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MASTER RESERVES TRUST
PART A
PROSPECTUS
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PROSPECTUS APRIL 28, 1995
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MASTER RESERVES TRUST
200 Berkeley Street, Boston, Massachusetts 02116-5034
Call toll free 1-800-343-2138
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Master Reserves Trust (the "Fund") is a mutual fund that seeks maximum current
income while preserving capital. Currently, the Fund offers institutional and
other substantial investors a money market portfolio ("Money Market Portfolio I"
or the "Portfolio"). Money Market Portfolio I is a "multiple user" portfolio,
i.e., a portfolio available to more than one investor.
SHARES OF THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
WHILE THE FUND INTENDS TO MAINTAIN A NET ASSET VALUE PER SHARE OF $1.00, THERE
IS NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
This prospectus relates only to the Fund and the Portfolio and summarizes
information about the Fund and the Portfolio that a prospective investor should
know before investing. Investors should read and retain this prospectus for
future reference.
Additional information about the Fund and the Portfolio is contained in a
statement of additional information dated April 28, 1995, which has been filed
with the Securities and Exchange Commission and is incorporated by reference
into this prospectus. For a free copy, or for other information about the Fund
and the Portfolio, write to the address or call the telephone number listed
above.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
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TABLE OF CONTENTS
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Page Page
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Fee Table .......................................... 2 How to Buy Shares .............................. 8
Financial Highlights ............................... 3 How to Redeem Shares ........................... 9
The Fund ........................................... 4 Shareholder Services ........................... 10
Investment Objective and Policies .................. 4 Performance Data ............................... 11
Investment Restrictions ............................ 5 Fund Shares .................................... 11
Pricing Shares ..................................... 6 Additional Information ......................... 12
Dividends and Taxes ................................ 7 Additional Investment Information .............. A-1
Portfolio Management and Expenses .................. 7
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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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MASTER RESERVES TRUST
FEE TABLE
FOR
MONEY MARKET PORTFOLIO I
Set forth below is the fee table for the Portfolio currently offered by the
Fund. The purpose of the fee table is to assist investors in understanding the
costs and expenses that an investor in the Portfolio will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Portfolio Management and Expenses" in this prospectus.
SHAREHOLDER TRANSACTION EXPENSES
There are no shareholder transaction expenses associated with this
investment.
ANNUAL PORTFOLIO OPERATING EXPENSES<F1>
(as a percentage of average net assets)
Management Fee .......................................... 0.09%
Other Expenses .......................................... 0.01%
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(Fees payable to the Fund's Independent Trustees)
Total Portfolio Operating Expenses ...................... 0.10%
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EXAMPLE<F2>
1 Year 3 Years 5 Years 10 Years
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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: ................... $1.00 $3.00 $6.00 $13.00
AMOUNTS SHOWN IN THE FEE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES;
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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<F1> Expense ratios are for the Portfolio's fiscal year ended December 31, 1994.
<F2> The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this
example. Actual return for the Portfolio may be greater or less than 5%.
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The Portfolio may be offered to customers of financial institutions that
offer a variety of services to their customers at varying fees. The fees
associated with such services, such as sweep, trustee, agency or custodian fees,
may have to be paid by customers in order to purchase Portfolio shares. Such
fees are not expected to be directly related to the Portfolio. Some fees,
however, such as those based on a bank customer's assets or income, may be
indirectly related to the Portfolio.
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FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
MONEY MARKET PORTFOLIO I
The following table contains important financial information relating to the
Portfolio and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.
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Year Ended December 31,
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1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
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NET ASSET VALUE, BEGINNING OF YEAR ..... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Income from Investment Operations
Net Investment Income .................. 0.042 0.032 0.037 0.059 0.079 0.089 0.073 0.064 0.066 0.078
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Less Distributions
Dividends from Net Investment Income ... (0.042) (0.032) (0.037) (0.059) (0.079) (0.089) (0.073) (0.064) (0.066) (0.078)
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NET ASSET VALUE, END OF YEAR ........... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
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TOTAL RETURN ........................... 4.23% 3.24% 3.76% 6.01% 8.27% 9.25% 7.57% 6.60% 6.76% 7.80%
RATIOS/SUPPLEMENTAL DATA
Ratios to Average Net Assets:
Net Investment Income ................ 4.49% 3.23% 3.70% 5.90% 7.92% 9.24% 7.41% 6.51% 6.42% 7.87%
Operating and Management Expenses .... 0.10% 0.10% 0.19% 0.20% 0.26% 0.30% 0.25% 0.23% 0.24% 0.40%
Net Assets, End of Year (thousands)..... $30,314 $61,354 $205,818 $56,603 $67,682 $162,336 $280,142 $222,314 $187,845 $55,265
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THE FUND
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The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. The Fund has been operating continuously since September
22, 1975, when it was created under Massachusetts law as a Massachusetts
business trust. The Fund is one of twenty-nine funds managed or advised by
Keystone Investment Management Company (formerly Keystone Custodian Funds, Inc.)
("Keystone"), the Fund's investment adviser.
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INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to provide shareholders with maximum
current income while preserving capital. To meet this objective, the Fund
currently offers only the Portfolio.
The Fund is designed for institutional and other substantial investors who
wish to keep temporary cash balances invested in money market instruments. Since
the Portfolio is fully diversified among many securities, investors may incur
less risk by investing in the Portfolio than by investing directly in a small
number of instruments. Investors also achieve liquidity since the Portfolio's
shares may be redeemed at any time. Furthermore, investors are relieved of the
administrative tasks of collecting income and reinvesting the proceeds of
matured securities and receive detailed records of their accounts.
The Portfolio invests in money market instruments maturing in 397 calendar
days or less and/or U.S. government securities maturing in 762 calendar days or
less and maintains an average dollar-weighted maturity of 90 days or less.
The Portfolio limits its investments, including repurchase agreements, to
those U.S. dollar-denominated instruments that Keystone determines present
minimal credit risks and are at the time of acquisition eligible securities
("Eligible Securities") as defined under Rule 2a-7 of the Investment Company Act
of 1940 (the "1940 Act"). Eligible Securities include (1) securities rated by
the requisite rating agencies at the date of investment in one of the two
highest short-term rating categories; (2) securities of issuers receiving such
rating with respect to other short-term debt securities; (3) and comparable
unrated securities. Requisite rating agencies means any two agencies that have
issued a rating with respect to a security or class of debt obligations of an
issuer or one rating agency if only one agency has issued a rating with respect
to such security or issuer. If the Portfolio purchases securities that are
unrated or that have been rated by a single rating agency, the purchase must be
approved or ratified by the Fund's Board of Trustees.
The short-term ratings are as follows: A-1 and A-2, the two highest ratings
given by Standard & Poor's Corporation ("S&P"); Prime-1 and Prime-2, the two
highest ratings given by Moody's Investors Service, Inc. ("Moody's"); and F-1
and F-2, the two highest ratings given by Fitch Investors Service, Inc.
("Fitch").
While the Portfolio may purchase single rated or unrated securities, the Fund
anticipates that at least 95% of the Portfolio's assets will be invested in
instruments that at the date of investment are rated or deemed to be of
comparable quality to securities rated in the highest short-term rating
categories by any two rating agencies. The Portfolio will not invest more than
5% of its assets in securities issued by any one issuer, except for securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
nor will it invest more than 1% of its assets in securities rated in the second
highest short-term rating category issued by any one issuer. The Portfolio will
not invest more than 5% of its assets in securities rated in the second highest
short-term rating category.
The Fund is presently authorized by the Board of Trustees to invest in
short-term municipal obligations. The Portfolio will only invest in short-term
municipal obligations when such investment is consistent with the Fund's
investment objective and the Portfolio's investment policies. The Board has also
authorized the purchase by the Fund of U.S. dollar-denominated obligations of
foreign branches of foreign banks when such investments otherwise satisfy the
investment criteria of the Fund.
The Portfolio invests in the following types of instruments: (1) commercial
paper, including master demand notes and loan participation agreements; (2)
obligations issued or guaranteed by the U.S. government or by any agency or
instrumentality of the U.S. government; (3) obligations (including U.S., Yankee
and Eurodollar certificates of deposit, time deposits and bankers' acceptances)
of domestic and foreign banks or savings and loan associations provided that (a)
at the time of investment, the depository institution or guarantor bank has at
least $1 billion in assets (as of the date of its most recently published
financial statements), or (b) the principal amount of the instrument is insured
in full by the Federal Deposit Insurance Corporation; (4) obligations that at
the date of investment are rated AA or better by S&P or Aa or better by Moody's;
and (5) repurchase agreements for any security listed above.
To the extent permitted by its investment policies, the Portfolio may invest
in restricted securities, including securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 (the "1933 Act"). Generally, Rule
144A establishes a safe harbor from the registration requirements of the 1933
Act for resales by large institutional investors of securities not publicly
traded in the U.S. The Portfolio may purchase Rule 144A securities when such
securities present an attractive investment opportunity and otherwise meet the
Portfolio's selection criteria. Keystone determines the liquidity of the
Portfolio's Rule 144A securities in accordance with guidelines adopted by the
Board of Trustees.
At the present time, the Fund cannot accurately predict exactly how the market
for Rule 144A securities will develop. A Rule 144A security that was readily
marketable upon purchase may subsequently become illiquid. In such an event, the
Board of Trustees will consider what action, if any, is appropriate.
Because interest rates on money market instruments fluctuate in response to
economic factors, the rates on short-term investments made by the Portfolio and
the daily dividend paid to investors will vary, rising or falling with
short-term rates generally. Also, yields from short-term securities may
frequently be lower than yields from longer term securities. In addition, the
value of the Portfolio's securities will fluctuate inversely with interest
rates, the amount of outstanding debt and other factors.
For a further explanation about the types of investments and investment
techniques available to the Portfolio, including the associated risks, please
refer to the description of such investments and investment techniques at the
back of this prospectus as well as the statement of additional information.
Of course, there can be no assurance that the Fund will achieve its investment
objective since there is uncertainty in every investment.
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INVESTMENT RESTRICTIONS
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The Fund has adopted the fundamental restrictions summarized below, which may
not be changed without the vote of a majority of the Fund's outstanding shares.
These restrictions and certain other fundamental restrictions are set forth in
detail in the statement of additional information. Unless otherwise stated, all
references to the Fund's assets are in terms of current market value.
Generally, the Fund will not do the following: (1) invest more than 5% of its
assets in the securities of other single issuers; (2) borrow money, except that
the Fund may borrow money from banks for extraordinary or emergency purposes in
amounts up to one-third (normally less than 5%) of its total assets, including
the amount borrowed, and such borrowings will be repaid before additional
investments are made; (3) pledge more than 15% of its total assets to secure
borrowings; and (4) purchase any security, other than U.S. government
securities, if as a result more than 25% of the Fund's total assets would be
invested in a single industry, except that the Fund may invest up to 100% of its
assets in finance companies as a group, banks and bank holding companies as a
group and utility companies as a group.
Notwithstanding the more flexible limits set forth above, the Fund deems each
of its fundamental investment restrictions to apply to the investments of the
Portfolio. Moreover, notwithstanding the freedom reserved by the Fund to
concentrate all of its assets in finance companies, banks, bank holding
companies and utilities, the Portfolio (if permitted by its investment policies)
may invest up to 100% of its assets only in (1) securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities; and (2) instruments
issued by a domestic bank (including a foreign branch of a domestic bank for
which the investment risk associated with the securities issued by such branch
is the same as the investment risk associated with the securities issued by its
domestic parent as well as a U.S. branch of a foreign bank that is subject to
the same regulation as U.S. banks).
In addition, the Fund has a policy that the Portfolio will not invest more
than 10% of its total assets in illiquid securities, including repurchase
agreements maturing in more than seven days.
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PRICING SHARES
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Transactions in the money market instruments in which the Fund invests
normally require immediate settlement in federal funds. The Portfolio intends to
be as fully invested as is reasonably practicable in order to maximize the yield
on its portfolio assets. Accordingly, all payments must be in federal funds or
other funds available to the Fund that day. If notification of the purchase
order is received by 12:00 Noon (eastern time) and federal funds or other funds
available to the Fund that day are received by wire on a day on which banks in
both Boston and New York City are open for business, the purchase order will be
accepted that day. The shares purchased will be entitled to that day's dividend.
Other orders will be accepted and will become entitled to dividends declared on
the next bank business day after receipt of payment.
The net asset value per share of the Portfolio is computed as of the close of
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.
eastern time for purposes of pricing Portfolio shares) on each day on which the
Exchange is open, except on days when changes in the value of the Portfolio's
securities do not affect the net asset value of its shares. The Exchange is
currently closed on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Portfolio is determined by adding the value
of all securities and other assets held by the Portfolio, deducting the
liabilities chargeable to the Portfolio, including its share of the general
liabilities of the Fund, and dividing the result by the number of shares of the
Portfolio outstanding.
Since the net income of the Portfolio is declared as a dividend each time net
income is determined, the net asset value per share of the Portfolio is rounded
to the nearest penny daily and is expected to remain at $1.00 per share
immediately after each dividend declaration. The Fund expects to have net income
at the time of each dividend determination for the Portfolio. If, for any
reason, there is a net loss in the Portfolio, the Fund will first offset such
amount pro rata against dividends accrued during the month in each shareholder
account. To the extent that such a net loss would exceed such accrued dividends
for the Portfolio, the Fund will reduce the number of outstanding shares by
having each shareholder of the Portfolio contribute to the Fund's capital his
pro rata portion of the total number of shares required to be cancelled in order
to maintain a net asset value of $1.00 for the Portfolio. Each shareholder will
be deemed to have agreed to such a contribution in these circumstances by his
investment in the Portfolio.
Securities purchased with maturities of sixty days or less are valued at
amortized cost (original purchase cost as adjusted for amortization of premium
or accretion of discount), which, when combined with accrued interest,
approximates market; securities maturing in more than sixty days for which
market quotations are readily available are valued at current market value; and
securities maturing in more than sixty days when purchased, that are held on the
sixtieth day prior to maturity, are valued at amortized cost (market value on
the sixtieth day adjusted for amortization of premium or accretion of discount),
which, when combined with accrued interest, approximates market; in any case
reflecting fair value as determined by the Board of Trustees. All other
investments are valued at market value or, where market quotations are not
readily available, at fair value as determined in good faith by the Board of
Trustees.
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DIVIDENDS AND TAXES
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The Portfolio has qualified and intends to qualify in the future as a
regulated investment company under the Internal Revenue Code. The Portfolio
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for its fiscal year. The Portfolio also intends
to make timely distributions, if necessary, sufficient in amount to avoid the
nondeductible 4% excise tax imposed on a regulated investment company to the
extent that it fails to distribute, with respect to each calendar year, at least
98% of its ordinary income for such calendar year and 98% of its net capital
gains for the one-year period ending on October 31 of such calendar year. Any
taxable distribution would be (1) declared in October, November or December to
shareholders of record in such a month, (2) paid by the following January 31,
and (3) includable in the taxable income of shareholders for the year in which
such distributions were declared. If the Portfolio qualifies and if it
distributes all of its net investment income and net capital gains, if any, to
shareholders, it will be relieved of any federal income tax liability. The
Portfolio will make distributions from its net investment income to its
shareholders by the 15th day of each month and net capital gains, if any, at
least annually.
Dividends distributed by the Portfolio will be automatically invested in
additional shares of the Portfolio unless the shareholder elects to receive them
in cash. Dividends are taxable as ordinary income to shareholders who are
subject to federal income taxes and may also be subject to state and local
taxes. The Fund does not expect to realize any capital gains or losses. The Fund
advises its shareholders annually as to the federal tax status of all
distributions made during the year.
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PORTFOLIO MANAGEMENT AND EXPENSES
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BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the authority of the Board of Trustees, Keystone serves as the Fund's
investment adviser and, in general, supervises the management and investment
program of the Portfolio.
INVESTMENT ADVISER
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
has provided investment advisory and management services to investment companies
and private accounts since it was organized in 1932. Keystone is a wholly-owned
subsidiary of Keystone Investments, Inc. ("Keystone Investments"), 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation predominantly owned by former and
current members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in a
number of voting trusts, the trustees of which are George S. Bissell, Albert H.
Elfner, III, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Inc., Keystone, their affilitates and the
Keystone Investments Family of Funds.
Pursuant to its Investment Advisory Agreement with the Fund (the "Advisory
Agreement") , Keystone provides investment management and administrative
services to the Portfolio. Such services include managing the investment and
reinvestment of the Portfolio's assets as well as providing the Portfolio with
office space, facilities, equipment and personnel.
Under the terms of the Advisory Agreement, Keystone is generally entitled to a
management fee, payable quarterly, equal to (1) 5% of the gross income of the
Portfolio, less (2) the amount of the net expenses of the Fund (excluding
Keystone's compensation, interest, taxes, brokerage commissions, fees of the
Fund's independent Trustees and extraordinary expenses).
PORTFOLIO EXPENSES
On October 1, 1990, Keystone voluntarily limited its management fee for an
indefinite period to a maximum annual rate of 0.20% of the Portfolio's average
daily net assets. Keystone may, after notice to shareholders, change or
eliminate this voluntary fee limitation. In addition, commencing December 28,
1992, Keystone voluntarily limited its advisory fee with respect to the
Portfolio to an annual rate of 0.09% of the Portfolio's average net assets.
Keystone expects to maintain this voluntary limitation until the end of the
Fund's fiscal year, at which time, a determination of whether to continue the
limitation and, if so, at what rate will be made. Keystone continues to pay the
Fund's normal operating expenses, excluding Keystone's compensation, interest,
taxes, brokerage commissions and extraordinary expenses.
During the year ended December 31, 1994, the Fund, in aggregate, paid or
accrued to Keystone investment management and advisory services fees of
$148,293, which amount includes amounts paid with respect to portfolios that
became inactive during such period. Of such amount paid to Keystone, $49,118 was
paid to Keystone for services to Money Market Portfolio I, which represented
0.09% of the Portfolio's average daily net assets.
PORTFOLIO MANAGER
Barbara A. McCue is the Fund's portfolio manager. She is a Keystone Vice
President and Senior Portfolio Manager with more than 19 years of investment
experience.
SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, Keystone selects
broker-dealers to execute portfolio transactions for the Portfolio subject to
receipt of best execution. When selecting broker-dealers, Keystone may consider
as a factor the number of shares of the Portfolio sold by such broker-dealers.
In addition, broker-dealers executing Portfolio transactions may, from time to
time, be affiliated with the Fund, Keystone, Fiduciary Investment Company, Inc.
("FICO"), the Fund's principal underwriter ("Principal Underwriter"), or their
affiliates. FICO, a wholly-owned subsidiary of Keystone, is located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.
Subject to the requirement of receipt of best execution, the Fund may pay
higher commissions to broker-dealers that provide research services. Keystone
may use these services in advising the Fund as well as in advising its other
clients.
The Glass-Steagall Act presently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments in connection with the sale of securities, or should Congress relax
current restrictions on depository institutions, the Board of Trustees will
consider what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein; banks and financial
institutions may be required to register as dealers pursuant to state law.
PORTFOLIO TURNOVER
The Fund will not trade in securities for short-term profits, but, when
circumstances warrant, securities may be sold without regard to the length of
time held.
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HOW TO BUY SHARES
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Money Market Portfolio I is available to any investor making a minimum initial
purchase aggregating $250,000.
There is no minimum amount required for subsequent purchases.
Shares of the Portfolio are sold without a sales charge at the net asset value
per share, normally $1.00, on each day on which banks in both Boston and New
York City are open for business. The Fund and its Principal Underwriter reserve
the right o reject any order for the purchase of Fund shares.
OPENING AN ACCOUNT
First, telephone Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's
transfer and dividend disbursing agent, toll free at 1-800-343-2898 to open an
account and to obtain an account or wire identification number.
Second, arrange with your bank to wire federal funds to KIRC's agent at the
following address (please include your account number):
State Street Bank and Trust Company
For credit to MRT
Account or wire identification
number -------------------------------------------------------------------
Third, complete and sign the Account Application and mail it to:
Keystone Investor Resource Center, Inc.
P.O. Box 2121
Boston, Massachusetts 02106-2121
If KIRC deems it appropriate, additional documentation or verification of
authority may be required.
Information on how to wire federal funds is available at any national bank or
any state bank that is a member of the Federal Reserve System. The bank may
charge for these services. Presently, there is no fee for receipt by KIRC of
federal funds wired, but the right to charge for this service is reserved.
Additional purchases for an existing account may be made by wiring federal
funds, or other funds available to the Fund that day, to State Street Bank and
Trust Company as described above.
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HOW TO REDEEM SHARES
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Shareholders may redeem shares of the Fund at net asset value, normally $1.00
per share, by mail or by using the telephone.
MAIL REDEMPTIONS
A shareholder may redeem shares on each day on which the Exchange is open by
mailing a written request to KIRC at the following address:
Keystone Investor Resource Center, Inc.
P.O. Box 2121
Boston, Massachusetts 02106-2121
The signatures on the written request must be PROPERLY GUARANTEED by a bank or
other persons eligible to guarantee signatures under the Securities Exchange Act
of 1934 and KIRC policies when the circumstances of such redemptions indicate
that guaranteed signatures are appropriate, in the judgment of the Fund or KIRC,
for the protection of the Fund, its shareholders and KIRC.
TELEPHONE REDEMPTIONS
A shareholder may redeem shares on each day on which banks in both Boston and
New York City are open for business by calling (toll free 1-800-343-2138). To
engage in telephone transactions generally, you must complete the appropriate
sections of the Fund's application.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days. If you cannot reach the Fund by telephone, you should follow the
procedures for redeeming by mail as set forth above.
The proceeds of all redemptions will be wired in federal funds only to the
commercial bank (and account number) designated by the shareholder on the
Account Application form. CONSEQUENTLY, SHAREHOLDERS MUST COMPLETE AN ACCOUNT
APPLICATION, INCLUDING THE REDEMPTION AUTHORIZATION. If KIRC deems it
appropriate, additional documentation may be required. Although at present the
Fund pays the wire costs involved, it reserves the right at any time to require
the shareholder to pay such costs.
Under normal circumstances, if the request for redemption is received by 12:00
Noon (eastern time) on a day on which banks in both Boston and New York City are
open for business, the proceeds of such redemption will be wired on the same
day, but the shareholder will not receive that day's dividend. If the request is
received after 12:00 Noon or on a day when such banks are not open, that day's
dividend will be received, and the redemption proceeds will be wired the next
bank business day. In order to permit the most effective management of its
investments, however, the Fund strongly urges shareholders intending to redeem
amounts over $1,000,000 to notify the Fund at least one day in advance of the
redemption. The Fund reserves the right to take up to seven days to wire
redemption proceeds if, in the judgment of management, the number and amount of
redemption requests received on any day prior to 12:00 Noon is unusual or if the
Fund could otherwise be adversely affected by making any payment.
Payment will be made promptly and, in any event, within seven days after a
properly completed redemption request is received, subject to suspension of the
right of redemption or extension of the date for payment when (1) the Exchange
is closed, other than customary weekend and holiday closings; (2) trading on the
Exchange is restricted; (3) an emergency exists and the Fund cannot dispose of
its investments or fairly determine their value; or (4) the Securities and
Exchange Commission so orders.
Any change in the bank account designated to receive redemption proceeds must
be made in another Account Application signed by the shareholder (WITH
SIGNATURES PROPERLY GUARANTEED IN THE MANNER DESCRIBED ABOVE) and delivered to
KIRC at the above address.
The Fund reserves the right, at any time, to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor FICO assumes
responsibility for the authenticity of any instructions received by any of them
from a shareholder in writing or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over the telephone are genuine.
Neither the Fund, KIRC nor FICO will be liable when following instructions
received by telephone that KIRC reasonably believes to be genuine.
If a shareholder redeems all the shares in an account, the shareholder will
receive, in addition to the value thereof, all declared but unpaid distributions
thereon.
The Fund has made no arrangements with brokers for the repurchase of shares.
Redemptions placed through brokers, who may charge for their services, must
comply with the redemption procedures and requirements described above.
SMALL ACCOUNTS
The Fund reserves the right to redeem shares in any account in which the value
of shares of the Portfolio is less than such minimum amount as the Trustees
prescribe. Such redemption proceeds will be promptly paid to the shareholder.
Shareholders will be notified if their accounts are less than the minimum amount
and given 30 days to bring the account up to the minimum amount before
redemption.
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
Details on all shareholder services may be obtained from KIRC by calling toll
free 1-800-343-2138 or from FICO by writing FICO at 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
KEYSTONE AUTOMATED RESPONSE LINE
The Keystone Automated Response Line ("KARL") offers shareholders specific
fund account information; price, total return and yield quotations; and the
ability to effect account transactions, including investments, exchanges and
redemptions. Shareholders may access KARL by dialing toll free 1-800-346-3858 on
any touch-tone telephone, 24 hours a day, seven days a week.
SHAREHOLDER ACCOUNTS
Each investor will automatically have established an account under which he
will receive a statement showing details of all transactions, including the
current balance of full and fractional shares owned by such investor.
Certificates will not be issued.
SUBACCOUNTS
Special processing has been arranged with KIRC for banks and other
institutions that wish to open multiple accounts (a master account and
subaccounts). An investor wishing to avail himself of KIRC's subaccounting
facilities will be required to enter into a separate agreement, with the charges
to be determined on the basis of the level of services to be rendered. An
investor may open a subaccount with his initial investment or at a later date
and may register the subaccount either by name or by number.
- ------------------------------------------------------------------------------
PERFORMANCE DATA
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise "yield" and "effective yield." BOTH
YIELD FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The "yield" of the Portfolio refers to the income generated
by an investment in the Portfolio over a seven-day period (which period will be
stated in the advertisement). This income is then "annualized," i.e., the amount
of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly, but, when annualized,
the income earned by an investment in the Portfolio is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
The Fund may also include comparative performance information in advertising
or marketing the Fund's shares, such as data from Lipper Analytical Services,
Inc., Morningstar, Inc., CDA-Weisenberger and Value Line or other industry
publications.
Any given yield quotation should not be considered representative of the
Portfolio's yield for any future period.
- ------------------------------------------------------------------------------
FUND SHARES
- ------------------------------------------------------------------------------
The Fund may issue an unlimited number of shares of the Portfolio. Shares of
the Portfolio participate equally in dividends and distributions and have equal
voting, liquidation and other rights. When issued and paid for, the shares will
be fully paid and nonassessable by the Fund. Shares have no preference,
conversion, exchange or preemptive rights. Shares are redeemable, transferable
and freely assignable as collateral. There are no sinking fund provisions.
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 portfolio. The Fund does not have annual
meetings. The Fund will have special meetings, from time to time, as required
under its Declaration of Trust and under the 1940 Act. As provided in the Fund's
Declaration of Trust, shareholders have the right to remove Trustees by an
affirmative vote of two-thirds of the outstanding shares. A special meeting of
the shareholders will be held when 10% of the outstanding shares request a
meeting for the purpose of removing a Trustee. The Fund is prepared to assist
shareholders in communications with one another for the purpose of convening
such meeting as prescribed by Section 16(c) of the 1940 Act.
Under Massachusetts law, it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. 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 Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone. KIRC serves as the Portfolio's transfer
agent and dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
- ------------------------------------------------------------------------------
ADDITIONAL INVESTMENT INFORMATION
- ------------------------------------------------------------------------------
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS ("EURODOLLAR CERTIFICATES
OF DEPOSIT")
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such obligations may be held
outside of the U.S. and the Fund may, consequently, be subject to the risks
associated with the holding of such property overseas. Examples of governmental
actions would be the imposition of currency controls, interest limitations,
withholding taxes, seizure of assets or the declaration of a moratorium. Various
provisions of federal law governing domestic branches do not apply to foreign
branches of domestic banks.
OBLIGATIONS OF FOREIGN BRANCHES OF FOREIGN BANKS ("EURODOLLAR CERTIFICATES OF
DEPOSIT")
The obligations of foreign branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by government regulation.
Payment of interest and principal upon these obligations may also be affected by
governmental action in the country of domicile of the branch (generally referred
to as sovereign risk). In addition, evidences of ownership of such obligations
are expected to be held outside of the U.S., and, consequently, the Fund may be
subject to the risks associated with the holding of such property overseas.
Examples of governmental actions would be the imposition of currency controls,
interest limitations, withholding taxes, seizure of assets or the declaration of
a moratorium. Various provisions of federal law governing domestic branches do
not apply to foreign branches of foreign banks.
OBLIGATIONS OF U.S. BRANCHES OF FOREIGN BANKS ("YANKEE CERTIFICATES OF DEPOSIT")
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as
by governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Portfolio at varying rates of interest pursuant to
direct arrangements between the Portfolio as lender, and the issuer as borrower.
The Portfolio has the right to increase the amount under a note at any time up
to the full amount provided by the note agreement, or to decrease the amount,
and the borrower may repay up to the full amount of the note without penalty.
Notes purchased by the Portfolio permit it to demand payment of principal and
accrued interest at any time (on not more than seven days' notice). Notes
acquired by the Portfolio may have maturities of more than one year, provided
(1) the Portfolio is entitled to payment of principal and accrued interest upon
not more than seven days' notice, and (2) the rate of interest on such notes is
adjusted automatically at periodic intervals, which normally will not exceed 31
days, but may extend up to one year. The notes will be deemed to have a maturity
equal to the longer of the period remaining to the next interest rate adjustment
or the demand notice period. Because these types of notes are direct lending
arrangements between the lender and the borrower, such instruments are not
normally traded, and there is no secondary market for these notes, although they
are redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the right of the Portfolio to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. In connection with master demand notes, Keystone considers, under
standards established by the Board of Trustees, earning power, cash flow and
other liquidity ratios of the borrower and will monitor the ability of the
borrower to pay principal and interest on demand. These notes are not typically
rated by credit rating agencies. Unless rated, the Portfolio will invest in them
only if the issuer meets the criteria established for commercial paper.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a domestic or foreign bank or a
savings and loan association in exchange for the deposit of funds. The issuer
agrees to pay the amount deposited plus interest to the bearer of the receipt on
the date specified on the certificate. The certificate usually can be traded in
the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of domestic or foreign banks and/or a savings and loan association
provided that (1) at the time of investment the depository institution or
guarantor bank has at least $1 billion in deposits (as of the date of its most
recently published financial statements) or (2) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation
("FDIC").
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development; the Asian Development
Bank or the Inter-American Development Bank. See also "Obligations of Foreign
Branches of United States Banks," "Obligations of Foreign Branches of Foreign
Banks," and "Obligations of U.S. Branches of Foreign Banks."
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Portfolio must have been accepted by
domestic or foreign commercial banks or savings and loan associations and (1) at
the time of investment the depository institution or guarantor bank has at least
$1 billion in deposits (as of the date of their most recently published
financial statements) or (2) the principal amount of the instrument is insured
in full by the FDIC.
LOAN PARTICIPATION NOTES
A loan participation note represents participation in a corporate loan of a
commercial bank with a remaining maturity of one year or less. Such loans must
be to corporations in whose obligations the Portfolio may invest. Any
participation purchased by the Portfolio must be issued by a bank in the U.S.
with assets exceeding $1 billion. Since the issuing bank does not guarantee the
participations in any way, they are subject to the credit risks generally
associated with the underlying corporate borrower. In addition, because it may
be necessary under the terms of the loan participation for the Portfolio to
assert through the issuing bank such rights as may exist against the corporate
borrower, in the event the underlying corporate borrower fails to pay principal
and interest when due, the Portfolio may be subject to delays, expenses and
risks that are greater than those that would have been involved if the Portfolio
had purchased a direct obligation (such as commercial paper) of such borrower.
Moreover, under the terms of the loan participation the Portfolio may be
regarded as a creditor of the issuing bank (rather than the underlying corporate
borrower), so that the Portfolio may also be subject to the risk that the
issuing bank may become insolvent. The secondary market, if any, for loan
participations is extremely limited and any such participations purchased by the
Portfolio may be regarded as illiquid.
REPURCHASE AGREEMENTS
To earn additional income, the Portfolio may enter into repurchase agreements
with member banks of the Federal Reserve System that have at least $1 billion in
assets, primary dealers in U.S. government securities or other financial
institutions believed by Keystone to be creditworthy. Such persons are required
to be registered as U.S. government securities dealers with the Securities and
Exchange Commission and/or the regulatory organization routinely responsible for
their regulation. Under such agreements, the bank, primary dealer or other
financial institution agrees to repurchase the security at a mutually agreed
upon time and price, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period. Under a repurchase agreement, the seller must
maintain the value of the securities subject to the agreement at not less than
the repurchase price, and such value is determined on a daily basis by marking
the underlying securities to their market values. Although the securities
subject to the repurchase agreement might bear maturities exceeding a year, the
Portfolio only intends to enter into repurchase agreements that provide for
settlement within a year and usually within seven days. Securities subject to
repurchase agreements will be held by the Fund's custodian or in the Federal
Reserve book entry system. The Portfolio does not bear the risk of a decline in
the value of the underlying security unless the seller defaults under its
repurchase obligation. In the event of a bankruptcy or other default of a seller
of a repurchase agreement, the Portfolio could experience both delays in
liquidating the underlying securities and losses including (1) possible declines
in the value of the underlying securities during the period while the Portfolio
seeks to enforce its rights thereto; (2) possible subnormal levels of income and
lack of access to income during this period; and (3) expenses of enforcing its
rights. The Board of Trustees of the Fund has established procedures to evaluate
the creditworthiness of each party with whom the Portfolio enters into
repurchase agreements by setting guidelines and standards of review for Keystone
and monitoring Keystone's actions with regard to repurchase agreements.
LOANS OF SECURITIES TO BROKER-DEALERS
To earn additional income, the Portfolio may lend securities to brokers and
dealers pursuant to agreements requiring that the loans be continuously secured
by cash or securities of the U.S. government, its agencies or instrumentalities,
or any combination of cash and such securities, as collateral equal at all times
in value to at least the market value of the securities loaned. Such securities
loans will not be made with respect to the Portfolio if, as a result, the
aggregate of all outstanding securities loans exceeds 15% of the value of the
Portfolio's total assets taken at their current value. The Portfolio continues
to receive interest or dividends on the securities loaned and simultaneously
earns interest on the investment of the cash loan collateral in U.S. Treasury
notes, certificates of deposit, other high grade, short term obligations or
interest bearing cash equivalents. Although voting rights attendant to
securities loaned pass to the borrower, such loans may be called at any time and
will be called so that the securities may be voted by the Portfolio if, in the
opinion of the Fund, a material event affecting the investment is to occur.
There may be risks of delay in receiving additional collateral or in recovering
the securities loaned or even loss of rights in the collateral should the
borrower of the securities fail financially. Loans may only be made, however, to
borrowers deemed to be of good standing, under standards approved by the Board
of Trustees, when the income to be earned from the loan justifies the attendant
risks.
<PAGE>
MASTER
RESERVES
TRUST
BOSTON, MASSACHUSETTS
Investment Adviser
KEYSTONE INVESTMENT MANAGEMENT
COMPANY
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
Shareholder Services
KEYSTONE INVESTOR RESOURCE
CENTER, INC.
P.O. BOX 2121
BOSTON, MASSACHUSETTS 02106
TEL. NO.: TOLL FREE 800-343-2898
Independent Auditors
KPMG PEAT MARWICK LLP
ONE BOSTON PLACE
BOSTON, MASSACHUSETTS 02108
Distributor
FIDUCIARY INVESTMENT COMPANY,
INC.
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
TEL. NO.: 800-225-2618
Custodian
STATE STREET BANK AND TRUST
COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
MASTER
RESERVES
TRUST
PROSPECTUS
APRIL 28, 1995
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MASTER RESERVES TRUST
APRIL 28, 1995
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Master
Reserves Trust (the "Fund") dated April 28, 1995. A copy of the prospectus may
be obtained from Fiduciary Investment Company, Inc. ("FICO"), the Fund's
principal underwriter, 200 Berkeley Street, Boston, Massachusetts 02116- 5034.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Fund Objective and Policies 2
Investment Restrictions 3
Valuation and Redemption of Securities 5
Dividends and Taxes 6
Yield Quotations 6
Trustees and Officers 7
Declaration of Trust 11
Investment Adviser 13
Distributor 15
Brokerage 17
Additional Information 18
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-17
<PAGE>
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FUND OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide shareholders with maximum
current income while preserving capital. To meet this objective, the Fund
currently offers only one portfolio, Money Market Portfolio I (the "Portfolio").
This statement of additional information provides information about and relates
solely to the Fund and the Portfolio. Keystone Investment Management Company
(formerly Keystone Custodian Funds, Inc.) ("Keystone") serves as the Fund's
investment adviser.
Subject to the availability of master notes and to the conditions
described in the next sentence, it is the Fund's present intention that any
investments the Portfolio may make in instruments maturing in one day or less
shall be made in master notes payable on demand. The Portfolio will invest in
demand master notes only at such times as the yields available on such notes, to
Keystone's knowledge, are comparable to or exceed the yields then available on
securities (otherwise appropriate for investment by the Portfolio) of like
maturity issued or guaranteed by the United States ("U.S.") government or any
agency or instrumentality thereof.
The Portfolio will be diversified among issuers. The Fund's investment
restrictions permit the Fund to concentrate up to 100% of its assets in one or
more of the following industries: finance companies, banks and bank holding
companies and utility companies. Notwithstanding the freedom reserved by the
Fund to so concentrate assets, the Portfolio (if permitted by its investment
policies) may concentrate its assets only in (1) securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities; and (2) instruments
issued by a domestic bank (including (a) a foreign branch of a domestic bank for
which the investment risk associated with the securities issued by such branch
is the same as the investment risk associated with the securities issued by its
domestic parent and (b) a U.S. branch of a foreign bank that is subject to the
same regulation as U.S. banks). If permitted by its investment policies, the
Portfolio will invest in excess of 25% of its assets in domestic banks only at
such times as (1) the yields then available on such securities, to Keystone's
knowledge, exceed the yields then available on securities (otherwise appropriate
for investment by the Portfolio) issued or guaranteed by the U.S. government or
any agency or instrumentality thereof; and (2) in the opinion of management, the
relative return from such investments, compared with the relative risk,
marketability and quality of such securities, appears to warrant such
concentration.
The Fund intends to manage the maturities of instruments in the
Portfolio so that reasonably anticipated liquidity needs can be met from then
available cash rather than from the sale of portfolio instruments prior to
maturity.
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions set forth below are fundamental and may not
be changed without the vote of a majority, as defined in the Investment Company
Act of 1940 (the "1940 Act"), of the Fund's outstanding shares. The Fund may not
do the following:
(1) purchase securities on margin, but the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities;
(2) make short sales of securities or maintain a short position, unless
at all times when a short position is open, the Fund 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 the securities sold short;
(3) borrow money, except from banks as a temporary measure in an amount
not to exceed one-third of its total assets to facilitate redemptions or for
extraordinary or emergency purposes; a loan limitation in excess of 5% is
generally associated with a leveraged fund, but since the Fund anticipates
ordinarily having to pay interest on borrowed money at rates comparable to its
yield, the Fund has no intention of attempting to increase its net income by
borrowing, and any such borrowings will be repaid before any additional
investments are made;
(4) pledge assets except to secure indebtedness permitted by the third
investment restriction enumerated above, with pledged assets to be no more than
15% of its total assets;
(5) purchase any security, other than U.S. government securities, if as
a result more than 25% of the Fund's total assets would be invested in a single
industry, except that the Fund may invest up to 100% of its assets in finance
companies as a group, banks and bankholding companies as a group and utility
companies as a group when, in the opinion of management, yield differentials and
money market conditions make such investments desirable and suitable investments
are available;
(6) purchase any security, other than U.S. government securities, if,
as a result, (a) more than 5% of the Fund's total assets would be invested in
securities of the issuer, or (b) the Fund would hold more than 10% of the voting
securities of the issuer;
(7) invest for the purpose of exercising control over or management of
any company;
(8) invest in securities of other investment companies, except as part
of a merger, consolidation, purchase of assets or similar transaction approved
by the Fund's shareholders;
(9) make investments in commodities, commodity contracts or real
estate; although the Fund has no present intention of doing so, it may invest in
securities secured by real estate or interests therein or issued by companies,
including real estate investment trusts, which deal in real estate or interests
therein;
(10) act as an underwriter or purchase securities that are not readily
marketable, except for repurchase agreements;
(11) purchase or retain securities of an issuer if, to the knowledge of
the Fund, an officer, Trustee or Director of the Fund or Keystone owns
beneficially more than 1/2 of 1% of the shares or securities of such issuer and
all such officers, Trustees and Directors owning more than 1/2 of 1% of such
shares or securities together own more than 5% of such shares or securities;
(12) purchase securities of any company that has, with predecessors, a
record of less than three years' continuing operations, if as a result more than
5% of the total assets of the Fund would be invested in such securities;
(13) purchase puts, calls, straddles, spreads or combinations thereof,
except that in connection with the purchase of fixed-income securities it may
acquire warrants or other rights to subscribe for securities of companies
issuing such fixed-income securities or securities of parents or subsidiaries of
such companies, although the fixed-income securities would be purchased on the
basis of their investment characteristics exclusive of such warrants or other
rights; and
(14) invest in interests in oil, gas or other mineral exploration or
development programs.
Notwithstanding the more flexible limits above, the Fund deems each of
its fundamental investment restrictions to apply to the investments of the
Portfolio. For a clarification of how the concentration policies set forth in
the fifth investment restriction above specifically apply to the Portfolio, see
"Fund Objective and Policies."
With respect to the Portfolio, the Fund has no present intention of
investing more than 5% of the Portfolio's assets in short sales of securities,
securities secured by real estate or interests therein, securities issued by
companies that deal in real estate or interests therein, or warrants.
The Fund may make loans, but only through the purchase of debt
instruments or repurchase agreements and through the lending of its portfolio
securities. The Fund has a policy that no portfolio will invest more than 10% of
its assets in illiquid securities, including repurchase agreements maturing in
more than seven days.
The foregoing percentages will apply at the time of the purchase of a
security and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of a purchase of such
security. In the event that any common stock should be acquired through the
exercise of warrants, it is expected that such stock would be sold as market
conditions permit in the exercise of prudent investment judgment.
The Fund understands that the securities laws of one state would not
permit the Fund to sell the Portfolio's shares in that state if it should pledge
in excess of 10% of the Portfolio's net assets. The Fund has no present
intention of exceeding this limit, although this limit is more restrictive than
the fourth investment restriction enumerated above.
- --------------------------------------------------------------------------------
VALUATION AND REDEMPTION OF SECURITIES
- --------------------------------------------------------------------------------
Current value for the Fund's portfolio securities is determined as
follows: securities purchased with maturities of sixty days or less are valued
at amortized cost (original purchase cost as adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market; securities maturing in more than sixty days for which
market quotations are readily available are valued at current market value; and
securities maturing in more than sixty days when purchased that are held on the
sixtieth day prior to maturity are valued at amortized cost (market value on the
sixtieth day adjusted for amortization of premium or accretion of discount),
which, when combined with accrued interest, approximates market, in any case
reflecting fair value as determined by the Board of Trustees. Any securities for
which market quotations are not readily available or other assets are valued on
a consistent basis at fair value as determined in good faith using methods
prescribed by the Board of Trustees.
The Fund computes the net asset value per share of the Portfolio
rounded to the nearest one cent on a net asset value of $1.00. Accordingly, the
net asset value will not reflect net realized or unrealized gains or losses on
portfolio securities that amount to less than one-half cent per share. By
adhering to restrictions on the quality and maturity of its investments, by
valuing certain securities at amortized cost, and by declaring all net income of
the Portfolio as a dividend each time it is determined, the Fund anticipates
that, under usual and ordinary circumstances, it will be able to maintain a
constant net asset value, so rounded, of $1.00 per share for the Portfolio and
will use its best efforts to do so.
The Fund has obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption by any one shareholder in any 90 day period up
to the lesser of $250,000 or 1% of the Fund's assets at the beginning of such
period.
- --------------------------------------------------------------------------------
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The net income of the Portfolio is determined as of the normal close of
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.
eastern time) for purposes of pricing Fund shares on each business day on which
the Exchange is open. All net income of the Portfolio so determined is declared
as a dividend to shareholders of record of the Portfolio as of that time.
For this purpose, the net income of the Portfolio, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the assets of the Portfolio, less all expenses and liabilities
of the Portfolio chargeable against income. Interest income shall include
discount earned, including both original issue and market discount, on discount
paper accrued ratably to the date of maturity. Expenses, including the
compensation payable to Keystone, are accrued each day.
Any net realized short-term capital gains of the Fund in excess of any
capital loss carryover will be distributed to shareholders of the Portfolio
realizing the gain from time to time as management deems appropriate in
maintaining the Portfolio's net asset value at $1.00 per share.
- --------------------------------------------------------------------------------
YIELD QUOTATIONS
- --------------------------------------------------------------------------------
The current yield of the Portfolio as it may appear from time to time
in advertisements, is calculated by determining the net change exclusive of
capital changes (all realized and unrealized gains and losses) in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the net change in account value by the value
of the account at the beginning of the base period to obtain the base period
return, multiplying the base period return by 365/7 and carrying the resulting
current yield figure to the nearest hundredth of one percent. The determination
of net change in account value reflects the value of additional shares purchased
with the dividends from the original share and dividends declared on both the
original share and any such additional shares and all fees charged to
shareholder accounts in proportion to the length of the base period and the
Portfolio's average account size.
In addition to the current yield, the Portfolio's effective yield may
appear from time to time in advertisements. The Portfolio's effective yield will
be calculated by compounding the unannualized base period return, adding 1,
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result and carrying the resulting effective yield figure to the nearest
hundredth of one percent.
The current and effective yields as quoted in any such advertisements
will not be based on information as of a date more than fourteen days prior to
the date of its publication. Each yield will vary depending on market
conditions, and principal is not insured. Each yield also depends on the
quality, maturity and type of instruments held in the Portfolio and operating
expenses. The advertisements will include, among other things, the length and
the date of the last day in the base period used in computing the quotation.
The Fund does not currently advertise or intend to advertise any yield
figures.
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TRUSTEES AND OFFICERS
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Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Trustee and Chief Executive Officer of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Investments, Inc. (formerly known as Keystone
Group, Inc.) ("Keystone Investments"); President and Trustee or
Director of Keystone Capital Preservation and Income Fund, Keystone
Intermediate Term Bond Fund, Keystone Strategic Income Fund, Keystone
World Bond Fund, Keystone Tax Free Income Fund, Keystone State Tax Free
Fund, Keystone State Tax Free Fund-Series II, Keystone Fund for Total
Return, Keystone Global Opportunities Fund, Keystone Hartwell Emerging
Growth Fund, Inc., Keystone Hartwell Growth Fund, Inc., Keystone Omega
Fund, Inc., Keystone Fund of the Americas-Luxembourg and Keystone Fund
of the Americas-U.S., Keystone Strategic Development Fund
(collectively, "Keystone America Fund Family"); Keystone Quality Bond
Fund (B-1), Keystone Diversified Bond Fund (B-2), Keystone High Income
Bond Fund (B-4), Keystone Balanced Fund (K-1), Keystone Strategic
Growth Fund (K-2), Keystone Growth and Income Fund (S-1), Keystone Bond
Mid-Cap Growth Fund (S- 3), Keystone Bond Small Company Growth Fund
(S-4); Keystone International Fund, Keystone Precious Metals Holdings,
Inc., Keystone Tax Exempt Trust, Keystone Tax Free Fund, Keystone
Liquid Trust (collectively, "Keystone Fund Family"); and Keystone
Institutional Adjustable Rate Fund (all such funds, together with the
Fund, collectively, "Keystone Investments Family of Funds"); Director
and Chairman of the Board, Chief Executive Officer and Vice Chairman of
Keystone; Chairman of the Board and Director of Keystone Institutional
Company, Inc. (formerly Keystone Investment Management Corporation)
("Keystone Institutional") and Keystone Fixed Income Advisors, Inc.
("KFIA"); Director, Chairman of the Board, Chief Executive Officer and
President of Keystone Management, Inc. ("Keystone Management") and
Keystone Software Inc. ("Keystone Software"); Director and President of
Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"), Keystone Asset
Corporation, Keystone Capital Corporation, and Keystone Trust Company;
Director of Keystone Investment Distributors Company (formerly Keystone
Distributors, Inc.), Keystone Investor Resource Center, Inc. ("KIRC"),
and FICO; Director and Vice President of Robert Van Partners, Inc.;
Director of Boston Children's Services Association; Trustee of Anatolia
College, Middlesex School, and Middlebury College; Member, Board of
Governors and New England Medical Center; and former Trustee of Neworld
Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Professor, Finance
Department, George Washington University; President, Amling & Company
(investment advice); Member, Board of Advisers, Credito Emilano
(banking); and former Economics and Financial Consultant, Riggs
National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Investment Counselor
to Appleton Partners, Inc.; former Managing Director, Seaward
Management Corporation (investment advice); and former Director,
Executive Vice President and Treasurer, State Street Research &
Management Company (investment advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of
all other funds in the Keystone Investments Family of Funds; Director
and Chairman of the Board of Hartwell Keystone; Chairman of the Board
and Trustee of Anatolia College; Trustee of University Hospital (and
Chairman of its Investment Committee); former Chairman of the Board and
Chief Executive Officer of Keystone Investments; and former Chief
Executive Officer of the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Executive Director,
Coalition of Essential Schools, Brown University; Director and former
Executive Vice President, National Alliance of Business; former Vice
President, Educational Testing Services; and former Dean, School of
Business, Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; former Group Vice
President, Textron Corp.; and former Director, Peoples Bank (Charlotte,
N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Chairman of the Board,
Director and Executive Vice President, The London Harness Company;
Managing Partner, Roscommon Capital Corp.; Trustee, Cambridge College;
Chairman Emeritus and Director, American Institute of Food and Wine;
Chief Executive Officer, Gifford Gifts of Fine Foods; Chairman,
Gifford, Drescher & Associates (environmental consulting); President,
Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments and Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Of Counsel, Keyser,
Crowley & Meub, P.C.; Member, Governor's (VT) Council of Economic
Advisers; Chairman of the Board and Director, Central Vermont Public
Service Corporation and Hitchcock Clinic; Director, Vermont Yankee
Nuclear Power Corporation, Vermont Electric Power Company, Inc., Grand
Trunk Corporation, Central Vermont Railway, Inc., S.K.I. Ltd.,
Sherburne Corporation, Union Mutual Fire Insurance Company, New England
Guaranty Insurance Company, Inc. and the Investment Company Institute;
former Governor of Vermont; former Director and President, Associated
Industries of Vermont; former Chairman and President, Vermont Marble
Company; former Director of Keystone; and former Director and Chairman
of the Board, Green Mountain Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Executive Vice President,
DHR International, Inc. (executive recruitment); former Senior Vice
President, Boyden International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New Jersey, 411
International, Inc. and J & M Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other funds
in the Keystone Investments Family of Funds; Chairman, Environmental
Warranty, Inc., and Consultant, Drake Beam Morin, Inc. (executive
outplacement); Director of Connecticut Natural Gas Corporation, Trust
Company of Connecticut, Hartford Hospital, Old State House Association
and Enhanced Financial Services, Inc.; Member, Georgetown College Board
of Advisors; Chairman, Board of Trustees, Hartford Graduate Center;
Trustee, Kingswood-Oxford School and Greater Hartford YMCA; former
Director, Executive Vice President and Vice Chairman of The Travelers
Corporation; and former Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other funds in
the Keystone Investments Family of Funds; Partner, Farrell, Fritz,
Caemmerer, Cleary, Barnosky & Armentano, P.C.; President, Nassau County
Bar Association; former Associate Dean and Professor of Law, St. John's
University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other funds in the Keystone Investments Family of Funds; Director,
Senior Vice President, Chief Financial Officer and Treasurer of
Keystone Investments, Keystone Investment Distributors Company,
Keystone Asset Corporation, Keystone Capital Corporation, Keystone
Trust Company; Treasurer of Keystone Institutional, Robert Van
Partners, Inc., and FICO; Treasurer and Director of Keystone
Management, Keystone Software, Inc., and Hartwell Keystone; Vice
President and Treasurer of KFIA; and Director of KIRC.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of all
other funds in the Keystone Investments Family of Funds; and President
of Keystone.
BARBARA A. McCUE: Vice President of the Fund and Vice President of Keystone.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other funds in
the Keystone Investments Family of Funds; Vice President of Keystone
Investments; Assistant Treasurer of FICO and Keystone; and former Vice
President and Treasurer of KIRC.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other funds in the Keystone
Investments Family of Funds; Senior Vice President, General Counsel and
Secretary of Keystone; Senior Vice President, General Counsel,
Secretary and Director of Keystone Investment Distributors Company,
Keystone Management and Keystone Software; Senior Vice President and
General Counsel of Keystone Institutional; Senior Vice President,
General Counsel and Director of FICO and KIRC; Senior Vice President
and Secretary of Hartwell Keystone and Robert Van Partners, Inc.; Vice
President and Secretary of KFIA; and Senior Vice President, General
Counsel and Secretary of Keystone Investments, Keystone Asset
Corporation, Keystone Capital Corporation and Keystone Trust Company.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Hartwell Keystone, Keystone Investment Distributors and
KIRC. Mr. Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner
is Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
During the fiscal year ended December 31, 1994, no Trustee or officer
received any direct remuneration from the Fund. During this same year, the Fund,
in aggregate, paid or accrued $8,796 in retainers and fees to its nonaffiliated
Trustees for their services to the Portfolio and other portfolios of the Fund
that have since become inactive. For the year ending December 31, 1994, fees
paid to Independent Trustees on a fund complex wide basis were approximately
$585,990. As of March 31, 1995, the Fund's Trustees and officers, as a group,
beneficially owned less than one percent of the Fund's outstanding shares.
The address of all the Fund's Trustees and officers is 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
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DECLARATION OF TRUST
- --------------------------------------------------------------------------------
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated September 22, 1975, as amended and restated July 27,
1993 ("Declaration of Trust"). The Fund is similar in most respects to a
business corporation. The principal distinction between the Fund and a
corporation relates to the shareholder liability described below. A copy of the
Declaration of Trust was filed as an exhibit to the Fund's Registration
Statement. This summary is qualified in its entirety by reference to the Fund's
Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of one or more series and classes. Each share
of a series or class represents an equal proportionate interest with each other
share of the series or class. Upon liquidation shares are entitled to a pro rata
share in the net assets of the portfolio of securities underlying the series.
Shareholders have no preemptive or conversion rights. Shares are transferable,
redeemable and fully assignable as collateral. There are no sinking fund
provisions.
SHAREHOLDER LIABILITY
Pursuant to court decisions or other theories of law, shareholders of a
Massachusetts business trust may be held personally liable on the obligations of
the Fund. The possibility of shareholders incurring financial loss under such
circumstances appears remote because the Fund's Declaration of Trust (1)
contains an express disclaimer of shareholder liability for obligations of the
Fund; (2) requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees;
and (3) provides for indemnification out of the Fund property for any
shareholder held personally liable for the obligations of the Fund.
VOTING RIGHTS
Under the Declaration of Trust, the Fund does not hold annual meetings.
Shares are entitled, however, to vote at meetings called for the election of
Trustees or to consider other matters. No amendment may be made to the
Declaration of Trust without the approval of the shareholders of the Fund.
Shares have non-cumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election of Trustees can elect 100% of the
Trustees to be elected at a meeting, and, in such event, the holders of the
remaining percentage of shares voting will not be able to elect any Trustees.
Shares of all of the Fund's portfolios vote together irrespective of class on
all matters except (1) when the 1940 Act requires that shares shall be voted by
an individual portfolio, and (2) when the Trustees of the Fund have determined
that a matter does not affect any interest of one or more portfolios, only
holders of shares of the other portfolio(s) shall be entitled to vote thereon.
The Trustees shall continue to hold office indefinitely, unless
otherwise required by law, and may appoint successor Trustees. Trustees may be
removed from office (1) at any time by two-thirds vote of the Trustees; (2) when
any Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares. Any
Trustee may also voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only
for his own willful defaults. If reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, a Trustee shall
not be liable for any neglect or wrongdoing of any such person; provided,
however, that nothing in the Declaration of Trust shall protect a Trustee
against any liability for his willful misfeasance, bad faith, gross negligence
or reckless disregard of his duties.
The Trustees have absolute and exclusive control over the management
and disposition of all assets of the Fund and may perform such acts as in their
sole judgment and discretion are necessary and proper for conducting the
business and affairs of the Fund or promoting the interests of the Fund and the
shareholders.
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INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone serves as investment adviser to the Fund and is responsible for the
overall management of the Fund's business and affairs.
Keystone, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Investments, 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation predominantly owned by current
and former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in a
number of voting trusts, the trustees of which are George S. Bissell, Albert H.
Elfner, III, Edward F. Godfrey, and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Keystone, their affiliates and the Keystone
Investments Family of Mutual Funds.
Pursuant to its Investment Advisory and Management Agreement with the
Fund (the "Advisory Agreement") and subject to the supervision of the Fund's
Board of Trustees, Keystone is required to provide all necessary administrative
services, office space, equipment and clerical personnel for handling the
affairs of the Portfolio. The Advisory Agreement also requires Keystone to
furnish the Portfolio investment management services, subject to the control of
the Trustees of the Fund; provided, however, that Keystone, at its own expense
may contract with one or more firms to provide such investment management
services. At the request and subject to the direction of the Trustees of the
Fund, Keystone is also required to provide or cause to be provided to the
Portfolio custodial, auditing, valuation, bookkeeping, legal, stock transfer and
dividend disbursing services; services related to and preparation of
shareholders' reports, trustees' and shareholders' meetings; and maintenance of
registration with the Securities and Exchange Commission and various states as
well as insurance and membership in trade associations and related items.
Keystone pays all charges and expenses relating to these items as further
described below. Keystone provides certain of these items itself and obtains
others from other organizations, in each case subject to the direction of the
Trustees.
In addition to Keystone's compensation, the Fund pays its brokerage
commissions, interest charges, taxes, fees (other than the registration fees
referred to above) payable to government agencies, any fees of its unaffiliated
Trustees for services to the Fund, and extraordinary expenses. Keystone pays the
compensation of any officers and affiliated Trustees of the Fund.
As compensation for the services and facilities provided to the Fund
pursuant to the Advisory Agreement, Keystone is generally entitled to receive at
the end of each fiscal quarter an amount equal to (1) 5% of the gross income of
the Portfolio, less (2) the amount of the net expenses borne by the Fund
(excluding Keystone's compensation, interest, taxes, brokerage commissions, and
extraordinary expenses) for such quarter; but in no event shall the amount of
such compensation be less than zero. "Gross income" means the total of all
interest income calculated on an accrual basis and includes accrued discounts on
debt securities.
Commencing December 28, 1992, Keystone, voluntarily limited its fee for
the Portfolio to an annual rate of 0.09% of the Portfolio's average net assets.
Keystone expects to maintain this voluntary limitation until the end of the
Fund's fiscal year; at which time, a determination of whether to continue the
limitation and, if so, at what rate will be made. Keystone continues to pay the
Fund's normal operating expenses, excluding Keystone's compensation, interest,
taxes, brokerage commissions, fees of the Fund's Independent Trustees, and
extraordinary expenses.
The Advisory Agreement also provides that if the annual expenses of the
Fund exceed the limits on investment company expenses imposed by any statute or
any regulatory authority of any jurisdiction in which shares of the Fund are
qualified for offer and sale, Keystone will bear the amount of such excess to
the extent required thereunder. Keystone will not be required to bear such
excess, however, (1) to an extent greater than the compensation due Keystone for
the period for which such expense limitation is required to be calculated,
unless such statute or regulatory authority shall so require; and (2) to an
extent that would result in the Fund's inability to qualify as a regulated
investment company under provisions of the Internal Revenue Code. The term
"expenses" is defined in such laws or regulations and, generally speaking,
excludes brokerage commissions, taxes, interest and extraordinary expenses. It
is believed that the lowest such annual limitation, as of the date of this
statement of additional information, was 2.5% of the first $30,000,000 of
average month-end net assets, 2.0% of the next $70,000,000 and 1.5% of any
excess over $100,000,000.
For the fiscal years ended December 31, 1992 and 1993, the Fund paid
Keystone $1,517,357 and $510,844, respectively, for investment management
services. For the year ended December 31, 1994, the Fund paid Keystone $148,293
for such services. Of such amount, $49,118 was paid to Keystone for services to
Money Market Portfolio I, which represented 0.09% of its average daily net
assets.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.
The Advisory Agreement continues in effect from year to year only so
long as such continuance is specifically approved at least annually by the vote
of a majority of the Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Fund or Keystone cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement may be terminated,
without penalty, on 60 days' written notice by the vote of the Board of Trustees
or by the vote of a majority of the outstanding voting securities of the Fund.
Keystone may terminate the Advisory Agreement on 90 days' written notice to the
Fund. The Advisory Agreement will terminate automatically upon its assignment.
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DISTRIBUTOR
- --------------------------------------------------------------------------------
The Fund has entered into a Distribution Agreement (the "Distribution
Agreement") with FICO, a wholly-owned subsidiary of Keystone.
The Fund has appointed FICO to act as principal underwriter of the
Fund's shares in such states as the Fund may, from time to time, designate. FICO
will act as agent for the Fund and not as principal. FICO will have the right to
obtain subscriptions for and to sell shares as agent of the Fund and, in so
doing, may retain and employ representatives to promote distribution of the
shares and may obtain orders from brokers or dealers or others for sales of
shares to them. No such representative, dealer or broker shall have any
authority to act as agent for the Fund. The Distribution Agreement provides that
FICO will bear the expenses of preparing, printing and distributing advertising
and sales literature and prospectuses used by it.
All subscriptions and sales of shares by FICO are at the offering price
of the shares in accordance with the provisions of the Fund's Declaration of
Trust, By-Laws, current prospectus and statement of additional information. All
orders are subject to acceptance by the Fund, and the Fund reserves the right in
its sole discretion to reject any order received. Under the Distribution
Agreement, the Fund is not liable to anyone for failure to accept any order.
FICO has agreed that it will, in all respects, duly conform with all
state and federal laws applicable to the sale of the shares and will indemnify
and hold harmless the Fund, and each person who has been, is or may be a Trustee
or officer of the Fund, against expenses reasonably incurred by any of them in
connection with any claim or in connection with any action, suit or proceeding
to which any of them may be a party, that arises out of or is alleged to arise
out of any misrepresentation or omission to state a material fact on the part of
FICO or any other person for whose acts FICO is responsible or is alleged to be
responsible, unless such misrepresentation or omission was made in reliance upon
written information furnished by the Fund.
The Distribution Agreement continues in effect only if its terms and
its continuance are approved at least annually at a meeting called for that
purpose by a majority of the Trustees who are not parties to such agreement or
"interested persons" of any such party and if its continuance is approved by
vote of a majority of the Trustees or a majority of the outstanding voting
shares of the Fund. Under the Distribution Agreement, the Fund is responsible
for all expenses in connection with the registration of its shares with the
Securities and Exchange Commission, auditing and filing fees in connection with
the registration of its shares under the various state "blue-sky" laws and the
cost of preparation of prospectuses and other expenses. Keystone pays such
expenses on the Fund's behalf.
The Distribution Agreement may be terminated, without penalty, on 60
days' written notice by the Fund or on 90 days' written notice by FICO. The
Distribution Agreement will terminate automatically upon its "assignment" as
that term is defined in the 1940 Act.
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BROKERAGE
- --------------------------------------------------------------------------------
It is the policy of the Fund, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net economic result to the
Fund, involving both price paid or received and any commissions and other costs
paid, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Such
considerations are weighed by management in determining the overall
reasonableness of brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund or Keystone is considered to be in
addition to and not in lieu of services required to be performed by Keystone
under the Advisory Agreement. The cost, value and specific application of such
information are indeterminable and cannot be practicably allocated among the
Fund and other clients of Keystone who may indirectly benefit from the
availability of such information. Similarly, the Fund may indirectly benefit
from information made available as a result of transactions for such other
clients.
The Fund's securities transactions are generally principal transactions
with the issuer of the security or with major underwriters and dealers for money
market instruments. Accordingly, the Fund does not pay significant brokerage
commissions. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
Purchases from underwriters will include the underwriting commission or
concession and purchases from dealers serving as market makers will include the
spread between the bid and asked prices. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the purchase directly from an issuer of certain securities for the Fund's
portfolio in order to take advantage of the lower purchase price available to
members of such a group.
The Board of Trustees of the Fund has determined that the Fund may
follow a policy of considering sales of shares as a factor in the selection of
broker-dealers to execute portfolio transactions, subject to the requirements of
best execution, including best price, described above.
Investment decisions for the Fund are made independently from those of
the other funds and investment accounts managed by Keystone. It may frequently
develop that the same investment decision is made for more than one fund.
Simultaneous transactions are inevitable when the same security is suitable for
the investment objective of more than one account. When two or more funds or
accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula that is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund. It is the opinion of the Board of Trustees of the Fund
that the desirability of retaining Keystone as investment adviser to the Fund
outweighs any disadvantages that may result from exposure to simultaneous
transactions.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Board of Trustees from time to time. Because of the possibility
of further regulatory developments affecting the securities exchanges and
brokerage practices generally, the foregoing practices may be changed, modified
or eliminated.
In no instance are portfolio securities purchased from or sold to
Keystone, FICO or any of their affiliated persons, as defined in the 1940 Act
and rules and regulations issued thereunder.
During the fiscal years ended December 31, 1992, 1993 and 1994, the
Fund did not pay any brokerage commissions.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
As of March 31, 1995, the following entities owned of record 5% or more
of the outstanding shares of the Fund: Keystone Investment Distributors Company,
Attn: Mgr. Financial Accounting, 200 Berkeley Street, Boston, MA 02116-5022,
38.9%; Keystone Asset Corp., Attn: Kim Lynch, 200 Berkeley Street, Boston, MA
02116-5022, 26.9%; Keystone Investment Management Company and subsidiaries,
Attn: Kim Lynch, 200 Berkeley Street, Boston, MA 02116-5022, 13.7%; and Keystone
Management, Inc., Attn Kim Lynch, 200 Berkeley Street, Boston, MA 02116-5022,
12.8%.
State Street Bank and Trust Company (the "Custodian"), located at 225
Franklin Street, Boston, Massachusetts 02110, is custodian of all securities and
cash of the Fund. The Custodian, in addition to its custodial services, performs
accounting and related recordkeeping functions for the Fund.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519,
is a wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the Fund.
KPMG Peat Marwick LLP, located at One Boston Place, Boston,
Massachusetts 02108, Certified Public Accountants, are the independent auditors
for the Fund.
Except as otherwise stated in its prospectuses or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectuses without shareholder approval, including the right to impose or
change fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectuses, statements of additional information or in supplemental sales
literature issued by the Fund or its Principal Underwriter. No person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and this statement of additional information omit
certain information contained in the Fund's Registration Statement filed with
the Securities and Exchange Commission, which may be obtained from the
Securities and Exchange Commission's principal office in Washington, D.C. upon
payment of the fee prescribed by the rules and regulations promulgated by the
Securities and Exchange Commission.
<PAGE>
APPENDIX
MONEY MARKET INSTRUMENTS
The Fund's investments in commercial paper are limited to those rated
A-1 by Standard & Poor's Corporation ("S&P"), Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or F-1 by Fitch's Investors Services, Inc.
("Fitch's"). These ratings and other money market instruments are described
below.
COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P has the following characteristics:
(1) liquidity ratios are adequate to meet cash requirements; (2) the issuer's
long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed; (3) the issuer has access to at least two additional
channels of borrowing; (4) basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances; and (5) typically, the issuer's
industry is well established, and the issuer has a strong position within the
industry.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks that may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships that exist with the issuer; and (8) recognition by the management
of obligations that may be present or may arise as a result of public
preparations to meet such obligations. Relative strength or weakness of the
above factors determines how the issuer's commercial paper is rated within
various categories.
The rating F-1 is the highest rating assigned by Fitch's. Among the
factors considered by Fitch's in assigning this rating are the following: (1)
the issuer's liquidity; (2) its standing in the industry; (3) the size of its
debt; (4) its ability to service its debt; (5) its profitability; (6) its return
on equity; (7) its alternative sources of financing; and (8) its ability to
access the capital markets. Analysis of the relative strength or weakness of
these factors and others determines whether an issuer's commercial paper is
rated F-1.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the
investment of fluctuating amounts by the Fund at varying rates of interest
pursuant to direct arrangements between the Fund, as lender, and the issuer, as
borrower. Master demand notes may permit daily fluctuations in the interest rate
and daily changes in the amounts borrowed. The Fund has the right to increase
the amount under the note at any time up to the full amount provided by the note
agreement or to decrease the amount under the note, and the borrower may repay
up to the full amount of the note without penalty. Notes purchased by the Fund
must permit the Fund to demand payment of principal and accrued interest at any
time (on not more than seven days' notice) or to resell the note at any time to
a third party. Master demand notes purchased by the Fund may have maturities of
more than one year, provided they specify that (1) the Fund be entitled to
payment of principal and accrued interest upon not more than seven days' notice,
and (2) the rate of interest on such notes be adjusted automatically at periodic
intervals which normally will not exceed 31 days but may extend up to one year.
Because these types of notes are direct lending arrangements between the lender
and borrower, such instruments are not normally traded, and there is no
secondary market for these notes, although they are redeemable and thus
repayable by the borrower at face value plus accrued interest at any time.
Accordingly, the Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. In connection with master
demand note arrangements, Keystone Investment Management Company ("Keystone")
considers, under standards established by the Board of Trustees, earning power,
cash flow, and other liquidity ratios of the borrower and continually monitors
the ability of the borrower to pay principal and interest on demand. These
notes, as such, are not typically rated by credit rating agencies. Unless they
are so rated, the Fund may invest in them only if at the time of an investment
the issuer meets the criteria set forth above for commercial paper. The notes
will be deemed to have a maturity equal to the longer of the period remaining to
the next interest rate adjustment or the demand notice period.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance. Treasury bills have maturities of one year or
less. Treasury notes have maturities of one to ten years and Treasury bonds
generally have maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities include direct obligations of the U.S. Treasury and
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Banks, Federal
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Maritime Administration, The Tennessee Valley Authority, District of
Columbia Armory Board and Federal National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as Treasury bills and Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U.S. government.
Others, such as securities of Federal Home Loan Banks, are supported by the
right of the issuer to borrow from the Treasury. Still others, such as bonds
issued by the Federal National Mortgage Association, a private corporation, are
supported only by the credit of the instrumentality. Because the U.S. government
is not obligated by law to provide support to an instrumentality it sponsors,
the Fund will invest in the securities issued by such an instrumentality only
when Keystone determines that the credit risk with respect to the
instrumentality does not make its securities unsuitable investments. U.S.
government securities will not include international agencies or
instrumentalities in which the U.S. government, its agencies or
instrumentalities participate, such as the International Bank for Reconstruction
and Development (the "World Bank"), the Asian Development Bank or the
Inter-American Development Bank, or issues insured by the Federal Deposit
Insurance Corporation.
CERTIFICATES OF DEPOSITS
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar denominated
certificates of U.S. banks (including their branches abroad) and of U.S.
branches of foreign banks that are members of the Federal Reserve System or the
Federal Deposit Insurance Corporation, and have at least $1 billion in deposits
as of the date of their most recently published financial statements.
The Fund will not acquire time deposits or obligations issued by the
World Bank, the Asian Development Bank or the Inter-American Development Bank.
Additionally, the Fund does not currently intend to purchase such foreign
securities (except to the extent that certificates of deposit of foreign
branches of U.S. banks may be deemed foreign securities) or purchase
certificates of deposit, bankers' acceptances or other similar obligations
issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. Repurchase agreements
may be entered into only with a member bank of the Federal Reserve System which
has at least $1 billion in assets, a primary dealer in U.S. government
securities or other financial institution believed by Keystone to be
creditworthy. At this time such persons are not required to be registered as
U.S. government securities dealers with any regulatory organization. Under such
agreements, the bank, primary dealer or other financial institution agrees, upon
entering into the contract, to repurchase the security at a mutually agreed upon
date and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations during
such period. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement at not less than
the repurchase price, and such value will be determined on a daily basis by
marking the underlying securities to their market value. Although the securities
subject to the repurchase agreement might bear maturities exceeding a year, the
Fund only intends to enter into repurchase agreements that provide for
settlement within a year and usually within seven days. Securities subject to
repurchase agreements will be held by the Fund's custodian or in the Federal
Reserve Book Entry System. The Fund does not bear the risk of a decline in value
of the underlying security unless the seller defaults under its repurchase
obligation. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and losses, including (1) possible declines in the value
of the underlying securities during the period while the Fund seeks to enforce
its rights thereto; (2) possible subnormal levels of income and lack of access
to income during this period; and (3) expenses of enforcing its rights. The
Board of Trustees of the Fund has established procedures to evaluate the
creditworthiness of each party with whom the Fund enters into repurchase
agreements by setting guidelines and standards of review for Keystone and
monitoring Keystone's actions with regard to repurchase agreements.
<PAGE>
MASTER RESERVES TRUST
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
STATEMENT NAME / PORTFOLIO DATES OR PERIODS COVERED PAGE
Financial Highlights
Money Market Portfolio I Each of the years in the ten year period 1
ended December 31, 1994
U.S. Treasury Money Market The period from January 1, 1994 to May 2
Portfolio 27, 1994 and each of the years in the
ten year period December 31, 1993
Money Market Portfolio XI The period from January 1, 1994 to July 3
29, 1994 and each of the years in the
ten year period December 31, 1993
Robert Van U.S. Gov't The period from January 1, 1994 to 4
Securities Money Market August 16, 1994 and the period March 4,
Portfolio 1993 (Commencement of Operations) to
December 31, 1993
<PAGE>
MASTER RESERVES TRUST
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
STATEMENT NAME / PORTFOLIO DATES OR PERIODS COVERED PAGE
Schedule of Investments
Money Market Portfolio I As of December 31, 1994 5
Statement of Assets and Liabilities
Money Market Portfolio I As of December 31, 1994 7
Statement of Operations
Money Market Portfolio I Year Ended December 31, 1994 8
U.S. Treasury Money Market The period from January 1, 1994 to May
Portfolio 27, 1994
Money Market Portfolio XI The period from January 1, 1994 to 9
July 29, 1994
Robert Van U.S. Gov't The period from January 1, 1994 to 9
Securities Money Market August 16, 1994
Portfolio
<PAGE>
MASTER RESERVES TRUST
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
STATEMENT NAME / PORTFOLIO DATES OR PERIODS COVERED PAGE
Statements of Changes in Net Assets
Money Market Portfolio I Each of the years in the two year period 10
ended December 31, 1994
U.S. Treasury Money Market The period from January 1, 1994 to May 10
Portfolio 27, 1994 and year ended December
31, 1993
Money Market Portfolio XI The period from January 1, 1994 to 11
July 29, 1994 and the year ended
December 31, 1993
Robert Van U.S. Gov't The period from January 1, 1994 to 11
Securities Money Market August 16, 1994 and the period March 4,
Portfolio 1993 (Commencement of Operations) to
December 31, 1993
Notes to Financial Statements 12
<PAGE>
MONEY MARKET PORTFOLIO I
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING
OF YEAR ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from
Investment
Operations
Net Investment
Income .............. 0.042 0.032 0.037 0.059 0.079 0.089 0.073 0.064 0.066 0.078
Less Distributions
Dividends from Net
Investment Income ... (0.042) (0.032) (0.037) (0.059) (0.079) (0.089) (0.073) (0.064) (0.066) (0.078)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END
OF YEAR ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN ......... 4.23% 3.24% 3.76% 6.01% 8.27% 9.25% 7.57% 6.60% 6.76% 7.80%
RATIOS/SUPPLEMENTAL
DATA
Ratios to Average
Net Assets:
Net Investment Income 4.49% 3.23% 3.70% 5.90% 7.92% 9.24% 7.41% 6.51% 6.42% 7.87%
Operating and
Management
Expenses .......... 0.10% 0.10% 0.19% 0.20% 0.26% 0.30% 0.25% 0.23% 0.24% 0.40%
Net Assets, End of
Year (thousands) .... $30,314 $61,354 $205,818 $56,603 $67,682 $162,336 $280,142 $222,314 $187,845 $55,265
</TABLE>
See Notes to Financial Statements.
<PAGE>
U.S. TREASURY MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
January 1,
to
May 27, Year Ended December 31,
---------- -----------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Income from Investment
Operations
Net Investment Income.. 0.014 0.030 0.035 0.056 0.075 0.080 0.065 0.057 0.061 0.074
Less Distributions
Dividends from Net
Investment Income...... (0.014) (0.030) (0.035) (0.056) (0.075) (0.080) (0.065) (0.057) (0.061) (0.074)
----- ------ ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END
OF PERIOD.............. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ====== ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN............ 1.40% 3.00% 3.57% 5.72% 7.77% 8.30% 6.70% 5.86% 6.26% 7.40%
RATIOS/SUPPLEMENTAL
DATA
Ratios to Average
Net Assets:
Net Investment
Income............... 3.35%<F1> 3.02% 3.49% 5.85% 7.46% 8.03% 6.48% 5.74% 5.95% 7.30%
Operating and
Management Expenses... 0.17%<F1> 0.10% 0.20% 0.20% 0.28% 0.31% 0.27% 0.24% 0.25% 0.30%
Net Assets, End of
Period (thousands)..... 0 $2,517 $13,297 $16,892 $19,963 $24,561 $22,505 $24,234 $26,314 $14,263
<FN>
- --------------
<F1> Annualized
</FN>
</TABLE>
See Notes to Financial Statements.
<PAGE>
MONEY MARKET PORTFOLIO XI FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
January 1,
to
July 29, Year Ended December 31,
---------- --------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Income from Investment
Operations
Net Investment Income 0.039 0.031 0.037 0.058 0.079 0.089 0.073 0.064 0.066 0.079
Less Distributions
Dividends from Net
Investment Income.... (0.039) (0.031) (0.037) (0.058) (0.079) (0.089) (0.073) (0.064) (0.066) (0.079)
----- -------- -------- -------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE,
END OF PERIOD........ $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ======== ======== ======== ======== ======== ======== ======== ======== =======
TOTAL RETURN.......... 3.95% 3.15% 3.79% 6.00% 8.22% 9.25% 7.54% 6.56% 6.77% 7.90%
RATIOS/SUPPLEMENTAL
DATA
Ratios to Average
Net Assets:
Net Investment
Income............. 2.96%<F1> 3.03% 3.73% 5.88% 7.91% 9.13% 7.24% 6.41% 6.61% 8.01%
Operating and
Management Expenses. 0.13%<F1> 0.14% 0.20% 0.20% 0.27% 0.31% 0.28% 0.25% 0.26% 0.33%
Net Assets, End of
Period (thousands).. $ 0 $122,103 $145,936 $166,684 $138,419 $117,194 $105,066 $113,801 $108,646 $95,555
<FN>
- ----------------
<F1> Annualized
</FN>
</TABLE>
See Notes to Financial Statements.
<PAGE>
ROBERT VAN U.S. GOVERNMENT SECURITIES MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
March 4, 1993
January 1, (Commencement of
to Operations) to
August 16, December 31,
---------- ---------------
1994 1993
---- ----
NET ASSET VALUE, BEGINNING OF PERIOD.......... $1.00 $1.00
Income from Investment Operations
Net Investment Income......................... 0.053 0.024
Less Distributions
Dividends from Net Investment Income.......... (0.053) (0.024)
------ ------
NET ASSET VALUE, END OF PERIOD................ $1.00 $1.00
====== ======
TOTAL RETURN 5.34% 2.45%
RATIOS/SUPPLEMENTAL DATA
Ratios to Average Net Assets:
Net Investment Income......................... 2.98%* 3.00%*
Operating and Management Expenses............. 0.19%* 0.21%*
Net Assets, End of Period (thousands)......... $ 0 $2,001
- ---------------
* Annualized
See Notes to Financial Statements.
<PAGE>
MONEY MARKET PORTFOLIO I
SCHEDULE OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL MATURITY MARKET
AMOUNT DATE VALUE
--------- -------- ------
<S> <C> <C> <C> <C>
BANK NOTES (1.6%)
$500,000 Wachovia Bank (Cost $499,990) 01/17/95 $ 499,978
-----------
COMMERCIAL PAPER (6.6%)
500,000 AIG Funding 01/11/95 499,339
500,000 Nestle Capital Corp. 01/12/95 499,260
500,000 Raytheon Co. 01/05/95 499,834
500,000 Sara Lee Corp. 01/10/95 499,432
-----------
Total Commercial Paper (Cost $1,997,865) 1,997,865
-----------
MASTER NOTE (1.7%)
500,000 Associates Corporation of North America, 5.497% 01/02/95 500,000
(Cost $500,000) -----------
U.S. GOVERNMENT (AND AGENCY) ISSUES (40.5%)
2,000,000 Federal Farm Credit Bank Discount Notes 01/04/95 1,999,691
1,000,000 Federal Farm Credit Bank Discount Notes 01/23/95 996,700
2,000,000 Federal Home Loan Bank Discount Notes 01/03/95 2,000,000
1,000,000 Federal Home Loan Bank Discount Notes 01/09/95 999,020
785,000 Federal Home Loan Mortgage Corp. Discount Notes 01/03/95 785,000
1,000,000 Federal National Mortgage Association Discount Notes 01/05/95 999,679
500,000 Federal National Mortgage Association Discount Notes 01/05/95 499,844
2,000,000 Federal National Mortgage Association Discount Notes 01/06/95 1,999,033
1,010,000 Federal National Mortgage Association Discount Notes 01/11/95 1,008,743
1,000,000 Federal National Mortgage Association Discount Notes 01/13/95 998,445
-----------
Total U.S. Government (and Agency) Issues (Cost
$12,286,155) 12,286,155
-----------
MATURITY
REPURCHASE AGREEMENTS (50.1%) VALUE
--------
Goldman Sachs Co., 5.80%, purchased 12/30/94,
(Collateralized by $2,521,000 FHLMC #755230, 4.00%,
due 08/01/34) maturing 01/02/95 $2,401,546 2,400,000
HSBC Securities, Inc., 5.25%, purchased 12/30/94,
(Collateralized by $2,575,000 U.S. Treasury Notes, 8.50%,
due 08/15/34) maturing 01/02/95 2,591,511 2,590,000
<PAGE>
MONEY MARKET PORTFOLIO I
SCHEDULE OF INVESTMENTS
December 31, 1994
REPURCHASE AGREEMENTS (CONTINUED)
Paine Webber, 5.85%, purchased 12/30/94,
(Collateralized by $2,440,000 U.S. Treasury Bills, 5.85%,
due 02/16/95) maturing 01/02/95 $2,401,546 $2,400,000
Prudential Securities, Inc., 6.02%, purchased 12/30/94,
(Collateralized by $2,978,000, FHLMC #845688, 3.91%,
due 04/01/94) maturing 01/02/95 2,401,605 2,400,000
Sanwa BGK Securities, 6.00%, purchased 12/30/94,
(Collateralized by $2,411,000, GNMA #8447, 6.50%,
due 06/20/94) maturing 01/02/95 2,401,600 2,400,000
Smith Barney Harris Upham & Co., 4.75%, purchased 12/30/94
(Collateralized by $3,000,000, 5.50%, due 02/15/95)
maturing 01/02/95 3,001,583 3,000,000
-----------
Total Repurchase Agreements (Cost $15,190,000) 15,190,000
-----------
Total Investments (Cost $30,474,010)<F1> 30,473,998
OTHER ASSETS AND LIABILITIES - NET (-0.5%) (159,819)
-----------
NET ASSETS (100%) $30,314,179
===========
NOTES TO SCHEDULE OF INVESTMENTS
<FN>
- ------------
<F1> The cost of investments for federal income tax purposes is identical to the
cost for financial reporting purposes. Gross unrealized appreciation and
depreciation of investments, based on identified tax cost, at December 31,
1994 are as follows:
Gross unrealized appreciation......................... $ 0
Gross unrealized depreciation......................... (12)
----
Net unrealized depreciation......................... $(12)
====
</FN>
</TABLE>
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
MONEY MARKET
PORTFOLIO I
------------
ASSETS:
Investments at market value*
(Note 1) .............................................. $ 30,473,998
Cash .................................................... 149
Interest receivable ..................................... 15,638
------------
Total assets ........................................ 30,489,785
------------
LIABILITIES:
Distribution payable .................................... 160,345
Accrued trustees' expenses ............................. 9,076
Accrued management fees ................................. 6,185
------------
Total liabilities ................................... 175,606
------------
NET ASSETS $ 30,314,179
NET ASSETS REPRESENTED BY:
Paid-in capital ......................................... $ 30,309,213
============
Accumulated realized gains
(losses) on investment
transactions-net ...................................... 8,880
Distributions in excess of
investment income-net .................................. (3,902)
Unrealized appreciation (depreciation)
on investments ....................................... (12)
------------
Total net assets applicable to outstanding shares
($1.00 per share on outstanding shares)**
(Notes 1 and 3) ..................................... $ 30,314,179
============
Net asset value, offering and
redemption price per share .............................. $ 1.00
------------
*Amortized cost of investments .......................... $ 30,474,010
============
**Outstanding shares (Note 3) ........................... 30,309,213
============
See Notes to Financial Statements.
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ROBERT VAN
U.S. GOVERNMENT
MONEY U.S. TREASURY SECURITIES
MARKET MONEY MARKET MONEY MARKET MONEY MARKET
PORTFOLIO I PORTFOLIO PORTFOLIO XI PORTFOLIO
------------ ------------- ------------ ------------
PERIOD FROM PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, JANUARY 1, JANUARY 1,
DECEMBER 31, TO MAY 27, TO JULY 29, TO AUGUST 16,
1994 1994 1994 1994
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (NOTE 1):
Interest................... $ 2,226,924 $ 64,631 $ 2,364,000 $45,637
----------- -------- ----------- -------
EXPENSES (NOTES 1 AND 2):
Management fee............. 49,118 1,568 95,141 2,466
Trustees' fees and expenses 545 1,436 6,494 321
----------- -------- ----------- -------
Total expenses......... 49,663 3,004 101,635 2,787
----------- -------- ----------- -------
Investment income-net.......... 2,177,261 61,627 2,262,365 42,850
----------- -------- ----------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS - NET (NOTES 1 AND 4):
Realized gain (loss) on
investments-net.......... (5,765) 0 0 0
Unrealized appreciation
(depreciation) on
investments:
Beginning of period....... $ (2,183) $ (14) $ (2,666) $ (8)
End of period............. (12) 0 0 0
----------- -------- ----------- -------
Increase (decrease) in
unrealized appreciation
or depreciation-net........ 2,171 14 2,666 8
----------- -------- ----------- -------
Net gain (loss) on investments.. (3,594) 14 2,666 8
Net increase in net assets
resulting from operations..... $ 2,173,667 $ 61,641 $ 2,265,031 $42,858
----------- -------- ----------- -------
See Notes to Financial Statements.
</TABLE>
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY MARKET U.S TREASURY
PORTFOLIO I MONEY MARKET PORTFOLIO
------------------------------- -------------------------------
YEAR ENDED YEAR ENDED PERIOD FROM YEAR ENDED
DECEMBER 31, DECEMBER 31, JANUARY 1, TO DECEMBER 31,
1994 1993 MAY 27, 1994 1993
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Investment income-net....... $ 2,177,261 $ 6,182,678 $ 61,627 $ 245,600
Realized gain (loss) on
investments-net............ (5,765) 10,710 0 110
Increase (decrease) in
unrealized appreciation
or depreciation-net 2,171 (5,027) 14 283
----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations 2,173,667 6,188,361 61,641 245,993
----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
FROM INVESTMENT INCOME-NET
(NOTE 1).................... (2,177,261) (6,171,546) (59,262) (245,337)
CAPITAL SHARE TRANSACTIONS
(NOTE 3):
Proceeds from shares sold... 225,765,967 658,498,481 9,427,998 22,318,663
Payments for shares redeemed (257,357,648) (803,163,149) (11,947,529) (33,098,877)
Net asset value of shares
issued in reinvestment
of distributions from
investment income-net..... 555,364 183,923 -0- -0-
----------- ----------- ----------- -----------
Net increase (decrease)
in net assets resulting
from capital share
transactions.......... (31,036,317) (144,480,745) (2,519,531) (10,780,214)
----------- ----------- ----------- -----------
Total increase (decrease)
in net assets......... (31,039,911) (144,463,930) (2,517,152) (10,779,558)
NET ASSETS:
Beginning of period......... 61,354,090 205,818,020 2,517,152 13,296,710
----------- ----------- ----------- -----------
End of period............... $30,314,179 $61,354,090 $ 0 $ 2,517,152
----------- ----------- ----------- -----------
</TABLE>
See Notes to Financial Statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
ROBERT VAN U.S.
MONEY MARKET GOVERNMENT SECURITIES
PORTFOLIO XI MONEY MARKET PORTFOLIO
------------------------------- -------------------------------
MARCH 4, 1993
PERIOD FROM YEAR ENDED PERIOD FROM (COMMENCEMENT OF
JANUARY 1, TO DECEMBER 31, JANUARY 1, TO OPERATIONS TO
JULY 29, 1994 1993 AUGUST 16, 1994 DECEMBER 31, 1994
------------- ------------ ---------------- -----------------
OPERATIONS:
<S> <C> <C> <C> <C>
Investment income-net....... $ 2,262,365 $ 4,397,305 $ 42,850 $ 188,714
Realized gain (loss) on
investments-net............ 0 0 0 72
Increase (decrease) in
unrealized appreciation
or depreciation-net........ 2,666 (5,074) 8 (8)
----------- ------------ ----------- -----------
Net increase in net assets
resulting from operations 2,265,031 4,392,231 42,858 188,778
----------- ------------ ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
FROM INVESTMENT INCOME-NET
(NOTE 1).................... (2,261,327) (4,393,517) (43,280) (188,356)
CAPITAL SHARE TRANSACTIONS
(NOTE 3):
Proceeds from shares sold... 187,482,726 248,108,268 0 10,001,000
Payments for shares redeemed (309,589,024) (271,940,492) (2,001,043) (8,000,000)
Net asset value of shares
issued in reinvestment
of distributions from
investment income-net...... -0- -0- 21 22
----------- ----------- ----------- -----------
Net increase (decrease)
in net assets resulting
from capital share
transactions........... (122,106,298) (23,832,224) (2,001,022) 2,001,022
----------- ----------- ----------- -----------
Total increase (decrease)
in net assets......... (122,102,594) (23,833,510) (2,001,444) 2,001,444
NET ASSETS:
Beginning of period......... 122,102,594 145,936,104 2,001,444 0
----------- ------------ ----------- -----------
End of period............... $ 0 $122,102,594 $ 0 $ 2,001,444
=========== ============ =========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) SIGNIFICANT ACCOUNTING POLICIES
Master Reserves Trust (the "Fund"), a Massachusetts business trust, is
an open-end management investment company registered under the Investment
Company Act of 1940. Keystone Management, Inc. ("KMI") is the Investment Manager
and Keystone Custodian Funds, Inc. ("Keystone"), is the Investment Adviser.
Keystone is a wholly-owned subsidiary of Keystone Group, Inc. ("KGI"), a
Delaware corporation. KGI is privately owned by an investor group consisting of
members of current management of Keystone. Keystone Investor Resource Center,
Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer
agent.
The Fund began offering shares of its existing portfolio, Money Market I on
May 4, 1976.
On May 27,1994, all of the outstanding shares of the U.S. Treasury Money Market
Portfolio were redeemed. On July 29, 1994, all of the outstanding shares of
Money Market Portfolio XI were redeemed. On August 16, 1994, all of the
outstanding shares of the Robert Van U.S. Government Securities Money Market
Portfolio were redeemed.
The following is a summary of significant accounting policies
consistently followed by the Fund in preparation of its financial statements.
The policies are in conformity with generally accepted accounting principles.
A. Portfolio securities which are purchased with maturities of sixty
days or less are valued at amortized cost (original purchase cost as adjusted
for amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market. Portfolio securities maturing in more
than sixty days for which market quotations are readily available are valued at
current market value. Portfolio securities maturing in more than sixty days when
purchased, which are held on the sixtieth day prior to maturity, are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount) which when combined with accrued interest
approximates market. All other securities and other assets are valued at fair
value as determined in good faith using methods prescribed by the Board of
Trustees.
B. Securities transactions are accounted for on the trade date.
Interest income is recorded on the accrual basis. Realized gains and losses from
securities transactions are determined using the identified cost basis for both
financial reporting and federal income tax purposes. Any net realized short-term
capital gains of the Fund will be distributed from time to time as Keystone
deems appropriate to maintain a portfolio's net asset value at $1.00 per share.
C. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986 as amended
(Internal Revenue Code). Thus, the Fund (each portfolio) is relieved of any
federal income tax liability by distributing all of its net investment income
and net capital gains, if any, to its shareholders. The Fund intends to avoid
excise tax liability by making the required distributions under the Internal
Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of
securities whereby the seller agrees to repurchase the securities at a mutually
agreed upon date and price) the repurchase price of the securities will
generally equal the amount paid by the Fund plus a negotiated interest amount.
The seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not less
than the repurchase price, and which generally will be maintained at 101% of the
repurchase price. The Fund monitors the value of collateral on a daily basis,
and if the value of the collateral falls below required levels, the Fund intends
to seek additional collateral from the seller or terminate the repurchase
agreement. If the seller defaults, the Fund would suffer a loss to the extent
that the proceeds from the sale of the underlying securities were less than the
repurchase price. Any such loss would be increased by any cost incurred on
disposing of such securities. If bankruptcy proceedings are commenced against
the seller under the repurchase agreement, the realization on the collateral may
be delayed or limited. Repurchase agreements entered into by the Fund will be
limited to transactions with dealers or domestic banks believed to present
minimal credit risks, and the Fund will take constructive receipt of all
securities underlying repurchase agreements until such agreements expire.
<PAGE>
E. Each portfolio declares dividends from net investment income daily,
pays dividends monthly and automatically reinvests such dividends in additional
shares at net asset value, unless shareholders request payment in cash.
F. Unaffiliated Trustees are paid an annual retainer of $1,000 and a
meeting attendance fee of $30. Any compensation of officers and affiliated
Trustees of the Fund is paid by the Investment Manager.
(2) MANAGEMENT FEES
Under the terms of the current management contract, Keystone provides
investment management and administrative services as well as office space,
equipment and clerical personnel for handling the affairs of the Fund. At the
request and subject to the discretion of the Trustees of the Fund, Keystone is
required at its own expense to provide or cause to be provided to the Fund the
following additional operating services, facilities and supplies: custodial,
auditing, valuation, bookkeeping, legal, stock transfer and dividend disbursing
services, shareholders' reports, and shareholders' meetings and maintenance of
registration with the Securities and Exchange Commission and various states, as
well as insurance and membership in trade associations and related items. In
return, Keystone is entitled to a fee, payable quarterly, computed at the annual
rate of 0.09% of average daily net assets of each portfolio except as follows:
Money Market Portfolio XI pays quarterly 4% of gross income on an annualized
basis; the Robert Van U.S. Government Securities Money Market Portfolio, accrues
an annual fee of 0.20% of average daily net assets, payable quarterly.
During the year ended December 31, 1994, the Fund, in aggregate, paid a
management fee of $148,293 to Keystone.
(3) SHARES OF BENEFICIAL INTEREST
The Fund is authorized to issue an unlimited number of shares, no par
value, for each portfolio. All capital share transactions included in each
portfolio's Statement of Changes in Net Assets were made at net asset value of
$1.00 per share.
(4) INVESTMENT TRANSACTIONS
The aggregate cost of purchases and the proceeds from the sale of
investment securities for the year ended December 31, 1994, (except as noted),
were as follows:
U.S.
MONEY TREASURY
MARKET MONEY MARKET
PORTFOLIO I PORTFOLIO*
-------------- ------------
Aggregate cost of purchases $5,564,420,765 $21,570,283
============== ===========
Aggregate proceeds from sales $5,596,604,131 $24,156,248
============== ===========
ROBERT VAN U.S.
MONEY GOVERNMENT SECURITIES
MARKET MONEY MARKET
PORTFOLIO XI** PORTFOLIO ***
-------------- ---------------------
Aggregate cost of purchases $5,624,214,953 $215,801,432
============== ============
Aggregate proceeds from sales $5,747,815,634 $217,822,902
============== ============
* Period from January 1, to May 27, 1994
** Period from January 1, to July 29, 1994.
*** Period from January 1, to August 16, 1994.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Master Reserves Trust
We have audited the financial statements, including the schedule of investments,
and the financial highlights for the portfolios of Master Reserves Trust (the
"Portfolios") as listed in the accompanying index to financial statements. These
financial statements and financial highlights are the responsibility of the
Portfolios' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1994 by correspondence with the custodian. An audit includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of the portfolios of
Master Reserves Trust as of December 31, 1994, the results of their operations,
the changes in their net assets and financial highlights for the periods
specified in the index to financial statements in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 17, 1995
