shareholders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferring the
Trust property to such organizations or entities.
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals
in the City of Boston, Massachusetts, for themselves and their assigns, as of
the day and year first above written.
/s/ Frederick Amling
-------------------------------------------------
Frederick Amling
/s/ Charles A. Austin, III
-------------------------------------------------
Charles A. Austin, III
/s/ George S. Bissell
-------------------------------------------------
George S. Bissell
/s/ Edwin D. Campbell
-------------------------------------------------
Edwin D. Campbell
/s/ Charles F. Chapin
-------------------------------------------------
Charles F. Chapin
/s/ Albert H. Elfner, III
-------------------------------------------------
Albert H. Elfner, III
/s/ K. Dun Gifford
-------------------------------------------------
K. Dun Gifford
/s/ Leroy Keith, Jr.
-------------------------------------------------
Leroy Keith, Jr.
/s/ F. Ray Keyser, Jr.
-------------------------------------------------
F. Ray Keyser, Jr.
/s/ David M. Richardson
-------------------------------------------------
David M. Richardson
/s/ Richard J. Shima
-------------------------------------------------
Richard J. Shima
/s/ Andrew J. Simons
-------------------------------------------------
Andrew J. Simons
<PAGE>
EXHIBIT 99.5(A)
INVESTMENT MANAGEMENT AGREEMENT
Agreement dated August 19, 1993 between KEYSTONE TAX FREE FUND, a
Massachusetts business trust organized under a Declaration of Trust dated July
27, 1993 (the "Fund"), and KEYSTONE MANAGEMENT, INC., a Nevada corporation
(the "Company").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE COMPANY TO THE FUND.
The Company will provide investment management and other services to the
Fund as specified below.
A. In providing investment management services to the Fund, the Company
will determine from time to time what securities shall be acquired, held or
disposed of and what portion of the assets of the Fund shall be held
uninvested. Should the Board of Trustees of the Fund at any time, however,
notify the Company in writing of any portfolio transaction to be made or not
to be made or any investment policy to be followed by the Fund, the Company
shall be obliged to follow such direction or such investment policies for the
period, if any, specified in such notice or until the Company has received
written notice that such investment policy is no longer to be followed. The
Company shall take, on behalf of the Fund, all actions which it deems
necessary to implement the investment policies of the Fund, and in particular
shall place all orders for the purchase, sale or loan of portfolio securities
for the Fund's account with brokers or dealers or others selected by it, and
to that end the Company is authorized to give instructions to the custodian of
the Fund's assets as to deliveries of securities and payments of cash for the
account of the Fund. In the placement of such orders and the selection of
brokers or dealers, the Company shall conform to the Fund's policies
concerning such matters as may be from time to time determined by the Board of
Trustees of the Fund or set forth in the Fund's most recent prospectus under
the Securities Act of 1933. In the performance of these duties, the Company
will use its best efforts to safeguard and promote the welfare of the Fund.
However, nothing in this agreement shall be construed to constitute the
Company as an agent of the Fund.
B. The Company, at its own expense, shall furnish to the Fund office
space in the offices of the Company or in such other place as may be agreed
upon from time to time, and all necessary office facilities, equipment and
personnel for managing the affairs of the Fund, and shall arrange, if desired
by the Fund, for members of the Company's organization to serve without
salaries from the Fund as officers and agents of the Fund.
C. At the request of the Board of Trustees of the Fund, the Company at
its own expense will provide or cause to be provided to the Fund the following
management and operating services, facilities and personnel: (a) the officers
of the Fund and each Trustee of the Fund who is an affiliated person of the
Company or any investment adviser retained by the Company as contemplated in
Section 4; (b) determination from time to time of the value of the net assets
of the Fund, the keeping of its books and records and the safekeeping of its
cash, securities and other property; (c) auditors and accountants; (d)
transfer agents, dividend disbursing agents and registrars, including checks,
stationery and other supplies for the performance of such functions; (e)
insurance and membership in trade associations; (f) share certificates
representing shares of the Fund; (g) registration and maintenance of
registrations of the Fund and of its shares with various states and with the
Securities and Exchange Commission, including the preparation and printing of
prospectuses for filing with said Commission; (h) for shareholders' and
Trustees' meetings and the preparation, printing and mailing of reports and
other material to shareholders; (i) legal counsel in connection with the
Fund's existence, organization and financial structure and relations with its
shareholders, in connection with any of the foregoing items or otherwise, and
in connection with other legal matters with respect to which the Fund may
require and desire advice of legal counsel; and (j) all other services and
facilities, the expenses of which are not hereinafter specifically assumed by
the Fund, for the management of the investment and reinvestment of the assets
of the Fund, the offering and sale of the shares of the Fund and the
administration of the affairs of the Fund. The expense, charges, dues, fees
and other costs to be borne by the Company in providing or causing to be
provided to the Fund the services, facilities and personnel described in
clauses (b) through (i) are hereinafter referred to as the "Reimbursable
Expenses of the Company".
The additional management and operating services, facilities and personnel
required by clauses (b) through (i), of the immediately preceding paragraph
and the performance of the same shall be paid for solely by the Company, but
shall be at all times subject to the directions, instructions and requests of
the Board of Trustees of the Fund, including, without limitation, directions
as to the identity of the person or organization providing or performing the
same, the manner of performance and the rates of fees and charges of such
persons or organizations.
D. The Fund assumes and shall pay (1) broker's commissions (which may be
higher than other brokers would charge if paid to a broker which provides
brokerage and research services to the Company or any investment adviser
retained by the Company as contemplated by Section 4 or any affiliate of
either, for use in rendering investment management, advisory or similar
services to the Fund or other clients of the Company, of such investment
adviser or of any affiliate of either); (2) issue and transfer taxes
chargeable to the Fund in connection with securities transactions to which the
Fund is a party; (3) its interest charges and all taxes and fees (not
hereinabove specifically required to be borne by the Company) payable by the
Fund to federal, state or other governmental agencies and (4) the compensation
of each Trustee of the Fund who is not an affiliated person of the Company or
any investment adviser retained by the Company as contemplated by Section 4.
E. The Company may delegate its obligation to provide all of the services
required hereunder to the Fund to an investment adviser as contemplated by
Section 4.
F. The services of the Company to the Fund hereunder are not to be deemed
exclusive, and the Company shall be free to render similar services to others
or to have any other business or management interests.
2. COMPENSATION TO BE PAID BY THE FUND TO THE COMPANY.
As compensation for the services, facilities and personnel which the
Company is to provide or cause to be provided pursuant to Section 1, the Fund
shall pay to the Company at the end of each calendar month (i) an amount
calculated as set forth below:
ANNUAL AGGREGATE NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE INCOME OF THE FUND
- ------------------------------------------------------------------------------
2.0% of
Gross Dividend and
Interest Income
Plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000;
and (ii) an amount equal to the amount of the Reimbursable Expenses of the
Company accrued during such calendar month.
Any other provision of this agreement to the contrary notwithstanding, the
total monthly compensation payable to the Company shall not exceed (i) the
largest amount which would not cause the Fund's expenses to exceed the lowest
applicable expense limitation imposed as of the beginning of the fiscal year
by any statute or any regulatory authority of any jurisdiction in which shares
of the Fund are qualified for offer and sale as such limitation is set forth
in the most recent notice furnished by the Company to the Fund not later than
the first day of the fiscal year or (ii) such lower percentage limit as the
Company may by written notice to the Fund declare to be effective for such
period of time as shall be stated in the notice. For purposes of clause (i) of
this paragraph, there shall be excluded from the "Fund's expenses" any amount
borne directly or indirectly by the Fund which is permitted to be excluded
from the computation of such limitation by such statute or regulatory
authority. If the Company shall serve under this agreement for less than the
whole of any calendar month, the foregoing compensation will be prorated. The
Company shall submit to the Fund detailed statements of all Reimbursable
Expenses of the Company promptly after the end of each such calendar month.
The Fund and its agents, accountants and employees shall have the right at
reasonable times during normal business hours to inspect the books and records
of the Company pertaining to such Reimbursable Expenses of the Company.
3. PUBLIC ACCOUNTANT'S REPORT.
The Fund's books and accounts shall be audited at least once each year by
a reputable, independent public accountant or organization of public
accountants who shall render a report to the Fund.
4. INVESTMENT ADVISER.
The Company may enter into an agreement to retain at its own expense
Keystone Custodian Funds, Inc. or any other firm or firms ("Adviser") to
provide the Fund all of the services to be provided by the Company hereunder
if such agreement is approved as required by law. Such agreement may delegate
to such Adviser all of the Company's rights, obligations and duties hereunder.
5. INTERESTED AND AFFILIATED PERSONS.
Subject to and in accordance with the Declaration of Trust of the Fund,
the Articles of Incorporation of the Company and the governing documents of
the Adviser, it is understood that Trustees, officers, agents and shareholders
of the Fund or the Adviser are or may be interested in the Company (or any
successor thereof) as Directors and officers of the Company or its affiliates,
as stockholders of Keystone Group, Inc. or otherwise; that Directors, officers
and agents of the Company and its affiliates or stockholders of Keystone
Group, Inc. are or may be interested in the Fund or the Adviser as Trustees,
Directors, officers, shareholders or otherwise; that the Company (or any such
successor) is or may be interested in the Fund or the Adviser as shareholder,
or otherwise, and that the effect of any such adverse interests shall be
governed by said Declaration of Trust of the Fund, Articles of Incorporation
of the Company and governing documents of the Adviser.
6. TERMINATION AND AMENDMENT.
This agreement shall continue in effect until July 1, 1994, after which it
will terminate unless its continuance after said date is specifically approved
at least annually by the vote of a majority of the Trustees of the Fund who
are not interested persons of the Fund or interested persons of the Company
(as defined in the Investment Company Act of 1940) cast in person at a meeting
called for the purpose of voting on such approval; provided, however, that (1)
this agreement may at any time be terminated without the payment of any
penalty either by the vote of the Board of Trustees of the Fund or by the vote
of a majority of the outstanding voting securities of the Fund, on 60 days'
written notice to the Company, (2) this agreement shall immediately terminate
in the event of its assignment (within the meaning of the Investment Company
Act of 1940), and (3) this agreement may be terminated by the Company on 90
days' written notice to the Fund. The aforesaid requirement that continuance
of this agreement be "specifically approved at least annually" shall be
construed in a manner consistent with the Investment Company Act of 1940 and
the Rules and Regulations thereunder. Any notice under this agreement shall be
given in writing, addressed and delivered, or mailed postpaid, to the other
party at any office of such party.
This agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Fund shall have been
approved by the vote of a majority of the outstanding voting securities of the
Fund and by the vote of a majority of the Trustees of the Fund who are not
interested persons of the Fund or interested persons of the Company (as
defined in the Investment Company Act of 1940) cast in person at a meeting
called for the purpose of voting on such approval.
7. LIABILITY OF THE COMPANY.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Company, or of reckless disregard of its obligations and
duties hereunder, the Company shall not be subject to liability for any act or
omission in the course of, or connected with, rendering services hereunder.
The Fund agrees to indemnify and hold the Company harmless from all taxes,
charges, expenses, assessments, claims and liabilities (including, without
limitation, liabilities arising under the Securities Act of 1933, the
Securities Exchange Act of 1934, the Investment Company of 1940, and any state
and foreign securities and blue sky laws, as amended from time to time) and
expenses, including (without limitation) attorneys' fees and disbursements,
arising directly or indirectly from any action or thing which the Company
takes or does or omits to take or do hereunder provided that the Company shall
not be indemnified against any liability to the Fund or to its shareholders
(or any expenses incident to such liability) arising out of a breach of
fiduciary duty with respect to the receipt of compensation for services,
willful misfeasance, bad faith, or gross negligence on the part of the Company
in the performance of its duties, or from reckless disregard by it of its
obligations and duties under this agreement.
8. DEFINITIONS.
For the purpose of this agreement the words: (1) "vote of a majority of
the outstanding voting securities of the Fund" mean the affirmative vote, at a
duly held meeting of shareholders of the Fund, (a) of the holders of 67% or
more of the shares of the Fund present in person or by proxy and entitled to
vote at such meeting, if the holders or more than 50% of the outstanding
shares of the Fund are present in person or by proxy and entitled to vote at
such meeting, or (b) of the holders of more than 50% of the outstanding shares
of the Fund, whichever is less, and (2) the words "brokerage and research
services" shall have the meaning given in the Securities Exchange Act of 1934
and the Rules and Regulations thereunder.
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of The Commonwealth of Massachusetts and notice is hereby given that
this instrument is executed on behalf of the Trustees of the Fund as Trustees
and not individually and that the obligations of this instrument are not
binding upon the Trustees or holders of Shares of the Fund individually but
are binding only upon the assets and property of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their respective officers thereunto authorized at Boston,
Massachusetts, on the day and year first above written.
KEYSTONE TAX FREE FUND
By: /s/ Ralph J. Spuehler Jr.
------------------------------
Title: Treasurer
KEYSTONE MANAGEMENT, INC.
By: /s/ E. Godfrey
-------------------------------
Title: Treasurer
<PAGE>
EXHIBIT 99.5(B)
INVESTMENT ADVISORY AGREEMENT
Agreement dated August 19, 1993 between KEYSTONE MANAGEMENT, INC., a Nevada
corporation (the "Manager") and KEYSTONE CUSTODIAN FUNDS, INC., a Delaware
corporation (the "Company").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY THE COMPANY TO KEYSTONE TAX FREE FUND (THE
"FUND").
The Company will provide investment management and other services to the
Fund (with the exception of certain managerial and administrative services to be
provided by the Manager) as specified below.
A. In providing investment management services to the Fund, the Company
will determine from time to time what securities shall be acquired, held or
disposed of and what portion of the assets of the Fund shall be held uninvested.
Should the Board of Trustees of the Fund or the Manager at any time, however,
notify the Company in writing of any portfolio transaction to be made or not to
be made or any investment policy to be followed by the Fund, the Company shall
be obliged to follow such direction or such investment policies for the period,
if any, specified in such notice or until the Company has received written
notice that such investment policy is no longer to be followed. The Company
shall take, on behalf of the Fund, all actions which it deems necessary to
implement the investment policies of the Fund, and in particular shall place all
orders for the purchase, sale or loan of portfolio securities for the Fund's
account with brokers or dealers or others selected by it, and to that end the
Company is authorized to give instructions to the custodian of the Fund's assets
as to deliveries of securities and payments of cash for the account of the Fund.
In the placement of such orders and the selection of brokers or dealers, the
Company shall conform to the Fund's policies concerning such matters as may be
from time to time determined by the Board of Trustees of the Fund or set forth
in the Fund's most recent prospectus under the Securities Act of 1933. In the
performance of these duties, the Company will use its best efforts to safeguard
and promote the welfare of the Fund. However, nothing in this agreement shall be
construed to constitute the Company as an agent of the Fund or the Manager.
B. The Company, at its own expense, shall furnish to the Fund office space
in the offices of the Company or in such other place as may be agreed upon from
time to time, and all necessary office facilities, equipment and personnel for
managing the affairs of the Fund, and shall arrange, if desired by the Fund, for
members of the Company's organization to serve without salaries from the Fund as
officers and agents of the Fund.
C. At the request of the Board of Trustees of the Fund or the Manager, the
Company at its own expense will provide or cause to be provided to the Fund the
following management and operating services, facilities and personnel: (a) the
officers of the Fund and each Trustee of the Fund who is an affiliated person of
the Company or the Manager; (b) determination from time to time of the value of
the net assets of the Fund, the keeping of its books and records and the
safekeeping of its cash, securities and other property; (c) auditors and
accountants; (d) transfer agents, dividend disbursing agents and registrars,
including checks, stationery and other supplies for the performance of such
functions; (e) insurance and membership in trade associations; (f) share
certificates representing shares of the Fund; (g) registration and maintenance
of registrations of the Fund and of its shares with various states and with the
Securities and Exchange Commission, including the preparation and printing of
prospectuses for filing with said Commission; (h) for shareholders' and
Trustees' meetings and the preparation, printing and mailing of reports and
other material to shareholders; (i) legal counsel in connection with the Fund's
existence, organization and financial structure and relations with its
shareholders, in connection with any of the foregoing items or otherwise, and in
connection with other legal matters with respect to which the Fund may require
and desire advice of legal counsel; and (j) all other services and facilities,
the expenses of which are not hereinafter specifically assumed by the Fund, for
the management of the investment and reinvestment of the assets of the Fund, the
offering and sale of the shares of the Fund and the administration of the
affairs of the Fund. The expense, charges, dues, fees and other costs to be
borne by the Company in providing or causing to be provided to the Fund the
services, facilities and personnel described in clauses (b) through (i) are
hereinafter referred to as the "Reimbursable Expenses of the Company".
The additional management and operating services, facilities and personnel
required by clauses (b) through (i), of the immediately preceding paragraph and
the performance of the same shall be paid for solely by the Company, but shall
be at all times subject to the directions, instructions and requests of the
Board of Trustees of the Fund and the Manager, including, without limitation,
directions as to the identity of the person or organization providing or
performing the same, the manner of performance and the rates of fees and charges
of such persons or organizations.
D. The Manager represents and warrants that the Fund has assumed and agreed
to pay (1) broker's commissions (which may be higher than other brokers would
charge if paid to a broker which provides brokerage and research services to the
Company or the Manager or any affiliate of either, for use in rendering
investment management, advisory or similar services to the Fund or other clients
of the Company or the Manager, or any affiliate of either); (2) issue and
transfer taxes chargeable to the Fund in connection with securities transactions
to which the Fund is a party; (3) its interest charges and all taxes and fees
(not hereinabove specifically required to be borne by the Company or the
Manager) payable by the Fund to federal, state or other governmental agencies
and (4) the compensation of each Trustee of the Fund who is not an affiliated
person of the Company or the Manager.
E. The services of the Company to the Fund hereunder are not to be deemed
exclusive, and the Company shall be free to render similar services to others or
to have any other business or management interests.
2. COMPENSATION TO BE PAID BY THE MANAGER TO THE COMPANY.
For its services (as described in Section 1) for the preceding month, the
Company will receive on the first business day of each month a fee which is 85%
of the management fee paid by the Fund to the Manager for the preceding month.
If and when this agreement terminates, any compensation payable hereunder for
the period ending with the date of such termination shall be payable upon such
termination. Amounts payable hereunder shall be promptly paid when due.
Any other provision of this agreement to the contrary notwithstanding, the
total monthly compensation payable to the Company shall not exceed (i) the
largest amount which would not cause the Fund's expenses to exceed the lowest
applicable expense limitation imposed as of the beginning of the fiscal year by
any statute or any regulatory authority of any jurisdiction in which shares of
the Fund are qualified for offer and sale as such limitation is set forth in the
most recent notice furnished by the Company to the Fund not later than the first
day of the fiscal year or (ii) such lower percentage limit as the Company may by
written notice to the Fund and the Manager declare to be effective for such
period of time as shall be stated in the notice. For purposes of clause (i) of
this paragraph, there shall be excluded from the "Fund's expenses" any amount
borne directly or indirectly by the Fund which is permitted to be excluded from
the computation of such limitation by such statute or regulatory authority. If
the Company shall serve under this agreement for less than the whole of any
calendar month, the foregoing compensation will be prorated. The Company shall
submit to the Fund and the Manager detailed statements of all Reimbursable
Expenses of the Company promptly after the end of each such calendar month. The
Fund and the Manager and their agents, accountants and employees shall have the
right at reasonable times during normal business hours to inspect the books and
records of the Company pertaining to such Reimbursable Expenses of the Company.
3. PUBLIC ACCOUNTANT'S REPORT.
The Manager represents and warrants that the Fund has agreed that its books
and accounts shall be audited at least once each year by a reputable,
independent public accountant or organization of public accountants who shall
render a report to the Fund.
4. INTERESTED AND AFFILIATED PERSONS.
Subject to and in accordance with the Declaration of Trust of the Fund, the
Certificate of Incorporation of the Company and the Articles of Incorporation of
the Manager, it is understood that Trustees, Directors, officers, agents and
shareholders of the Fund or the Manager are or may be interested in the Company
(or any successor thereof) as Directors and officers of the Company or its
affiliates, as stockholders of Keystone Group, Inc. or otherwise; that
Directors, officers and agents of the Company and its affiliates or stockholders
of Keystone Group, Inc. are or may be interested in the Fund or the Manager as
Trustees, Directors, officers, shareholders or otherwise, that the Company (or
any such successor) is or may be interested in the Fund or the Manager as
shareholder, or otherwise, and that the effect of any such adverse interests
shall be governed by said Declaration of Trust of the Fund, Certificate of
Incorporation of the Company and Articles of Incorporation of the Manager.
5. TERMINATION AND AMENDMENT.
This agreement shall continue in effect until July 1, 1994, after which it
will terminate unless its continuance after said date is specifically approved
at least annually by the vote of a majority of the Trustees of the Fund who are
not interested persons of the Fund or interested persons of the Company or the
Manager (as defined in the Investment Company Act of 1940) cast in person at a
meeting called for the purpose of voting on such approval; provided, however,
that (1) this agreement may at any time be terminated without the payment of any
penalty by the Manager, by the vote of the Board of Trustees of the Fund or by
the vote of a majority of the outstanding voting securities of the Fund, on 60
days' written notice to the Company, (2) this agreement shall immediately
terminate in the event of its assignment (within the meaning of the Investment
Company Act of 1940), and (3) this agreement may be terminated by the Company on
90 days' written notice to the Fund and the Manager. The aforesaid requirement
that continuance of this agreement be "specifically approved at least annually"
shall be construed in a manner consistent with the Investment Company Act of
1940 and the Rules and Regulations thereunder. Any notice under this agreement
shall be given in writing, addressed and delivered, or mailed postpaid, to the
other party at any office of such party.
This agreement may be amended at any time by mutual consent of the parties,
provided that such consent on the part of the Fund shall have been approved by
the vote of a majority of the outstanding voting securities of the Fund and by
the vote of a majority of the Trustees of the Fund who are not interested
persons of the Fund or interested persons of the Company (as defined in the
Investment Company Act of 1940) cast in person at a meeting called for the
purpose of voting on such approval.
6. LIABILITY OF THE COMPANY.
In the absence of willful misfeasance, bad faith or gross negligence on the
part of the Company, or of reckless disregard of its obligations and duties
hereunder, the Company shall not be subject to liability for any act or omission
in the course of, or connected with, rendering services hereunder. The Fund
agrees to indemnify and hold the Company harmless from all taxes, charges,
expenses, assessments, claims and liabilities (including, without limitation,
liabilities arising under the Securities Act of 1933, the Securities Exchange
Act of 1934, the Investment Company Act of 1940, and any state and foreign
securities and blue sky laws, as amended from time to time) and expenses,
including (without limitation) attorneys' fees and disbursements, arising
directly or indirectly from any action or thing which the Company takes or does
or omits to take or do hereunder provided that the Company shall not be
indemnified against any liability to the Fund or to its shareholders (or any
expenses incident to such liability) arising out of a breach of fiduciary duty
with respect to the receipt of compensation for services, willful misfeasance,
bad faith, or gross negligence on the part of the Company in the performance of
its duties, or from reckless disregard by it of its obligations and duties under
this agreement.
7. DEFINITIONS.
For the purpose of this agreement (1) the words "vote of a majority of the
outstanding voting securities of the Fund" mean the affirmative vote, at a duly
held meeting of shareholders of the Fund, (a) of the holders of 67% or more of
the shares of the Fund present in person or by proxy and entitled to vote at
such meeting, if the holders or more than 50% of the outstanding shares of the
Fund are present in person or by proxy and entitled to vote at such meeting, or
(b) of the holders of more than 50% of the outstanding shares of the Fund,
whichever is less, and (2) the words "brokerage and research services" shall
have the meaning given in the Securities Exchange Act of 1934 and the Rules and
Regulations thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their respective officers thereunto authorized at Boston,
Massachusetts, on the day and year first above written.
KEYSTONE MANAGEMENT, INC.
By: /s/ E. Godfrey
-------------------------------
Title: Treasurer
KEYSTONE CUSTODIAN FUNDS, INC.
By: /s/ E. Godfrey
-------------------------------
Title: Sr. Vice President
<PAGE>
EXHIBIT 99.6
PRINCIPAL UNDERWRITING AGREEMENT
KEYSTONE TAX FREE FUND
AGREEMENT made this 19th day of August, 1993 by and between Keystone
Tax Free Fund (the "Fund"), and Keystone Distributors, Inc., a Delaware
corporation (the "Principal Underwriter").
It is hereby mutually agreed as follows:
1. The Fund hereby appoints Principal Underwriter a Principal
Underwriter pursuant to the terms of the 12b-1 Plan most recently adopted by the
Fund ("12b-1 Plan") and a Principal Underwriter of the shares of beneficial
interest of the Fund (the "Shares") as an independent contractor upon the terms
and conditions hereinafter set forth. Except as the Fund may from time to time
agree, Principal Underwriter will act as agent for the Fund and not as
principal.
2. Principal Underwriter will use its best efforts to find purchasers
for the Shares and in so doing may retain and employ representatives to promote
distribution of the Shares and may obtain orders from brokers, dealers or others
for sales of Shares to them. No such representative, dealer or broker shall have
any authority to act as agent for the Fund; such dealer or broker shall act only
as principal in the sale of Shares.
3. All sales of Shares by Principal Underwriter shall be at the
applicable public offering price determined in the manner set forth in the
prospectus and/or statement of additional information of the Fund current at the
time of the Fund's acceptance of the order for Shares. All orders shall be
subject to acceptance by the Fund and the Fund reserves the right in its sole
discretion to reject any order received. The Fund shall not be liable to anyone
for failure to accept any order.
4. On all sales of Shares, the Fund shall receive the current net asset
value and Principal Underwriter shall be entitled to receive payments in
accordance with the 12b-1 Plan and as set forth in the then current prospectus
and/or statement of additional information of the Fund and to receive the sales
charges, including contingent deferred sales charges, as set forth in the then
current prospectus and/or statement of additional information of the Fund.
Principal Underwriter may reallow all or a part of the 12b-1 payments and the
sales charges to such brokers, dealers or other persons as Principal Underwriter
may determine.
5. Payment for Shares shall be in New York or Boston Clearing House
funds received by Principal Underwriter within ten (10) business days after
notice of acceptance of the purchase order and notice of the amount of the
applicable public offering price has been given to the purchaser. If such
payment is not received within such ten-day period, the Fund reserves the right,
without further notice forthwith to cancel its acceptance of any such order. The
Fund shall pay such issue taxes as may be required by law in connection with the
issue of the Shares.
6. Principal Underwriter shall not make, or permit any representative,
broker or dealer to make, in connection with any sale or solicitation of a sale
of the Shares, any representations concerning the Shares except those contained
in the then current prospectus and/or statement of additional information
covering the Shares and in printed information approved by the Fund as
information supplemental to such prospectus and/or statement of additional
information. Copies of the then current prospectus and/or statement of
additional information and any such printed supplemental information will be
supplied by the Fund to Principal Underwriter in reasonable quantities upon
request.
7. Principal Underwriter agrees to comply with the rules of Fair
Practice of the National Association of Securities Dealers, Inc.
8. The Fund appoints Principal Underwriter as its agent to accept
orders for redemptions and repurchases of Shares at values and in the manner
determined in accordance with the then current prospectus and/or statement of
additional information of the Fund.
9. Principal Underwriter covenants and agrees that it will in all
respects duly conform with all state and federal laws and regulations applicable
to the sale of the Shares and will indemnify and hold harmless the Fund and each
person who has been, is or may hereafter be a Trustee or officer of the Fund
against expenses reasonably incurred by any of them in connection with any claim
or in connection with any action, suit or proceeding to which any of them may be
a party, which arises out of or is alleged to arise out of any misrepresentation
or omission to state a material fact on the part of Principal Underwriter or any
other person for whose acts Principal Underwriter is responsible, or is alleged
to be responsible unless such misrepresentation or omission was made in reliance
upon written information furnished by the Fund. The term "expenses" includes
amounts paid in satisfaction of judgments or in settlement. The foregoing right
in indemnification shall be in addition to any other rights to which the Fund or
any such Trustee or officer may be entitled as a matter of law.
10. The Fund agrees to execute such papers and to do such acts and
things as shall from time to time be reasonably requested by Principal
Underwriter for the purpose of qualifying the Shares for sale under the
so-called "blue sky" laws of any state or for registering and maintaining the
registration of the Fund and of the Shares under the Federal Securities Act of
1933, as amended ("1933 Act"), and the Federal Investment Company Act of 1940,
as amended ("1940 Act"). Principal Underwriter shall bear the expense of
preparing, printing and distributing advertising and sales literature and
prospectuses and statements of additional information used by it (but not the
expenses of registering Shares under the 1933 Act and the 1940 Act, qualifying
Shares for sale under the so-called "blue sky" laws of any state and the
preparation and printing of prospectuses and statements of additional
information and reports required to be filed with the Securities and Exchange
Commission by such Acts and the direct expenses of the issue of Shares).
11. The Principal Underwriter shall provide to the Board of Trustees of
the Fund in connection with the 12b-1 Plan, not less than quarterly, a written
report of the amounts expended pursuant to such 12b-1 Plan and the purpose for
which such expenditures were made.
12. Unless sooner terminated or continued as provided below, the term
of this Agreement shall begin on the date hereof and expire after one year. This
Agreement shall continue in effect after such term if its continuance is
specifically approved by a majority of the Trustees of the Fund and a majority
of the 12b-1 Trustees referred to in the 12b-1 Plan of the Fund ("Rule 12b-1
Directors") at least annually in accordance with the 1940 Act and the rules and
regulations thereunder.
This Agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Rule 12b-1 Directors or by a vote of a
majority of the Fund's outstanding shares on not more than sixty days' written
notice to any other party to the Agreement; and shall terminate automatically in
the event of its assignment (as defined in the 1940 Act).
13. It is expressly agreed that this Agreement is executed on behalf of
the Trustees of the Fund as Trustees and not individually and that the
obligations of this Agreement are not binding upon the Trustees or shareholders
of the Fund individually but only the assets of the Trust are bound.
14. This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts. All sales hereunder are to be made, and title
to the Shares shall pass, in Boston, Massachusetts.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their respective officers therunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE TAX FREE FUND
By:/s/ Roger T. Wickers
--------------------
Title: Vice President
KEYSTONE DISTRIBUTORS, INC.
By:/s/ E.F. Godfrey
--------------------
Title: Sr. Vice President
#1016032D
<PAGE>
EXHIBIT 99.8
SIXTH
AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE TAX FREE FUND
AND
STATE STREET BANK AND TRUST COMPANY
This Sixth Amendment to the Custodian, Fund Accounting and
Recordkeeping Agreement by and between KEYSTONE TAX FREE FUND, a Massachusetts
business trust organized and existing under the laws of the Commonwealth of
Massachusetts and having a principal place of business at 99 High Street,
Boston, Massachusetts 02110 (hereinafter called the "Fund"), and State Street
Bank and Trust Company, a Massachusetts trust company, having its principal
place of business at 225 Franklin Street, Boston, Massachusetts 02110
(hereinafter called the "Custodian").
WHEREAS: The Fund and the Custodian are parties to a Custodian, Fund
Accounting and Recordkeeping Agreement dated December 31, 1979, as most recently
amended January 1, 1989 (the "Custodian Contract");
WHEREAS: The Fund desires that the Custodian issue a letter of credit
(the "Letter of Credit") on behalf of the Fund for the benefit of ICI Mutual
Insurance Company (the "Company") in accordance with the Continuing Letter of
Credit and Security Agreement and that the Fund's obligations to the Custodian
with respect to the Letter of Credit shall be fully collateralized at all times
while the Letter of Credit is outstanding by, among other things, segregated
assets of the Fund equal to 100% of the Fund's proportionate share of the face
amount of the Letter of Credit;
WHEREAS: the Custodian Contract provides for the establishment of
segregated accounts for proper Fund purposes upon Proper Instructions (as
defined in the Custodian Contract); and
WHEREAS: The Fund and the Custodian desire to establish a segregated
account to hold the collateral for the Fund's obligations to the Custodian with
respect to the Letter of Credit and to amend the Custodian Contract to provide
for the establishment and maintenance thereof:
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto hereby amend the Custodian
Contract as follows:
1. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Custodian Contract.
2. The Fund hereby instructs the Custodian to establish and maintain
a segregated account (the "Letter of Credit Custody Account") for
and on behalf of the Fund as contemplated by [Section II,
Paragraph 3N (iv) of the Custodian Contract] for the purpose of
collateralizing the Fund's obligations under this Amendment to the
Custodian Contract.
3. The Fund shall deposit with the Custodian and the Custodian shall
hold in the Letter of Credit Custody Account cash, certificates of
deposit, U.S. government securities or other high-grade debt
securities owned by the Fund acceptable to the Custodian
(collectively "Collateral Securities") equal to 100% of the Fund's
proportionate share of the face amount which the Company may draw
under the Letter of Credit. Upon receipt of such Collateral
Securities in the Letter of Credit Custody Account, the Custodian
shall issue the Letter of Credit to the Company.
4. The Fund hereby grants to the Custodian a security interest in the
Collateral Securities from time to time in the Letter of Credit
Custody Account (the "Collateral") to secure the performance of
the Fund's obligations to the Custodian with respect to the Letter
of Credit, including, without limitation, under Section 5-144(3)
of the Uniform Commercial Code. The Fund shall register the pledge
of Collateral and execute and deliver to the Custodian such powers
and instruments of assignment as may be requested by the Custodian
to evidence and perfect the limited interest in the Collateral
granted hereby.
5. The Collateral Securities in the Letter of Credit Custody Account
may be substituted or exchanged (including substitutions or
exchanges which increase or decrease the aggregate value of the
Collateral) only pursuant to Proper Instructions from the Fund
after the Fund notifies the Custodian of the contemplated
substitution or exchange and the Custodian agrees that such
substitution or exchange is acceptable to the Custodian.
6. Upon any payment made pursuant to the Letter of Credit by the
Custodian to the Company, the Custodian may withdraw from the
Letter of Credit Custody Account Collateral Securities in an
amount equal in value to the amount actually so paid. The
Custodian shall have with respect to the Collateral so withdrawn
all of the rights of a secured creditor under the Uniform
Commercial Code as adopted in the Commonwealth of Massachusetts at
the time of such withdrawal and all other rights granted or
permitted to it under law.
7. The Custodian will transfer upon receipt all income earned on the
Collateral to the Fund custody account unless the Custodian
receives Proper Instructions from the Fund to the contrary.
8. Upon the drawing by the Company of all amounts which may become
payable to it under the Letter of Credit and the withdrawal of all
Collateral Securities with respect thereto by the Custodian
pursuant to Section 6 hereof, or upon the termination of the
Letter of Credit by the Fund with the written consent of the
Company, the Custodian shall transfer any Collateral Securities
then remaining in the Letter of Credit Custody Account to another
fund custody account.
9. Collateral held in the Letter of Credit Custody Account shall be
released only in accordance with the provisions of this Amendment
to Custodian Contract. The Collateral shall at all times until
withdrawn pursuant to Section 6 hereof remain the property of the
Fund, subject only to the extent of the interest granted herein to
the Custodian.
10. Notwithstanding any other termination of the Custodian Contract,
the Custodian Contract shall remain in full force and effect with
respect to the Letter of Credit Custody Account until transfer of
all Collateral Securities pursuant to Section 8 hereof.
11. The Custodian shall be entitled to reasonable compensation for its
issuance of the Letter of Credit and for its services in
connection with the Letter of Credit Custody Account as agreed
upon from time to time between the Fund and the Custodian.
12. The Custodian Contract as amended hereby shall be governed by, and
construed and interpreted under, the laws of the Commonwealth of
Massachusetts.
13. The parties agree to execute and deliver all such further
documents and instruments and to take such further action as may
be required to carry out the purposes of the Custodian Contract,
as amended hereby.
14. Except as provided in this Amendment, the Custodian Contract shall
remain in full force and effect, without amendment or
modification, and all applicable provisions of the Custodian
Contract, as amended hereby, shall govern the Letter of Credit
Custody Account and the rights and obligations of the Fund and the
Custodian under this Amendment to Custodian Contract. No provision
of this Amendment to Custodian Contract shall be deemed to
constitute a waiver of any rights of the Custodian under the
Custodian Contract or under law.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to
Custodian Contract to be executed in its name and behalf by its duly authorized
representatives and its seal to be hereunder affixed as of the 8th day of
February, 1990.
ATTEST: KEYSTONE TAX FREE FUND
By: /s/ Mary E. Couillard By: /s/ T. Drumm
--------------------------------- -----------------------------------
ATTEST: STATE STREET BANK AND TRUST COMPANY
By: /s/ Louis Albright By: /s/ K. Donelin
--------------------------------- -----------------------------------
Assistant Secretary Vice President
<PAGE>
FIFTH
AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE TAX FREE FUND
AND
STATE STREET BANK AND TRUST COMPANY
This Fifth Amendment to the Custodian, Fund Accounting and Recordkeeping
Agreement by and between KEYSTONE TAX FREE FUND ("Fund") and STATE STREET BANK
AND TRUST COMPANY ("State Street"), dated December 31, 1979 and amended through
January 1, 1989 ("Agreement"), is made by and between the Fund and State Street
as of February 8, 1990.
In consideration of the mutual agreements contained herein, State Street and
the Fund hereby agree to amend the Agreement as follows:
1. Section II is amended by deleting Paragraph 8 and by
inserting the following as Paragraph 7A:
" 7A. The Fund shall pay State Street for its services as
Custodian such compensation as specified in the existing Schedule A.
Such compensation shall remain fixed until March 31, 1990 unless this
Agreement is terminated as provided in Paragraph 8A."
2. In all other respects the Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by a duly authorized
officer as of the day and year first above written.
ATTEST: KEYSTONE TAX FREE FUND
/s/ Mary E. Couillard By: /s/ T. Drumm
- ----------------------------------- -----------------------------------
ATTEST: STATE STREET BANK AND
TRUST COMPANY
/s/ J. Medoff By: /s/ K. Donelin
- ----------------------------------- -----------------------------------
Vice President
<PAGE>
FOURTH
AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE TAX FREE FUND
AND
STATE STREET BANK AND TRUST COMPANY
This Fourth Amendment to the Custodian, Fund Accounting and
Recordkeeping Agreement by and between KEYSTONE TAX FREE FUND ("Fund") and STATE
STREET BANK AND TRUST COMPANY ("State Street"), dated December 31, 1979 and
amended through September 1, 1988 ("Agreement") is made by and between the Fund
and State Street as of January 1, 1989.
In consideration of the mutual agreements contained herein, State Street and
the Fund hereby agree to amend the Agreement as follows:
1. Section 3-D of Section II entitled, Purchases is amended by
concluding the first sentence of such paragraph with the following:
"or, upon receipt by State Street of a facsimile copy of a letter of
understanding with respect to a time deposit account of the Fund signed
by any bank, whether domestic or foreign, and pursuant to Proper
Instructions from the Fund as defined in Section 5-A, for transfer to
the time deposit account of the Fund in such bank; such transfer may be
effected prior to receipt of a confirmation from a broker and/or the
applicable bank."
2. Section II is amended by deleting existing Paragraph 7
and by inserting the following as Paragraphs 7 and 8:
" 7. Lien on Assets. If the Fund requires State Street to advance cash
or securities for any purpose or in the event that State Street or its
nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance
of this Agreement, except such as may arise from its or its nominee's
own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay State Street
promptly, State Street shall be entitled to utilize available cash and
to dispose of the Fund assets to the extent necessary to obtain
reimbursement.
8. The Fund shall pay State Street for its services as
Custodian such compensation as shall be specified in the attached
Exhibit A. Such compensation shall remain fixed until December 31,
1989, unless this Agreement is terminated as provided in Section 8A."
3. In all other respects the Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by a duly authorized
officer as of the day and year first above written.
ATTEST: KEYSTONE TAX FREE FUND
/s/ R.D. Van Antwerp By: /s/ Albert H. Elfner III
- ------------------------------------ ---------------------------------------
President
ATTEST: STATE STREET BANK AND
TRUST COMPANY
/s/ J. Medoff By: /s/ K. Donelin
- ------------------------------------ ---------------------------------------
Vice President
<PAGE>
THIRD
AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE TAX FREE FUND
AND
STATE STREET BANK AND TRUST COMPANY
This Third Amendment to the Custodian, Fund Accounting and Recordkeeping
Agreement by and between KEYSTONE TAX FREE FUND ("Fund") and STATE STREET BANK
AND TRUST COMPANY ("State Street"), dated December 31, 1979 and amended through
January 31, 1987 ("Agreement") is made by and between the Fund and State Street
as of September 1, 1988.
In consideration of the mutual agreements contained herein, State Street and
the Fund hereby agree to amend the Agreement as follows:
1. Section II, Paragraph 3(K) is amended by inserting the following
language after Paragraph 3(J) and by renumbering existing Paragraph 3(K) as
Paragraph 3(L):
"K. Compliance with Applicable Rules and Regulations of The
Options Clearing Corporation and National Securities or Commodities Exchanges or
Commissions. Upon receipt of proper instructions, deliver securities in
accordance with the provisions of any agreement among the Fund, the Custodian
and a broker-dealer registered under the Securities Exchange Act of 1934
("Exchange Act") and a member of the National Association of Securities Dealers,
Inc.("NASD"), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of any
similar organization or organ- izations, regarding escrow or other arrangements
in connection with transactions by the Fund; or, upon receipt of proper
instructions deliver securities in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any Contract market, or
any similar organization or organizations, regarding account deposits in
connection with transactions by the Fund."
2. Existing Section II, Paragraph 3(L) is renumbered as Paragraph 3(M).
3. The following language is inserted after new Paragraph 3(M) as
Paragraph 3(N) :
"N. Segregated Account. The Custodian shall upon receipt of
proper instructions, establish and maintain a segregated account or accounts for
and on behalf of the Fund, into which account or accounts may be transferred
cash and/or securities, including securities maintained in an account by the
Custodian pursuant to Paragraph 3(B) hereof, (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and a broker-dealer
registered under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Fund, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the Fund,
(iii) for the purposes of compliance by the Fund with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or releases
of the Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv), for other
proper corporate purposes, but only, in the case of clause (iv), upon receipt
of, in addition to proper instructions, a certified copy of a resolution of the
Board of Trustees signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes."
4. Existing Section II, Paragraphs 3(M) and 3(N) are renumbered as
Paragraphs 3(O) and 3(P).
5. In all other respects the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by a duly authorized
officer as of the day and year first above written.
ATTEST: KEYSTONE TAX FREE FUND
/s/ Rosemary D. Van Antwerp By: /s/ Albert H. Elfner III
- ------------------------------------ ---------------------------------------
President
ATTEST: STATE STREET BANK AND
TRUST COMPANY
/s/ J. Medoff By: /s/ K. Donelin
- ------------------------------------ ---------------------------------------
Vice President
<PAGE>
SECOND AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE TAX FREE FUND
AND
STATE STREET BANK AND TRUST COMPANY
This Second Amendment to the Custodian, Fund Accounting and Recordkeeping
Agreement by and between KEYSTONE TAX FREE FUND ("the Fund") and STATE STREET
BANK AND TRUST COMPANY ("State Street"), dated December 31, 1979 ("the
Agreement") is made by and between the Fund and State Street as of January 31,
1987.
In consideration of the mutual agreements contained herein, State Street
and the Fund hereby agree to amend the Agreement by replacing all of Section II,
Paragraph 3(B) with the following provisions:
B. Deposit of Fund Assets in Securities Systems.
Notwithstanding any other provision of this Agreement, State Street may
deposit and/or maintain securities owned by the Fund in Depository Trust
Company, a clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934, which
acts as a securities depository, or in the book-entry system authorized by
the U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "Securities System(s)" in accordance
with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
1. State Street may keep securities of the Fund in a Securities System
provided that such securities are deposited in an account ("Account")
of State Street in the Securities System which shall not include any
assets of State Street other than assets held as a fiduciary,
custodian or otherwise for customers;
2. The records of State Street with respect to securites of the fund
which are maintained in a Securities System shall identify by book
entry those securities belonging to the Fund;
3. State Street shall pay for securities purchased for the account of the
Fund upon (i) receipt of advice from the Securities System that such
securities have been trans- ferred to the Account, and (ii) the making
of an entry on the records of State Street to reflect such transfer
and payment for the account of the Fund. State Street shall transfer
securities sold for the account of the Fund upon (i) receipt of advice
from the Securities System that payment for such securities has been
transferred to the Account, and (ii) the making an entry on the
records of State Street to reflect such transfer and payment for the
account of the Fund. Copies of all advices from the Securities System
of transfers of securities for the account of the Fund shall
identify the Fund, be maintained for the Fund by State Street and be
provided to the Fund at its request. State Street shall furnish the
Fund confirmation of each transfer to or from the account of the Fund
in the form of a written advice or notice and shall furnish to the
Fund copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the Fund on
the next business day;
4. State Street shall promptly provide the Fund with any report
obtained by State Street on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System. State Street shall
promptly provide the Fund any report on State Street's accounting
system, internal accounting control and procedures for safeguarding
securities deposited with State Street which is reasonably requested
by the Fund;
5. Anything to the contrary in this Agreement notwithstanding, State
Street shall be liable to the Fund for any claim, loss, liability,
damage or expense to the Fund, including attorney's fees resulting
from use of a Securities System by reason of any negligence,
misfeasance or misconduct of State Street or any of its agents or of
any of its or their employees or from failure of State Street or any
such agent to enforce effectively such rights as it may have against a
Securities System. At the election of the Fund, it shall be entitled
to be subrogated to the rights of State Street or its agents with
respect to any claim against the Securities System or any other person
which State Street or its agents may have as a consequence of any such
claim, loss, liability, damage or expense if and to the extent that
the Fund has not been made whole for any such loss or damage."
BB. State Street's Records
The records of State Street (and its agents or subcustodians) with
respect to its services for the Fund shall at all times during the
regular business hours of State Street (or its agents or
subcustodians) be open for inspection by duly authorized officers,
employees or agents of the Fund and employees and agents of the
Securities and Exchange Commission."
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by a duly authorized
officer as of the day and year first written above.
KEYSTONE TAX FREE FUND
Attest:
By: /s/ Albert H. Elfner III
-----------------------------------
/s/ R.D. Van Antwerp Title: President
---------------------------------
STATE STREET BANK AND TRUST COMPANY
Attest:
By: /s/ K. Donelin
-----------------------------------
/s/ J. Medoff, A.S. Title: Vice President
---------------------------------
<PAGE>
FIRST AMENDMENT
TO
CUSTODIAN, FUND ACCOUNTING AND RECORDKEEPING AGREEMENT
BY AND BETWEEN
KEYSTONE TAX FREE FUND
AND
STATE STREET BANK AND TRUST COMPANY
This First Amendment to the Custodian, Fund Accounting and Recordkeeping
Agreement by and between KEYSTONE TAX FREE FUND (the "Fund") and STATE STREET
BANK AND TRUST COMPANY ("State Street"), dated December 31, 1979 (the
"Agreement") is made by and between the Fund and State Street as of December 31,
1982.
In consideration of the mutual agreements contained herein, State Street
and the Fund hereby agree to amend the Agreement by replacing each of Section
II, Paragraph 6(B), and Section II, Paragraph 7 with the following provisions:
"6. B. Expense Reimbursement. State Street shall be entitled to receive
from the Fund on demand reimbursement for its cash disbursements, expenses and
charges, excluding salaries and usual overhead expenses, as set forth on the
attached Schedule C."
"7. The Fund shall pay State Street for its services as Custodian such
compensation as shall be as specified in the attached Schedule C. Such
compensation shall remain as provided in Schedule C until December 31, 1984,
unless this Agreement is terminated as provided in section 8A; provided,
however, that in the event either party terminates this Agreement as PROVIDED IN
SECTION 8A STATE Street hereby guarantees and agrees that no new Agreement
entered into between the parties shall require payment of compensation greater
than that specified herein during such period."
IN WITNESS WHEREOF, each of the parties hereto has caused this FIRST
Amendment to the Agreement to be executed in its name and on its behalf by a
duly authorized officer as of the day and year first written above.
KEYSTONE TAX FREE FUND
By: /s/ Ralph J. Spuehler, Jr.
-----------------------------------
Treasurer
Attest
/s/ R. Van Antwerp
- -------------------------------
STATE STREET BANK AND TRUST COMPANY
By: /s/ B. Weidlich
------------------------------------
Vice President
Attest:
/s/ illegible
- -------------------------------
<PAGE>
Schedule C
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
KEYSTONE TAX FREE FUND
(Effective l/l/83)
I. Administration
Custody, Portfolio and Fund Accounting Service - Maintain custody of fund
assets. Settle portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements and report
cash transactions. Maintain investment ledgers, provide selected portfolio
transactions, position and income reports. Maintain general ledger and
capital stock accounts. Prepare daily trial balance. Calculate net asset
value daily. Provide selected general ledger reports. Securities yield or
market value quotations will be provided to State Street from a source
designated by the Fund.
The administration fee shown below is an annual charge, billed and payable
monthly, based on average net assets and calculated in the same manner as
the fund management fee.
Annual Fee
Fund Net Assets
- ---------------
First $35 million l/15 of 1%
Next $65 million 1/30 of 1%
Excess l/100 of 1%
No Minimum
<PAGE>
II. Portfolio Trades - For each line item processed
-----------------------------------------------
ALL TRADES $ 10.00
III. Holdings & Appraisal Charge
---------------------------
For each issue maintained - monthly charge $ 5.00
IV. Out-of-Pocket Expenses
----------------------
A billing for the recovery of applicable out-of-pocket expenses will be made as
of the end of each month. Out-of-pocket expenses include, but are not limited to
the following:
Telephone
Wire charges ($3.65 per wire in and $3.50 out)
Postage and insurance
Courier service
Legal fees
Supplies related to fund records
Rush transfer - $8 each
Duplicating
DTC Eligibility Books
Transfer fees
Sub-custodian charges
Price Waterhouse Audit Letter
Check writing ($.50 per check)
This fee schedule will terminate 12/31/83
<PAGE>
Schedule C
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
KEYSTONE TAX FREE FUND
(Effective 1/1/84)
- --------------------------------------------------------------------------------
I. Administration
Custody, Portfolio and Fund Accounting Service - Maintain custody of fund
assets. Settle portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements and report
cash transactions. Maintain investment ledgers, provide selected portfolio
transactions, position and income reports. Maintain general ledger and
capital stock accounts Prepare daily trial balance. Calculate net asset
value daily. Provide selected general ledger reports. Securities yield or
market value quotations will be provided to State Street from a source
designated by the Fund.
The administration fee shown below is an annual charge, billed and payable
monthly, based on average net assets and calculated in the same manner as
the fund management fee.
Annual Fee
Fund Net Assets
- ---------------
First $35 million 1/15 of 1%
Net $65 million 1/30 of 1%
Excess 1/100 of 1%
No Minimum
<PAGE>
II. Portfolio Trades - For each line item processed
-----------------------------------------------
All Trades $ 12.25
III. Holdings & Appraisal Charge
---------------------------
For each issue maintained - monthly charge $ 5.00
IV. Out-of-Pocket Expenses
----------------------
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
Telephone
Wire charges ($3.65 per wire in and $3.50 out)
Postage and insurance
Courier service
Legal fees
Supplies related to fund records
Rush transfer - $8 each
Duplicating
DTC Eligibility Books
Transfer fees
Sub-custodian charges
Price Waterhouse Audit Letter
Check writing ($.50 per check)
This fee schedule `will terminate 12/31/84
<PAGE>
CUSTODIAN AND RECORDKEEPING AGREEMENT
Agreement made as of this 31st day of December, 1979 by and among
Keystone Tax Free Fund, a Massachusetts business trust having its principal
place of business at 99 High Street, Boston, Massachusetts, (the "Fund'), The
Massachusetts Companies, Inc., a Massachusetts corporation having its principal
place of business at 99 High Street, Boston, Massachusetts (the "Manager") and
State Street Bank and Trust Company, a Massachusetts banking Corporation having
its principal place of business at 225 Franklin Street, Boston, Massachusetts
("State Street").
WITNESSETH THAT:
In consideration of the mutual agreements herein contained, the Fund,
the Manager, and State Street agree as follows:
I. DEPOSITORY
The Fund hereby appoints State Street as its Depository subject to the
provisions hereof. The Fund shall deliver to State Street certified or
authenticated copies of its Declaration of Trust, By-Laws, all amendments
thereto, a certified copy of the resolution of its board of trustees appointing
State Street to act in the capacities covered by this Agreement and authorizing
the signing of this Agreement and copies of such resolutions of its board of
trustees, contracts and other documents as may be reasonably required by State
Street in the performance of its duties hereunder.
II. CUSTODIAN
1. The Fund appoints State Street as its Custodian, subject to the
provisions hereof. State Street hereby accepts such appointment as Custodian. As
such Custodian, State Street shall retain all securities and cash now owned or
hereafter acquired by the Fund, and the Fund shall deliver and pay or cause to
be delivered and paid to State Street, as Custodian, all securities, cash now
owned or hereafter acquired by the Fund during the period of this Agreement.
2. All securities delivered to State Street (other than in bearer form)
shall be properly endorsed and in proper form for transfer into or in the name
of the Fund, of a nominee of State Street for the exclusive use of the Fund, or
of such other nominee as may be mutually agreed upon by State Street and the
Fund.
3. As Custodian, State Street shall promptly:
A. Safekeeping. Keep safely in a separate account the
securities of the Fund, including without limitation all securities in bearer
form, and on behalf of the Fund, receive delivery of certificates, including
without limitation all securities in bearer form, for safekeeping and keep such
certificates physically segregated at all times from those of any other person.
State Street shall maintain records of all receipts, deliveries and locations of
such securities, together with a current inventory thereof and shall conduct
periodic physical inspections of certificates representing bonds and other
securities held by it under this Agreement at least annually in such manner as
State Street shall determine from time to time to be advisable in order to
verify the accuracy of such inventory. State Street shall provide the Fund with
copies of any reports of its internal count or other verification of the
securities of the Fund held in its custody, including reports on its own system
of internal accounting control. In addition, if and when independent certified
public accountants retained by State Street shall count or otherwise verify the
securities of the Fund held in State Street's custody, State Street shall
provide the Fund with a copy of the report of such accountants. With respect to
securities held by any agent or Sub-Custodian appointed pursuant to paragraph
6-C of section II hereof, State Street may rely upon certificates from such
agent and from such Sub-Custodian as to the holdings of such Sub-Custodian, it
being understood that such reliance in no way releases State Street of its
responsibilities or liabilities under this Agreement. State Street shall
promptly report to the Fund the results of such inspections, indicating any
shortages or discrepancies uncovered thereby, and take appropriate action to
remedy and such shortages or discrepancies.
B. Use of a System for the Central Handling of Securities. Not
withstanding any other provision of this Agreement, if in the best interest of
the Fund, deposit all or any part of the securities owned by the Fund in the
book-entry system of the Federal Reserve Banks (hereinafter called the "system")
and to use the facilities of such system, all as provided under the provisions
of Rule 17f-4 of the Investment Company Act of 1940, as amended. Without
limiting the generality of such use, the following provisions shall apply
thereto:
(1) State Street may keep securities of the Fund in the system provided
that such securities are represented in an account ("Account") of State Street's
(or its agent or Sub-Custodian) in the system which shall not include any assets
of State Street (or such agent or Sub-Custodian) other than assets held as
fiduciary, custodian or otherwise for customers. The records of State Street
(and such agents or Sub-Custodians) shall at all times during the regular
business hours of State Street (or such agents or Sub-Custodians) be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission.
(2) State Street shall send to the Fund a confirmation of all transfers
to or from the system for the account of the Fund. Where securities are
transferred to the Fund's account, State Street shall, by book-entry or
otherwise, identify as belonging to the Fund a quantity of securities in a
fungible bulk of securities (i) registered in the name of State Street or its
nominee or (ii) shown on State Street's account on the books of the appropriate
Federal Reserve Bank. For this purpose, the term "confirmation" means advice or
notice of transaction; it is not intended to require preparation by State Street
of the confirmation required of broker-dealers under the Securities Exchange Act
of 1934.
(3) State Street shall promptly send to the Fund any report it receives
from the appropriate Federal Reserve Bank on its system of internal accounting
control.
(4) Anything to the contrary in this Agreement notwithstanding, State
Street shall be liable to the Fund for any claim, liability, loss or expense,
including attorney's fees, resulting to such Fund from use of the system by
reason of any negligence, misfeasance or misconduct of State Street or any of
its agents or Sub-Custodians) or of any of its (or their) employees or from any
failure of State Street (or any such agent or Sub-Custodian) to enforce
effectively such rights as it (or they) may have against the system. At the
election of the Fund, it shall be entitled to be subrogated to State Street, its
agents, or Sub-Custodians in any claim against the system or any other person
which State Street, its agents, or Sub-Custodians may have as a consequence of
any such claim, liability, loss or expense if and to the extent that the Fund
has not been made whole for such claim, liability, loss or expense.
C. Registered Name, Nominee. Register securities of the Fund
held by State Street in the name of the Fund, of a nominee of State Street for
the exclusive use of the Fund, of such other nominees as may be mutually agreed
upon, or of any mutually acceptable nominee of any agent or Sub-Custodian
appointed pursuant to paragraph 6-C of section II hereof.
D. Purchases. Upon receipt of proper instructions (as defined
in paragraph 5-A of section II hereof; hereafter "proper instructions") and
insofar as cash is available for the purpose, pay for and receive all securities
purchased for the account of the Fund, payment being made only upon receipt of
the securities by State Street (or any bank, banking firm, responsible
commercial agent or trust company doing business in the United States and
appointed pursuant to paragraph 6-C of section II hereof as State Street's agent
or Sub-Custodian for this purpose, registered as provided in paragraph 3-C of
section II hereof or in form for transfer satisfactory to State Street, or, in
the case of repurchase agreements entered into between the Fund and a bank or a
dealer, delivery of the securities either in certificate form or through an
entry crediting State Street's account at the Federal Reserve Bank with such
securities. All securities accepted by State Street shall be accompanied by
payment of, or a "due bill" for, any dividends, interest or other distributions
of the issuer, due the purchaser. In any and every case of a purchase of
securities for the account of the Fund where payment is made by State Street in
advance of receipt of the securities purchased, State Street shall be absolutely
liable to the Fund for such securities to the same extent as if the securities
had been received by State Street except that in the case of repurchase
agreements entered into by the Fund with a bank which is a member of the Federal
Reserve System, State Street may transfer funds to the account of such bank
prior to the receipt of written evidence that the securities subject to such
repurchase agreement have been transferred by book-entry into a segregated
nonproprietary account of State Street maintained with the Federal Reserve Bank
of Boston, provided, that such securities have in fact been so transferred by
book-entry; and provided, further however, that State Street and the Fund agree
to use their best efforts to insure receipt by State Street of copies of
documentation for each such transaction as promptly as possible.
E. Exchanges. Upon receipt of proper instructions, exchange
securities, interim receipts or temporary securities held by it or by any agent
or Sub-Custodian appointed by it pursuant to paragraph 6-C of section II hereof
for the account of the Fund for other securities alone or for other securities
and cash, and expend cash insofar as cash is available in connection with any
merger, consolidation, reorganization, recapitalization, split-up of shares,
changes of par value, conversion or in connection with the exercise of warrants,
subscription or purchase rights, or otherwise, and deliver securities to the
designated depository or other receiving agent in response to tender offers or
similar offers to purchase received in writing; provided that in any such case
the securities and/or cash to be received as a result of any such exchange,
expenditure or delivery are to be delivered to State Street, its agents or its
Sub-Custodians. State Street shall give notice as provided under paragraph 4-L
of section II hereof to the Fund in connection with any transaction specified in
this paragraph and at the same time shall specify to the Fund whether such
notice relates to securities held by an agent or Sub-Custodian appointed
pursuant to paragraph 6-C of section II hereof, so that the Fund may issue to
State Street proper instructions for State Street to act thereon prior to any
expiration date (which shall be presumed to be two business days prior to such
date unless State Street has previously advised the Fund of a different period).
The Fund shall give to State Street full details of the time and method of
submitting securities in response to any tender or similar offer, exercising any
subscription or purchase right or making any exchange pursuant to this
paragraph. When such securities are in the possession of an agent appointed by
State Street pursuant to paragraph 6-C of section II hereof, the proper
instructions referred to in the preceding sentence must be received by State
Street in timely enough fashion (which shall be presumed to be three business
days unless State Street has advised the Fund in writing of a different period)
for State Street to notify the agent in sufficient time to permit such agent to
act prior to any expiration date. When the securities are in the possession of a
Sub-Custodian appointed pursuant to paragraph 6-C of section II hereof, the
proper instructions must be received by the Sub-Custodian in timely enough
fashion as previously advised in writing to the Fund by State Street or the
Sub-Custodian to permit the Sub-Custodian to act prior to any expiration date.
F. Sales. Upon receipt of proper instructions and upon receipt
of full payment therefor, release and deliver securities which have been sold
for the account of the Fund. At the time of delivery all such payments are to be
made in cash, by a certified check upon or a treasurer's or cashier's check of a
bank, by effective bank wire transfer through the Federal Reserve Wire System
or, if appropriate, outside of the Federal Reserve Wire System and subsequent
credit to the Fund's Custodian account, or, in case of delivery through a stock
clearing company, by book-entry credit by the stock clearing company in
accordance with the then current "street" custom.
G. Purchases by Issuer. Upon receipt of proper instructions,
release and deliver securities owned by the Fund to the issuer thereof or its
agent when such securities are called, redeemed, retired or otherwise become
payable; provided that in any such case, the cash or other consideration is to
be delivered to State Street.
H. Changes of Name and Denomination. Upon receipt of proper
instructions, release and deliver securities owned by the Fund to the issuer
thereof or its agent for transfer into the name of the Fund or of a nominee of
State Street or of the Fund for the exclusive use of the Fund or for exchange
for a different number of bonds, certificates, or other evidence representing
the same aggregate face amount or number of units bearing the same interest
rate, maturity date and call provisions if any; provided that in any such case,
the new securities are to be delivered to State Street.
I. Street Delivery. In connection with delivery in New York
City and upon receipt of proper instructions, which in the case of registered
securities may be standing instructions, release securities owned by the Fund
upon receipt of a written receipt for such securities to the broker selling the
same for examination in accordance with the existing "street delivery" custom.
In every instance either payment in full for such securities shall be made or
such securities shall be returned to the Custodian that same day. In the event
existing "street delivery" custom is modified, State Street shall obtain
authorization from the board of directors of the Fund prior to any use of such
modified "street delivery" custom.
J. Release of Securities for Use as Collateral. Upon receipt
of proper instructions and subject to Section 7 of the Fund's By-Laws, as
amended, release securities belonging to the Fund to any bank or trust company
or other pledgee for the purpose of pledge or hypothecation to secure any loan
incurred by the Fund; provided, however, that securities shall be released only
upon payment to State Street of the monies borrowed, except that in cases where
additional collateral is required to secure a borrowing already made, subject to
proper prior authorization from the Fund, further securities may be released for
that purpose. Upon receipt of proper instructions, pay such loan upon redelivery
to it of the securities pledged or hypothecated therefor and upon surrender of
the note or notes evidencing the loan.
K. Release or Delivery of Securities for Other Purposes. Upon
receipt of proper instructions, release or deliver any securities held by it for
the account of the Fund for any other purpose (in addition to those specified in
paragraphs 3-E, 3-F, 3-G, 3-H, 3-I and 3-J of section II hereof) which the Fund
declares is a proper corporate purpose pursuant to proper instructions.
L. Proxies, Notices, Etc. State Street shall promptly forward
upon receipt to the Fund all forms of proxies and all notices of meetings and
any other notices or announcements affecting or relating to the securities,
including without limitation notices relating to class action claims and
bankruptcy claims, and upon receipt of proper instructions execute and deliver
or cause its nominee to execute and deliver such proxies or other authorizations
as may be required. State Street, its nominee, its agents, and Sub-Custodians
shall not vote upon any of the securities or execute any proxy to vote thereof
or give any consent or take any other action with respect thereto (except as
otherwise herein provided) unless ordered to do so by proper instructions. State
Street shall require its agents and Sub-Custodians appointed pursuant to
paragraph 6-C of section II hereof to forward any such announcements and notices
to State Street upon receipt.
M. Miscellaneous. In general, attend to all nondiscretionary
details in connection with the sale, exchange, substitution, purchase, transfer
or other dealing with such securities or property of the Fund, except as
otherwise directed by the Fund pursuant to proper instructions. State Street
shall render to the Fund daily a report of all monies received or paid on behalf
of the Fund, an itemized statement of the securities and cash for which it is
accountable to the Fund under this agreement and an itemized statement of
security transactions which settled the day before and shall render to the Fund
weekly an itemized statement of security transactions which failed to settle as
scheduled. At the end of each week State Street shall provide a list of all
security transactions that remain unsettled at such time.
4. Additionally, as Custodian, State Street shall promptly:
A. Bank Account. Retain all cash of the Fund, other than cash
maintained by the Fund in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940, as amended, in the banking
department of State Street in a separate account or accounts in the name of the
Fund, subject only to draft or order by State Street acting pursuant to the
terms of this Agreement. If and when authorized by proper instructions in
accordance with a vote of the board of directors of the Fund, State Street may
open and maintain an additional account or accounts in such other bank or trust
companies as may be designated by such instructions, such account or accounts,
however, to be solely in the name of State Street in its capacity as Custodian
and subject only to its draft or order in accordance with the terms of this
Agreement. State Street shall furnish the Fund, not later than thirty (30)
calendar days after the last business day of each month, a statement reflecting
the current status of its internal reconciliation of the closing balance as of
that day in all accounts described in this paragraph to the balance shown on the
daily cash report for that day rendered to the Fund.
B. Collections. Unless otherwise instructed by receipt of
proper instructions, collect, receive and deposit in the bank account or
accounts maintained pursuant to paragraph 4-A of section II hereof all income
and other payments with respect to the securities held hereunder, execute
ownership and other certificates and affidavits for all Federal and State tax
purposes in connection with the collection of bond and note coupons, do all
other things necessary or proper in connection with the collection of such
income, and without waiving the generality of the foregoing:
(1) Present for payment on the date of payment all coupons
and other income items requiring presentation;
(2) present for payment all securities which may mature or
be called, redeemed, retired or otherwise become
payable on the date such securities become payable;
(3) endorse and deposit for collection, in the name of the
Fund, checks, drafts or other negotiable instruments on
the same day as received.
In any case in which State Street does not receive any such due and
unpaid income within a reasonable time after it has made proper demands for the
same (which shall be presumed to consist of at least three demand letters and at
least one telephonic demand), it shall so notify the Fund in writing, including
copies of all demand letters, any written responses thereto, and memoranda of
all oral responses thereto and to telephonic demands, and await proper
instruction; the Custodian shall not be obliged to take legal action for
collection unless and until reasonably indemnified to its satisfaction for the
reasonable costs of such legal action for collection. It shall also notify the
Fund as soon as reasonably practicable whenever income due on securities is not
collected in due course.
C. Sale of Shares of the Fund. Make such arrangements with the
Transfer Agent of the Fund as will enable State Street to make certain it
receives the cash consideration due to the Fund for shares of the Fund as may be
issued or sold from time to time by the Fund, all in accordance with the Fund's
Declaration of Trust and By-Laws, both as amended.
D. Dividends and Distributions. Upon receipt of proper
instructions, release or otherwise apply cash insofar as cash is available for
the purpose for the payment of dividends or other distributions to shareholders
of the Fund.
E. Redemption of Shares of the Fund. From such funds as may be
available for the purpose, but subject to the limitation of the Fund's
Declaration of Trust and By-Laws, both as amended, and applicable resolutions of
the board of trustees of the Fund pursuant thereto, make funds available to
shareholders who have delivered to the Transfer Agent a request for redemption
of their shares by the Fund pursuant to said Declaration of Trust and By-Laws,
both as amended.
In connection with the redemption of shares of the Fund pursuant to the
Fund's Declaration of Trust and By-Laws, both as amended, State Street is
authorized and directed upon receipt of proper instructions from the Transfer
Agent for the Fund to make funds available for transfer through the Federal
Reserve Wire System or by other bank wire to a commercial bank account
designated by the redeeming shareholder.
F. Stock Dividends, Rights, Etc. Receive and collect all stock
dividends, rights and other items of like nature; and deal with the same
pursuant to proper instructions relative thereto.
G. Disbursements. Upon receipt of proper instructions, make or
cause to be made, insofar as cash is available for the purpose, disbursements
for the payment on behalf of the Fund of interest, taxes, advisory fees and
operating expenses, including registration and qualification costs and other
expenses of issuing and selling shares or changing its capital structure,
whether or not such expenses shall be in whole or in part capitalized or treated
as deferred expenses.
H. Other Proper Corporate Purposes. Upon receipt of proper
instructions, make or cause to be made, insofar as cash is available for the
purpose, disbursements for any other purpose (in addition to the purposes
specified in paragraphs 3-D, 3-E, 4-D, 4-E, and 4-G of this Agreement) which the
Fund declares is a proper corporate purpose.
I. Records. Create, maintain and retain all records a)
relating to its activities and obligations under this Agreement in such manner
as shall meet the obligations of the Fund under the Investment Company Act of
1940, as amended, particularly Section 31 thereof and Rules 31a-1 and 31a-2
thereunder, under applicable Federal and State tax laws and under any other law
or administrative rules or procedures which may be applicable to the Fund, (b)
necessary to comply with the representations of Part I - Fund Custodian Services
and Part II - Portfolio Pricing and Accounting of State Street's Response, dated
May 1, 1979, as amended, to Keystone Custodian Funds, Inc.'s and the
Massachusetts Companies, as amended, to Keystone Custodian Funds, Inc.'s and The
Massachusetts Companies, Inc.'s Request for Proposal, dated March 19, 1979, as
amended, (amendments after June 22, 1979 are set forth in Exhibit B) ("Parts I
and II"), insofar as such representations relate to the creation, maintenance
and retention of records for the Fund, or (c) as reasonably requested from time
to time by the Fund. All records maintained by State Street in connection with
the performance of its duties under this Agreement shall remain the property of
the Fund and in the event of termination of this Agreement shall be delivered in
accordance with the terms of paragraph 8 below.
J. Miscellaneous. Assist generally in the preparation of
routine reports to holders of shares of the Fund, to the Securities and Exchange
Commission, including forms N1-R and N1-Q, to State "Blue Sky" authorities, to
others in the auditing of accounts and in other matters of like nature, as
required to comply with the representations of Parts I and II insofar as such
representations relate to the preparation of reports for the Fund and as
otherwise reasonably requested by the Fund.
K. Fund Accounting and Net Asset Value Computation. State
Street shall maintain the general ledger and all other books of account of the
Fund, including the accounting for the Fund's portfolio. In addition, upon
receipt of proper instructions, which may be deemed to be continuing
instructions, State Street shall daily compute the net asset value of the Shares
of the Fund and the total net asset value of the Fund. State Street shall, in
addition, perform such other services incidental to its duties hereunder as may
be reasonably requested from time to time by the Fund.
L. Services under Parts I and Part II. In addition to the
services specified herein, State Street shall perform those services set forth
in Parts I and II, including without limitation general ledger accounting, daily
Fund portfolio pricing and custodian services to the extent such services relate
to the Fund; provided, however, that in the event that Parts I and II as they
relate to the Fund are in conflict with the terms of this Agreement, the terms
of this Agreement shall govern.
5. State Street and the Fund further agree as follows:
A. Proper Instructions. State Street shall be deemed to have
received proper instructions upon receipt of written instructions signed by the
board of trustees or by one or more person or persons as the board of trustees
shall have from time to time authorized to give the particular class of
instructions in question. Different persons may be authorized to give
instructions for different purposes. A copy of a resolution or action of the
board of trustees certified by the secretary or an assistant secretary of the
Fund may be received and accepted by State Street as conclusive evidence of the
instruction of the board of trustees and/or the authority of any person or
persons to act on behalf of the Fund and may be considered as in full force and
effect until receipt of written notice to the contrary. Such instructions may be
general or specific in terms. Oral instructions will be considered proper
instruction if the Custodian reasonably believes them to have been given by a
person authorized by the board of trustees to give such oral instructions with
respect to the class of instruction involved. The Fund shall cause all oral
instructions to be confirmed in writing.
B. Investments, Limitations. In performing its duties
generally, and more particularly in connection with the purchase, sale and
exchange of securities made by or for the Fund, State Street may take cognizance
of the provisions of the Declaration of Trust and By-Laws of the Fund, both as
amended; provided, however, that except as otherwise expressly provided herein,
State Street may assume unless and until notified in writing to the contrary
that instructions purporting to be proper instructions received by it are not in
conflict with or in any way contrary to any provision of the Declaration of
Trust and By-Laws of the Fund, both as amended, or resolutions or proceedings of
the board of trustees of the Fund.
6. State Street and the Fund further agree as follows:
A. Indemnification. State Street, as Depository and Custodian,
shall be entitled to receive and act upon advice of counsel (who may be counsel
for the Fund) and shall be without liability for any action reasonably taken or
thing reasonably done pursuant to such advice; provided that such action is not
in violation of applicable Federal or State laws or regulations or contrary to
written instructions received from the Fund, and shall be indemnified by the
Fund and without liability for any action taken or thing done by it in carrying
out the terms and provisions of this Agreement in good faith and without
negligence, misfeasance or misconduct. In order that the indemnification
provision contained in this paragraph shall apply, however, if the Fund is asked
to indemnify or save State Street harmless, the Fund shall be fully and promptly
advised of all pertinent facts concerning the situation in question, and State
Street shall use all reasonable care to identify and notify the Fund fully and
promptly concerning any situation which presents or appears likely to present
the probability of such a claim for indemnification against the Fund. The Fund
shall have the option to defend State Street against any claim which may be the
subject of this indemnification, and thereupon the Fund shall take over complete
defense of the claim, and State Street shall initiate no further legal or other
expenses for which it shall seek indemnification under this paragraph. State
Street shall in no case confess any claim or make any compromise in any case in
which the Fund will be asked to indemnify State Street except with the Fund's
prior written consent.
B. Expenses Reimbursement. State Street shall be entitled to
receive from the Manager on demand reimbursement for its cash disbursements,
expenses and charges, excluding salaries and usual overhead expenses, as set
forth on Schedule A.
C. Appointment of Agent and Sub-Custodians. State Street, as
Custodian, may appoint (and may remove) any other bank, trust company or
responsible commercial agent as its agent to carry out such of the provisions of
this Agreement as State Street may from time to time direct, and State Street,
as Custodian, may from time to time employ one or more Sub-Custodians, but only
in compliance with the terms and conditions set forth in the Fund's Declaration
of Trust and By-Laws, both as amended, provided, however, that the appointment
of any such agent or Sub-Custodian shall not relieve State Street of any of its
responsibilities under this Agreement.
D. Reliance on Documents. So long as and to the extent that it
is in good faith and in the exercise of reasonable care, State Street, as
Depository and Custodian, shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement, shall be protected in acting upon
any instructions, notice, request, consent, certificate or other instrument or
paper reasonably believed by it to be genuine and to constitute proper
instructions under this Agreement and shall, except as otherwise specifically
provided in this Agreement, be entitled to receive as conclusive proof of any
fact or matter required to be ascertained by it hereunder a certificate signed
by the board of trustees, the secretary or an assistant secretary of the Fund or
any other person expressly authorized by the board of trustees of the Fund.
E. Access to Records. Subject to security requirements of
State Street applicable to its own employees having access to similar records
within State Street and such regulations as to the conduct of such monitors as
may be reasonably imposed by State Street after prior consultation with an
authorized officer of the Fund, books and records of State Street pertaining to
its actions under this Agreement shall be open to inspection and audit at
reasonable times by the trustees and officers of, attorneys for, auditors
employed by the Fund or the Manager or any other person as the board of trustees
shall direct.
G. Record-Keeping. State Street shall maintain such records as
shall enable the Fund to comply with the requirements of all Federal and State
laws and regulations applicable to the Fund with respect to the matters covered
by this Agreement and shall comply with the representations of Parts I and II as
such representations relate to maintaining records of the Fund.
7. The Manager shall pay State Street for its services as Custodian
such compensation as shall be as specified in the attached Exhibit A. Such
compensation shall remain fixed for two years from the date hereof, unless this
Agreement is terminated as provided in section 8A, and shall remain fixed for an
additional year in the event the Fund decides to continue this Agreement for
such period; provided, however, that in the event either party terminates this
Agreement as provided in section 8A State Street hereby guarantees and agrees
that no new Agreement entered into between the parties shall require payment of
compensation greater than that specified herein during such three year period.
8. State Street and the Fund further agree as follows:
A. Effective Period, Termination, Amendment and Interpretive
and Additional Provisions. This Agreement shall become effective as of the date
of its execution, shall continue in full force and effect until terminated as
hereinafter provided, may be amended at any time by mutual agreement of the
parties hereto and may be terminated at any time (1) by the Fund by an
instrument in writing delivered or mailed, postage prepaid, to the other
parties, (2) by State Street through notice to the other parties at any time
after three years from the date hereof, or in the event of the Fund's
substantial default under this Agreement which default continues, after notice
to the Fund of such default, uncorrected for 30 days and (3) by the Manager,
upon 60 days written notice to the other parties, but only as to the rights and
obligations of the Manager hereunder, whereupon the Fund shall succeed to the
Manager's rights and shall become bound by the Manager's obligations hereunder.
In the event of termination under (1) or (2) above, State Street shall remain as
Custodian hereunder for a reasonable period thereafter if the Fund has used its
best efforts and is unable to find a Successor Custodian and any such
termination shall take effect not sooner than sixty (60) days after the date of
such delivery or mailing. The Fund shall not amend or terminate this Agreement
in contravention of any applicable Federal or State laws or regulations, or any
provision of the Declaration of Trust or By-Laws of the Fund, both as amended.
The Fund may by action of its board of trustees substitute another bank or trust
company for State Street by giving notice as provided above to State Street.
In connection with the operation of this Agreement, the parties may
agree from time to time on such provisions interpretive of or in addition to the
provisions of this Agreement as may in their joint opinion be consistent with
the general tenor of this Agreement, any such interpretive or additional
provision to be signed by both parties and annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable Federal or
State laws or regulations, or any provision of the Fund's Declaration of Trust
or By-laws, both as amended. No interpretive provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Agreement.
B. Successor Custodian. Upon termination hereof or the
inability of the Custodian to continue to serve hereunder, the Manager shall pay
to State Street such compensation as may be due for services through the date of
such termination and shall likewise reimburse State Street for its costs,
expenses and disbursements incurred prior to such termination in accordance with
paragraph 6-B of section II hereof and such reasonable costs, expenses and
disbursements as may be incurred by State Street in connection with such
termination.
If a Successor Custodian is appointed by the board of trustees of the
Fund in accordance with Section 7 of the Fund's By-Laws, as amended, State
Street shall, upon termination, deliver to such Successor Custodian at the
office of State Street, properly endorsed and in proper form for transfer, all
securities then held hereunder, all cash and other properties of the Fund
deposited with or held by it hereunder.
If no such Successor Custodian is appointed, State Street shall, in
like manner at its office, upon receipt of a certified copy of a resolution of
the shareholders or board of trustees pursuant to section 7 of the Fund's
By-Laws, as amended, deliver such securities, cash and other properties in
accordance with such resolution.
In the event that no written order designating a Successor Custodian or
certified copy of a resolution of the shareholders or board of trustees shall
have been delivered to State Street on or before the date when such termination
shall become effective, then State Street shall have the right to deliver to a
bank or trust company doing business in Boston, Massachusetts of its own
selection, having an aggregate capital, surplus and undivided profits as shown
by its last published report, of not less than $2,000,000, all securities, cash
and other properties held by State Street and all instruments held by State
Street and all instruments held by it relative thereto and all other property
held by it under this Agreement. Thereafter, such bank or trust company shall be
the Successor of State Street under this Agreement and subject to the
restrictions, limitations and other requirements of the Fund's Declaration of
Trust and By-Laws, both as amended.
In the event that securities, funds, and other properties remain in the
possession of State Street after the date of termination hereof owing to failure
of the Fund to procure the certified copy above referred to, or of the board of
trustees to appoint a Successor Custodian, State Street shall be entitled to
fair compensation for its services during such period and the provisions of this
Agreement relating to the duties and obligations of State Street shall remain in
full force and effect.
C. Duplicate Records and Backup Facilities. State Street shall
not be liable for loss of data, occurring by reason of circumstances beyond its
control, including but not limited to acts of civil or military authority,
national emergencies, fire, flood or catastrophe, acts of God, insurrection,
war, riots, or failure of transportation, communication or power supply.
However, State Street shall keep in a separate and safe place additional copies
of all records required to be maintained pursuant to this Agreement or
additional tapes, disks or other sources of information necessary to reproduce
all such records. Furthermore, at all times during this Agreement, State Street
shall maintain a contractual arrangement whereby State Street will have a
back-up computer facility available for its use in providing the services
required hereunder in the event circumstances beyond State Street's control
result in State Street not being able to process the necessary work at its
principal computer facility, State Street shall, from time to time, upon request
from the Fund provide written evidence and details of its arrangement for
obtaining the use of such a back-up computer facility. State Street shall use
its best efforts to minimize the likelihood of all damage, loss of data, delays
and errors resulting from an uncontrollable event, and should such damage, loss
of data, delays or errors occur, State Street shall use its best efforts to
mitigate the effects of such occurrence. Representatives of the Fund shall be
entitled to inspect the State Street premises and operating capabilities within
reasonable business hours upon reasonable notice to State Street, and, upon
request of such representative or representatives, State Street shall from time
to time as appropriate, furnish to the Fund a letter setting forth the insurance
coverage thereon, any changes in such coverage which may occur and any claim
relating to the Fund which State Street may have made under such insurance.
D. Confidentiality. State Street agrees to treat all records
and other information relative to the Fund confidentially and State Street on
behalf of itself and its officers, employees, agents and Sub-Custodians agrees
to keep confidential all such information, except after prior notification to
and approval by the Fund (which approval shall not be unreasonably withheld and
may not be withheld where State Street may be exposed to civil or criminal
contempt proceedings), when requested to divulge such information by duly
constituted authorities or when so requested by a properly authorized person.
(a) State Street and the Fund agree that they, their officers,
employees, agents, and Sub-Custodians shall maintain all
information disclosed to them by the other in connection with
this agreement in confidence and will not disclose any such
information to any other person, nor use such information for
their own benefit or for the benefit of third parties without
the consent in writing of the other; provided, however, that
each party shall have the right to use any such information
for its own necessary internal purposes while this Agreement
is in effect. The provisions of the Paragraph shall not apply
to information which (i) is in or becomes part of the public
domain, or (ii) is demonstrably known previously to the party
to whom it is disclosed, or (iii) is independently developed
outside this Agreement by the party to whom it is disclosed or
(iv) is rightfully obtained from third parties by the party to
whom it is disclosed.
9. The Fund shall not circulate any printed matter which contains any
reference to State Street without the prior written approval of State Street,
excepting solely such printed matter as merely identifies State Street as
Depository or Custodian. The Fund will submit printed matter requiring approval
to State Street in draft form, allowing sufficient time for review by State
Street and its counsel prior to any deadline for printing.
10. In the event of a reorganization of the Fund through a merger,
consolidation, sale of assets or other reorganization, State Street, at the
request of the Fund, shall act as Custodian for shares of any investment company
or other company obtained in any such reorganization by the Fund for
distribution to those Fund shareholders whose shares are represented by
certificates. The Fund shall give notice to each such shareholder of his right
to exchange his Fund shares represented by certificates for shares held by the
Custodian upon surrender to the Custodian of his certificates representing such
Fund shares properly endorsed and in proper form for transfer. Upon the
surrender of such Fund certificates State Street will issue a certificate or
certificates to the surrendering shareholder for an appropriate number of shares
held by State Street, unless such shareholder establishes an Open Account Plan
or other similar account at the time in which case such shares will be credited
to his or her account. State Street shall not be required to issue certificates
for any fractional shares held by it. Instead, fractional interests in such
shares shall be distributed to the shareholder in cash at their then current
market value or, if the fractional share represents an interest in an investment
company, it shall be redeemed by State Street at the then current redemption
price for such shares and the proceeds of such redemption shall be distributed
to such shareholder in cash. The Custodian shall not release to any shareholder
any such shares held by it until such shareholder has properly surrendered for
exchange his or her Fund shares represented by certificates.
11. This Agreement is executed and delivered in the Commonwealth of
Massachusetts and shall be subject to and be construed in accordance with the
laws of said Commonwealth.
12. Notices and other writings delivered or mailed postage prepaid to
the Fund and to the Manager, 99 High Street, 32nd Floor, Boston, Massachusetts
02110 or to State Street at 225 Franklin Street, Boston, Massachusetts 02110 or
to such other address as the Fund, the Manager or State Street may hereafter
specify, shall be deemed to have been properly delivered or given hereunder to
the respective address.
13. It is understood and is expressly stipulated that neither the
holders of shares in the Fund nor its board of trustees, officers or employees
shall be personally liable hereunder, but only the assets of the Fund shall be
bound.
14. This Agreement shall be binding on and shall inure to the benefit
of the parties here to and their respective successors or assigns.
15. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by a duly authorized
officer as of the day and year first above written.
KEYSTONE TAX FREE FUND
By:/s/ illegible
----------------------
President
THE MASSACHUSETTS COMPANIES, INC.
By:/s/ illegible
----------------------
Executive Vice President
STATE STREET BANK AND TRUST COMPANY
By:/s/ J.R. Towers
----------------------
Vice President
#10160634
<PAGE>
SCHEDULE A
Fee Schedule
I. Annual Fee
$6,000
II. Out-of-Pocket Expenses
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include the
following:
Telephone
Postage and insurance
Courier service
Legal fees
Supplies related to Fund records
Duplicating
Transfer fees
Sub-Custodian charges
Wire Service ($2.00 in or out)
III. Additional Services
Any modifications, innovations, improvements or other changes made by
State Street in the services and reports which it provides to other
customers receiving its custodial services without additional charges
or fees shall be provided to the Fund at its request for no additional
charge or fee.
<PAGE>
SCHEDULE B
I. Operating Plan - Fund Custodian Services
1. Page 1
(a) Trade instructions by tape input compatible with the
SPARK system will not be given.
(b) System 34 terminals will not be provided for trade
input.
2. Page 2
(a) Distributions will be charged against the custodian
account and credited to the disbursement account on the
payable date.
(b) Reports - improved or new SPARK Reports will be made
available to the Fund at its request for no additional
cost.
II. Fund Custodian Services
A. Page 1
(1) The Fund will receive Custody and Full Accounting
Services.
B. Page 2
(1) Polaris Fund Inc. is now Keystone International Fund
Inc.
III. I. Custodian Reports
A. Page 1
(2) Analytics - Spark information reports - the Funds will
receive none of these.
IV. KM - SSB Reports Comparison
A. Page 1 - MASSCO Report
(1) (9) To be prepared for Keystone Tax Free Fund
(Massachusetts Fund for Tax Exempt Income) rather than
Master Reserves Trust (MRT).
(2) (12) To be prepared for all Funds.
(3) (13) Trade Settlement Authorizations and all other
reports as provided to the Keystone Funds will be
provided MassCo Funds.
(4) (26) Initial instructions in memo from Mr. Joseph Naples
attached hereto and incorporated herein by reference.
Instructions may be changed from time to time by proper
instructions.
(5) (30) Letter to be supplied by Bradford Trust Company.
(6) (31) Report to be supplied by Bradford Trust Company.
B. Keystone Reports
(1) (3) Information to be supplied by Open Order System.
(2) (16) Will be prepared manually by State Street.
(3) (18) To be prepared by State Street.
(4) (30) New SPARK Report to be provided the Funds.
(5) (31) Pricing Quotes for foreign issues, restricted
securities and private placements not otherwise
available to State Street to be supplied by the Funds.
(6) (46) KIMCO Reports unnecessary.
(7) (58) State Street to prepare manually.
(8) (57) New SPARK Report to be provided the Funds.
(9) (70) New SPARK Report to be provided the Funds.
(10) (73) New SPARK Report to be provided the Funds.
(11) (74) New SPARK Report to be provided the Funds.
(12) (75) State Street to provide weekly report of fails for
each Fund.
(13) All new SPARK reports must be reviewed and accepted by
the Funds before they will be considered to comply with
State Street's Custodian, Portfolio Accounting and
Recordskeeping Agreements with the Funds.
IV. Responses
I. Fund Custodian Services
(a) Page 2
Checkwriting privilege is $.35 per check - charged only
for American Liquid Trust.
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Keystone Tax Free Fund
We consent to the use of our report dated February 2, 1996 included herein and
to the references to our firm under the captions "FINANCIAL HIGHLIGHTS" in the
prospectus and "ADDITIONAL INFORMATION" in the statement of additional
information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
April 3, 1996
<PAGE>
EXHIBIT 99.15
APPENDIX A
DISTRIBUTION PLAN OF KEYSTONE TAX FREE FUND
Section 1. Keystone Tax Free Fund (the "Fund") may act as the distributor of
securities of which it is the issuer, pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "Act") according to the terms of this
Distribution Plan (the "Plan").
Section 2. Amounts, not exceeding in the aggregate a maximum amount equal to
.3125% of the averages of the daily net asset values of the Fund during each
fiscal quarter of the Fund elapsed after the inception of the Plan (i.e., the
first time that shares of the Fund are generally offered to the public at a
price equal to their net asset value) may be paid by the Fund to the Distributor
at any time after the inception of the Plan in order: (i) to pay to the
Distributor commissions in respect of shares of the Fund previously sold at any
time after the inception of the Plan, all or any part of which may be or may
have been reallowed or otherwise paid to others by the Distributor in respect of
or in furtherance of sales of shares of the Fund after the inception of the
Plan; and (ii) to enable the Distributor to pay or to have paid to others who
sell Fund shares a maintenance or other fee, at such intervals as the
Distributor may determine, in respect of Fund shares previously sold by any such
others at any time after the inception of the Plan and remaining outstanding
during the period in respect of which such fee is or has been paid.
Section 3. This Plan shall not take effect until it has been approved by a
vote of at least a majority (as defined in the Act) of the outstanding shares of
the Fund.
Section 4. This Plan shall not take effect until it has been approved
together with any related agreements of the Fund by votes of the majority of
both (a) the Board of Directors of the Fund and (b) those independent Directors
of the Fund who have no direct or indirect financial interest in the operation
of this Plan or any, agreements of the Fund or any other person related to this
Plan (the "Rule 12b-1 Directors"), cast in person at a meeting called for the
purpose of voting on this Plan or such agreements.
Section 5. Unless sooner terminated pursuant to Section 8, this Plan shall
continue in effect for a period of one year from the date it takes effect and
thereafter shall continue in effect so long as such continuance is specifically
approved at least annually in the manner provided for approval of this Plan in
Section 4.
Section 6. Any person authorized to direct the disposition of monies paid or
payable by the Fund pursuant to this Plan or any related agreement shall provide
to the Fund's Board and the Board shall review at least quarterly a written
report of the amounts so expended and the purposes for which such expenditures
were made.
Section 7. This Plan may be terminated at any time by vote of a majority of
the Rule 12b-1 Directors, or by vote of a majority of the Fund's outstanding
shares.
Section 8. Any agreement of the Fund related to this Plan shall be in
writing, and shall provide:
A. That such agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Rule 12b-1 Directors or by a vote of
a majority of the Fund's outstanding shares on not more than sixty days
written notice to any other party to the agreement; and
B. That such agreement shall terminate automatically in the event of its
assignment.
Section 9. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in Section 2 hereof unless such amendment is
approved in the manner provided in Section 3 hereof and no material amendment to
the Plan shall be made unless approved in the manner provided for in Section 4
hereof.
<PAGE>
EXHIBIT 99.16
<TABLE>
<CAPTION>
KTFF MTD YTD ONE YEAR THREE YEAR THREE YEAR
29-Dec-95 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
with cdsc N/A 13.61% 13.61% 19.14% 6.01%
W/O CDSC 1.05% 16.61% 16.61% 20.12% 6.30%
Beg dates 30-Nov-95 30-Dec-94 30-Dec-94 31-Dec-92 31-Dec-92
Beg Value (no load) 39,122 33,902 33,902 32,914 32,914
End Value (W/O CDSC) 39,534 39,534 39,534 39,534 39,534
End Value (with cdsc) 38,517 38,517 39,213 39,213
beg nav 7.81 7.10 7.10 8.04 8.04
end nav 7.86 7.86 7.86 7.86 7.86
shares originally purhased 5,009.19 4,774.92 4,774.92 4,093.74 4,093.74
TIME 3
<CAPTION>
KTFF FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
29-Dec-95 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
with cdsc 43.13% 7.44% 118.15% 8.11%
W/O CDSC 43.13% 7.44% 118.15% 8.11%
Beg dates 31-Dec-90 31-Dec-90 31-Dec-85 31-Dec-85
Beg Value (no load) 27,621 27,621 18,122 18,122
End Value (W/O CDSC) 39,534 39,534 39,534 39,534
End Value (with cdsc) 39,534 39534.403248 39,534 39534.403248
beg nav 7.90 7.9 8.32 8.32
end nav 7.86 7.86 7.86 7.86
shares originally purhased 3,496.37 3,496.37 2,178.17 2,178.17
TIME 5 10
INCEPTION DATE 31-Mar-81
KTFF
29-Dec-95
</TABLE>
<PAGE>
<TABLE>
FUND #: 5006 SEC STANDARDIZED ADVERTISING YIELD
FUND NAME: KEYSTONE TAX FREE
PRICING DAT 26-Dec-95
=========== TOTAL INCOME FOR PERIOD 5,925,156.85
TOTAL EXPENSES FOR PERIOD 945,388.20
30 DAY YTM 5.00074% AVERAGE SHARES OUTSTANDING 154,196,196.476
=========== LAST PRICE DURING PERIOD 7.83
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRICE OID MORTGAGE PAYDOWN GAIN/LOSS ST FIXED ST VAR LONG TERM TOTAL 12B-1 & SER.
DATE INCOME INCOME ADJ ADJ INCOME INCOME INCOME INCOME EXPENSES
TOTALS 370,171 0 0 0 74,624.78 0 5,480,360.61 5,925,156.85 337,234.82
0.37525% 0.00000% 0.00000% 0.00000% 0.07569% 0.00000% 5.49733% -0.29534%
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 27-Nov-95 12,315.01 3,952.26 183,041.62 199,308.89 8,097.75
2 28-Nov-95 12,317.00 3,826.65 183,311.61 199,455.26 8,097.75
3 29-Nov-95 12,314.99 3,388.36 183,649.39 199,352.74 17,620.08
4 30-Nov-95 12,315.62 3,080.61 183,286.64 198,682.87 19,294.32
5 01-Dec-95 12,314.48 2,661.19 182,669.10 197,644.77 9,829.39
6 02-Dec-95 12,314.48 2,661.19 182,669.10 197,644.77 9,829.39
7 03-Dec-95 12,314.48 2,661.19 182,669.10 197,644.77 9,829.39
8 04-Dec-95 12,319.66 2,688.81 182,643.41 197,651.88 21,024.06
9 05-Dec-95 12,327.94 2,343.71 182,677.74 197,349.39 10,456.98
10 06-Dec-95 12,324.08 2,337.66 182,499.01 197,160.75 16,157.92
11 07-Dec-95 12,333.34 2,397.60 182,727.85 197,458.79 10,615.77
12 08-Dec-95 12,329.24 2,629.71 182,821.25 197,780.20 9,874.05
13 09-Dec-95 12,329.24 2,629.71 182,821.25 197,780.20 9,874.05
14 10-Dec-95 12,329.24 2,629.71 182,821.25 197,780.20 9,874.05
15 11-Dec-95 12,335.15 2,642.57 182,906.70 197,884.42 9,654.40
16 12-Dec-95 12,341.28 2,471.55 183,479.47 198,292.30 13,947.00
17 13-Dec-95 12,345.08 2,538.96 184,215.63 199,099.67 11,085.85
18 14-Dec-95 12,349.36 1,265.07 183,626.82 197,241.25 10,992.52
19 15-Dec-95 12,353.25 1,288.06 182,842.67 196,483.98 8,628.67
20 16-Dec-95 12,353.25 1,288.06 182,842.67 196,483.98 8,628.67
21 17-Dec-95 12,353.25 1,288.06 182,842.67 196,483.98 8,628.67
22 18-Dec-95 12,362.44 1,125.77 183,202.55 196,690.76 7,369.96
23 19-Dec-95 12,357.73 1,418.31 183,153.15 196,929.19 10,042.16
24 20-Dec-95 12,357.65 1,628.04 182,600.01 196,585.70 10,042.16
25 21-Dec-95 12,358.18 2,440.11 181,595.91 196,394.20 19,499.68
26 22-Dec-95 12,360.22 3,073.57 181,394.93 196,828.72 9,705.48
27 23-Dec-95 12,360.22 3,073.57 181,394.93 196,828.72 9,705.48
28 24-Dec-95 12,360.22 3,073.57 181,394.93 196,828.72 9,705.48
29 25-Dec-95 12,360.22 3,073.57 181,394.93 196,828.72 9,705.48
30 26-Dec-95 12,365.16 3,047.60 181,164.32 196,577.08 9,418.21
<CAPTION>
- ----------------------------------------------------------------------- 30 DAY 30 DAY 30 DAY
PRICE DAILY DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
DATE CDSC EXPENSES SHARES PRICE INCOME EXPENSES SHARES
TOTALS (46,291.36) 964,613.90
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 27-Nov-95 (1,430.27) 36,818.90 154,912,080.552 7.75 199,308.89 36,818.90 154,912,080.55
2 28-Nov-95 0.00 38,249.17 154,824,157.110 7.75 398,764.15 75,068.07 309,736,237.66
3 29-Nov-95 (1,568.62) 38,120.55 154,782,631.533 7.77 598,116.89 113,188.62 464,518,869.20
4 30-Nov-95 (1,921.67) 31,373.52 154,665,266.284 7.81 796,799.76 144,562.14 619,184,135.48
5 01-Dec-95 0.00 32,143.41 154,835,164.960 7.82 994,444.53 176,705.55 774,019,300.44
6 02-Dec-95 0.00 32,143.41 154,835,164.960 7.82 1,192,089.29 208,848.96 928,854,465.40
7 03-Dec-95 0.00 32,143.41 154,835,164.960 7.82 1,389,734.06 240,992.37 1,083,689,630.36
8 04-Dec-95 (2,400.25) 40,714.48 154,838,495.470 7.85 1,587,385.94 281,706.85 1,238,528,125.83
9 05-Dec-95 (1,382.68) 31,361.07 154,800,250.929 7.86 1,784,735.33 313,067.92 1,393,328,376.76
10 06-Dec-95 (506.45) 37,942.04 154,789,414.567 7.88 1,981,896.08 351,009.96 1,548,117,791.33
11 07-Dec-95 0.00 32,926.49 154,722,065.816 7.86 2,179,354.87 383,936.45 1,702,839,857.14
12 08-Dec-95 (651.10) 28,888.06 154,658,459.753 7.86 2,377,135.07 412,824.51 1,857,498,316.89
13 09-Dec-95 (651.10) 28,888.06 154,658,459.753 7.86 2,574,915.26 441,712.58 2,012,156,776.65
14 10-Dec-95 (651.10) 28,888.06 154,658,459.753 7.86 2,772,695.46 470,600.64 2,166,815,236.40
15 11-Dec-95 (1,923.75) 37,882.48 154,523,880.328 7.86 2,970,579.88 508,483.12 2,321,339,116.73
16 12-Dec-95 (1,838.92) 34,380.27 154,293,407.168 7.82 3,168,872.18 542,863.39 2,475,632,523.90
17 13-Dec-95 (5,910.32) 27,393.69 153,504,357.083 7.81 3,367,971.85 570,257.08 2,629,136,880.98
18 14-Dec-95 (1,577.15) 31,597.26 153,421,213.786 7.80 3,565,213.10 601,854.34 2,782,558,094.77
19 15-Dec-95 (112.59) 28,035.34 153,361,140.037 7.79 3,761,697.08 629,889.68 2,935,919,234.80
20 16-Dec-95 (112.59) 28,035.34 153,361,140.037 7.79 3,958,181.05 657,925.01 3,089,280,374.84
21 17-Dec-95 (112.59) 28,035.34 153,361,140.037 7.79 4,154,665.03 685,960.35 3,242,641,514.88
22 18-Dec-95 (11,680.14) 25,690.14 153,289,835.484 7.75 4,351,355.79 711,650.49 3,395,931,350.36
23 19-Dec-95 (1,222.14) 30,889.48 153,209,279.744 7.74 4,548,284.98 742,539.97 3,549,140,630.10
24 20-Dec-95 0.00 32,111.62 153,935,534.064 7.78 4,744,870.68 774,651.59 3,703,076,164.17
25 21-Dec-95 (1,608.58) 40,031.72 153,869,524.848 7.79 4,941,264.88 814,683.31 3,856,945,689.02
26 22-Dec-95 (1,769.44) 27,131.51 153,806,917.099 7.82 5,138,093.60 841,814.82 4,010,752,606.12
27 23-Dec-95 (1,769.44) 27,131.51 153,806,917.099 7.82 5,334,922.33 868,946.33 4,164,559,523.21
28 24-Dec-95 (1,769.44) 27,131.51 153,806,917.099 7.82 5,531,751.05 896,077.83 4,318,366,440.31
29 25-Dec-95 (1,769.44) 27,131.51 153,806,917.099 7.82 5,728,579.77 923,209.34 4,472,173,357.41
30 26-Dec-95 (1,951.59) 41,404.56 153,712,536.869 7.83 5,925,156.85 964,613.90 4,625,885,894.28
</TABLE>
<PAGE>
CALCULATION OF FEDERAL TAX EQUIVALENT YIELD
Fund: Keystone Tax Free Fund
Calculation Period: 30 days ended December 31, 1995
Yield: 5.00%
The Keystone Tax Free Fund intends to advertise tax equivalent yield
based on the yield of the Fund over a 30-day period. The calculation includes
the tax equivalent yield from an investment which is exempt from federal taxes.
Calculation below assumes:
Joint return, 31% tax bracket
Method:
Subtract federal rate from 1 and divide yield by the result:
1.00
0.31
----
0.69
30 day yield 5.00% = 7.25% Federal Tax Equivalent Yield
-----
0.69
EXHIBIT 99.19
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief
Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser
or Manager and registering from time to time the shares of such companies, and
generally to do all such things in my name and in my behalf to enable such
investment companies to comply with the provisions of the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
my said attorneys to any and all registration statements and amendments thereto.
/s/ George S. Bissell
George S. Bissell
Director/Trustee,
Chairman of the Board
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chief Executive Officer and for
which Keystone Custodian Funds, Inc. serves as Adviser or Manager and
registering from time to time the shares of such companies, and generally to do
all such things in my name and in my behalf to enable such investment companies
to comply with the provisions of the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and all requirements and regulations
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by my said attorneys to any and all
registration statements and amendments thereto.
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Director/Trustee,
President and Chief
Executive Officer
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Rosemary D. Van Antwerp, Jean S.
Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T. Murphy, each of
them singly, my true and lawful attorneys, with full power to them and each of
them to sign for me and in my name in the capacity indicated below any and all
registration statements, including, but not limited to, Forms N-8A, N-8B-1, S-5,
N-1 and N-1A, as amended from time to time, and any and all amendments thereto
to be filed with the Securities and Exchange Commission for the purpose of
registering from time to time all investment companies of which I am now or
hereafter a Director, Trustee or officer and for which Keystone Investment
Management Company serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and in my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ J. Kevin Kenely
J. Kevin Kenely
Treasurer
Dated: December 15, 1995
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Frederick Amling
Frederick Amling
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles A. Austin III
Charles A. Austin III
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Edwin D. Campbell
Edwin D. Campbell
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles F. Chapin
Charles F. Chapin
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ K. Dun Gifford
K. Dun Gifford
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Leroy Keith, Jr.
Leroy Keith, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ F. Ray Keyser, Jr.
F. Ray Keyser, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ David M. Richardson
David M. Richardson
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Richard J. Shima
Richard J. Shima
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Andrew J. Simons
Andrew J. Simons
Director/Trustee
Dated: December 14, 1994
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> KEYSTONE TAX FREE FUND CLASS A
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1,111,572,150
<INVESTMENTS-AT-VALUE> 1,199,160,324
<RECEIVABLES> 25,644,141
<ASSETS-OTHER> 326,595
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,225,131,060
<PAYABLE-FOR-SECURITIES> 14,001,422
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,661,596
<TOTAL-LIABILITIES> 20,663,018
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,147,477,232
<SHARES-COMMON-STOCK> 153,295,044
<SHARES-COMMON-PRIOR> 168,806,043
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1,663,086)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (28,934,278)
<ACCUM-APPREC-OR-DEPREC> 87,588,174
<NET-ASSETS> 1,204,468,042
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 77,382,761
<OTHER-INCOME> 0
<EXPENSES-NET> (11,461,089)
<NET-INVESTMENT-INCOME> 65,921,672
<REALIZED-GAINS-CURRENT> 8,930,765
<APPREC-INCREASE-CURRENT> 113,250,664
<NET-CHANGE-FROM-OPS> 188,103,101
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (63,827,615)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,669,831
<NUMBER-OF-SHARES-REDEEMED> (37,618,182)
<SHARES-REINVESTED> 4,437,352
<NET-CHANGE-IN-ASSETS> 6,741,146
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> (3,916,731)
<OVERDIST-NET-GAINS-PRIOR> (37,649,351)
<GROSS-ADVISORY-FEES> (5,327,202)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (11,609,240)
<AVERAGE-NET-ASSETS> 1,218,465,926
<PER-SHARE-NAV-BEGIN> 7.10
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> 0.74
<PER-SHARE-DIVIDEND> (0.39)
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
