KEYSTONE TEXAS TAX FREE FUND
A Portfolio of
KEYSTONE STATE TAX FREE FUND
200 Berkeley Street
Boston, Massachusetts 02116
Telephone Number (800) 343-2898 or (617) 621-6100
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on April 30, 1996
To the Shareholders:
Notice is hereby given that a special meeting of the shareholders of
the Keystone Texas Tax Free Fund (the "Texas Fund"), a separate series or
portfolio of Keystone State Tax Free Fund, will be held at the offices of
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts, on the 26th Floor, on Tuesday, April 30, 1996 at 3:00 p.m.
Eastern time for the following purposes:
1. To approve an Agreement and Plan of Reorganization whereby Keystone
Tax Free Income Fund ("KTFIF") (a) will acquire substantially all of
the assets of the Texas Fund in exchange for shares of KTFIF; and (b)
will assume the liabilities of the Texas Fund, all as substantially
described in the accompanying Prospectus/Proxy Statement.
2. To transact such other business as may properly come before the
meeting and any adjournments thereof.
Shareholders of record at the close of business as of March 4, 1996 are
entitled to notice of and to vote at this meeting and any adjournments thereof.
By order of the Board of Trustees,
Rosemary D. Van Antwerp
Secretary
March 8, 1996
Please complete, date and sign your proxy - NOW - and mail it TODAY - in the
stamped envelope enclosed for your convenience. In order to avoid unnecessary
expense or delay, we ask your cooperation in mailing in your proxy. Thank you.
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PROSPECTUS/PROXY STATEMENT
March 4, 1996
Acquisition of the Assets of
KEYSTONE TEXAS TAX FREE FUND
A Portfolio of
KEYSTONE STATE TAX FREE FUND
200 Berkeley Street, Boston, Massachusetts 02116
Telephone Number (800) 343-2898 or (617) 621-6100
By and in exchange for Shares of
KEYSTONE TAX FREE INCOME FUND
200 Berkeley Street, Boston, Massachusetts 02116
Telephone Number (800) 343-2898 or (617) 621-6100
This Prospectus/Proxy Statement is being furnished to the shareholders
of Keystone Texas Tax Free Fund (the "Texas Fund"), a separate series or
portfolio of Keystone State Tax Free Fund ("KSTFF"), in connection with the
proposed tax-free reorganization of the Texas Fund into Keystone Tax Free Income
Fund ("KTFIF"), whereby KTFIF will (i) acquire all of the assets of the Texas
Fund in exchange for Class A, B, and C Shares (as said term is hereinafter
defined) of KTFIF; and (ii) assume the liabilities of the Texas Fund.
Immediately following this transfer, Class A, B, and C Shares of KTFIF will be
distributed to the Class A, B, and C shareholders of the Texas Fund,
respectively, in place of their Shares of the Texas Fund. The Texas Fund will
then be terminated and its Shares cancelled. As a result of the proposed
transaction, each class of shareholder of the Texas Fund will receive that
number of full and fractional Shares of the corresponding class of Shares of
KTFIF having a total net asset value, on the effective date of the proposed
transaction, equal to the total net asset value of that shareholder's Shares in
the Texas Fund.
KTFIF is an open-end, diversified management investment company. KSTFF
is a open-end, non-diversified management investment company. The Texas Fund is
a non-diversified portfolio of KSTFF. Keystone Investment Management Company
("Keystone") serves as investment adviser to both Funds. Keystone Management,
Inc., a wholly-owned subsidiary of Keystone, provides certain administrative and
management services to KTFIF.
Both Funds seek the highest possible current income exempt from federal
income taxes while preserving capital. KTFIF pursues this objective by investing
primarily in a relatively diverse pool
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<PAGE>
of municipal bonds, consisting of debt securities issued by or on behalf of a
number of different states, state agencies, or instrumentalities. In contrast,
the Texas Fund pursues the same objective by investing primarily in municipal
obligations of the State of Texas, its political subdivisions, agencies, and
instrumentalities. Texas does not impose an income tax on individuals.
Accordingly, unlike shareholders in other state municipal bond mutual funds
(such as mutual funds investing primarily in California or New York municipal
obligations), who are generally able to exclude their mutual fund earnings from
their state income taxes, shareholders in the Texas Fund have enjoyed no such
benefit. Consequently, the exchange of shares in the Texas Fund for shares in
KTFIF will not have any impact on the taxes an individual shareholder pays to
the State of Texas.
This Prospectus/Proxy Statement sets forth concisely the information
about KTFIF that a prospective investor should know before investing and should
be retained for future reference. This Prospectus/Proxy Statement is accompanied
by the Prospectus of KTFIF dated March 31, 1995, as supplemented June 1, 1995,
which has been filed with the Securities and Exchange Commission (the
"Commission") and is incorporated by reference herein. Additional information
about KTFIF is contained in KTFIF's Statement of Additional Information ("SAI")
dated March 31, 1995, as supplemented June 1, 1995, and in an SAI dated March 4,
1996 relating specifically to the proposed transaction, each of which has been
filed with the Commission and is incorporated by reference herein. KTFIF's most
recent Annual Report as filed with the Commission is also incorporated by
reference herein.
A Prospectus and SAI containing additional information about the Texas
Fund, each dated May 31, 1995, as supplemented June 1, 1995, have been filed
with the Commission and are incorporated by reference herein.
Copies of any of the Prospectuses, SAIs, or Reports referred to above
may be obtained without charge by writing to KTFIF at the address listed above
or by calling the telephone numbers listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<PAGE>
KEYSTONE TEXAS TAX FREE FUND
A Portfolio of
KEYSTONE STATE TAX FREE FUND
200 Berkeley Street
Boston, Massachusetts 02116
Special Meeting of Shareholders
To be Held April 30, 1996
This Prospectus/Proxy Statement is furnished to shareholders of
Keystone Texas Tax Free Fund (the "Texas Fund"), a separate series or portfolio
of Keystone State Tax Free Fund ("KSTFF"), in connection with the solicitation
of proxies by the Board of Trustees of KSTFF to be used at a special meeting of
the Texas Fund's shareholders (the "Meeting") to be held at the offices of
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts, on the 26th Floor, on Tuesday, April 30, 1996, at 3:00 p.m.
Eastern time. This document also serves as a prospectus of Keystone Tax Free
Income Fund ("KTFIF") and covers the issuance of KTFIF (as said term is
hereinafter defined) Shares in connection with the proposed transaction.
For any proxy that is properly executed and returned in time to be
voted at the Meeting, the Texas Fund Shares represented thereby will be voted in
accordance with the instructions thereon. In the absence of such instructions,
the proxy will be voted in favor of the approval of the Agreement and Plan of
Reorganization (the "Reorganization Agreement") and the transaction described
therein, whereby KTFIF will (i) acquire all of the assets of the Texas Fund in
exchange for Shares of KTFIF; and (ii) assume the liabilities of the Texas Fund.
The individuals duly appointed as Proxies ("Proxies") may, in their
discretion, vote upon such other matters as may come before the Meeting or any
adjournments thereof. When voting proxies on a proposal to adjourn, the Proxies
will consider what is in the best interest of all shareholders at that time.
Any shareholder may revoke his or her proxy at any time before it is
voted by delivering written notice of revocation or by executing and delivering
a later-dated proxy to Rosemary D. Van Antwerp, Keystone Investment Management
Company, 200 Berkeley Street, Boston, Massachusetts 02116, or by appearing in
person at the Meeting to vote his or her Shares.
Each Texas Fund shareholder will be entitled to one vote for each Share
and a fractional vote for each fractional Share held by such shareholder.
Shareholders of the Texas Fund of record at the close of business on March 4,
1996 (the "Record Date") will be entitled to notice of and to vote at the
Meeting or any adjournment
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thereof. On the Record Date, there were 529,362 Shares of the Texas Fund
outstanding.
Proxy material is expected to be mailed to the Texas Fund shareholders
on or about March 11, 1996.
VOTE REQUIRED
Approval of the Reorganization Agreement will require the affirmative
vote of the holders of (i) 67% of the Shares represented at the Meeting, if the
holders of more than 50% of the outstanding Shares of the Texas Fund are
represented; or (ii) more than 50% of the Texas Fund's outstanding Shares,
whichever is less. Shareholders of KTFIF will not be voting on the approval of
the Reorganization Agreement since their approval is not required.
Abstentions and broker "non-votes" will be counted for purposes of
determining a quorum, but will not be counted in determining approval of the
Reorganization Agreement. Broker "non-votes" are proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owner or other persons entitled to vote shares on a particular matter
with respect to which the brokers or nominees do not have discretionary power.
IMPORTANT DEFINITIONS
"12b-1 Plan" A distribution plan
adopted pursuant to Rule
12b-1 under the Investment
Company Act of 1940, as
amended.
"1933 Act" The Securities Act of 1933, as
amended.
"1934 Act" The Securities Exchange Act of 1934,
as amended.
"1940 Act" The Investment Company Act of 1940,
as amended.
"Effective Date" The effective date of the
Reorganization as contemplated by
the Reorganization Agreement.
"Independent Trustees" Those members of
the Board of Trustees of
KSTFF or KTFIF who are not
"interested persons" of
such Funds, as said term is
defined in the 1940 Act.
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"KSTFF" Keystone State Tax Free Fund, 200
Berkeley Street, Boston,
Massachusetts 02116
"KTFIF" Keystone Tax Free Income Fund, 200
Berkeley Street, Boston,
Massachusetts 02116.
"Keystone" Keystone Investment Management
Company (formerly named Keystone
Custodian Funds, Inc.), 200 Berkeley
Street, Boston, Massachusetts 02116,
a wholly-owned subsidiary of
Keystone Investments, Inc. Keystone
is the investment adviser of KSTFF
and KTFIF and of each of the other
Keystone Investments Funds.
"Keystone America Fund A group of 16 mutual funds with
Family" different investment objectives and
policies that hold
themselves out to investors
as being related for
purposes of investments,
investor services, and
exchange privileges, including KSTFF
and KTFIF.
"Keystone Investments" Keystone Investments, Inc. (formerly
named Keystone Group, Inc.), 200
Berkeley Street, Boston,
Massachusetts 02116. Keystone
Investments owns all of the
outstanding shares of Keystone.
Keystone Investments is
predominantly owned by an investor
group composed of current and former
members of management and certain
employees of Keystone Investments
and its affiliates.
"Keystone Investments Funds" A family of mutual funds with
varying investment objectives and
policies, managed, advised, or
administered by Keystone and/or an
affiliate of Keystone. Currently,
there are more than 30 Keystone
Investments Funds, including KSTFF
and KTFIF.
"Keystone Management" Keystone Management, Inc., 200
Berkeley Street, Boston,
Massachusetts 02116, a wholly-owned
subsidiary of Keystone. Keystone
Management is the investment manager
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<PAGE>
of 20 Keystone Investments Funds,
including KTFIF.
"KIRC" Keystone Investor Resource
Center, Inc., 101 Main Street,
Cambridge, Massachusetts 02142, a
wholly-owned subsidiary of Keystone.
KIRC is the transfer agent and
dividend disbursing agent for each
of the Keystone Investments Funds,
including KSTFF and KTFIF.
"Meeting" The Special Meeting of the Texas
Fund shareholders to be held on
Tuesday, April 30, 1996.
"Principal Underwriter" Keystone Investment Distributors
Company (formerly named Keystone
Distributors, Inc.), 200 Berkeley
Street, Boston, Massachusetts 02116,
a wholly-owned subsidiary of
Keystone. The Principal Underwriter
is the principal underwriter of
KSTFF and KTFIF and of each of the
other Keystone Investments Funds.
"Reorganization" The proposed transaction as
contemplated by the Reorganization
Agreement.
"Reorganization Agreement" The Agreement and Plan of
Reorganization between KSTFF and
KTFIF, pursuant to which KTFIF will acquire
all of the assets of the Texas Fund
in exchange for Shares of KTFIF and
will assume the liabilities of the
Texas Fund.
"Shares" The Class A, B, and C
shares of beneficial
interest of KTFIF and the
Texas Fund as well as
shares of the other
Keystone Investments Funds.
"Texas Fund" Keystone Texas Tax Free Fund, a
separate series or portfolio of
KSTFF, 200 Berkeley Street, Boston,
Massachusetts 02116.
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SYNOPSIS
The following is a summary of certain information contained in or
incorporated by reference in this Prospectus/Proxy Statement. This summary is
not intended to be a complete statement of all material features of the
Reorganization and is qualified in its entirety by reference to the full text of
this Prospectus/Proxy Statement and the documents referred to herein.
DESCRIPTION OF THE PROPOSED TRANSACTION
The Board of Trustees of each Fund, including each Fund's Independent
Trustees, have unanimously approved the Reorganization Agreement, which provides
for the transfer of all of the assets of the Texas Fund to KTFIF in exchange for
Shares of KTFIF as well as the assumption of the Texas Fund's liabilities by
KTFIF.
The aggregate net asset value of KTFIF Shares to be issued in exchange
for the assets of the Texas Fund will be equal to the net asset value of the
Texas Fund on the Effective Date. Immediately following the transfer of assets
and liabilities of the Texas Fund to KTFIF, Class A, B, and C Shares of KTFIF
will be distributed to the respective Class A, B, and C shareholders of the
Texas Fund, and the Texas Fund will be dissolved. The Texas Fund Shares will be
cancelled, and the Texas Fund will be terminated. Each shareholder in the Texas
Fund will receive that percentage of the total number of the corresponding class
of KTFIF Shares received by the Texas Fund equal in amount to that shareholder's
percentage interest in the Texas Fund on the Effective Date. For example, Class
A shareholders of the Texas Fund will receive Class A shares of KTFIF.
The Reorganization will effectively combine the two Funds into a single
fund offering three classes of Shares.
For the reasons set forth below in "The Reorganization Reasons for the
Proposed Transaction," the Board of Trustees of KSTFF, including the Independent
Trustees, has concluded that the Reorganization would be in the best interests
of the shareholders of the Texas Fund and has further determined that the
interests of the existing shareholders of the Texas Fund will not be diluted as
a result of the Reorganization.
Accordingly, the Board of KSTFF recommends A VOTE FOR the approval of
the Reorganization.
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<PAGE>
COMPARISON OF THE FUNDS
Summary of Fees and Expenses--Fee and Expense Tables
The following tables show the current shareholder transaction fees, the
annual operating expenses applicable to each Fund on an individual basis, and
the annual operating expenses for KTFIF on a pro forma basis after giving effect
to the Reorganization. The purpose of the KTFIF pro forma expense table is to
assist a shareholder in understanding the costs and expenses that he or she may
bear directly or in directly in KTFIF after giving effect to the Reorganization.
SHAREHOLDER TRANSACTION EXPENSES APPLICABLE
TO
KEYSTONE TAX FREE INCOME FUND
AND
KEYSTONE TEXAS TAX FREE FUND*
Class A Shares Class B Shares Class C Shares
Front End Back End Level
SHAREHOLDER TRANSACTION Load Option Load Option(1) Load Option
EXPENSES FOR EACH FUND
Sales Charge . . . . . 4.75%(2) None None
(as a percentage of
offering price)
Contingent Deferred
Sales Charge . . . . 0.00%(3) 5.00% in the first 1.00% in the
(as a percentage year declining to first year and
of the lesser of 1.00% in the sixth 0.00% thereafter
cost or market year and 0.00%
value of shares thereafter
redeemed)
Exchange Fee $10.00 $10.00 $10.00
(per exchange)(4)
1 Class B Shares purchased on or after June 1, 1995 convert tax free to
Class A Shares after eight years.
2 The sales charge applied to purchases of Class A Shares declines as the
amount invested increases.
3 Purchases of Class A Shares in the amount of $1,000,000 or more and/or
purchases made by certain qualifying retirement or other plans are not
subject to a sales charge, but may be subject to a contingent deferred
sales charge.
4 There is no fee for exchange orders received by a Fund directly from a
shareholder over the Keystone Automated Response Line.
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EXPENSE TABLES FOR
KEYSTONE TAX FREE INCOME FUND
AND
KEYSTONE TEXAS TAX FREE FUND*
Class A Class B Class C
Shares Shares Shares
ANNUAL FUND OPERATING EXPENSES
KTFIF(1)
(as a percentage of average
net assets)
Management Fees . . . . . . . 0.61% 0.61% 0.61%
12b-1 Fees . . . . . . . . . . 0.25% 1.00%(2) 1.00%(2)
Other Expenses . . . . . . . . 0.33% 0.35% 0.35%
----- ----- -----
Total Fund Operating Expenses 1.19% 1.96% 1.96%
===== ===== =====
Examples(3) 1 Year 3 Years 5 Years 10 Years
---- ------- ------- --------
You would pay the following
expenses on a $1,000
investment, assuming
(1) 5% annual return and
(2) redemption at the end
of each period:
Class A . . . . . . . $59 $83 $110 $185
Class B . . . . . . . $70 $92 $126 $209
Class C . . . . . . . $30 $62 $106 $229
You would pay the following
expenses on a $1,000
investment, assuming no
redemption at the end
of each period:
Class A . . . . . . . $59 $83 $110 $185
Class B . . . . . . . $20 $62 $106 $209
Class C . . . . . . . $20 $62 $106 $229
* Please see footnotes following pro forma fee table.
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ANNUAL FUND OPERATING EXPENSES
TEXAS FUND(1)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees . . . . . . . . . . . . 0.55% 0.55% 0.55%
12b-1 Fees . . . . . . . . . . . . . . . 0.15% 0.90%(2) 0.90%(2)
Other Expenses . . . . . . . . . . . . . 0.05% 0.05% 0.05%
----- ----- -----
Total Fund Operating Expenses . . . . . 0.75% 1.50% 1.50%
===== ===== =====
Examples(3) 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
You would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return
and (2) redemption at the end
of each period:
Class A . . . . . . . . . . $55 $70 $87 $136
Class B . . . . . . . . . . $65 $77 $102 $159
Class C . . . . . . . . . . $25 $47 $82 $179
You would pay the following
expenses on a $1,000 investment,
assuming no redemption at the
end of each period:
Class A . . . . . . . . . . $55 $70 $87 $136
Class B . . . . . . . . . . $15 $47 $82 $159
Class C . . . . . . . . . . $15 $47 $82 $179
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.
* Please see footnotes following pro forma fee table.
To summarize, for the fiscal year ended November 30, 1995, KTFIF's
Class A, B, and C Shares each paid 1.19%, 1.96%, and 1.96%, respectively, of
average daily net assets in expenses. After expense reimbursements made by
Keystone in connection with certain voluntary expense limitations, for the
fiscal year ended March 31, 1995, the Texas Fund's Class A, B, and C Shares each
paid 0.75%, 1.50%, and 1.50%, respectively, of average daily net assets in
expenses. Absent such voluntary expense limitations, expenses for the Texas
Fund's Class A, B, and C Shares would have been 2.57%, 3.36%, and 3.28%,
respectively .
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<PAGE>
PRO FORMA EXPENSE TABLE
FOR
KEYSTONE TAX FREE INCOME FUND
Class A Class B Class C
Shares Shares Shares
ANNUAL FUND OPERATING EXPENSES(1)
(as a percentage of average
net assets)
Management Fees . . . . . . . . 0.61% 0.61% 0.61%
12b-1 Fees . . . . . . . . . . . 0.25% 1.00%(2) 1.00%(2)
Other Expenses . . . . . . . . . 0.32% 0.32% 0.32%
----- ----- -----
Total Fund Operating Expenses . 1.18% 1.93% 1.93%
===== ===== =====
Examples(3) 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
You would pay the following
expenses on a $1,000
investment, assuming
(1) 5% annual return and
(2) redemption
at the end of each period:
Class A . . . . . . . . $59 $83 $109 $184
Class B . . . . . . . . $70 $91 $124 $206
Class C . . . . . . . . $30 $61 $104 $225
You would pay the following
expenses on a $1,000 investment,
assuming no redemption at the
end of each period:
Class A . . . . . . . . $59 $83 $109 $184
Class B . . . . . . . . $20 $61 $104 $206
Class C . . . . . . . . $20 $61 $104 $225
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 Expense ratios for KTFIF are for the Fund's fiscal year ended November
30, 1995. Expense ratios for the Texas Fund are for the Fund's fiscal
year ended March 31, 1995 after giving effect to the reimbursement by
Keystone of expenses in accordance with certain voluntary expense
limitations. Currently, Keystone has voluntarily limited expenses of
the Texas Fund's Class A, B, and C Shares to 0.75%, 1.50%, and 1.50%
(respectively) of average daily net assets of each such class. Keystone
is under no obligation to maintain these limits. Keystone currently
intends to continue the expense limits on a calendar month by month
basis. Keystone will periodically evaluate the foregoing expense limits
and may modify or terminate them in the future. Absent the voluntary
expense limits, expense ratios for the fiscal year ended March 31, 1995
for Texas Fund's Class A, B, and C Shares would have been 2.57%, 3.36%,
and 3.28%, respectively. The pro forma expense ratios for KTFIF after
giving effect to the Reorganization are estimated for the Fund's fiscal
year ending November 30, 1996. KTFIF Total Fund Operating Expenses
include indirectly paid expenses.
2 Long term shareholders may pay more than the equivalent of the maximum
front end sales charges permitted by the National Association of
Securities Dealers, Inc. ("NASD").
3 The Securities and Exchange Commission requires use of a 5% annual
return figure for purposes of this example. Actual return for a Fund
may be greater or less than 5%.
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Investment Advisory and Management Fees
Keystone serves as the investment adviser to both Funds. Keystone
Management serves as the investment manager to KTFIF only.
KTFIF Advisory Fees
Keystone Management serves as the investment manager to KTFIF. Pursuant
to its Investment Advisory Agreement with Keystone (the "Advisory Agreement"),
Keystone Management has delegated its investment management functions, except
for certain administrative and management services, to Keystone.
KTFIF pays Keystone Management for its services at the annual rate set
forth below:
Aggregate Net Asset
Value of the Shares
Management Fee Income of the Fund
2% of Gross Dividend and
Interest Income plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
computed as of the close of business each business day and paid or
accrued daily.
For the fiscal year ended November 30, 1995, KTFIF paid Keystone
Management fees of $919,802, which represented 0.61% of KTFIF's average daily
net assets.
Pursuant to the Advisory Agreement, Keystone receives an annual fee
representing 85% of the management fee received by Keystone Management from
KTFIF. For the fiscal year ended November 30, 1995, for services rendered to
KTFIF, Keystone Management paid Keystone $781,832.
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Texas Fund Advisory Fees
Keystone serves as the investment adviser to the Texas Fund. Pursuant
to an Investment Advisory and Management Agreement with KSTFF, Keystone provides
investment advisory and management services to the Texas Fund.
The Texas Fund pays Keystone a fee for its services at the annual rate
set forth below:
Aggregate Net Asset
Value of the Shares
Management Fee of the Fund
0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
computed as of the close of business each business day and paid
daily.
For the fiscal year ended March 31, 1995, the Texas Fund paid or
accrued to Keystone investment management and service fees of $25,402, which
represented 0.55% of the Texas Fund's average daily net assets.
The Funds' investment advisory and management fees are
separate from and do not include the costs of custody, transfer
agency, and other expenses. See "Other Significant Fees and
Expenses" below.
Other Significant Fees and Expenses
In addition to the investment advisory and management fees described
above, each Fund's principal expenses include, but are not limited to, (i)
expenses of its transfer agent (KIRC), custodian bank (State Street Bank and
Trust Company), and independent auditors (KPMG Peat Marwick LLP); (ii) expenses
under its 12b-1 Plans; (iii) fees of its Independent Trustees; (iv) fees payable
to government agencies; (v) expenses of preparing, printing, and mailing Fund
prospectuses, notices, reports, and proxy material; and (vi) certain
extraordinary expenses. In addition to such expenses, each Fund pays its
brokerage commissions, interest charges, and taxes.
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<PAGE>
Performance Data
The total returns for the Texas Fund's Class A, B, and C Shares for the
Fund's fiscal year ended March 31, 1995 were 5.66%, 5.01%, and 5.14%,
respectively. Total returns for KTFIF's Class A, B, and C Shares for the Fund's
fiscal year ended November 30, 1995 were 18.71%, 17.84%, and 17.84%,
respectively. The foregoing total returns exclude applicable sales charges.
Investment Objectives and Policies
The Funds have the same investment objective: each Fund seeks the
highest possible current income, exempt from federal income taxes, while
preserving capital. The Funds principally differ in that KTFIF, unlike the Texas
Fund, does not seek to achieve its investment objective by investing primarily
in Texas municipal bonds.
To achieve its investment objective, KTFIF generally invests in a
diverse portfolio of municipal bonds. More specifically, KTFIF invests
substantially all and, under ordinary circumstances, at least 80% of its assets
in federally tax-exempt obligations, including municipal bonds and notes and
tax-exempt commercial paper (municipal bonds), which are obligations issued by
or on behalf of states, territories, and possessions of the United States
("U.S."), the District of Columbia, and their political subdivisions, agencies,
and instrumentalities, the interest from which is, in the opinion of counsel to
the issuers of such bonds, exempt from federal income taxes.
To achieve the same investment objective, the Texas Fund generally
invests in Texas municipal bonds. More specifically, under ordinary
circumstances, the Texas Fund invests substantially all and at least 80% of its
assets in municipal obligations of the State of Texas that are exempt from
federal income taxes. Such securities include debt obligations of the State of
Texas and its political subdivisions, agencies, authorities, and
instrumentalities. Unlike KTFIF, the Texas Fund is not "diversified" as that
term is defined under the 1940 Act.
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<PAGE>
In addition, each Fund invests in municipal bonds only if, at the date
of investment, they are rated within the four highest grades by Standard &
Poor's Corporation (AAA, AA, A and BBB), by Moody's Investors Service, Inc.
(Aaa, Aa A and Baa), or by Fitch Investors Service, Inc. - Municipal Division
(AAA, AA, A and BBB), or, if not rated, are of comparable quality to obligations
so rated as determined by Keystone.
Moreover, in furtherance of their investment objectives, both Funds may
use certain "derivative instruments," including structured securities.
In summary, excepting the Texas Fund's strict geographic focus, both
Funds invest in the same kinds of securities and use the same types of
investment techniques.
For a more complete discussion of the Funds' investment objectives,
policies, restrictions, permitted investments, and investment techniques, see
"Investment Restrictions" below, "Information About the Funds," and each Fund's
Prospectus and SAI.
Investment Restrictions
Each of the Funds has certain fundamental investment restrictions that
may not be changed without the vote of a 1940 Act majority of the Fund's
outstanding voting shares. Except as noted below, KSTFF's and KTFIF's
fundamental investment restrictions are substantially the same. KTFIF differs
from KSTFF in that KTFIF is subject to the additional fundamental restrictions
set forth below.
KTFIF may not:
(1) purchase any security (other than U.S. government securities) of
any issuer if as a result more than 5% of its total assets would be invested in
securities of the issuer, except that up to 25% of its total assets may be
invested without regard to this limit;
(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) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis, or collateral
arrangement with respect to the writing of options on securities, are not deemed
to be a pledge of assets; and
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(4) invest more than 5% of its total assets in securities of any
company having a record, together with its predecessors, of less than three
years of continuous operation.
For a more complete discussion of the Funds' investment restrictions,
see "Information About the Funds" and each Fund's Prospectus and SAI.
Purchase and Redemption Procedures, Deferred Sales Charges, and
Exchange Rights
Generally, each Fund offers three classes of Shares:
Class A Shares - Front End Load Option
Class A Shares are sold with a sales charge at the time of purchase.
With certain exceptions, Class A Shares are not subject to a deferred sales
charge when redeemed.
Class B Shares - Back End Load Option
Class B Shares are sold without a sales charge at the time of purchase,
but are, with certain exceptions, subject to a contingent deferred sales charge
when redeemed. Class B Shares purchased on or after June 1, 1995 are subject to
a deferred sales charge upon redemption during the 72 month period commencing
from and including the month of purchase at rates ranging from a maximum of 5%
of amounts redeemed during the first 12 month period after purchase to 1% of
amounts redeemed during the sixth twelve month period after purchase.
Class C Shares - Level Load Option
Class C Shares are sold without a sales charge at the time of purchase,
but, with certain exceptions, are subject to a deferred sales charge if they are
redeemed within one year after the date of purchase. Class C Shares are
available only through dealers who have entered into special distribution
agreements with the Principal Underwriter.
Shares of the Texas Fund and of KTFIF may be purchased in
exactly the same manner. See "How to Buy Shares" in the
accompanying KTFIF Prospectus.
With respect to Class B and Class C Shares, no deferred sales charge is
imposed on amounts redeemed after the lapsing of the above described periods 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.
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Redemptions for both Funds may be made by submitting a redemption
request to KIRC or to the shareholder's broker-dealer. See "How to Redeem
Shares" in the accompanying KTFIF Prospectus.
The Texas Fund Shares and KTFIF Shares have the same exchange rights.
Subject to certain limitations, such Shares may be exchanged for Shares of any
of the other funds in the Keystone America Fund Family on the basis of their
respective net asset values. See "Shareholder Services" in the accompanying
KTFIF Prospectus.
In the proposed Reorganization, shareholders of the Texas Fund will
receive the corresponding class of Shares of KTFIF that they currently hold in
the Texas Fund. As indicated above, the Class A, B, and C Shares of KTFIF have
identical arrangements with respect to the imposition of initial and contingent
deferred sales charges as the comparable class of Shares of the Texas Fund.
Because the Reorganization will be effected at net asset value without the
imposition of an initial sales charge, Class A KTFIF Shares acquired by Class A
shareholders of the Texas Fund pursuant to the proposed Reorganization will not
be subject to any initial sales charge as a result of the Reorganization. KTFIF
Shares issued pursuant to the Reorganization that replace Texas Fund Shares
still subject to a contingent deferred sales charge will still be subject to
that charge.
Distribution Procedures and Payments
The Texas Fund and KTFIF have adopted substantially similar 12b-1
Distribution Plans with regard to their respective Class A, B, and C Shares,
pursuant to which they incur certain distribution related expenses.
Each Fund's Class A Distribution Plan provides for expenditures by the
Fund to pay costs related to sales of its Class A Shares, including shareholder
service fees. For KTFIF, expenses are currently limited to 0.25% annually of the
average daily net asset value of Class A Shares. For the Texas Fund, expenses
are currently limited to 0.15% annually of the average daily net asset value of
Class A Shares.
Each Fund's Class B Distribution Plans provide for expenditures by the
Fund at an annual rate of up to 1.00% of the average daily net asset value of
Class B Shares to pay costs related to sales of its Class B Shares, including
commissions and shareholder service fees. For the Texas Fund, expenses incurred
under its Class B Distribution Plans are currently limited to 0.90% annually of
the average daily net asset value of Class B Shares.
Each Fund's Class C Distribution Plan provides for expenditures by the
Fund at an annual rate of up to 1.00% of the average daily net asset value of
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Class C Shares to pay costs related to sales of its Class C Shares, including
commissions and shareholder service fees. For the Texas Fund, expenses incurred
under its Class C Distribution Plan are currently limited to 0.90% of the
average daily net asset value of Class C Shares.
The NASD limits annual distribution expenditures to 1.00%, of which
0.75% may be used to pay distribution costs and 0.25% may be used to pay
shareholder service fees. The aggregate amount that each Fund may pay for such
distribution costs is limited to 6.25% of gross Share sales since the inception
of the Fund's Distribution Plan, plus interest at the prime rate plus 1.00% on
such amounts (less any contingent deferred sales charges paid by shareholders to
the Principal Underwriter) remaining unpaid from time to time.
Payments under each Fund's Distribution Plans 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/or (2) as shareholder service fees
in respect of Shares maintained by the recipients on each of the Fund's books
for specified periods. Amounts paid or accrued to the Principal Underwriter
under (1) and (2) in the aggregate may not exceed the annual limitations
discussed above.
With respect to the Class B Shares of both Funds, the Principal
Underwriter generally reallows to brokers or others a commission in the amount
of 4.00% of the price paid for each Class B Share sold plus the first year's
service fee in advance in the amount of 0.25% of the price paid for each KTFIF
Class B Share sold and 0.15% of the price paid for each Texas Fund Class B Share
sold.
With respect to the Class C Shares of both Funds, the Principal
Underwriter generally reallows to brokers or others a commission in the amount
of 0.75% of the price paid for each Class C Share sold plus the first year's
service fee in advance in the amount of 0.25% of the price paid for each Class C
Share sold.
After the Reorganization, it is anticipated that the commissions that
the Principal Underwriter will pay brokers or others for KTFIF Share sales and
shareholder service fees will remain the same as currently in effect for KTFIF
Shares.
For more information, see "Distribution Plans" in the accompanying
KTFIF Prospectus.
Dividends and Distributions
Each shareholder of the Texas Fund who becomes a shareholder of KTFIF
will be entitled to dividends and distributions of KTFIF.
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The Texas Fund declares dividends from net investment income daily and
distributes such dividends monthly and declares and distributes all net realized
long term capital gains annually.
KTFIF declares and distributes dividends from net investment income
monthly and declares and distributes all net realized long term capital gains
annually.
For both Funds, distributions are payable in Shares of the relevant
Fund, or, at the shareholder's option (which must be exercised before the record
date for the distribution), in cash. Fund distributions in the form of
additional Shares are made at net asset value without the imposition of a sales
charge.
Unless a Texas Fund shareholder instructs or has instructed otherwise,
any distributions paid after the Effective Date will be automatically reinvested
in additional Shares of KTFIF without a sales charge. Texas Fund shareholders
will be deemed to have elected to receive dividends and distributions in the
same manner that he or she receives dividends and distributions on his or her
Texas Fund Shares. After the Reorganization, shareholders may elect, at any
time, to change the manner in which their dividends and distributions are paid.
See "Dividends and Taxes" in the accompanying KTFIF Prospectus.
Portfolio Manager
Daniel A. Rabasco, the current portfolio manager of the Texas
Fund, is also responsible for the day to day portfolio management
of KTFIF. Mr. Rabasco is a Keystone Vice President with more than
7 years of investment experience.
TAX CONSEQUENCES
In the opinion of Sullivan & Worcester, legal counsel to the Texas
Fund, the Reorganization will constitute a tax free reorganization pursuant to
Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). No gain or loss will be recognized by the Texas Fund
or its shareholders as a result of the Reorganization. The tax basis and holding
period of the KTFIF Shares received by the Texas Fund shareholders will be the
same as the tax basis and holding period of the Texas Fund Shares surrendered
therefor. In addition, the tax basis and holding period of the assets of the
Texas Fund in the hands of KTFIF will be the same as the tax basis and holding
period of such assets in the hands of the Texas Fund prior to the
Reorganization. See "The Reorganization -- Federal Income Tax Consequences."
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Texas does not impose an income tax on individuals. Accordingly, unlike
shareholders in other state municipal bond mutual funds (such as mutual funds
investing primarily in California or New York municipal obligations), who are
generally able to exclude their mutual fund earnings from their state income
taxes, shareholders in the Texas Fund have enjoyed no such benefit.
Consequently, the exchange of Shares in the Texas Fund for Shares in KTFIF will
not have any impact on the taxes an individual shareholder pays to the State of
Texas.
While Texas does not impose an income tax on corporations, it does
impose a corporate franchise tax on corporations that do business in Texas or
are chartered or authorized to do business in Texas. The corporate franchise tax
imposed on those corporations is based on the corporations "net taxable capital"
apportioned to Texas or the corporation's "net taxable earned surplus"
apportioned to Texas. Since neither earnings from the Texas Fund nor earnings
from KTFIF are considered gross receipts apportioned to Texas for purposes of
computing a corporation's "net taxable capital" apportioned to Texas, the
exchange of Shares in the Texas Fund for Shares in KTFIF will not have any
impact on the taxes a corporate shareholder pays to the State of Texas based on
"net taxable capital." The amount of "net taxable earned surplus" is based
generally on the corporation's "reportable federal taxable income" as computed
under the Internal Revenue Code. Since all "exempt interest dividends" excluded
from reportable federal taxable income by federal law are likewise excluded from
the net taxable earned surplus component upon which the Texas corporate
franchise tax may be imposed, the exchange of Shares in the Texas Fund for
Shares in KTFIF will not have any impact on the taxes a corporate shareholder
pays to the State of Texas based on "net taxable earned surplus."
PRINCIPAL RISK FACTORS
Excepting the Texas Fund's emphasis on Texas debt securities and its
non-diversified status, the investment objectives, policies, and techniques of
the Texas Fund and KTFIF are substantially similar. Both Funds invest in the
same kinds of securities and use the same types of investment techniques.
Accordingly, the investment risks for both Funds are substantially similar.
Indeed, KTFIF's more broadly diversified portfolio may make it less susceptible
than the Texas Fund to adverse economic, political, or regulatory developments.
The principal risk factor of investing in either the Texas Fund or
KTFIF is that the net asset value upon which the value of Shares is based will
increase or decrease in response to changes in
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economic conditions, interest rates, and the market's perception of the Fund's
underlying portfolio securities.
More specifically, the market value of the Funds' fixed income
securities investments may vary inversely to changes in prevailing interest
rates. In addition, the ability of each Fund to achieve its investment objective
is dependent upon the continuing ability of issuers of municipal bonds held in
the Fund's portfolio to meet their continuing obligation to pay interest and
principal when due. Furthermore, from time to time, proposals have been
introduced before Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on municipal bonds. Similar proposals
may be introduced in the future, which, if enacted, could materially affect the
availability of municipal bonds for investment by the Funds and the value of
each Fund's portfolio.
Both Funds invest in securities with similar maturities, and both Funds
use substantially identical procedures for the valuation of portfolio
securities.
Both Funds may enter into repurchase agreements and reverse repurchase
agreements, firm commitment agreements for securities and currencies, options
transactions, currency, and other financial futures contracts and related
options transactions for hedging purposes, and, in furtherance of their
investment objectives, certain other types of derivative instruments, including
structured securities. Both Funds may also invest in obligations denominated in
foreign currencies that are exempt from federal income tax. Each of these
investment techniques involve certain investment risks.
There are risks associated with any investment program, and there can
be no assurance that KTFIF will achieve its investment objective.
Each Fund's Prospectus contains a discussion of the Fund's investment
risks in the section entitled "Risk Factors." See also the "Additional
Investment Information" section at the back of the accompanying KTFIF
Prospectus.
THE REORGANIZATION
REASONS FOR THE PROPOSED TRANSACTION
The Board of Trustees of the Texas Fund, including all of the Fund's
Independent Trustees, has determined that the tax-free Reorganization would be
in the best interests of the Fund, would not dilute the interests of the Fund's
shareholders, and would not impose an unfair burden on the Fund.
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The Board of Trustees has proposed the transaction in the interest of
providing a cost effective investment alternative for the Texas Fund
shareholders. As KTFIF shareholders, the Texas Fund shareholders can continue to
pursue the highest possible current income, exempt from federal income taxes,
while preserving capital. Continuity of investment management as well as all
other investor services (including exchange privileges with the other funds in
the Keystone America Fund Family) currently provided to the Texas Fund will be
maintained.
The combination of the two Funds should permit the Texas Fund
shareholders, as shareholders of KTFIF, to pursue the same investment objective
in a larger fund with the following resulting advantages (although no assurance
can be given that these benefits will be obtained):
(1) Economies of scale - The proposed reorganization is expected to
reduce operating expenses for the Texas Fund. Investment management and
custodial fees are reduced as the asset base reaches certain levels, thus
decreasing as assets increase. Fixed expenses such as accounting, legal, and
printing costs will be spread over a larger asset base resulting in per share
expense reductions or economies of scale. For example, KTFIF's Class A, B, and C
pro forma annual operating expense ratios, after giving effect to the
Reorganization, are estimated to be 1.18%, 1.93%, and 1.93%, respectively, of
each class's average net assets. In contrast, the Texas Fund's unsubsidized
Class A, B, and C annual operating expense ratios for its most recently
completed fiscal year were 2.57%, 3.36%, and 3.28%, respectively, of each
class's average net assets.
As of December 31, 1995, the Texas Fund's net assets were approximately
$5.6 million, and KTFIF's net assets were approximately $147.0 million.
(2) Increased investment opportunities - It is expected that the
combined Fund will be more easily and efficiently managed. A larger single asset
base reduces transaction costs, might result in reduced portfolio turnover, and
provides the opportunity to obtain a wider variety of investments.
(3) Facilitate marketing and distribution efforts - It is expected that
the combined Fund will facilitate marketing and distribution efforts with a view
toward increasing the asset base, which in turn will benefit shareholders as
described in (1) and (2) above.
The Board of Trustees of KSTFF based their decision to recommend the
Reorganization on a number of factors, including the following:
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(1) projected expense ratios and information regarding fees
and expenses of the Texas Fund and KTFIF;
(2) the terms and conditions of the Reorganization and
whether it would result in dilution of the interests of
the Texas Fund shareholders;
(3) the compatibility of the Texas Fund, its investment
objective, policies, and restrictions with those of
KTFIF;
(4) the costs to the Texas Fund of the Reorganization;
(5) the tax consequences to the Texas Fund and its
shareholders resulting from the Reorganization;
(6) the availability to KTFIF shareholders of shareholder
services identical to those available to the Texas Fund
shareholders; and
(7) the possible investment benefits to be gained from a
single larger fund.
AGREEMENT ON THE TRANSFER OF ASSETS
The terms and conditions under which the Reorganization are to be
consummated are set forth in the Reorganization Agreement. Significant
provisions of the Reorganization Agreement are summarized below. This summary,
however, is qualified in its entirety by reference to the Reorganization
Agreement, a copy of which is attached hereto as Exhibit A.
The Reorganization Agreement provides that all of the assets of the
Texas Fund will be transferred to KTFIF in exchange for Shares of KTFIF and the
liabilities of the Texas Fund will be assumed by KTFIF on the Effective Date
(the later of (i) receipt of all necessary regulatory approvals, (ii) final
adjournment of the meeting of the shareholders of the Texas Fund at which the
Reorganization Agreement will be considered so long as the Reorganization
Agreement is approved by the shareholders, or (iii) such later date as the
parties to the Reorganization Agreement may mutually agree upon).
The number of full and fractional Class A, B, and C KTFIF Shares to be
delivered to the Texas Fund shareholders will be determined on the basis of the
relative net asset values of the
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Class A, B, and C Shares of KTFIF and the Texas Fund as of the close of business
on the New York Stock Exchange on the Effective Date. The net asset value of a
KTFIF Share will be determined in the manner set forth in KTFIF's Prospectus, a
copy of which accompanies this Prospectus/Proxy Statement, except that such
computation will be made to the nearest hundredth of a cent. The valuation
practices of KTFIF are described under "Pricing Shares" in KTFIF's Prospectus.
The assets and liabilities of the Texas Fund will be valued in the same manner
as that used with respect to the valuation of the assets and liabilities of
KTFIF. The valuation procedures of both Funds are substantially identical. The
value of the Shares of the Texas Fund will be computed to the nearest hundredth
of a cent.
Under the Reorganization Agreement, (i) all of the assets and
liabilities of the Texas Fund will be exchanged for Class A, B, and C Shares of
KTFIF; (ii) KTFIF Class A, B, and C Shares will be distributed to the Class A,
B, and C shareholders of the Texas Fund, respectively, as of the close of
business on the Effective Date; and (iii) the Texas Fund will be liquidated. The
distribution of KTFIF Class A, B, and C Shares will be accomplished by the
establishment of open accounts on the records of KTFIF in the name of each Class
A, B, and C shareholder of the Texas Fund representing the respective pro rata
number of the appropriate Class of Shares of KTFIF due such shareholder.
Fractional Shares of KTFIF will be carried to the third decimal place. After the
Effective Date, KTFIF Share certificates will be issued only upon written
request, and such requests must be accompanied by any Share certificates issued
for Texas Fund Shares held by the investor.
The Board of Trustees of KSTFF, including all of the Independent
Trustees, has determined that the interests of the existing shareholders of the
Texas Fund will not be diluted as a result of the Reorganization, and that the
Reorganization is in the best interests of the Texas Fund shareholders. The
Board of Trustees of KTFIF, including all of the Independent Trustees, has made
the same determinations with respect to the interests of the existing
shareholders of KTFIF.
The consummation of the Reorganization is subject to a number of
conditions set forth in the Reorganization Agreement. Notwithstanding approval
by shareholders of the Texas Fund, the Reorganization Agreement may be
terminated at any time prior to the consummation of the Reorganization, without
liability on the part of either party or its respective Trustees, officers or
shareholders, by either party on written notice to the other party if
circumstances should develop that, in the opinion of the Funds, make proceeding
with the Reorganization inadvisable. The Reorganization Agreement may be
amended, waived, or supplemented in such manner as may be mutually agreed upon
by the authorized officers of the Funds; provided, however, that following the
approval of the Reorganization Agreement by the Texas Fund shareholders, no such
amendment, waiver or supplement may have the
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effect of substantially changing the provisions of the Reorganization Agreement.
KTFIF will pay the expenses (consisting primarily of legal, accounting,
custodian, and transfer agent fees, as well as printing and mailing and other
expenses in connection with the registration of KTFIF Shares under the 1933 Act)
incurred by it in connection with the Reorganization. The Texas Fund will pay
the expenses of printing and mailing this Prospectus/Proxy Statement and other
material to the Texas Fund shareholders as well as the expenses of conducting
additional proxy solicitations and any other fees or expenses incurred by it as
a result of the Reorganization.
DESCRIPTION OF THE SECURITIES TO BE ISSUED
KTFIF is an open-end, diversified management investment company
organized as a Massachusetts business trust. KTFIF currently offers and issues
to the public Class A, B, and C Shares. After the Reorganization, KTFIF will
continue to offer and issue all three classes. Each class participates in
dividends and distributions. Each class has equal voting, liquidation, and other
rights, including rights of appraisal, except (i) expenses related to the
distribution of each class of Shares, or other expenses that the Board of
Trustees may designate as class expenses from time to time, are borne solely by
each class; (ii) each class of Shares has exclusive voting rights with respect
to its 12b-1 Plan; (iii) each class has different exchange privileges; and (iv)
each class generally has a different designation. Subject to certain
limitations, KTFIF Shares may be exchanged for the same class of Shares of other
members of the Keystone America Fund Family and Keystone Liquid Trust, but will
have no other preference, conversion, exchange, or preemptive rights.
KTFIF shareholders are entitled to one vote for each full Share owned
and fractional votes for fractional Shares. Shares of the Fund vote together
except when required by law to vote separately by series or class. The Fund is
not required to hold annual meetings. The Fund will hold special meetings from
time to time as required under its Declaration of Trust and the 1940 Act. A
special meeting of shareholders will be held when 10% of the outstanding Shares
request a meeting for the purpose of removing a Trustee.
Under Massachusetts law, it is possible that a KTFIF shareholder may be
held personally liable for the Fund's obligations. The Fund's Declaration of
Trust provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from the 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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The foregoing is only a summary of certain of the provisions of KTFIF's
Declaration of Trust and By-laws. Shareholders should refer to the provisions of
the Declaration of Trust and By-laws for their full terms.
FEDERAL INCOME TAX CONSEQUENCES
The completion of the Reorganization is contingent upon the receipt by
KSTFF and KTFIF of a tax opinion from Sullivan & Worcester that, on the basis of
the existing provisions of the Internal Revenue Code, Treasury regulations,
current administrative rules, and court decisions, for federal income tax
purposes, substantially addresses the following: KSTFF and KTFIF: (i) no gain or
loss will be recognized by the Texas Fund or KTFIF as a result of the
Reorganization; (ii) the basis of the assets of the Texas Fund in the hands of
KTFIF will be the same as the basis of those assets in the hands of the Texas
Fund immediately prior to the Reorganization; (iii) the holding period of the
Texas Fund's assets in the hands of KTFIF will include the period during which
the assets were held by the Texas Fund; (iv) no gain or loss will be recognized
by shareholders of the Texas Fund as a result of the Reorganization; (v) the
basis of KTFIF Shares received by the Texas Fund shareholders will be the same
as the basis of the Texas Fund Shares surrendered therefor; and (vi) the holding
period of KTFIF Shares received by the Texas Fund shareholders will include the
holding period during which the Texas Fund Shares surrendered in exchange
therefor were held, provided that such Shares were held as a capital asset in
the hands of the Texas Fund shareholders on the date of the Reorganization.
As of January 23, 1996, the Texas Fund had available, for federal
income tax purposes, unused capital loss carry forwards of $80,704 expiring in
2002. As a result of the Reorganization, the unused capital loss carryforwards
will become tax attributes of KTFIF, and the utilization of the carryforwards
will benefit all the shareholders of KTFIF. If the Reorganization is
consummated, KTFIF will be constrained, however, in the extent to which it can
use the capital loss carryforwards of the Texas Fund because of limitations
imposed by the Internal Revenue Code upon the occurrence of an "ownership
change." KTFIF should be able to use, in each year from 1996 through 2002,
capital loss carryforwards in an amount equal to the value of the Texas Fund on
the date of the Reorganization multiplied by a long-term tax-exempt rate
calculated by the Internal Revenue Service (currently about 6%). If the amount
of such losses is not used in one year, it may be added to the amount available
for use in the next year.
See also "Synopsis--Tax Consequences."
The Texas Fund shareholders should consult their tax advisers regarding
the tax effects, if any, of the proposed Reorganization in light of their
individual circumstances. Since the foregoing discussion relates only to the
federal income tax consequences of the Reorganization, shareholders of the Texas
Fund should also
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consult their tax advisers as to the state and local tax
consequences, if any, of the Reorganization.
CAPITALIZATION
The following table shows the capitalization of KTFIF and the Texas
Fund as of December 31, 1995 and on a pro forma basis as of that date after
giving effect to the proposed acquisition of assets of the Texas Fund at the
then net asset value per Share. The pro forma data reflects an exchange ratio of
1.07, 1.06, and 1.06 for the KTFIF Class A, B, and C Shares, respectively,
issued for each Class A, B, and C Share, respectively, of the Texas Fund:
Pro Forma
KTFIF The Texas Fund Combined
Total Net Assets
Class A $ 94,012,938 $1,492,294 $ 95,505,232
Class B $ 33,419,936 $3,792,523 $ 37,212,459
Class C $ 19,723,630 $ 343,218 $ 20,066,848
Total $147,156,504 $5,628,035 $152,784,539
Net Asset Value
per Share
Class A $ 10.10 $ 10.78 $10.10
Class B $ 10.01 $ 10.64 $10.01
Class C $ 10.02 $ 10.63 $10.02
Total Shares
Outstanding
Class A 9,307,653 138,477 9,455,453
Class B 3,337,184 356,548 3,716,172
Class C 1,969,174 32,302 2,003,442
Total 14,614,011 527,327 15,175,067
The table above should not be relied upon to reflect the number of
Shares to be received in the Reorganization; the actual number of Shares to be
received will depend upon the net asset value and number of Shares outstanding
of each Fund at the time of the Reorganization.
INFORMATION ABOUT THE FUNDS
KEYSTONE TAX FREE INCOME FUND
Information about KTFIF is included in its Prospectus dated March 31,
1995, as supplemented June 1, 1995, which is incorporated by reference herein
and a copy of which accompanies this
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Prospectus/Proxy Statement. Additional information about KTFIF is included in
its SAI dated March 31, 1995, as supplemented June 1, 1995, and in the SAI dated
March 4, 1996, relating to the Reorganization, each of which is incorporated by
reference herein. Information about KTFIF is also included in its most recent
Annual Report, which is incorporated by reference herein. Important information
about the Fund's performance for its most recent fiscal year is contained in
management's discussion of the same attached hereto as Exhibit B. Copies of
KTFIF's SAIs and Annual Report may be obtained without charge by writing to
KTFIF at the address listed at the front of this Prospectus/Proxy Statement or
by calling KTFIF at (800) 343-2898 or (617) 621-6100.
KEYSTONE TEXAS TAX FREE FUND
Information about the Texas Fund is included in its Prospectus and SAI
each dated May 31, 1995, as supplemented June 1, 1995, each of which is
incorporated by reference herein. Copies of the Texas Fund's Prospectus and SAI
may be obtained without charge by writing to KTFIF at the address listed at the
front of this Prospectus/Proxy Statement or by calling KTFIF at (800) 343-2898
or (617) 621-6100.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Both KTFIF and the Texas Fund are subject to the informational
requirements of the 1934 Act and the 1940 Act, and, in accordance therewith,
file reports, proxy material, and other information with the Commission.
Such reports, proxy material, and other information can be inspected
and copied at the Public Reference Facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549 at prescribed rates.
SUPPLEMENTARY SOLICITATION
Supplementary solicitation will generally be made by mail, telephone,
facsimile, telegram, or in person by officers of KTFIF and the Texas Fund and by
officers or employees of KIRC, Keystone, Keystone Investments, the Principal
Underwriter, or any of their subsidiaries.
The Texas Fund may also arrange to have votes recorded by
telephone. A telephone voting procedure has been designated to
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authenticate shareholders' identities, to allow shareholders to authorize the
voting of their shares in accordance with their instructions, and to confirm
that their instructions have been properly recorded. If these procedures were
subject to a successful legal challenge, such votes would not be counted at the
Meeting. The Fund is unaware of any such challenge at this time. Shareholders
voting by telephone will be called at the phone numbers KIRC has in its records
for accounts, will be asked to verify certain criteria specific to their
accounts intended to ensure the identity of the shareholder, and will be given
an opportunity to authorize proxies to vote their shares at the Meeting in
accordance with their instructions. To ensure that shareholders' instructions
have been recorded correctly, shareholders will receive a confirmation of their
instructions in the mail. A toll-free number will be available in case the
information contained in the confirmation is incorrect. Although shareholders'
votes may be taken by telephone, each shareholder will receive a copy of this
Prospectus/Proxy Statement and may vote by mail using the enclosed proxy card.
SUBSTANTIAL SHAREHOLDERS
As of December 31, 1995, to the best knowledge of KTFIF, the following
accounts owned of record 5% or more of the outstanding Shares of KTFIF:
Class A Shares
Record Owner Percentage Interest
Merrill Lynch Pierce 22.482%
Fenner & Smith
Attn: Book Entry
480 Deer Lake Dr E 3rd FL.
Jacksonville, FL 32246-6484
Class B Shares
Record Owner Percentage Interest
Merrill Lynch Pierce 20.609%
Fenner & Smith
Attn: Book Entry
480 Deer Lake Dr E 3rd FL.
Jacksonville, FL 32246-6484
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Aletta Laird Downs TTEE 6.175%
Alletta Laird Downs Trust
U/A DTD 3-29-89
PO Box 3666
Wilmington, DE 19807-0666
Class C Shares
Record Owner Percentage Interest
Merrill Lynch Pierce 51.621%
Fenner & Smith
Attn: Book Entry
480 Deer Lake Dr E 3rd Fl.
Jacksonville, FL 32246-6484
On that date, the Trustees and officers of KTFIF, as a group,
beneficially owned less than 1% of the outstanding Shares of KTFIF.
As of December 31, 1995, to the best knowledge of the Texas Fund, the
following accounts owned of record 5% or more of the outstanding Shares of the
Texas Fund.
Class A Shares
Record Owner Percentage Interest
Odelia B. McCarley 33.284%
20450 Huebner Road #11222
San Antonio, TX 78258-3908
Nancy L. Holmes 6.154%
Separate Property
3108 Winthrop Avenue
Fort Worth, TX 76116-5515
Ben H. Typpi & Effie M. Typpi 5.063%
JT WROS
1001 South ED Carey Dr.
Harlingen, TX 78552-8720
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<PAGE>
Class B Shares
Record Owner Percentage Interest
Raymond James & Associates, Inc. 22.177%
For Elite Acct # 50115367
FAO RH Tyler & Mildred Tyler T-I-C
Loop 132 HWY 79 Olney, TX 76374
Jodie W. McCarley 7.166%
7339 Seidel
San Antonio, TX 78209-3028
Donaldson Lufkin Jenrette 5.787%
Securities Corporation, Inc.
PO Box 2052
Jersey City, NJ 07303-2052
Mary Jo Clark 5.227%
PO Box 25366
Houston, TX 77265-5366
Class C Shares
Record Owner Percentage Interest
David D. Tatsch 19.033%
Loyce E. Tatsch JTWROS
Route 4 Box 50
Fredericksburg, TX 78624-9561
Barbara B. Matheney 14.468%
Bond Account
C/O First Natl Bank of El Dorado
PO Box 751
El Dorado, AR 717310-0751
Frank H. Bethune 13.033%
Sylvia Bethune JT WROS
3020 Country Square Dr
Apt 1147
Carrollton, TX 75006-5322
Patricia E. Pigg 12.455%
4003 Post Oak Road
Tyler, TX 75701-9334
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Clifford E. Dickey 11.268%
Vivian A. Dickey JT WROS
1600 Texas Street
Apt 1404
Fort Worth, TX 76102-3475
Merrill Lynch Pierce 8.401%
Fenner & Smith
Attn: Book Entry
4800 Deer Lake Dr E, 3rd FL
Jacksonville, FL 32246-6484
On that date, the Trustees and officers of the Texas Fund, as a group,
beneficially owned less than 1% of the outstanding Shares of the Texas Fund.
INTEREST OF CERTAIN PERSONS
The following entities receive payments from KTFIF for services
rendered pursuant to contractual arrangements with KTFIF: Keystone Management,
as investment manager, receives payments for its investment management services,
as described in the section above entitled "Investment Advisory and Management
Fees"; Keystone, as investment adviser, receives payments for its investment
advisory services, also as described in the section above entitled "Investment
Advisory and Management Fees"; the Principal Underwriter receives payments
pursuant to the 12b-1 Plans described in the section above entitled
"Distribution Procedures and Payments" as well as certain payments in respect of
contingent deferred sales charges; and KIRC is compensated for acting as the
Funds' transfer and dividend disbursing agent.
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<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered
into as of _____________, by and between Keystone Tax Free Income Fund
("KTFIF"), a Massachusetts business trust, and Keystone State Tax Free Fund
("KSTFF"), a Massachusetts business trust (each, a "Fund," and together, the
"Funds"), on behalf of the Keystone Texas Tax Free Fund, a separate series or
portfolio of KSTFF (the "Texas Fund"), each Fund having its principal place of
business at 200 Berkeley Street, Boston, Massachusetts 02116.
W I T N E S S E T H:
WHEREAS, each of KTFIF and the KSTFF is a open-end management company
registered under the Investment Company Act of 1940 (the "1940 Act") and issues
shares of beneficial interest;
WHEREAS, KTFIF and KSTFF have agreed, subject to the receipt of the
approvals described in Section 3 below, to transfer all of the assets of the
Texas Fund to KTFIF in exchange for shares of KTFIF, with KTFIF assuming the
liabilities of the Texas Fund to the extent provided herein;
WHEREAS, following the reorganization, shares of KTFIF will be
distributed to the shareholders of the Texas Fund in liquidation of the Texas
Fund, and the Texas Fund will be terminated;
WHEREAS, the reorganization described in this Agreement is intended to
be a reorganization within the meaning of Section 368 (a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the respective Boards of Trustees of KSTFF and KTFIF,
including each Fund's Trustees who are not interested persons of the Fund as
defined in the 1940 Act (the "Independent Trustees"), have determined that
participating in the transactions contemplated by this Agreement is in the best
interests of the Funds;
NOW THEREFORE, in consideration of the premises set forth above and the
mutual covenants and agreements set forth below, the parties hereto agree as
follows:
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SECTION 1. EXCHANGE OF ASSETS FOR SHARES
1.1 Terms of Exchange.
(a) Upon the Effective Date (as defined in Subsection 1.2 below),
KSTFF, on behalf of the Texas Fund, will sell, transfer, and deliver to KTFIF
good and marketable title to all of the then existing assets of the Texas Fund
free and clear of all liens, claims, charges, options, and encumbrances.
(b) KTFIF will assume and pay, to the extent that they exist on the
Effective Date, all the liabilities of the Texas Fund, whether absolute,
accrued, contingent, or otherwise.
(c) KTFIF will deliver to the Texas Fund that number of full and
fractional shares of KTFIF having an aggregate net asset value equal to the
aggregate net asset value of the Texas Fund, all determined as provided in
Section 1.1(d) below.
(d) The following provisions shall apply to the determination of the
number of shares of KTFIF to be delivered:
(i) The net asset value per share of KTFIF shall be determined
as of the close of business on the New York Stock Exchange (the "Exchange") on
the Effective Date.
(ii) The net value of the assets and liabilities of the Texas
Fund shall be determined as of the close of business on the Exchange on the
Effective Date.
(iii) The net asset value per share of the Texas Fund shall be
determined as of the close of business on the Exchange on the Effective Date.
(iv) The net asset value of KTFIF shall be computed in the
manner set forth in KTFIF's current Registration Statement under the Securities
Act of 1933 ("1933 Act") and the 1940 Act, except that such computation shall be
made to the nearest one-hundredth of a cent.
(v) The assets and liabilities of the Texas Fund shall be
valued in the same manner as that used with respect to the valuation of the
assets and liabilities of KTFIF in the computation of the net asset value per
share of KTFIF.
(vi) The net asset value per share of the Texas Fund shall be
computed by dividing the net value of the assets and liabilities of the Texas
Fund, determined as provided in (ii) and (v) above, by the number of shares of
the Texas Fund outstanding as of the close of business on the Exchange on the
Effective Date; and such computation shall be made to the nearest one-hundredth
of a cent.
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(vii) The net asset value per share of the Texas Fund
determined as provided in (vi) above shall be divided by the net asset value per
share of KTFIF determined as provided in (i) and (iv) above; and the result of
such division shall be calculated to six decimal places (the "Conversion
Ratio").
(viii) The number of shares of the Texas Fund outstanding at
the close of business on the Exchange on the Effective Date shall be multiplied
by the Conversion Ratio to determine the number of shares of KTFIF to be
delivered.
(ix) KPMG Peat Marwick LLP shall provide a written report to
each of KTFIF and KSTFF on procedures they will have performed to determine the
accuracy of the computations required by this Section 1.1(d).
1.2 Closing and Effective Date. The closing shall be held at
the offices of Keystone Investment Management Company, investment adviser to
KTFIF, located at 200 Berkeley Street, Boston, Massachusetts 02116, and shall
occur on the later of (a) receipt of all necessary regulatory approvals; (b) the
final adjournment of the meeting of the shareholders of the Texas Fund at which
this Agreement will be considered so long as this Agreement and the transaction
set forth herein are approved by the shareholders of the Texas Fund at the
meeting; or (c) such later date as the parties may mutually agree (the
"Effective Date").
1.3 The Texas Fund Share Sales and Transfers. The Texas
Fund shall not issue, sell, or transfer any of its shares after the
Effective Date.
1.4 Transfer Books; Redemptions. The stock transfer books of
the Texas Fund will be permanently closed as of the close of business on the
Effective Date and only redemption requests relating to the Texas Fund received
in proper form on or prior to the close of trading on the Exchange on the
Effective Date shall be accepted by the Texas Fund. Redemption requests relating
to the Texas Fund thereafter received shall be deemed to be redemption requests
for shares of KTFIF to be distributed to the shareholders of the Texas Fund
under this Agreement.
1.5 Treasury Shares. Any shares of the Texas Fund held in the
treasury of the Texas Fund immediately prior to the Effective Date shall be
cancelled upon the Effective Date without conversion into shares of KTFIF.
1.6 Transfer Taxes. Any transfer taxes payable upon issuance
of shares of KTFIF in a name other than the registered shareholder of the Texas
Fund entitled to receive the same shall be paid by the person to whom such
shares are to be issued as a condition of such transfer.
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1.7 Contingent Deferred Sales Charge. The Texas Fund imposes
deferred sales charges on its shares. The shareholders of the Texas
Fund may be subject to such deferred sales charges with respect to those shares
of KTFIF received by them under this Agreement in exchange for their shares of
the Texas Fund if their shares of the Texas Fund were subject to such deferred
sales charges.
SECTION 2. LIQUIDATION OF THE TEXAS FUND
2.1 Plan of Liquidation. As soon as practicable after the
Effective Date, the Texas Fund will distribute pro rata to its shareholders of
record as of the close of business on the Effective Date, KTFIF shares received
by the Texas Fund pursuant to Section 1 above. KTFIF will establish an open
account on its share records in the name of each shareholder of the Texas Fund
representing the respective number of shares of KTFIF due such shareholder.
Fractional KTFIF shares will be carried to the third decimal place. No
certificates representing KTFIF shares will be issued. Simultaneously with such
crediting of KTFIF shares to the shareholders of record of the Texas Fund, the
shares of the Texas Fund held by such shareholders shall be cancelled.
2.2 Further Actions to Complete Dissolution. As soon as
practicable after the Effective Date, the Texas Fund shall take, in accordance
with its Declaration of Trust, Massachusetts law, and the rules and regulations
of the Securities and Exchange Commission (the "Commission"), all such other
steps as shall be necessary and proper to effect a complete liquidation and
dissolution of the Texas Fund.
SECTION 3. APPROVAL OF TRANSACTIONS
3.1 Trustees of KTFIF. A duly constituted meeting of the Board
of Trustees of KTFIF was held on December 13, 1995, at which meeting this
Agreement and the transactions set forth herein were duly approved by the
Trustees of KTFIF.
3.2 Trustees of KSTFF. A duly constituted meeting of the
Trustees of KSTFF was held on December 13, 1995, at which meeting this Agreement
and the transactions set forth herein were duly approved by the Trustees of
KSTFF, subject to the approval of
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the shareholders of the Texas Fund as set forth in Subsection 3.3
below.
3.3 Approval by Shareholders of the Texas Fund. A meeting of
the shareholders of the Texas Fund shall be called and held for the purpose of
having the Texas Fund shareholders act upon this Agreement and the transactions
set forth herein. KTFIF shall furnish to the Texas Fund such data and
information relating to KTFIF as shall be reasonably requested by the Trustees
and officers of KSTFF for inclusion in the information to be furnished to the
Texas Fund shareholders in connection with such meeting.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF KEYSTONE TAX
FREE INCOME FUND
4.1 Organization, Existence, etc. KTFIF is a business trust,
duly organized, validly existing, and in good standing under the laws of The
Commonwealth of Massachusetts and has the requisite power to carry on its
business as it is now being conducted. KTFIF has all necessary federal, state,
and local authorization to own all of its properties and assets and to carry on
its business as now being conducted.
4.2 Registration as Investment Company. KTFIF is registered
under the 1940 Act as an open-end, diversified investment company of the
management type, and such registration has not been revoked or rescinded and is
in full force and effect.
4.3 Financial Statements. The financial statements of KTFIF
for the fiscal year ended November 30, 1995, previously delivered to KSTFF,
fairly present the financial position of KTFIF as of November 30, 1995, and the
results of its operations and changes in its net assets for the year then ended.
4.4 Shares to be Issued. The shares of KTFIF to be issued in
exchange for the assets of the Texas Fund have been duly authorized and when
delivered pursuant to this Agreement will be validly issued, fully paid, and
nonassessable by KTFIF.
4.5 Authority Relative to this Agreement. KTFIF has the power
to enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated herein have been duly authorized by the Board of
Trustees of KTFIF and no other proceedings by KTFIF are necessary to authorize
KTFIF's officers to effectuate this Agreement and the transactions contemplated
herein. KTFIF is not a party to, or obligated under, any charter, by-law,
indenture, or contract provision or any other commitment or obligation or
subject to any order or decree that would be violated by its executing and
carrying out this Agreement.
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4.6 Liabilities. There are no liabilities of KTFIF, whether or
not determined or determinable, other than liabilities disclosed or provided for
in its financial statements for the fiscal year ended November 30, 1995
previously delivered as set forth in Subsection 4.3, and liabilities incurred in
the ordinary course of business subsequent to November 30, 1995 or otherwise
previously disclosed to the KSTFF, none of which has been materially adverse to
the business, assets, or results of operations of KTFIF.
4.7 Litigation. There are no claims, actions, suits, or
proceedings pending or, to the knowledge of KTFIF, threatened that would
materially adversely affect KTFIF or its assets or business or prevent or hinder
consummation of the transactions contemplated hereby.
4.8 Contracts. Except for contracts and agreements previously
disclosed to KSTFF, under which no default exists, KTFIF is not a party to or
subject to any material contract, debt, instrument, plan, lease, franchise,
license, or permit of any kind or nature whatsoever.
4.9 Taxes. The federal income tax returns of KTFIF have been
filed for all taxable years prior to and including November 30, 1994, and all
taxes payable pursuant to such returns have been paid. KTFIF has qualified as a
regulated investment company under the Code in respect to each taxable year of
KTFIF since commencement of its operations.
4.10 Registration/Proxy Statement. KTFIF shall file with the
Commission a Registration/Proxy Statement (the "Registra-tion/Proxy Statement")
under the 1933 Act relating to the shares of KTFIF issuable hereunder. At the
time the Registration/Proxy Statement becomes effective, the Registration/Proxy
Statement (a) will comply in all material respects with the provisions of the
1933 Act and the regulations of the Commission thereunder, and (b) will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. In addition, at the time the Registration/Proxy Statement becomes
effective, at the time of the meeting of the shareholders of the Texas Fund
referred to in Subsection 3.3, and on the Effective Date, the proxy statement
(the "Proxy Statement"), the prospectus (the "Prospectus"), and statement of
additional information (the "Statement of Additional Information") included in
the Registration/Proxy Statement, as amended or supplemented by any amendments
or supplements filed by KTFIF, will not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and warranties
in this Subsection shall apply to statements in or omissions from the
Registration/Proxy
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Statement or Proxy Statement, Prospectus, and Statement of Additional
Information made in reliance upon and in conformity with information furnished
by KSTFF for use in the Registration/Proxy Statement, as provided in Subsection
5.10.
4.11 Capitalization. On December 31, 1995, 14,614,011 shares
of KTFIF were duly and validly issued and outstanding, fully-paid and
non-assessable by KTFIF. KTFIF does not have any outstanding options, warrants,
or other rights to subscribe for or purchase any of its shares nor is there
outstanding any security convertible into any of its shares.
4.12 Prospectus. The prospectus and statement of additional
information of KTFIF each dated March 31, 1995, as supplemented June 1, 1995
("KTFIF Prospectus"), which have previously been furnished to KSTFF, did not
contain as of such date and do not as of this date contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF KEYSTONE STATE
TAX FREE FUND
5.1 Organization, Existence etc. KSTFF is a business trust,
duly organized, validly existing, and in good standing under the laws of The
Commonwealth of Massachusetts and has the requisite power to carry on its
business as it is now being conducted. KSTFF has all necessary federal, state,
and local authorization to own all of its properties and assets and to carry on
its business as now being conducted.
5.2 Registration as Investment Company. KSTFF is registered
under the 1940 Act as an open-end, non-diversified investment company of the
management type and such registration has not been revoked or rescinded and is
in full force and effect.
5.3 Financial Statements. The financial statements of the
KSTFF for the year ended March 31, 1995 and the fiscal period ended September
30, 1995, previously delivered to KTFIF, fairly present the financial position
of the Texas Fund as of March 31, 1995 and September 30, 1995, respectively, and
the results of its operations and changes in its net assets for the year and
period, respectively, then ended.
5.4 Authority Relative to this Agreement. KSTFF has the
requisite power to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the Board of
Trustees of the Texas Fund, and, except for the requisite approval by the
shareholders of the Texas Fund, no other proceedings on behalf of KSTFF are
necessary to authorize KSTFF's officers to effectuate this Agreement and the
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transactions contemplated herein. KSTFF is not a party to or obligated under any
charter, by-law, indenture, or contract provisions or any other commitment or
obligation or subject to any order or decree that would be violated by its
executing and carrying out this Agreement.
5.5 Liabilities. There are no liabilities of the Texas Fund,
whether or not determined or determinable, other than liabilities disclosed or
provided for in the financial statements of KSTFF with respect to the year ended
March 31, 1995 and the fiscal period ended September 30, 1995, previously
delivered as set forth in Subsection 5.3, and liabilities incurred in the
ordinary course of business subsequent to September 30, 1995 or otherwise
previously disclosed to KTFIF, none of which has been materially adverse to the
business assets or results of operations of KSTFF.
5.6 Litigation. There are no claims, actions, suits or
proceedings pending or, to the knowledge of KSTFF, threatened that would
materially adversely affect the Texas Fund or its assets or business or prevent
or hinder consummation of the transactions contemplated hereby.
5.7 Contracts. Except for contracts and agreements previously
disclosed to KTFIF, under which no default exists, KSTFF is not a party to or
subject to any material contract, debt, instrument, plan, lease, franchise,
license, or permit of any kind or nature whatsoever.
5.8 Portfolio Securities. All securities and other assets held
as investments by the Texas Fund as of the Effective Date will be owned by the
Texas Fund free and clear of any liens, claims, charges, options, and
encumbrances, except as otherwise indicated in a schedule to be delivered to
KTFIF prior to the Effective Date. The assets of the Texas Fund do not include
any assets not permitted under the KSTFF Prospectus (as hereinafter defined).
Except as disclosed to KTFIF prior to the Effective Date, none of such
securities or other assets is, or, after the completion of the transactions
contemplated by this Agreement, will be subject to any restrictions, legal or
contractual, on the disposition thereof (including restrictions as to the public
offering or sale thereof under the 1933 Act), and all such securities and other
assets are or will be readily marketable.
5.9 Taxes. The federal income tax returns of the Texas Fund
have been filed for all taxable years prior to and including March 31, 1995, and
all taxes payable pursuant to such returns have been paid. The Texas Fund has
qualified as a regulated investment company under the Code in respect to each
taxable year of the Texas Fund since commencement of its operations.
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5.10 Registration/Proxy Statement. In connection with the
Registration/Proxy Statement, KSTFF will cooperate with KTFIF in the preparation
of the proxy statement portion of the Registration/Proxy Statement, and will
furnish to KTFIF the information relating to the Texas Fund required by the 1933
Act and the regulations thereunder to be set forth in the Registra-tion/Proxy
Statement (including the Proxy Statement, Prospectus, and Statement of
Additional Information). At the time the Regis-tration/Proxy Statement becomes
effective, the Registration/ Proxy Statement, insofar as it relates to the Texas
Fund (a) will comply in all material respects with the provisions of the 1933
Act and the regulations thereunder, and (b) will not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. In addition,
at the time the Registra-tion/Proxy Statement becomes effective, at the time of
the meeting of the shareholders of the Texas Fund referred to in Subsection 3.3,
and on the Effective Date, the Proxy Statement, the Prospectus, and Statement of
Additional Information, as amended or supplemented by any amendments or
supplements filed by KTFIF insofar as they relate to the Texas Fund, will not
contain an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
5.11 Capitalization. On December 31, 1995, 527,327 shares of
the Texas Fund were duly and validly issued and outstanding, fully-paid, and
non-assessable by KSTFF. The Texas Fund does not have any outstanding options,
warrants, or other rights to subscribe for or purchase any shares of the Texas
Fund, nor is there outstanding any security convertible into any shares of the
Texas Fund.
5.12 Prospectus. The prospectus and statement of additional
information of KSTFF each dated May 30, 1995, as supplemented June 1, 1995 (the
"KSTFF Prospectus"), which have previously been furnished to KTFIF, did not
contain as of such date and do not as of this date contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
SECTION 6. CONDITIONS TO OBLIGATIONS OF KEYSTONE STATE
TAX FREE FUND
The obligations of KSTFF hereunder with respect to the consummation of
the exchange of assets of the Texas Fund for shares of KTFIF are subject to the
satisfaction of the conditions set forth below in this Section.
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6.1 Shareholder Approval. This Agreement and the transactions
set forth herein with respect to the Texas Fund shall have been approved by the
affirmative vote of the holders of a majority (as defined in the 1940 Act) of
the outstanding voting shares of the Texas Fund.
6.2 Representations, Warranties and Agreements.
KTFIF shall have complied with each of its agreements contained herein, each of
the representations and warranties of KTFIF contained herein shall be true in
all material respects as of the Effective Date, and, except as otherwise
indicated in any financial statements of KTFIF audited or certified by the
Treasurer of KTFIF, which may be delivered to KSTFF on or prior to the last
business day preceding the Effective Date, as of the Effective Date, there shall
have been no material adverse change in the financial condition, results of
operations, business, properties or assets of KTFIF since November 30, 1995.
KSTFF shall have received a certificate of the President of KTFIF satisfactory
in form and substance so stating; provided, however, that a decline in net asset
value shall not constitute a material adverse change.
6.3 Regulatory Approval. The Registration/Proxy Statement
shall have been declared effective by the Commission and no stop order under the
1933 Act pertaining thereto shall have been issued, and all approvals,
registrations, and exemptions under federal and state laws considered to be
necessary shall have been obtained.
6.4 Dividends. KTFIF will declare to its shareholders of
record on or prior to the Effective Date a dividend or dividends, which,
together with all previous such dividends, shall have the effect of distributing
to such shareholders as of the Effective Date, all of KTFIF's investment company
taxable income computed for taxable years ending prior to, as well as for the
period ending on, the Effective Date (computed without regard to any deduction
for dividends paid).
6.5 Opinion of Counsel. KSTFF shall have received the opinion
of Rosemary D. Van Antwerp, General Counsel of Keystone Investment Management
Company, dated the Effective Date, addressed to and in form and substance
satisfactory to the KSTFF, to the effect that (a) KTFIF is a business trust duly
organized and existing and in good standing under the laws of The Commonwealth
of Massachusetts; (b) KTFIF is an open-end, diversified investment company of
the management type registered under the 1940 Act; (c) this Agreement, the
transactions provided for herein and the execution of this Agreement have been
duly authorized and approved by all requisite action of KTFIF, and this
Agreement has been duly executed and delivered by KTFIF and is a valid and
binding obligation of KTFIF; (d) the Registration/Proxy Statement has been
declared effective by the Commission and no stop order under the 1933 Act
pertaining thereto has been issued, and all approvals, registrations and
exemptions under federal and state laws
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considered to be necessary shall have been obtained; and (e) the shares of KTFIF
to be issued in exchange for the assets of the Texas Fund shall have been duly
authorized and upon issuance thereof in accordance with this Agreement will be
validly issued, fully paid and nonassessable by KTFIF.
6.6(a) Secretary's Certificate. KSTFF shall have received
copies of the resolutions adopted by the Board of Trustees of KTFIF authorizing
the execution of this Agreement by KTFIF and the transactions contemplated
hereby, certified by the Secretary or an Assistant Secretary of KTFIF.
(b) KSTFF shall have received a certificate of the
Secretary or an Assistant Secretary of KTFIF as to the signatures and incumbency
of its officers who executed this Agreement on behalf of KTFIF and any other
documents delivered in connection with the transactions contemplated hereby on
behalf of KTFIF.
6.7 Treasurer's Certificate. KTFIF shall have furnished to
KSTFF a statement of KTFIF's assets and liabilities with values determined as
provided in Section 1.1(d) of this Agreement, together with a list of the
respective tax cost of the assets certified by KTFIF's Treasurer.
6.8(a) Officer's Certificate. KSTFF shall have received a
certificate of an appropriate officer of KTFIF as to the fulfillment of all
agreements and conditions on its part to be fulfilled hereunder on or prior to
the Effective Date, and to the effect that the representations and warranties of
KTFIF are true and correct in all material respects at and as of the Effective
Date as if made at and as of such date.
(b) KSTFF shall have received a certificate of an
appropriate officer of KTFIF that (i) material relating to KTFIF included in the
Proxy Statement and in the KTFIF Prospectus that accompanied such Proxy
Statement, taken together, is complete and correct and contained, as of the date
of the Proxy Statement and as of the Effective Date, no untrue statement of a
material fact and omitted no statement of a material fact required to be stated
therein or necessary to make the statements contained therein not misleading;
(ii) the Registration/Proxy Statement insofar as it relates to KTFIF complied
otherwise with the regulations of the Commission applicable to the solicitation
of proxies by registered investment companies; and (iii) KTFIF's Prospectus and
Statement of Additional Information dated March 31, 1995 as supplemented June 1,
1995 complied with the requirements of the 1933 Act and the rules and
regulations of the Commission thereunder.
6.9 Opinion of Tax Counsel. KSTFF shall have received an
opinion of Sullivan & Worcester that for federal income tax purposes (a) no gain
or loss will be recognized by the Texas Fund or KTFIF upon receipt by KTFIF of
the assets transferred pursuant to
A-11
<PAGE>
this Agreement; (b) the basis to KTFIF of the assets will be the same as the
basis of the assets in the hands of the Texas Fund immediately before the
exchange; and (c) KTFIF's holding periods with respect to the assets will
include the respective periods for which the assets were held by the Texas Fund.
6.10 KPMG Peat Marwick LLP Letter. KSTFF shall have received a
letter from KPMG Peat Marwick LLP reporting on procedures performed by them to
determine the accuracy of the computations required by Section 1.1(d) above.
SECTION 7. CONDITIONS TO OBLIGATIONS OF KEYSTONE TAX FREE
INCOME FUND.
The obligations of KTFIF hereunder with respect to the consummation of
the exchange of its shares for the assets and liabilities of the Texas Fund are
subject to the satisfaction of the conditions set forth below in this Section.
7.1 Shareholder Approval. This Agreement and the transactions
set forth herein with respect to the Texas Fund shall have been approved by the
affirmative vote of the holders of a majority (as defined in the 1940 Act) of
the outstanding voting shares of the Texas Fund.
7.2 Representations, Warranties and Agreements.
KSTFF shall have complied with each of its agreements contained herein, each of
the representations and warranties of KSTFF contained herein shall be true in
all material respects as of the Effective Date, and, except as otherwise
indicated in any financial statements of KSTFF audited or certified by the
Treasurer of KSTFF, which may be delivered to KTFIF on or prior to the last
business day preceding the Effective Date, as of the Effective Date, there shall
have been no material adverse change in the financial condition, results of
operations, business, properties, or assets of the Texas Fund since September
30, 1995. KTFIF shall have received a certificate of the President of KSTFF
satisfactory in form and substance to KTFIF so stating; provided, however, that
a decline in net asset value shall not constitute a material adverse change.
7.3 Regulatory Approval. The Registration/Proxy Statement
shall have been declared effective by the Commission and no stop order under the
1933 Act pertaining thereto shall have been issued, and all approvals,
registrations, and exemptions under federal and state laws considered to be
necessary shall have been obtained.
7.4 Dividends. The Texas Fund will declare to its shareholders
of record on or prior to the Effective Date a dividend or dividends, which,
together with all previous such dividends, shall have the effect of distributing
to such shareholders, as of the
A-12
<PAGE>
Effective Date, all of the Texas Fund's investment company taxable income for
taxable years ending at or prior to the Effective Date (computed without regard
to any deduction for dividends paid) and all of the Texas Fund's net capital
gains if any, realized in taxable years ending at or prior to the Effective Date
(after reduction for any capital loss carryforward).
7.5 Opinion of Counsel. KTFIF shall have received the opinion
of Rosemary D. Van Antwerp, General Counsel of Keystone Investment Management
Company, dated the Effective Date, addressed to and in form and substance
satisfactory to KTFIF, to the effect that (a) the KSTFF is a business trust duly
organized and existing and in good standing under the laws of The Commonwealth
of Massachusetts; (b) KSTFF is an open-end, non-diversified investment company
of the management type registered under the 1940 Act; (c) all approvals,
registrations and exemptions under federal and state laws considered to be
necessary have been obtained; and (d) this Agreement, the transactions provided
for herein and the execution of this Agreement have been duly authorized and
approved by all requisite action of the KSTFF, and this Agreement has been duly
executed and delivered by the KSTFF and is a valid and binding obligation of
KSTFF.
7.6(a) Secretary's Certificate. KTFIF shall have received
copies of the resolutions adopted by the Board of Trustees of KSTFF and its
shareholders authorizing the execution of this Agreement on behalf of KSTFF and
the transactions contemplated hereby, each certified by the Secretary or an
Assistant Secretary of KSTFF.
(b) KTFIF shall have received a certificate of the
Secretary or an Assistant Secretary of KSTFF as to the signatures and incumbency
of its officers who executed this Agreement on behalf of KSTFF and any other
documents delivered in connection with the transactions contemplated thereby on
behalf of KSTFF.
7.7 Treasurer's Certificate. KSTFF shall have furnished
to KTFIF a statement of the Texas Fund's assets and liabilities
with values determined as provided in Section 1.1(d) of this Agreement, together
with a list of the respective tax cost of the assets certified by KSTFF's
Treasurer.
7.8(a) Officer's Certificate. KTFIF shall have received a
certificate of an appropriate officer of KSTFF as to the fulfillment of all
agreements and conditions on its part to be fulfilled hereunder on or prior to
the Effective Date, and to the effect that the representations and warranties of
KSTFF are true and correct in all material respects at and as of the Effective
Date as if made at and as of such date.
(b) KTFIF shall have received such other documents,
including an opinion of Rosemary D. Van Antwerp, General Counsel to
A-13
<PAGE>
Keystone Investment Management Company, as KTFIF may reasonably request to show
fulfillment of the purposes and conditions of this Agreement.
7.9 Opinion of Tax Counsel. KTFIF shall have received an
opinion of Sullivan & Worcester that for federal income tax purposes (a) no gain
or loss will be recognized by the Texas Fund or KTFIF upon receipt by KTFIF of
the assets transferred pursuant to this Agreement; (b) the basis to KTFIF of the
assets will be the same as the basis of the assets in the hands of the Texas
Fund immediately before the exchange; and (c) KTFIF's holding periods with
respect to the assets will include the respective periods for which the assets
were held by the Texas Fund.
7.10 KPMG Peat Marwick LLP Letter. KTFIF shall have received a
letter from KPMG Peat Marwick LLP reporting on procedures performed by them to
determine the accuracy of the computations required by Section 1.1(d) above.
7.11 Other Acts. KSTFF will, from time to time, as and when
requested by KTFIF, execute and deliver or cause to be executed and delivered,
all such assignments and other instruments, and will take and cause to be taken
such further action, as KTFIF may deem necessary or desirable in order to vest
in and confirm to KTFIF title to and possession of all the assets to be sold,
assigned, transferred, and delivered hereunder and otherwise to carry out the
intent and purpose of this Agreement.
SECTION 8. AMENDMENT.
By agreement in writing authorized by the Trustees of KSTFF and KTFIF,
the parties hereto may amend this Agreement at any time before or after approval
hereof by the shareholders of the Texas Fund; provided, however, that after such
approval by the shareholders, no amendment shall be made that substantially
changes the terms hereof.
SECTION 9. TERMINATION OF AGREEMENT.
This Agreement may be terminated at any time prior to the Effective Date by
either party hereto by written notice given to the other party hereto, without
liability on the part of either party hereto or its respective Trustees,
officers, or shareholders. In addition, unless the term of this Agreement is
extended by mutual consent of the parties hereto, this Agreement shall be
terminated without liability on the part of any of the foregoing as of the close
of business on April 30, 1996, if the Effective Date is not on or prior to such
date.
A-14
<PAGE>
SECTION 10. WAIVER OF REPRESENTATIONS AND CONDITIONS.
At any time prior to the Effective Date, either of the parties may by
written instrument signed by it (a) waive any inaccuracies in the
representations and warranties made to it contained herein; and (b) waive
compliance with any of the covenants or conditions made for its benefit
contained herein; but after approval by the shareholders, no waiver shall be
made that substantially impacts the transactions contemplated hereby.
SECTION 11. EXPENSES.
(a) KTFIF will pay or cause to be paid all fees and expenses that it
incurs in connection with the transaction contemplated by this Agreement,
including, but not limited to, legal, accounting, custodian and transfer agents
fees, as well as printing, mailing and other expenses in connection with the
registration of its shares under the 1933 Act, and additional audit fees.
(b) The Texas Fund will pay or cause to be paid (i) all the costs of
printing and mailing the Prospectus/Proxy Statement and other materials to the
Texas Fund shareholders and conducting proxy solicitations; and (ii) all other
fees and expenses that it incurs in connection with the transaction contemplated
by this Agreement, including, but not limited to, legal, accounting, custodian
and transfer agents fees, and additional audit fees.
SECTION 12. INDEMNIFICATION.
(a) KTFIF agrees to indemnify and hold harmless KSTFF, its Trustees and
officers against any and all claims, to the extent such claims are based upon,
arise out of or relate to any untruthful or inaccurate representation, any
omission of a material fact necessary to make a statement not misleading or any
breach of any warranty or any failure to perform or comply with any of its
covenants, conditions, or agreements set forth in this Agreement and any
obligation or liability of the Texas Fund specifically assumed by KTFIF pursuant
to Section 1.1(a);
(b) KSTFF agrees to indemnify and hold harmless KTFIF, its Trustees and
officers against any and all claims, to the extent such claims are based upon,
arise out of or relate to any untruthful or inaccurate representation, any
omission of a material fact necessary to make a statement not misleading or any
breach of any warranty or any failure to perform or comply with any of its
covenants, conditions or agreements set forth in this Agreement and any
obligation or liability of the Texas Fund (other than obligations and
liabilities specifically assumed by KTFIF pursuant to the provisions of Section
1.1(a)) accruing on or prior to, or existing on the Effective Date or thereafter
accrued.
A-15
<PAGE>
(c) Any claim for indemnification under paragraphs (a) and (b) based
upon any untruthful or inaccurate representation or any breach of any warranty
must be asserted within three years from the Effective Date. As used in this
section, the word "claim" means any and all liabilities, obligations, losses,
damages, deficiencies, demands, claims, penalties, assessments, judgments,
actions, proceedings, and suits of whatever kind and nature and all costs and
expenses (including, without limitation, reasonable attorneys' fees).
SECTION 13. SURVIVAL OF REPRESENTATIONS, ETC.
The representations, warranties, covenants, and indemnifications
provided for in this Agreement shall survive the Effective Date.
SECTION 14. GENERAL.
14.1 Notices. All notices required or permitted hereunder
shall be in writing and shall be deemed to have been delivered when deposited in
the United States mail, postage prepaid, registered or certified mail, return
receipt requested addressed to the parties as set forth below:
To KSTFF: Albert H. Elfner, III
President and
Chief Executive Officer
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
With a copy to: Rosemary D. Van Antwerp
Senior Vice President and Secretary
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
To KTFIF: Albert H. Elfner, III
President and
Chief Executive Officer
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
With a copy to: Rosemary D. Van Antwerp
Senior Vice President and Secretary
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
The address of any of the foregoing may be changed by notice given to
the other party in accordance with this Subsection.
A-16
<PAGE>
14.2 Recourse Limited. Each of KSTFF and KTFIF is a
Massachusetts business trust established under a Declaration of Trust, as
amended from time to time. The obligations of each of the KSTFF and KTFIF are
not personally binding upon, nor shall recourse be had against the private
property of any of its Trustees, shareholders, officers, employees, or agents,
but only property of KSTFF or KTFIF, as the case may be, shall be bound.
14.3 Entire Agreement. This Agreement supersedes all prior
agreements between the parties whether written or oral, is intended as a
complete and exclusive statement of the terms of the Agreement between the
parties, and may not be changed or terminated orally.
14.4 Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more counterparts have been executed on
behalf of KSTFF and KTFIF and delivered to each of the parties hereto.
14.5 Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.6 No Third Party Rights. Nothing in this Agreement
expressed or implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement. In addition, the parties hereto
represent and warrant that they have not employed any broker, finder, or
intermediary in connection with this transaction who might be entitled to a
finder's fee or other similar fee or commission.
14.7 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of The Commonwealth of
Massachusetts.
A-17
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
KEYSTONE STATE TAX FREE FUND
ATTEST: ________________________________ By: _________________________
Albert H. Elfner, III
Chief Executive Officer and
President
KEYSTONE TAX FREE INCOME FUND
ATTEST: ________________________________ By: _________________________
Albert H. Elfner, III
Chief Executive Officer and
President
A-18
<PAGE>
EXHIBIT B
MANAGEMENT'S DISCUSSION OF THE PERFORMANCE
OF KEYSTONE TAX FREE INCOME FUND
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995
Q What does the Fund offer investors?
A The Fund is designed for tax-sensitive investors. It seeks consistent,
attractive income that is exempt from federal income tax.(1) The Fund offers
professional management and diversification by investing in investment grade
municipal bonds. We manage the Fund with careful attention to credit quality
and financial stability.
Q How did municipal bonds perform over the past year?
A Municipal bonds rebounded strongly as a slowing economy reduced the threat
of higher interest rates and inflation. Most bond holders more than recovered
from their losses in 1994 and recorded double-digit total returns. This was a
reversal from 1994 when yields rose and bond prices declined. As growth
moderated at the start of 1995, municipal bonds rallied resulting in
unusually positive total returns.
Q How did the Fund perform?
A The Fund generated returns that paralleled the strong performance of the
municipal bond market. At the beginning of 1995 we expected economic growth
to moderate and interest rates to decline. So, we emphasized bonds that we
expected to benefit from declining rates: non-callable, discount and zero
coupon bonds. Since callable bonds are likely to be bought back by the issuer
in this type of environment, we emphasized noncallable bonds to preserve
income as rates declined. At the same time, these bonds became expensive
relative to other municipal bonds and this contributed to the Fund's price
appreciation.
Discount bonds are sold at a discount from par, or value at maturity.
Historically these bonds have tended to provide more price appreciation in a
falling rate environment than bonds priced close to or above par.
Zero coupon bonds represented a small portion of the portfolio. But, these
bonds were important contributors to the Fund's strong price recovery.
Because zeroes pay income at maturity, they have historically tended to be
the most sensitive to changes in interest rates. As rates declined, they were
among the best performing holdings in the portfolio.
We were pleased with the results of this strategy which helped the Fund
participate in the strong recovery of municipal bonds this year.
Q Total returns were impressive, but municipal bond yields declined. Why?
A Yields declined for nearly every municipal bond investor, including
Keystone Tax Free Income Fund. Slower economic growth lessens the potential
for higher inflation which reduces net bond yields. We held a number of high
coupon bonds and attempted to lock-in income by emphasizing selected
non-callable bonds. While the Fund's income still declined, we believe the
portfolio's holdings of these bonds helped the portfolio to maintain income.
(1) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
3
<PAGE>
Q Did talk about a 'flat tax' in Washington affect municipal bonds?
A The 'flat tax' proposals have introduced an element of uncertainty into the
municipal bond market. There are a number of proposals which would remove the
tax advantage of municipal bonds. As the debate on the flat tax continues, we
will closely monitor its development.
Q What is your outlook?
A We continue to be cautiously optimistic about the municipal bond market. We
expect the economy to continue slowing to a sustainable, non-inflationary
level. This should provide the potential for stable to declining interest
rates over the next six months. In particular, we expect short-term interest
rates to decline further, which could result in some price appreciation.
Q Why do you think growth will remain slow?
A Demographics are important to economic growth. With new home sales and new
family formation slowing, we think economic growth should remain moderate
compared to the 1980s and early 1990s. In addition, world economic growth is
a factor. In Europe, growth has been slow, even with cuts in interest rates.
Because U.S. growth is increasingly dependent on world growth, economic
growth should not be a threat to bond investors for some time. Combined with
a proposal to balance the federal budget, these could be strong positives for
municipal bond investors over the long term.
Q What should shareholders expect?
A We think shareholders should not expect a repeat of the unusually positive
performance of 1995; investors should look forward to returns to come
primarily from income rather than price appreciation in the months ahead.
Q Are municipal bond funds still a good value?
A Even after such a great year, we believe municipal bond yields are still
very attractive values compared to taxable bond yields. On November 30 the
yield on a 30-year AA-rated municipal bond equaled 93% of the yield on a
comparable U.S. Treasury bond. As rates declined, taxable bond yields
declined more than tax free yields. This increased the attractiveness of
municipal bonds compared to taxable bonds. As a result, the after-tax yield
of municipal bonds remains relatively high by historical standards.
- ---------------------------------------[pie chart]------------------------------
Portfolio Quality Summary
as of November 30, 1995
S&P rating(2)
AAA 37%
A 19%
BBB 18%
AA 14%
Not rated 12%
Average portfolio quality: AA-
(percentage of portfolio assets)
(2) Where Standard & Poor's (S&P) ratings were not available, we have used
ratings from Moody's Investor Service, Inc., Fitch Investor's Service,
Inc. or ratings assigned by another nationally recognized statistical
rating organization.
- --------------------------------------------------------------------------------
4
<PAGE>
- ----------------------------------[bar chart]-----------------------------------
Relatively Attractive
Municipal Bond Yields(3)
as of November 30, 1995
Municipal Bonds 5.7
U.S. Treasury Bond 6.13
Municipal bond yields recently equalled 93% of
the yield on a comparable U.S. Treasury bond.
(3) Source: Keystone Investments, Inc. Based on a selection of 30-year
AA-rated municipal bonds versus the yield on the 30-year U.S. Treasury
bond on November 30, 1995.
- --------------------------------------------------------------------------------
Tax-Equivalent Yields
Federal Tax Bracket(4)
- ---------------------------------------
31% 36% 39.6%
- ---------------------------------------
Yield Taxable Equivalent Yield
- ---------------------------------------
4.5% 6.5% 7.0% 7.5%
- ---------------------------------------
5.0% 7.2% 7.8% 8.3%
- ---------------------------------------
5.5% 8.0% 8.6% 9.1%
- ---------------------------------------
A tax free yield of 5% is equal to a taxable yield of 7.8% if you are in the
36% federal tax bracket.
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
(4) The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields
are hypothetical and do not represent the returns of any particular
investment.
5
<PAGE>
Your Fund's Performance
******************************* [MOUNTAIN CHART] *******************************
Growth of an investment in
Keystone Tax Free Income Fund Class A
Initial Reinvested
Investment Distributions
11/86 9649 9649
11/87 9249 9541
11/88 9534 10553
11/89 9801 11605
11/90 9534 12249
11/91 9820 13423
11/92 9991 14678
11/93 9763 16053
11/94 8506 14799
11/95 9572 17568
A $10,000 investment in Keystone Tax Free Income Fund Class A
made on April 14, 1987 with all distributions reinvested was worth
$17,569 on November 30, 1995. Past performance is no guarantee
of future results.
*******************************************************************************
Twelve-Month Performance as of November 30, 1995
Class A Class B Class C
Total returns* 18.71% 17.84% 17.84%
Net asset value 11/30/94 $ 8.93 $ 8.88 $ 8.88
11/30/95 $10.05 $ 9.97 $ 9.97
Dividends $ 0.52 $ 0.46 $ 0.46
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of November 30, 1995
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 18.71% 17.84% 17.84%
1-year 13.07% 13.84% 17.84%
5-year 36.62% -- --
Life of Class 75.69% 12.11% 15.02%
Average Annual Returns
1-year w/o sales charge 18.71% 17.84% 17.84%
1-year 13.07% 13.84% 17.84%
5-year 6.44% -- --
Life of Class 6.75% 4.12% 5.06%
Class A share performance is from the commencement of investment operations
on April 14, 1987. Performance is reported at the current maximum front-end
sales charge of 4.75%.
Class B share performance is from the commencement of investment operations
on February 1, 1993. Shares purchased after June 1, 1995 are subject to a
contingent deferred sales charge (CDSC) that declines from 5% to 1% over six
years from the month purchased. Performance assumes that shares were redeemed
after the end of a one-year holding period and reflects the deduction of a 4%
CDSC.
Class C share performance is from the commencement of investment operations
on February 1, 1993. Performance reflects the return you would have received
for holding shares for one year and redeeming after the end of the period.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
B-5
<PAGE>
Growth of an Investment
******************************* [LINE CHART] ***********************************
Comparison of change in value of a $10,000 investment
in Keystone Tax Free Income Fund, the Lehman
Municipal Bond Index, and the Consumer Price Index.
In thousands April 14, 1987 through November 30, 1995
Average Annual Total Return
1 Year 5 Year Life of Class
Class A 13.07% 6.44% 6.75%
Class B 13.84% -- 4.12%
Class C 17.84% -- 5.06%
Class A LMBI CPI
11/86 9649 10000 10000
11/87 9541 9768 10294
11/88 10553 10805 10731
11/89 11605 11994 11231
11/90 12249 12917 11936
11/91 13423 14243 12293
11/92 14678 15672 12667
11/93 16053 17409 13006
11/94 14799 16499 13354
11/95 17569 19618 13711
Past performance is no guarantee of future results. The performance of Class B
or Class C shares may be greater or less than the line shown based on
differences in loads and fees paid by the shareholder investing in the different
classes. Class B and Class C shares were introduced February 1, 1993. The Lehman
Municipal Bond Index is from March 31, 1987. The Consumer Price Index is through
October 31, 1995.
*******************************************************************************
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of three lines that represent the accumulated value of
an initial $10,000 investment for the period indicated. The lines illustrate
a hypothetical investment in:
1. Keystone Tax Free Income Fund
Your Fund seeks current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds. The return
is quoted after deducting sales charges (if applicable), fund expenses, and
transaction costs and assumes reinvestment of all distributions.
2. Lehman Municipal Bond Index (LMBI)
The LMBI is a broad-based, unmanaged market index of securities issued by
state and local governments. It represents the price change and coupon income
of several thousand securities with various maturities and qualities.
Securities are selected and compiled by Lehman Brothers, Inc. according to
criteria that may be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
The CPI is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as the prices of
services, housing, food, transportation and electricity which are compiled by
the U.S. Bureau of Labor Statistics. The CPI is generally considered a
valuable benchmark for investors who seek to outperform increases in the cost
of living.
The indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help
you evaluate fund performance in conjunction with the other important
financial considerations such as safety, stability and consistency.
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have
B-6
<PAGE>
income as one of their objectives also will tend to compare less favorably to
relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
B-7
<PAGE>
TABLE OF CONTENTS
IMPORTANT DEFINITIONS........................................3
SYNOPSIS.....................................................4
PRINCIPAL RISK FACTORS.......................................11
THE REORGANIZATION...........................................12
INFORMATION ABOUT THE FUNDS..................................15
ADDITIONAL INFORMATION ABOUT THE FUNDS.......................16
<PAGE>
INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
OF
KEYSTONE TAX FREE INCOME FUND
Statement of Additional Information
March 4, 1996
This Statement of Additional Information ("SAI") contains or
incorporates by reference material that may be of interest to investors, but
which is not included in the Prospectus/Proxy Statement ("Prospectus") of
Keystone Tax Free Income Fund ("KTFIF") dated March 4, 1996. This SAI is not a
Prospectus and is authorized for distribution only when it accompanies or
follows delivery of the above-referenced Prospectus. This SAI should be read in
conjunction with the Prospectus. Copies of the Prospectus can be obtained by
writing to KTFIF, 200 Berkeley Street, Boston, Massachusetts 02116-5034, or
calling toll-free (800) 343-2898.
TABLE OF CONTENTS
This SAI contains or incorporates by reference the following documents:
I. Statement of Additional Information of KTFIF dated March 31,
1995, as supplemented June 1, 1995, which is hereby incorporated
by reference herein.
II. Annual Report of KTFIF for the fiscal year ended November
30, 1995, which is hereby incorporated by reference herein.
III. Annual Report of Keystone State Tax Free Fund ("KSTFF") for the
fiscal year ended March 31, 1995, which is hereby incorporated
by reference herein.
IV. Semi-Annual Report of KSTFF for the fiscal period ended
September 30, 1995, which is hereby incorporated by
reference herein.
<PAGE>
KEYSTONE TEXAS TAX FREE FUND
A Portfolio of Keystone State Tax Free Fund
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 30, 1996
The undersigned, revoking all Proxies heretofore given, hereby appoints
Albert H. Elfner, III, Rosemary D. Van Antwerp, and James M. Wall or any of them
as Proxies of the undersigned, with full power of substitution, to vote on
behalf of the undersigned all shares of Keystone Texas Tax Free Fund (the "Texas
Fund") that the undersigned is entitled to vote at the special meeting of
shareholders of the Texas Fund to be held at 3:00 p.m. on Tuesday, April 30,
1996 at the offices of Keystone Investment Management Company, 26th Floor, 200
Berkeley Street, Boston, Massachusetts 02116 and at any adjournments thereof, as
fully as the undersigned would be entitled to vote if personally present, as
follows:
To approve an Agreement and Plan of Reorganization whereby Keystone Tax
Free Income Fund ("KTFIF") will (i) acquire substantially all of the assets of
the Texas Fund in exchange for Shares of KTFIF; and (ii) assume the liabilities
of the Texas Fund, as substantially described in the accompanying
Prospectus/Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE>
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE KEYSTONE STATE TAX
FREE FUND.
THE BOARD OF TRUSTEES OF THE KEYSTONE STATE TAX FREE FUND RECOMMENDS A VOTE FOR
THE PROPOSAL.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR THE PROPOSAL
IF NO CHOICE IS INDICATED.
THE PROXIES ARE AUTHORIZED IN THEIR DISCRETION TO VOTE UPON SUCH OTHER MATTERS
AS MAY COME BEFORE THE MEETING OR ANY ADJOURNMENTS THEREOF.
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEAR ON THIS CARD.
Dated: ____________________, 199__
Signature(s):_______________________________
Signature (of joint
owner, if any):___________________________
NOTE: When signing as attorney, executor, administrator, trustee, guardian, or
as custodian for a minor, please sign your name and give your full title as
such. If signing on behalf of a corporation, please sign full corporate name and
your name and indicate your title. If you are a partner signing for a
partnership, please sign the partnership name and your name. Joint owners should
each sign this proxy. Please sign, date and return.
