1933 Act Registration No. 333-37615
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [X] Post-Effective
Amendment No. Amendment No. 1
EVERGREEN MUNICIPAL TRUST
[Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP 1025
Connecticut Avenue, N.W.
Washington, D.C. 20036
The Registrant has registered an indefinite amount of securities under
the Securities Act of 1933 pursuant to Section 24(f) under the Investment
Company Act of 1940 (File No. 333-36033); accordingly, no fee is payable
herewith. Registrant is filing as an exhibit to this Registration Statement a
copy of an earlier declaration under Rule 24f-2. Pursuant to Rule 429, this
Registration Statement relates to the aforementioned registration on Form N-1A.
A Rule 24f-2 Notice for the Registrant's fiscal year ending May 31, 1998 will be
filed with the Commission on or about July 30, 1998.
<PAGE>
It is proposed that this filing will become effective :
X immediately upon filing pursuant to paragraph (b)
on ____________ pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
on ____________ pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(1)
on ____________ pursuant to paragraph (a)(2) of Rule 485
This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
<PAGE>
EVERGREEN MUNICIPAL TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Cross Reference Sheet; Cover
Statement and Outside Page
Front Cover Page of
Prospectus
2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary; Comparison
of Investment Objectives and
Policies; Risks
4. Information About the Summary; Reasons for the
Transaction Reorganizations; Comparative
Information on Shareholders'
Rights; Exhibits A-1 and A-2
(Agreements and Plans of
Reorganization)
5. Information about the Cover Page; Summary; Risks;
Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
6. Information about the Cover Page; Summary; Risks;
Company Being Acquired Comparison of Investment
Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
<PAGE>
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
7. Voting Information
Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
9. Additional Information Inapplicable
Required for Reoffering
by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of the Evergreen
Municipal Trust - Evergreen
Tax Free Fund November 12,
1997
13. Additional Information Statement of Additional
about the Company Being Information of Keystone Tax
Acquired Free Income Fund dated
September 3, 1997;
Statement of Additional
Information of Keystone Tax
Free Fund dated April 30, 1997
14. Financial Statements Financial Statements dated May
31, 1997 of Keystone Tax Free
Income Fund; Financial
Statements of Keystone Tax
Free Fund dated December 31,
1996 and June 30, 1997
<PAGE>
Location in Prospectus/Proxy
Statement
Item of Part C of Form N-14
15. Indemnification Incorporated by Reference to
Part A Caption - "Comparative
Information on Shareholders'
Rights - Liability and
Indemnification of Trustees"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
EVERGREEN (FORMERLY KEYSTONE) TAX FREE INCOME FUND
KEYSTONE TAX FREE FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
November 14, 1997
Dear Shareholder,
I am writing to shareholders of Evergreen (formerly Keystone) Tax Free Income
Fund and the Keystone Tax Free Fund to inform you of a Special Shareholders'
meeting to be held on January 6, 1998. Before that meeting, I would like your
vote on the important issues affecting your fund as described in the attached
Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes the proposed reorganization of the
Evergreen Tax Free Income Fund and the Keystone Tax Free Fund. All of the assets
of both funds would be acquired by a new fund, the Evergreen Tax Free Fund.
Details about the new fund's investment objective, portfolio management team,
performance, etc. are contained in the attached Prospectus/Proxy Statement.
The Boards of Trustees have unanimously approved the proposal and recommend that
you vote FOR this proposal.
You will receive shares of the new fund in the same class, with the same letter
designation, the same fees and the same contingent deferred sales charges as the
shares you held prior to the reorganization. This is a non-taxable event for
shareholders.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposal presented and sign and return your proxy card(s) in the enclosed
postage-paid envelope today. You may receive more than one proxy card if you own
shares in more than one fund. Please sign and return each card you receive.
If we do not receive your completed proxy card(s) after several weeks, you may
be contacted by our proxy solicitor, Shareholder Communications Corporation.
They will remind you to vote your shares or will record your vote over the phone
if you choose to vote in that manner. You may also call Shareholder
Communications Corporation directly at 1-800-733- 8481 ext.404 and vote by
phone.
<PAGE>
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
William M. Ennis
Managing Director
Evergreen Funds
<PAGE>
November 1997
IMPORTANT NEWS
FOR EVERGREEN SHAREHOLDERS
We encourage you to read the attached Prospectus/Proxy Statement in full;
however, the following questions and answers represent some typical concerns
that shareholders might have regarding this document.
Q: WHY IS EVERGREEN SENDING ME THIS PROSPECTUS/PROXY
STATEMENT?
Mutual funds are required to get shareholders' votes for certain types of
changes. As a shareholder, you have a right to vote on major policy decisions,
such as those included here.
Q: WHAT ARE THE ISSUES CONTAINED IN THIS PROSPECTUS/PROXY
STATEMENT?
You are being asked to vote to approve a proposal to reorganize the Evergreen
(formerly Keystone) Tax Free Income Fund and the Keystone Tax Free Fund into a
new fund, called Evergreen Tax Free Fund. The new fund's investment objective is
substantially the same as that of the former
funds.
Q: HOW WILL THIS CHANGE AFFECT ME AS A FUND SHAREHOLDER?
The reorganization of these funds into the Evergreen Tax Free Fund means that
the Evergreen Tax Free Income Fund and the Keystone Tax Free Fund would no
longer exist after January 23, 1998. Shareholders would receive shares of the
new fund in the same class, with the same letter designation, the same fees and
the same contingent deferred sales charges as the shares held prior to the
reorganization. This is a non-taxable event for shareholders.
<PAGE>
Q: WHY IS EVERGREEN PROPOSING THIS CHANGE?
This proposal represents one of the final steps we are undertaking to unify the
Evergreen and Keystone fund families. Shareholders can anticipate the following
benefits:
A comprehensive fund family with a common risk/reward spectrum
The elimination of any overlap or gaps in fund offerings
Reduced confusion surrounding privileges associated with each fund,
specifically regarding exchangeability, letter of intent, and rights of
accumulation
A user-friendly product line for both shareholders and investment
professionals
A single location for fund information, whether you're looking up funds
in the newspaper or locating a Morningstar report on the Internet.
Q: HOW DO THE BOARD MEMBERS OF MY FUND RECOMMEND THAT I VOTE?
The Board members of each fund recommend that you vote in favor of or FOR the
proposal on the enclosed proxy card.
Q: WHOM DO I CALL FOR MORE INFORMATION OR
TO PLACE MY VOTE?
Please call Shareholder Communications Corporation at 1-800-
733-8481 ext. 404 for additional information. You can vote one
of three ways:
Use the enclosed proxy card to record your vote either FOR, AGAINST or
ABSTAIN, then return the card in the postpaid envelope provided.
or
Complete the enclosed proxy card and FAX to 1-800-733- 1885.
or
Call 1-800-733-8481 ext. 404 and record your vote by
telephone.
Q: WHY ARE MULTIPLE CARDS ENCLOSED?
<PAGE>
If you own shares of more than one fund, you will receive a proxy card for each
fund you own. Please sign, date and return each proxy card you receive.
<PAGE>
EVERGREEN (FORMERLY KEYSTONE) TAX FREE INCOME FUND
KEYSTONE TAX FREE FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 6, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of each of Evergreen (formerly Keystone) Tax Free Income Fund and
Keystone Tax Free Fund (each a "Fund") will be held at the offices of the
Evergreen Keystone Funds, 200 Berkeley Street, Boston, Massachusetts 02116, on
January 6, 1998 at 3:00 p.m. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of September 30, 1997, providing for the acquisition of
all of the assets of the Fund by Evergreen Tax Free Fund, a series of Evergreen
Municipal Trust, ("Evergreen Tax Free") in exchange for shares of Evergreen Tax
Free and the assumption by Evergreen Tax Free of certain identified liabilities
of the Fund. The Plan also provides for distribution of such shares of Evergreen
Tax Free to shareholders of the Fund in liquidation and subsequent termination
of the Fund. A vote in favor of the Plan is a vote in favor of the liquidation
and dissolution of the Fund.
2. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of Evergreen Tax Free Income Fund and the Trustees of
Keystone Tax Free Fund have fixed the close of business on November 10, 1997 as
the record date for the determination of shareholders of each respective Fund
entitled to notice of and to vote at the Meeting or any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO
NOT EXPECT TO ATTEND IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE
ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
<PAGE>
By Order of the Boards of Trustees
George O. Martinez
Secretary
November 14, 1997
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as
it appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name
of the party signing should conform exactly to a name shown in
the Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Jr. John B. Smith, Jr.,
Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED NOVEMBER 14, 1997
Acquisition of Assets of
EVERGREEN (FORMERLY KEYSTONE) TAX FREE INCOME FUND
200 Berkeley Street
Boston, Massachusetts 02116
and
KEYSTONE TAX FREE FUND
200 Berkeley Street
Boston, Massachusetts 02116
By and in Exchange for Shares of
EVERGREEN TAX FREE FUND
a series of
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
Evergreen (formerly Keystone) Tax Free Income Fund ("Evergreen Tax Free Income")
and Keystone Tax Free Fund ("Keystone Tax Free") in connection with a proposed
Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of each of Evergreen Tax Free Income and Keystone Tax Free for
consideration at a Special Meeting of Shareholders to be held on January 6, 1998
at 3:00 p.m. at the offices of the Evergreen Keystone Funds, 200 Berkeley
Street, Boston, Massachusetts 02116, and any adjournments thereof (the
"Meeting"). Each Plan provides for all of the assets of Evergreen Tax Free
Income and Keystone Tax Free, respectively, to be acquired by Evergreen Tax Free
Fund ("Evergreen Tax Free") in exchange for shares of Evergreen Tax Free and the
assumption by Evergreen Tax Free of certain identified liabilities of Evergreen
Tax Free Income and Keystone Tax Free, respectively (hereinafter referred to
individually as the "Reorganization" or collectively as the "Reorganizations").
Evergreen Tax Free, Evergreen Tax Free Income and Keystone Tax Free are
sometimes hereinafter referred to individually as the "Fund" and collectively as
the "Funds." Following the Reorganizations, shares of Evergreen Tax Free will be
distributed to shareholders of Evergreen Tax Free Income and Keystone Tax Free
in liquidation of Evergreen Tax Free Income and Keystone Tax Free and such Funds
will be terminated. Holders of shares of Evergreen Tax Free Income will receive
shares of the class of Evergreen Tax Free (the "Corresponding Shares") having
the same letter
<PAGE>
designation and the same distribution-related fees, shareholder
servicing-related fees and contingent deferred sales charges ("CDSCs"), if any,
as the shares of the class of Evergreen Tax Free Income held by them prior to
the Reorganization. Holders of shares of Keystone Tax Free will receive shares
of Evergreen Tax Free having the same distribution-related fees, shareholder
servicing-related fees and CDSCs, if any, as the shares of Keystone Tax Free
held by them prior to the Reorganization. As a result of the proposed
Reorganizations, shareholders of Evergreen Tax Free Income will receive that
number of full and fractional Corresponding Shares of Evergreen Tax Free, and
shareholders of Keystone Tax Free will receive that number of full and
fractional shares of Evergreen Tax Free having an aggregate net asset value
equal to the aggregate net asset value of such shareholder's shares of Evergreen
Tax Free Income or Keystone Tax Free. Each Reorganization is being structured as
a tax-free reorganization for federal income tax purposes.
Evergreen Tax Free is a separate series of Evergreen Municipal Trust,
an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The investment objective of
Evergreen Tax Free is to provide shareholders with the highest possible current
income exempt from federal income taxes, while preserving capital. Such
investment objective is substantially similar to those of Evergreen Tax Free
Income and Keystone Tax Free.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Evergreen Tax Free that
shareholders of Evergreen Tax Free Income and Keystone Tax Free should know
before voting on the Reorganizations. Certain relevant documents listed below,
which have been filed with the Securities and Exchange Commission ("SEC"), are
incorporated in whole or in part by reference. A Statement of Additional
Information dated November 14, 1997 relating to this Prospectus/Proxy Statement
and the Reorganizations incorporating by reference the financial statements of
Evergreen Tax Free Income dated May 31, 1997 and Keystone Tax Free dated
December 31, 1996 and June 30, 1997 has been filed with the SEC and is
incorporated by reference in its entirety into this Prospectus/Proxy Statement.
Evergreen Tax Free is a newly created series of Evergreen Municipal Trust and
has had no operations to date. Consequently, there are no current financial
statements of Evergreen Tax Free. A copy of such Statement of Additional
Information is available upon request and without charge by
<PAGE>
writing to Evergreen Tax Free at 200 Berkeley Street, Boston, Massachusetts
02116, or by calling toll-free 1-800-343-2898.
The Prospectus of Evergreen Tax Free dated November 12, 1997 is
incorporated herein by reference in its entirety. The Prospectus, which pertains
to Class A, Class B and Class C shares, describes the separate distribution and
shareholder servicing arrangements applicable to the classes. Shareholders of
Evergreen Tax Free Income and Keystone Tax Free will receive, with this
Prospectus/Proxy Statement, copies of the Prospectus pertaining to the class of
shares of Evergreen Tax Free that they will receive as a result of the
consummation of each Reorganization. Additional information about Evergreen Tax
Free is contained in its Statement of Additional Information of the same date
which has been filed with the SEC and which is available upon request and
without charge by writing to or calling Evergreen Tax Free at the address or
telephone number listed in the preceding paragraph.
The Prospectus of Evergreen Tax Free Income dated September 3, 1997, as
supplemented, and the Prospectus of Keystone Tax Free dated April 30, 1997, as
supplemented, are incorporated herein in their entirety by reference. Copies of
the Prospectuses and related Statements of Additional Information dated the same
respective dates are available upon request without charge by writing or calling
the Fund of which you are a shareholder at the address listed in the second
preceding paragraph.
Included as Exhibits A-1 and A-2 to this Prospectus/Proxy Statement are
copies of each Plan.
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/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk,
including possible loss of capital.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES........................................ 5
SUMMARY................................................................ 11
Proposed Plans of Reorganization.............................. 11
Tax Consequences.............................................. 12
Investment Objectives and Policies
of the Funds................................................ 13
Comparative Performance Information
for each Fund...................................... 13
Management of the Funds....................................... 14
Investment Adviser ........................................... 14
Portfolio Management.......................................... 15
Distribution of Shares........................................ 16
Purchase and Redemption Procedures............................ 19
Exchange Privileges........................................... 19
Dividend Policy............................................... 20
Risks......................................................... 21
REASONS FOR THE REORGANIZATIONS........................................ 22
Agreements and Plans of Reorganization........................ 25
Federal Income Tax Consequences............................... 28
Pro-forma Capitalization...................................... 29
Shareholder Information....................................... 31
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES....................... 33
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS........................ 36
Forms of Organization......................................... 36
Capitalization................................................ 36
Shareholder Liability......................................... 37
Shareholder Meetings and Voting Rights........................ 38
Liquidation or Dissolution.................................... 39
Liability and Indemnification of Trustees..................... 39
ADDITIONAL INFORMATION................................................. 40
VOTING INFORMATION CONCERNING THE MEETINGS............................. 41
FINANCIAL STATEMENTS AND EXPERTS....................................... 44
LEGAL MATTERS.......................................................... 44
OTHER BUSINESS......................................................... 45
<PAGE>
COMPARISON OF FEES AND EXPENSES
It is anticipated that on or about January 9, 1998 Keystone Tax Free
will become a multiple class fund. As of that date the Fund will offer Class A,
Class B and Class C shares, each of which Class of shares will be similar in all
respects to the Class A, Class B and Class C shares of Evergreen Tax Free. It is
further anticipated that at that time current outstanding shares of Keystone Tax
Free will become Class B shares of the Fund. On or about January 16, 1998, it is
anticipated that any Class B shares of Keystone Tax Free purchased prior to
January 1, 1995 will be converted to Class A shares of the Fund. Should these
events occur, shareholders of Keystone Tax Free will receive on the date of the
Reorganization the same Class of shares of Evergreen Tax Free held by them in
the Fund after January 16, 1998. See "Reasons for the Reorganizations -
Pro-forma Capitalization."
The amounts for shares of Evergreen Tax Free Income and Keystone Tax
Free set forth in the following tables and in the examples are based on the
expenses for each Fund for the fiscal years ended May 31, 1997 and December 31,
1996, respectively. The pro forma amounts for Class A, Class B and Class C
shares of Evergreen Tax Free are based on the estimated expenses of Evergreen
Tax Free for the fiscal year ending May 31, 1998.
The following tables show for Evergreen Tax Free Income, Keystone Tax
Free and Evergreen Tax Free pro forma the shareholder transaction expenses and
annual fund operating expenses associated with an investment in the shares of
each Fund. The pro forma numbers reflect the events described in the first
paragraph of this section.
<TABLE>
<CAPTION>
Comparison of Shares of Evergreen Tax Free
With Shares of Evergreen Tax Free Income
and Keystone Tax Free
Evergreen Tax Free Income
-------------------------
Shareholder
Transaction Class A Class B Class C
Expenses ------- ------- -------
<PAGE>
<S> <C> <C> <C>
Maximum Sales Load 4.75% None None
Imposed on
Purchases (as a
percentage of
offering price)
Maximum Sales Load None None None
Imposed on
Reinvested
Dividends (as a
percentage of
offering price)
Contingent Deferred None 5.00% in 1.00% in the
Sales Charge (as a the first first year
percentage of year, and 0.00%
original purchase declining thereafter
price or redemption to 1.00%
proceeds, whichever in the
is lower) sixth year
and 0.00%
thereafter
Exchange Fee None None None
Annual Fund
Operating Expenses
(as a percentage of
average daily net
assets)
Management Fee 0.61% 0.61% 0.61%
12b-1 Fees (1) 0.24% 1.00% 1.00%
Other Expenses 0.34% 0.34% 0.34%
----- ----- -----
Annual Fund 1.19% 1.95% 1.95%
Operating Expenses ----- ----- -----
(3) ----- ----- -----
</TABLE>
Keystone Tax Free
-----------------
Shareholder
Transaction Expenses
<PAGE>
Contingent Deferred
Sales Charge (as a 4.00% in the
percentage of original first year,
purchase price or declining to
redemption proceeds, 1.00% in the
whichever is lower) fourth year and
0.00%
thereafter
Exchange Fee None
Annual Fund Operating
Expenses (as a
percentage of average
daily net assets)
Management Fee 0.42%
12b-1 Fees (1) 0.30%
Other Expenses 0.15%
-----
Annual Fund Operating 0.87%
Expenses(3) -----
-----
<TABLE>
<CAPTION>
Evergreen Tax Free Pro Forma
----------------------------
Shareholder Class A Class B Class C
Transaction Expenses ------- ------- -------
<S> <C> <C> <C>
Maximum Sales Load 4.75% None None
Imposed on Purchases
(as a percentage of
offering price)
Maximum Sales Load None None None
Imposed on Reinvested
Dividends (as a
percentage of offering
price)
<PAGE>
Contingent Deferred None 5.00% in the 1.00% in the
Sales Charge (as a first year, first year
percentage of original declining to and 0.00%
purchase price or 1.00% in the thereafter
redemption proceeds, sixth year
whichever is lower) and 0.00%
thereafter(2)
Exchange Fee None None None
Annual Fund Operating
Expenses (as a
percentage of average
daily net assets)
Management Fee 0.42% 0.42% 0.42%
12b-1 Fees (1) 0.25% 1.00% 1.00%
Other Expenses 0.16% 0.16% 0.16%
------ ------ ------
Annual Fund Operating
Expenses 0.83% 1.58% 1.58%
------ ------ ------
------ ------ ------
</TABLE>
- ---------------
(1) Class A Shares of Evergreen Tax Free and Evergreen Tax Free Income can pay
up to 0.75% of average daily net assets as a 12b-1 fee. For the foreseeable
future, the Class A 12b-1 fees will be limited to 0.25% of average daily
net assets. For shares of Keystone Tax Free and for Class B and Class C
shares of Evergreen Tax Free and Evergreen Tax Free Income, a portion of
the 12b-1 fees equivalent to 0.25% of average daily net assets will be
shareholder servicing-related. Distribution-related 12b-1 fees will be
limited to 0.75% of average daily net assets as permitted under the rules
of the National Association of Securities Dealers, Inc.
(2) The contingent deferred sales charge, if any, applicable to shares of
Evergreen Tax Free Income and Keystone Tax Free prior to the date of
the Reorganizations will carry over to the shares of Evergreen Tax Free
received in the Reorganizations.
<PAGE>
(3) Expense ratios include indirectly paid expenses, which represent
expense offset arrangements with the Fund's custodian.
Examples. The following tables show for Evergreen Tax Free Income and
Keystone Tax Free and for Evergreen Tax Free pro forma, assuming consummation of
the Reorganizations, examples of the cumulative effect of shareholder
transaction expenses and annual fund operating expenses indicated above on a
$1,000 investment in each class of shares for the periods specified, assuming
(i) a 5% annual return, and (ii) redemption at the end of such period, and
additionally for Class B and Class C shares of Evergreen Tax Free and Evergreen
Tax Free Income and shares of Keystone Tax Free, no redemption at the end of
each period.
<TABLE>
<CAPTION>
Evergreen Tax Free Income
------------------------
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Class A $59 $83 $110 $185
Class B $70 $91 $125 $198
(Assuming
redemption at end
of period)
Class B $20 $61 $105 $198
(Assuming no
redemption at end
of period)
Class C $30 $61 $105 $227
(Assuming
redemption at end
of period)
Class C $20 $61 $105 $227
(Assuming no
redemption at end
of period)
</TABLE>
<TABLE>
<CAPTION>
Keystone Tax Free
-----------------
<PAGE>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
(Assuming $49 $48 $48 $107
redemption at end
of period)
(Assuming no $9 $28 $48 $107
redemption at end
of period)
</TABLE>
<TABLE>
<CAPTION>
Evergreen Tax Free Pro Forma
----------------------------
One Three Five Ten
Year Years Years Years
----- ----- ----- -----
<S> <C> <C> <C> <C>
Class A $56 $73 $91 $145
Class B $66 $80 $106 $158
(Assuming
redemption at end
of period)
Class B $16 $50 $86 $158
(Assuming no
redemption at end
of period)
Class C $26 $50 $86 $188
(Assuming
redemption at end
of period)
Class C $16 $50 $86 $188
(Assuming no
redemption at end
of period)
</TABLE>
The purpose of the foregoing examples is to assist Evergreen Tax Free
Income and Keystone Tax Free shareholders in understanding the various costs and
expenses
<PAGE>
that an investor in Evergreen Tax Free as a result of the Reorganizations would
bear directly and indirectly, as compared with the various direct and indirect
expenses currently borne by a shareholder in each Fund. These examples should
not be considered a representation of past or future expenses or annual return.
Actual expenses may be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement
and, to the extent not inconsistent with such additional information, the
Prospectus of Evergreen Tax Free dated November 12, 1997 and the Prospectuses of
Evergreen Tax Free Income and Keystone Tax Free dated September 3, 1997, as
supplemented, and April 30, 1997, as supplemented, respectively, (which are
incorporated herein by reference), and the Plans, forms of which are attached to
this Prospectus/Proxy Statement as Exhibits A-1 and A-2.
Proposed Plans of Reorganization
The Plans provide for the transfer of all of the assets of Evergreen
Tax Free Income and Keystone Tax Free, as applicable, in exchange for shares of
Evergreen Tax Free and the assumption by Evergreen Tax Free of certain
identified liabilities of each Fund. The identified liabilities consist only of
those liabilities reflected on each Fund's statement of assets and liabilities
determined immediately preceding the Reorganizations. The Plans also call for
the distribution of shares of Evergreen Tax Free to Evergreen Tax Free Income
and Keystone Tax Free shareholders in liquidation of those Funds as part of the
Reorganizations. As a result of the Reorganizations, the shareholders of
Evergreen Tax Free Income will become owners of that number of full and
fractional Corresponding Shares of Evergreen Tax Free and the shareholders of
Keystone Tax Free will become the owners of that number of full and fractional
shares of Evergreen Tax Free having an aggregate net asset value equal to the
aggregate net asset value of the shareholder's respective class of shares of
Evergreen Tax Free Income and Keystone Tax Free as of the close of business
immediately prior to the date that such Fund's assets are exchanged for shares
of Evergreen Tax Free. See "Reasons for the Reorganizations - Agreements and
Plans of Reorganization."
The Trustees of Evergreen Tax Free Income and
the Trustees of Keystone Tax Free, including the Trustees who
<PAGE>
are not "interested persons," (the "Trustees") as such term is defined in the
1940 Act (the "Independent Trustees"), have concluded that the Reorganizations
would be in the best interests of shareholders of Evergreen Tax Free Income and
Keystone Tax Free, respectively, and that the interests of the shareholders of
Evergreen Tax Free Income and Keystone Tax Free, respectively, will not be
diluted as a result of the transactions contemplated by the Reorganizations.
Accordingly, the Trustees have submitted the Plans for the approval of Evergreen
Tax Free Income's and Keystone Tax Free's shareholders.
THE BOARD OF TRUSTEES OF EVERGREEN TAX FREE INCOME
RECOMMENDS
APPROVAL BY SHAREHOLDERS OF EVERGREEN TAX FREE
INCOME
OF THE PLAN EFFECTING THE REORGANIZATION.
THE BOARD OF TRUSTEES OF KEYSTONE TAX FREE RECOMMENDS
APPROVAL BY SHAREHOLDERS OF KEYSTONE TAX FREE
OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Municipal Trust have also
approved the Plans, and accordingly, Evergreen Tax Free's
participation in the Reorganizations.
Approval of a Reorganization on the part of Evergreen Tax Free Income
and Keystone Tax Free will require the affirmative vote of a majority of each
Fund's shares present and entitled to vote, with all classes voting together as
a single class at Meetings at which a quorum of each Fund's shares is present. A
majority of the outstanding shares of each Fund entitled to vote, represented in
person or by proxy, is required to constitute a quorum at the Meetings. See
"Voting Information Concerning the Meetings."
The Reorganizations are scheduled to take place on or about January 23,
1998.
If the shareholders of Evergreen Tax Free Income or Keystone Tax Free
do not vote to approve the Reorganizations, the Trustees will consider other
possible courses of action in the best interests of shareholders.
Tax Consequences
Prior to or at the completion of a Reorganization, Evergreen Tax Free
Income and Keystone Tax Free will each have received an opinion of counsel that
the Reorganization has been structured so that no gain or loss
<PAGE>
will be recognized by the Fund or its shareholders for federal income tax
purposes as a result of the receipt of shares of Evergreen Tax Free in the
Reorganization. The holding period and aggregate tax basis of shares of
Evergreen Tax Free that are received by each Fund's shareholders will be the
same as the holding period and aggregate tax basis of shares of the Fund
previously held by such shareholders, provided that shares of the Fund are held
as capital assets. In addition, the holding period and tax basis of the assets
of each Fund in the hands of Evergreen Tax Free as a result of the
Reorganization will be the same as in the hands of each Fund immediately prior
to the Reorganization, and no gain or loss will be recognized by Evergreen Tax
Free upon the receipt of the assets of each Fund in exchange for shares of
Evergreen Tax Free and the assumption by Evergreen Tax Free of certain
identified liabilities.
Investment Objectives and Policies of the Funds
The investment objective and policies of each of Evergreen Tax Free,
Evergreen Tax Free Income and Keystone Tax Free are substantially identical.
Each Fund seeks the highest possible current income, exempt from federal income
taxes, while preserving capital. Under ordinary circumstances, each Fund invests
substantially all and at least 80% of its assets in federally tax-exempt
obligations. These obligations include municipal bonds and notes and tax-exempt
commercial paper obligations that are issued by or on behalf of states,
territories and possessions of the United States ("U.S."), the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest from which is, in the opinion of counsel to the issuers, exempt from
federal income taxes, including the alternative minimum tax. At least 80% of the
municipal bonds in which the Fund invests will be rated within the four highest
categories by a nationally recognized statistical ratings organization
("NRSRO"). Each Fund may invest 20% of its assets in lower rated bonds but will
not invest in bonds rated below B.
Each Fund may invest in taxable corporate and bank obligations,
obligations issued or guaranteed by the U.S. government or by any of its
agencies or instrumentalities, commercial paper and repurchase agreements. Each
Fund may also purchase certain derivative securities including futures and
options. See "Comparison of Investment Objectives and Policies" below.
Comparative Performance Information for each Fund
<PAGE>
Discussions of the manner of calculation of total return are contained
in the respective Prospectuses and Statements of Additional Information of the
Funds. Evergreen Tax Free, as of the date of this Prospectus/Proxy Statement,
had not commenced operations. The total return of Evergreen Tax Free Income and
Keystone Tax Free for the one, five and ten year periods ended August 31, 1997
and for the periods from inception through August 31, 1997 is set forth in the
table below. The calculations of total return assume the reinvestment of all
dividends and capital gains distributions on the reinvestment date and the
deduction of all recurring expenses (including sales charges) that were charged
to shareholders' accounts.
<TABLE>
<CAPTION>
Average Annual Total Return
5 Years
1 Year Ended 10 Years From
Ended August Ended Inception
August 31, August To August Inception
31, 1997 1997 31, 1997 31, 1997 Date
-------- ------- -------- --------- ---------
<S> <C> <C> <C> <C>
Evergreen Tax
Free Income
Class A 3.49% 4.46% 6.27% 6.34% 4/14/87
shares
Class B 2.90% N/A N/A 4.15% 2/1/93
shares
Class C 6.90% N/A N/A 4.50% 2/1/93
shares
Keystone Tax 5.21% 5.57% 7.07% 7.05% 1/19/78
Free
- --------------
</TABLE>
Management of the Funds
The overall management of Evergreen Tax Free, of Evergreen Tax Free
Income and of Keystone Tax Free is the responsibility of, and is supervised by,
the Board of Trustees of Evergreen Municipal Trust, Evergreen Tax Free
Income and Keystone Tax Free, respectively.
Investment Adviser
<PAGE>
The investment adviser to Evergreen Tax Free, Evergreen Tax Free Income
and Keystone Tax Free is Keystone Investment Management Company ("Keystone").
Keystone has provided investment advisory and management services to investment
companies and private accounts since 1932. Keystone is an indirect wholly-owned
subsidiary of First Union National Bank ("FUNB"). Keystone is located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.
FUNB is a subsidiary of First Union Corporation , the sixth largest
bank holding company in the U.S.
based on total assets as of June 30, 1997.
Evergreen Tax Free, Evergreen Tax Free Income
and Keystone Tax Free each pay Keystone a fee for its services
at the annual rate below:
Aggregate Net Asset
Value of the Shares
Management Fee Income of the Fund
2.00% of Gross Dividend
and Interest Income
Plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts
over $500,000,000.
Keystone's fee is computed as of the close of business each business
day and payable monthly.
Keystone may, at its discretion, also reduce or waive its fee or
reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Keystone may reduce or cease these voluntary waivers and
reimbursements at any time.
Portfolio Management
The portfolio manager of both Evergreen Tax Free and Keystone Tax Free is
Betsy A. Hutchings, a Keystone Senior Vice President since 1995 and Senior
Portfolio Manager since 1993. Ms. Hutchings joined Keystone in 1988 and has
managed Keystone Tax Free since 1990.
Distribution of Shares
<PAGE>
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of Evergreen Tax Free's, Evergreen Tax Free
Income's and Keystone Tax Free's shares. EDI distributes each Fund's shares
directly or through broker-dealers, banks (including FUNB), or other financial
intermediaries. Evergreen Tax Free offers three classes of shares: Class A,
Class B and Class C. Keystone Tax Free currently offers only one class of shares
and Evergreen Tax Free Income offers Class A, Class B and Class C shares.
However, it is anticipated that on or about January 9, 1998, Keystone Tax Free
will offer three classes of shares, Class A, Class B and Class C. Each class has
separate distribution arrangements. (See "Distribution- Related and Shareholder
Servicing-Related Expenses" below.) No class bears the distribution expenses
relating to the shares of any other class.
In the proposed Reorganizations, shareholders of Evergreen Tax Free
Income will receive the corresponding class of shares of Evergreen Tax Free
which they currently hold. The Class A, Class B and Class C shares of Evergreen
Tax Free have substantially identical arrangements with respect to the
imposition of initial sales charges, CDSCs and distribution and service fees as
the comparable classes of Evergreen Tax Free Income. Holders of shares of
Keystone Tax Free will receive Class A and/or Class B shares of Evergreen Tax
Free. As of January 9, 1998, it is anticipated that each Class of shares of
Evergreen Tax Free, Evergreen Tax Free Income and Keystone Tax Free will have
identical arrangements with respect to CDSCs and distribution and service fees.
Because the Reorganizations will be effected at net asset value without the
imposition of a sales charge, Evergreen Tax Free shares acquired by shareholders
of Evergreen Tax Free Income and Keystone Tax Free pursuant to the proposed
Reorganizations would not be subject to any initial sales charge or CDSC as a
result of the Reorganizations. However, shares acquired as a result of the
Reorganizations would continue to be subject to a CDSC upon subsequent
redemption to the same extent as if shareholders had continued to hold their
shares of Evergreen Tax Free Income and Keystone Tax Free. The CDSC applicable
to a class of shares received in the Reorganizations will be the CDSC schedule
in effect at the time shares of Evergreen Tax Free Income or Keystone Tax Free
were originally purchased.
The following is a summary description of charges and fees for each of
the different classes of shares. More detailed descriptions of the distribution
arrangements applicable to the classes of shares are contained in the
<PAGE>
respective Evergreen Tax Free Prospectus, the Evergreen Tax Free Income
Prospectus, the Keystone Tax Free Prospectus and in each Fund's respective
Statement of
Additional Information.
Currently, Keystone Tax Free offers only one class of shares. Shares
are sold without any front-end sales charges, but are subject to a CDSC which
ranges from 4% to 1% if shares are redeemed during the first four calendar years
after purchase. In addition, shares are subject to distribution- related and
shareholder servicing-related fees as described below. It is anticipated that
Keystone Tax Free will become a multiple class fund on or about January 9, 1998.
Should this occur, the Fund will offer three classes of shares identical to the
Class A, Class B and Class C shares of Evergreen Tax Free and hereafter
described, including identical distribution-related and shareholder
servicing-related expenses.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees.
Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a CDSC, which ranges from 5% to 1%, if shares are redeemed
during the first six years after the month of purchase. In addition, Class B
shares are subject to distribution-related fees and shareholder
servicing-related fees as described below. Class B shares issued in the
Reorganizations will automatically convert to Class A shares in accordance with
the conversion schedule of Evergreen Tax Free in effect at the time of the
Reorganizations. For purposes of determining when Class B shares issued in the
Reorganizations to shareholders of Evergreen Tax Free Income and Keystone Tax
Free will convert to Class A shares, such shares will be deemed to have been
purchased as of the date the shares of Evergreen Tax Free Income and Keystone
Tax Free were originally purchased.
Class B shares are subject to higher distribution-related fees than the
corresponding Class A shares on which a front-end sales charge is imposed (until
they convert to Class A shares). The higher fees mean a higher expense ratio, so
Class B shares pay correspondingly lower dividends and may have a lower net
asset value than Class A shares of the Fund.
Class C Shares. Class C shares are sold without an initial sales charge
but, as indicated below, are subject to distribution and shareholder
servicing-related fees. Class C
<PAGE>
shares are subject to a 1% CDSC if such shares are redeemed during the month of
purchase and the 12-month period following the month of purchase. No CDSC is
imposed on amounts redeemed thereafter. Class C shares incur higher distribution
and shareholder servicing-related fees than Class A shares but, unlike Class B
shares, do not convert to any other class of shares.
The amount of the CDSC applicable to redemptions of shares of Evergreen
Tax Free, Evergreen Tax Free Income and Keystone Tax Free is charged as a
percentage of the lesser of the then current net asset value or original cost.
The CDSC is deducted from the amount of the redemption and is paid to the Fund's
distributor or its predecessor, as the case may be. Shares of each Fund acquired
through dividend or distribution reinvestment are not subject to a CDSC. For
purposes of determining the schedule of CDSCs, and the time of conversion to
Class A shares, applicable to shares of Evergreen Tax Free received by Evergreen
Tax Free Income's or Keystone Tax Free's shareholders in the Reorganizations,
Evergreen Tax Free will treat such shares as having been sold on the date the
shares of Evergreen Tax Free Income or Keystone Tax Free were originally
purchased by such Fund's shareholder. Additional information regarding the
Classes of shares of each Fund is included in its respective Prospectus and
Statement of Additional Information.
Distribution-Related and Shareholder Servicing-Related Expenses.
Evergreen Tax Free and Evergreen Tax Free Income have each adopted a Rule 12b-1
plan with respect to its Class A shares under which the Class may pay for
distribution-related expenses at an annual rate which may not exceed 0.75% of
average daily net assets attributable to the Class. Payments with respect to
Class A shares of Evergreen Tax Free and Evergreen Tax Free Income are currently
limited to 0.25% of average daily net assets attributable to the Class, which
amount may be increased to the full plan rate for such Fund by the Trustees
without shareholder approval.
Each of Evergreen Tax Free and Evergreen Tax Free Income has also
adopted a Rule 12b-1 plan with respect to its Class B and Class C shares under
which each Class may pay for distribution-related and shareholder
servicing-related expenses at an annual rate which may not exceed 1.00% of
average daily net assets attributable to the Class.
The Class B and Class C Rule 12b-1 plans provide that of the total
1.00% 12b-1 fees, up to 0.25% may be for payment in respect of "shareholder
services." Consistent with the requirements of Rule 12b-1 and the applicable
rules of the
<PAGE>
National Association of Securities Dealers, Inc. ("NASD"), following the
Reorganizations Evergreen Tax Free may make distribution-related and shareholder
servicing-related payments with respect to Evergreen Tax Free Income and
Keystone Tax Free shares sold prior to the Reorganizations, including payments
to Evergreen Tax Free Income's and Keystone Tax Free's former underwriters.
Keystone Tax Free has adopted a Rule 12b-1 plan with respect to its
shares pursuant to which the Fund may pay for distribution-related and
shareholder servicing-related expenses at an annual rate that may not exceed
1.25% of average daily net assets. The NASD limits the amount that the Fund may
pay annually in distribution costs for the sale of its shares and shareholder
service fees. The NASD currently limits such annual expenditures to 1.00% of the
aggregate average daily net asset value of the Fund's shares, of which 0.75% may
be used to pay distribution costs and 0.25% may be used to pay shareholder
service fees.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectus and Statement of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges, distribution-related
fees and shareholder servicing-related fees is described above. Investments in
the Funds are not insured. The minimum initial purchase requirement for each
Fund is $1,000. There is no minimum for subsequent purchases of shares of any
Fund. Each Fund provides for telephone, mail or wire redemption of shares at net
asset value, less any CDSC, as next determined after receipt of a redemption
request on each day the New York Stock Exchange ("NYSE") is open for trading.
Additional information concerning purchases and redemptions of shares, including
how each Fund's net asset value is determined, is contained in the respective
Prospectus for each Fund. Each Fund may involuntarily redeem shareholders'
accounts that have less than $1,000 of invested funds. All funds invested in
each Fund are invested in full and fractional shares. The Funds reserve the
right to reject any purchase order.
Exchange Privileges
Shares of Evergreen Tax Free Income may be exchanged for shares of a
similar class of any other fund in the Evergreen Keystone fund family other than
shares of any
<PAGE>
fund in the Keystone Classic fund family. Exchanges of shares of Keystone Tax
Free are limited to the shares of funds in the Keystone Classic fund family and
Class K shares of Evergreen Money Market Fund. Shares of Evergreen Tax Free may
be exchanged for shares of a similar class of any fund in the Evergreen Keystone
fund family other than any shares of any fund in the Keystone Classic fund
family. No sales charge is imposed on an exchange. An exchange which represents
an initial investment in another fund must amount to at least $1,000. The
current exchange privileges, and the requirements and limitations attendant
thereto, are described in each Fund's respective Prospectus and Statement of
Additional Information.
Dividend Policy
Each Fund declares dividends daily and distributes such income monthly.
Distributions of any net realized gains of each Fund will be made at least
annually. Shareholders begin to earn dividends on the first business day after
shares are purchased unless shares were not paid for, in which case dividends
are not earned until the next business day after payment is received. Dividends
and distributions are reinvested in additional shares of the same class of the
respective Fund, or paid in cash, as a shareholder has elected. See the
respective Prospectus of each Fund for further information concerning dividends
and distributions.
After the Reorganizations, shareholders of Evergreen Tax Free Income
and Keystone Tax Free who have elected to have their dividends and/or
distributions reinvested will have dividends and/or distributions received from
Evergreen Tax Free reinvested in shares of Evergreen Tax Free. Shareholders of
Evergreen Tax Free Income and Keystone Tax Free who have elected to receive
dividends and/or distributions in cash will receive dividends and/or
distributions from Evergreen Tax Free in cash after the Reorganizations,
although they may, after the Reorganizations, elect to have such dividends
and/or distributions reinvested in additional shares of Evergreen Tax Free.
Each of Evergreen Tax Free Income and Keystone Tax Free has qualified
and intends to continue to qualify, and Evergreen Tax Free intends to qualify,
to be treated as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"). While so qualified, so long as each Fund
distributes all of its investment company taxable income and any net realized
gains to shareholders, it is expected that a Fund will not be required to pay
any federal income taxes on the amounts so distributed. A 4%
<PAGE>
nondeductible excise tax will be imposed on amounts not distributed if a Fund
does not meet certain distribution requirements by the end of each calendar
year. Each Fund anticipates meeting such distribution requirements.
Risks
Since the investment objectives and policies of each Fund are
substantially identical, the risks involved in investing in each Fund's shares
are comparable. For a discussion of each Fund's objectives and policies, see
"Comparison of Investment Objectives and Policies." Each Fund's ability to
achieve its objective depends partially on the prompt payment by issuers of the
interest on and principal of the municipal bonds held by the Fund. A moratorium,
default, or other nonpayment of interest or principal when due on any municipal
bond, in addition to affecting the market value and liquidity of that particular
security, could affect the market value and liquidity of other municipal bonds
held by a Fund. In addition, the market for municipal bonds is often thin and
can be temporarily affected by large purchases and sales, including those by a
Fund.
From time to time, proposals have been introduced before the U.S.
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on municipal bonds, and similar proposals may be
introduced in the future. The enactment of such a proposal could materially
affect the availability of municipal bonds for investment by a Fund and the
value of the Fund's portfolio. In the event of such legislation, each Fund would
re-evaluate its investment objective and policies and consider changes in the
structure of the Fund or dissolution.
Each Fund stresses earning income by investing in fixed income
securities, which are generally considered to be interest rate sensitive. This
means that their market values (and the Fund's share prices) will tend to vary
inversely with changes in interest rates (i.e., decreasing when interest rates
rise and increasing when interest rates fall). For example, if interest rates
increase after a security is purchased, the security, if sold prior to maturity,
may return less than its cost. Shorter term bonds are less sensitive to interest
rate changes, but longer term bonds generally offer higher yields.
In addition, to the extent that investments are made in debt securities
(other than U.S. government securities), derivatives or structured securities,
such investments,
<PAGE>
despite favorable credit ratings, are subject to some risk of
default.
Each Fund may invest up to 20% of its assets in below- investment grade
bonds. For a discussion of the risks involved in such investments, see
"Comparison of Investment Objectives and Policies."
Each Fund may invest in derivatives. The market values of derivatives
or structured securities may vary depending upon the manner in which the
investments have been structured and may fluctuate much more rapidly and to a
much greater extent than investments in other securities. As a result, the
values of such investments may change at a rate in excess of the rates at which
traditional fixed income securities change and, depending on the structure of a
derivative, would change in a manner opposite to the change in the market value
of a traditional fixed income security. See each Fund's Prospectus and Statement
of Additional Information for further discussion of the risks inherent in the
use of derivatives.
REASONS FOR THE REORGANIZATIONS
At a regular meeting held on September 17, 1997, the Board of Trustees
of Evergreen Tax Free Income considered and approved the Reorganization as in
the best interests of shareholders and determined that the interests of existing
shareholders of Evergreen Tax Free Income will not be diluted as a result of the
transactions contemplated by the Reorganization.
At a regular meeting held on September 17, 1997, the Board of Trustees
of Keystone Tax Free considered and approved the Reorganization as in the best
interests of shareholders and determined that the interests of existing
shareholders of Keystone Tax Free will not be diluted as a result of the
transactions contemplated by the Reorganization.
In approving each Plan, the Trustees reviewed various factors about the
respective Funds and the proposed Reorganizations. The Reorganizations are part
of an overall plan to convert the Evergreen Keystone funds into series of
Delaware business trusts and, to the extent practicable, simplify and make
consistent various investment restrictions and policies. Holders of shares of
beneficial interest in a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. Although provisions of the Declaration of Trust and other legal documents
pertaining to each Fund's affairs seek to minimize the potential for such
<PAGE>
liability, some degree of exposure, however unlikely, continues to exist with
respect to the Funds as long as they are governed by Massachusetts law.
Substantially all written agreements, obligations, instruments, or undertakings
made by Evergreen Tax Free Income or Keystone Tax Free must contain a provision
limiting the obligations created by that transaction to the Fund to which the
transaction relates, as well as related provisions to the effect that the
shareholders of the Fund and Trustees of the Trust under which the Fund operates
are not personally liable thereunder. Although the Declarations of Trust of
Evergreen Tax Free Income and Keystone Tax Free provide for indemnification out
of the Funds' property of any shareholder held personally liable for the
obligations of a Fund solely by reason of his or her being or having been a
shareholder, a shareholder could conceivably incur financial loss exceeding any
amounts indemnified on account of shareholder liability if the circumstances
were such that the Fund had insufficient assets or would otherwise be unable to
meet its obligations.
As a Delaware business trust, the Evergreen Municipal Trust's
operations will be governed by applicable Delaware law rather than by
Massachusetts law. The Delaware Business Trust Act (the "Delaware Act") provides
that a shareholder of a Delaware business trust shall be entitled to the same
limitation of personal liability extended to stockholders of Delaware
corporations. Shareholders of Delaware corporations do not have personal
liability for obligations of the corporation.
Delaware has obtained a favorable national reputation for its business
laws and business environment. The Delaware courts, which may be called upon to
interpret the Delaware Act, are among the nation's most highly respected and
have an expertise in corporate matters which in part grew out of the fact that
Delaware corporate legal issues are concentrated in the Court of Chancery where
there are no juries and where judges issue written opinions explaining their
decisions. Thus, there is a well established body of precedent which may be
relevant in deciding issues pertaining to a Delaware business trust.
There are other advantages that may be afforded by a Delaware business
trust. Under Delaware law, the Evergreen Municipal Trust will have the
flexibility to respond to future business contingencies. For example, the
Trustees will have the power to change the Evergreen Municipal Trust to a
corporation, to merge or consolidate it with another entity, to cause each
series to become a separate trust, and to change the Evergreen Municipal Trust's
domicile without a shareholder
<PAGE>
vote. This flexibility could help to assure that the Evergreen Municipal Trust
operates under the most advanced form of organization and could reduce the
expense and frequency of future shareholder meetings for non-investment related
issues.
In addition, although it is proposed that Evergreen Tax Free Income and
Keystone Tax Free each sell all of its assets to Evergreen Tax Free, a newly
established series of Evergreen Municipal Trust, an important part of the
Reorganizations is that Evergreen Tax Free Income, for all practical purposes,
will be combined with Keystone Tax Free. The investment objective and policies
of Evergreen Tax Free are substantially identical to those of Evergreen Tax Free
Income and Keystone Tax Free . Consequently, in considering the Reorganizations,
each Fund's Trustees reviewed the Reorganization in the context of Evergreen Tax
Free Income being combined with Keystone Tax Free.
Evergreen Tax Free Income and Keystone Tax Free have substantially
identical investment objectives and policies and comparable risk profiles. See
"Comparison of Investment Objectives and Policies" below. At the same time, the
Boards of Trustees of Evergreen Tax Free Income and Keystone Tax Free evaluated
the potential economies of scale associated with larger mutual funds and
concluded that operational efficiencies may be achieved upon the combination of
Evergreen Tax Free Income with another Evergreen Keystone fund with a greater
level of assets. As of August 31, 1997, Keystone Tax Free's net assets were
approximately $1,392 million and Evergreen Tax Free Income's net assets were
approximately $108 million.
In addition, assuming that an alternative to the Reorganizations would
be to propose that Evergreen Tax Free Income and Keystone Tax Free continue
their existences as separate series of Evergreen Municipal Trust, Evergreen Tax
Free Income would be offered through common distribution channels with the
substantially identical Keystone Tax Free. Evergreen Tax Free Income would also
have to bear the cost of maintaining its separate existence. Keystone believes
that the prospect of dividing the resources of the Evergreen Keystone mutual
fund organization between two substantially identical funds could result in each
Fund being disadvantaged due to an inability to achieve optimum size,
performance levels and the greatest possible economies of scale. Accordingly,
for the reasons noted above and recognizing that there can be no assurance that
any economies of scale or other benefits will be
<PAGE>
realized, Keystone believes that the proposed Reorganizations would be in the
best interests of each Fund and its shareholders.
The Board of Trustees of Evergreen Tax Free Income and the Board of
Trustees of Keystone Tax Free met and considered the recommendation of Keystone,
and, in addition, considered among other things, (i) the disadvantages which
apply to operating each Fund as a Massachusetts business trust or a series of a
Massachusetts business trust; (ii) the advantages which apply to each Fund
operating as a series of a Delaware business trust; (iii) the terms and
conditions of the Reorganization; (iv) whether the Reorganization would result
in the dilution of shareholders' interests; (v) expense ratios, fees and
expenses of Evergreen Tax Free Income and Keystone Tax Free; (vi) the
comparative performance records of each of the Funds; (vii) compatibility of
their investment objectives and policies; (viii) the investment experience,
expertise and resources of Keystone; (ix) service features available to
shareholders of the respective Funds and Evergreen Tax Free; (x) the fact that
FUNB will bear the expenses incurred by Evergreen Tax Free Income and Keystone
Tax Free in connection with the Reorganizations; (xi) the fact that Evergreen
Tax Free will assume certain identified liabilities of Evergreen Tax Free Income
and Keystone Tax Free; and (xii) the expected federal income tax consequences of
the Reorganizations.
The Trustees of Evergreen Tax Free Income also considered the benefits
to be derived by shareholders of Evergreen Tax Free Income from its combination,
for all practical purposes, with Keystone Tax Free. In this regard, the Trustees
considered the potential benefits of being associated with a larger entity and
the economies of scale that could be realized by the participation by
shareholders of Evergreen Tax Free Income.
In addition, the Trustees of Evergreen Tax Free Income and Keystone Tax
Free considered that there are alternatives available to shareholders of
Evergreen Tax Free Income and Keystone Tax Free, including the ability to redeem
their shares, as well as the option to vote against the Reorganizations.
During their consideration of the Reorganizations the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Evergreen Municipal Trust on behalf of Evergreen Tax
Free also approved at a meeting on September 17, 1997 the proposed
Reorganizations.
<PAGE>
THE TRUSTEES OF EVERGREEN TAX FREE INCOME RECOMMEND
THAT SHAREHOLDERS APPROVE THE PROPOSED
REORGANIZATION.
THE TRUSTEES OF KEYSTONE TAX FREE RECOMMEND THAT
SHAREHOLDERS APPROVE THE PROPOSED REORGANIZATION.
Agreements and Plans of Reorganization
The following summary is qualified in its entirety by reference to the
Plans (Exhibits A-1 and A-2 hereto).
Each Plan provides that Evergreen Tax Free will acquire all of the
assets of Evergreen Tax Free Income and Keystone Tax Free, respectively, in
exchange for shares of Evergreen Tax Free and the assumption by Evergreen Tax
Free of certain identified liabilities of Evergreen Tax Free Income and Keystone
Tax Free on or about January 23, 1998 or such other date as may be agreed upon
by the parties (the "Closing Date"). Prior to the Closing Date, Evergreen Tax
Free Income and Keystone Tax Free will endeavor to discharge all of their known
liabilities and obligations. Evergreen Tax Free will not assume any liabilities
or obligations of Evergreen Tax Free Income and Keystone Tax Free other than
those reflected in an unaudited statement of assets and liabilities of Evergreen
Tax Free Income and Keystone Tax Free prepared as of the close of regular
trading on the NYSE, currently 4:00 p.m. Eastern time, on the business day
immediately prior to the Closing Date. Evergreen Tax Free will provide the
Trustees of Evergreen Tax Free Income and Keystone Tax Free with certain
indemnifications as set forth in each Plan. The number of full and fractional
shares of Evergreen Tax Free to be received by the shareholders of Evergreen Tax
Free Income and Keystone Tax Free will be as follows. Shareholders of Keystone
Tax Free will receive the number of shares of each class of Evergreen Tax Free
equal to the number of shares of each corresponding class as they currently hold
of Keystone Tax Free. Shareholders of Evergreen Tax Free Income will receive the
number of shares of Evergreen Tax Free determined by multiplying the respective
outstanding class of shares of Evergreen Tax Free Income by a factor which shall
be computed by dividing the net asset value per share of the respective class of
Evergreen Tax Free Income by the net asset value per share of the respective
class of Evergreen Tax Free. Such computations will take place as of the close
of regular trading on the NYSE on the business day immediately prior to the
Closing Date. The net asset value per share of each class will be determined by
dividing assets, less liabilities, in each case attributable
<PAGE>
to the respective class, by the total number of outstanding
shares.
State Street Bank and Trust Company, the custodian for the Funds, will
compute the value of Evergreen Tax Free Income's and Keystone Tax Free's
respective portfolio securities. The method of valuation employed will be
consistent with the procedures set forth in the Prospectus and Statement of
Additional Information of Evergreen Tax Free, Rule 22c-1 under the 1940 Act, and
with the interpretations of such Rule by the SEC's Division of Investment
Management.
At or prior to the Closing Date, Evergreen Tax Free Income and Keystone
Tax Free will have declared a dividend or dividends and distribution or
distributions which, together with all previous dividends and distributions,
shall have the effect of distributing to each Fund's shareholders (in shares of
each Fund, or in cash, as the shareholder has previously elected) all of each
Fund's investment company taxable income for the taxable period ending on the
Closing Date (computed without regard to any deduction for dividends paid) and
all of its net capital gains realized in all taxable periods ending on the
Closing Date (after reductions for any capital loss carryforward).
As soon after the Closing Date as conveniently practicable, Evergreen
Tax Free Income and Keystone Tax Free will liquidate and distribute pro rata to
shareholders of record as of the close of business on the Closing Date the full
and fractional shares of Evergreen Tax Free received by each Fund. Such
liquidation and distribution will be accomplished by the establishment of
accounts in the names of each Fund's shareholders on the share records of
Evergreen Tax Free's transfer agent. Each account will represent the respective
pro rata number of full and fractional shares of Evergreen Tax Free due to each
Fund's shareholders. All issued and outstanding shares of each Fund, including
those represented by certificates, will be canceled. The shares of Evergreen Tax
Free to be issued will have no preemptive or conversion rights. After such
distributions and the winding up of its affairs, each of Evergreen Tax Free
Income and Keystone Tax Free will be terminated. In connection with such
terminations, Evergreen Tax Free Income and Keystone Tax Free will file with the
SEC applications for termination as registered investment companies.
The consummation of each Reorganization is subject to the conditions
set forth in the Plan for Evergreen Tax Free Income and the Plan for Keystone
Tax Free, including
<PAGE>
approval by each Fund's shareholders, accuracy of various representations and
warranties and receipt of opinions of counsel, including opinions with respect
to those matters referred to in "Federal Income Tax Consequences" below.
Notwithstanding approval of each Fund's shareholders, each Plan may be
terminated (a) by the mutual agreement of the Fund and Evergreen Tax Free; or
(b) at or prior to the Closing Date by either party (i) because of a breach by
the other party of any representation, warranty, or agreement contained therein
to be performed at or prior to the Closing Date if not cured within 30 days, or
(ii) because a condition to the obligation of the terminating party has not been
met and it reasonably appears that it cannot be met.
The expenses of Evergreen Tax Free Income and Keystone Tax Free in
connection with the Reorganizations (including the cost of any proxy soliciting
agent) will be borne by FUNB whether or not the Reorganizations are consummated.
The current Trustees of Evergreen Tax Free Income and Keystone Tax Free,
including those Trustees not continuing to serve as Trustees of Evergreen
Municipal Trust, will retain their ability to make claims under their existing
directors and officers insurance policy for a period of three years following
the consummation of the Reorganizations.
If the Reorganization is not approved by shareholders of a Fund, the
Board of Trustees of Evergreen Tax Free Income and Keystone Tax Free, as
applicable, will consider other possible courses of action in the best interests
of shareholders.
Federal Income Tax Consequences
Each Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of a Reorganization, Evergreen Tax Free Income and
Keystone Tax Free will each receive an opinion of counsel to the effect that, on
the basis of the existing provisions of the Code, U.S. Treasury regulations
issued thereunder, current administrative rules, pronouncements and court
decisions, for federal income tax purposes, upon consummation of the
Reorganization:
(1) The transfer of all of the assets of the Fund solely in exchange
for shares of Evergreen Tax Free and the assumption by Evergreen Tax Free of
certain identified liabilities, followed by the distribution of Evergreen Tax
Free's shares by the Fund in dissolution and liquidation of the Fund, will
constitute a "reorganization" within the
<PAGE>
meaning of section 368(a)(1)(C) (with respect to Evergreen Tax Free Income and
368(a)(1)(F) with respect to Keystone Tax Free) of the Code, and Evergreen Tax
Free and the Fund will each be a "party to a reorganization" within the meaning
of section 368(b) of the Code;
(2) No gain or loss will be recognized by the Fund on the transfer of
all of its assets to Evergreen Tax Free solely in exchange for Evergreen Tax
Free's shares and the assumption by Evergreen Tax Free of certain identified
liabilities of the Fund or upon the distribution of Evergreen Tax Free's shares
to the Fund's shareholders in exchange for their shares of the Fund;
(3) The tax basis of the assets transferred will be the same to
Evergreen Tax Free as the tax basis of such assets to the Fund immediately prior
to the Reorganization, and the holding period of such assets in the hands of
Evergreen Tax Free will include the period during which the assets were held by
the Fund;
(4) No gain or loss will be recognized by Evergreen Tax Free upon the
receipt of the assets from the Fund solely in exchange for the shares of
Evergreen Tax Free and the assumption by Evergreen Tax Free of certain
identified liabilities of the Fund;
(5) No gain or loss will be recognized by the Fund's shareholders upon
the issuance of the shares of Evergreen Tax Free to them, provided they receive
solely such shares (including fractional shares) in exchange for their shares of
the Fund; and
(6) The aggregate tax basis of the shares of Evergreen Tax Free,
including any fractional shares, received by each of the shareholders of the
Fund pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of the Fund held by such shareholder immediately prior to the
Reorganization, and the holding period of the shares of Evergreen Tax Free,
including fractional shares, received by each such shareholder will include the
period during which the shares of the Fund exchanged therefor were held by such
shareholder (provided that the shares of the Fund were held as a capital asset
on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If a Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, shareholders of Evergreen Tax Free
Income and Keystone Tax Free would recognize a taxable gain or
<PAGE>
loss equal to the difference between his or her tax basis in his or her Fund
shares and the fair market value of Evergreen Tax Free shares he or she
received. Shareholders of Evergreen Tax Free Income and Keystone Tax Free should
consult their tax advisers regarding the effect, if any, of the proposed
Reorganization in light of their individual circumstances. It is not anticipated
that the securities of the combined portfolio will be sold in significant
amounts in order to comply with the policies and investment practices of
Evergreen Tax Free. Since the foregoing discussion relates only to the federal
income tax consequences of the Reorganization, shareholders of Evergreen Tax
Free Income and Keystone Tax Free should also consult their tax advisers as to
the state and local tax consequences, if any, of the Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalizations of Evergreen Tax
Free Income and Keystone Tax Free as of August 31, 1997 and the capitalization
of Evergreen Tax Free on a pro forma basis as of that date, giving effect to the
proposed acquisitions of assets at net asset value and the conversion of certain
Keystone Tax Free Class B shares to Class A shares. See "Comparison of Fees and
Expenses." As a newly created series of Evergreen Municipal Trust, Evergreen Tax
Free, immediately preceding the Closing Date, will have nominal assets and
liabilities. The pro forma data reflects an exchange ratio of approximately
1.28, 1.27, and 1.27 Class A, Class B and Class C shares of Evergreen Tax Free
issued for each Class A, Class B and Class C share of Evergreen Tax Free Income,
respectively, and an exchange ratio of approximately 1.00 Class B share of
Evergreen Tax Free issued for each share of Keystone Tax Free.
<TABLE>
<CAPTION>
Capitalization of Evergreen Tax Free Income,
Keystone Tax Free and Evergreen
Tax Free (Pro Forma)
Evergreen Tax
Free (After
Evergreen Keystone Reorgani-
Tax Free Tax Free zations)
Income -------- ------------
--------
<S> <C> <C> <C>
Net Assets
Class A...................... $70,385,204 N/A
$1,369,839,202
<PAGE>
Evergreen Tax
Free (After
Evergreen Keystone Reorgani-
Tax Free Tax Free zations)
Income -------- ------------
--------
Class B...................... $27,442,064 $1,392,023,565
$120,011,631
Class C...................... $9,990,647 N/A $9,990,647
----------- -------------- --------------
Total Net
Assets..................... $107,817,915 $1,392,023,565 $1,499,841,480
Net Asset Value
Per Share
Class A...................... $9.91 N/A $7.75
Class B...................... $9.82 $7.75 $7.75
Class C...................... $9.82 N/A $7.75
Shares Outstanding
Class A...................... 7,099,916 N/A
176,823,860
Class B...................... 2,794,366 179,694,836
15,490,439
Class C...................... 1,017,062 N/A 1,288,716
---------- ----------- -----------
All Classes.................. 10,911,344 179,694,836 193,603,015
</TABLE>
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganizations; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganizations.
Shareholder Information
As of November 10, 1997 (the "Record Date"), there were 6,810,956.901
Class A, 2,660,752.049 Class B and 871,125.932 Class C shares (a total of
10,342,834.882 shares) of Evergreen Tax Free Income outstanding and
176,622,550.503 shares of Keystone Tax Free outstanding.
As of September 30, 1997, the officers and Trustees of Evergreen Tax
Free Income beneficially owned as a group less than 1% of the outstanding shares
of Evergreen Tax Free Income. To Evergreen Tax Free Income's knowledge, the
following persons owned beneficially or of record more than 5% of Evergreen Tax
Free Income's total outstanding shares as of September 30, 1997:
<PAGE>
<TABLE>
<CAPTION>
Percen-
Percen- tage of
tage of Shares of
Shares of Class
Class Outstand-
No. of Before ing After
Name and Address Class Shares Reorgani- Reorgani-
- ---------------- ----- ------ zations zations
--------- ---------
<S> <C> <C> <C> <C>
Merrill Lynch Pierce A 1,545,032 22.20
Fenner & Smith 1.12
For the Sole Benefit
of its Customers
Attn: Fund
Administration
4800 Deer Lake Drive
East
3rd Floor
Jacksonville, FL
32246-6484
Merrill Lynch Pierce B 537,858 19.67 4.44
Fenner & Smith
For the Sole Benefit
of its Customers
Attn: Fund
Administration
4800 Deer Lake Drive
East
3rd Floor
Jacksonville, FL
32246-6484
Alletta Laird Downs B 205,973 7.53 1.70
TTEE
Alletta Laird Downs
Trust
U/A DTD 03-29-89
P.O. Box 3666
Wilmington, DE 19807-
0666
<PAGE>
Merrill Lynch Pierce
Fenner & Smith C 442,374 44.65 44.65
For the Sole Benefit
of its Customers
Attn: Fund
Administration
4800 Deer Lake Drive
East
3rd Floor
Jacksonville, FL
32246-6484
</TABLE>
As of September 30, 1997, the officers and Trustees of Keystone Tax
Free beneficially owned as a group less than 1% of the outstanding shares of
Keystone Tax Free. To Keystone Tax Free's knowledge, the following persons owned
beneficially or of record more than 5% of Keystone Tax Free's total outstanding
shares as of September 30, 1997:
<TABLE>
<CAPTION>
Percentage of
Percen- Shares of
tage of Class
Shares Outstanding
After
No. of Before Reorgani-
Name and Address Shares Reorgani- zations
- ---------------- ------ zations ---------
---------
<S> <C> <C> <C>
Merrill Lynch Pierce 22,801,239 12.76 Class A 12.12
Fenner & Smith Class 9.88
For the Sole Benefit of
its Customers
Attn: Fund
Administration
4800 Deer Lake Drive
East
3rd Floor
Jacksonville, FL 32246-
6484
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in
its entirety by the descriptions of the respective investment
<PAGE>
objectives, policies and restrictions set forth in the respective Prospectuses
and Statements of Additional Information of the Funds. The investment objective,
policies and restrictions of Evergreen Tax Free can be found in the Prospectus
of Evergreen Tax Free under the caption "Investment Objective and Policies." The
investment objectives, policies and restrictions of Evergreen Tax Free Income
and Keystone Tax Free can be found in the respective Prospectus of each Fund
under the caption "Investment Objective and Policies."
The investment objective and policies of Evergreen Tax Free, Evergreen
Tax Free Income and Keystone Tax Free are substantially identical. These Funds
seek the highest possible current income exempt from federal income taxes, while
preserving capital. Unlike Evergreen Tax Free, the investment objective of
Evergreen Tax Free Income and Keystone Tax Free cannot be changed without
shareholder approval.
Under ordinary circumstances, each Fund invests substantially all and
at least 80% of its assets in federally tax-exempt obligations. These
obligations include municipal bonds and notes and tax-exempt commercial paper
obligations that are issued by or on behalf of states, territories and
possessions of the U.S., the District of Columbia and their political
subdivisions, agencies and instrumentalities, the interest from which is, in the
opinion of counsel to the issuer, exempt from federal income taxes, including
the alternative minimum tax.
Municipal bonds include debt obligations issued by or on behalf of a
political subdivision of the U.S. or any agency or instrumentality thereof to
obtain funds for various public purposes. In addition, municipal bonds include
certain types of industrial development bonds issued by or on behalf of public
authorities to finance privately operated facilities. Each Fund's policies limit
its investments in qualified "private activity" industrial development bonds to
no more than 20% of the Fund's total assets. No Fund currently intends to invest
in "private activity" (private purpose) bonds.
Each Fund invests at least 80% of its assets in bonds that, at the date
of investment, are rated within the four highest categories by Standard & Poor's
Ratings Group ("S&P") (AAA, AA, A and BBB), by Moody's Investors Service
("Moody's") (Aaa, Aa, A and Baa), by Fitch Investors Services, L.P. ("Fitch")
(AAA, AA, A and BBB) or, if not rated or rated under a different system, are of
comparable quality to obligations
<PAGE>
so rated as determined by another NRSRO or by the Fund's
investment adviser.
Evergreen Tax Free and Keystone Tax Free may invest 20% of their assets
in lower rated bonds, but will not invest in bonds rated below B. A Fund is not
required to sell or otherwise dispose of any security that loses its rating or
has its rating reduced after the Fund has purchased it.
The Funds are permitted to make taxable investments, and may from time
to time generate income subject to federal regular income tax.
While each Fund may invest in securities of any maturity, it is
currently expected that Evergreen Tax Free Income will not invest in securities
with maturities of more than 30 years or less than 5 years (other than certain
money market instruments).
Debt rated BBB by S&P, Baa by Moody's or BBB by Fitch is regarded as
having an adequate capacity to pay interest and repay principal. While it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are generally more likely to lead to a weakened capacity
to pay interest and repay principal for debt in this category than in higher
rated categories.
Securities rated BB or lower by S&P or Fitch or Ba or lower by Moody's
are considered predominantly speculative with respect to the ability of the
issuer to meet principal and interest payments. The lower ratings of certain
securities held by the Fund reflect a greater possibility that adverse changes
in the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates may impair the ability of the
issuer to make payments of interest and principal, especially if the issuer is
highly leveraged. Such issuer's ability to meet its debt obligations may also be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecasts, or the unavailability of additional
financing. Also, an economic downturn or an increase in interest rates may
increase the potential for default by the issuers of these securities.
Values of such securities are more sensitive to real or perceived
adverse economic, company or industry conditions and publicity than is the case
for higher quality securities. Their values, like those of other fixed income
securities, fluctuate in response to changes in interest rates, generally rising
when interest rates decline and falling when interest
<PAGE>
rates rise. For example, if interest rates increase after a fixed income
security is purchased, the security, if sold prior to maturity, may return less
than its cost. The prices of below-investment grade bonds, however, are
generally less sensitive to interest rate changes than the prices of higher-
rated bonds.
Each Fund also may invest in securities that pay interest that is not
exempt from federal income taxes, such as corporate and bank obligations,
obligations issued or guaranteed by the U.S. government or by any of its
agencies or instrumentalities, commercial paper and repurchase agreements. Such
securities must be rated, for Evergreen Tax Free and Keystone Tax Free, at least
BBB by S&P or Baa by Moody's, and, for Evergreen Tax Free Income, at least A,
or, if not rated, must be determined by Keystone to be of comparable quality.
Each Fund will not invest more than 20% of its total assets under ordinary
circumstances and up to 100% of its total assets for temporary defensive
purposes in such securities.
Each Fund also may enter into reverse repurchase agreements and firm
commitment agreements for securities and currencies. A Fund may enter into
options transactions and may write covered call and put options, purchase call
and put options, including purchasing call and put options to close out existing
positions, and purchase call options to fix the interest rates of obligations
held by it. A Fund may enter into currency and other financial futures contracts
and related options transactions for hedging purposes and not for speculation.
In addition, each Fund may also invest in obligations denominated in foreign
currencies that are exempt from federal income tax. Evergreen Tax Free does not
currently intend to invest in foreign securities or securities denominated in
foreign currencies.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectus and Statement of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectus and Statement of Additional Information of each
Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Municipal Trust, Evergreen Tax Free Income and Keystone Tax
Free are open-end management investment companies registered with the SEC under
the 1940
<PAGE>
Act, which continuously offer shares to the public. Each of Evergreen Tax Free
Income and Keystone Tax Free is organized as a Massachusetts business trust.
Evergreen Municipal Trust is organized as a Delaware business trust. Each Trust
is governed by a Declaration of Trust, By-Laws and a Board of Trustees. Each
Trust is also governed by applicable Delaware, Massachusetts and federal law.
Evergreen Tax Free is a series of Evergreen Municipal Trust. Evergreen Tax Free
Income changed its name from Keystone Tax Free Income Fund effective October 31,
1997.
Capitalization
The beneficial interests in Evergreen Tax Free are represented by an
unlimited number of transferable shares of beneficial interest $.001 par value
per share. The beneficial interests in Evergreen Tax Free Income and Keystone
Tax Free are represented by an unlimited number of transferable shares of
beneficial interest without par value per share. The respective Declaration of
Trust under which each Fund has been established permits the Trustees to
allocate shares into an unlimited number of series, and classes thereof, with
rights determined by the Trustees, all without shareholder approval. Fractional
shares may be issued. Except with respect to Evergreen Tax Free where each share
of the Fund is entitled to one vote for each dollar of net asset value
applicable to such share, each Fund's shares have equal voting rights with
respect to matters affecting shareholders of all classes of each Fund and
represent equal proportionate interests in the assets belonging to each class of
shares of the Funds. Shareholders of each Fund are entitled to receive dividends
and other amounts as determined by the Trustees. Shareholders of each Fund vote
separately, by class, as to matters, such as approval of or amendments to Rule
12b-1 distribution plans, that affect only their particular class and by series
as to matters, such as approval of or amendments to investment advisory
agreements or proposed reorganizations, that affect only their particular
series.
Shareholder Liability
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the respective Declaration of Trust under which
Evergreen Tax Free Income and Keystone Tax Free was established disclaims
shareholder liability for acts or obligations of the series and requires that
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or
<PAGE>
executed by the Fund or the Trustees. Each Declaration of Trust provides for
indemnification out of the series property for all losses and expenses of any
shareholder held personally liable for the obligations of the series. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is considered remote since it is limited to circumstances in which a
disclaimer is inoperative and the series or the Trust itself would be unable to
meet its obligations. A substantial number of mutual funds in the United States
are organized as Massachusetts business trusts.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen Municipal Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject shareholders of a Delaware trust to liability. To guard
against this risk, the Declaration of Trust of Evergreen Municipal Trust: (a)
provides that any written obligation of the Trust may contain a statement that
such obligation may only be enforced against the assets of the Trust or the
particular series in question and the obligation is not binding upon the
shareholders of the Trust; however, the omission of such a disclaimer will not
operate to create personal liability for any shareholder; and (b) provides for
indemnification out of Trust property of any shareholder held personally liable
for the obligations of Evergreen Municipal Trust. Accordingly, the risk of a
shareholder of the Trust incurring financial loss beyond that shareholder's
investment because of shareholder liability is limited to circumstances in
which: (i) the court refuses to apply Delaware law; (ii) no contractual
limitation of liability was in effect; and (iii) the Trust itself would be
unable to meet its obligations. In light of Delaware law, the nature of the
Trust's business, and the nature of its assets, the risk of personal liability
to a shareholder of Evergreen Municipal Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Municipal Trust on behalf of Evergreen Tax Free,
Evergreen Tax Free Income nor Keystone Tax Free is required to hold annual
meetings of shareholders. However, a meeting of shareholders for the purpose of
voting upon the question of removal of a Trustee must be called when requested
in writing by the holders of at least 10% of the outstanding shares. In
addition, each is required to call a meeting of shareholders for the purpose of
electing Trustees
<PAGE>
if, at any time, less than a majority of the Trustees then holding office were
elected by shareholders. Each Trust currently does not intend to hold regular
shareholder meetings. Each Trust does not permit cumulative voting. Except when
a larger quorum is required by applicable law, twenty-five percent (25%) with
respect to Evergreen Tax Free and, with respect to Evergreen Tax Free Income and
Keystone Tax Free, a majority of the outstanding shares entitled to vote on a
matter, constitutes a quorum for consideration of such matter. For Evergreen Tax
Free, a majority of the shares voted, and for Evergreen Tax Free Income and
Keystone Tax Free, a majority of the shares present and entitled to vote is
sufficient to act on a matter (unless otherwise specifically required by the
applicable governing documents or other law, including the 1940 Act).
Under the Declaration of Trust of Evergreen Municipal Trust, each share
of Evergreen Tax Free is entitled to one vote for each dollar of net asset value
applicable to each share. Under the current voting provisions governing
Evergreen Tax Free Income and Keystone Tax Free, each share is entitled to one
vote. Over time, the net asset values of the Funds have changed in relation to
one another and are expected to continue to do so in the future. Because of the
divergence in net asset values, a given dollar investment in a Fund with a lower
net asset value will purchase more shares and, under the Funds' current voting
provisions, have more votes than the same investment in a Fund with a higher net
asset value. Under the Declaration of Trust of Evergreen Municipal Trust, voting
power is related to the dollar value of the shareholder's investment rather than
to the number of shares held.
Liquidation or Dissolution
In the event of the liquidation of Evergreen Tax Free, Evergreen Tax
Free Income and Keystone Tax Free, the shareholders are entitled to receive,
when, and as declared by the Trustees, the excess of the assets belonging to
such Fund or attributable to the class over the liabilities belonging to the
Fund or attributable to the class. In either case, the assets so distributable
to shareholders of the Fund will be distributed among the shareholders in
proportion to the number of shares of a class of the Fund held by them and
recorded on the books of the Fund.
Liability and Indemnification of Trustees
The Declarations of Trust of Evergreen Tax Free Income and Keystone Tax
Free provide that a Trustee shall be
<PAGE>
liable only for his own willful defaults, and that no Trustee shall be protected
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. The Declarations of Trust of
Evergreen Tax Free Income and Keystone Tax Free provide that present and former
Trustees or officers are entitled to indemnification against liabilities and
expenses with respect to claims related to their position with the Fund unless
such Trustee or officer shall have been adjudicated not to have acted in good
faith in the reasonable belief that his or her action was in the best interest
of the Fund, or unless such Trustee or officer is otherwise subject to liability
to the Fund or its shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. In the event of settlement, no such indemnification shall be
provided unless there has been a determination that such Trustee or officer
appears to have acted in good faith in the reasonable belief that his action was
in the best interests of the Fund and that such indemnification would not
protect such person against any liability to the Fund to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Under the Declaration of Trust of Evergreen Municipal Trust, a Trustee
is liable to the Trust and its shareholders only for such Trustee's own willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of the office of Trustee or the discharge of such
Trustee's functions. As provided in the Declaration of Trust, each Trustee of
the Trust is entitled to be indemnified against all liabilities against him or
her, including the costs of litigation, unless it is determined that the Trustee
(i) did not act in good faith in the reasonable belief that such Trustee's
action was in or not opposed to the best interests of the Trust; (ii) had acted
with willful misfeasance, bad faith, gross negligence or reckless disregard of
such Trustee's duties; and (iii) in a criminal proceeding, had reasonable cause
to believe that such Trustee's conduct was unlawful (collectively, "disabling
conduct"). A determination that the Trustee did not engage in disabling conduct
and is, therefore, entitled to indemnification may be based upon the outcome of
a court action or administrative proceeding or by (a) a vote of a majority of
those Trustees who are neither "interested persons" within the meaning of the
1940 Act nor parties to the proceeding or (b) an independent legal counsel in a
written opinion. The Trust may also advance money for such litigation expenses
provided that the
<PAGE>
Trustee undertakes to repay the Trust if his or her conduct is later determined
to preclude indemnification and certain other conditions are met.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws, Delaware and Massachusetts law
and is not a complete description of those documents or law. Shareholders should
refer to the provisions of such Declarations of Trust, By-Laws, Delaware and
Massachusetts law directly for more complete information.
ADDITIONAL INFORMATION
Evergreen Tax Free. Information concerning the operation and management
of Evergreen Tax Free is incorporated herein by reference from the Prospectus
dated November 12, 1997, a copy of which is enclosed, and Statement of
Additional Information dated November 12, 1997. A copy of such Statement of
Additional Information is available upon request and without charge by writing
to Evergreen Tax Free at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
Evergreen Tax Free Income. Information about the Fund is included in
its current Prospectus dated September 3, 1997, as supplemented, and in the
Statement of Additional Information of the same date that have been filed with
the SEC, all of which are incorporated herein by reference. A copy of the
Prospectus and Statement of Additional Information are available upon request
and without charge by writing to the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800- 343-2898.
Keystone Tax Free. Information about the Fund is included in its
current Prospectus dated April 30, 1997, as supplemented, and in the Statement
of Additional Information of the same date that have been filed with the SEC,
all of which are incorporated herein by reference. A copy of the Prospectus and
Statement of Additional Information are available upon request and without
charge by writing to the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
Evergreen Tax Free, Evergreen Tax Free Income and Keystone Tax Free are
each subject to the informational requirements of the Securities Exchange Act of
1934 and the 1940 Act, and in accordance therewith file reports and other
information, including proxy material and charter documents,
<PAGE>
with the SEC. These items can be inspected and copies obtained at the Public
Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices located at Northwest
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2511 and Seven
World Trade Center, Suite 1300, New York, New York 10048.
VOTING INFORMATION CONCERNING THE MEETINGS
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of Evergreen Tax Free Income and
Keystone Tax Free to be used at each Special Meeting of Shareholders to be held
at 3:00 p.m., January 6, 1998, at the offices of the Evergreen Keystone Funds,
200 Berkeley Street, Boston, Massachusetts 02116, and at any adjournments
thereof. This Prospectus/Proxy Statement, along with a Notice of the meeting and
a proxy card, is first being mailed to shareholders of Evergreen Tax Free Income
and Keystone Tax Free on or about November 14, 1997. Only shareholders of record
as of the close of business on the Record Date will be entitled to notice of,
and to vote at, the Meeting or any adjournment thereof. The holders of a
majority of the outstanding shares entitled to vote of each Fund at the close of
business on the Record Date present in person or represented by proxy will
constitute a quorum for the Meeting. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Meeting, the proxies named
therein will vote the shares represented by the proxy in accordance with the
instructions marked thereon. Unmarked proxies will be voted FOR the proposed
Reorganization and FOR any other matters deemed appropriate. Proxies that
reflect abstentions and "broker non-votes" (i.e., shares held by brokers or
nominees as to which (i) instructions have not been received from the beneficial
owners or the persons entitled to vote or (ii) the broker or nominee does not
have discretionary voting power on a particular matter) will be counted as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum. Such proxies will have the effect of being counted as
votes against the Plan since the vote required is a majority of the shares
present and entitled to vote. A proxy may be revoked at any time on or before
the Meeting by written notice to the Secretary of Evergreen Tax Free Income or
Keystone Tax Free, as applicable, 200 Berkeley Street, Boston, Massachusetts
02116. Unless revoked, all valid proxies will be voted in accordance with the
specifications thereon or, in the absence of such specifications, FOR approval
of the Plan and the Reorganization contemplated thereby.
<PAGE>
Approval of each Plan will require the affirmative vote of a majority
of the shares present and entitled to vote, with all Classes voting together as
a single class at Meetings at which a quorum of each Fund's shares is present.
Each full share outstanding is entitled to one vote and each fractional share
outstanding is entitled to a proportionate share of one vote.
Proxy solicitations will be made primarily by mail, but proxy
solicitations may also be made by telephone, telegraph or personal solicitations
conducted by officers and employees of FUNB, its affiliates or other
representatives of Evergreen Tax Free Income and Keystone Tax Free (who will not
be paid for their soliciting activities). Shareholder Communications Corporation
("SCC") and its agents have been engaged by Evergreen Tax Free Income and
Keystone Tax Free to assist in soliciting proxies, and may call shareholders to
ask if they would be willing to authorize SCC to execute a proxy on their behalf
authorizing the voting of their shares in accordance with the instructions given
over the telephone by the shareholders. In addition, shareholders may call SCC
at 1-800-733-8481 extension 404 between the hours of 9:00 a.m. and 11:00 p.m.
Eastern time in order to initiate the processing of their votes by telephone.
SCC will utilize a telephone vote solicitation procedure designed to
authenticate the shareholder's identity by asking the shareholder to provide his
or her social security number (in the case of an individual) or taxpayer
identification number (in the case of an entity). The shareholder's telephone
instructions will be implemented in a proxy executed by SCC and a confirmation
will be sent to the shareholder to ensure that the vote has been authorized in
accordance with the shareholder's instructions. Although a shareholder's vote
may be solicited and cast in this manner, each shareholder will receive a copy
of this Prospectus/Proxy Statement and may vote by mail using the enclosed proxy
card. The Funds believe that this telephonic voting system complies with
applicable law and have reviewed opinions of counsel to that effect.
<PAGE>
If you wish to participate in the Meeting, but do not wish to give your
proxy by telephone, you may still submit the proxy card included with this
Prospectus/Proxy Statement or attend in person. Any proxy given by you, whether
in writing or by telephone, is revocable.
In the event that sufficient votes to approve a Reorganization are not
received by January 6, 1998, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast; the percentage of negative
votes actually cast; the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
A shareholder who objects to a proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of Evergreen
Tax Free Income or Keystone Tax Free, as applicable, to demand payment for, or
an appraisal of, his or her shares. However, shareholders should be aware that
the Reorganizations as proposed are not expected to result in recognition of
gain or loss to shareholders for federal income tax purposes and that, if the
Reorganizations are consummated, shareholders will be free to redeem the
<PAGE>
shares of Evergreen Tax Free which they receive in the transaction at their
then-current net asset value. Shares of Evergreen Tax Free Income and Keystone
Tax Free may be redeemed at any time prior to the consummation of the
Reorganizations. Shareholders of Evergreen Tax Free Income and Keystone Tax Free
may wish to consult their tax advisers as to any differing consequences of
redeeming Fund shares prior to the Reorganizations or exchanging such shares in
the Reorganizations.
Evergreen Tax Free Income and Keystone Tax Free do not hold annual
shareholder meetings. If a Reorganization is not approved, shareholders wishing
to submit proposals for consideration for inclusion in a proxy statement for a
subsequent shareholder meeting should send their written proposals to the
Secretary of Evergreen Tax Free Income or Keystone Tax Free, as applicable, at
the address set forth on the cover of this Prospectus/Proxy Statement such that
they will be received by the Funds in a reasonable period of time prior to any
such meeting.
The votes of the shareholders of Evergreen Tax Free are not being
solicited by this Prospectus/Proxy Statement and are not required to carry out
the Reorganizations.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise Evergreen Tax Free Income and Keystone Tax Free whether other
persons are beneficial owners of shares for which proxies are being solicited
and, if so, the number of copies of this Prospectus/Proxy Statement needed to
supply copies to the beneficial owners of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Evergreen Tax Free Income as of May 31,
1997 and the financial statements and financial highlights for the periods
indicated therein have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements of Keystone Tax Free as of December 31, 1996
and the financial statements and financial highlights for the periods indicated
therein have been incorporated by reference herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by
<PAGE>
reference herein and upon the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen
Tax Free will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
OTHER BUSINESS
The Trustees of Evergreen Tax Free Income and Keystone Tax Free do not
intend to present any other business at the Meeting. If, however, any other
matters are properly brought before the Meeting, the persons named in the
accompanying form of proxy will vote thereon in accordance with their judgment.
THE RESPECTIVE TRUSTEES OF EVERGREEN TAX FREE INCOME AND KEYSTONE TAX
FREE RECOMMEND APPROVAL OF EACH RESPECTIVE PLAN AND ANY UNMARKED PROXIES WITHOUT
INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLANS.
November 14, 1997
<PAGE>
EXHIBIT A-1
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 30th day of September, 1997, by and between the Evergreen Municipal
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its
Evergreen Tax Free Fund series (the "Acquiring Fund"), and Keystone Tax Free
Income Fund, a Massachusetts business trust, with its principal place of
business at 200 Berkeley Street, Boston, Massachusetts 02116 (the "Selling
Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A, Class B and Class
C shares of beneficial interest, $.001 par value per share, of the Acquiring
Fund (the "Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of
certain identified liabilities of the Selling Fund; and (iii) the distribution,
after the Closing Date hereinafter referred to, of the Acquiring Fund Shares to
the shareholders of the Selling Fund in liquidation of the Selling Fund as
provided herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are a registered
open-end investment company and a separate investment series of an open-end,
registered investment company of the management type, respectively, and the
Selling Fund owns securities that generally are assets of the character in which
the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of beneficial
interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of the Selling Fund have determined that the
Selling Fund should exchange all of its assets and
<PAGE>
certain identified liabilities for Acquiring Fund Shares and that the interests
of the existing shareholders of the Selling Fund will not be diluted as a result
of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and futures interests and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
<PAGE>
The Selling Fund reserves the right to sell any of such securities, but will
not, without the prior written approval of the Acquiring Fund, acquire any
additional securities other than securities of the type in which the Acquiring
Fund is permitted to invest.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a statement of the Acquiring Fund's
investment objectives, policies, and restrictions and a list of the securities,
if any, on the Selling Fund's list referred to in the second sentence of this
paragraph that do not conform to the Acquiring Fund's investment objectives,
policies, and restrictions. In the event that the Selling Fund holds any
investments that the Acquiring Fund may not hold, the Selling Fund will dispose
of such securities prior to the Closing Date. In addition, if it is determined
that the Selling Fund and the Acquiring Fund portfolios, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Selling Fund if requested
by the Acquiring Fund will dispose of a sufficient amount of such investments as
may be necessary to avoid violating such limitations as of the Closing Date.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. Except as specifically provided in this paragraph 1.3, the Acquiring Fund
shall assume only those liabilities, expenses, costs, charges and reserves
reflected on a Statement of Assets and Liabilities of the Selling Fund prepared
on behalf of the Selling Fund, as of the Valuation Date (as defined in paragraph
2.1), in accordance with generally accepted accounting principles consistently
applied from the prior audited period. The Acquiring Fund shall assume only
those liabilities of the Selling Fund reflected in such Statement of Assets and
Liabilities and shall not except as specifically provided in this paragraph 1.3
assume any other liabilities, whether absolute or contingent, known or unknown,
accrued or unaccrued, all of which shall remain the obligation of the Selling
Fund. The Acquiring Fund hereby agrees with the Selling Fund and each Trustee of
the Selling Fund: (i) to indemnify each Trustee of the Selling Fund against all
liabilities and expenses referred to in the indemnification provisions of the
Selling Fund's Declaration of Trust and ByLaws, to the extent provided therein,
incurred by any Trustee of the Selling Fund; and (ii) in addition to the
indemnification provided in (i) above, to indemnify each Trustee of the Selling
Fund against all liabilities and expenses and pay the same as they arise and
become due,
<PAGE>
without any exception, limitation or requirement of approval by any person, and
without any right to require repayment thereof by any such Trustee (unless such
Trustee has had the same repaid to him or her) based upon any subsequent or
final disposition or findings made in connection therewith or otherwise, if such
action, suit or other proceeding involves such Trustee's participation in
authorizing or permitting or acquiescing in, directly or indirectly, by action
or inaction, the making of any distribution in any manner of all or any assets
of the Selling Fund without making provision for the payment of any liabilities
of any kind, fixed or contingent, of the Selling Fund, which liabilities were
not actually and consciously personally known to such Trustee to exist at the
time of such Trustee's participation in so authorizing or permitting or
acquiescing in the making of any such distribution.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount permitted to be charged to the Acquiring Fund
under the National Association of Securities Dealers, Inc. Conduct Rule 2830,
minus the amount of the sales charges paid or accrued (including asset based
sales charges), plus permitted interest ("Aggregate NASD Cap"), the Acquiring
Fund will add to its Aggregate NASD Cap immediately prior to the Reorganization
the Aggregate NASD Cap of the Selling Fund immediately prior to the
Reorganization.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
<PAGE>
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of each
class to be issued (including fractional shares, if any) in exchange for the
Selling Fund's assets
<PAGE>
shall be determined by multiplying the shares outstanding of each class of the
Selling Fund by the ratio computed by dividing the net asset value per share of
the Selling Fund attributable to each of its classes by the net asset value per
share of the respective classes of the Acquiring Fund determined in accordance
with paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about January 23, 1998 or such other date as the parties may agree to in writing
(the "Closing Date"). All acts taking place at the Closing shall be deemed to
take place simultaneously immediately prior to the opening of business on the
Closing Date unless otherwise provided. The Closing shall be held as of 9:00
a.m. at the offices of the Evergreen Keystone Funds, 200 Berkeley Street,
Boston, MA 02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. State Street Bank and Trust Company, as
custodian for the Selling Fund (the "Custodian"), shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Selling Fund's
portfolio securities, cash, and any other assets shall have been delivered in
proper form to the Acquiring Fund on the Closing Date; and (b) all necessary
taxes including all applicable federal and state stock transfer stamps, if any,
shall have been paid, or provision for payment shall have been made, in
conjunction with the delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
<PAGE>
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date ("ESC"), shall
deliver at the Closing a certificate of an authorized officer stating that its
records contain the names and addresses of the Selling Fund Shareholders and the
number and percentage ownership of outstanding shares owned by each such
shareholder immediately prior to the Closing. The Acquiring Fund shall issue and
deliver or cause ESC, its transfer agent as of the Closing Date, to issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited on
the Closing Date to the Secretary of the Selling Fund or provide evidence
satisfactory to the Selling Fund that such Acquiring Fund Shares have been
credited to the Selling Fund's account on the books of the Acquiring Fund. At
the Closing, each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts and other documents as such
other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling
Fund represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a Massachusetts business trust duly
organized, validly existing, and in good standing under the laws of The
Commonwealth of Massachusetts.
(b) The Selling Fund is a registered investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectus and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution,
delivery, and performance of this Agreement (subject to
<PAGE>
shareholder approval) will not result, in violation of any provision of the
Selling Fund's Declaration of Trust or By-Laws or of any material agreement,
indenture, instrument, contract, lease, or other undertaking to which the
Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The financial statements of the Selling Fund at May 31,
1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since May 31, 1997 there has not been any material adverse
change in the Selling Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of business, or any
incurrence by the Selling Fund of indebtedness maturing more than one year from
the date such indebtedness was incurred, except as otherwise disclosed to and
accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports
<PAGE>
shall have been paid, or provision shall have been made for the payment thereof.
To the best of the Selling Fund's knowledge, no such return is currently under
audit, and no assessment has been asserted with respect to such returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued and
outstanding shares of the Selling Fund will, at the time of the Closing Date, be
held by the persons and in the amounts set forth in the records of the transfer
agent as provided in paragraph 3.4. The Selling Fund does not have outstanding
any options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling
Fund for use in no-action letters, applications for orders,
<PAGE>
registration statements, proxy materials, and other documents that may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects and shall comply in all material
respects with federal securities and other laws and regulations thereunder
applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring
Fund represents and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectuses and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
<PAGE>
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise.
(g) At the Closing Date, there will not be any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(j) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement
<PAGE>
constitutes a valid and binding obligation of the Acquiring Fund enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(k) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(l) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
(m) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(n) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
<PAGE>
5.2 APPROVAL OF SHAREHOLDERS. The Selling Fund will call a meeting of
its Shareholders to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by its independent
auditors and certified by the Selling Fund's President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund
will provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
ARTICLE VI
<PAGE>
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement comply with the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution and delivery of this Agreement by the Selling Fund, is
a valid and binding obligation of the Acquiring Fund enforceable against the
Acquiring Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium, and other
<PAGE>
laws relating to or affecting creditors' rights generally and
to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by the Selling
Fund's President or Vice President and the Treasurer or Assistant Treasurer, in
form and substance satisfactory to the Acquiring Fund and dated as of the
Closing Date, to such effect and as to such other matters as the Acquiring Fund
shall reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
<PAGE>
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of the Selling Fund.
7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of Sullivan & Worcester LLP, counsel to the Selling Fund, in a form
satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a Massachusetts business trust duly
organized, validly existing and in good standing under the laws of The
Commonwealth of Massachusetts and has the power to own all of its properties and
assets and to carry on its business as presently conducted.
(b) The Selling Fund is a Massachusetts business trust
registered as an investment company under the 1940 Act, and, to such counsel's
knowledge, such registration with the Commission as an investment company under
the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement comply with the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution, and delivery of this Agreement by the Acquiring Fund,
is a valid and binding obligation of the Selling Fund enforceable against the
Selling Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall,
<PAGE>
at its option, not be required to consummate the transactions
contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of the Selling Fund's
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's investment company
taxable income for all taxable periods ending on the Closing Date (computed
without regard to any deduction for dividends
<PAGE>
paid) and all of its net capital gains realized in all taxable periods ending on
the Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(C) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
<PAGE>
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by Selling Fund's
management and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
<PAGE>
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the Acquiring
Fund; and
(c) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
8.9 The Acquiring Fund and the Selling Fund shall also have received
from KPMG Peat Marwick LLP a letter addressed to the Acquiring Fund and the
Selling Fund, dated on the Closing Date in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to
<PAGE>
the provisions of this Agreement; (c) registration or qualification fees and
expenses of preparing and filing such forms as are necessary under applicable
state securities laws to qualify the Acquiring Fund Shares to be issued in
connection herewith in each state in which the Selling Fund Shareholders are
resident as of the date of the mailing of the Prospectus and Proxy Statement to
such shareholders; (d) postage; (e) printing; (f) accounting fees; (g) legal
fees; and (h) solicitation costs of the transaction. Notwithstanding the
foregoing, the Acquiring Fund shall pay its own federal and state registration
fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, the respective Trustees or
officers, to the other party or its Trustees or officers.
<PAGE>
ARTICLE XII
AMENDMENTS
This Agreement may be amended, modified, or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of the
Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of The Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm, or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or
<PAGE>
employees of the Selling Fund personally, but shall bind only the trust property
of the Selling Fund, as provided in the Declaration of Trust of the Selling
Fund. The execution and delivery of this Agreement have been authorized by the
Trustees of the Selling Fund and signed by authorized officers of the Selling
Fund, acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officers shall be deemed to have been made by any
of them individually or to impose any liability on any of them personally, but
shall bind only the trust property of the Selling Fund as provided in the
Declaration of Trust of the Selling Fund.
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN MUNICIPAL TRUST
ON BEHALF OF EVERGREEN
TAX FREE FUND
By: /s/ JOHN J. PILEGGI
Name: John J. Pileggi
Title: President
KEYSTONE TAX FREE INCOME
FUND
By: /s/ JOHN J. PILEGGI
Name: John J. Pileggi
Title: President
<PAGE>
EXHIBIT A-2
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 30th day of September, 1997, by and between the Evergreen Municipal
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its
Evergreen Tax Free Fund series (the "Acquiring Fund"), and Keystone Tax Free
Fund, a Massachusetts business trust, with its principal place of business at
200 Berkeley Street, Boston, Massachusetts 02116 (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(F) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for shares of beneficial
interest, $.001 par value per share, of the Acquiring Fund (the "Acquiring Fund
Shares"); (ii) the assumption by the Acquiring Fund of certain identified
liabilities of the Selling Fund; and (iii) the distribution, after the Closing
Date hereinafter referred to, of the Acquiring Fund Shares to the shareholders
of the Selling Fund in liquidation of the Selling Fund as provided herein, all
upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are a registered
open-end investment company and a separate investment series of an open-end,
registered investment company of the management type, respectively, and the
Selling Fund owns securities that generally are assets of the character in which
the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares
of beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of the Selling Fund have determined that the
Selling Fund should exchange all of its assets and
<PAGE>
certain identified liabilities for Acquiring Fund Shares and that the interests
of the existing shareholders of the Selling Fund will not be diluted as a result
of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and futures interests and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
<PAGE>
The Selling Fund reserves the right to sell any of such securities, but will
not, without the prior written approval of the Acquiring Fund, acquire any
additional securities other than securities of the type in which the Acquiring
Fund is permitted to invest.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a statement of the Acquiring Fund's
investment objectives, policies, and restrictions and a list of the securities,
if any, on the Selling Fund's list referred to in the second sentence of this
paragraph that do not conform to the Acquiring Fund's investment objectives,
policies, and restrictions. In the event that the Selling Fund holds any
investments that the Acquiring Fund may not hold, the Selling Fund will dispose
of such securities prior to the Closing Date. In addition, if it is determined
that the Selling Fund and the Acquiring Fund portfolios, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Selling Fund if requested
by the Acquiring Fund will dispose of a sufficient amount of such investments as
may be necessary to avoid violating such limitations as of the Closing Date.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. Except as specifically provided in this paragraph 1.3, the Acquiring Fund
shall assume only those liabilities, expenses, costs, charges and reserves
reflected on a Statement of Assets and Liabilities of the Selling Fund prepared
on behalf of the Selling Fund, as of the Valuation Date (as defined in paragraph
2.1), in accordance with generally accepted accounting principles consistently
applied from the prior audited period. The Acquiring Fund shall assume only
those liabilities of the Selling Fund reflected in such Statement of Assets and
Liabilities and shall not except as specifically provided in this paragraph 1.3
assume any other liabilities, whether absolute or contingent, known or unknown,
accrued or unaccrued, all of which shall remain the obligation of the Selling
Fund. The Acquiring Fund hereby agrees with the Selling Fund and each Trustee of
the Selling Fund: (i) to indemnify each Trustee of the Selling Fund against all
liabilities and expenses referred to in the indemnification provisions of the
Selling Fund's Declaration of Trust and ByLaws, to the extent provided therein,
incurred by any Trustee of the Selling Fund; and (ii) in addition to the
indemnification provided in (i) above, to indemnify each Trustee of the Selling
Fund against all liabilities and expenses and pay the same as they arise and
become due,
<PAGE>
without any exception, limitation or requirement of approval by any person, and
without any right to require repayment thereof by any such Trustee (unless such
Trustee has had the same repaid to him or her) based upon any subsequent or
final disposition or findings made in connection therewith or otherwise, if such
action, suit or other proceeding involves such Trustee's participation in
authorizing or permitting or acquiescing in, directly or indirectly, by action
or inaction, the making of any distribution in any manner of all or any assets
of the Selling Fund without making provision for the payment of any liabilities
of any kind, fixed or contingent, of the Selling Fund, which liabilities were
not actually and consciously personally known to such Trustee to exist at the
time of such Trustee's participation in so authorizing or permitting or
acquiescing in the making of any such distribution.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount permitted to be charged to the Acquiring Fund
under the National Association of Securities Dealers, Inc. Conduct Rule 2830,
minus the amount of the sales charges paid or accrued (including asset based
sales charges), plus permitted interest ("Aggregate NASD Cap"), the Acquiring
Fund will add to its Aggregate NASD Cap immediately prior to the Reorganization
the Aggregate NASD Cap of the Selling Fund immediately prior to the
Reorganization.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
<PAGE>
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of each
class to be issued (including fractional shares, if any) in exchange for the
Selling Fund's assets
<PAGE>
shall be determined by multiplying the shares outstanding of each class of the
Selling Fund by the ratio computed by dividing the net asset value per share of
the Selling Fund attributable to each of its classes by the net asset value per
share of the respective classes of the Acquiring Fund determined in accordance
with paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about January 23, 1998 or such other date as the parties may agree to in writing
(the "Closing Date"). All acts taking place at the Closing shall be deemed to
take place simultaneously immediately prior to the opening of business on the
Closing Date unless otherwise provided. The Closing shall be held as of 9:00
a.m. at the offices of the Evergreen Keystone Funds, 200 Berkeley Street,
Boston, MA 02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. State Street Bank and Trust Company, as
custodian for the Selling Fund (the "Custodian"), shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Selling Fund's
portfolio securities, cash, and any other assets shall have been delivered in
proper form to the Acquiring Fund on the Closing Date; and (b) all necessary
taxes including all applicable federal and state stock transfer stamps, if any,
shall have been paid, or provision for payment shall have been made, in
conjunction with the delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
<PAGE>
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date ("ESC"), shall
deliver at the Closing a certificate of an authorized officer stating that its
records contain the names and addresses of the Selling Fund Shareholders and the
number and percentage ownership of outstanding shares owned by each such
shareholder immediately prior to the Closing. The Acquiring Fund shall issue and
deliver or cause ESC, its transfer agent as of the Closing Date, to issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited on
the Closing Date to the Secretary of the Selling Fund or provide evidence
satisfactory to the Selling Fund that such Acquiring Fund Shares have been
credited to the Selling Fund's account on the books of the Acquiring Fund. At
the Closing, each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts and other documents as such
other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling
Fund represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a Massachusetts business trust duly
organized, validly existing, and in good standing under the laws of The
Commonwealth of Massachusetts.
(b) The Selling Fund is a registered investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectus and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution,
delivery, and performance of this Agreement (subject to
<PAGE>
shareholder approval) will not result, in violation of any provision of the
Selling Fund's Declaration of Trust or By-Laws or of any material agreement,
indenture, instrument, contract, lease, or other undertaking to which the
Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The financial statements of the Selling Fund at December
31, 1996 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since December 31, 1996 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports
<PAGE>
shall have been paid, or provision shall have been made for the payment thereof.
To the best of the Selling Fund's knowledge, no such return is currently under
audit, and no assessment has been asserted with respect to such returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued and
outstanding shares of the Selling Fund will, at the time of the Closing Date, be
held by the persons and in the amounts set forth in the records of the transfer
agent as provided in paragraph 3.4. The Selling Fund does not have outstanding
any options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling
Fund for use in no-action letters, applications for orders,
<PAGE>
registration statements, proxy materials, and other documents that may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects and shall comply in all material
respects with federal securities and other laws and regulations thereunder
applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring
Fund represents and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectuses and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
<PAGE>
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise.
(g) At the Closing Date, there will not be any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(j) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement
<PAGE>
constitutes a valid and binding obligation of the Acquiring Fund enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(k) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(l) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
(m) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(n) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
<PAGE>
5.2 APPROVAL OF SHAREHOLDERS. The Selling Fund will call a meeting of
its Shareholders to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by its independent
auditors and certified by the Selling Fund's President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund
will provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
ARTICLE VI
<PAGE>
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement comply with the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution and delivery of this Agreement by the Selling Fund, is
a valid and binding obligation of the Acquiring Fund enforceable against the
Acquiring Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium, and other
<PAGE>
laws relating to or affecting creditors' rights generally and
to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by the Selling
Fund's President or Vice President and the Treasurer or Assistant Treasurer, in
form and substance satisfactory to the Acquiring Fund and dated as of the
Closing Date, to such effect and as to such other matters as the Acquiring Fund
shall reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
<PAGE>
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of the Selling Fund.
7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of Sullivan & Worcester LLP, counsel to the Selling Fund, in a form
satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a Massachusetts business trust duly
organized, validly existing and in good standing under the laws of The
Commonwealth of Massachusetts and has the power to own all of its properties and
assets and to carry on its business as presently conducted.
(b) The Selling Fund is a Massachusetts business trust
registered as an investment company under the 1940 Act, and, to such counsel's
knowledge, such registration with the Commission as an investment company under
the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement comply with the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution, and delivery of this Agreement by the Acquiring Fund,
is a valid and binding obligation of the Selling Fund enforceable against the
Selling Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall,
<PAGE>
at its option, not be required to consummate the transactions
contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of the Selling Fund's
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's investment company
taxable income for all taxable periods ending on the Closing Date (computed
without regard to any deduction for dividends
<PAGE>
paid) and all of its net capital gains realized in all taxable periods ending on
the Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(F) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
<PAGE>
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by Selling Fund's
management and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
<PAGE>
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the Acquiring
Fund; and
(c) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
8.9 The Acquiring Fund and the Selling Fund shall also have received
from KPMG Peat Marwick LLP a letter addressed to the Acquiring Fund and the
Selling Fund, dated on the Closing Date in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to
<PAGE>
the provisions of this Agreement; (c) registration or qualification fees and
expenses of preparing and filing such forms as are necessary under applicable
state securities laws to qualify the Acquiring Fund Shares to be issued in
connection herewith in each state in which the Selling Fund Shareholders are
resident as of the date of the mailing of the Prospectus and Proxy Statement to
such shareholders; (d) postage; (e) printing; (f) accounting fees; (g) legal
fees; and (h) solicitation costs of the transaction. Notwithstanding the
foregoing, the Acquiring Fund shall pay its own federal and state registration
fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, the respective Trustees or
officers, to the other party or its Trustees or officers.
<PAGE>
ARTICLE XII
AMENDMENTS
This Agreement may be amended, modified, or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of the
Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of The Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm, or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or
<PAGE>
employees of the Selling Fund personally, but shall bind only the trust property
of the Selling Fund, as provided in the Declaration of Trust of the Selling
Fund. The execution and delivery of this Agreement have been authorized by the
Trustees of the Selling Fund and signed by authorized officers of the Selling
Fund, acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officers shall be deemed to have been made by any
of them individually or to impose any liability on any of them personally, but
shall bind only the trust property of the Selling Fund as provided in the
Declaration of Trust of the Selling Fund.
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN MUNICIPAL TRUST
ON BEHALF OF EVERGREEN
TAX FREE FUND
By: /s/ JOHN J. PILEGGI
Name: John J. Pileggi
Title: President
KEYSTONE TAX FREE FUND
By: /s/ JOHN J. PILEGGI
Name: John J. Pileggi
Title: President
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
EVERGREEN (FORMERLY KEYSTONE) TAX FREE INCOME FUND
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
and
KEYSTONE TAX FREE FUND
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
By and In Exchange For Shares of
EVERGREEN TAX FREE FUND
a Series of
EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Evergreen (formerly Keystone)
Tax Free Income Fund ("Evergreen Tax Free Income"), and Keystone Tax Free Fund
("Keystone Tax Free"), to Evergreen Tax Free Fund ("Evergreen Tax Free"), a
series of the Evergreen Municipal Trust, in exchange, as applicable, for Class
A, Class B and Class C shares of beneficial interest, $.001 par value per share,
of Evergreen Tax Free, consists of this cover page and the following described
documents, each of which is attached hereto and incorporated by reference
herein:
(1) The Statement of Additional Information of Keystone
Tax Free Income Fund (currently known
as Evergreen Tax Free Income) dated September 3,
1997;
(2) The Statement of Additional Information of Keystone
Tax Free dated April 30, 1997;
(3) Annual Report of Keystone Tax Free Income Fund
(currently known as Evergreen Tax Free Income) for
the period ended May 31, 1997;
<PAGE>
(4) Annual Report of Keystone Tax Free for the year
ended December 31, 1996; and
(5) Semi-Annual Report of Keystone Tax Free for the six month
period ended June 30, 1997.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen Tax Free, Evergreen Tax Free Income and Keystone Tax Free
dated November 14, 1997. A copy of the Prospectus/Proxy Statement may be
obtained without charge by calling or writing to Evergreen Tax Free, Evergreen
Tax Free Income or Keystone Tax Free at the telephone numbers or addresses set
forth above.
The date of this Statement of Additional Information is November 14,
1997.
STATEMENT OF ADDITIONAL INFORMATION
September 3, 1997
THE EVERGREEN KEYSTONE NATIONAL TAX FREE FUNDS
200 Berkeley Street, Boston, Massachusetts 02116
800-343-2898
Evergreen High Grade Tax Free Fund ("High Grade")
Evergreen Short-Intermediate Municipal Fund ("Short-Intermediate")
Keystone Tax Free Income Fund ("Tax Free Income")
This Statement of Additional Information pertains to all classes of shares
of the Funds listed above. It is not a prospectus and should be read in
conjunction with the Prospectus dated September 3, 1997, as supplemented from
time to time for the Fund in which you are making or contemplating an
investment. The Evergreen Keystone National Tax Free Funds are offered through
two separate prospectuses: one offering Class A shares and Class B shares of
High Grade and Short-Intermediate and Class A shares, Class B shares and Class C
shares of Tax Free Income, and a separate prospectus offering Class Y shares of
High Grade and Short-Intermediate. Copies of each Prospectus may be obtained
without charge by calling the number listed above.
TABLE OF CONTENTS
Investment Objectives and Policies.........................................2
Investment Restrictions...................................................11
Non-fundamental Operating Policies........................................16
Management................................................................17
Investment Advisers.......................................................22
Distribution Plans........................................................25
Allocation of Brokerage ..................................................27
Additional Tax Information................................................28
Net Asset Value...........................................................30
Purchase of Shares........................................................31
General Information about the Funds ......................................39
Performance Information...................................................41
General...................................................................44
Financial Statements......................................................45
Appendix "A".............................................................A-1
21328
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
(See also "Description of the Funds - Investment Objectives
and Policies" in each Fund's Prospectus)
The investment objective of each Fund and a description of the
securities in which each Fund may invest is set forth under "Description of the
Funds - Investment Objectives and Policies" in the relevant Prospectus. The
investment objective of Tax Free Income Fund is fundamental and cannot be
changed without the approval of shareholders. The following expands the
discussion in the Prospectus regarding certain investments of each Fund.
Additional Information Regarding Investments that each Fund May Make
Participation Interests (All Funds)
Participation interests may take the form of participations, beneficial
interests in a trust, partnership interests, or any other form of indirect
ownership that allows a Fund to treat the income from the investments as exempt
from federal and state tax. The financial institutions from which a Fund
purchases participation interests frequently provide or secure from another
financial institution irrevocable letters of credit or guarantees and give a
Fund the right to demand payment of the principal amounts of the participation
interests plus accrued interest on short notice (usually within seven days).
Variable Rate Municipal Securities (All Funds)
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less for variable rate municipal securities than for fixed
income obligations.
Many municipal securities with variable interest rates purchased by a Fund
are subject to repayment of principal (usually within seven days) on the Fund's
demand. The terms of these variable rates demand instruments require payment of
principal obligations by the issuer of the participation interests or a
guarantor of either issuer. All variable rate municipal securities will meet the
quality standards for a Fund. Each Fund's investment adviser has been instructed
by the Board of Trustees (the "Trustees") to monitor the pricing, quality, and
liquidity of the variable rate municipal securities, including participation
interests held by a Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
Municipal Leases (All Funds)
When determining whether municipal leases purchased by a Fund will be
classified as a liquid or illiquid security, the Trustees have directed each
Fund's investment adviser to consider certain factors, such as: the frequency of
trades and quotes for the security; the volatility of quotations and trade
prices for the security, the number of dealers willing to purchase or sell the
security and the number of potential purchasers; dealer undertakings to make a
market in the security; the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of
21328
2
<PAGE>
the security, the method of soliciting offers, and the mechanics of transfer);
the rating of the security and the financial condition and prospects of the
issuer of the security; whether the lease can be terminated by the lessee; the
potential recovery, if any, from a sale of the leased property upon termination
of the lease; the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and prospects); the
likelihood that the lessee will discontinue appropriating funding for the leased
property because the property is no longer deemed essential to its operations
(e.g., the potential for an "event of nonappropriation"); any credit enhancement
or legal recourse provided upon an event of nonappropriation or other
termination of the lease; and such other factors as may be relevant to the
Fund's ability to dispose of the security.
When-Issued and Delayed Delivery Transactions (All Funds)
These transactions are made to secure what is considered to be an
advantageous price or yield for a Fund. No fees or other expenses, other than
normal transaction costs, are incurred. However, liquid assets of a Fund
sufficient to make payment for the securities to be purchased are segregated on
the Fund's records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. Short-Intermediate
does not expect its commitments to purchase when-issued securities will normally
exceed 25% of their total assets and High Grade does not expect that such
commitments will exceed 20% of its total assets.
Futures and Options Transactions (Tax Free Income)
The Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts and options on financial futures
contracts. Additionally, the Fund may buy and sell call and put options on
portfolio securities.
Purchasing Put Options on Financial Futures Contracts (Tax Free Income)
Tax Free Income may purchase listed put and call options on financial
futures contracts for U.S. government securities. Unlike entering directly into
a futures contract, which requires the purchaser to buy a financial instrument
on a set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or before a
future date whether to assume a short position at the specified price.
The Fund may purchase put options on futures to protect portfolio securities
against decreases in value resulting from an anticipated increase in market
interest rates. Generally, if the hedged portfolio securities decrease in value
during the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If the hedge is
successful, the proceeds received by a Fund upon the sale of the second option
will be large enough to offset both the premium paid by the Fund for the
original option plus the realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the option
(for a price less than the strike price of the option) and exercise the option.
The Fund would then deliver the futures contract in return for payment of the
strike price. If the Fund neither closes out nor exercises an option, the option
will expire on the date provided in the option contract, and the premium paid
for the contract will be lost.
21328
3
<PAGE>
Writing Call Options on Financial Futures Contracts (Tax Free Income)
In addition to purchasing put options on futures, Tax Free Income may write
listed call options on futures contracts for U.S. government securities to hedge
its portfolio against an increase in market interest rates. When the Fund writes
a call option on a futures contract, it is undertaking the obligation of
assuming a short futures position (selling a futures contract) at the fixed
strike price at any time during the life of the option, if the option is
exercised. As market interest rates rise, causing the prices of futures to go
down, the Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call option
position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call, so
that the Fund keeps the premium received for the option. This premium can offset
the drop in value of the Fund's fixed income portfolio which is occurring as
interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of
it by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be less
than the premium received by the Fund for the initial option. The net premium
income of a Fund will then offset the decrease in value of the hedged
securities.
Writing Put Options on Financial Futures Contracts (Tax Free Income)
Tax Free Income may write listed put options on financial futures
contracts for U.S. government securities to hedge its portfolio against a
decrease in market interest rates. When the Fund writes a put option on a
futures contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at any time
during the life of the option. As market interest rates decrease, the market
price of the underlying futures contract normally increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the buyer
can sell the same futures contract at a higher price in the market. The premium
received by the Fund can then be used to offset the higher prices of portfolio
securities to be purchased in the future due to the decrease in the market
interest rates.
Prior to the expiration of the put option or its exercise by the buyer,
the Fund may close out the option by buying an identical option. If the hedge is
successful, the cost of buying the second option will be less than the premium
received by the Fund for the initial option.
Purchasing Call Options on Financial Futures Contracts (Tax Free Income)
An additional way in which Tax Free Income may hedge against decreases
in market interest rates is to buy a listed call option on a financial futures
contract for U.S. government securities. When the Fund purchases a call option
on a futures contract, it is purchasing the right (not the obligation) to assume
a long futures position (buy a futures contract) at a fixed price at any time
during the life of the option. As market interest rates fall, the value of the
underlying futures contract will normally increase, resulting in an increase in
value of the Fund's option position. When the market price of the underlying
futures contract increases above the strike price plus premium paid, the Fund
could exercise its option and buy the futures contract below
21328
4
<PAGE>
market price.
Prior to the exercise or expiration of the call option the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium originally
paid, the Fund has completed a successful hedge.
Limitation on Open Futures Positions (Tax Free Income)
Tax Free Income will not maintain open positions in futures contracts
it has sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the unrealized
gain or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close out a sufficient
number of open contracts to bring its open futures and options positions within
this limitation.
"Margin" in Futures Transactions (Tax Free Income)
Unlike the purchase or sale of a security, Tax Free Income does not pay
or receive money upon the purchase or sale of a futures contract. Rather, the
Fund is required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted). The
nature of initial margin in futures transactions is different from that of
margin in securities transactions in that futures contract initial margin does
not involve the borrowing of funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. The Fund may
not purchase or sell futures contracts or related options if immediately
thereafter the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, the
Fund will mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
Purchasing and Writing Put and Call Options on Portfolio Securities
(Tax Free Income)
The Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities. A put option gives the
Fund, in return for a premium, the right to sell the underlying security to the
writer (seller) at a specified price during the term of the option. A call
option gives the Fund, in return for a premium, the right to buy the underlying
security from the seller.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the writers or buyers of
the options since
21328
5
<PAGE>
options on the portfolio securities held by the Fund are to be traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's investment adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange traded options have a
continuous liquid market while over-the-counter options may not.
Repurchase Agreements (All Funds)
Repurchase agreements are arrangements in which banks, broker/dealers,
and other recognized financial institutions sell U.S. government securities or
other securities to a Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price within one year from the date of
acquisition. A Fund or its custodian will take possession of the securities
subject to repurchase agreements. To the extent that the original seller does
not repurchase the securities from a Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. Each Fund believes
that under the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or disposition
of such securities. A Fund may only enter into repurchase agreements with banks
and other recognized financial institutions, such as broker/dealers, which are
found by the Fund's investment adviser to be creditworthy pursuant to guidelines
established by the Trustees.
Reverse Repurchase Agreements (All Funds)
A Fund may enter into reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, a Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
Lending of Portfolio Securities (All Funds)
The collateral received when a Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are
21328
6
<PAGE>
on loan, the borrower pays the Fund any dividends or interest paid on such
securities. Loans are subject to termination at the option of the Fund or the
borrower. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or equivalent collateral to the borrower or placing broker. A Fund
does not have the right to vote securities on loan, but would terminate the loan
and regain the right to vote if that were considered important with respect to
the investment.
Restricted Securities (All Funds)
With the exceptions noted below, a Fund may invest in restricted
securities. Restricted securities are any securities in which a Fund may
otherwise invest pursuant to its investment objectives and policies but which
are subject to restrictions on resale under federal securities laws.
Short-Intermediate will not invest more than 15% and for High Grade and Tax Free
Income, 10%, of the value of their net assets in restricted securities; however,
certain restricted securities which the Trustees deem to be liquid will be
excluded from this limitation.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange Commission
("SEC") Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under the
Rule 144A. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
(i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security
and the number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace trades.
Municipal Bond Insurance (High Grade)
The Fund may purchase two types of municipal bond insurance policies
("Policies") issued by municipal bond insurers. One type of Policy covers
certain municipal securities only during the period in which they are in the
Fund's portfolio. In the event that a municipal security covered by such a
Policy is sold by the Fund, the insurer of the relevant Policy will be liable
only for those payments of interest and principal which are then due and owing
at the time of sale.
The other type of Policy covers municipal securities not only while
they remain in the Fund's portfolio but also until their final maturity, even if
they are sold out of the Fund's portfolio, so that the coverage may benefit all
subsequent holders of those municipal securities. The Fund will obtain insurance
which covers municipal securities until final maturity even after they are sold
out of the Fund's portfolio only if, in the judgment of the investment adviser,
the Fund would receive net proceeds from the sale of those securities, after
deducting the cost of such permanent insurance and related fees, significantly
in excess of the proceeds it would receive if such
21328
7
<PAGE>
municipal securities were sold without insurance. Payments received from
municipal bond insurers may not be tax-exempt income to shareholders of the
Fund.
Depending upon the characteristics of the municipal security held by
the Fund, the annual premiums for the Policies are estimated to range from 0.10%
to 0.25% of the value of the municipal securities covered under the Policies,
with an average annual premium rate of approximately 0.175%.
The Fund may purchase Policies from Municipal Bond Investors Assurance
Corp. ("MBIA"), AMBAC Indemnity Corporation ("AMBAC"), Financial Guaranty
Insurance Company ("FGIC"), each as described under "Municipal Bond Insurers",
or any other municipal bond insurer which is rated at least Aaa by Moody's
Investors Service, Inc. ("Moody's") or AAA by Standard & Poor's Ratings Group
("S&P"). Each Policy guarantees the payment of principal and interest on those
municipal securities it insures. The Policies will have the same general
characteristics and features. A municipal security will be eligible for coverage
if it meets certain requirements set forth in a Policy. In the event interest or
principal on an insured municipal security is not paid when due, the insurer
covering the security will be obligated under its Policy to make such payment
not later than 30 days after it has been notified by the Fund that such
non-payment has occurred.
MBIA, AMBAC, and FGIC will not have the right to withdraw coverage on
securities insured by their Policies so long as such securities remain in the
Fund's portfolio, nor may MBIA, AMBAC, or FGIC cancel their Policies for any
reason except failure to pay premiums when due. MBIA, AMBAC, and FGIC will
reserve the right at any time upon 90 days' written notice to the Fund to refuse
to insure any additional municipal securities purchased by the Fund after the
effective date of such notice. The Fund's investment adviser will reserve the
right to terminate any of the Policies if it determines that the benefits to the
Fund of having its portfolio insured under such Policy are not justified by the
expense involved.
Additionally, the Fund's investment adviser reserves the right to enter
into contracts with insurance carriers other than MBIA, AMBAC, or FGIC, if such
carriers are rated Aaa by Moody's or AAA by S&P.
Under the Policies, municipal bond insurers unconditionally guarantee
to the Fund the timely payment of principal and interest on the insured
municipal securities when and as such payments shall become due but shall not be
paid by the issuer, except that in the event of any acceleration of the due date
of the principal by reason of mandatory or optional redemption (other than
acceleration by reason of mandatory sinking fund payments), default or
otherwise, the payments guaranteed will be made in such amounts and at such
times as payments of principal would have been due had there not been such
acceleration. The municipal bond insurers will be responsible for such payments
less any amounts received by the Fund from any trustee for the municipal bond
holders or from any other source. The Policies do not guarantee payment on an
accelerated basis, the payment of any redemption premium, the value for the
shares of the Fund, or payments of any tender purchase price upon the tender of
the municipal securities. The Policies also do not insure against nonpayment of
principal of or interest on the securities resulting from the insolvency,
negligence or any other act or omission of the trustee or other paying agent for
the securities. However, with respect to small issue industrial development
municipal bonds and pollution control revenue municipal bonds covered by the
Policies, the municipal bond insurers guarantee the full and complete payments
required to be made by or on behalf of an issuer of such municipal securities if
there occurs any change in the tax-exempt status of interest on such municipal
securities, including principal, interest or premium payments, if
21328
8
<PAGE>
any, as and when required to be made by or on behalf of the issuer pursuant to
the terms of such municipal securities. A when-issued municipal security will be
covered under the Policies upon the settlement date of the original issue of
such when-issued municipal securities. In determining whether to insure
municipal securities held by the Fund, each municipal bond insurer has applied
its own standard, which corresponds generally to the standards it has
established for determining the insurability of new issues of municipal
securities. This insurance is intended to reduce financial risk, but the cost
thereof and compliance with investment restrictions imposed under the Policies
and these guidelines will reduce the yield to shareholders of the Fund.
If a Policy terminates as to municipal securities sold by the Fund on
the date of sale, in which event municipal bond insurers will be liable only for
those payments of principal and interest that are then due and owing, the
provision for insurance will not enhance the marketability of securities held by
the Fund, whether or not the securities are in default or subject to significant
risk of default, unless the option to obtain permanent insurance is exercised.
On the other hand, since issuer-obtained insurance will remain in effect as long
as the insured municipal securities are outstanding, such insurance may enhance
the marketability of municipal securities covered thereby, but the exact effect,
if any, on marketability cannot be estimated. The Fund generally intends to
retain any securities that are in default or subject to significant risk of
default and to place a value on the insurance, which ordinary will be the
difference between the market value of the defaulted security and the market
value of similar securities of minimum high grade (i.e., rated A by Moody's or
S&P) that are not in default. To the extent that the Fund holds defaulted
securities, it may be limited in its ability to manage its investment and to
purchase other municipal securities. Except as described above with respect to
securities that are in default or subject to significant risk of default, the
Fund will not place any value on the insurance in valuing the municipal
securities that it holds.
Municipal Bond Insurers
Municipal bond insurance may be provided by one or more of the
following insurers or any other municipal bond insurer which is rated at least
Aaa by Moody's or AAA by S&P.
Municipal Bond Investors Assurance Corp.
Municipal Bond Investors Assurance Corp. is a wholly-owned subsidiary
of MBIA, Inc., a Connecticut insurance company, which is owned by AEtna Life and
Casualty, Credit Local DeFrance CAECL, S.A., The Fund American Companies, and
the public. The investors of MBIA, Inc. are not obligated to pay the obligations
of MBIA. MBIA, domiciled in New York, is regulated by the New York State
Insurance Department and licensed to do business in various states. The address
of MBIA is 113 King Street, Armonk, New York, 10504, and its telephone number is
(914) 273-4345. S&P has rated the claims-paying ability of MBIA AAA.
AMBAC Indemnity Corporation
AMBAC Indemnity Corporation is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of Wisconsin, and licensed to do
business in various states. AMBAC is a wholly-owned subsidiary of AMBAC, Inc., a
financial holding company which is owned by the public. Copies of certain
statutorily required filings of AMBAC can be obtained from AMBAC. The address of
AMBAC's administrative offices is One State Street Plaza, 17th Floor, New York,
New York, 10004, and its telephone number is (212) 668-0340. S&P has rated the
claims-paying ability of AMBAC AAA.
21328
9
<PAGE>
Financial Guaranty Insurance Company
Financial Guaranty Insurance Company is a wholly-owned subsidiary of
FGIC Corporation, a Delaware holding company. FGIC Corporation is wholly-owned
by General Electric Capital Corporation. The investors of FGIC Corporation are
not obligated to pay the debts of or the claims against Financial Guaranty.
Financial Guaranty is subject to regulation by the state of New York Insurance
Department and is licensed to do business in various states. The address of
Financial Guaranty is 115 Broadway, New York, New York, 10006, and its telephone
number is (212) 312-3000. S&P has rated the claims-paying ability of Financial
Guaranty AAA.
Municipal Bonds (All Funds)
The two principal classifications of municipal bonds are "general
obligation" bonds and "revenue bonds". General obligation bonds are secured by
the issuer's pledge of its full faith, credit and unlimited taxing power for the
payment of principal and interest. Revenue or special tax bonds are payable only
from the revenues derived from a particular facility or class of facilities or
projects or, in a few cases, from the proceeds of a special excise or other tax,
but are not supported by the issuer's power to levy general taxes. There are, of
course, variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors. The
yields of municipal bonds depend on, among other things, general money market
conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligations and rating of the issue.
Since the Funds may invest in industrial development bonds, the Funds
may not be appropriate investment for entities which are "substantial users" of
facilities financed by industrial development bonds or for investors who are
"related persons". Generally, an individual will not be a "related person" under
the Internal Revenue Code of 1986 (the "Code") unless such investor or his
immediate family (spouse, brothers, sisters and lineal descendants) own directly
or indirectly in the aggregate more than 50 percent of the value of the equity
of a corporation or partnership which is a "substantial user" of a facility
financed from proceeds of "industrial development bonds". A "substantial user"
of such facilities is defined generally as a "non-exempt person who regularly
uses a part of a facility" financed from the proceeds of industrial development
bonds.
As set forth in the Prospectus, the Code establishes new unified volume
caps for most "private purpose" municipal bonds (such as industrial development
bonds and obligations to finance low-interest mortgages on owner-occupied
housing and student loans). The unified volume cap is not expected to affect
adversely the availability of municipal bonds for investment by the Funds;
however, it is possible that proposals will be introduced before Congress to
further restrict or eliminate the federal income tax exemption for interest on
Municipal Obligations. Any such proposals, if enacted, could adversely affect
the availability of municipal bonds for investment by the Funds and the value of
each Fund's portfolio might be affected. In that event, each Fund might
reevaluate its investment policies and restrictions and consider recommending to
its shareholders changes in both.
21328
10
<PAGE>
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
Except as noted, the investment restrictions set forth below are
fundamental and may not be changed with respect to each Fund without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
Where an asterisk (*) appears after a Fund's name, the relevant policy is
non-fundamental with respect to that Fund and may be changed by the Fund's
investment adviser without shareholder approval, subject to review and approval
by the Trustees. As used in this Statement of Additional Information and in the
Prospectus, "a majority of the outstanding voting securities of the Fund" means
the lesser of (1) the holders of more than 50% of the outstanding shares of
beneficial interest of the Fund or (2) 67% of the shares present if more than
50% of the shares are present at a meeting in person or by proxy.
1. Concentration of Assets in Any One Issuer
Neither Short-Intermediate nor Tax Free Income Fund may invest more
than 5% of its total assets, at the time of the investment in question, in the
securities of any one issuer other than the U.S. government and its agencies or
instrumentalities, except that up to 25% of the value of each Fund's total
assets may be invested without regard to such 5% limitation. For this purpose
each political subdivision, agency, or instrumentality and each multi-state
agency of which a state is a member, and each public authority which issues
industrial development bonds on behalf of a private entity, will be regarded as
a separate issuer for determining the diversification of each Fund's portfolio.
With respect to 75% of the value of its total assets, High Grade will
not purchase securities of any one issuer (other than cash, cash items or
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities) if as a result more than 5% of the value of its total assets
would be invested in the securities of that issuer.
Under this limitation, each governmental subdivision, including states
and the District of Columbia, territories, possessions of the United States, or
their political subdivisions, agencies, authorities, instrumentalities, or
similar entities, will be considered a separate issuer if its assets and
revenues are separate from those of the governmental body creating it and the
security is backed only by its own assets and revenues.
Industrial development bonds, backed only by the assets and revenues of a
nongovernmental issuer, are considered to be issued solely by that issuer. If,
in the case of an industrial development bond or governmental-issued security, a
governmental or other entity guarantees the security, such guarantee would be
considered a separate security issued by the guarantor as well as the other
issuer, subject to limited exclusions allowed by the Investment Company Act of
1940.
2. Ten Percent Limitation on Securities of Any One Issuer
Short-Intermediate may not purchase more than 10% of any class of
voting securities of any one issuer other than the U.S. government and its
agencies or instrumentalities.
21328
11
<PAGE>
3. Investment for Purposes of Control or Management
Short-Intermediate may not invest in companies for the purpose of
exercising control or management.
4. Purchase of Securities on Margin
High Grade, Short-Intermediate or Tax Free Income Fund may not purchase
securities on margin, except that each Fund may obtain such short-term credits
as may be necessary for the clearance of transactions. A deposit or payment by a
Fund of initial or variation margin in connection with financial futures
contracts or related options transactions is not considered the purchase of a
security on margin.
5. Unseasoned Issuers
High Grade* will not invest more than 5% of its total assets in
industrial development bonds and other municipal securities where the principal
and interest are the responsibility of companies (or guarantors, where
applicable) with less than three years of continuous operations, including the
operation of any predecessor.
Short-Intermediate may not invest more than 5% of its total assets in
taxable securities of unseasoned issuers that have been in continuous operation
for less than three years, including operating periods of their predecessors,
except that no such limitation shall apply to the extent that (i) the Fund may
invest in obligations issued or guaranteed by the U.S. government and its
agencies or instrumentalities, and (ii) the Fund may invest in municipal
securities.
Tax Free Income may not invest more than 5% of its total assets in
securities of any company having a record, together with its predecessors, of
less that three years of continuous operation.
6. Underwriting
High Grade, Short-Intermediate or Tax Free Income may not engage in the
business of underwriting the securities of other issuers, provided that the
purchase of municipal securities or other permitted investments, directly from
the issuer thereof (or from an underwriter for an issuer) and the later
disposition of such securities in accordance with a Fund's investment program
shall not be deemed to be an underwriting.
7. Interests in Oil, Gas or Other Mineral Exploration or Development
Programs
Short-Intermediate may not purchase, sell or invest in interests in
oil, gas or other mineral exploration or development programs.
High Grade will not purchase interests in or sell oil, gas or other
mineral exploration or development programs or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
8. Concentration in Any One Industry
Short-Intermediate may not invest 25% or more of its total assets in
the securities of issuers conducting their principal business activities in any
one industry; provided, that this limitation shall not apply to obligations
issued or guaranteed by the U.S. government or its agencies or instrumentalities
and to municipal
21328
12
<PAGE>
securities.
High Grade will not purchase securities if, as a result of such
purchase, 25% or more of the value of its total assets would be invested in any
one industry, or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects. However,
the Fund may invest as temporary investments more than 25% of the value of its
total assets in cash or cash items, securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or instruments secured by these
money market instruments, such as repurchase agreements.
Tax Free Income may not purchase any security (other than U.S.
government securities) of any issuer if as a result more than 25% of its total
assets would be invested in a single industry, including industrial development
bonds from the same facility or similar types of facilities; governmental
issuers of municipal bonds are not regarded as members of an industry and the
Fund may invest more than 25% of its assets in industrial bonds.
9. Warrants
Short-Intermediate may not invest more than 5% of its total net assets
in warrants, and, of this amount, no more than 2% of each Fund's total net
assets may be invested in warrants that are listed on neither the New York nor
the American Stock Exchange.
10. Ownership by Trustees/Officers
High Grade* and Short-Intermediate may not purchase or retain the
securities of any issuer if (i) one or more officers or Trustees of a Fund or
its investment adviser individually owns or would own, directly or beneficially,
more than 1/2 of 1% of the securities of such issuer, and (ii) in the aggregate,
such persons own or would own, directly or beneficially, more than 5% of such
securities.
11. Short Sales
High Grade and Tax Free Income will not make short sales of securities
or maintain a short position, unless at all times when a short position is open
a 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, and equal in amount to, the securities sold
short. The use of short sales will allow the Funds to retain certain bonds in
their portfolios longer than it would without such sales. To the extent that a
Fund receives the current income produced by such bonds for a longer period than
it might otherwise, a Fund's investment objective is furthered.
Short-Intermediate will not sell any securities short or maintain a
short position.
12. Lending of Funds and Securities
Short-Intermediate may not lend its funds to other persons, provided
that each Fund may purchase issues of debt securities, acquire privately
negotiated loans made to municipal borrowers and enter into repurchase
agreements.
Short-Intermediate may not lend its portfolio securities, unless the
borrower is
21328
13
<PAGE>
a broker, dealer or financial institution that pledges and maintains collateral
with the Fund consisting of cash or securities issued or guaranteed by the U.S.
government having a value at all times not less than 100% of the current market
value of the loaned securities, including accrued interest, provided that the
aggregate amount of such loans shall not exceed 30% of the Fund's total assets.
High Grade will not lend any of its assets except that it may purchase
or hold money market instruments, including repurchase agreements and variable
amount demand master notes in accordance with its investment objective, policies
and limitations and it may lend portfolio securities valued at not more than 15%
of its total assets to broker-dealers.
Tax Free Income may not make loans, except that the Fund may purchase
or hold debt securities consistent with its investment objective, lend portfolio
securities valued at not more thatn 15% of its total assets to broker-dealers
and enter repurchase agreements.
13. Commodities
Short-Intermediate may not purchase, sell or invest in commodities,
commodity contracts or financial futures contracts.
Tax Free Income may not purchase or sell commodities or commodity
contracts except that it may engage in currency or other financial futures
contracts and related options transactions.
14. Real Estate
High Grade will not buy or sell real estate, although it may invest in
securities of companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or interests in real
estate.
Tax Free Income may not purchase or sell real estate, except that it
may purchase and sell securities secured by real estate and securities of
companies which invest in real estate.
Short-Intermediate may not purchase, sell or invest in real estate or
interests in real estate, except that each Fund may purchase municipal
securities and other debt securities secured by real estate or interests
therein.
15. Borrowing, Senior Securities, Reverse Repurchase Agreements
Short-Intermediate may not borrow money, issue senior securities or
enter into reverse repurchase agreements, except for temporary or emergency
purposes, and not for leveraging, and then in amounts not in excess of 10% of
the value of the Fund's net assets at the time of such borrowing; or mortgage,
pledge or hypothecate any assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts borrowed or 10%
of the value of the Fund's total assets at the time of such borrowing, provided
that the Fund will not purchase any securities at any time when borrowings,
including reverse repurchase agreements, are outstanding. The Fund will not
enter into reverse repurchase agreements exceeding 5% of the value of its total
assets.
High Grade will not issue senior securities, except the Fund may borrow
money directly or through reverse repurchase agreement as a temporary measure
for
21328
14
<PAGE>
extraordinary or emergency purposes in an amount up to one-third of the value of
its net assets, including the amount borrowed, in order to meet redemption
requests without immediately selling portfolio instruments; and except to the
extent the Fund will enter into futures contracts. Any such borrowings need not
be collateralized. The Fund will not purchase any securities while borrowings in
excess of 5% of its total assets are outstanding. The Fund will not borrow money
or engage in reverse repurchase agreements for investment leverage purposes.
High Grade will not mortgage, pledge or hypothecate any assets except to secure
permitted borrowings. In those cases, High Grade may pledge assets having a
market value not exceeding the lesser of the dollar amounts borrowed or 15% of
the value of total assets at the time of borrowing. Margin deposits for the
purchase and sale of financial futures contracts and related options and
segregation or collateral arrangements made in connection with options
activities and the purchase of securities on a when-issued basis are not deemed
to be a pledge.
Tax Free Income will not issue senior securities; the purchase or sale
of securities on a "when-issued" basis or collateral arrangement with respect to
the writing of options on securities, are not deemed to be a pledge of assets.
Tax Free Income will not borrow money or enter into reverse repurchase
agreements, except that the Fund may enter into reverse repurchase agreements or
borrow money from banks for temporary or emergency purposes in aggregated
amounts up to one-third of the value of the Fund's net assets; provided that
while borrowings from banks (not including reverse repurchase agreements) exceed
5% of the Fund's net assets, any such borrowings will be repaid before
additional investments are made.
Tax Free Income will not pledge more than 15% of its net asets to
secure indebtedness; the purchase or sale of securities on a "when issued"
basis, or collateral arrangement with respect to the writing of options on
securities, are not deemed to be a pledge of assets.
16. Options
Short-Intermediate may not write, purchase or sell put or call options,
or combinations thereof, except the Fund may purchase securities with rights to
put securities to the seller in accordance with its investment program.
17. Investing in Securities of Other Investment Companies
High Grade will purchase securities of investment companies only in
open-market transactions involving customary broker's commissions. However,
these limitations are not applicable if the securities are acquired in a merger,
consolidation or acquisition of assets. It should be noted that investment
companies incur certain expenses such as management fees and therefore any
investment by the Fund in shares of another investment company would be subject
to such duplicate expenses.
Short-Intermediate* may not purchase the securities of other investment
companies, except to the extent such purchases are not prohibited by applicable
law.
Tax Free Income may not purchase securities of other investment
companies, except as part of a merger, consolidation, purchase of assets or
similar transaction.
18. Restricted Securities
High Grade will not invest more than 10% of its total assets in
securities subject to restrictions on resale under the Federal securities laws.
21328
15
<PAGE>
Tax Free Income will not invest more than 10% of its total assets in
securities with legal or contractual restrictions on resale or in securities for
which market quotations are not readily available, or in repurchase agreements
maturing in more than seven days.
19. Investment in Municipal Securities
Short-Intermediate may not invest more than 20% of its total assets in
securities other than municipal securities, (as described under "Description of
the Funds Investment Objectives and Policies" in the Fund's Prospectus), unless
extraordinary circumstances dictate a more defensive posture.
NON-FUNDAMENTAL OPERATING POLICIES
Certain Funds have adopted additional non-fundamental operating
policies. Operating policies may be changed by the Board of Trustees without a
shareholder vote.
1. Securities Issued by Government Units; Industrial Development Bonds
Short-Intermediate has determined not to invest more than 25% of its
total assets (i) in securities issued by governmental units located in any one
state, territory or possession of the United States (but this limitation does
not apply to project notes backed by the full faith and credit of the U.S.
government) or (ii) industrial development bonds not backed by bank letters of
credit.
Tax Free Income does not presently intend to invest more than 25% of
its total assets in (1) municipal bonds of a single state and its subdivisions,
agencies and instrumentalities; of a single territory or possession of the U.S.
and its subdivisions, agencies or instrumentalities; or of the District of
Columbia and any subdivision, agency or instrumentality thereof; or (2)
municipal bonds, the payment of which depends on revenues derived from a single
facility or similar types of facilities. Since certain municipal bonds may be
related in such a way that an economic, business or political development or
change affecting one such security could likewise affect the other securities, a
change in this policy could result in increased investment risk, but no change
is presently contemplated. The Fund may invest more than 25% of its total assets
in industrial development bonds.
High Grade does not intend to invest more than 25% of the value of its
assets in any issuer in a single state.
2. Illiquid Securities
Short-Intermediate may not invest more than 15% and High Grade not more
than 10% of their net assets in illiquid securities and other securities which
are not readily marketable, including repurchase agreements which have a
maturity of longer than seven days, but excluding certain securities and
municipal leases determined by the Trustees to be liquid.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
For purposes of their policies and limitations, the Funds consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or
21328
16
<PAGE>
savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items".
MANAGEMENT
The Evergreen Keystone funds consist of seventy-three mutual funds.
Each mutual fund is, or is a series of, a registered, open-end management
company.
Trustees and executive officers of each mutual fund, their ages, and
their principal occupations during the last five years are shown below. Except
as set forth below, the address of each of the Trustees is 200 Berkeley Street,
Boston, Massachusetts 02116.
FREDERICK AMLING (69). Trustee of Tax Free Income; Trustee or Director of 23
other Evergreen Keystone funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); and former Member,
Board of Advisers, Credito Emilano (banking).
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL. Trustee of the
Trusts; Trustee or Director of all Evergreen Keystone funds other than Evergreen
Investment Trust and Evergreen Variable Trust; real estate developer and
construction consultant; and President of Centrum Equities and Centrum
Properties, Inc.
CHARLES A. AUSTIN III (61). Trustee of Tax Free Income; Trustee or Director of
23 other Evergreen Keystone funds; Investment Counselor to Appleton Partners,
Inc.; and former Managing Director, Seaward Management Corporation (investment
advice).
FOSTER BAM (70), Greenwich Plaza, Greenwich, CT. Trustee of the Trusts; Trustee
or Director of all other Evergreen Keystone funds other than Evergreen
Investment Trust and Evergreen Variable Trust; Partner in the law firm of
Cummings & Lockwood; Director, Symmetrix, Inc. (sulphur company) and Pet
Practice, Inc. (veterinary services); and former Director, Chartwell Group Ltd.
(manufacturer of office furnishings and accessories), Waste Disposal Equipment
Acquisition Corporation and Rehabilitation Corporation of America
(rehabilitation hospitals).
*GEORGE S. BISSELL(67). Chairman of the Board and Chief Executive Officer and
Trustee of Tax Free Income and 23 other Evergreen Keystone funds; Chairman of
the Board and Trustee of Anatolia College; Trustee of University Hospital (and
Chairman of its Investment Committee); former Director and Chairman of the Board
of Hartwell Keystone Advisers, Inc.; and former Chairman of the Board, Director
and Chief Executive Officer of Keystone Investments, Inc.
EDWIN D. CAMPBELL (69). Trustee of Tax Free Income; Trustee or Director of 23
other Evergreen Keystone funds; Principal, Padanaram Associates, Inc.; and
former Executive Director, Coalition of Essential Schools, Brown University.
CHARLES F. CHAPIN (67). Trustee of Tax Free Income; Trustee or Director of 23
other Evergreen Keystone funds; and former Director, Peoples Bank (Charlotte,
NC).
K. DUN GIFFORD (57). Trustee of Tax Free Income; Trustee or Director of 23 other
Evergreen Keystone funds; Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and Director, American Institute
of Food and Wine; Chairman and President, Oldways Preservation and Exchange
Trust (education); former Chairman of the Board, Director, and Executive Vice
President, The London Harness Company; former Managing Partner, Roscommon
Capital Corp.; former Chief Executive Offi cer, Gifford Gifts of Fine Foods;
former Chairman, Gifford, Drescher & Associates (environmental consulting); and
former Director, Keystone Investments, Inc. and Keystone Investment Management
Company.
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC. Trustee; Chairman of
11 Evergreen Keystone funds and Trustee or Director of all Evergreen Keystone
funds; former Chairman of the Distribution Foundation for the Carolinas; and
former Vice President of Lance Inc. (food manufacturing).
LEROY KEITH, JR. (57), 4124 Crossgate Road, Charlotte, NC. Trustee of Tax Free
Income; Trustee or Director of 23 other Evergreen Keystone funds; Chairman of
the Board and Chief Executive Officer, Carson Products Company; 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.
F. RAY KEYSER, JR. (69). Trustee of Tax Free Income; Trustee or Director and
Member of the Board of Advisers of all other Evergreen Keystone funds; Chairman
and 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 Lahey Hitchcock Clinic; Director, Vermont Yankee Nuclear
Power Corporation, Grand Trunk Corporation, Grand Trunk Western Railroad, Union
Mutual Fire Insurance Company, New England Guaranty Insurance Company, Inc., and
the Investment Company Institute; former Director and President, Associated
Industries of Vermont; former Director of Keystone, Central Vermont Railway,
Inc., S.K.I. Ltd., and Arrow Financial Corp.; and former Director and Chairman
of the Board, Proctor Bank and Green Mountain Bank.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC. Trustee; Trustee or
Director of all other Evergreen Keystone funds with the exception of Evergreen
Variable Trust; and Sales Representative with Nucor-Yamoto, Inc. (steel
producer) since 1988.
THOMAS L. MCVERRY (58), 4419 Parkview Drive, Charlotte, NC. Trustee; Trustee or
Director of all other Evergreen Keystone funds with the exception of Evergreen
Variable Trust; former Vice President and Director of Rexham Corporation; and
former Director of Carolina Cooperative Federal Credit Union.
*WILLIAM WALT PETTIT (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC. Trustee; Trustee or Director of all other Evergreen Keystone
funds with the exception of Evergreen Variable Trust; and Partner in the law
firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON (55). Trustee of Tax Free Income; Trustee or Director of 23
other Evergreen Keystone funds; Vice Chair and former Executive Vice President,
DHR Interna tional, 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.
RUSSELL A. SALTON, III M.D. (49), 205 Regency Executive Park, Charlotte, NC.
Trustee; Trustee or Director of all other Evergreen Keystone funds; Medical
Director, U.S. Health Care/Aetna Health Services; and former Managed Health Care
Consultant; former President, Primary Physician Care.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street, Suite 980, Charlotte, NC.
Trustee; Trustee or Director of all other Evergreen Keystone funds; and
Attorney, Law Offices of Michael S. Scofield.
RICHARD J. SHIMA (57). Trustee of Tax Free Income; Trustee or Director or Member
of the
21369
17
<PAGE>
Board Advisers of all other Evergreen Keystone funds; Chairman, Environmental
Warranty, Inc. (insurance agency); Executive Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of Connecticut Natural Gas Corporation,
Hartford Hospital, Old State House Association, Middlesex Mutual Assurance
Company, and Enhance Financial Services, Inc.; Chairman, Board of Trustees,
Hartford Graduate Center; Trustee, Greater Hartford YMCA; former Director, Vice
Chairman and Chief Investment Officer, The Travelers Corporation; former
Trustee, Kingswood-Oxford School; and former Managing Director and Consultant,
Russell Miller, Inc.
ANDREW J. SIMONS (57). Trustee of Tax Free Income; Trustee or Director of 23
other Evergreen Keystone funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; Adjunct Professor of Law and former Associate Dean,
St. John's Univer sity School of Law; Adjunct Professor of Law, Touro College
School of Law; and former President, Nassau County Bar Association.
ROBERT J. JEFFRIES (74), 2118 New Bedford Drive, Sun City Center, FL. Trustee
Emeritus of 11 Evergreen Keystone funds and Corporate Consultant since 1967.
JOHN J. PILEGGI (37) President and Treasurer of the Trusts; President and
Treasurer of all other Evergreen Keystone funds; Senior Managing Director,
Furman Selz LLC since 1992; Managing Director from 1984 to 1992; Consultant to
BISYS Fund Services since 1996; 230 Park Avenue, Suite 910, New York, NY.
GEORGE O. MARTINEZ (37) Secretary of the Trusts; Secretary of all other
Evergreen Keystone funds; Senior Vice President and Director of Administration
and Regulatory Services, BISYS Fund Services; Vice President/Assistant General
Counsel, Alliance Capital Management from 1988 to 1995; 3435 Stelzer Road,
Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Funds within the
meaning of the 1940 Act.
For the fiscal year ended May 31, 1997, Trustees of the Funds received
$32,166, $159,659 and $9,830 in retainers and fees from Evergreen Municipal
Trust, Evergreen Investment Trust and Tax Free Income. For the year ending May
31, 1997, fees paid to Independent Trustees on a fund complex wide basis were
approximately $964,000.
The officers of the Trusts are all officers and/or employees of The
BISYS Group, Inc. ("BISYS"), except for Mr. Pileggi, who is a consultant to
BISYS. BISYS is an affiliate of Evergreen Keystone Distributor, Inc. ("EKD"),
the distributor of each Class of shares of each Fund.
No officer or Trustee of the Trusts owned more than 1.0% of Class A,
Class B or Class C or Class Y shares of any Fund as of Augsut 31, 1997.
Set forth below for each of the Trustees receiving in excess of $60,000
for the fiscal period of June 1, 1996 through May 31, 1997 is the aggregate
compensation paid to such Trustee by the Evergreen Keystone funds:
21369
18
<PAGE>
Total Compensation
From Fund Complex
NAME PAID TO TRUSTEE
James S. Howell $76,875
Gerald M. McDonnell 65,550
Thomas L. McVerry 71,375
William Walt Pettit 69,375
Russell A Salton, III M.D. 71,325
Michael S. Scofield 71,325
Set forth below is information with respect to each person, who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a class of
each Fund's total outstanding shares and their aggregate ownership of the Fund's
total outstanding shares as of August 31, 1997.
<TABLE>
<CAPTION>
Name of No. of % of
Name and Address Fund/Class Shares Class
- ---------------- ---------- ------ ----------
<S> <C> <C>
First Union National Bank High Grade/Y 504,862 23.59%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0002
Foster & Foster High Grade/Y 405,595 16.95%
PO Box 1669
Greenwich, CT 06836-1669
FUBS & Co. FEBO Short-Intermediate/A 104,560 16.93%
Haywood D. Cochrane Ljr.
21 Castlewood Court
Nashville, TN 37215-4617
FUBS & Co. FEBO Short-Intermediate/A 93,702 12.37%
Stephen Nash and
Linda N. Nash
10006 Stonemill Road
Richmond, VA 23233-2800
FUBS & Co. FEBO Short-Intermediate/A 76,391 12.37%
Manuel Garcia and
Adeline Garcia
4933 New Providence
Tampa, FL 33269-4814
FUBS & Co. FEBO Short-Intermediate/A 39.115 6.33%
Anthony M. Truscello Sr and
Carolyn A. Truscello
878 Taylor Dr.
Folcroft, PA 19032-1523
21369
19
<PAGE>
FUBS & Co. FEBO Short-Intermediate/A 37,789 6.12%
First Union Nat'l Bank-PA FBO
Anthony Dambro Loan Acct.
Attn: Augusto Bonnani PA 1322
123 Broad St.
Philadelphia, PA 19109-1029
FUBS & Co. FEBO Short-Intermediate/B 50,343 7.97%
Carl R. Nodine and
Linda F. Nodine
PO Box 210086
Nashville, TN 37221-0086
FUBS & Co. FEBO Short-Intermediate/B 38,129 6.03%
Mark E. Smith
Melissa A. Smith Jt Ten
397 Yadkin Valley Road
Advance, NC 27006-8702
FUBS & Co FEBO Short-Intermediate/B 32,757 5.18%
Shirley L. Roberts
2770 S. Garden Dr.
210 Bldg. 21
Lake Worth, FL 33461-6280
First Union National Bank/EB/INT Short-Intermediate/Y 779,296 17.16%
Cash Accuont
Attn Trust Opoerations Fund Group
401 S. Tryon St., 3rd Fl, CMG 1151
Charlotte,NC 28202-1191
Merrill Lynch, Pierce, Tax Free Income/A 1,590,918 22.38%
Fenner, Smith
For Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Merrill Lynch, Pierce, Tax Free Income/B 553,766 19.80%
Fenner, Smith
For Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Alletta Laird Downs TTEE Tax Free Income/B 205,973 7.36%
Alletta Laird Downs Trust
U/A DTD 3-29-89
P.O. Box 3666
21369
20
<PAGE>
Wilmington, DE 19807-0666
Merrill Lynch, Pierce, Tax Free Income/C 459,477 45.17%
Fenner, Smith
For Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
</TABLE>
INVESTMENT ADVISERS
(See also "Management of the Funds" in each Fund's Prospectus)
The investment adviser of Short-Intermediate is Evergreen Asset
Management Corp., a New York corporation, with offices at 2500 Westchester
Avenue, Purchase, New York ("Evergreen Asset" or the "Adviser") and which
Evergreen Asset is owned by First Union National Bank ("FUNB" or the "Adviser")
which, in turn, is a subsidiary of First Union Corporation ("First Union"), a
bank holding company headquartered in Charlotte, North Carolina. The sub-adviser
to Short-Intermediate is Lieber and Company ("Lieber"), located at 2500
Westchester Avenue, Purchase, New York, which provides certain services to
Evergreen Asset and is owned by First Union. The investment adviser of High
Grade is FUNB which provides investment advisory services through its Capital
Management Group. The Directors of Evergreen Asset are Richard K. Wagoner and
Barbara I. Colvin. The executive officers of Evergreen Asset are Stephen A.
Lieber, Chairman and Co-Chief Executive Officer, Nola Maddox Falcone, President
and Co-Chief Executive Officer and Theodore J. Israel, Jr., Executive Vice
President.
The investment adviser of Tax Free Income is Keystone Investment
Management Company ("Keystone" or the "Adviser"), a Delaware corporation,
located at 200 Berkeley Street, Boston, Massachusetts. Keystone is an indirectly
owned subsidiary of FUNB.
The Directors of Keystone are Donald McMullen; William M. Ennis, II;
Barbara I. Colvin; Albert H. Elfner, III, Chairman, CEO and President; Edward F.
Godfrey, Senior Vice President and Chief Operating Officer; and W. Douglas Munn,
Senior Vice President, Chief Financial Officer and Treasurer.
On September 6, 1996, First Union and FUNB entered into an Agreement
and Plan of Acquisition and Merger (the "Merger") with Keystone Investments,
Inc. ("Keystone Investments"), the corporate parent of Keystone, which provided,
among other things, for the merger of Keystone Investments with and into a
wholly-owned subsidiary of FUNB. The Merger was consummated on December 11,
1996. Keystone continues to provide investment advisory services to the Keystone
Family of Funds. Contemporaneously with the Merger, Tax Free Income entered into
a new investment advisory agreement with Keystone and into a principal
underwriting agreement with EKD.
Under its Investment Advisory Agreement with each Fund, each Adviser
has agreed to furnish reports, statistical and research services and
recommendations with respect to each Fund's portfolio of investments. In
addition, each Adviser provides office facilities to the Funds and performs a
variety of administrative services. Each Fund pays the cost of all of its other
expenses and liabilities, including expenses and liabilities incurred in
connection with maintaining their registration under the Securities Act of 1933,
as amended, and the 1940 Act, printing prospectuses (for existing shareholders)
as they are updated, state qualifications, share certificates, mailings,
brokerage, custodian and stock transfer charges, printing, legal and auditing
21369
21
<PAGE>
expenses, expenses of shareholder meetings and reports to shareholders.
Notwithstanding the foregoing, each Adviser will pay the costs of printing and
distributing prospectuses used for prospective shareholders.
The method of computing the investment advisory fee for each Fund is
described in such Fund's Prospectus. The advisory fees paid by each Fund for the
three most recent fiscal periods reflected in its registration statement are set
forth below. For Tax Free Income, total dollar amounts paid by the Fund to
Keystone Management, Inc., the Fund' former investment manager, for investment
management and administrative services rendered, are inclusive of amounts paid
by Keystone Management to Keystone for investment advisory services:
HIGH GRADE Period Ended Year Ended Period Ended
05/31/97 8/31/96 8/31/95
Advisory Fee $399,929 $575,456 $338,767
Waiver (64,199) (228,548) (20,456)
--------- --------- ---------
Net Advisory Fee $335,730 $346,908 $318,311
========= ========= =========
SHORT-INTERMEDIATE Period Ended Year Ended Year Ended
5/31/97 8/31/96 8/31/95
Advisory Fee $248,564 $287,149 $263,947
Waiver (60,003) (109,619) (63,612)
--------- --------- --------
Net Advisory Fee $188,561 $177,530 $200,335
========= ======== ========
Expense
Reimbursement 0 ( 30,962) $(28,521)
--------- --------- --------
TAX FREE INCOME Period Ended Year Ended Year Ended
5/31/97 11/30/96 8/31/95
Advisory Fee 367,154 $844,486 $919,802
717,813 781,832
Waiver 0 0 0
-------- -------- --------
Net Advisory Fee $367,154 $844,486 $919,802
======== ======== ========
With respect to Short-Intermediate, Evergreen Asset has agreed to
reimburse the Fund to the extent that the Fund's aggregate operating expenses
(including the Adver's fee but excluding interest, taxes, brokerage commissions
and extraordinary expenses, and, for Class A and Class B shares Rule 12b-1
distribution fees and shareholder servicing fees payable) exceed 1% of its
average net assets for any fiscal year.
21369
22
<PAGE>
The Investment Advisory Agreements are terminable, without the payment
of any penalty, on sixty days' written notice, by a vote of the holders of a
majority of each Fund's outstanding shares, or by a vote of a majority of each
Trust's Trustees or by the respective Adviser. The Investment Advisory
Agreements will automatically terminate in the event of their assignment. Each
Investment Advisory Agreement provides in substance that the Adviser shall not
be liable for any action or failure to act in accordance with its duties
thereunder in the absence of willful misfeasance, bad faith or gross negligence
on the part of the Adviser or of reckless disregard of its obligations
thereunder. The Investment Advisory Agreements with respect to each Fund
continue in effect for two years from their effective dates and, thereafter,
from year to year provided that their continuance is approved annually by a vote
of a majority of the Trustees of each Trust including a majority of those
Trustees who are not parties thereto or "interested persons" (as defined in the
1940 Act) of any such party, cast in person at a meeting duly called for the
purpose of voting on such approval or a majority of the outstanding voting
shares of each Fund.
Certain other clients of each Adviser may have investment objectives and
policies similar to those of the Funds. Each Adviser (including the sub-adviser)
may, from time to time, make recommendations which result in the purchase or
sale of a particular security by its other clients simultaneously with a Fund.
If transactions on behalf of more than one client during the same period
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price or quantity. It is the
policy of each Adviser to allocate advisory recommendations and the placing of
orders in a manner which is deemed equitable by the Adviser to the accounts
involved, including the Funds. When two or more of the clients of the Adviser
(including one or more of the Funds) are purchasing or selling the same security
on a given day from the same broker-dealer, such transactions may be averaged as
to price.
Although the investment objectives of the Funds are not the same, and their
investment decisions are made independently of each other, they rely upon some
of the same resources for investment advice and recommendations. Therefore, on
occasion, when a particular security meets the different investment objectives
of the various Funds, they may simultaneously purchase or sell the same
security. This could have a detrimental effect on the price and quantity of the
security available to each Fund. If simultaneous transactions occur, the Adviser
attempts to allocate the securities, both as to price and quantity, in
accordance with a method deemed equitable to each Fund and consistent with their
different investment objectives. In some cases, simultaneous purchases or sales
could have a beneficial effect, in that the ability of one Fund to participate
in volume transactions may produce better executions for that Fund.
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to
permit purchase and sales transactions to be effected between each Fund and the
other registered investment companies for which Evergreen Asset, Keystone, FUNB
or its affiliates acts as investment adviser or between the Fund and any
advisory clients of Evergreen Asset, Keystone, FUNB or its affiliates. Each Fund
may from time to time engage in such transactions but only in accordance with
these procedures and if they are equitable to each participant and consistent
with each participant's investment objectives.
At present, Evergreen Keystone Investment Services ("EKIS") serves as
administrator to High Grade and Short-Intermediate subject to the supervision
and control of the Trustees of each Trust. As administrator, EKIS provides
facilities, equipment and personnel to the Funds and is entitled to receive a
fee based on the
21328
23
<PAGE>
average daily net assets of all mutual funds for which CMG, Keystone or Evergeen
Asset serve as investment adviser, calculated in accordance with the following
schedule:.050% on the first $7 billion; .035% on the next $3 billion; .030% on
the next $5 billion; .020% on the next $10 billion; .015% on the next $5
billion; and .010% on assets in excess of $30 billion.
BISYS Fund Services, an affiliate of EKD, serves as sub-administrator
to High Grad and Short-Intermediate and is entitled to receive a fee from EKIS
calculated on the average daily net assets of each Fund at a rate based on the
total assets of the mutual funds administered by EKIS for which FUNB, Evergreen
Asset, Keystone or affiliates of First Union also serve as investment adviser.
BISYS Fund Services also serves as sub-administrator to Tax Free Income and is
entitled to receive a fee from Keystone based on the total assets of the mutual
funds for which FUNB affiliates serve as investment adviser. Fees are calculated
in accordance with the following schedule: .0100% of the first $7 billion;
.0075% on the next $3 billion; .0050% on the next $15 billion; and .0040% on
assets in excess of $25 billion. The total assets of mutual funds for which
FUNB, Evergreen Asset, Keystone, or affiliates of First Union serve as
investment adviser as of June 30, 1997 were approximately $30.5 billion.
For the fiscal period ended May 31, 1997, the fiscal year ended August
31, 1996, and fiscal period ended August 31, 1995 High Grade paid to EKIS or its
predecessor, Evergreen Asset, $33,901, $59,073 and $50,406, respectively, in
administrative service costs.
DISTRIBUTION PLANS
Reference is made to "Management of the Funds - Distribution Plans and
Agreements" in the Prospectus of each Fund for additional disclosure regarding
the Funds' distribution arrangements. Distribution fees are accrued daily and
paid monthly on the Class A, Class B and Class C shares and are charged as class
expenses, as accrued. The distribution fees attributable to the Class B shares
are designed to permit an investor to purchase such shares through
broker-dealers without the assessment of a front-end sales charge, while at the
same time permitting the Distributor to compensate broker-dealers in connection
with the sale of such shares. In this regard the purpose and function of the
combined contingent deferred sales charge and distribution services fee on the
Class B shares are the same as those of the front-end sales charge and
distribution fee with respect to the Class A shares in that in each case the
sales charge and/or distribution fee provide for the financing of the
distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each
Fund with respect to each of its Class A, Class B and, where applicable, Class C
shares (each a "Plan" and collectively, the "Plans"), the Treasurer of each Fund
reports the amounts expended under the Plan and the purposes for which such
expenditures were made to the Trustees of each Trust for their review on a
quarterly basis. Also, each Plan provides that the selection and nomination of
Trustees who are not "interested persons" of each Trust (as defined in the 1940
Act) are committed to the discretion of such disinterested Trustees then in
office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
The Plans permit the payment of fees to brokers and others for
distribution and
21328
24
<PAGE>
shareholder-related administrative services and to broker-dealers, depository
institutions, financial intermediaries and administrators for administrative
services as to Class A, Class B and Class C shares. The Plans are designed to
(i) stimulate brokers to provide distribution and administrative support
services to each Fund and holders of Class A, Class B and Class C shares and
(ii) stimulate administrators to render administrative support services to the
Fund and holders of Class A, Class B and Class C shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to
providing office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding Class A, Class B and
Class C shares; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests for its Class A, Class B and Class C shares.
In addition to the Plans, High Grade has adopted a Shareholder Services
Plan whereby shareholder servicing agents may receive fees from the Fund for
providing services which include, but are not limited to, distributing
prospectuses and other information, providing shareholder assistance, and
communicating or facilitating purchases and redemptions of Class B shares of the
Fund.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to EKD with respect to that Class or Classes, and (ii) the Fund would not
be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by EKD from distribution
services fees in respect of shares of such Class or Classes through deferred
sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of a Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. With respect to High Grade,
amendments to the Shareholder Services Plan require a majority vote of the
disinterested Trustees but do not require a shareholders vote. Any Plan,
Shareholder Services Plan or Distribution Agreement may be terminated (a) by a
Fund without penalty at any time by a majority vote of the holders of the
outstanding voting securities of the Fund, voting separately by Class or by a
majority vote of the Trustees who are not "interested persons" as defined in the
1940 Act, or (b) by EKD. To terminate any Distribution Agreement, any party must
give the other parties 60 days' written notice; to terminate a Plan only, the
Fund need give no notice to EKD. Any Distribution Agreement will terminate
automatically in the event of its assignment.
FEES PAID PURSUANT TO DISTRIBUTION PLANS. The Funds incurred the following
distribution services fees:
21328
25
<PAGE>
High Grade. For the fiscal period ended May 31, 1997 and the fiscal year ended
August 31, 1996, $92,644 and $97,996, respectively, on behalf of Class A shares;
and $240,510 and $167,706, respectively, on behalf of Class B shares.
Short-Intermediate. For the fiscal period ended May 31, 1997 and the fiscal year
ended August 31, 1996, $19,181 and $4,106, respectively, on behalf of Class A
shares; and $52,576 and $20,584, respectively, on behalf of Class B shares.
Tax Free Income. For the fiscal period ended May 31, 1997 and the fiscal year
ended November 30, 1996, $90,496 and $205,872, respectively, on behalf of Class
A shares; $154,261 and $333,417, respectively, on behalf of Class B shares and
$62,367 and $169,992 on behalf of Class C shares.
FEE PAID PURSUANT TO SHAREHOLDER SERVICES PLAN. High Grade incurred the
following shareholder services fees: For the fiscal period ended May 31, 1997
and the fiscal year ended August 31, 1996, $60,421 and $55,902, respectively, on
behalf of Class B shares.
Short-Intermediate. For the fiscal period ended May 31, 1997, the fiscal year
ended August 31, 1996 and the fiscal period ended August 31, 1995, $13,161,
$17,458 and $6,623, respectively, on behalf of Class B shares.
ALLOCATION OF BROKERAGE
Decisions regarding each Fund's portfolio are made by its Adviser,
subject to the supervision and control of the Trustees. Orders for the purchase
and sale of securities and other investments are placed by employees of the
Adviser, all of whom, in the case of Evergreen Asset, are associated with
Lieber. In general, the same individuals perform the same functions for the
other funds managed by the Adviser. A Fund will not effect any brokerage
transactions with any broker or dealer affiliated directly or indirectly with
the Adviser unless such transactions are fair and reasonable, under the
circumstances, to the Fund's shareholders. Circumstances that may indicate that
such transactions are fair or reasonable include the frequency of such
transactions, the selection process and the commissions payable in connection
with such transactions.
It is anticipated that most of the Funds purchase and sale transactions
will be with the issuer or an underwriter or with major dealers in such
securities acting as principals. Such transactions are normally on a net basis
and generally do not involve payment of brokerage commissions. However, the cost
of securities purchased from an underwriter usually includes a commission paid
by the issuer to the underwriter. Purchases or sales from dealers will normally
reflect the spread between bid and ask prices.
In selecting firms to effect securities transactions, the primary
consideration of each Fund shall be prompt execution at the most favorable
price. A Fund will also consider such factors as the price of the securities and
the size and difficulty of execution of the order. If these objectives may be
met with more than one firm, the Fund will also consider the availability of
statistical and investment data and economic facts and opinions helpful to the
Fund. To the extent that receipt of these services for which the Adviser or its
affiliates might otherwise have paid, it would tend to reduce their expenses.
The transactions in which the Funds engage do not involve the payment
of brokerage commissions and are executed with dealers other than Lieber.
21328
26
<PAGE>
ADDITIONAL TAX INFORMATION
(See also "Taxes" in the Prospectus)
Each Fund has qualified and intends to continue to qualify for and
elect the tax treatment applicable to regulated investment companies ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). (Such qualification does not involve supervision of management or
investment practices or policies by the Internal Revenue Service.) In order to
qualify as a regulated investment company, a Fund must, among other things, (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of
securities or foreign currencies and other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in such securities; (b) derive less than 30% of its gross income from the sale
or other disposition of securities, options, futures or forward contracts (other
than those on foreign currencies), or foreign currencies (or options, futures or
forward contracts thereon) that are not directly related to the RIC's principal
business of investing in securities (or options and futures with respect
thereto) held for less than three months (this provision is repealed starting in
1998); and (c) diversify its holdings so that, at the end of each quarter of its
taxable year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash, U.S. government securities and other securities limited in
respect of any one issuer, to an amount not greater than 5% of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. government securities and securities of other
regulated investment companies). By so qualifying, a Fund is not subject to
Federal income tax if it timely distributes its investment company taxable
income and any net realized capital gains. A 4% nondeductible excise tax will be
imposed on a Fund to the extent it does not meet certain distribution
requirements by the end of each calendar year. Each Fund anticipates meeting
such distribution requirements.
Dividends paid by a Fund from investment company taxable income
generally will be taxed to the shareholders as ordinary income. Investment
company taxable income includes net investment income and net realized
short-term gains (if any).
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders (who are not exempt from
tax) as long-term capital gain, regardless of the length of time the shares of a
Fund have been held by such shareholders. Short-term capital gains distributions
are taxable to shareholders who are not exempt from tax as ordinary income. Such
distributions are not eligible for the dividends-received deduction.
Distributions of investment company taxable income and any net
short-term capital gains will be taxable as ordinary income as described above
to shareholders (who are not exempt from tax), whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for Federal income tax purposes in each share so
received equal to the net asset value of a share of a Fund on the reinvestment
date.
Distributions by each Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would be taxable as
ordinary income or capital gain as described above to shareholders (who are not
exempt from tax), even though, from an investment standpoint, it may constitute
a return of capital. In
21328
27
<PAGE>
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive what is in effect a return of
capital upon the distribution which will nevertheless be taxable to shareholders
subject to taxes.
Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on its basis in the shares. Such gains or losses
will be treated as a capital gain or loss if the shares are capital assets in
the investor's hands and will be a long-term capital gain or loss if the shares
have been held for more than one year. Long-term capital gains on assets held
for more than 18 months are taxable as a maximum rate of 28%; such gains on
assets held for more than 18 months are taxable as a maximum rate of 20%.
Generally, any loss realized on a sale or exchange will be disallowed to the
extent shares disposed of are replaced within a period of sixty-one days
beginning thirty days before and ending thirty days after the shares are
disposed of. Any loss realized by a shareholder on the sale of shares of the
Fund held by the shareholder for six months or less will be disallowed to the
extent of any exempt interest dividends received by the shareholder with respect
to such shares, and will be treated for tax purposes as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her Federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
Shareholders who fail to furnish their taxpayer identification numbers
to a Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% Federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). It does not reflect
the special tax consequences to certain taxpayers (e.g., banks, insurance
companies, tax exempt organizations and foreign persons). Shareholders are
encouraged to consult their own tax advisers regarding specific questions
relating to Federal, state and local tax consequences of investing in shares of
a Fund. Each shareholder who is not a U.S. person should consult his or her tax
adviser regarding the U.S. and foreign tax consequences of ownership of shares
of a Fund, including the possibility that such a shareholder may be subject to a
U.S. withholding tax at a rate of 31% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
Special Tax Considerations
In order to qualify to pay exempt interest dividend for a year, a Fund
must have exempt bonds with a value equal to more than half of the Fund's total
asset value at the close of each quarter of the year. To the extent that the
Fund distributes exempt interest dividends to a shareholder, interest on
indebtedness incurred or continued by
21328
28
<PAGE>
such shareholder to purchase or carry shares of the Fund is not deductible.
Furthermore, entities or persons who are "substantial users" (or related
persons) of facilities financed by "private activity" bonds (some of which were
formerly referred to as "industrial development" bonds) should consult their tax
advisers before purchasing shares of the Fund. "Substantial user" is defined
generally as including a "non-exempt person" who regularly uses in its trade or
business a part of a facility financed from the proceeds of industrial
development bonds.
The percentage of the total dividends paid by a Fund with respect to
any taxable year that qualifies as exempt interest dividends will be the same
for all shareholders of the Fund receiving dividends with respect to such year.
If a shareholder receives an exempt interest dividend with respect to any share
and such share has been held for six months or less, any loss on the sale or
exchange of such share will be disallowed to the extent of the exempt interest
dividend amount.
NET ASSET VALUE
The following information supplements that set forth in each Fund's
Prospectus under the subheading "How to Buy Shares - How the Funds Value Their
Shares" in the Section entitled "Purchase and Redemption of Shares".
The public offering price of shares of a Fund is its net asset value,
plus, in the case of Class A shares, a sales charge which will vary depending on
the purchase alternative chosen by the investor, as more fully described in the
Prospectus. See "Purchase of Shares - Class A Shares - Front-End Sales Charge
Alternative. " On each Fund business day on which a purchase or redemption order
is received by a Fund and trading in the types of securities in which a Fund
invests might materially affect the value of Fund shares, the per share net
asset value of each such Fund is computed in accordance with the Declaration of
Trust and By-Laws governing each Fund as of the next close of regular trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time)
by dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any weekday,
exclusive of national holidays on which the Exchange is closed and Good Friday.
For each Fund, securities for which the primary market is on a domestic or
foreign exchange and over-the-counter securities admitted to trading on the
NASDAQ National List are valued at the last quoted sale or, if no sale, at the
mean of closing bid and asked price and portfolio bonds are presently valued by
a recognized pricing service when such prices are believed to reflect the fair
value of the security. Over-the-counter securities not included in the NASDAQ
National List for which market quotations are readily available are valued at a
price quoted by one or more brokers. If accurate quotations are not available,
securities will be valued at fair value determined in good faith by the Board of
Trustees.
Under certain circumstances, however, the per share net asset values of
the Class B and Class C shares may be lower than the per share net asset value
of the Class A shares (and, in turn, that of Class A shares may be lower than
Class Y shares) as a result of the greater daily expense accruals, relative to
Class A and Class Y shares, of Class B shares and Class C shares relating to
distribution services fees (and, with respect to High Grade, Shareholder Service
Plan fee) and the fact that Class Y shares bear no additional distribution or
shareholder service related fees. While it is expected that, in the event each
Class of shares of a Fund realizes net investment income or does not realize a
net operating loss for a period, the per share net asset values of the classes
will tend to converge immediately after the payment of dividends, which
dividends will differ by approximately the amount of the expense accrual
differential among the Classes, there is no assurance that this will be the
case. In
21328
29
<PAGE>
the event one or more Classes of a Fund experiences a net operating loss for any
fiscal period, the net asset value per share of such Class or Classes will
remain lower than that of Classes that incurred lower expenses for the period.
PURCHASE OF SHARES
The following information supplements that set forth in each Prospectus
under the heading "Purchase and Redemption of Shares - How To Buy Shares."
General
Shares of each Fund will be offered on a continuous basis at a price
equal to their net asset value plus an initial sales charge at the time of
purchase (the "front-end sales charge alternative"), or with a contingent
deferred sales charge (the deferred sales charge alternative"), as described
below. Class Y shares which, as described below, are not offered to the general
public, are offered without any front-end or contingent sales charges. Shares of
each Fund are offered on a continuous basis through (i) investment dealers that
are members of the National Association of Securities Dealers, Inc. and have
entered into selected dealer agreements with EKD ("selected dealers"), (ii)
depository institutions and other financial intermediaries or their affiliates,
that have entered into selected agent agreements with EKD ("selected agents"),
or (iii) EKD. The minimum for initial investments is $1,000; there is no minimum
for subsequent investments. The subscriber may use the Application available
from EKD for his or her initial investment. Sales personnel of selected dealers
and agents distributing a Fund's shares may receive differing compensation for
selling Class A, Class B or Class C shares.
Investors may purchase shares of a Fund in the United States either
through selected dealers or agents or directly through EKD. A Fund reserves the
right to suspend the sale of its shares to the public in response to conditions
in the securities markets or for other reasons.
Each Fund will accept unconditional orders for its shares to be
executed at the public offering price equal to the net asset value next
determined (plus for Class A shares, the applicable sales charges), as described
below. Orders received by EKD prior to the close of regular trading on the
Exchange on each day the Exchange is open for trading are priced at the net
asset value computed as of the close of regular trading on the Exchange on that
day (plus for Class A shares the sales charges). In the case of orders for
purchase of shares placed through selected dealers or agents, the applicable
public offering price will be the net asset value as so determined, but only if
the selected dealer or agent receives the order prior to the close of regular
trading on the Exchange and transmits it to EKD prior to its close of business
that same day (normally 5:00 p.m. Eastern time). The selected dealer or agent is
responsible for transmitting such orders by 5:00 p.m. Eastern time. If the
selected dealer or agent fails to do so, the investor's right to that day's
closing price must be settled between the investor and the selected dealer or
agent. If the selected dealer or agent receives the order after the close of
regular trading on the Exchange, the price will be based on the net asset value
determined as of the close of regular trading on the Exchange on the next day it
is open for trading.
Following the initial purchase of shares of a Fund, a shareholder may
place orders to purchase additional shares by telephone if the shareholder has
completed the appropriate portion of the Application. Payment for shares
purchased by telephone can be made only by Electronic Funds Transfer from a bank
account maintained by the shareholder at a bank that is a member of the National
Automated Clearing House
21328
30
<PAGE>
Association ("ACH"). If a shareholder's telephone purchase request is received
before 4:00 p.m.Eastern time on a Fund business day, the order to purchase
shares is automatically placed the same Fund business day for non-money market
funds, and two days following the day the order is received for money market
funds, and the applicable public offering price will be the public offering
price determined as of the close of business on such business day. Full and
fractional shares are credited to a subscriber's account in the amount of his or
her subscription. As a convenience to the subscriber, and to avoid unnecessary
expense to a Fund, stock certificates representing shares of a Fund are not
issued for any class of shares of any Fund. This facilitates later redemption
and relieves the shareholder of the responsibility for and inconvenience of lost
or stolen certificates.
Alternative Purchase Arrangements
High Grade and Short-Intermediate issue three classes of shares: (i)
Class A shares, which are sold to investors choosing the front-end sales charge
alternative; (ii) Class B shares, which are sold to investors choosing the
deferred sales charge alternative; and (iii) Class Y shares, which are offered
only to (a) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (b) certain investment advisory clients
of the Advisers and their affiliates, and (c) institutional investors. Tax Free
Income offers Class A, Class B and Class C shares. The three classes of shares
each represent an interest in the same portfolio of investments of the Fund,
have the same rights and are identical in all respects, except that (I) only
Class A, Class B and Class C shares are subject to a Rule 12b-1 distribution
fee, (II) Class B shares of High Grade are subject to a Shareholder Service Plan
fee, (III) Class A shares bear the expense of the front-end sales charge and
Class B, Class C and, when applicable, Class A shares bear the expense of the
deferred sales charge, (IV) Class B and Class C shares bear the expense of a
higher Rule 12b-1 distribution services fee and Shareholder Service Plan fee
than Class A shares (V) with the exception of Class Y shares, each Class of each
Fund has exclusive voting rights with respect to provisions of the Rule 12b-1
Plan pursuant to which its distribution services (and, to the extent applicable,
Shareholder Service Plan) fee is paid which relates to a specific Class and
other matters for which separate Class voting is appropriate under applicable
law, provided that, if the Fund submits to a simultaneous vote of Class A, Class
B and, where applicable, Class C shareholders an amendment to the Rule 12b-1
Plan that would materially increase the amount to be paid thereunder with
respect to the Class A shares, the shareholders will vote separately by Class,
and (VI) only the Class B shares are subject to a conversion feature. Each Class
has different exchange privileges and certain different shareholder service
options available.
The alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the anticipated life of
their investment in the Fund, the accumulated distribution services (and, to the
extent applicable, Shareholder Service Plan) fee and contingent deferred sales
charges on Class B shares prior to conversion would be less than the front-end
sales charge and accumulated distribution services fee on Class A shares
purchased at the same time, and to what extent such differential would be offset
by the higher return of Class A shares. Class B shares will normally not be
suitable for the investor who qualifies to purchase Class A shares at the lowest
applicable sales charge. For this reason, EKD will reject any order (except
orders for Class B shares from certain retirement plans) for more than $250,000
for Class B shares.
21328
31
<PAGE>
Class A shares are subject to a lower distribution services fee and no
Shareholder Service Plan fee and, accordingly, pay correspondingly higher
dividends per share than Class B shares. However, because front-end sales
charges are deducted at the time of purchase, investors purchasing Class A
shares would not have all their funds invested initially and, therefore, would
initially own fewer shares. Investors not qualifying for reduced front-end sales
charges who expect to maintain their investment for an extended period of time
might consider purchasing Class A shares because the accumulated continuing
distribution (and, to the extent applicable, Shareholder Service Plan) charges
on Class B shares may exceed the front-end sales charge on Class A shares during
the life of the investment. Again, however, such investors must weigh this
consideration against the fact that, because of such front-end sales charges,
not all their funds will be invested initially.
Other investors might determine, however, that it would be more
advantageous to purchase Class B or Class C shares in order to have all their
funds invested initially, although remaining subject to higher continuing
distribution services (and, to the extent applicable, Shareholder Service Plan
)fees and being subject to a contingent deferred sales charge for a seven-year
period. For example, based on current fees and expenses, an investor subject to
the 4.75% front-end sales charge imposed on Class A shares of the Funds would
have to hold his or her investment approximately seven years for the Class B and
Class C distribution services (and, to the extent applicable, Shareholder
Service Plan) fees to exceed the front-end sales charge plus the accumulated
distribution services fee of Class A shares. In this example, an investor
intending to maintain his or her investment for a longer period might consider
purchasing Class A shares. This example does not take into account the time
value of money, which further reduces the impact of the Class B and Class C
distribution services (and, to the extent applicable, Shareholder Service Plan)
fees on the investment, fluctuations in net asset value or the effect of
different performance assumptions.
With respect to each Fund, the Trustees have determined that currently
no conflict of interest exists between or among the Class A, Class B, Class C
and Class Y shares. On an ongoing basis, the Trustees, pursuant to their
fiduciary duties under the 1940 Act and state laws, will seek to ensure that no
such conflict arises.
Front-end Sales Charge Alternative--Class A Shares
The public offering price of Class A shares for purchasers choosing the
front-end sales charge alternative is the net asset value plus a sales charge as
set forth in the Prospectus for each Fund.
Shares issued pursuant to the automatic reinvestment of income
dividends or capital gains distributions are not subject to any sales charges.
The Fund receives the entire net asset value of its Class A shares sold to
investors. The Distributor's commission is the sales charge set forth in the
Prospectus for each Fund, less any applicable discount or commission "reallowed"
to selected dealers and agents. EKD will reallow discounts to selected dealers
and agents in the amounts indicated in the table in the Prospectus. In this
regard, EKD may elect to reallow the entire sales charge to selected dealers and
agents for all sales with respect to which orders are placed with EKD.
Set forth below is an example of the method of computing the offering
price of the Class A shares of each Fund. The example assumes a purchase of
Class A shares of a Fund aggregating less than $100,000 subject to the schedule
of sales charges set forth in the Prospectus at a price based upon the net asset
value of Class A shares of
21328
32
<PAGE>
each Fund at the end of each Fund's latest fiscal year.
Net Per Share Offering
Asset Sales Price
Value Charge Date Per Share
High Grade $10.89 $.54 5/31/97 $11.43
Short-
Intermediate $10.09 $.34 5/31/97 $10.43
Tax Free Income $ 9.78 $.49 5/31/97 $10.27
With respect to High Grade, the following commissions were paid and
amounts retained by EKD or its predecessor for the period ending May 31, 1997,
the fiscal year ended August 31, 1996 and from July 7, 1995 through August 31,
1995:
Period From Fiscal Year Period From
9/1/96-5/31/97 Ended 8/31/96 7/7/95-8/31/95
Commissions Received $46,714 $73,014 $5,767
Commissions Retained $6,389 9,050 712
With respect to Short-Intermediate for the period ending May 31, 1997,
the fiscal year ended August 31, 1996 and the period from January 3, 1995
(commencement of offering of Class A shares) through August 31, 1995, and
commissions were paid to and amounts retained by EKD or its predecessor are
noted below:
Period From Fiscal Year Period From
9/1/96-5/31/97 Ended 8/31/96 1/5/95-8/31/95
Commissions Received $26,752 $33,816 $ 37,130
Commissions Retained 3,820 8,464 4,445
With respect to Tax Free Income for the period ending May 31, 1997 and
the fiscal years ended November 30, 1996 and 1995 commissions were paid to and
amounts retained by EKD or its predecessor are noted below:
Period From Fiscal Year Fiscal Year
12/1/96-5/31/97 Ended 11/30/96 Ended 11/30/95
Commissions Received $9,477 $469,269 $254,934
Commissions Retained 890 254,934 143,281
Investors choosing the front-end sales charge alternative may under
certain circumstances be entitled to pay reduced sales charges. The
circumstances under which such investors may pay reduced sales charges are
described below.
Combined Purchase Privilege. Certain persons may qualify for the sales
charge reductions by combining purchases of shares of one or more Evergreen
Keystone fund other than money market funds into a single "purchase", if the
resulting "purchase" totals at least $100,000. The term "purchase" refers to:
(i) a single purchase by an individual, or to concurrent purchases, which in the
aggregate are at least equal to
21328
33
<PAGE>
the prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own
account(s); (ii) a single purchase by a trustee or other fiduciary purchasing
shares for a single trust, estate or single fiduciary account although more than
one beneficiary is involved; or (iii) a single purchase for the employee benefit
plans of a single employer. The term "purchase" also includes purchases by any
"company", as the term is defined in the 1940 Act, but does not include
purchases by any such company which has not been in existence for at least six
months or which has no purpose other than the purchase of shares of a Fund or
shares of other registered investment companies at a discount. The term
"purchase" does not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit card holders of
a company, policy holders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser. A "purchase" may also include
shares, purchased at the same time through a single selected dealer or agent, of
any Evergreen Keystone fund.
Prospectuses for the Evergreen Keystone funds may be obtained without
charge by contacting EKD or the Advisers at the telephone number shown on the
front cover of this Statement of Additional Information.
Cumulative Quantity Discount (Right of Accumulation). An investor's
purchase of additional Class A shares of a Fund may qualify for a Cumulative
Quantity Discount. The applicable sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the previous
day) of (a) all Class A and Class B shares of the Fund held by
the investor and (b) all such shares of any other Evergreen
mutual fund held by the investor; and
(iii) the net asset value of all shares described in paragraph (ii)
owned by another shareholder eligible to combine his or her
purchase with that of the investor into a single "purchase"
(see above).
For example, if an investor owned Class A, Class B or Class C shares of
an Evergreen Keystone fund worth $200,000 at their then current net asset value
and subsequently purchased Class A shares worth an additional $100,000, the
sales charge for the $100,000 purchase, in the case of Short-Intermediate, would
be at the 2.00% rate applicable to a single $300,000 purchase rather than the
2.50% rate, or in the case of High Grade, at the 2.50% rate applicable to a
single $300,000 purchase rather than the 3.75% rate.
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through a selected dealer or agent,
the investor or selected dealer or agent must provide the Distributor with
sufficient information to verify that each purchase qualifies for the privilege
or discount.
Letter of Intent. Class A investors may also obtain the reduced sales
charges shown in the Prospectus by means of a written Letter of Intent, which
expresses the investor's intention to invest not less than $100,000 within a
period of 13 months in Class A shares (or Class A, Class B and Class C shares)
of the Fund or any other Evergreen mutual fund. Each purchase of shares under a
Letter of Intent will be made at the public offering price or prices applicable
at the time of such purchase to a single transaction of the dollar amount
indicated in the Letter of Intent. At the
21328
34
<PAGE>
investor's option, a Letter of Intent may include purchases of Class A or B
shares of the Fund or any other Evergreen Keystone fund made not more than 90
days prior to the date that the investor signs a Letter of Intent; however, the
13-month period during which the Letter of Intent is in effect will begin on the
date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege described
above may purchase shares of the Evergreen Keystone funds under a single Letter
of Intent. For example, if at the time an investor signs a Letter of Intent to
invest at least $100,000 in Class A shares of the Fund, the investor and the
investor's spouse each purchase shares of the Fund worth $20,000 (for a total of
$40,000), it will only be necessary to invest a total of $60,000 during the
following 13 months in shares of the Fund or any other Evergreen Keystone fund,
to qualify for the 3.75% sales charge applicable to purchases in High Grade and
Tax Free Income or 2.50% applicable to purchases in Short-Intermediate on the
total amount being invested (the sales charge applicable to an investment of
$100,000).
The Letter of Intent is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intent is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow (while remaining registered in the name of
the investor) to secure payment of the higher sales charge applicable to the
shares actually purchased if the full amount indicated is not purchased, and
such escrowed shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Fund shares, are not subject to escrow. When the full
amount indicated has been purchased, the escrow will be released. To the extent
that an investor purchases more than the dollar amount indicated on the Letter
of Intent and qualifies for a further reduced sales charge, the sales charge
will be adjusted for the entire amount purchased at the end of the 13-month
period. The difference in sales charge will be used to purchase additional
shares of the Fund subject to the rate of sales charge applicable to the actual
amount of the aggregate purchases.
Investors wishing to enter into a Letter of Intent in conjunction with
their initial investment in Class A shares of a Fund should complete the
appropriate portion of the Application while current Class A shareholders
desiring to do so can obtain a form of Letter of Intent by contacting a Fund at
the address or telephone number shown on the cover of this Statement of
Additional Information.
Investments Through Employee Benefit and Savings Plans. Certain
qualified and non-qualified benefit and savings plans may make shares of the
Evergreen mutual funds available to their participants. Investments made by such
employee benefit plans may be exempt from any applicable front-end sales charges
if they meet the criteria set forth in the Prospectus under "Class A
Shares-Front End Sales Charge Alternative". The Advisers may provide
compensation to organizations providing administrative and record keeping
services to plans which make shares of the Evergreen Keystone mutual funds
available to their participants.
Reinstatement Privilege. A Class A shareholder who has caused any or
all of his or her shares of the Fund to be redeemed or repurchased may reinvest
all or any portion of the redemption or repurchase proceeds in Class A shares of
the Fund at net asset value without any sales charge, provided that such
reinvestment is made within 30 calendar days after the redemption or repurchase
date. Shares are sold to a reinvesting shareholder at the net asset value next
determined as described above. A reinstatement pursuant to this privilege will
not cancel the redemption or repurchase transaction;
21328
35
<PAGE>
therefore, any gain or loss so realized will be recognized for Federal tax
purposes except that no loss will be recognized to the extent that the proceeds
are reinvested in shares of the Fund. The reinstatement privilege may be used by
the shareholder only once, irrespective of the number of shares redeemed or
repurchased, except that the privilege may be used without limit in connection
with transactions whose sole purpose is to transfer a shareholder's interest in
the Fund to his or her individual retirement account or other qualified
retirement plan account. Investors may exercise the reinstatement privilege by
written request sent to the Fund at the address shown on the cover of this
Statement of Additional Information.
Sales at Net Asset Value. In addition to the categories of investors
set forth in the Prospectus, each Fund may sell its Class A shares at net asset
value, i.e., without any sales charge, to: (i) certain investment advisory
clients of the Advisers or their affiliates; (ii) officers and present or former
Trustees of the Trusts; present or former trustees of other investment companies
managed by the Advisers; officers, directors and present or retired full-time
employees of the Adviser, the Distributor, and their affiliates; officers,
directors and present and full-time employees of selected dealers or agents; or
the spouse, sibling, direct ancestor or direct descendant (collectively
"relatives") of any such person; or any trust, individual retirement account or
retirement plan account for the benefit of any such person or relative; or the
estate of any such person or relative, if such shares are purchased for
investment purposes (such shares may not be resold except to the Fund); (iii)
certain employee benefit plans for employees of the Advisers, EKD, and their
affiliates; (iv) persons participating in a fee-based program, sponsored and
maintained by a registered broker-dealer and approved by EKD, pursuant to which
such persons pay an asset-based fee to such broker-dealer, or its affiliate or
agent, for service in the nature of investment advisory or administrative
services. These provisions are intended to provide additional job-related
incentives to persons who serve the Funds or work for companies associated with
the Funds and selected dealers and agents of the Funds. Since these persons are
in a position to have a basic understanding of the nature of an investment
company as well as a general familiarity with the Fund, sales to these persons,
as compared to sales in the normal channels of distribution, require
substantially less sales effort. Similarly, these provisions extend the
privilege of purchasing shares at net asset value to certain classes of
institutional investors who, because of their investment sophistication, can be
expected to require significantly less than normal sales effort on the part of
the Funds and the Distributor.
Deferred Sales Charge Alternative--Class B and Class C Shares
Investors choosing the deferred sales charge alternative purchase Class
B shares at the public offering price equal to the net asset value per share of
the Class B shares on the date of purchase without the imposition of a sales
charge at the time of purchase. The Class B shares are sold without a front-end
sales charge so that the full amount of the investor's purchase payment is
invested in the Fund initially.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within seven years after the month of purchase will be subject to a contingent
deferred sales charge at the rates set forth in the Prospectus charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the cost of the shares being redeemed or their
net asset value at the time of redemption. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial purchase price. In
addition, no contingent deferred sales charge will be assessed on shares derived
from reinvestment of dividends or capital gains distributions. The amount of the
contingent deferred sales charge, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B
21328
36
<PAGE>
shares until the time of redemption of such shares.
In determining the contingent deferred sales charge applicable to a
redemption, it will be assumed that the redemption is first of any Class A
shares in the shareholder's Fund account, second of Class B shares held for over
seven years or Class B shares acquired pursuant to reinvestment of dividends or
distributions and third of Class B shares held longest during the seven-year
period.
To illustrate, assume that an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the second year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional Class B shares upon dividend reinvestment. If at such
time the investor makes his or her first redemption of 50 Class B shares, 10
Class B shares will not be subject to charge because of dividend reinvestment.
With respect to the remaining 40 Class B shares, the charge is applied only to
the original cost of $10 per share and not to the increase in net asset value of
$2 per share. Therefore, of the $600 of the shares redeemed $400 of the
redemption proceeds (40 shares x $10 original purchase price) will be charged at
a rate of 4.0% (the applicable rate in the second year after purchase for a
contingent deferred sales charge of $16).
The contingent deferred sales charge is waived on redemptions of shares
(i) following the death or disability, as defined in the Code, of a shareholder,
or (ii) to the extent that the redemption represents a minimum required
distribution from an individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2.
Proceeds from the contingent deferred sales charge are paid to EKD or its
predecessor and are used by EKD to defray the expenses of EKD related to
providing distribution-related services to the Fund in connection with the sale
of the Class B shares, such as the payment of compensation to selected dealers
and agents for selling Class B shares. The combination of the contingent
deferred sales charge and the distribution services fee (and, with respect to
High Grade, the Shareholder Service Plan fee) enables the Fund to sell the Class
B shares without a sales charge being deducted at the time of purchase. The
higher distribution services fee (and, with respect to Florida Municipal Bond,
Georgia Municipal Bond, New Jersey Tax-Free, North Carolina Municipal Bond,
South Carolina Municipal Bond, Virginia Municipal Bond and High Grade, the
Shareholder Service Plan fee) incurred by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than those related to
Class A shares.
Conversion Feature. At the end of the period ending seven years after
the end of the calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A shares and will
no longer be subject to a higher distribution services fee and the applicable
shareholder service fee imposed on Class B shares. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose of the conversion
feature is to reduce the distribution services fee paid by holders of Class B
shares that have been outstanding long enough for the Distributor to have been
compensated for the expenses associated with the sale of such shares.
For purposes of conversion to Class A, Class B shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's account (other
than those in the
21328
37
<PAGE>
sub-account) convert to Class A, an equal pro-rata portion of the Class B shares
in the sub-account will also convert to Class A.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee (and, with respect to High
Grade, Shareholder Service Plan fee) with respect to Class B shares does not
result in the dividends or distributions payable with respect to other Classes
of a Fund's shares being deemed "preferential dividends" under the Code, and
(ii) the conversion of Class B shares to Class A shares does not constitute a
taxable event under Federal income tax law. The conversion of Class B shares to
Class A shares may be suspended if such an opinion is no longer available at the
time such conversion is to occur. In that event, no further conversions of Class
B shares would occur, and shares might continue to be subject to the higher
distribution services fee (and, with respect to High Grade, the Shareholder
Service Plan fee) for an indefinite period which may extend beyond the period
ending seven years after the end of the calendar month in which the
shareholder's purchase order was accepted.
Level-Load Alternative--Class C Shares
Investors choosing the level-load sales charge alternative purchase
Class C shares at the public offering price equal to the net asset value per
share of the Class C shares on the date of purchase without the imposition of a
front-end sales charge. However, you will pay a 1.0% contingent deferred sales
charge if you redeem shares during the first year after the month of purchase.
No charge is imposed in connection with redemptions made more than one year
after the month of purchase. Class C shares are sold without a front-end sales
charge so that the Fund will receive the full amount of the investor's purchase
payment and after the first year without a contingent deferred sales charge so
that the investor will receive as proceeds upon redemption the entire net asset
value of his or her Class C shares. The Class C distribution services fee
enables the Fund to sell Class C of shares without either a front-end or
contingent deferred sales charge. However, unlike Class B shares, Class C shares
do not convert to any other Class shares of the Fund. Class C shares incur
higher distribution services fees than Class A shares, and will thus have a
higher expense ratio and pay correspondingly lower dividends than Class A
shares.
Class Y Shares
Class Y shares are not offered to the general public and are available
only to (i) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (ii) certain investment advisory clients
of the Advisers and their affiliates, and (iii) institutional investors. Class Y
shares do not bear any Rule 12b-1 distribution expenses and are not subject to
any front-end or contingent deferred sales charges.
GENERAL INFORMATION ABOUT THE FUNDS
(See also "Other Information - General Information" in each Fund's Prospectus)
Capitalization and Organization
The Evergreen Short-Intermediate Municipal Fund is a separate series of
The Evergreen Municipal Trust, a Massachusetts business trust. Evergreen High
Grade Tax Free Fund is a separate series of Evergreen Investment Trust, a
Massachusetts business trust. Keystone Tax Free Income Fund is a Massachsuetts
business trust. The above-named Trusts are individually referred to in this
Statement of Additional Information as the
21328
38
<PAGE>
"Trust" and collectively as the "Trusts". Each Trust is governed by a board of
trustees. Unless otherwise stated, references to the "Board of Trustees" or
"Trustees" in this Statement of Additional Information refer to the Trustees of
all the Trusts.
Each Fund, other than Tax Free Income, may issue an unlimited number of
shares of beneficial interest with a $0.0001 par value. Tax Free Income may
issue an unlimited number of shares of beneficial interest with no par value.
All shares of these Funds have equal rights and privileges. Each share is
entitled to one vote, to participate equally in dividends and distributions
declared by the Funds and on liquidation to their proportionate share of the
assets remaining after satisfaction of outstanding liabilities. Shares of these
Funds are fully paid, nonassessable and fully transferable when issued and have
no pre-emptive, conversion or exchange rights. Fractional shares have
proportionally the same rights, including voting rights, as are provided for a
full share.
Under each Trust's Declaration of Trust, each Trustee will continue in
office until the termination of the Trust or his or her earlier death,
incapacity, resignation or removal. Shareholders can remove a Trustee upon a
vote of two-thirds of the outstanding shares of beneficial interest of the
Trust. Vacancies will be filled by a majority of the remaining Trustees, subject
to the 1940 Act. As a result, normally no annual or regular meetings of
shareholders will be held, unless otherwise required by the Declaration of Trust
of each Trust or the 1940 Act.
Shares have noncumulative 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 if they choose to do so and in such event the holders of
the remaining shares so voting will not be able to elect any Trustees.
The Trustees of each Trust are authorized to reclassify and issue any
unissued shares to any number of additional series without shareholder approval.
Accordingly, in the future, for reasons such as the desire to establish one or
more additional portfolios of a Trust with different investment objectives,
policies or restrictions, additional series of shares may be created by one or
more Trusts. Any issuance of shares of another series or class would be governed
by the 1940 Act and the law of the Commonwealth of Massachusetts. If shares of
another series of a Trust were issued in connection with the creation of
additional investment portfolios, each share of the newly created portfolio
would normally be entitled to one vote for all purposes. Generally, shares of
all portfolios would vote as a single series on matters, such as the election of
Trustees, that affected all portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of the Investment
Advisory Agreement and changes in investment policy, shares of each portfolio
would vote separately.
In addition any Fund may, in the future, create additional classes of
shares which represent an interest in that same investment portfolio. Except for
the different distribution related and other specific costs borne by such
additional classes, they will have the same voting and other rights described
for the existing classes of each Fund.
Procedures for calling a shareholders meeting for the removal of the
Trustees of each Trust, similar to those set forth in Section 16(c) of the 1940
Act, will be available to shareholders of each Fund. The rights of the holders
of shares of a series of a Fund may not be modified except by the vote of a
majority of the outstanding shares of such series.
21328
39
<PAGE>
An order has been received from the SEC permitting the issuance and
sale of multiple classes of shares representing interests in each Fund. In the
event a Fund were to issue additional Classes of shares other than those
described herein, no further relief from the SEC would be required.
Distributor
Evergreen Keystone Distributor, Inc. ("EKD" or the "Distributor"), 125
W. 55th Street, New York, New York 10019, serves as each Fund's principal
underwriter, and as such may solicit orders from the public to purchase shares
of any Fund. The Distributor is not obligated to sell any specific amount of
shares and will purchase shares for resale only against orders for shares. Under
the Agreement between each Fund and the Distributor, each Fund has agreed to
indemnify the Distributor, in the absence of its willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations thereunder, against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended.
Counsel
Sullivan & Worcester LLP, Washington, D.C., serves as counsel to the
Funds.
Independent Auditors
Price Waterhouse LLP has been selected to be the independent auditors
of Short-Intermediate and High Grade.
KPMG Peat Marwick LLP has been selected to be the independent auditors
of Tax Free Income.
PERFORMANCE INFORMATION
Total Return
From time to time a Fund may advertise its "total return". Computed
separately for each class, the Fund's "total return" is its average annual
compounded total return for recent one, five, and ten-year periods (or the
period since the Fund's inception). The Fund's total return for such a period is
computed by finding, through the use of a formula prescribed by the SEC, the
average annual compounded rate of return over the period that would equate an
assumed initial amount invested to the value of such investment at the end of
the period. For purposes of computing total return, income dividends and capital
gains distributions paid on shares of the Fund are assumed to have been
reinvested when paid and the maximum sales charge applicable to purchases of
Fund shares is assumed to have been paid. The Fund will include performance data
for Class A, Class B, Class C and Class Y shares in any advertisement or
information including performance data of the Fund.
The average annual compounded total return for each Class of shares
offered by the Funds for the most recently completed one year, three year, five
year and ten year periods, where applicable, and the period since each Fund's
inception is set forth in the table below.
21328
40
<PAGE>
1 Year 3 Years 5 Years 10 Years
Ended Ended Ended Ended From Inception**
05/31/97 05/31/97 05/31/97 05/31/97 to 05/31/97
HIGH GRADE
Class A 1.90% 5.11% 5.75% N/A 6.00%
Class B 1.19% 5.16% N/A N/A 5.13%
Class Y 7.25% 7.10% N/A N/A 5.11%
SHORT-
INTERMEDIATE
Class A 0.92% N/A N/A N/A 3.40%
Class B 1.51% N/A N/A N/A 2.76%
Class Y 4.62% 3.95% 4.44% N/A 4.88%
TAX FREE INCOME
Class A 1.80% 4.39% 4.64% 6.23% N/A
Class B 1.03% 4.39% N/A N/A 3.84%
Class C 5.03% 5.26% N/A N/A 4.22%
** INCEPTION DATE
Short-Intermediate
Class A and B January 3, 1995
Class Y July 17, 1991
High Grade Class A February 21, 1992
Class B January 11, 1993
Class Y February 28, 1994
Tax Free Income Class A February 13, 1987
Class B February 1, 1993
Class C February 1, 1993
A Fund's total return is not fixed and will fluctuate in response to
prevailing market conditions or as a function of the type and quality of the
securities in a Fund's portfolio and its expenses. Total return information is
useful in reviewing a Fund's performance but such information may not provide a
basis for comparison with bank deposits or other investments which pay a fixed
yield for a stated period of time. An investor's principal invested in a Fund is
not fixed and will fluctuate in response to prevailing market conditions.
YIELD CALCULATIONS
From time to time, a Fund may quote its yield in advertisements or in
reports or other communications to shareholders. Yield quotations are expressed
in annualized terms and may be quoted on a compounded basis. Yields are computed
by dividing the Fund's interest income (as defined in the SEC yield formula) for
a given 30-day or one month period, net of expenses, by the average number of
shares entitled to receive distributions during the period, dividing this figure
by the Fund's net asset value per share at the end of the period and annualizing
the result (assuming compounding of income) in order to arrive at an annual
percentage rate. The formula for calculating yield is as follows:
21328
41
<PAGE>
YIELD = 2[(a-b+1)6-1]
cd
Where a = Interest earned during the period
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of shares outstanding during the
period that were entitled to receive dividends
d = The maximum offering price per share on the last day of
the period
Income is calculated for purposes of yield quotations in accordance with
standardized methods applicable to all stock and bond funds. Gains and losses
generally are excluded from the calculation. Income calculated for purposes of
determining a Fund's yield differs from income as determined for other
accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yields quoted for
a Fund may differ from the rate of distributions a Fund paid over the same
period, or the net investment income reported in a Fund's financial statements.
Tax Equivalent Yield
The Funds invest principally in obligations the interest from which is
exempt from Federal income tax other than the Alternative Minimum Tax. However,
from time to time the Funds may make investment which generate taxable income. A
Fund's tax-equivalent yield is the rate an investor would have to earn from a
fully taxable investment in order to equal the Fund's yield after taxes.
Tax-equivalent yields are calculated by dividing a Fund's yield by the result of
one minus a stated Federal or combined Federal and state tax rate. (If only a
portion of the Fund's yield is tax-exempt, only that portion is adjusted in the
calculation.) Of course, no assurance can be given that a Fund will achieve any
specific tax-exempt yield. If only a portion of the Fund's yield is tax-exempt,
only that portion is adjusted in the calculation. Of course, no assurance can be
given that the Fund will achieve any specific tax-exempt yield.
The following formula is used to calculate Tax Equivalent Yield without
taking into account state tax:
FUND'S YIELD
1 - Fed Tax Rate
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Funds'
investment portfolios, portfolio maturity, operating expenses and market
conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares
21328
42
<PAGE>
will likely be invested in instruments producing lower yields than the balance
of the Fund's investments, thereby reducing the current yield of the Fund. In
periods of rising interest rates, the opposite can be expected to occur.
The tax exempt yields (calculated using a 31% federal tax rate) of each
Fund for the thirty-day period ended May 31, 1997 for each Class of shares
offered by the Funds is set forth in the table below:
Yield Tax Equivalent Yield
High Grade
Class A 4.19% 6.07%
Class B 3.63% 5.26%
Class Y 4.66% 6.75%
Short-Intermediate
Class A 3.74% 5.42%
Class B 2.94% 4.26%
Class Y 3.93% 5.70%
Tax Free Income
Class A 4.58% 6.64%
Class B 4.05% 5.87%
Class C 4.05% 5.87%
Non-Standardized Performance
In addition to the performance information described above, a Fund may
provide total return information for designated periods, such as for the most
recent six months or most recent twelve months. This total return information is
computed as described under "Total Return" above except that no annualization is
made.
GENERAL
From time to time, a Fund may quote its performance in advertising and
other types of literature as compared to the performance of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, Lehman
Brothers General Obligations Municipal Bond Index or any other commonly quoted
index of common stock or municipal bond prices. The Standard & Poor's 500
Composite Stock Price Index and the Dow Jones Industrial Average are unmanaged
indices of selected common stock prices. The Lehman Brothers General Obligations
Municipal Bond Index is an unmanaged index of state general obligation debt
issues which are rated A or better and represent a variety of coupon ranges. A
Fund's performance may also be compared to those of other mutual funds having
similar objectives. This comparative performance would be expressed as a ranking
prepared by Lipper Analytical Services, Inc. or similar independent services
monitoring mutual fund performance. A Fund's performance will be calculated by
assuming, to the extent applicable, reinvestment of all capital gains
distributions and income dividends aid. Any such comparisons may be useful to
investors who wish to compare a Fund's past performance with that of its
competitors. Of course, past performance cannot be a guarantee of future
results.
Additional Information
Any shareholder inquiries may be directed to the shareholder's broker
or to each Adviser at the address or telephone number shown on the front cover
of this Statement of Additional Information. This Statement of Additional
Information does not contain
21328
43
<PAGE>
all the information set forth in the Registration Statements filed by the Trusts
with the SEC under the Securities Act of 1933. Copies of the Registration
Statement may be obtained at a reasonable charge from the SEC or may be
examined, without charge, at the offices of the SEC in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements of Tax Free Income, appearing in its most
current fiscal year Annual Report to Shareholders and the report thereon of KPMG
Peat Marwick LLP, independent auditors, appearing therein are incorporated by
reference into this Statement of Additional Information. The financial
statements of High Grade and Short-Intermediate, appearing in their most current
Annual Reports to Shareholders and the report thereon of Price Waterhouse LLP,
independent auditors, appearing therein are incorporated by reference into this
Statement of Additional Information. The Annual Report to Shareholders for the
Funds, which contain the referenced statements, are available upon request and
without charge.
21328
44
<PAGE>
APPENDIX "A"
DESCRIPTION OF BOND, MUNICIPAL NOTE AND COMMERCIAL PAPER RATINGS
Standard & Poor's Ratings Group. A Standard & Poor's corporate or
municipal bond rating is a current assessment of the credit worthiness of an
obligor with respect to a specific obligation. This assessment of credit
worthiness may take into consideration obligers such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform any audit in connection
with the ratings and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or their arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay interest and
repay any principal.
AA - Debt rated AA also qualifies as high quality debt obligations.
Capacity to pay interest and repay principal is very strong and in the majority
of instances they differ from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than is higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
21328
A-1
<PAGE>
BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace periods; it will also be used upon a
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate and municipal issues. The ratings
measure the credit worthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA,
21328
A-2
<PAGE>
AA, A, BBB, commonly known as "Investment Grade" ratings) are generally regarded
as eligible for bank investment. In addition, the Legal Investment Laws of
various states may impose certain rating or other standards for obligations
eligible for investment by savings banks, trust companies, insurance companies
and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. NOTE:
Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - bonds which are rated C are the lowest rated class of bonds and
issue so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
21328
A-3
<PAGE>
Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible risk
factors; AA -- high credit quality, with strong protection factors and modest
risk, which may vary very slightly form time to time because of economic
conditions; A--average credit quality with adequate protection factors, but with
greater and more variable risk factors in periods of economic stress. The
indicators "+" and "-" to the AA and A categories indicate the relative position
of a credit within those rating categories.
Fitch Investors Service, Inc.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA -- very
high credit quality, with very strong ability to pay interest and repay
principal; A -- high credit quality, considered strong as regards principal and
interest protection, but may be more vulnerable to adverse changes in economic
conditions and circumstances. The indicators "+" and "-" to the AA, A and BBB
categories indicate the relative position of credit within those rating
categories.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
o Amortization schedule (the larger the final maturity relative to
other maturities the more likely it will be treated as a note).
o Source of Payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.) Note
rating symbols are as follows:
o SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
o SP-2 Satisfactory capacity to pay principal and interest.
o SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings - Moody's ratings for state and
municipal short-term obligations will be designated Moody's Investment Grade
(MIG). This distinction is in recognition of the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the borrower
are uppermost in importance in short-term borrowing, while various factors of
major importance in bond risk are of lesser importance over the short run.
Rating symbols and their meanings follow:
o MIG 1 - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
o MIG 2 - This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
o MIG 3 - This designation denotes favorable quality. All security
elements are
21328
A-4
<PAGE>
accounted for but this is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
o MIG 4 - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.: Commercial paper rated "Prime" carries
the smallest degree of investment risk. The modifiers 1, 2, and 3 are used to
denote relative strength within this highest classification.
Standard & Poor's Ratings Group: "A" is the highest commercial paper
rating category utilized by Standard & Poor's Ratings Group which uses the
numbers 1+, 1, 2 and 3 to denote relative strength within its "A"
classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating
category utilized by Duff & Phelps which uses + or - to denote relative strength
within this classification. Duff 2 represents good certainty of timely payment,
with minimal risk factors. Duff 3 represents satisfactory protection factors,
with risk factors larger and subject to more variation.
Fitch Investors Service, Inc.: F-1+ -- denotes exceptionally strong
credit quality given to issues regarded as having strongest degree of assurance
for timely payment; F-1+ -- very strong credit quality, with only slightly less
degree of assurance for timely payment than F-1 -- very strong, with only
slightly less degree of assurance for timely payment than F-1+; F-2 -- good
credit quality, carrying a satisfactory degree of assurance for timely payment.
21328
A-5
<PAGE>
KEYSTONE TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1997
This statement of additional information (the "SAI") is not a
prospectus, but relates to, and should be read in conjunction with, the
prospectus of Keystone Tax Free Fund (the "Fund") dated April 30, 1997, as
supplemented from time to time. A copy of the prospectus may be obtained from
Evergreen Keystone Distributor, Inc. or your broker-dealer.
TABLE OF CONTENTS
Page
The Fund ...............................................................2
Service Providers.......................................................2
Investment Restrictions.................................................3
Valuation of Securities.................................................5
Brokerage...............................................................5
Sales Charges...........................................................7
Distribution Plan.......................................................9
Trustees and Officers..................................................10
Investment Adviser.....................................................14
Principal Underwriter..................................................16
Sub-administrator......................................................16
Declaration of Trust...................................................17
Expenses ..............................................................18
Financial Statements...................................................19
Standardized Total Return and Yield Quotations.........................19
Additional Information.................................................20
Appendix .............................................................A-1
<PAGE>
THE FUND
The Fund is an open-end diversified management investment company. The
Fund's investment objective is to provide shareholders with the highest possible
current income, exempt from federal income taxes, while preserving capital. The
Fund invests primarily in municipal bonds, but also may invest in certain other
securities as described in the Appendix hereto and in the "Additional Investment
Information" section of the Fund's prospectus.
Certain information about the Fund is contained in its prospectus. This
statement of additional information provides additional information about the
Fund that may be of interest to some investors.
SERVICE PROVIDERS
<TABLE>
<S> <C>
Service Provider
- ----------------------------------------- -----------------------------------------------------------------------
Investment adviser (referred to Keystone Investment Management Company, 200 Berkeley
in this SAI as "Keystone") Street, Boston, Massachusetts 02116. (Keystone is a
wholly-owned subsidiary of First Union Keystone, Inc.,
(formerly Keystone Investments, Inc.) ("First Union
Keystone") also located at 200
Berkeley Street, Boston,
Massachusetts 02116.
Principal underwriter ( referred Evergreen Keystone Distributor, Inc. (formerly Evergreen
to in this SAI as "EKD") Funds Distributor, Inc.), 125 W. 55th Street, New York,
New York 10019.
Marketing services agent and Evergreen Keystone Investment Services, Inc. (formerly
predecessor to EKD (referred to Keystone Investment Distributors Company), 200 Berkeley
in this SAI as "EKIS") Street, Boston, Massachusetts 02116.
Sub-administrator (referred to in BISYS Fund Services, Inc., 125 W. 55th Street, New York,
this SAI as "BISYS") New York 10019.
Transfer and dividend Evergreen Keystone Service Company, 200 Berkeley
disbursing agent (referred to in Street, Boston, Massachusetts 02116. (EKSC is a wholly-
this SAI as "EKSC") owned subsidiary of Keystone.)
Independent auditors KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110, Certified Public Accountants
Custodian State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
</TABLE>
INVESTMENT RESTRICTIONS
None of the restrictions enumerated in this paragraph may be changed
without a vote of the holders of a majority of the Fund's outstanding shares as
defined in the Investment Company Act of 1940 (the "1940 Act") as the lesser of
(1) 67% of the shares, represented at a meeting at which more than 50% of the
outstanding shares are represented or (2) more than 50% of the outstanding
shares. The Fund shall not do the following:
(1) purchase securities on margin, but the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities;
(2) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or of securities which without payment of any further consideration
are convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short;
(3) borrow money, except that the Fund may (a) borrow money from banks
for emergency or extraordinary purposes in aggregate amounts up to one-third of
its net assets, and (b) enter into reverse repurchase agreements;
(4) pledge, mortgage or hypothecate its assets except to secure
indebtedness permitted by subparagraph (3) above, with pledged assets to be no
more than 15% of its total assets;
(5) purchase any security other than United States ("U.S.") government
securities of any issuer if as a result more than 25% of its total assets would
be invested in a single industry, including industrial development bonds from
the same facility or similar types of facilities; governmental issuers of
municipal bonds are not regarded as members of an industry and the Fund may
invest more than 25% of its assets in industrial development bonds;
(6) purchase any security, other than U.S. government securities, if as
a result more than 5% of the Fund's total assets would be invested in securities
of the issuer, or the Fund would hold more than 10% of the voting securities of
the issuer;
(7) invest for the purpose of exercising control over or management of
any company;
(8) invest in securities of other investment companies, except as part
of a merger, consolidation, purchase of assets or similar transaction approved
by the Fund's shareholders;
(9) purchase or sell commodities or commodity contracts or real estate,
except that it may purchase and sell securities secured by real estate and
securities of companies which invest in real estate, and may engage in currency
or other financial futures and related options transactions;
(10) act as an underwriter except to the extent that, in connection
with the disposition of its portfolio investments, it may be deemed to be an
underwriter under federal securities laws; or purchase securities which are not
readily marketable except for repurchase agreements;
(11) purchase or retain securities of an issuer if, to the knowledge of
the Fund, an officer, Trustee or Director of the Fund or Keystone owns
beneficially more than 1/2 of 1% of the shares or securities of such issuer and
all such officers, Trustees and Directors owning more than 1/2 of 1% of such
shares or securities together own more than 5% of such shares or securities;
(12) purchase securities of any issuer if the person responsible for
payment, together with any predecessor, has been in operation for less than
three years if, as a result, the aggregate of such investments would exceed 5%
of the Fund's total assets; provided, however, that this restriction shall not
apply to U.S. government securities or to any obligation the payment of which
involves the credit and taxing power of any person authorized to issue municipal
bonds;
(13) invest in interests in oil, gas or other mineral exploration or
development programs;
(14) make loans, except to the extent that the purchase of debt
instruments or repurchase agreements may be deemed to be loans; repurchase
agreements maturing in more than seven days will not exceed 10% of the Fund's
total assets; and
(15) purchase securities of foreign issuers.
The foregoing percentage restrictions will apply at the time of the
purchase of a security and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of a purchase of
such security. For the purpose of Investment Restrictions (5) and (6), the Fund
will treat each state, territory and possession of the U.S., the District of
Columbia and, if its assets and revenues are separate from those of the entity
or entities creating it, each political subdivision, agency and instrumentality
of any one (or more, as in the case of a multistate authority or agency) of the
foregoing as an issuer of all securities that are backed primarily by its assets
or revenues; each company as an issuer of all securities that are backed
primarily by its assets or revenues; and each of the foregoing entities as an
issuer of all securities that it guarantees; provided, however, that for the
purpose of limitation (6) no entity shall be deemed to be an issuer of a
security that it guarantees so long as no more than 10% of the Fund's total
assets (taken at current value) are invested in securities guaranteed by the
entity and securities of which it is otherwise deemed to be an issuer.
The Fund does not presently intend to invest more than 25% of its total
assets in (1) municipal bonds of a single state and its subdivisions, agencies
and instrumentalities; of a single territory or possession of the U.S. and its
subdivisions, agencies or instrumentalities; or of the District of Columbia and
any subdivision, agency or instrumentality thereof; or (2) municipal bonds the
payment of which depends on revenues derived from a single facility or similar
types of facilities. Since certain municipal bonds may be related in such a way
that an economic, business or political development or change affecting one such
security could likewise affect the other securities, a change in this policy
could result in increased investment risk, but no change is presently
contemplated. The Fund may invest more than 25% of its total assets in
industrial development bonds.
In addition, the Fund will not issue senior securities, except as
appropriate to evidence indebtedness which the Fund is permitted to incur
pursuant to Investment Restriction (3) above and except for shares of any
additional series or portfolios which may be established by the Trustees.
Notwithstanding the eighth investment restriction enumerated above or
any of the other limitations above, the Fund may invest all of its assets in the
securities of a single open-end management investment company with substantially
the same fundamental investment objectives, policies, and restrictions as the
Fund. See "Investment Objective and Policies" in the prospectus.
VALUATION OF SECURITIES
The Fund believes that reliable market quotations generally are not
readily available for purposes of valuing municipal bonds. As a result,
depending on the particular municipal bonds owned by the Fund, it is likely that
most of the valuations for such bonds will be based upon their fair value
determined under procedures that have been approved by the Fund's Board of
Trustees. The Fund's Board of Trustees has authorized the use of a pricing
service to determine the fair value of its municipal bonds and other securities.
Non-tax exempt securities for which market quotations are readily
available are valued on a consistent basis at that price quoted that, in the
opinion of the Fund's Board of Trustees or the person designated by the Board of
Trustees to make the determination, most nearly represents the market value of
the particular security.
Short-term investments that are purchased with maturities of sixty days
or less are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market; short-term investments maturing in more
than sixty days for which market quotations are readily available are valued at
current market value; and short-term investments maturing in more than sixty
days when purchased that are held on the sixtieth day prior to maturity are
valued at amortized cost (market value on the sixtieth day adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market and which, in any case, reflects fair
value as determined by the Fund's Board of Trustees.
Any securities for which market quotations are not readily available
are valued on a consistent basis at fair value as determined in good faith using
methods prescribed by the Fund's Board of Trustees.
BROKERAGE
Selection of Brokers
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large
block is involved;
4. the broker's readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information
("research services.")
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should the Fund or Keystone receive research services from a broker,
the Fund would consider such services to be in addition to, and not in lieu of,
the services Keystone is required to perform under the Advisory Agreement.
Keystone believes that the cost, value and specific application of research
services are indeterminable and cannot be practically allocated between the Fund
and its other clients who may indirectly benefit from the availability of
research services. Similarly, the Fund may indirectly benefit from information
made available as a result of transactions effected for Keystone's other
clients. Under the Advisory Agreement, Keystone is permitted to pay higher
brokerage commissions for brokerage and research services in accordance with
Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone
follows such a practice, it will do so on a basis that is fair and equitable to
the Fund.
Neither the Fund nor Keystone intends on placing securities
transactions with any particular broker. The Fund's Board of Trustees has
determined, however, that the Fund may consider sales of Fund shares as a factor
when selecting brokers-dealers to execute portfolio transactions, subject to the
requirements of best execution described above.
Brokerage Commissions
The Fund expects that purchases and sales of municipal bonds and temporary
instruments usually will be principal transactions. Municipal bonds and
temporary instruments are normally purchased directly from the issuer or from an
underwriter or market maker for the securities. There usually will be no
brokerage commissions paid by the Fund for such purchases. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark up
or reflect a dealer's mark down. 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.
General Brokerage Policies
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, EKD or any of their affiliated persons, as defined in
the 1940 Act.
The Board of Trustees periodically reviews the Fund's brokerage policy.
In the event of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the Board of Trustees may change,
modify or eliminate any of the foregoing practices.
SALES CHARGES
The Fund may charge a contingent deferred sales charge (a "CDSC") when
you redeem certain of its shares within four calendar years after you purchase
the shares. The Fund charges a CDSC as reimbursement for certain expenses, such
as commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Plan"). If imposed, the Fund
deducts the CDSC from the redemption proceeds you would otherwise receive. CDSCs
attributable to your shares are, to the extent permitted by the National
Association of Securities Dealers, Inc. ("NASD"), paid to EKD or its
predecessor.
Calculating the CDSC
The CDSC is a declining percentage of the lesser of (1) the net asset
value of the shares you redeemed, or (2) the total cost of such shares. The CDSC
is calculated according to the following schedule:
Redemption Timing CDSC
During the calendar year of purchase........................4.00%
During the calendar year after the
year of purchase..........................................3.00%
During the second calendar
year after the year of purchase...........................2.00%
During the third calendar year
after the year of purchase................................1.00%
Thereafter..................................................0.00%
In determining whether a CDSC is payable and, if so, the percentage
charge applicable, the Fund assumes that you have redeemed shares not subject to
a CDSC first and then it will redeem shares you have held the longest first.
Shares That Are Not Subject to a CDSC
However, the Fund will only sell shares to these parties upon the
purchaser's written assurance that he or she is buying the shares for investment
purposes only. Such purchasers may not resell the securities except through
redemption by the Fund.
CDSC Waivers. The Fund does not impose a CDSC when the amount you are
redeeming represents:
1. an increase in the value of the shares redeemed above the
total cost of such shares due to increases in the net asset
value per share of the Fund;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares you have held for all or part of more than four
consecutive calendar years;
4. shares that are held in the accounts of a shareholder who has
died or become disabled;
5. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
6. automatic withdrawals from the ERISA plan of a shareholder who
is a least 59 1/2 years old;
7. shares in an account that the Fund has closed because the
account has an aggregate net asset value of less than $1,000;
8. automatic withdrawals under a Systematic Withdrawal Plan of up
to 1.00% per month of your initial account balance;
9. withdrawals consisting of loan proceeds to a retirement plan
participant;
10. financial hardship withdrawals made by a retirement plan
participant;
11. withdrawals consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan;
12. shares purchased by a bank or trust company in a single
account in the name of such bank or trust company as trustee
if the initial investment in shares of the Fund, any other
Keystone Classic fund, and/or any Evergreen Keystone fund, is
at least $500,000 and any commission paid by the Fund and such
other fund at the time of such purchase is not more than 1% of
the amount invested;
13. any Director, Trustee, officer, full-time employee or sales
representative of the Fund, Keystone, First Union Keystone,
EKD or their affiliates, who has held such position for at
least ninety days; or
14. the pension and profit-sharing plans established by such
companies and their affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees and sales
representatives.
Exchanges. The Fund does not charge a CDSC on exchanges of shares
between Keystone Classic funds that have adopted distribution plans pursuant to
Rule 12b-1 under the 1940 Act. If you do exchange shares of one such fund for
shares of another such fund, the Fund will deem the calendar year of the
exchange, for purposes of any future CDSC, to be the year the shares tendered
for exchange were originally purchased.
- --------------------------------------------------------------------------------
DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund to use their assets to bear the expenses of distributing their shares, if
they comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1. The Fund bears some of
the costs of selling its shares under a Distribution Plan adopted on June 1,
1983 pursuant to Rule 12b-1 (the "Distribution Plan").
The Fund's Distribution Plan provides that the Fund may expend up to
0.3125% quarterly (1.25% annually) of the average daily net asset value of its
shares to pay distribution costs for sales of its shares and to pay shareholder
service fees. The NASD currently limits such annual expenditures to 1.00%, of
which 0.75% may be used to pay such distribution costs and 0.25% may be used to
pay shareholder service fees. The NASD also limits the aggregate amount that the
Fund may pay for such distribution costs to 6.25% of gross share sales since the
inception of the Fund's Distribution Plan plus interest at the prime rate plus
1% on unpaid amounts thereof (less any CDSC paid by shareholders to the
Principal Underwriter).
Payments under the Distribution Plan are currently made to the
Principal Underwriter (which may reallow all or part to others, such as dealers)
(1) as commissions for Fund shares sold, (2) as shareholder service fees in
respect to shares maintained by the recipients and outstanding on the Fund's
books for specified periods and (3) as interest. Amounts paid or accrued to the
Principal Underwriter and its predecessor in the aggregate may not exceed the
annual limitations referred to above. The Principal Underwriter generally
reallows to brokers or others a commission equal to 4.00% of the price paid for
each Fund share sold as well as a shareholder service fee at a rate of 0.25% per
annum of the net asset value of shares maintained by such recipients and
outstanding on the books of the Fund for specified periods.
If the Fund is unable to pay the Principal Underwriter a commission on
a new sale because the annual maximum (0.75% of average daily net assets) has
been reached, the Principal Underwriter intends, but is not obligated, to
continue to accept new orders for the purchase of Fund shares and to pay or
accrue commissions and service fees to broker-dealers in excess of the amount it
currently receives from the Fund ("Advances"). While the Fund is under no
contractual obligation to reimburse the Principal Underwriter or its predecessor
for Advances, the Principal Underwriter and its predecessor intend to seek full
payment for such Advances from the Fund (together with interest at the prime
rate plus 1.00%) at such time in the future as, and to the extent that, payment
thereof by the Fund would be within permitted limits. EKIS currently intends to
seek payment of interest only on such Advances paid or accrued by EKIS
subsequent to July 7, 1992. If the Fund's Independent Trustees authorize such
payments, the effect would be to extend the period of time during which the Fund
incurs the maximum amount of costs allowed by the Distribution Plan.
The Distribution Plan may be terminated at any time by vote of a
majority of the Independent Trustees or by vote of a majority of the outstanding
voting shares of the Fund. If the Distribution Plan is terminated, EKD will ask
the Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such Advances.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above. In addition, the
amounts and purposes of expenditures under the Distribution Plan must be
reported to the Fund's Independent Trustees
<PAGE>
10
quarterly. The Fund's Independent Trustees may require or approve changes in the
implementation or operation of the Distribution Plan, and may also require that
total expenditures by the Fund under the Distribution Plan be kept within limits
lower than the maximum amount permitted by the Distribution Plan as stated
above. If such costs are not limited by the Independent Trustees, such costs
could, for some period of time, be higher than such costs permitted by most
other plans presently adopted by other investment companies.
The Distribution Plan may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
securities of the Fund. Any change in the Distribution Plan that would
materially increase the distribution expenses of the Fund provided for in the
Distribution Plan requires shareholder approval. Otherwise, the Distribution
Plan may be amended by the votes of the majority of both (1) the Fund's Board of
Trustees and (2) the Independent Trustees, cast in person at a meeting called
for the purpose of voting on such amendment.
While the Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
Whether any expenditure under the Distribution Plan is subject to a
state expense limit will depend upon the nature of the expenditure and the terms
of the state law, regulation or order imposing the limit. A portion of the
Fund's Distribution Plan expenses may be includable in the Fund's total
operating expenses for purposes of determining compliance with state expense
limits.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plan have
benefited the Fund.
TRUSTEES AND OFFICERS
The Trustees of the Fund, their principal occupations and some of their
affiliations over the last five years, and the officers of the Fund are as
follows:
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of
all other funds in the Key
stone Families of Funds; Professor, Finance
Department, George Washington University;
President, Amling & Company (investment
advice); and former Member, Board of
Advisers, Credito Emilano (bank ing).
LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of
all other funds in the Keystone Families of
Funds; Trustee or Director of all of the
funds in the Evergreen Family of Funds other
than Evergreen Investment Trust; real estate
developer and construction consultant; and
President of Centrum Equities and Centrum
Properties, Inc.
CHARLES A AUSTIN III: Trustee of the Fund; Trustee or Director of
all other funds in the Keystone Families of
Funds; Investment Counselor to Appleton
Partners, Inc.; and former Managing
Director, Seaward Management Corporation
(investment advice).
FOSTER BAM: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; Trustee or Director of
all of the funds in the Evergreen Family of
Funds other than Evergreen Investment Trust;
Partner in the law firm of Cummings &
Lockwood; Director, Symmetrix, Inc. (sulphur
company) and Pet Practice, Inc. (veterinary
services); and former Director, Chartwell
Group Ltd. (manufacturer of office
furnishings and accessories), Waste Disposal
Equipment Acquisition Corporation and
Rehabilitation Corporation of America
(rehabilitation hospitals).
*GEORGE S. BISSELL: Chief Executive Officer of the
Fund and each of the other funds in the
Keystone Families of Funds; Chairman of the
Board and Trustee of the Fund; Chairman of
the Board and Trustee or Director of all
other funds in the Keystone Families of
Funds; Chairman of the Board and Trustee of
Anatolia College; Trustee of University
Hospital (and Chairman of its Investment
Committee); former Director and Chairman of
the Board of Hartwell Keystone; and former
Chairman of the Board, Director and Chief
Executive Officer of Keystone Investments,
Inc.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; Principal, Padanaram
Associates, Inc.; and former Executive
Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; and former Director,
Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; Trustee, Treasurer and
Chairman of the Finance Committee, Cambridge
College; Chairman Emeritus and Direc tor,
American Institute of Food and Wine;
Chairman and President, Oldways Preservation
and Exchange Trust (education); former
Chairman of the Board, Director, and
Executive Vice President, The London Harness
Company; former Managing Partner, Roscommon
Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Associates
(environmental consulting); and former
Director, Keystone Investments, Inc.
JAMES S. HOWELL: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; Chairman and Trustee or
Director of all of the funds in the
Evergreen Family of Funds; former Chairman
of the Distribution Foundation for the
Carolinas; and former Vice President of
Lance Inc. (food manufacturing).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; Chairman of the Board and
Chief Executive Officer, Carson Products
Company; 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.
F. RAY KEYSER, JR.: Trustee of the Fund;
Trustee or Director of all other funds in
the Keystone Families of Funds; Chairman and
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 Lahey Hitchcock Clinic;
Director, Vermont Yankee Nuclear Power
Corporation, Grand Trunk Corporation, Grand
Trunk Western Railroad, Union Mutual Fire
Insurance Company, New England Guaranty
Insurance Company, Inc., and the Investment
Company Institute; former Director and
President, Associated Industries of Vermont;
former Director of Keystone, Central Vermont
Railway, Inc., S.K.I. Ltd., and Arrow
Financial Corp.; and former Director and
Chairman of the Board, Proctor Bank and
Green Mountain Bank.
GERALD M. MCDONNELL: Trustee of the Fund; Trustee
or Director of all other funds in the
Keystone Families of Funds; Trustee or
Director of all of the funds in the
Evergreen Family of Funds; and Sales
Representative with Nucor- Yamoto, Inc.
(steel producer).
THOMAS L. MCVERRY: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; Trustee or Director of
all of the funds in the Evergreen Family of
Funds; former Vice President and Director of
Rexham Corporation; and former Director of
Carolina Cooperative Federal Credit Union.
*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; Trustee or Director of
all of the funds in the Evergreen Family of
Funds; and Partner in the law firm of
Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee
or Director of all other funds in the
Keystone Families of Funds; Vice Chair and
former Executive Vice President, DHR
International, Inc. (executive recruitment);
former Senior Vice President, Boyden
International Inc. (executive recruit ment);
and Director, Commerce and Industry
Association of New Jersey, 411
International, Inc., and J&M Cumming Paper
Co.
RUSSELL A.
SALTON, III MD: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; Trustee or Director of
all of the funds in the Evergreen Family of
Funds; Medical Director, U.S. Health
Care/Aetna Health Services; and former
Managed Health Care Consultant; former
President, Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or
Director of all other funds in the Evergreen
Family of Funds; and Attorney, Law Offices
of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; Chairman, Environmental
Warranty, Inc. (insurance agency); Executive
Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of
Connecticut Natural Gas Corpora tion,
Hartford Hospital, Old State House
Association, Middlesex Mutual Assurance
Company, and Enhance Financial Services,
Inc.; Chairman, Board of Trustees, Hartford
Graduate Center; Trustee, Greater Hartford
YMCA; former Director, Vice Chairman and
Chief Investment Officer, The Travelers
Corporation; former Trustee,
Kingswood-Oxford School; and former Managing
Director and Consultant, Russell Miller,
Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or
Director of all other funds in the Keystone
Families of Funds; Partner, Farrell, Fritz,
Caemmerer, Cleary, Barnosky & Armentano,
P.C.; Adjunct Professor of Law and former
Associate Dean, St. John's University School
of Law; Adjunct Professor of Law, Touro
College School of Law; and former President,
Nassau County Bar Association.
JOHN J. PILEGGI: President and Treasurer of the
Fund; President and Treasurer of all other
funds in the Keystone Families of Funds;
President and Treasurer of all of the funds
in the Evergreen Family of Funds; Senior
Managing Director, Furman Selz LLC since
1992; Managing Director from 1984 to 1992;
Consultant to BISYS Fund Services since
1996; 230 Park Avenue, Suite 910, New York,
NY.
GEORGE O. MARTINEZ: Secretary of the Fund;
Secretary of all other funds in the Keystone
Families of Funds; Secretary of all the
funds in the Evergreen Family of Funds;
Senior Vice President and Director of
Administration and Regulatory Services,
BISYS Fund Services; Vice
President/Assistant General Counsel,
Alliance Capital Management from 1988 to
1995; 3435 Stelzer Road, Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
For the fiscal year ended December 31, 1996, none of the affiliated or
Independent Trustees and officers of the Fund received any direct remuneration
from the Fund. For the year ending December 31, 1996, fees paid to Independent
Trustees on a fund complex wide basis (which included approximately 60 mutual
funds) were approximately $846,350. On March 29, 1996, the Trustees and officers
of the Fund, as a group, beneficially owned less than 1% of the Fund's then
outstanding shares.
Except as set forth above, the address of all the Fund's Trustees and
officers is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Set forth below for each of the Trustees receiving in excess of $60,000
for the fiscal period of January 1, 1996 through December 31, 1996 is the
aggregate compensation paid to such Trustee by the Evergreen-Keystone Funds:
Aggregate Total Compensation
Compensation From Registrant
from and Fund Complex
Name Registrant Pd. To Trustee
James S. Howell $0 $66,000
Russell A Salton,III M.D. $0 $61,000
Michael S. Scofield $0 $61,000
INVESTMENT ADVISER
Subject to the general supervision of the Fund's Board of Trustees,
Keystone provides investment advice, management and administrative services to
the Fund.
On December 11, 1996, the predecessor corporation to First Union
Keystone, Keystone Investments, Inc. ("Keystone Investments") and indirectly
each subsidiary of Keystone Investments, including Keystone, were acquired (the
"Acquisition") by First Union National Bank of North Carolina ("FUNB"), a
wholly-owned subsidiary of First Union Corporation ("First Union"). Keystone
Investments was acquired by FUNB by merger into a wholly-owned subsidiary of
FUNB, which entity then assumed the name "First Union Keystone, Inc." and
succeeded to the business of the predecessor corporation. Contemporaneously with
the Acquisition, the Fund entered into a new investment advisory agreement with
Keystone and into a principal underwriting agreement with EKD, a wholly-owned
subsidiary of The BISYS Group, Inc. ("BISYS"). The new investment advisory
agreement (the "Advisory Agreement") was approved by the shareholders of the
Fund on December 9, 1996, and became effective on December 11, 1996. As a result
of the above transactions, Keystone Management, Inc. ("Keystone Management"),
which, prior to the Acquisition, acted as the Fund's investment manager, no
longer acts as such to the Fund. Keystone currently provides the Fund with all
the services that may previously have been provided by Keystone Management.
First Union Keystone and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $140 billion in consolidated assets as of
December 31, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB and Evergreen Asset Management Corp.,
wholly-owned subsidiaries of FUNB, manage or otherwise oversee the investment of
over $60 billion in assets as of December 31, 1996, belonging to a wide range of
clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
All charges and expenses, other than those specifically referred to as
being borne by Keystone, will be paid by the Fund, including, but not limited
to, (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees and expenses of
Independent Trustees; (5) brokerage commissions, brokers' fees and expenses; (6)
issue and transfer taxes; (7) costs and expenses under the Distribution Plans;
(8) taxes and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
the Fund and its shares with the Securities and Exchange Commission (the
"Commission") or under state or other securities laws; (11) expenses of
preparing, printing and mailing prospectuses, statements of additional
information, notices, reports and proxy materials to shareholders of the Fund;
(12) expenses of shareholders' and Trustees' meetings; (13) charges and expenses
of legal counsel for the Fund and for the Independent Trustees of the Fund on
matters relating to the Fund; and (14) charges and expenses of filing annual and
other reports with the Commission and other authorities, and all extraordinary
charges and expenses of the Fund.
The Fund pays Keystone a fee at the end of each month for its services
consisting of (i) an amount calculated as set forth below:
Aggregate Net Asset
Management Value of the Shares
Fee Income of the Fund
- --------------------------------------------------------------------------
0.50% of the next 2.0% of Gross Dividend $ 100,000,000, plus
0.45% of the next and Interest Income Plus $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000.000;
and (ii) an amount equal to the amount of the reimbursable expenses of Keystone
accrued during such calendar month.
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
duties.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its assignment.
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement") with EKD. EKD, which is not affiliated with First
Union, replaces EKIS as the Fund's principal underwriter. EKIS may no longer act
as principal underwriter of the Fund due to regulatory restrictions imposed by
the Glass-Steagall Act upon national banks such as FUNB and their affiliates,
that prohibit such entities from acting as the underwriters of mutual fund
shares. While EKIS may no longer act as principal underwriter of the Fund as
discussed above, EKIS may continue to receive compensation from the Fund or EKD
in respect of underwriting and distribution services performed prior to the
termination of EKIS as principal underwriter. In addition, EKIS may also be
compensated by EKD for the provision of certain marketing support services to
EKD at an annual rate of up to 0.75% of the average daily net assets of the
Fund, subject to certain restrictions.
EKD, as agent, has agreed to use its best efforts to find purchasers
for the shares. EKD may retain and employ representatives to promote
distribution of the shares and may obtain orders from broker-dealers, and
others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that EKD will bear the expense of preparing, printing, and
distributing advertising and sales literature and prospectuses used by it. In
its capacity as principal underwriter, EKD or EKIS, its predecessor, may receive
payments from the Fund pursuant to the Fund's Distribution Plan.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Independent Trustees, and (ii) by vote of a majority of the
Trustees, in each case, cast in person at a meeting called for that purpose.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its assignment.
From time to time, if, in EKD's judgment, it could benefit the sales of
Fund shares, EKD may provide to selected broker-dealers promotional materials
and selling aids, including, but not limited to, personal computers, related
software and Fund data files.
- --------------------------------------------------------------------------------
SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
BISYS, or an affiliate, provides officers and certain administrative
services to the Fund pursuant to a sub-administration agreement. For its
services under that agreement, BISYS will receive from Keystone an annual fee at
the maximum annual rate of 0.01% of the average daily net assets of the Fund.
DECLARATION OF TRUST
The Fund is a Massachusetts business trust originally established under
a Declaration of Trust dated April 12, 1977, as amended and restated on July 27,
1993 (the "Declaration of Trust"). The Fund is similar in most respects to a
business corporation. The principal distinction between the Fund and a
corporation relates to the shareholder liability described below. This summary
is qualified in its entirety by reference to the Declaration of Trust.
Description of Shares
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest and the creation of additional series and/or
classes of series of Fund shares. Each share represents an equal proportionate
interest in the Fund with each other share of that class. Upon liquidation,
shares are entitled to a pro rata share in the net assets of their class of Fund
shares. Shareholders shall have no preemptive or conversion rights. Shares are
transferable. The Fund currently intends to issue only one class of shares.
Shareholder Liability
Pursuant to court decisions or other theories of law, shareholders of a
Massachusetts business trust could possibly be held personally liable as
partners for the obligations of the Fund. The possibility of Fund shareholders
incurring financial loss for that reason appears remote, however, because the
Declaration of Trust (1) contains an express disclaimer of shareholder liability
for obligations of the Fund; (2) requires that notice of such disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the Fund's Board of Trustees; and (3) provides for indemnification
out of Fund property for any shareholder held personally liable for the
obligations of the Fund.
Voting Rights
Under the terms of the Declaration of Trust, the Fund does not hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matters, shares are entitled to one vote per share. Shares
generally vote together as one class on all matters. No amendment may be made to
the Declaration of Trust that adversely affects any class of shares without the
approval of a majority of the shares of that class. There shall be no cumulative
voting in the election of Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law or until such time as less than a majority of the Trustees holding office
have been elected by shareholders, at which time, the Trustees then in office
will call a shareholder's meeting for the election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely unless otherwise required by law and may appoint successor
Trustees. A Trustee may cease to hold office or may be removed from office (as
the case may be) (1) at any time by a two-thirds vote of the remaining Trustees;
(2) when such Trustee becomes mentally or physically incapacitated; or (3) at a
special meeting of shareholders by a two-thirds vote of the outstanding shares.
Any Trustee may voluntarily resign from office.
Limitation of Trustees' Liability
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by any reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
Investment Advisory Fees
For each of the Fund's last three fiscal years, the table below lists
the total dollar amounts paid by (1) the Fund to Keystone Management, the Fund's
former investment manager, for investment management and administrative services
rendered and (2) by Keystone Management to Keystone for investment advisory
services rendered. For more information, see "Investment Adviser."
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fiscal Year ended
December 31, Total Management Percent of Fund's
1996 Fee Paid Average Net Assets
- ------------------------- ---------------------------- ---------------------------- -----------------------
$6,642,609 0.42%
Fee Paid to Keystone Fee Paid to
Management under Keystone under
the Management the Advisory
Agreement Agreement
---------------------------- -----------------------
$6,272,478 $5,646,218
Period of 12/12/96
to 12/31/96 $370,131
Percent of Fund's
Fee Paid to Keystone Average Net Assets Fee Paid to
Management under represented by Keystone under
Fiscal Year Ended the Management Keystone the Advisory
December 31, Agreement Management's Fee Agreement
- ------------------------- ---------------------------- ---------------------------- -----------------------
1995 $5,327,202 0.44% $4,528,122
1994 $5,941,545 0.43% $5,050,313
</TABLE>
Distribution Plan Expenses
For the fiscal year ended December 31, 1996, the Fund paid $4,706,968
to EKIS under its Distribution Plan. For more information, see "Distribution
Plan."
Underwriting Commissions For each of the Fund's last three fiscal
years, the table below lists the aggregate dollar amounts of underwriting
commissions distribution fees plus CDSCs) paid with respect to the public
distribution of the Fund's shares. The table also indicates the aggregate dollar
amount of underwriting commissions retained by EKD and/or EKIS. For more
information, see "Principal Underwriter" and "Sales Charges."
<TABLE>
<CAPTION>
<S> <C> <C>
Aggregate Dollar Amount of
Fiscal Year Ended Aggregate Dollar Amount of Underwriting Commissions
December 31, Underwriting Commissions Retained by EKIS and/or EKD
- -------------------------- ---------------------------------------- -----------------------------------------
1996 $2,402,158 $632,014
1995 $2,537,213 $845,504
1994 $10,904,376 $9,742,842
</TABLE>
Brokerage Commissions
The Fund paid no brokerage commissions for the fiscal years ended December
31, 1996, 1995 and 1994.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Fund's financial statements for the fiscal year ended December 31,
1996, and the report thereon of KPMG Peat Marwick LLP, are incorporated by
reference herein from the Fund's Annual Report, as filed with the Commission
pursuant to Section 30(d) of the 1940 Act and Rule 30d-1 thereunder.
You may obtain a copy of the Fund's Annual Report without charge by
writing to EKSC, P.O. Box 2121, Boston, Massachusetts 02106-2121, or by calling
EKSC toll free at 1-800-343-2898.
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
Total return quotations for the Fund as they may appear from time to
time in advertisements are calculated by finding the average annual compounded
rates of return over the one-, five- and ten-year periods on a hypothetical
$1,000 investment that would equate the initial amount invested to the ending
redeemable value. To the initial investment all dividends and distributions are
added, and all recurring fees charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the one,
five or ten year periods.
The annual total return of the Fund for the one year period ended
December 31, 1996, including applicable sales charge, was 0.21%. The average
annual returns for the five- and ten-years ended December 31, 1996 were 5.91%
and 6.64%, respectively (including contingent deferred sales charge).
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The current yield for the
30-day period ended December 31, 1996 was 5.09%.
Tax equivalent yield is, in general, the current yield divided by a
factor equal to one minus a stated income tax rate and reflects the yield a
taxable investment would have to achieve in order to equal on an after tax-basis
a tax exempt yield. The tax equivalent yield for an investor in the 31% federal
tax bracket for the 30-day period ended December 31, 1996 was 7.38%.
Any given yield or total return quotation should not be considered
representative of the Fund's yield or total return for any future period.
ADDITIONAL INFORMATION
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
As of April 1, 1997, Merrill Lynch Pierce Fenner & Smith, For Sole
Benefit of its Customers, Attn: Fund Administration, 4800 Deer Lake Dr. E., 3rd
Floor, Jacksonville, FL 32246-6484 owned of record 12.97% of the Fund's
outstanding shares.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this statement of additional information, or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
For information on taxes, particularly with respect to dividends and
the Fund's qualifications as a registered investment company, please refer to
the section of your prospectus entitled "Dividends and Taxes."
The Fund's prospectus and this statement of additional information omit
certain information contained in the registration statement filed with the
Commission, which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the rules and regulations
promulgated by the Commission.
<PAGE>
Evergreen Keystone
National Tax Free
Funds
(Photo of mountain and stream surrounded by trees)
1997 Annual Report
Evergreen Keystone
(logo) FUNDS (logo)
<PAGE>
(logo) EVERGREEN KEYSTONE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Letter to Shareholders............................... 1
Evergreen High Grade Tax Free Fund
Fund at a Glance................................... 2
Management Report.................................. 3
Evergreen Short-Intermediate Municipal Fund
Fund at a Glance................................... 4
Management Report.................................. 5
Keystone Tax Free Income Fund
Fund at a Glance................................... 6
Management Report.................................. 7
Growth of Investments................................ 8
Financial Highlights
Evergreen High Grade Tax Free Fund................. 9
Evergreen Short-Intermediate Municipal Fund........ 11
Keystone Tax Free Income Fund...................... 13
Schedule of Investments
Evergreen High Grade Tax Free Fund................. 16
Evergreen Short-Intermediate Municipal Fund........ 20
Keystone Tax Free Income Fund...................... 22
Statements of Assets and Liabilities................. 27
Statements of Operations............................. 28
Statements of Changes in Net Assets.................. 30
Combined Notes to Financial Statements............... 33
Report of Independent Accountants-- Price Waterhouse
LLP................................................ 39
Independent Auditors' Report-- KPMG Peat Marwick
LLP................................................ 41
</TABLE>
ABOUT EVERGREEN KEYSTONE
Since 1971, the Evergreen Funds have been providing investors with a proven,
value-driven approach to equity investment management. For over 60 years of
changing economic conditions, Keystone has taken pride in helping investors meet
their financial goals through a broad range of financial products and services.
Combined, Evergreen Keystone offers over 70 funds designed to meet a broad range
of objectives, including fixed-income, balanced, growth and income, and
aggressive growth. Assets under management total more than $30 billion.
<PAGE>
EVERGREEN KEYSTONE
(logo)
LETTER TO SHAREHOLDERS
July 1997
(Photo of William M. Ennis)
WILLIAM M. ENNIS
Dear Shareholders:
They don't have the glamour or the impressive recent returns of stock funds, but
municipal bond funds quietly have been doing their job for the past three years.
In fact, the average annual return of the Lehman Brothers Municipal Bond Index
for the three years that ended on May 31, 1997 was 7.32%. Considering the tax
advantages and relatively low volatility of municipal bonds and the modest
inflation we have been enjoying, that is nothing to ignore. In fact, on May 31,
the average AAA-rated 30-year municipal bond was yielding 5.50%. For investors
in the 31% federal income tax bracket, that's equivalent to a
before-federal-taxes yield of 7.97% on a taxable bond at a time when the 30-year
Treasury bond was yielding less than 7%.
The outlook for municipal bonds is no less encouraging. Thanks to factors that
include the careful monetary policy of the Federal Reserve Board and the
increasing productivity of American industry, we continue to expect a sustained
economic environment of moderate growth, contained inflation, low unemployment,
and stable interest rates. That is an ideal climate for bond investing in
general, and municipal bond investing in particular, especially considering the
rather limited supply of new municipal bonds available in the market. During
1996, new municipal bond issuance totaled $185 billion, compared to the $292
billion peak in 1993. In the face of this limited supply, an increase in demand
for municipal bonds could have a favorable impact on performance.
It is easy to believe we could see an increase in demand. As stock market prices
reach record highs in late spring and early summer, it makes more and more sense
for investors to allocate at least a portion of their portfolios into bond
funds. That makes sense for both diversification purposes and for risk reduction
reasons. For investors in higher income tax brackets, municipal bond funds make
even more sense. At Evergreen Keystone, we also believe it is important for
investors to remain in close touch with their professional advisers for guidance
on changing markets and strategies.
I am delighted to inform you that Evergreen Keystone successfully integrated all
service functions of the Evergreen and Keystone Funds in early May. This means
that you now have full exchange privileges among all Evergreen and Keystone
America Funds. In addition, you will be receiving the top-flight shareholder
service that earned Evergreen Keystone the 1996 Dalbar Quality Tested Service
Seal, the highest award for mutual fund service presented by Dalbar, an
independent mutual fund survey and rating firm.
In the following pages, Evergreen Keystone investment professionals will give
you more detailed information about the investment environment and the
strategies employed in managing your funds. You will notice that this annual
report is a departure from past reports in format. It represents the effort of
Evergreen Keystone Funds to provide honest, thoughtful reports and to present
them in a format that is attractive and makes information easily accessible. We
are very interested in hearing your thoughts on this new format, and we welcome
any suggestions you may have.
Sincerely,
/s/ William M. Ennis
WILLIAM M. ENNIS
MANAGING DIRECTOR
1
<PAGE>
(logo) EVERGREEN
HIGH GRADE TAX FREE FUND
FUND-AT-A-GLANCE
As of May 31, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
One year with sales charge 1.90% 1.19% 7.25%
One year w/o sales charge 6.99% 6.19% 7.25%
One year dividends per share 50.2(cents) 42.1(cents) 52.0(cents)
30-day SEC Yield
(as of 5/31/97) 4.19% 3.63% 4.66%
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Three years 5.11% 5.16% 7.10%
Five years 5.75% N/A N/A
Since Inception* 6.00% 5.13% 5.11%
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Nine months w/o sales charge 5.13% 4.55% 5.32%
Three years 16.13% 16.30% 22.83%
Five years 32.24% N/A N/A
Since Inception* 36.01% 24.55% 17.64%
</TABLE>
* CLASS A BEGAN 2/21/92; CLASS B BEGAN 1/11/93;
CLASS Y BEGAN 2/28/94
** ALL RETURNS INCLUDE THE MAXIMUM SALES CHARGE, IF APPLICABLE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS MAY 31, 1997
<S> <C> <C> <C>
Total Net Assets (all classes) $102.1 million
Average Credit Quality AAA
Average Maturity 12.3 years
Average Duration 8.2 years
</TABLE>
PORTFOLIO COMPOSITION MAY 31, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
Hospital 14.8%
Ports 9.4%
Industrial Development
(pollution control) 8.5%
Electric 8.0%
General Obligation
(schools) 8.8%
Water/Sewer 6.5%
Airport 6.2%
Industrial Development 5.3%
Housing 4.9%
Pre-refunded 4.6%
General Obligation
(municipalities) 3.8%
General Obligation 3.8%
Toll Roads 3.3%
Other 12.1%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen High Grade Tax Free Fund seeks income exempt from federal income taxes
while conserving capital. Income may be subject to local taxes and the Federal
Alternative Minimum Tax for certain investors.
STRATEGY
The Fund seeks its objective by investing in insured municipal securities and
municipal securities rated high grade by independent bond rating services. The
portfolio management team will, in seeking the Fund's objectives, buy and sell
securities to effect changes in portfolio maturities and to change allocations
among different sectors. Insured bonds are bonds insured as to timely payment of
principal and interest. The Fund itself is not insured, nor is the value of its
shares guaranteed. Insured bonds must be insured by a municipal bond insurance
company which is rated AAA by Standard & Poors Ratings Group (S&P) and/or Aaa by
Moody's Investors Service, Inc., (Moody's). Bonds that are considered high grade
are rated A or better by S&P or Moody's or, if unrated, are considered of
comparable quality as determined by the Fund's investment advisor.
PORTFOLIO MANAGEMENT TEAM
(Photo of James T. Colby, III, the Senior Portfolio Manager, is a Vice
James T. Colby, President and Senior Portfolio Manager of Evergreen Asset
III) Management. He also is Senior Portfolio Manager for Evergreen
U.S. Government Securities Fund and is co-manager of the
Evergreen Tax Strategic Foundation Fund. Prior to joining
Evergreen in 1992, Mr. Colby was Vice President and Senior
Portfolio Manager for $5 billion in tax-exempt holdings at
American Express. Mr. Colby also has served in portfolio
management capacities at Marinvest, a subsidiary of Marine
Midland Bank. He is a graduate of Brown University, and holds
an MBA from Hofstra University. In 1996, Mr. Colby was
Chairman of the Municipal Bond Buyers Conference.
2
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
MANAGEMENT REPORT
July 1997
Dear Fellow Shareholders:
We are pleased to report on Evergreen High Grade Tax Free Fund for the fiscal
period that ended on May 31, 1997. You may recall that you recently received a
semiannual report for the six-month period that ended on February 28, 1997. We
have changed your Fund's fiscal year so it now will end each May 31. This is
part of an effort by Evergreen Keystone Funds to streamline, and increase the
efficiency of, fund administration. Funds with similar investment objectives, in
this case national tax free funds, are placed on the same fiscal year cycle.
Information about these funds will be presented in common annual and semi-annual
reports. The next report you will receive will be a semiannual report for the
period ending November 30, 1997. You should expect to receive it in January
1998.
PERFORMANCE
We believe your Fund performed well as a high quality municipal bond fund during
a period marked by short-term interest rate volatility. The charts and tables on
page 2 provide a comprehensive view of the performance for the fiscal period, as
well as since each class of shares began.
STRATEGY
Evergreen High Grade Tax Free Fund is managed with a long-term view, with the
goal of providing federally tax-free income from insured and high quality
municipal bonds while protecting principal. We do not structure the portfolio in
anticipation of short-term movements in interest rates, but try to employ
strategies that build value over time based on longer-term trends in the
municipal bond market. The nine-month period that ended on May 31 was a
generally favorable period for municipal bond investing. During this period, we
kept the maturities of bonds in the portfolio relatively consistent, with
average maturities remaining in the 12-to-16 year range, and average duration in
the 7-to-9-year range. This policy proved successful during a time when
long-term interest rates, despite some short-term volatility, remained in a
consistent trading range of 6 1/2% to 7%.
Your Fund is required to invest at least 65% of net assets in high grade
municipal bonds. In fact, the Fund held 87% of net assets in insured municipal
bonds, with 95% of net assets AAA-rated at the end of the period. The bonds are
insured for the timely payment of principal and interest. The value of insured
bonds can fluctuate. The Fund itself is not insured. The Fund does not search
for opportunities among bonds that are below investment grade.
Evergreen High Grade Tax Free Fund invests in different sectors of the market
based upon evolving trends. For example, two sectors-- the hospital/health care
and the electric utility sectors-- have experienced changes which affected
portfolio strategy recently. In the hospital sector, the process of
consolidation has left behind the weaker institutions which we have pointedly
avoided. We hold only the dominant regional facilities or those aligned with
strong national systems, which we believe have the strongest potential to
survive the new era of competition. Accordingly, we have increased the Fund's
allocation to 14.8% of the net assets. Conversely, the impact of deregulation
and competition upon municipal utilities is less clear and we have decreased the
Fund's allocation to this sector to 7.9%, though we will closely monitor
important legislation pending in states on the east and west coasts which may
soon set new strategic parameters for this sector. For comparison, three years
ago this Fund's relative weightings of these two sectors would have been
reversed.
OUTLOOK
Looking ahead, we continue to see a favorable investment environment for
municipal bonds. We anticipate long-term interest rates, as represented by the
benchmark 30-year U.S. Treasury Bond, to trade in the 6-to-7% range, with
relatively firm economic growth and stable inflation.
Within this environment, we will continue our strategy of seeking to provide as
reasonable a yield as is possible, without assuming significant market risks by
extending maturities. At the same time, we will continue to monitor changes in
the municipal bond industry and put in place further strategies that have the
potential to benefit from evolving trends.
Thank you for your support of the Evergreen High Grade Tax Free Fund.
Sincerely,
/s/ James T. Colby, III
JAMES T. COLBY, III
VICE PRESIDENT
SENIOR PORTFOLIO MANAGER
Evergreen Asset Management Corp.
3
<PAGE>
EVERGREEN
(logo) SHORT-INTERMEDIATE MUNICIPAL FUND
FUND-AT-A-GLANCE
As of May 31, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
One year with sales charge 0.92% 1.51% 4.62%
One year w/o sales charge 4.31% 3.49% 4.62%
One year dividends per share 39.7(cents) 30.7(cents) 40.7 (cents)
30-day SEC Yield
(as of 5/31/97) 3.74% 2.94% 3.93%
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Three years N/A N/A 3.95%
Five years N/A N/A 4.44%
Since Inception* 3.40% 2.76% 4.88%
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS Y
<S> <C> <C> <C>
Nine months w/o sales charge 3.08% 2.49% 3.36%
Three years N/A N/A 12.33%
Five years N/A N/A 24.26%
Since Inception* 8.38% 6.76% 30.24%
</TABLE>
* CLASSES A AND B BEGAN 1/5/95; CLASS Y BEGAN 7/17/91. SINCE
INCEPTION RETURN FOR CLASS Y SHARES REFLECTS TOTAL RETURN FROM
11/18/91 WHEN THE FUND CHANGED TO A FLUCTUATING NET ASSET VALUE FUND.
** ALL RETURNS INCLUDE THE MAXIMUM SALES CHARGE, IF APPLICABLE.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS MAY 31, 1997
<S> <C> <C> <C>
Total Net Assets (all classes) $45.1 million
Average Credit Quality AA
Average Maturity 2.7 years
Average Duration 2.4 years
</TABLE>
PORTFOLIO QUALITY MAY 31, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
NR 2.25%
AAA 45.52%
AA 37.37%
A 12.63%
BBB 2.23%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Evergreen Short-Intermediate Municipal Fund seeks income that is exempt from
federal income taxes, while preserving capital. Income may be subject to local
taxes and the Federal Alternative Minimum Tax for certain investors.
STRATEGY
The Fund invests in high-quality and upper medium-quality municipal bonds. The
average maturity of bonds in the portfolio is expected to be between two and
five years.
PORTFOLIO MANAGEMENT TEAM
(Photo of Steven Steven C. Shachat, Portfolio Manager of Evergreen
C. Shachat) Short-Intermediate Municipal Fund, has been a member of the
investment team of Evergreen Asset Management team since 1988,
concentrating on short-term tax exempt investments. He also is
manager of the Evergreen Tax-Exempt Money Market Fund and the
Evergreen Short-Intermediate Municipal Fund-California. Prior
to joining Evergreen, Mr. Shachat served at Mitchell Hutchins
Asset Management, Inc., a subsidiary of Paine Webber, Inc., as
a Portfolio Manager in the tax-exempt area. Earlier, he served
at Donald Sheldon & Co., a firm specializing in tax-exempt
securities. Mr. Shachat is a graduate of Boston University.
4
<PAGE>
EVERGREEN
SHORT-INTERMEDIATE MUNICIPAL FUND
(logo)
MANAGEMENT REPORT
July 1997
Dear Fellow Shareholders:
We are pleased to report on Evergreen Short-Intermediate Municipal Fund for the
fiscal period that ended on May 31, 1997. You may recall that you recently
received a semiannual report for the six-month period that ended on February 28,
1997. We have changed your Fund's fiscal year so that it now will end each May
31. This is part of an effort by Evergreen Keystone Funds to streamline, and
increase the efficiency of, fund administration. Funds with similar investment
objectives, in this case national tax free funds, are placed on the same fiscal
year cycle. Information about these funds will be presented in common annual and
semiannual reports. The next report you will receive will be a semiannual report
for the period ending November 30, 1997. You should expect to receive it in
January 1998.
PERFORMANCE
We believe the Fund performed satisfactorily, consistent with its objective,
which is to seek to provide as high a level of income, exempt from federal
income taxes other than the alternative minimum tax, as is consistent with
preserving capital and providing liquidity. The tables on page 4 provide a
comprehensive view of the performance for the fiscal period, as well as since
each class of shares began.
STRATEGY
Evergreen Short-Intermediate Municipal Fund, in the face of a significant amount
of near-term interest rate volatility, maintained a laddered structure of its
portfolio securities. This strategy, which seeks to maintain as stable a price
as possible, is one in which the maturities of the portfolio are spread
throughout the range in which the Fund invests. There is not an over-emphasis on
securities that are on either the long end or the short end of the range. The
allocation of the maturity dates of the Fund's portfolio securities is
illustrated in the pie chart on this page. As interest rates changed during the
period, your Fund was able to use the proceeds from the minority of securities
which had matured to re-invest at current market rates.
An additional factor which contributed to your Fund's dividend income was the
employment of a strategy to seek opportunities in sectors that we believed may
have been undervalued. One example is the healthcare sector, where a series of
consolidations and mergers among hospitals and other health care delivery
institutions have
PORTFOLIO MATURITIES MAY 31, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
0-1 years 17 %
1-2 years 19.8%
2-3 years 11.8%
3-4 years 21.4%
4-5 years 24.4%
5-7 years 5.6%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
helped some previously weaker institutions become stronger. This made bonds
issued by these institutions more attractive, given the institutions' new
strength. Another area in which we increased the Fund's emphasis was in general
obligation bonds, backed by the full taxing ability of municipalities and other
public agencies.
The Fund continues to maintain an emphasis on quality, with an average credit
rating of AA at the end of the period.
OUTLOOK
We anticipate the demand for municipal bonds in the short-to-intermediate
maturity range to continue to be strong. At a time of some uncertainty over the
direction of interest rates, at least for the near term, investors appear to
want to take a conservative approach and maintain short-to-intermediate term
securities in their portfolios. We believe the potential implications are that
these securities should continue to exhibit relatively stable prices because of
the strong demand, but that yields available may not rise significantly.
Thank you for your support of Evergreen Short-Intermediate Municipal Fund.
Sincerely,
/s/ Steven C. Shachat
STEVEN C. SHACHAT
PORTFOLIO MANAGER
Evergreen Asset Management Corp.
5
<PAGE>
KEYSTONE
(logo) TAX FREE INCOME FUND
FUND-AT-A-GLANCE
As of May 31, 1997
<TABLE>
<CAPTION>
ONE YEAR PERFORMANCE CLASS A CLASS B CLASS C
<S> <C> <C> <C>
One year with sales charge 1.80% 1.03% 5.03%
One year w/o sales charge 6.88% 6.03% 6.03%
One year dividends per share 50.7(cents) 43.5(cents) 43.5 (cents)
30-day SEC Yield
(as of 5/31/97) 4.58% 4.05% 4.05%
<CAPTION>
AVERAGE
ANNUAL RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Three years 4.39% 4.39% 5.26%
Five years 4.64% N/A N/A
Ten years 6.23% N/A N/A
Since Inception* N/A 3.84% 4.22%
<CAPTION>
CUMULATIVE RETURNS** CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Six months w/o sales charge 1.34% 0.97% 0.97%
Three years 13.75% 13.76% 16.63%
Five years 25.44% N/A N/A
Ten years 83.03% N/A N/A
Since Inception* N/A 17.73% 19.61%
</TABLE>
* CLASS A BEGAN 2/13/87. CLASS B AND CLASS C BEGAN 2/1/93.
** ALL RETURNS INCLUDE THE MAXIMUM SALES CHARGE, IF APPLICABLE. FOR CLASSES WITH
MORE THAN 10-YEAR HISTORY, THE 10-YEAR HISTORY IS PRESENTED.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS MAY 31, 1997
<S> <C>
Total Net Assets (all classes) $113.3 million
Average Credit Quality AA+
Average Maturity 17 years
Average Duration 8 years
</TABLE>
PORTFOLIO QUALITY MAY 31, 1997
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
AAA 62.8%
NR 5.0%
A 9.5%
AA 10.5%
BBB 12.2%
PORTFOLIO ALLOCATIONS ARE SUBJECT TO CHANGE.
OBJECTIVE
Keystone Tax Free Income Fund seeks the highest possible current income exempt
from federal taxes, while preserving capital. Income may be subject to local
taxes and the Federal Alternative Minimum Tax for certain investors.
STRATEGY
The Fund invests in high quality municipal bonds from different regions of the
country. In pursuing the Fund's objective, the portfolio management team may
make adjustments in the portfolio's maturity, asset allocation among sectors, or
credit quality. When targeting investments, the portfolio management team seeks
out bonds that meet high standards for safety and creditworthiness. These bonds
are principally rated within the four highest grades by established rating
agencies. Keystone's fixed income analysts also conduct extensive in-house
research and regularly monitor bonds in the portfolio.
PORTFOLIO MANAGEMENT
(Photo of Betsy Betsy A. Hutchings, a Senior Vice President and Group Leader
A. Hutchings) of the Municipal Bond Team of Keystone Investment Management
Company, is Portfolio Manager of the Fund. A professional with
more than 15 years' experience in investment management, Ms.
Hutchings also is Portfolio Manager of Keystone Tax Free Fund.
Prior to joining Keystone in 1988, Ms. Hutchings served in
portfolio management and research positions at Scudder Stevens
& Clark, New York, and John Nuveen & Co., Chicago. Ms.
Hutchings is active in the Boston Municipal Analysts Forum and
the Municipal Bond Buyers Conference. She is a graduate of
Wheaton College.
6
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
MANAGEMENT REPORT
July 1997
Dear Shareholders:
We are pleased to report on Keystone Tax Free Income Fund for the fiscal period
that ended on May 31, 1997. You may recall that you recently received an annual
report for the fiscal period that ended November 30, 1996. We have changed your
Fund's fiscal year so that it will now end each May 31. This is part of an
effort by Evergreen Keystone Funds to streamline, and increase the efficiency
of, fund administration. Funds with similar investment objectives, in this case
national tax free funds, are being placed on the same fiscal year cycle, and
information about these funds will be presented in common annual and semi-annual
reports. The next report you will receive will be a semi-annual report for the
period ending November 30, 1997. You should expect to receive it in January
1998.
PERFORMANCE
We believe your Fund performed satisfactorily in a challenging interest rate
environment over the past six months. During this period, rates moved down and
then up before ending at approximately the same point as they began. The bond
market in general was vigilant about a possible pickup of inflation and the
potential of higher interest rates. In fact, after interest rates fell during
late 1996 and very early 1997, they started to rise again in February and March,
hurting the prices of bonds in general, including municipal bonds.
STRATEGY
In this changing environment, we managed your Fund conservatively, as we both
shortened the overall maturity of portfolio holdings and upgraded the average
quality of the bonds. At the same time as we were reducing the interest rate
risk by selling longer maturity bonds into the market as rates were falling, we
were also reducing credit risk by improving overall quality. This quality
upgrade was achieved by paring back BBB-rated and nonrated bonds and using the
proceeds to buy higher quality holdings, principally AAA-rated bonds. During the
past 12 months, the percentage of AAA-rated holdings in the portfolio went from
40% to 54%.
Through the full 12-month period, the average maturity of bond holdings was
reduced from 18.5 years to 17 years, while the average credit quality was
increased from AA- to AA+.
We pursued these tactics with two objectives:
(Bullet) To lock-in gains through the sale of bonds that had performed well.
(Bullet) To position the Fund more defensively by lowering both interest rate
risk and credit risk.
OUTLOOK
Looking forward, we are positive about the investment environment for municipal
bonds. On a technical basis, the demand for bonds is strong, with a relatively
limited
PORTFOLIO COMPOSITION MAY 31, 1997
(AS A PERCENTAGE OF NET ASSETS)
(Pie chart appears with the following plot points)
General Obligations 16.6%
Hospital 14.0%
Water & Sewer 12.9%
Electric 8.5%
Transportation 8.0%
Industrial Development
(pollution control) 7.1%
Pre-Refunded 6.9%
Housing 6.5%
Education 6.4%
Airports 4.8%
Solid Waste 1.3%
Other 7.0%
supply of available bonds as public agencies in general have been restrained in
borrowing. On an after-tax, after-inflation basis, municipal bonds continue to
appear to be an attractive value. At the close of the period, for example, an
AA-rated 30-year municipal bond was yielding 85% of the yield of a 30-year
Treasury bond.
On a fundamental economic basis, the overall economy is growing at a moderate
basis, with inflation well under control. Shorter-term, fixed income investors
can be expected to continue to watch nervously for signs of inflation, and there
may be some month-to-month interest rate volatility. Longer term, we see more
reason for stability in interest rates, as it appears that the policies of the
Federal Reserve Board have been successful in keeping inflation well under
control.
With this outlook, we continue to emphasize the income from higher quality bonds
in the 15-to-20-year maturity range and to be guardedly optimistic.
Thank you for your support of Keystone Tax Free Income Fund.
Sincerely,
/s/ Albert H. Elfner, III
ALBERT H. ELFNER, III
CHAIRMAN
Keystone Investment Management Company
/s/ Betsy A. Hutchings
BETSY A. HUTCHINGS
SENIOR VICE PRESIDENT
HEAD, MUNICIPAL BOND GROUP
Keystone Investment Management Company
7
<PAGE>
EVERGREEN KEYSTONE
(logo)
GROWTH OF INVESTMENTS
EVERGREEN HIGH GRADE TAX FREE FUND
Comparisons of a $10,000 investment in Evergreen High Grade Tax Free Fund,
Class A shares, versus a similar investment in the Lehman Brothers Insured
Bond Index (LBIBI) and the Consumer Price Index (CPI).
In Thousands
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 1.90% 5.75% 6.00%
Class B 1.19% -- 5.13%
Class Y 7.25% -- 5.11%
(Line graph appears here with the following plot points.)
2/92 5/92 5/93 5/94 5/95 5/96 5/97
Class A Shares (PLEASE FILL IN) $13,601
CPI (PLEASE FILL IN) $11,591
LBIBI (PLEASE FILL IN) $14,607
Past performance is no guarantee of future results. The performance of each
class may vary baed on differences in loads and fees paid by the shareholder
investing in the different classes. The Lehman Brothers Insured Bond Index
is an unmanaged, market index. The index does not include transaction costs
associated with buying and selling securities, nor any management fees. The
Consumer Price Index, a measure of inflation, is through May 31, 1997.
EVERGREEN SHORT-INTERMEDIATE MUNICIPAL FUND
Comparisons of a $10,000 investment in Evergreen Short-Intermediate
Municipal Fund, Class A shares, versus a similar investment in the Lehman
Brothers 3 Year Municipal Bond Index (LB3YMBI) and the Consumer Price
Index (CPI).
In Thousands
Average Annual Total Returns
1 Year 5 Year Life of Class
Class A 0.92% -- 3.40%
Class B 1.51% -- 2.76%
Class Y 4.62% 4.44% 4.88%
(Line graph appears here with the following plot points.)
1/95 5/95 11/95 5/96 11/96 5/97
Class A Shares (PLEASE FILL IN) $10,695
CPI (PLEASE FILL IN) $10,838
LB3YMBI (PLEASE FILL IN) $11,560
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholder
investing in the different classes. The Lehman Brothers 3 Year Municipal Bond
Index is an unmanaged, market index. The index does not include transaction
costs associated with buying and selling securities, nor any management fees.
The Consumer Price Index, a measure of inflation, is through May 31, 1997.
KEYSTONE TAX FREE INCOME FUND
Comparisons of a $10,000 investment in Keystone Tax Free Income Fund,
Class A shares, versus a similar investment in the Lehman Brothers Municipal
Bond Index (LMBI) and the Consumer Price Index (CPI).
In Thousands
Average Annual Total Returns
1 Year 5 Year 10 Year Life of Class
Class A 1.80% 4.64% 6.23% --
Class B 1.03% -- -- 3.84%
Class Y 5.03% -- -- 4.22%
(Line graph appears here with the following plot points.)
<TABLE>
<CAPTION>
5/97 5/88 5/89 5/90 5/91 5/92 5/93 5/94 5/95 5/96 5/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares (PLEASE FILL IN) $18,303
CPI (PLEASE FILL IN) $14,158
LMBI (PLEASE FILI IN) $22,346
</TABLE>
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholder
investing in the different classes. The Lehman Brothers Municipal Bond
Index is an unmanaged, market index. The index does not include transaction
costs associated with buying and selling securities, nor any management fees.
The Consumer Price Index, a measure of inflation, is through May 31, 1997.
8
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
EIGHT
MONTHS
NINE MONTHS YEAR ENDED ENDED YEAR ENDED
ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
MAY 31, 1997 (a) 1996 1995 (d) 1994 1993
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 10.72 $ 10.69 $ 9.79 $ 11.16 $ 10.42
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.37 0.52 0.34 0.52 0.54
Net realized and unrealized gain
(loss) on investments............... 0.17 0.03 0.90 (1.37) 0.81
Total from investment operations...... 0.54 0.55 1.24 (0.85) 1.35
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.37) (0.52) (0.34) (0.52) (0.54)
Net realized gains on investments..... 0 0 0 0 (0.07)
Total distributions................... (0.37) (0.52) (0.34) (0.52) (0.61)
NET ASSET VALUE END OF PERIOD......... $ 10.89 $ 10.72 $ 10.69 $ 9.79 $ 11.16
Total return (c)...................... 5.13% 5.21% 12.83% (7.71%) 13.25%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 1.03%(b) 0.89% 1.06%(b) 1.01% 0.85%
Total expenses excluding indirectly
paid expenses..................... 1.03%(b) -- -- -- --
Total expenses excluding waivers and
reimbursements.................... 1.11%(b) 1.09% 1.09%(b) 1.02% 1.07%
Net investment income............... 4.60%(b) 4.78% 4.93%(b) 5.04% 4.99%
Portfolio turnover rate............... 114% 65% 27% 53% 14%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $ 45,814 $ 50,569 $ 58,751 $57,676 $101,352
<CAPTION>
FEBRUARY 21, 1992
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1992
<S> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.51
Net realized and unrealized gain
(loss) on investments............... 0.42
Total from investment operations...... 0.93
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.51)
Net realized gains on investments..... 0
Total distributions................... (0.51)
NET ASSET VALUE END OF PERIOD......... $ 10.42
Total return (c)...................... 9.48%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.49%(b)
Total expenses excluding indirectly
paid expenses..................... --
Total expenses excluding waivers and
reimbursements.................... 1.11%(b)
Net investment income............... 5.79%(b)
Portfolio turnover rate............... 7%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $ 90,738
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) The Fund changed its fiscal year end from December 31 to August 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
EIGHT MONTHS
NINE MONTHS ENDED YEAR ENDED
ENDED YEAR ENDED AUGUST 31, DECEMBER 31,
MAY 31, 1997 (a) AUGUST 31, 1996 1995 (d) 1994
<S> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD.... $ 10.72 $ 10.69 $ 9.79 $ 11.16
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.31 0.44 0.29 0.46
Net realized and unrealized gain (loss)
on investments....................... 0.17 0.03 0.90 (1.37)
Total from investment operations....... 0.48 0.47 1.19 (0.91)
LESS DISTRIBUTIONS FROM
Net investment income.................. (0.31) (0.44) (0.29) (0.46)
Net realized gain on investments....... 0 0 0 0
Total Distributions.................... (0.31) (0.44) (0.29) (0.46)
NET ASSET VALUE END OF PERIOD.......... $ 10.89 $ 10.72 $ 10.69 $ 9.79
Total return (c)....................... 4.55% 4.42% 12.27% (8.24%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................... 1.78%(b) 1.64% 1.81%(b) 1.58%
Total expenses excluding indirectly
paid expenses...................... 1.78%(b) -- -- --
Total expenses excluding waivers and
reimbursements..................... 1.86%(b) 1.84% 1.84%(b) 1.59%
Net investment income................ 3.85%(b) 4.03% 4.18%(b) 4.47%
Portfolio turnover rate................ 114% 65% 27% 53%
NET ASSETS END OF PERIOD
(THOUSANDS).......................... $ 31,874 $32,221 $34,206 $ 32,435
<CAPTION>
JANUARY 11, 1993
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1993
<S> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD.... $ 10.42
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.47
Net realized and unrealized gain (loss)
on investments....................... 0.81
Total from investment operations....... 1.28
LESS DISTRIBUTIONS FROM
Net investment income.................. (0.47)
Net realized gain on investments....... (0.07)
Total Distributions.................... (0.54)
NET ASSET VALUE END OF PERIOD.......... $ 11.16
Total return (c)....................... 12.52%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................... 1.35%(b)
Total expenses excluding indirectly
paid expenses...................... --
Total expenses excluding waivers and
reimbursements..................... 1.57%(b)
Net investment income................ 4.44%(b)
Portfolio turnover rate................ 14%
NET ASSETS END OF PERIOD
(THOUSANDS).......................... $ 41,030
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) The Fund changed its fiscal year end from December 31 to August 31.
<TABLE>
<CAPTION>
NINE MONTHS YEAR EIGHT MONTHS
ENDED ENDED ENDED
MAY 31, AUGUST 31, AUGUST 31,
1997 (a) 1996 1995 (c)
<S> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 10.72 $ 10.69 $ 9.79
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.39 0.55 0.36
Net realized and unrealized gain (loss) on investments...... 0.17 0.03 0.90
Total from investment operations............................ 0.56 0.58 1.26
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME............... (0.39) (0.55) (0.36)
NET ASSET VALUE END OF PERIOD............................... $ 10.89 $ 10.72 $ 10.69
Total return................................................ 5.32% 5.47% 13.02%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 0.78%(b) 0.64% 0.81%(b)
Total expenses excluding indirectly paid expenses......... 0.78%(b) -- --
Total expenses excluding waivers and reimbursements....... 0.86%(b) 0.84% 0.84%(b)
Net investment income..................................... 4.85%(b) 5.03% 5.18%(b)
Portfolio turnover rate..................................... 114% 65% 27%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $ 24,441 $ 25,112 $ 25,079
<CAPTION>
FEBRUARY 28, 1994
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
DECEMBER 31, 1994
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $10.93
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.46
Net realized and unrealized gain (loss) on investments...... (1.14)
Total from investment operations............................ (0.68)
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME............... (0.46)
NET ASSET VALUE END OF PERIOD............................... $ 9.79
Total return................................................ (6.29%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 0.76%(b)
Total expenses excluding indirectly paid expenses......... --
Total expenses excluding waivers and reimbursements....... 0.77%(b)
Net investment income..................................... 5.46%(b)
Portfolio turnover rate..................................... 53%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $4,318
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized.
(c) The Fund changed its fiscal year end from December 31 to August 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
EVERGREEN
SHORT-INTERMEDIATE MUNICIPAL FUND
(logo)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
JANUARY 5, 1995
(COMMENCEMENT
NINE MONTHS OF CLASS OPERATIONS)
ENDED YEAR ENDED THROUGH
MAY 31, 1997 (a) AUGUST 31, 1996 AUGUST 31, 1995
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................... $10.08 $ 10.17 $ 9.97
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................. 0.30 0.43 0.30
Net realized and unrealized gain (loss) on investments................ 0.01 (0.09) 0.20
Total from investment operations...................................... 0.31 0.34 0.50
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME......................... (0.30) (0.43) (0.30)
NET ASSET VALUE END OF PERIOD......................................... $10.09 $ 10.08 $10.17
Total return (c)...................................................... 3.08% 3.37% 5.09%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................................................... 0.84%(b) 0.80% 0.70%(b)
Total expenses excluding indirectly paid expenses................... 0.83%(b) -- --
Total expenses excluding waivers and reimbursements................. 0.96%(b) 1.11% 1.14%(b)
Net investment income............................................... 3.94%(b) 4.05% 4.32%(b)
Portfolio turnover rate............................................... 34% 29% 80%
NET ASSETS END OF PERIOD (THOUSANDS).................................. $6,072 $27,722 $6,820
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
<TABLE>
<CAPTION>
JANUARY 5, 1995
(COMMENCEMENT
NINE MONTHS OF CLASS OPERATIONS)
ENDED YEAR ENDED THROUGH
MAY 31, 1997 (a) AUGUST 31, 1996 AUGUST 31, 1995
<S> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................... $10.08 $ 10.17 $ 9.97
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................. 0.23 0.34 0.24
Net realized and unrealized gain (loss) on investments................ 0.02 (0.09) 0.20
Total from investment operations...................................... 0.25 0.25 0.44
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME......................... (0.23) (0.34) (0.24)
NET ASSET VALUE END OF PERIOD......................................... $10.10 $ 10.08 $10.17
Total return (c)...................................................... 2.49% 2.44% 4.50%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................................................... 1.73%(b) 1.67% 1.58%(b)
Total expenses excluding indirectly paid expenses................... 1.73%(b) -- --
Total expenses excluding waivers and reimbursements................. 1.86%(b) 2.07% 2.26%(b)
Net investment income............................................... 3.04%(b) 3.28% 3.50%(b)
Portfolio turnover rate............................................... 34% 29% 80%
NET ASSETS END OF PERIOD (THOUSANDS).................................. $6,742 $ 7,413 $6,050
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
EVERGREEN
SHORT-INTERMEDIATE MUNICIPAL FUND
(logo)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED AUGUST 31,
MAY 31, 1997 (a) 1996 1995 1994 1993 1992 (c)
<S> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $ 10.07 $ 10.17 $ 10.21 $ 10.58 $ 10.33 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.30 0.43 0.46 0.47 0.49 0.51
Net realized and unrealized gain
(loss) on investments............... 0.03 (0.10) (0.04) (0.32) 0.25 0.33
Total from investment operations...... 0.33 0.33 0.42 0.15 0.74 0.84
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.30) (0.43) (0.46) (0.47) (0.49) (0.51)
In excess of net investment income.... 0 0 0 (0.03) 0 0
Net realized gain on investments...... 0 0 0 (0.02) 0 0
Total distributions................... (0.30) (0.43) (0.46) (0.52) (0.49) (0.51)
NET ASSET VALUE END OF PERIOD......... $ 10.10 $ 10.07 $ 10.17 $ 10.21 $ 10.58 $ 10.33
Total return.......................... 3.36% 3.30% 4.20% 1.40% 7.40% 8.56%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.74%(b) 0.70% 0.74% 0.58% 0.40% 0.17%
Total expenses excluding indirectly
paid expenses..................... 0.73%(b) -- -- -- -- --
Total expenses excluding waivers and
reimbursements.................... 0.86%(b) 0.90% 0.86% 0.83% 0.81% 0.86%
Net investment income............... 4.04%(b) 4.27% 4.52% 4.54% 4.73% 4.85%
Portfolio turnover rate............... 34% 29% 80% 32% 37% 57%
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $ 32,293 $34,893 $40,581 $53,417 $66,607 $ 54,470
<CAPTION>
JULY 17, 1991
(COMMENCEMENT
OF CLASS OPERATIONS)
THROUGH
AUGUST 31, 1991 (c)
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF PERIOD... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.06
Net realized and unrealized gain
(loss) on investments............... 0
Total from investment operations...... 0.06
LESS DISTRIBUTIONS FROM:
Net investment income................. (0.06)
In excess of net investment income.... 0
Net realized gain on investments...... 0
Total distributions................... (0.06)
NET ASSET VALUE END OF PERIOD......... $10.00
Total return.......................... 0.62%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................... 0.00%(b)
Total expenses excluding indirectly
paid expenses..................... --
Total expenses excluding waivers and
reimbursements.................... 1.40%(b)
Net investment income............... 4.93%(b)
Portfolio turnover rate............... --
NET ASSETS END OF PERIOD
(THOUSANDS)......................... $4,025
</TABLE>
(a) The Fund changed its fiscal year end from August 31 to May 31 during the
current period.
(b) Annualized
(c) On November 18, 1991, the Fund was changed to a diversified municipal bond
fund with a fluctuating net asset value per share from a non-diversified
money market fund with a stable net asset value per share. The shares
outstanding and the related per share data as of August 31, 1991 are
restated to reflect both a 1 for 2 reverse share split on October 30, 1991
and a 1 for 5 reverse share split on August 19, 1992. Total return
calculated after November 18, 1991 reflects the fluctuation in net asset
value per share.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1997 (a) 1996 (f) 1995 (f) 1994
<S> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 9.90 $ 10.05 $ 8.93 $ 10.25
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.24 0.51 0.51 0.51
Net realized and unrealized gain (loss) on investments and
futures contracts................................................. (0.11) (0.14) 1.13 (1.28)
Total from investment operations.................................... 0.13 0.37 1.64 (0.77)
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.24) (0.52) (0.51) (0.52)
In excess of net investment income.................................. (0.01) 0(e) (0.01) 0
Net realized gain on investments.................................... 0 0 0 0
Tax basis return of capital......................................... 0 0 0 (0.03)
Total distributions................................................. (0.25) (0.52) (0.52) (0.55)
NET ASSET VALUE END OF PERIOD....................................... $ 9.78 $ 9.90 $ 10.05 $ 8.93
Total return (c).................................................... 1.34% 3.83% 18.71% (7.81%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.19%(b) 1.13% 1.19% 1.13%
Total expenses excluding indirectly paid expenses................. 1.18%(b) 1.12% 1.18% --
Net investment income............................................. 4.85%(b) 5.21% 5.35% 5.27%
Portfolio turnover rate............................................. 54% 128% 30% 98%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $ 72,629 $ 82,425 $ 94,183 $95,691
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1993
<S> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF PERIOD................................. $ 10.17
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................... 0.57
Net realized and unrealized gain (loss) on investments and
futures contracts................................................. 0.36
Total from investment operations.................................... 0.93
LESS DISTRIBUTIONS FROM:
Net investment income............................................... (0.57)
In excess of net investment income.................................. (0.04)
Net realized gain on investments.................................... (0.24)
Tax basis return of capital......................................... 0
Total distributions................................................. (0.85)
NET ASSET VALUE END OF PERIOD....................................... $ 10.25
Total return (c).................................................... 9.37%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.21%
Total expenses excluding indirectly paid expenses................. --
Net investment income............................................. 5.40%
Portfolio turnover rate............................................. 47%
NET ASSETS END OF PERIOD (THOUSANDS)................................ $124,102
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 13, 1987
(COMMENCEMENT
YEAR ENDED NOVEMBER 30, OF OPERATIONS) TO
1992 1991 1990 1989 1988 NOVEMBER 30, 1987
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES (CONTINUED)
NET ASSET VALUE BEGINNING OF PERIOD................. $ 10.13 $ 9.94 $ 10.24 $ 9.96 $ 9.64 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................... 0.63 0.61 0.59 0.62 0.63 0.33
Net realized and unrealized gain (loss) on
investments and futures contracts................. 0.30 0.31 (0.06) 0.34 0.37 (0.32)
Total from investment operations.................... 0.93 0.92 0.53 0.96 1.00 0.01
LESS DISTRIBUTIONS FROM:
Net investment income............................... (0.62) (0.61) (0.60) (0.63) (0.68) (0.37)
In excess of net investment income.................. 0 0 (0.03) 0 0 0
Net realized gain on investments.................... (0.27) (0.12) (0.20) (0.05) 0 0
Tax basis return of capital......................... 0 0 0 0 0 0
Total distributions................................. (0.89) (0.73) (0.83) (0.68) (0.68) (0.37)
NET ASSET VALUE END OF PERIOD....................... $ 10.17 $ 10.13 $ 9.94 $ 10.24 $ 9.96 $ 9.64
Total return (c).................................... 9.35% 9.59% 5.55% 9.97% 10.60% 0.17%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................... 1.25% 1.58% 1.66% 1.62% 1.57% 1.00%(d)
Total expenses excluding indirectly paid
expenses........................................ -- -- -- -- -- --
Net investment income............................. 6.02% 5.95% 6.03% 6.15% 6.13% 6.85%(d)
Portfolio turnover rate............................. 32% 37% 42% 49% 109% 67%
NET ASSETS END OF PERIOD (THOUSANDS)................ $120,660 $133,524 $146,335 $162,013 $179,191 $16,090
</TABLE>
(a) The Fund changed its fiscal year end from November 30 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to November 30, 1987.
(e) Reflects distributions in excess of net investment income which were under
$0.01 per share.
(f) Calculation based on average shares outstanding.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1997 (a) 1996 (e) 1995 (e) 1994
<S> <C> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 9.81 $ 9.97 $ 8.88 $ 10.25
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.19 0.44 0.44 0.45
Net realized and unrealized gain (loss) on investments and
futures contracts......................................... (0.10) (0.16) 1.11 (1.29)
Total from investment operations............................ 0.09 0.28 1.55 (0.84)
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.20) (0.44) (0.45) (0.50)
In excess of net investment income.......................... (0.01) 0(d) (0.01) 0
Net realized gain on investments............................ 0 0 0 0
Tax basis return of capital................................. 0 0 0 (0.03)
Total distributions......................................... (0.21) (0.44) (0.46) (0.53)
NET ASSET VALUE END OF PERIOD............................... $ 9.69 $ 9.81 $ 9.97 $ 8.88
Total return (c)............................................ 0.97% 2.99% 17.84% (8.43%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.95%(b) 1.90% 1.96% 1.88%
Total expenses excluding indirectly paid expenses......... 1.94%(b) 1.89% 1.94% --
Net investment income..................................... 4.09%(b) 4.44% 4.59% 4.60%
Portfolio turnover rate..................................... 54% 128% 30% 98%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $ 28,822 $ 33,063 $ 33,449 $28,860
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
PUBLIC OFFERING)
TO NOVEMBER 30,
1993
<S> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 10.27
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.37
Net realized and unrealized gain (loss) on investments and
futures contracts......................................... 0.30
Total from investment operations............................ 0.67
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.37)
In excess of net investment income.......................... (0.08)
Net realized gain on investments............................ (0.24)
Tax basis return of capital................................. 0
Total distributions......................................... (0.69)
NET ASSET VALUE END OF PERIOD............................... $ 10.25
Total return (c)............................................ 6.59%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.96%(b)
Total expenses excluding indirectly paid expenses......... --
Net investment income..................................... 4.42%(b)
Portfolio turnover rate..................................... 47%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $ 14,091
</TABLE>
(a) The Fund changed its fiscal year end from November 30 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) Reflects distributions in excess of net investment income which were under
$0.01 per share.
(e) Calculation based on average shares outstanding.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1997 (a) 1996 (e) 1995 (e) 1994
<S> <C> <C> <C> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 9.81 $ 9.97 $ 8.88 $ 10.26
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.18 0.41 0.44 0.43
Net realized and unrealized gain (loss) on investments and
futures contracts......................................... (0.09) (0.13) 1.11 (1.27)
Total from investment operations............................ 0.09 0.28 1.55 (0.84)
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.20) (0.44) (0.45) (0.51)
In excess of net investment income.......................... (0.01) 0(d) (0.01) 0
Net realized gain on investments............................ 0 0 0 0
Tax basis return of capital................................. 0 0 0 (0.03)
Total distributions......................................... (0.21) (0.44) (0.46) (0.54)
NET ASSET VALUE END OF PERIOD............................... $ 9.69 $ 9.81 $ 9.97 $ 8.88
Total return (c)............................................ 0.97% 2.99% 17.84% (8.52%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.95%(b) 1.90% 1.96% 1.89%
Total expenses excluding indirectly paid expenses......... 1.94%(b) 1.89% 1.94% --
Net investment income..................................... 4.09%(b) 4.44% 4.59% 4.52%
Portfolio turnover rate..................................... 54% 128% 30% 98%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $ 11,879 $ 13,769 $ 20,386 $23,230
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
PUBLIC OFFERING)
TO NOVEMBER 30,
1993
<S> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD......................... $ 10.27
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.37
Net realized and unrealized gain (loss) on investments and
futures contracts......................................... 0.31
Total from investment operations............................ 0.68
LESS DISTRIBUTIONS FROM:
Net investment income....................................... (0.37)
In excess of net investment income.......................... (0.08)
Net realized gain on investments............................ (0.24)
Tax basis return of capital................................. 0
Total distributions......................................... (0.69)
NET ASSET VALUE END OF PERIOD............................... $ 10.26
Total return (c)............................................ 6.70%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 1.94%(b)
Total expenses excluding indirectly paid expenses......... --
Net investment income..................................... 4.41%(b)
Portfolio turnover rate..................................... 47%
NET ASSETS END OF PERIOD (THOUSANDS)........................ $ 27,261
</TABLE>
(a) The Fund changed its fiscal year end from November 30 to May 31 during the
current period.
(b) Annualized.
(c) Excluding applicable sales charges.
(d) Reflects distributions in excess of net investment income which were under
$0.01 per share.
(e) Calculation based on average shares oustanding.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
SCHEDULE OF INVESTMENTS
May 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- 97.4%
ARIZONA-- 1.1%
$1,000,000 Creighton Elem. Sch. Dist.
No. 14 of Maricopa Cnty.,
Sch. Imp. Bonds (Proj. of
1990), (Series C 1991),
6.50%, 7/1/07, (FGIC)............. $ 1,125,240
CALIFORNIA-- 2.6%
2,000,000 Redevelopment Agcy. of the
City of San Jose Merged Area
Redev. Proj., Tax Allocation
Bonds, (Series 1993),
6.00%, 8/1/15, (MBIA)............. 2,144,880
500,000 San Mateo Cnty. Joint Pwrs.
Financing Auth. Lease RB
(Capital Projs. Prog.), (1993
Refunding Series A),
6.50%, 7/1/16, (MBIA)............. 560,505
2,705,385
COLORADO-- 3.7%
Arapahoe Cnty. Pub. Hwy.
Auth. Capital Imp. Trust Fund
Hwy. RB (E-470 Proj.):
1,000,000 6.15%, 8/31/26, (MBIA).............. 1,053,890
Sr. Current Interest Bonds,
2,000,000 7.00%, 8/31/26...................... 2,144,720
500,000 School Dist. No. 1,
City & Cnty. of Denver, GO
Refunding Bonds, (Series
1994A),
6.50%, 6/1/10, (MBIA)............. 560,370
3,758,980
FLORIDA-- 1.1%
1,000,000 Orange Cnty. Forida Hlth.
Facs. Auth. Hosp. RB (Orlando
Regional Healthcare Sys.),
(Series 1996C),
6.25%, 10/1/16, (MBIA)............ 1,089,760
GEORGIA-- 5.2%
500,000 City of Atlanta Arpt. Facs.
RRB, (Series 1994A),
6.50%, 1/1/10, (AMBAC)............ 557,990
1,000,000 Metropolitan Atlanta Rapid
Transit Auth. Georgia
Refunding Second Indenture,
(Series A),
5.50%, 7/1/17, (MBIA)............. 998,740
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
GEORGIA-- CONTINUED
Municipal Elec. Auth. Georgia
Spec. Oblig. Fifth Crossover
Series Proj. One:
$1,000,000 6.40%, 1/1/13, (AMBAC).............. $ 1,102,190
2,400,000 6.50%, 1/1/17, (MBIA)............... 2,694,720
5,353,640
HAWAII-- 3.7%
2,500,000 Hawaii St., GO, (Series. CM),
6.00%, 12/1/10, (FGIC)............ 2,679,750
1,000,000 State of Hawaii Arpt. Sys.
RB, (Second Series of 1990),
7.50%, 7/1/20, (FGIC)............. 1,088,990
3,768,740
IDAHO-- 0.9%
845,000 Idaho Hsg. Agcy. Single
Family Mtge. Bonds, (1994
Series C-1 Sr. Bonds &
Mezzanine Bonds),
6.30%, 7/1/11..................... 869,657
ILLINOIS-- 16.9%
4,725,000 City of Chicago Wtr. RRB,
(Series 1993),
6.50%, 11/1/15, (FGIC)............ 5,308,727
2,150,000 City of Chicago GO Current
Interest Bonds, (Proj. Series
1995),
6.13%, 1/1/16, (AMBAC)............ 2,229,249
Illinois Dev. Fin. Auth.
Poll. Ctrl. RRB (Commonwealth
Edison Co. Proj.):
(Series 1991),
2,000,000 7.25%, 6/1/11, (MBIA)............... 2,182,060
(Series 1994D),
3,000,000 6.75%, 3/1/15, (AMBAC).............. 3,293,160
1,750,000 Illinois Hlth. Facs. Auth.
Hlth. Facs. RRB (SSM Hlth.
Care), (Series 1992AA),
6.50%, 6/1/12, (MBIA)............. 1,953,875
5,625,000 Metropolitan Pier &
Exposition Authority Illinois
Refunding McCormick Place
Expn, Project B, (Eff. Yield
5.80%)(a),
0.00%, 6/15/13, (MBIA)............ 2,258,550
17,225,621
</TABLE>
(CONTINUED)
16
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
INDIANA-- 3.5%
$ 1,000,000 Indiana Muni. Pwr. Agcy.,
Pwr. Supply Sys. RRB, (1993
Series B),
6.00%, 1/1/13, (MBIA)............... $ 1,063,720
700,000 Indiana Trans. Fin. Auth.
Hwy. RB, (Series 1992A),
6.80%, 12/1/16, (MBIA).............. 808,024
1,500,000 Middle Sch. Bldg. Corp. of
Lawrence Township of Marion
Cnty., First Mtge. Bonds,
6.88%, 7/5/11, (MBIA)............... 1,729,185
3,600,929
1,000,000 LOUISIANA-- 1.3%
Orleans Parish Louisiana,
School Board RB
9.05%, 2/1/10, (MBIA)............. 1,339,390
1,000,000 MAINE-- 1.1%
Maine Turnpike Auth.,
Turnpike RB, (Series 1994),
7.13%, 7/1/08, (MBIA)............. 1,171,010
2,500,000 MARYLAND-- 2.4%
Maryland St. GO, St. & Local
Facilities, (First Series),
5.00%, 3/1/10..................... 2,455,900
MASSACHUSETTS-- 1.6%
500,000 Massachusetts Hsg. Fin.
Agcy., Hsg. Proj. RB, (1993
Series A),
6.15%, 10/1/15, (AMBAC)........... 508,015
1,000,000 Massachusetts St., Refunding,
(Series A),
6.50%, 11/1/14, (AMBAC)........... 1,119,500
1,627,515
MINNESOTA-- 0.5%
490,000 Minnesota Hsg. Fin. Agcy.
Single Family Mtge. Bonds,
(1994 Series H),
6.70%, 1/1/18..................... 514,397
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
NEW MEXICO-- 1.0%
City of Albuquerque, Arpt. RB:
(Series 1995 A),
$ 500,000 6.35%, 7/1/07, (AMBAC).............. $ 540,220
$ 500,000 (Series 1995 B),
7.00%, 7/1/16, (AMBAC).............. 501,170
1,041,390
NEW YORK-- 11.2%
1,000,000 Albany Cnty., Arpt. Auth.
Arpt. Rev.,
5.25%, 12/15/10, (FSA)............ 980,990
1,500,000 New York St. Housing Finance
Agency Revenue, (Series 1994 B),
6.35%, 8/15/23, (AMBAC)........... 1,538,700
2,590,000 New York St. Local Government
Assistance Corporation RB,
(Prerefunded @ $102), (Series B),
7.38%, 4/1/01..................... 2,895,076
5,000,000 Port Auth. New York & New
Jersey Special Obligation
(for JFK Intl. Arrivals
Terminal),
6.25%, 12/1/10, (MBIA)............ 5,453,950
500,000 The Port Auth. of New York &
New Jersey Consolidated Bonds
Fifth Installment,
(Ninety-Seventh Series),
6.50%, 7/15/19, (FGIC)............ 529,900
11,398,616
NORTH DAKOTA-- 3.0%
3,000,000 Mercer Cnty. Poll. Ctrl. RRB
(Basin Elec. Pwr.
Cooperative-Antelope Valley
Unit 1 & Common Facs.),
(Second 1995 Series),
6.05%, 1/1/19, (AMBAC)............ 3,107,910
OHIO-- 3.3%
1,000,000 Board of Ed., Kings Local
Sch. Dist. (City of Warren)
Sch. Imp. Bonds (Unltd. Tax
GO), (Series 1995),
7.50%, 12/1/16, (FGIC)............ 1,254,130
1,500,000 City of Toledo, GO (Ltd. Tax)
Hsg. Imp. Bonds (Macy's
Proj.), (Series 1995A),
6.35%, 12/1/25, (MBIA)............ 1,580,835
</TABLE>
(CONTINUED)
17
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
OHIO-- CONTINUED
$ 475,000 Ohio Hsg. Fin. Agcy.
Residential Mtge. RB (GNMA
Mortgage-Backed Securities
Prog.), (1995 Series A-2),
6.63%, 3/1/26..................... $ 490,252
3,325,217
SOUTH CAROLINA-- 3.4%
3,250,000 South Carolina St., Port
Auth. RB, (Series 1991),
6.63%, 7/1/11, (AMBAC)............ 3,468,563
SOUTH DAKOTA-- 4.2%
4,000,000 South Dakota Hlth. & Edl.
Facs. Auth. RRB (St. Luke's
Midland Regional Med. Center
Issue), (Series 1991),
6.63%, 7/1/11, (MBIA)............. 4,304,240
TENNESSEE-- 3.1%
1,200,000 The Hlth. & Edl. Facs. Board
of the City of Bristol Hosp.
RRB (Bristol Mem. Hosp.),
(Series 1993),
6.75%, 9/1/07, (FGIC)............. 1,366,740
1,700,000 The Hlth., Edl. & Hsg. Facs.
Board of the Cnty. of Knox
Hosp. RRB (Fort Sanders
Alliance Obligated Group),
(Series 1993),
6.25%, 1/1/13, (MBIA)............. 1,843,378
3,210,118
TEXAS-- 4.4%
1,500,000 City of Austin Arpt. Sys.
Prior Lien RB, (Series 1995A),
6.13%, 11/15/25, (MBIA)........... 1,533,060
1,000,000 City of Houston Wtr.
Conveyance Sys. Contract COP,
(Series 1993H),
7.50%, 12/15/14, (AMBAC).......... 1,221,290
6,000,000 Harris County Texas, RB Toll
Road, (Prerefunded @
$53.836), (Eff. Yield 5.39%)(a),
0.00%, 8/15/09, (AMBAC)........... 1,699,500
4,453,850
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
UTAH-- 3.6%
$2,500,000 Board of Ed. of Iron Cnty.
Sch. Dist. GO Sch. Bldg.
Bonds, (Series 1994),
6.40%, 1/15/12, (MBIA)............ $2,675,325
1,000,000 Salt Lake City, Salt Lake
Cnty. Arpt. RB, (Series 1993A),
6.00%, 12/1/12, (FGIC)............ 1,030,860
3,706,185
VIRGINIA-- 2.1%
2,000,000 Industrial Dev. Auth. of
Hanover Hosp. RB (Mem.
Regional Med. Center Proj. at
Hanover Med. Park), (Series 1995),
6.38%, 8/15/18, (MBIA)............ 2,196,040
WASHINGTON-- 2.6%
2,500,000 City of Tacoma Elec. Sys.
RRB, (Series 1994),
6.25%, 1/1/15, (FGIC)............. 2,619,825
WEST VIRGINIA-- 0.5%
500,000 West Virginia St. Hsg. Dev.
Fund Hsg. Fin. (Series. A),
6.05%, 5/1/27..................... 501,605
WISCONSIN-- 7.3%
4,500,000 City of Superior Ltd. Oblig.
RRB (Midwest Energy Res. Co.
Proj.), (Series E-1991),
6.90%, 8/1/21, (FGIC)............. 5,275,890
2,000,000 Wisconsin Hlth. & Edl. Facs.
Auth. RB (Wausau Hosps., Inc.
Proj.), (Series 1991B),
6.63%, 8/15/11, (AMBAC)........... 2,142,580
7,418,470
PUERTO RICO-- 2.1%
500,000 Commonwealth of Puerto Rico,
Elec. Pwr. Auth. RRB,
(Series Y),
6.50%, 7/1/06, (MBIA)............. 558,460
500,000 Commonwealth of Puerto Rico,
Hsg. Bank & Fin. Agcy.
Affordable Hsg. Mtge. Subsidy
Prog. Single Family Mtge. RB,
Portfolio I,
6.10%, 10/1/15,
(Collateralized by GNMA, FNMA
& FHLMC Certificates)............. 506,220
(CONTINUED)
18
<PAGE>
EVERGREEN
HIGH GRADE TAX FREE FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
LONG-TERM INVESTMENTS-- CONTINUED
PUERTO RICO-- CONTINUED
$1,000,000 Commonwealth of Puerto Rico,
Elec. Pwr. Auth.,
RB, (Series BB),
6.25%, 7/1/10, (MBIA)............. $ 1,100,720
2,165,400
TOTAL LONG-TERM INVESTMENTS
(COST $95,320,879)................ 99,523,593
SHORT-TERM INVESTMENTS-- 0.9%
ALABAMA-- 0.1%
100,000 Phenix Cnty. Alabama RB
Refunding Mead Coated Board
Project B, VRDN
4.15%, 10/1/25.................... 100,000
KANSAS-- 0.8%
800,000 Kansas City Kansas Industrial
Revenue PQ Corporation
Project, VRDN
4.10%, 8/15/01.................... 800,000
TOTAL SHORT-TERM INVESTMENTS
(COST $900,000)................... 900,000
PRINCIPAL
AMOUNT VALUE
MUTUAL FUND SHARES-- 0.2%
167,000 Federated Tax Free Fund
(cost $167,000)................... $ 167,000
TOTAL INVESTMENTS--
(COST $96,387,879)....... 98.5% 100,590,593
OTHER ASSETS AND
LIABILITIES-- NET........ 1.5 1,538,629
NET ASSETS--............... 100.0% $102,129,222
(a) Effective yield (calculated at date of purchase) is the annual yield at
which the bond accrues until its maturity date.
SUMMARY OF ABBREVIATIONS
AMBAC-- American Municipal Bond Assurance Corp.
COP-- Certificate of Participation
FGIC-- Financial Guaranty Insurance Corp.
FHLMC-- Federal Home Loan Mortgage Corporation
FNMA-- Federal National Mortgage Association
FSA-- Financial Security Assurance Corp.
GNMA-- Government National Mortgage Association
GO-- General Obligation Bonds
MBIA-- Municipal Bond Investors Assurance Corp.
RB-- Revenue Bonds
RRB-- Revenue Refunding Bonds
VRDN-- Variable Rate Demand Notes are payable on demand at par on no more than
seven calendar days' notice given by the Fund to the issuer or other parties not
affiliated with the issuer. Interest rates are determined and reset by the
issuer daily or weekly depending upon the terms of the security. The interest
rates presented for these securities are those in effect at May 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
EVERGREEN
SHORT - INTERMEDIATE MUNICIPAL FUND
(logo)
SCHEDULE OF INVESTMENTS
May 31, 1997
LONG-TERM INVESTMENTS-- 97.0%
ARIZONA-- 3.8%
$1,600,000 Pima Cnty. GO RFB, (Series 1992),
6.55%, 7/1/01..................... $ 1,718,384
COLORADO-- 1.2%
520,000 Colorado Stud. Oblig. Board
Auth., Stud. Loan RB,
(Series 1985B),
6.13%, 12/1/98.................... 530,104
DISTRICT OF COLUMBIA-- 3.4%
1,500,000 Dist. of Columbia GO RFB,
(Series 1989B),
6.63%, 6/1/98, (MBIA)............. 1,539,375
ILLINOIS-- 2.4%
1,000,000 Central Lake Cnty. Joint
Action Wtr. Agcy. RB,
(Prerefunded @ $102),
(Series 1990A),
7.00%, 5/1/00, (AMBAC)............ 1,086,340
MARYLAND-- 4.0%
635,000 Maryland Energy Financing
Administration Solid Waste
Disp. RB, (Wheelabrator Wtr.
Technologies Baltimore L.L.C.
Projs.), (Series 1996),
4.80%, 12/1/98.................... 638,156
1,140,000 Montgomery Cnty. GO Bonds
Consolidated Pub. Imp. RB,
(Series 1992A),
5.30%, 7/1/01..................... 1,174,075
1,812,231
MASSACHUSETTS-- 12.1%
Massachusetts Ind. Fin. Agcy. IDR:
460,000 (Series 1986G),
5.30%, 12/1/06.................... 467,149
565,000 (Series 1986I),
5.30%, 12/1/06.................... 573,780
1,185,000 (Series 1996A),
5.35%, 11/1/07.................... 1,208,368
1,160,000 (Series 1996B),
5.35%, 11/1/07.................... 1,182,875
New England Ed. Loan
Marketing Corp. Stud. Loan RB:
1,000,000 (Series 1993B),
5.40%, 6/1/00..................... 1,016,840
1,000,000 (Series 1993C),
4.75%, 7/1/98..................... 1,007,330
5,456,342
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
MINNESOTA-- 2.3%
$1,015,000 City of Minneapolis & Hsg.
& Redev. Auth. of the City of
St. Paul, Single Family Mtge.
RRB, (Series 1996A),
5.13%, 6/1/32..................... $ 1,015,974
MISSOURI-- 3.2%
North Kansas City Sch. Dist.
GO, Direct Deposit Prog.,
(Series 1996),
710,000 6.70%, 3/1/00....................... 750,179
665,000 7.00%, 3/1/99....................... 695,204
1,445,383
NEW JERSEY-- 4.7%
2,000,000 New Jersey St. GO, (Series 1991),
5.90%, 8/1/02..................... 2,116,380
NEW YORK-- 4.5%
1,000,000 New York, New York, (Series 1997L),
5.25%, 8/1/00..................... 1,009,710
1,000,000 Pwr. Auth. of the St. of New
York, General Purpose Bonds,
(Series Z),
5.85%, 1/1/00..................... 1,033,310
2,043,020
OHIO-- 2.3%
1,000,000 The Stud. Loan Funding Corp.
(Cincinnati) Stud. Loan RB,
(Series 1993A),
5.50%, 12/1/01.................... 1,019,940
OREGON-- 2.5%
1,125,000 Josephine Cnty., Sch. Dist.
#007 GO,
5.00%, 6/1/99, (FGIC)............. 1,140,818
PENNSYLVANIA-- 7.9%
1,000,000 Lancaster Cnty. Hosp. Auth.
Hosp. RB (The Lancaster
General Hosp. Proj.), (Series
1992),
5.60%, 7/1/00, (AMBAC)............ 1,031,900
1,950,000 Sayre Hlth. Care Facs. Auth.
RB, Guthrie Healthcare Sys.,
(Series 1991A),
6.40%, 3/1/99, (AMBAC)............ 2,017,489
500,000 St. of Pennsylvania GO,
(Series 1971),
6.00%, 12/15/98................... 503,270
3,552,659
(CONTINUED)
20
<PAGE>
EVERGREEN
SHORT - INTERMEDIATE MUNICIPAL FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
SOUTH CAROLINA-- 1.2%
$ 500,000 Charleston Cnty. Arpt.
Dist. Arpt. System RRB,
(Series 1993),
8.25%, 7/1/00, (MBIA)............. $ 552,420
TEXAS-- 15.0%
1,000,000 Brazos Higher Ed. Auth.,
Inc., Stud. Loan RRB,
(Series 1992A),
5.30%, 12/1/97.................... 1,006,210
500,000 City of Dallas GO,
5.90%, 2/15/01.................... 523,625
1,000,000 City of Houston Pub. Imp.
RFB, (Series 1992C),
5.70%, 3/1/01..................... 1,038,490
1,300,000 Dallas Cnty. Imp. (Ltd. Tax)
RB, (Series 1992A),
6.00%, 8/15/01.................... 1,373,905
505,000 San Antonio Independent Sch.
Dist. Pub. Facs. Corp. RB,
(Series 1996),
5.00%, 10/15/00, (AMBAC).......... 510,969
Texas Dept. Hsg. & Cmnty.
Affairs Single Family Mtge.
RB, (Series 1996E):
1,260,000 4.45%, 3/1/99, (MBIA)............... 1,261,562
1,045,000 4.65%, 3/1/00, (MBIA)............... 1,049,034
6,763,795
UTAH-- 6.4%
2,500,000 Intermountain Pwr. Agcy.,
Pwr. Supply RFB, (Series C),
6.00%, 7/1/00, (MBIA)............. 2,603,150
290,000 Utah Hsg. Fin. Agcy. Single
Family Mtge. RRB, (Series 1993A),
5.20%, 1/1/01..................... 293,996
2,897,146
VIRGINIA-- 3.4%
1,500,000 Virginia Hsg. Dev. Auth.
Commonwealth Mtge. Bonds,
(Series 1992B, Subseries B-1),
6.00%, 1/1/98..................... 1,513,845
WASHINGTON-- 11.9%
2,950,000 St. of Washington GO RB,
Motor Vehicle Fuel Tax,
(Series R-92D),
5.60%, 9/1/01..................... 3,064,844
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
WASHINGTON-- CONTINUED
$ 550,000 Washington Pub. Pwr. Supply
Sys. RRB (Nuclear Proj. #1),
(Series 1992A),
5.00%, 7/1/98..................... $ 556,122
Washington Pub. Pwr. Supply
Sys. RRB (Nuclear Proj. #2),
(Series 1992A):
1,070,000 5.00%, 7/1/98....................... 1,081,909
675,000 5.00%, 7/1/99....................... 681,088
5,383,963
WISCONSIN-- 4.8%
1,000,000 Milwaukee GO,
Pub. Imps., (Series BZ),
6.30%, 6/15/01.................... 1,064,300
1,000,000 Milwaukee Metropolitan Sewage
Dist. GO, (Series 1989A),
7.00%, 9/1/01..................... 1,092,060
2,156,360
TOTAL LONG-TERM INVESTMENTS
(COST $43,306,201)................ 43,744,479
SHORT-TERM INVESTMENTS-- 3.3%
COLORADO-- 3.3%
1,500,000 Arapahoe Cnty. MHRB Ref.
Stratford Sta., (Series 1994),
VRDN, (LOC: Heller Finl., Inc.)
4.45%, 11/1/17 (cost $1,500,000).. 1,500,000
TOTAL INVESTMENTS--
(COST $44,806,201)....... 100.3% 45,244,479
OTHER ASSETS AND
LIABILITIES-- NET........ (0.3) (137,878)
NET ASSETS--............... 100.0% $ 45,106,601
SUMMARY OF ABBREVIATIONS:
AMBAC-- American Municipal Bond Assurance Corp.
FGIC-- Financial Guaranty Insurance Corp.
GO-- General Obligation Bonds
IDR-- Industrial Development Revenue Bonds
LOC-- Letter of Credit
MBIA-- Municipal Bond Investors Assurance Corp.
MHRB-- Municipal Housing Revenue Bonds
RB-- Revenue Bonds
RFB-- Refunding Bonds
RRB-- Refunding Revenue Bonds
VRDN-- Variable Rate Demand Notes are payable on demand at par on no more than
seven calendar days' notice given by the Fund to the issuer or other parties not
affiliated with the issuer. Interest rates are determined and reset by the
issuer daily or weekly depending upon the terms of the security. The interest
rates presented for these securities are those in effect at May 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
SCHEDULE OF INVESTMENTS
May 31, 1997
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- 98.2%
ALABAMA-- 0.2%
$ 265,000 Alabama Housing Finance Agency,
Single Family Mortgage,
10.75%, 6/1/13.................... $ 281,125
ALASKA-- 0.4%
470,000 Alaska Housing Finance Corp.,
Collateralized Home Mortgage,
8.75%, 12/1/16.................... 483,898
ARIZONA-- 1.6%
1,875,000 Page, Arizona, Municipal Property
Corp., Excise Tax Revenue,
5.00%, 7/1/11, (MBIA)............. 1,806,450
CALIFORNIA-- 7.0%
500,000 Anaheim, California, Public
Financing Authority, Series C,
6.00%, 9/1/16..................... 529,385
1,400,000 California Health Facilities,
Children's Hospital,
5.38%, 7/1/20..................... 1,341,914
2,115,000 Central Coast, California, Water
Authority Revenue,
State Water Project, Regional
Facilities, Series A,
5.00%, 10/1/16, (AMBAC)........... 1,977,737
1,785,000 East Bay, California, Municipal
Utility District, Water System
Revenue,
5.00%, 6/1/16, (FGIC)............. 1,678,382
San Francisco, California, State
Building Authority, Lease Revenue,
San Francisco Civic Center
Complex-- A:
1,000,000 5.25%, 12/1/16...................... 964,440
500,000 5.25%, 12/1/21...................... 476,840
2,450,000 Victor Valley, California, Joint
Union High School District,
Capital Appreciation, (effective
yield
5.69%) (b),
0.00%, 9/1/13, (MBIA)............. 991,172
7,959,870
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
COLORADO-- 5.5%
City and County of Denver, Colorado,
Airport System:
Series A:
$1,250,000 7.00%, 11/15/99..................... $ 1,314,500
720,000 7.25%, 11/15/25..................... 821,102
1,000,000 8.00%, 11/15/25..................... 1,105,710
750,000 8.75%, 11/15/23..................... 876,570
Series B,
750,000 7.25%, 11/15/12..................... 814,590
Series D,
1,100,000 7.75%, 11/15/13..................... 1,339,877
6,272,349
FLORIDA-- 8.6%
750,000 Gainesville, Florida, Utilities
System Revenue, Series A,
5.20%, 10/1/22.................... 710,595
1,500,000 Martin County, Florida, Industrial
Development Authority, Industrial
Development Revenue, Indiantown
Cogeneration Project, Series A,
7.88%, 12/15/25................... 1,682,865
2,000,000 Orange County, Florida, Health
Facilities Authority, Orlando
Hospital Regional Healthcare,
Series A,
6.25%, 10/1/18.................... 2,186,940
1,000,000 Sarasota County, Florida, Utility
Systems Revenue,
6.50%, 10/1/22, (FGIC)............ 1,122,620
2,640,000 Tallahassee, Florida, Health
Facilities, Tallahassee Memorial
Regional Medical Project,
6.63%, 12/1/13, (MBIA)............ 2,927,971
1,015,000 Tampa, Florida, Subordinated
Guaranteed Entitlement Revenue,
Series 1988B,
8.40%, 10/1/08.................... 1,070,226
9,701,217
(CONTINUED)
22
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
ILLINOIS-- 1.9%
$910,000 Chicago, Illinois, Gas Supply
Revenue (People's Gas, Light and
Coke Co.), Series A,
8.10%, 5/1/20..................... $ 998,316
1,000,000 Illinois Health Facilities
Authority, United Medical Center,
8.38%, 7/1/12..................... 1,187,550
2,185,866
INDIANA-- 2.8%
1,300,000 Indiana Municipal Power Supply,
Systems Revenue,
5.50%, 1/1/16..................... 1,289,340
1,640,000 St. Joseph County, Indiana,
Educational Facilities Revenue,
University of Notre Dame,
6.50%, 3/1/26..................... 1,835,226
3,124,566
LOUISIANA-- 1.3%
1,415,000 Louisiana Public Facilities
Authority, Health and Education,
Pre-refunded,
7.90%, 12/1/15.................... 1,505,461
MASSACHUSETTS-- 8.2%
Massachusetts Bay Transportation
Authority, Series A:
1,875,000 6.25%, 3/1/12....................... 2,050,763
1,000,000 7.00%, 3/1/11....................... 1,167,180
1,950,000 7.00%, 3/1/21....................... 2,315,450
400,000 Massachusetts, General Obligation,
(effective yield 7.00%) (b),
0.00%, 6/1/07, (FGIC)............. 241,104
1,490,000 Massachusetts State Housing Finance
Agency, Residential Housing,
Series A,
8.40%, 8/1/21..................... 1,552,967
500,000 Massachusetts State Industrial
Finance Agency, Senior Lien,
Massachusetts Recycling
Association,
9.00%, 8/1/16 (a)................. 200,000
Massachusetts Water Resources
Authority, General Revenue Bonds:
1,000,000 Series A,
6.00%, 8/1/20..................... 1,012,170
1,000,000 1995, Series B,
4.00%, 12/1/18.................... 774,880
9,314,514
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
MICHIGAN-- 0.5%
$ 500,000 Monroe County, Michigan, Economic
Development Corp.,
Detroit Edison Co.,
6.95%, 9/1/22, (FGIC)............. $ 594,535
MINNESOTA-- 0.5%
595,000 Minnesota Housing Finance Agency,
Single Family Mortgage, Series A,
8.20%, 8/1/19..................... 611,785
MISSOURI-- 0.5%
500,000 Sikeston, Missouri, Electric
Revenue,
6.00%, 6/1/14, (MBIA)............. 530,165
NEW JERSEY-- 5.0%
1,000,000 New Jersey Economic Development
Authority, Water Facilities
Revenue, NJ American Water Co.,
Inc. Project,
6.50%, 4/1/22, (FGIC)............. 1,055,410
4,325,000 Salem County, New Jersey, Pollution
Control Financing Authority,
Waste Disposal Revenue,
6.50%, 11/15/21................... 4,560,496
5,615,906
NEW MEXICO-- 3.8%
500,000 Albuquerque, New Mexico, Airport
Revenue, Series B,
8.75%, 7/1/19..................... 506,720
1,950,000 Albuquerque, New Mexico, Joint Water
and Sewer System Revenue,
Capital Appreciation, Series A,
(effective yield 5.42%) (b),
0.00%, 7/1/08, (FGIC)............. 1,083,030
1,590,000 New Mexico Mortgage Finance
Authority, Single Family Mortgage,
8.63%, 7/1/17, (FGIC)............. 1,637,970
1,000,000 University of New Mexico, University
Revenue, Series A,
6.00%, 6/1/21..................... 1,045,860
4,273,580
(CONTINUED)
23
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
NEW YORK-- 14.4%
New York City, New York, GO:
$1,410,000 Fiscal 1992, Pre-refunded, Series A,
7.75%, 8/15/15 (d)................ $ 1,602,056
2,500,000 Series G,
6.75%, 2/1/09..................... 2,733,600
500,000 New York and New Jersey, Port
Authority, Special Obligation
Revenue, JFK International Airport
Terminal-- 6 Project,
5.75%, 12/1/25, (MBIA)............ 498,675
2,000,000 New York State Dormitory Authority,
State University Dormitory
Facilities, Series A,
6.00%, 7/1/09..................... 2,142,620
New York State Dormitory Authority,
State University Educational
Facilities Revenue:
800,000 Series A,
5.25%, 5/15/15, (AMBAC)........... 778,120
1,300,000 Series C,
7.38%, 5/15/10.................... 1,515,046
1,600,000 New York State Local Government
Assistance Corp., Series A
5.50%, 4/1/17..................... 1,573,072
2,510,000 New York State Tollway Authority,
Highway and Bridge
Trust Fund, Series A,
5.25%, 4/1/16, (AMBAC)............ 2,422,225
New York State Urban Development
Corp.:
Correctional Facilities, Series A:
1,000,000 6.50%, 1/1/10....................... 1,084,510
1,000,000 7.50%, 4/1/11....................... 1,121,870
805,000 Higher Education Technology Grants,
6.00%, 4/1/10, (MBIA)............... 847,528
16,319,322
1,000,000 NORTH CAROLINA-- 0.8%
North Carolina Medical Care, Duke
University Hospital, Series C,
5.25%, 6/1/21..................... 941,530
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
OHIO-- 1.8%
$1,000,000 Montgomery County, Ohio, Hospital
Revenue, Kettering Medical
Center, 6.25%, 4/1/20............. $1,087,260
1,000,000 North Olmsted, Ohio, GO,
5.00%, 12/1/16, (AMBAC)........... 935,880
2,023,140
PENNSYLVANIA-- 8.2%
1,500,000 Pennsylvania Convention Center
Authority, Series A,
(effective yield 7.00%) (b),
0.00%, 9/1/08, (FGIC)............. 840,405
2,450,000 Pennsylvania Economic Development
Financing Authority, Resources
Recovery, Northampton Project,
6.50%, 1/1/13 (c)................. 2,420,085
1,000,000 Philadelphia, Pennsylvania, Hospital
and Higher Education Facilities,
Community College, Series B,
6.50%, 5/1/07, (MBIA)............. 1,104,070
4,000,000 Pittsburgh, Pennsylvania, School
District, Capital Appreciation,
Series B, (effective yield 5.42%)
(b),
0.00%, 8/1/09, (AMBAC)............ 2,135,320
2,200,000 Scranton-Lackawanna, Pennsylvania,
Health and Welfare
Authority Revenue, Walters
Institute Project,
8.13%, 7/15/28.................... 2,307,184
500,000 Southeastern Pennsylvania
Transportation Authority,
Special Revenue,
5.38%, 3/1/22, (FGIC)............. 481,765
9,288,829
PUERTO RICO-- 3.5%
2,000,000 Commonwealth of Puerto Rico, GO,
7.00%, 7/1/10, (MBIA)............. 2,336,700
1,365,000 Puerto Rico Electric Power
Authority, Series S,
7.00%, 7/1/07..................... 1,584,287
3,920,987
(CONTINUED)
24
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
TENNESSEE-- 4.9%
$2,000,000 Bristol, Tennessee, Health and
Education Authority,
Bristol Memorial Hospital,
6.75%, 9/1/10, (FGIC)............. $ 2,303,820
Knox County, Tennessee, Health and
Educational Facilities,
Fort Sanders Hospital Alliance:
1,000,000 Series B,
7.25%, 1/1/10, (MBIA)............. 1,171,990
1,000,000 Series C,
5.25%, 1/1/15, (MBIA)............. 969,670
1,000,000 Metropolitan Government of Nashville
and Davidson County,
Tennessee Water and Sewer,
step bond, (effective yield 5.20%)
(b),
0.00%, 1/1/12, (FGIC)............. 1,100,570
5,546,050
TEXAS-- 10.7%
3,000,000 Brazos River Authority, Texas,
Revenue Refunding,
Houston Light and Power Project,
8.10%, 5/1/19, (MBIA)............. 3,154,980
1,000,000 Harris County, Texas, Toll Road,
Senior Lien, Series A,
7.00%, 8/15/10.................... 1,166,690
3,000,000 Houston, Texas, Water and Sewer
System Revenue,
Jr. Lien, Series C,
(effective yield 6.05%) (b),
0.00%, 12/1/11, (AMBAC)........... 1,349,400
1,500,000 Northwest, Texas, Independent School
District, Capital Appreciation,
(effective yield 5.50%) (b),
0.00%, 8/15/08, (PSFG)............ 832,260
1,000,000 Nueces River Authority, Texas Water
Supply, Facilities Corpus Christie
Lake,
5.25%, 7/15/16.................... 960,200
2,125,000 Tarrant County, Texas, Health
Facilities Development, Harris
Methodist Health Systems, Series
A,
5.13%, 9/1/12, (AMBAC)............ 2,036,388
2,125,000 Texas Municipal Power Agency,
(effective yield 7.09%) (b),
0.00%, 9/1/08, (AMBAC)............ 1,176,294
1,500,000 United Independent School District,
Texas, GO,
5.25%, 8/15/15, (PSFG)............ 1,438,335
12,114,547
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
UTAH-- 0.4%
$ 750,000 Intermountain Power Agency, Utah,
Power Supply Refunding, Series A,
(effective yield 6.95%) (b),
0.00%, 7/1/07..................... $ 445,320
WASHINGTON-- 4.7%
3,000,000 Chelan County, Washington, Public
Utilities District, Series A,
(effective yield 5.53%) (b),
0.00%, 6/1/09..................... 1,563,210
1,500,000 Tacoma, Washington, Solid Waste
Utility Revenue, Series B,
5.50%, 12/1/17, (AMBAC)........... 1,453,305
1,000,000 Washington Public Power Supply
System, Nuclear Project #2,
Series C,
7.63%, 7/1/10..................... 1,118,080
1,000,000 Washington State GO, Series A,
6.75%, 2/1/15..................... 1,146,110
5,280,705
WYOMING-- 1.0%
1,140,000 Wyoming Community Development
Authority, Single Family Mortgage,
Series A,
7.88%, 6/1/18..................... 1,180,196
TOTAL LONG-TERM INVESTMENTS
(COST-- $107,046,798)............. 111,321,913
SHORT-TERM INVESTMENTS-- 0.5%
FLORIDA-- 0.5%
565,000 Dade County, Florida, Water and
Sewer Systems Revenue, VRDN,
3.85%, 10/5/22.................... 565,000
WASHINGTON-- 0.0%
5,000 Washington State Health Care
Facilities, VRDN,
4.00%, 10/1/05.................... 5,000
TOTAL SHORT-TERM
INVESTMENTS (COST-- $570,000)... 570,000
TOTAL INVESTMENTS
(COST-- $107,616,798)...... 98.7% 111,891,913
OTHER ASSETS AND
LIABILITIES-- NET.......... 1.3% 1,437,886
NET ASSETS................... 100.0% $113,329,799
(CONTINUED)
25
<PAGE>
KEYSTONE
TAX FREE INCOME FUND
(logo)
SCHEDULE OF INVESTMENTS (CONTINUED)
May 31, 1997
(a) Securities which have defaulted on payment of interest and/or principal.
The Fund has stopped accruing income on those so identified.
(b) Effective yield (calculated at date of purchase) is the yield at which the
bond accretes on an annual basis until maturity date.
(c) Securities that may be resold to "qualified instituional buyers" under Rule
144A or securities offered pursuant to Section 4(2) of the Securities Act
of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
(d) At May 31, 1997, $300,000 principal amount of New York City, New York, GO,
Fiscal 1992, Pre-refunded, Series A, 7.75%, 8/15/15 was pledged to cover
margin requirements for open futures contracts.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC-- American Municipal Bond Assurance Corporation
FGIC-- Financial Guaranty Insurance Company
GO-- General Obligation Bonds
MBIA-- Municipal Bond Investors Assurance Corp.
PSFG-- Permanent School Fund Guaranteed
VRDN-- Variable Rate Demand Notes are payable on demand at par on no more than
seven calendar days' notice given by the Fund to the issuer or other parties not
affiliated with the issuer. Interest rates are determined and reset by the
issuer daily or weekly depending upon the terms of the security. The interest
rates presented for these securities are those in effect at May 31, 1997.
FUTURES CONTRACTS-- SHORT POSITIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NUMBER INITIAL CONTRACT UNREALIZED
EXPIRATION OF CONTRACTS AMOUNT DEPRECIATION
JUNE 97 17 U.S. TREASURY BOND INDEX $1,833,031 $(37,500)
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF ASSETS AND LIABILITIES
May 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND FUND INCOME FUND
ASSETS
Investments at market value (identified cost-- $96,387,879, $44,806,201
and $107,616,798, respectively)....................................... $100,590,593 $ 45,244,479 $111,891,913
Cash.................................................................... 0 66,326 4,334
Receivable for investments sold......................................... 0 0 2,466,140
Interest receivable..................................................... 1,897,863 843,625 1,892,703
Receivable for Fund shares sold......................................... 107,105 35,048 22,000
Prepaid expenses and other assets....................................... 26,968 30,724 58,554
Total assets........................................................ 102,622,529 46,220,202 116,335,644
LIABILITIES
Payable for investments purchased....................................... 0 1,008,560 2,341,411
Payable for Fund shares redeemed........................................ 228,082 17,401 290,463
Dividends payable....................................................... 140,678 44,499 244,167
Distribution fee payable................................................ 52,967 10,616 63,516
Due to related parties.................................................. 19,104 4,250 13,902
Due to custodian bank................................................... 18,471 0 0
Payable for daily variation margin on open futures contracts............ 0 0 12,219
Accrued expenses and other liabilities.................................. 34,005 28,275 40,167
Total liabilities................................................... 493,307 1,113,601 3,005,845
NET ASSETS................................................................ $102,129,222 $ 45,106,601 $113,329,799
NET ASSETS REPRESENTED BY
Paid-in capital......................................................... $ 99,066,689 $ 45,350,089 $112,869,280
Undistributed net investment income (accumulated distributions in excess
of net investment income)............................................. 124,532 0 (244,167 )
Accumulated net realized loss on investments and futures contracts...... (1,264,713) (681,766) (3,532,929 )
Net unrealized appreciation on investments and futures contracts........ 4,202,714 438,278 4,237,615
Total net assets.................................................... $102,129,222 $ 45,106,601 $113,329,799
NET ASSETS CONSIST OF
Class A................................................................. $ 45,814,519 $ 6,072,249 $72,629,064
Class B................................................................. 31,874,058 6,741,653 28,821,838
Class C................................................................. -- -- 11,878,897
Class Y................................................................. 24,440,645 32,292,699 --
$102,129,222 $ 45,106,601 $113,329,799
SHARES OUTSTANDING
Class A................................................................. 4,207,467 601,763 7,424,946
Class B................................................................. 2,927,195 667,292 2,974,366
Class C................................................................. -- -- 1,225,559
Class Y................................................................. 2,244,589 3,197,322 --
NET ASSET VALUE PER SHARE
Class A................................................................. $ 10.89 $ 10.09 $ 9.78
Class A-- Offering price (based on sales charge of 4.75%, 3.25% and
4.75%, respectively).................................................. $ 11.43 $ 10.43 $ 10.27
Class B................................................................. $ 10.89 $ 10.10 $ 9.69
Class C................................................................. -- -- $ 9.69
Class Y................................................................. $ 10.89 $ 10.10 --
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF OPERATIONS
Period Ended May 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND* FUND* INCOME FUND**
INVESTMENT INCOME
Interest....................................................... $ 4,496,797 $2,373,153 $ 3,631,204
EXPENSES
Management fee................................................. 399,929 248,564 367,154
Distribution Plan expenses..................................... 333,154 71,757 307,124
Transfer agent fees............................................ 65,152 45,027 99,665
Registration and filing fees................................... 52,562 30,280 6,147
Custodian fees................................................. 49,228 48,597 41,888
Administrative services fees................................... 33,901 0 17,396
Professional fees.............................................. 22,955 22,587 25,138
Trustees' fees and expenses.................................... 4,431 7,083 6,480
Other.......................................................... 57,713 23,623 12,229
Fee waivers by investment manager.............................. (64,199) (60,003) 0
Total expenses............................................... 954,826 437,515 883,221
Less: Indirectly paid expenses................................. (197) (639) (7,261)
Net expenses................................................. 954,629 436,876 875,960
NET INVESTMENT INCOME.......................................... 3,542,168 1,936,277 2,755,244
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FUTURES CONTRACTS
Net realized gain on:
Investments.................................................. 640,025 18,940 1,212,437
Futures contracts............................................ 0 0 50,174
Net realized gain on investments and futures contracts......... 640,025 18,940 1,262,611
Net change in unrealized appreciation (depreciation) on:
Investments.................................................. 982,691 139,624 (2,667,451)
Futures contracts............................................ 0 0 (37,500)
Net change in unrealized appreciation (depreciation) on
investments and futures contracts............................ 982,691 139,624 (2,704,951)
Net realized and unrealized gain (loss) on investments and
futures contracts............................................ 1,622,716 158,564 (1,442,340)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 5,164,884 $2,094,841 $ 1,312,904
</TABLE>
* Nine months ended May 31, 1997. During the period, the Fund changed its
fiscal year end from August 31 to May 31.
** Six months ended May 31, 1997. During the period, the Fund changed its fiscal
year end from November 30 to May 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF OPERATIONS
Fiscal Year Ended 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND FUND INCOME FUND
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996
INVESTMENT INCOME
Interest....................................................... $ 6,526,273 $2,837,285 $ 8,727,446
EXPENSES
Management fee................................................. 575,456 287,149 844,486
Distribution plan expenses..................................... 483,026 83,180 709,281
Custodian fees................................................. 100,816 55,841 94,590
Transfer agent fees............................................ 76,905 55,501 186,105
Administrative services fees................................... 59,073 0 21,926
Registration and filing fees................................... 49,627 67,347 36,773
Professional fees.............................................. 25,849 27,986 26,696
Trustees' fees and expenses.................................... 3,640 8,457 6,780
Amortization of organization expenses.......................... 0 8,846 0
Other.......................................................... 76,011 30,530 18,810
Fee waivers and/or expense reimbursement by investment
manager...................................................... (228,548) (140,581) 0
Total expenses............................................... 1,221,855 484,256 1,945,447
Less: Expenses paid indirectly................................. 0 0 (12,939)
Net expenses................................................. 1,221,855 484,256 1,932,508
NET INVESTMENT INCOME.......................................... 5,304,418 2,353,029 6,794,938
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FUTURES CONTRACTS
Realized gain (loss) on:
Investments.................................................. 1,622,360 161,202 2,300,652
Futures contracts............................................ 0 0 (301,239)
Net realized gain on investments and futures contracts......... 1,622,360 161,202 1,999,413
Net change in unrealized appreciation (depreciation) on
investments.................................................. (1,135,792) (564,810) (4,259,520)
Net realized and unrealized gain (loss) on investments and
futures contracts............................................ 486,568 (403,608) (2,260,107)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 5,790,986 $1,949,421 $ 4,534,831
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Period Ended May 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND* FUND* INCOME FUND**
OPERATIONS
Net investment income................................................ $ 3,542,168 $ 1,936,277 $ 2,755,244
Net realized gain on investments and futures contracts............... 640,025 18,940 1,262,611
Net change in unrealized appreciation (depreciation) on investments
and futures contracts.............................................. 982,691 139,624 (2,704,951)
Net increase in net assets resulting from operations............... 5,164,884 2,094,841 1,312,904
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A............................................................ (1,696,428) (755,942) (1,868,216)
Class B............................................................ (934,247) (159,979) (649,369)
Class C............................................................ 0 0 (262,024)
Class Y............................................................ (929,415) (1,020,356) 0
In excess of net investment income:
Class A............................................................ 0 0 (73,369)
Class B............................................................ 0 0 (25,502)
Class C............................................................ 0 0 (10,290)
Total distributions to shareholders................................ (3,560,090) (1,936,277) (2,888,770)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold............................................ 9,286,983 9,393,392 1,652,335
Proceeds from reinvestment of distributions.......................... 2,003,093 973,716 1,527,184
Payment for shares redeemed.......................................... (18,667,515) (35,446,549) (17,530,768)
Net decrease in net assets resulting from capital share
transactions..................................................... (7,377,439) (25,079,441) (14,351,249)
Total decrease in net assets..................................... (5,772,645) (24,920,877) (15,927,115)
NET ASSETS
Beginning of period.................................................. 107,901,867 70,027,478 129,256,914
END OF PERIOD........................................................ $102,129,222 $ 45,106,601 $113,329,799
Undistributed net investment income (accumulated distributions in
excess of net investment income)..................................... $ 124,532 $ 0 $ (244,167)
</TABLE>
* Nine months ended May 31, 1997. During the period, the Fund changed its
fiscal year end from August 31 to May 31.
** Six months ended May 31, 1997. During the period, the Fund changed its fiscal
year end from November 30 to May 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Fiscal Year Ended 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND FUND INCOME FUND
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996
OPERATIONS
Net investment income............................................. $ 5,304,418 $ 2,353,029 $ 6,794,938
Net realized gain on investments and futures contracts............ 1,622,360 161,202 1,999,413
Net change in unrealized depreciation on investments.............. (1,135,792) (564,810) (4,259,520)
Net increase in net assets resulting from operations............ 5,790,986 1,949,421 4,534,831
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A......................................................... (2,655,984) (541,615) (4,538,414)
Class B......................................................... (1,385,989) (229,080) (1,498,516)
Class C......................................................... 0 0 (758,007)
Class Y......................................................... (1,262,445) (1,582,334) 0
In excess of net investment income:
Class A......................................................... 0 0 (31,491)
Class B......................................................... 0 0 (10,398)
Class C......................................................... 0 0 (5,260)
Total distributions to shareholders............................. (5,304,418) (2,353,029) (6,842,086)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold......................................... 16,695,647 37,737,994 6,339,187
Proceeds from shares issued in acquisition of Keystone Texas Tax
Free Fund....................................................... 0 0 5,119,680
Proceeds from reinvestment of distributions....................... 3,093,850 1,651,747 3,629,202
Payment for shares redeemed....................................... (30,410,409) (22,410,625) (31,540,948)
Net increase (decrease) in net assets resulting from capital
share transactions............................................ (10,620,912) 16,979,116 (16,452,879)
Total increase (decrease) in net assets....................... (10,134,344) 16,575,508 (18,760,134)
NET ASSETS
Beginning of year................................................. 118,036,211 53,451,970 148,017,048
END OF YEAR....................................................... $ 107,901,867 $ 70,027,478 $ 129,256,914
Undistributed net investment income (accumulated distributions in
excess of net investment income).................................. $ 115,656 $ 0 $ (245,552)
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
EVERGREEN KEYSTONE
(logo)
STATEMENTS OF CHANGES IN NET ASSETS
Fiscal Year Ended 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(logo) (logo) (logo)
HIGH GRADE SHORT-INTERMEDIATE TAX FREE
FUND FUND INCOME FUND
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1995 AUGUST 31, 1995 NOVEMBER 30, 1995
OPERATIONS
Net investment income........................................ $ 3,187,579 $ 2,318,884 $ 7,600,756
Net realized gain (loss) on investments and futures
contracts.................................................. 437,882 (713,222) (760,743)
Net change in unrealized appreciation on investments......... 7,804,353 529,821 18,451,939
Net increase in net assets resulting from operations....... 11,429,814 2,135,483 25,291,952
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A.................................................... (1,935,789) (178,721) (5,042,433)
Class B.................................................... (936,437) (96,022) (1,531,824)
Class C.................................................... 0 0 (1,026,499)
Class Y.................................................... (315,353) (2,044,141) 0
In excess of net investment income:
Class A.................................................... 0 0 (70,626)
Class B.................................................... 0 0 (21,455)
Class C.................................................... 0 0 (14,377)
Total distributions to shareholders........................ (3,187,579) (2,318,884) (7,707,214)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.................................... 3,098,389 25,128,726 11,472,775
Proceeds from shares issued in acquisition of Evergreen
National
Tax-Free Fund.............................................. 28,779,194 0 0
Proceeds from reinvestment of distributions.................. 1,826,205 1,923,116 4,018,869
Payment for shares redeemed.................................. (18,339,492) (26,833,640) (32,840,818)
Net increase (decrease) in net assets resulting from
capital share transactions............................... 15,364,296 218,202 (17,349,174)
Total increase in net assets............................. 23,606,531 34,801 235,564
NET ASSETS
Beginning of year............................................ 94,429,680 53,417,169 147,781,484
END OF YEAR.................................................. $ 118,036,211 $ 53,451,970 $ 148,017,048
Undistributed net investment income (accumulated distributions
in excess of net investment income).......................... $ 22,568 $ 0 $ (288,160)
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Evergreen Keystone National Tax Free Funds consist of Evergreen High Grade
Tax Free Fund ("High Grade Fund"), Evergreen Short-Intermediate Municipal Fund
("Short-Intermediate Fund") and Keystone Tax Free Income Fund ("Tax Free Income
Fund") (collectively, the "Funds"), all of which are registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as diversified,
open-end management investment companies. High Grade Fund is a series of
Evergreen Investment Trust and Short-Intermediate Fund is a series of Evergreen
Municipal Trust.
The Funds offer Class A, Class B, Class C and/or Class Y shares. Class A shares
are sold with a maximum front-end sales charge of 4.75% for both the High Grade
and Tax Free Income Funds and a maximum front-end sales charge of 3.25% for the
Short-Intermediate Fund. Class B and Class C shares are sold without a front-end
sales charge, but pay a higher ongoing distribution fee than Class A. Class B
shares are sold subject to a contingent deferred sales charge that is payable
upon redemption and decreases depending on how long the shares have been held.
Class C shares are sold subject to a contingent deferred sales charge payable on
shares redeemed within one year after the month of purchase. Class B shares
purchased after January 1, 1997 will automatically convert to Class A shares
after seven years. Class B shares purchased prior to January 1, 1997 retain
their existing conversion rights. Class Y shares are sold at net asset value and
are not subject to contingent deferred sales charges or distribution fees. Class
Y shares are sold only to investment advisory clients of First Union and its
affiliates, certain institutional investors or Class Y shareholders of record of
certain other funds managed by First Union and its affiliates as of December 30,
1994.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
An independent pricing service values each Fund's municipal bonds at fair value
using a variety of factors which may include yield, liquidity, interest rate
risk, credit quality, coupon, maturity and type of issue. Securities for which
valuations are not available from an independent pricing service, including
restricted securities, are valued at fair value as determined in good faith
according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of sixty days or less are
carried at amortized cost, which approximates market value.
B. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values, Tax
Free Income Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill their obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
C. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums.
D. FEDERAL INCOME TAXES
The Funds have qualified and intend to continue to qualify as regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Funds will not incur any federal income tax liability since
they are expected to distribute all of their net investment company taxable
income and net capital gains, if any, to their shareholders. The Funds also
intend to avoid any excise tax liability by making the required distributions
under the Code. Accordingly, no provision for federal income taxes is required.
To the extent that realized capital gains can be offset by capital loss
carryforwards, it is each Fund's policy not to distribute such gains.
E. DISTRIBUTIONS
Distributions from net investment income for the Funds are declared daily and
paid monthly. Distributions from net realized capital gains, if any, are paid at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment for market
discount on securities.
F. CLASS ALLOCATIONS
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
33
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
G. ORGANIZATION EXPENSES
Organizational expenses of High Grade Fund were initially borne by a prior
administrator. As a result of a change in the administration agreement, First
Union purchased the remaining unreimbursed organizational expenses from the
prior administrator. The High Grade Fund had agreed to reimburse such expenses
during the five year period following its commencement of operations. Pursuant
to these arrangements, as of May 31, 1997, the High Grade Fund has fully
reimbursed First Union for such expenses.
2. CAPITAL SHARE TRANSACTIONS
The High Grade and Short-Intermediate Funds have an unlimited number of shares
of beneficial interest with a par value of $0.0001 authorized. The Tax Free
Income Fund has an unlimited number of shares of beneficial interest with no par
value authorized. Shares of beneficial interest of the Funds are currently
divided into Class A, Class B, Class C or Class Y. Transactions in shares of the
Funds were as follows:
HIGH GRADE FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 AUGUST 31, 1996 AUGUST 31, 1995
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 138,267 $ 1,503,579 728,801 $ 7,875,800 95,059 $ 1,003,763
Shares issued in acquisition of Evergreen
National Tax Free Fund........................ 0 0 0 0 369,661 3,970,157
Shares issued in reinvestment of
distributions................................. 91,672 998,917 144,023 1,571,241 109,500 1,150,986
Shares redeemed................................. (737,802) (8,010,676) (1,652,697) (17,891,048) (967,409) (10,152,313)
Net decrease.................................... (507,863) $ (5,508,180) (779,873) $ (8,444,007) (393,189) $ (4,027,407)
CLASS B
Shares sold..................................... 418,834 $ 4,553,869 420,508 $ 4,595,803 112,511 $ 1,186,133
Shares issued in acquisition of Evergreen
National Tax Free Fund........................ 0 0 0 0 243,174 2,611,688
Shares issued in reinvestment of
distributions................................. 50,410 549,306 75,686 825,507 52,945 556,311
Shares redeemed................................. (546,605) (5,937,166) (691,236) (7,495,373) (520,448) (5,459,057)
Net decrease.................................... (77,361) $ (833,991) (195,042) $ (2,074,063) (111,818) $ (1,104,925)
CLASS Y
Shares sold..................................... 296,083 $ 3,229,535 387,417 $ 4,224,044 85,773 $ 908,493
Shares issued in acquisition of Evergreen
National Tax Free Fund........................ 0 0 0 0 2,066,792 22,197,349
Shares issued in reinvestment of
distributions................................. 41,755 454,870 63,909 697,102 11,174 118,908
Shares redeemed................................. (434,833) (4,719,673) (455,583) (5,023,988) (258,812) (2,728,122)
Net increase (decrease)......................... (96,995) $ (1,035,268) (4,257) $ (102,842) 1,904,927 $ 20,496,628
</TABLE>
34
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SHORT-INTERMEDIATE FUND
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 AUGUST 31, 1996 AUGUST 31, 1995
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 182,673 $ 1,860,992 2,806,176 $ 28,333,550 1,438,502 $ 14,469,110
Shares issued in reinvestment of
distributions................................. 17,182 174,056 24,978 253,579 16,308 164,891
Shares redeemed................................. (2,348,922) (23,711,903) (750,660) (7,689,314) (784,474) (7,943,982)
Net increase (decrease)......................... (2,149,067) $(21,676,855) 2,080,494 $ 20,897,815 670,336 $ 6,690,019
CLASS B
Shares sold..................................... 144,261 $ 1,461,443 291,382 $ 2,967,713 673,520 $ 6,777,013
Shares issued in reinvestment of
distributions................................. 11,819 119,733 16,079 163,265 7,150 72,369
Shares redeemed................................. (224,553) (2,272,638) (166,441) (1,686,967) (85,925) (870,798)
Net increase (decrease)......................... (68,473) $ (691,462) 141,020 $ 1,444,011 594,745 $ 5,978,584
CLASS Y
Shares sold..................................... 600,756 $ 6,070,957 635,204 $ 6,436,731 385,625 $ 3,882,603
Shares issued in reinvestment of
distributions................................. 67,156 679,927 121,645 1,234,903 167,271 1,685,856
Shares redeemed................................. (934,601) (9,462,008) (1,283,965) (13,034,344) (1,791,852) (18,018,860)
Net decrease.................................... (266,689) $ (2,711,124) (527,116) $ (5,362,710) (1,238,956) $(12,450,401)
</TABLE>
TAX FREE INCOME FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 NOVEMBER 30, 1996 NOVEMBER 30, 1995
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
CLASS A
Shares sold..................................... 32,393 $ 317,311 181,417 $ 1,689,450 224,063 $ 2,127,732
Share issued in acquisition of Keystone Texas
Tax Free Fund................................. 0 0 131,228 1,269,729 0 0
Shares issued in reinvestment of
distributions................................. 105,269 1,024,777 243,221 2,380,811 270,624 2,608,685
Shares redeemed................................. (1,038,464) (10,140,338) (1,600,793) (15,690,464) (1,843,241) (17,659,525)
Net decrease.................................... (900,802) $ (8,798,250) (1,044,927) $(10,350,474) (1,348,554) $(12,923,108)
CLASS B
Shares sold..................................... 136,707 $ 1,324,403 332,958 $ 3,194,770 647,077 $ 6,139,897
Share issued in acquisition of Keystone Texas
Tax Free Fund................................. 0 0 374,545 3,592,334 0 0
Shares issued in reinvestment of
distributions................................. 35,437 341,830 80,112 776,860 82,512 790,394
Shares redeemed................................. (568,355) (5,489,766) (773,268) (7,498,073) (625,195) (5,968,412)
Net increase (decrease)......................... (396,211) $ (3,823,533) 14,347 $ 65,891 104,394 $ 961,879
CLASS C
Shares sold..................................... 1,101 $ 10,621 140,724 $ 1,454,967 338,010 $ 3,205,146
Share issued in acquisition of Keystone Texas
Tax Free Fund................................. 0 0 26,855 257,617 0 0
Shares issued in reinvestment of
distributions................................. 16,648 160,577 48,553 471,531 64,840 619,790
Shares redeemed................................. (195,509) (1,900,664) (857,965) (8,352,411) (974,642) (9,212,881)
Net decrease.................................... (177,760) $ (1,729,466) (641,833) $ (6,168,296) (571,792) $ (5,387,945)
</TABLE>
35
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the periods ended May 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
COST OF PROCEEDS
PURCHASES FROM SALES
High Grade Fund*........................................................ $116,031,811 $122,344,118
Short-Intermediate Fund*................................................ 21,730,862 46,574,525
Tax Free Income Fund**.................................................. 64,224,477 78,272,042
</TABLE>
* For the nine months ended May 31, 1997
** For the six months ended May 31, 1997
On May 31, 1997, the composition of unrealized appreciation and depreciation of
investment securities based on the aggregate cost of investments for federal tax
purposes was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
GROSS GROSS NET
TAX UNREALIZED UNREALIZED UNREALIZED
COST APPRECIATION DEPRECIATION APPRECIATION
High Grade Fund.................................................. $ 96,387,879 $4,291,252 $ (88,538) $4,202,714
Short-Intermediate Fund.......................................... 44,806,201 438,278 0 438,278
Tax Free Income Fund............................................. 107,616,798 4,709,914 (434,799) 4,275,115
</TABLE>
As of May 31, 1997, the Funds had capital loss carryovers for federal income tax
purposes as follows:
EXPIRATION
2002 2003 2004
High Grade Fund............................ $1,265,000 -- --
Short-Intermediate Fund.................... -- $249,000 $433,000
Tax Free Income Fund....................... 2,704,000 867,00 --
4. DISTRIBUTION PLANS
Since December 11, 1996, Evergreen Keystone Distributor, Inc. (formerly,
Evergreen Funds Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of The
BISYS Group Inc. ("BISYS") has served as principal underwriter for the Tax Free
Income Fund. Prior to December 11, 1996, Evergreen Keystone Investment Services,
Inc. (formerly, Keystone Investment Distributors Company) ("EKIS"), a
wholly-owned subsidiary of Keystone, served as the principal underwriter for the
Tax Free Income Fund. EKD also serves as the principal underwriter for the High
Grade and Short-Intermediate Funds.
Each Fund has adopted Distribution Plans for each class of shares as allowed by
Rule 12b-1 of the 1940 Act. Distribution plans permit the fund to reimburse its
principal underwriter for costs related to selling shares of the fund and for
various other services. These costs, which consist primarily of commissions and
services fees to broker-dealers who sell shares of the fund, are paid by
shareholders through expenses called "Distribution Plan expenses." Each class,
except Class Y, currently pays a service fee equal to 0.25% of the average daily
net asset of the class. The expenses are currently limited to 0.25% annually of
the average daily net assets of the Class A shares of the High Grade and Tax
Free Income Funds and limited to 0.10% annually of the average daily net assets
of the Class A shares of the Short-Intermediate Fund. Class B and Class C also
presently pay distribution fees equal to 0.75% of the average daily net assets
of the Class. Distribution Plan expenses are calculated daily and paid monthly.
With respect to Class B and Class C shares of the Tax Free Income Fund, the
principal underwriter may pay 12b-1 fees greater than the allowable annual
amounts the Fund is permitted to pay. The Fund may reimburse the principal
underwriter for such excess amounts in later years with annual interest at the
prime rate plus 1.00%.
During the period ended May 31, 1997, amounts paid to EKD and/or EKIS pursuant
to each Fund's Class A, Class B and Class C Distribution Plans were as follows:
CLASS A CLASS B CLASS C
High Grade Fund............................... $92,644 $240,510 N/A
Short-Intermediate Fund....................... 19,181 52,576 N/A
Tax Free Income Fund.......................... 90,496 154,261 $62,367
Each of the Distribution Plans for the Tax Free Income Fund may be terminated at
any time by a vote of the Independent Trustees or by a vote of a majority of the
outstanding voting shares of the respective class. However, after the
termination of any Distribution Plan, and subject to the discretion of the
Independent Trustees, payments to EKIS and/or EKD may continue as compensation
for services which had been earned while the Distribution Plan was in effect.
36
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
EKD and/or its predecessor has advised the Funds that it has retained front-end
sales charges resulting from the sales of Class A shares for the High Grade,
Short-Intermediate and Tax Free Income Funds during the period ended May 31,
1997 of $6,389, $3,820 and $9,477, respectively.
Contingent deferred sales charges paid by redeeming shareholders are paid to EKD
or its predecessor.
5. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
First Union National Bank of North Carolina ("FUNB"), a wholly-owned subsidiary
of First Union Corporation ("First Union"), serves as the investment adviser to
the High Grade Fund and is paid a fee computed daily and paid monthly at an
annual rate of 0.50% of the Fund's average daily net assets. EKIS, a subsidiary
of First Union, is the administrator. Prior to March 11, 1997, Evergreen Asset
Management Corp. ("Evergreen Asset"), a wholly owned subsidiary of First Union,
was the administrator. Furman Selz LLC ("Furman Selz") was the sub-administrator
through December 31, 1996. Effective January 1, 1997, BISYS acquired Furman
Selz' mutual fund unit and accordingly BISYS became sub-administrator. The
administrator and sub-administrator for the Fund are entitled to an annual fee
based on the average daily net assets of all funds administered by EKIS for
which First Union or its investment advisory subsidiaries is also the investment
adviser. The administration fee is calculated by applying percentage rates,
which start at 0.05% and decline to 0.01% per annum as net assets increase, to
the average daily net asset value of the funds. The sub-administration fee is
calculated by applying percentage rates, which start at 0.01% and decline to
.004% as net assets increase, to the average daily net asset value of the funds.
Evergreen Asset is the investment adviser for the Short-Intermediate Fund and is
paid a management fee that is computed daily and paid monthly at an annual rate
of 0.50% on the average daily net assets. Out of its fee, Evergreen Asset in
turn pays EKIS for its services as administrator, BISYS for its services as
sub-administrator and Lieber & Company, an affiliate of First Union, for its
services as sub-adviser.
Keystone Investment Management Company ("Keystone"), a subsidiary of First
Union, is the investment adviser for the Tax Free Income Fund. In return for
providing investment management and administrative services to the Tax Free
Income Fund, the Fund pays Keystone a management fee that is calculated daily
and paid monthly. The management fee is computed at an annual rate of 2.00% of
Tax Free Income Fund's gross investment income plus an amount determined by
applying percentage rates starting at 0.50% and declining to 0.25% per annum as
net assets increase, to the average daily net asset value of the Fund.
Effective, January 1, 1997, BISYS became the sub-administrator to the Fund and
is paid by Keystone.
During the period ended May 31, 1997, the investment adviser for the High Grade
and Short-Intermediate Funds waived its management fees in the amounts of
$64,199 and $60,003, respectively.
During the period ended May 31, 1997, High Grade Fund and Tax Free Income Fund
paid or accrued $27,577 and $17,396 to EKIS, respectively, for certain
accounting services.
Evergreen Keystone Service Company ("EKSC") (formerly, Keystone Investor
Resource Center, Inc.), a wholly-owned subsidiary of Keystone, serves as the
transfer and dividend disbursing agent for the Funds. Prior to May 5, 1997,
State Street Bank and Trust Company ("State Street") served as the transfer and
dividend disbursing agent for the High Grade and Short-Intermediate Funds. For
certain accounts for the High Grade and Short-Intermediate Funds, First Union
had been sub-contracted by State Street to maintain shareholder sub-account
records, take fund purchase and redemption orders and answer inquiries. For each
account, First Union is entitled a fee which in aggregate totaled $866 and $288
for the High Grade and Short-Intermediate Funds for the period ended May 31,
1997.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds. As sub-administrator, BISYS compensates the officers of the
Funds.
At May 31, 1997, FUNB owned, directly or beneficially, 22.0% of the outstanding
shares of Short-Intermediate Fund.
37
<PAGE>
EVERGREEN KEYSTONE
(logo)
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an expense offset arrangement with their custodian.
The assets deposited with the custodian under this expense offset arrangement
could have been invested in income-producing assets.
7. ACQUISITIONS
On July 7, 1995 the High Grade Fund acquired the net assets of Evergreen
National Tax Free Fund ("National Fund") and on April 30, 1996 the Tax Free
Income Fund acquired the net assets of Keystone Texas Tax Free Fund ("Texas
Fund") in exchange for Class A, B and C or Y shares. Both acquisitions were
accomplished by a tax-free exchange of the respective shares of each respective
Fund. The value of assets acquired, number of shares issued, unrealized
appreciation acquired and aggregate net assets of each Fund immediately after
the acquisition are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ACQUIRING ACQUIRED VALUE OF NET NUMBER OF UNREALIZED NET ASSETS
FUND FUND ASSETS ACQUIRED SHARES ISSUED APPRECIATION AFTER ACQUISITION
High Grade Fund National Fund $28,779,195 2,679,627 $528,003 $ 128,792,690
Tax Free Income Fund Texas Fund 5,119,680 532,628 81,550 140,303,798
</TABLE>
8. DEFERRED TRUSTEES' FEES
Each Independent Trustee of the High Grade and Short-Intermediate Funds may
defer any or all compensation related to their performance of duties as a
Trustee. Each Trustee's deferred balances are allocated to deferral accounts
which are included in the accrued expenses for the Fund. The investment
performance of the deferral accounts are based on the investment performance of
certain Evergreen Keystone Funds. Any gains earned or losses incurred in the
deferral accounts are reported in each Fund's Trustees' fees and expenses.
Trustees will be paid either in one lump sum or in quarterly installments for up
to ten years at their election, not earlier than either the year in which the
Trustee ceases to be a member of the Board of Trustees or January 1, 2000. As of
May 31, 1997, the value of the Trustees deferral account was $3,717 for the High
Grade Fund and $4,985 for the Short-Intermediate Fund.
9. FINANCING AGREEMENT
On October 31, 1996, a financing agreement between all of the Evergreen Funds
and State Street, Societe Generale and ABN Amro Bank N.V. (collectively, the
"Banks") became effective. Under this agreement, the Banks provide an unsecured
credit facility in the aggregate amount of $225 million ($112.5 million
committed and $112.5 million uncommitted) allocated evenly between the Banks.
Borrowings under this facility bear interest at 0.75% per annum above the
Federal Funds rate. A commitment fee of 0.10% per annum will be incurred on the
unused portion of the committed facility which will be allocated to all
participating funds. State Street acts as agent for the Banks, and as agent is
entitled to a fee of $15,000 which is allocated to all of the Evergreen Funds.
During the period ended May 31, 1997, the High Grade and Short-Intermediate
Funds had no borrowings under this agreement.
38
<PAGE>
EVERGREEN KEYSTONE
(logo)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Evergreen High Grade Tax Free Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Evergreen High Grade Tax Free Fund
(the "Fund"), one of the Evergreen Investment Trust Portfolios, at May 31, 1997,
and the results of its operations, the changes in its net assets and the
financial highlights for the period September 1, 1996 through May 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at May 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures, provides a reasonable basis for the opinion expressed above. The
financial statements of the Fund for the year ended, and indicated periods prior
to, August 31, 1996 were audited by other independent accountants whose report
dated October 16, 1996 expressed an unqualified opinion.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
July 8, 1997
39
<PAGE>
EVERGREEN KEYSTONE
(logo)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Evergreen Short-Intermediate Municipal Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Evergreen Short-Intermediate Fund
(the "Fund"), one of the Evergreen Municipal Trust Portfolios, at May 31, 1997,
and the results of its operations, the changes in its net assets and the
financial highlights for each of the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at May 31, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
July 8, 1997
40
<PAGE>
EVERGREEN KEYSTONE
(logo)
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Tax Free Income Fund
We have audited the accompanying statement of assets and liabilities of Keystone
Tax Free Income Fund, including the schedule of investments, as of May 31, 1997,
and the related statements of operations for the six months ended May 31, 1997
and the year ended November 30, 1996, the statements of changes in net assets
for the six months ended May 31, 1997 and for each of the years in the two-year
period ended November 30, 1996, and the financial highlights for the six months
ended May 31, 1997, each of the years in the nine-year period ended November 30,
1996 and the period from February 13, 1987 (Commencement of Operations) to
November 30, 1987 for Class A Shares and for the six months ended May 31, 1997,
each of the years in the three-year period ended November 30, 1996 and the
period from February 1, 1993 (Date of Initial Public Offering) to November 30,
1993, for Class B and Class C Shares. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Tax Free Income Fund as of May 31, 1997, the results of its operations
for the six months ended May 31, 1997 and the year ended November 30, 1996, the
changes in its net assets and the financial highlights for each of the years or
periods specified in the first paragraph above in conformity with generally
accepted accounting principles.
Boston, Massachusetts KPMG Peat Marwick LLP
June 27, 1997
41
<PAGE>
EVERGREEN KEYSTONE
(logo)
ADDITIONAL INFORMATION (Unaudited)
Shareholders of the Keystone Tax Free Income Fund considered and acted upon the
proposals listed below at a special meeting of shareholders held Monday,
December 9, 1996. In addition, below each proposal are the results of that vote.
1. To elect the following Trustees:
AFFIRMATIVE WITHHELD
Frederick Amling........................... 9,815,069 199,547
Laurence B. Ashkin......................... 9,812,403 202,213
Charles A. Austin III...................... 9,813,238 207,378
Foster Bam................................. 9,812,719 201,897
George S. Bissell.......................... 9,815,312 199,304
Edwin D. Campbell.......................... 9,812,195 202,421
Charles F. Chapin.......................... 9,814,500 200,116
K. Dun Gifford............................. 9,813,609 201,007
James S. Howell............................ 9,811,512 203,104
Leroy Keith, Jr............................ 9,813,609 201,007
F. Ray Keyser.............................. 9,810,159 204,457
Gerald M. McDonnell........................ 9,811,512 203,104
Thomas L. McVerry.......................... 9,811,512 203,104
William Walt Pettit........................ 9,810,932 203,684
David M. Richardson........................ 9,813,609 201,007
Russell A. Salton, III M.D................. 9,811,487 203,129
Michael S. Scofield........................ 9,813,283 201,333
Richard J. Shima........................... 9,808,652 205,964
Andrew J. Simons........................... 9,813,040 201,576
2. To approve an Investment Advisory and Management Agreement between Keystone
Tax Free Income Fund and Keystone Investment Management Company:
Affirmative............................. 9,365,556
Against................................. 146,890
Abstain................................. 502,170
FEDERAL INCOME TAX STATUS OF DIVIDENDS (UNAUDITED)
Of the dividends distributed by High Grade, Short-Intermediate and Tax Free
Income Funds for the period ended May 31, 1997, 99.01%, 99.98% and 99.29%,
respectively, is exempt from federal income tax other than alternative
minimum tax.
42
<PAGE>
This brochure must be preceded or accompanied by a prospectus of an Evergreen
fund contained herein. The prospectus contains more complete information,
including fees and expenses, and should be read carefully before investing
or sending money.
NOT May lose value
FDIC No bank guarantee
INSURED
Evergreen Keystone Distributor, Inc.
<PAGE>
PAGE 1
- --------------------
Keystone Tax Free Fund
Seeks high current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Dear Shareholder:
We are writing to report to you on the activities of Keystone Tax Free Fund
for the twelve-month period which ended December 31, 1996. Following this
letter, we have included a discussion with your Fund's manager
discussing portfolio strategy.
Performance
For the twelve-month period, your Fund returned 3.15%. These results include
price changes and reinvestment of dividends. The Lehman Municipal Bond
Index--a widely recognized benchmark of municipal bond performance--returned
4.43% for the same twelve-month period.
We were satisfied with your Fund's performance, which showed steady
improvement in the second half of last year.
Municipal bond yields rose by less than 1/4% in 1996. However, this modest
year-over-year increase masks the wide fluctuations that occurred during the
past twelve months.
The municipal bond market experienced a period of adjustment in the first
half of 1996. Interest rates reversed course quickly from the rally that had
characterized much of the prior year, as investors responded to stronger than
expected economic growth and anticipated rising inflation. The possibility of
tax-reform and uncertainty regarding the national elections also caused
municipal bond investors to exercise caution and push prices lower.
Clearer economic and political trends began to emerge by mid-year, causing
the market's tone to improve. Although economic growth was confirmed to be
moderate--stronger than many investors had originally expected--inflation
remained well-contained. Investors also grew more comfortable with political
agendas as the campaign season got underway, and tax-law changes became
increasingly less of a possibility. The municipal bond market rebounded from
its earlier lows to generate a positive performance in the second half of the
year.
Outlook
We enter 1997 with a cautiously optimistic outlook that municipal bond prices
will be relatively stable. We expect the economy to continue to grow at a
moderate rate and inflation to remain well-contained. While we continually
monitor the political environment, currently there appear to be no issues
that would have the impact of last year's potential tax-law changes and the
national elections. Although short periods of price fluctuations could
occasionally occur, for the most part we look for interest rates to move
within a narrow range.
Last year's municipal bond market performance also serves as a reminder that
periods of adjustment are a natural part of the financial markets. As
investors, we need to diversify our personal portfolios to help reduce the
effects of temporary volatility. We also need to maintain a long-term
perspective. Financial markets eventually stabilize; and total return builds
over time.
<PAGE>
PAGE 2
- --------------------
Keystone Tax Free Fund
We appreciate your continued support of Keystone funds. If you have any
questions or comments about your investment, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment Management Company
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
[photo] [photo]
Albert H. Elfner, III George S. Bissell
February 1997
<PAGE>
PAGE 3
- --------------------
A Discussion With
Your Fund's Manager
[photo]
Betsy A. Hutchings is vice president and senior
portfolio manager at Keystone specializing in tax-free municipal
bonds. A professional with 17 years of investment experience, Ms.
Hutchings is the portfolio manager of Keystone Tax Free Fund.
Q What does the Fund offer investors?
A Keystone Tax Free Fund is designed for tax-sensitive investors who seek
capital preservation and a high level of current income that is exempt from
federal income tax. For investors in certain tax situations, a portion of
income may be subject to the federal alternative minimum tax (AMT). The Fund
offers professional management and portfolio diversification. We believe
these are important attributes since many investors do not have the time or
resources to monitor credit quality, the economy and interest rates. Further,
we think that professional management and diversification can reduce credit
risk and enhance price stability.
Q How do you select securities for the Fund?
A Our management team employs an intensive research process, paying careful
attention to credit quality and financial stability. We structure the
portfolio with bonds that meet our high credit standards. Our holdings
typically have the characteristics that we believe are necessary for good
performance in the current and anticipated interest rate environment. We
emphasize diversification and focus on maximizing the Fund's income.
Q What was the environment like for municipal bonds over the past twelve
months?
A Municipal bond rates rose modestly in 1996. The interest rate environment
was volatile in the first half of the year and favorable in the second half
of 1996. The economy grew faster than expected in the first six months of
1996, causing concerns about future inflation. In addition to economic
uncertainties, municipal bond investors prepared for the national elections
and the possibility of tax-reform.
In the second half of last year, the uncertainties became resolved and
municipal bonds staged an impressive turnaround. The economy was confirmed to
be growing at a moderate pace. Inflation remained well-contained. As the
campaign season progressed, investors grew more comfortable with political
agendas; and tax-reform became increasingly less likely.
Other factors also helped shape the environment for municipal bonds.
Although new issuance rose approximately 14% to $183 billion--its highest
level since 1993 and demand from individuals was light, strong demand from
insurance companies helped to create a stable balance in the supply/demand
relationship. From a credit standpoint, upgrades exceeded downgrades and the
yields of lower-rated bonds fell--pushing their prices higher--relative to
higher-rated bonds. Municipal revenues were higher than past years and for
the most part, state fund balances were healthy.
Fund Profile
Objective: Seeks high current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Inception Date: April 12, 1977
Average Portfolio Quality: AA
Total assets: $1.56 billion
<PAGE>
PAGE 4
- --------------------
Keystone Tax Free Fund
Q How did you manage the Fund during this time?
A We shortened the Fund's average maturity and swapped out of lower yielding
issues into higher yielding issues that we considered to be undervalued. We
later focused on bonds whose primary component in total return, we believed
would be price appreciation, rather than income. These bonds had coupons that
ranged from 5% to 5.50%, and had maturities of 15-20 years. Throughout the
year we emphasized call protection. In fact, as of December 31, 1996,
approximately one-third of the Fund's net assets were non-callable.
The Fund had a longer average maturity early in 1996, which had a negative
effect on performance when interest rates became volatile. We shortened
average maturity modestly as interest rates rose. This change, combined with
the Fund's focus on bonds that emphasized price appreciation, resulted in the
Fund's total return showing solid improvement throughout the rest of the
year. The Fund posted a total return higher than that of the Lipper average
for the fourth quarter. As of December 31, 1996, Keystone Tax Free Fund had
an average maturity of just under 19 years. Average quality stood at AA.
Q What is your outlook for the next six months?
A We anticipate the overall economic and interest rate environment to be
favorable for municipal bonds, but look for periods of volatility as we
expect many investors to over-react to individual pieces of economic data. We
expect the economy to continue on its path of moderate growth with low
inflation. The political climate should also should be supportive. Voters
have approved over $10 billion in new municipal bond issues for 1997 to
improve infrastructures, particularly highways and schools. We believe new
volume will increase at a rate between 8%-10% per year, over the next few
years.
We will continue to emphasize bonds that we believe maximize price
appreciation and will seek to capitalize on situations that are undervalued.
Over the long-term, we believe this strategy can provide investors with solid
total returns and an attractive level of income that is exempt from federal
income tax.
The Benefits of Tax Free Investing
Federal Tax Bracket
--------------- ---------------------------
31%(1) 36%(2) 39.6%(3)
--------------- ------ ------ -------
Tax Free Yield Taxable Equivalent Yield
--------------- ---------------------------
5.0% 7.25% 7.81% 8.28%
6.0% 8.70% 9.38% 9.93%
7.0% 10.14% 10.94% 11.59%
The equivalent yield for a tax free yield of 6.0% is 9.38% for an investor in
the 36% tax bracket. In other words, a tax free yield of 6.0% is equal to a
taxable yield of 9.38% if you are in the 36% federal tax bracket.
(1) Single filers earning $53,501-$115,000; joint filers earning $89,151-
$140,000.
(2) Single filers earning $115,001-$250,000; joint filers earning $140,001-
$250,000.
(3) Single filers earning over $250,000; joint filers earning over $250,000.
[diamond]
This column is intended to answer
questions about your Fund. If you have a question
you would like answered, please write to:
Evergreen Keystone Investment Services, Inc.
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 5
- --------------------
Your Fund's Performance
Growth of an investment in
Keystone Tax Free Fund
[mountain chart]
In Thousands
Initial Reinvested
Investment Distributions
12/86 10,000 10,000
9,152 9,986
12/88 9,253 11,074
9,118 12,083
12/90 8,937 12,888
9,129 14,280
12/92 9,095 15,358
9,186 17,072
12/94 8,032 15,819
8,891 18,447
12/96 8,722 19,027
A $10,000 investment in Keystone Tax Free Fund made on December 31, 1986 with
all distributions reinvested was worth $19,027 on December 31, 1996. Past
performance is no guarantee of future results.
Twelve-Month Performance as of December 31, 1996
Total return* 3.15%
Net asset value 12/31/95 $7.86
12/31/96 $7.71
Dividends $0.39
Capital gains None
* Before deduction of any contingent deferred sales charge (CDSC).
Historical Record as of December 31, 1996
If you If you did
Cumulative total return redeemed not redeem
1-year 0.21% 3.15%
5-year 33.24% 33.24%
10-year 90.27% 90.27%
Average annual total return
1-year 0.21% 3.15%
5-year 5.91% 5.91%
10-year 6.64% 6.64%
The "if you redeemed" returns reflect the deduction of the 3% CDSC for those
investors who sold Fund shares after one calendar year. Investors who
retained their fund investment earned the returns reported in the second
column of the table.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone fund by phone or in
writing. You may also exchange funds using Keystone's Automated Response Line
(KARL). The Fund reserves the right to change or terminate the exchange
offer.
<PAGE>
PAGE 6
- --------------------
Keystone Tax Free Fund
Growth of an Investment
Comparison of change in value of a $10,000 investment in Keystone Tax Free
Fund, the Lehman Municipal Bond Index and the Consumer Price Index.
In Thousands December 31, 1986 through December 31, 1996
Fund Average
Annual Total Return
- ---------------------------
1 Year 5 Year 10 Year
0.21% 5.91% 6.64%
[line chart]
Lehman Municipal Consumer
Bond Index Price Index
Fund (LMBI) (CPI)
12/86 10,000 10,000 10,000
9,986 10,150 10,441
12/88 11,074 11,179 10,903
12,083 12,385 11,409
12/90 12,888 13,288 12,105
14,280 14,901 12,476
12/92 15,358 16,215 12,836
17,072 18,206 13,190
12/94 15,819 17,269 13,542
18,447 20,285 13,886
12/96 19,027 21,183 14,348
Past performance is no guarantee of future results. The one-year return
reflects the deduction of the Fund's 3% contingent deferred sales charge for
shares held for at least one year. CPI is through
This chart graphically compares your Fund's performance to certain investment
indexes. It is the result of fund performance guidelines issued by the
Securities and Exchange Commission. The intent is to provide investors with
more information about their investment.
Components of the Chart
The chart is composed of three lines that represent the accumulated value of
an initial $10,000 investment for the period indicated. The lines illustrate
a hypothetical investment in:
1. Keystone Tax Free Fund
Your fund seeks current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds. The return
is quoted after deducting contingent deferred sales charges (if applicable),
fund expenses, and transaction costs and assumes reinvestment of all
distributions.
2. Lehman Municipal Bond Index (LMBI)
The LMBI is a broad-based, unmanaged market index of securities issued by
state and local governments. It represents the price change and coupon income
of several thousand securities with various maturities and qualities.
Securities are selected and compiled by Lehman Brothers, Inc. according to
criteria that may be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's performance in relation to a well known
investment index and to increases in the cost of living. It is important to
understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance
over the same time frame and over a long period. Long-term performance is a
more reliable and useful measure of performance than measurements of
short-term returns or temporary swings in the market. Your financial adviser
can help you evaluate fund performance in conjunction with the other
important financial considerations such as safety, stability and consistency.
<PAGE>
PAGE 7
- --------------------
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the index does not
take into account any deductions for sales charges, transactions costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several MeasuresKeystone Tax Free Fund
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run perfomance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
<PAGE>
PAGE 8
- --------------------
Keystone Tax Free Fund
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short-term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The
fund pays income which can fluctuate daily. Liquidity and safety of principal
are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 9
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
MUNICIPAL BONDS (98.0%)
ALABAMA
Alabama Agricultural and Mechanic University (MBIA) 6.500% 11/01/2025 $ 2,035,000 $ 2,208,626
Alabama Housing Finance Authority, Single Family,
Collateralized Home Mortgage, Series D1 6.000 10/01/2016 2,065,000 2,089,945
Mobile, Alabama, Industrial Development Board, Solid
Waste Disposal, Mobile Energy Services Company Project 6.950 01/01/2020 3,500,000 3,681,790
ALASKA
Alaska Energy Authority, Utilities Revenue, Linked
Bulls/Bears Floaters (FGIC) (d) 6.600 07/01/2015 15,000,000 16,346,550
Alaska State Housing Finance Corporation, Collateralized
Home Mortgage, Series A 8.000 12/01/2013 405,000 419,835
North Slope Borough, Alaska, General Obligation, Series
A (MBIA) 5.900 06/30/2003 3,000,000 3,171,030
Valdez, Alaska, Marine Terminal Revenue, Union Alaska
Pipeline Company Project 6.200 05/01/2008 3,000,000 3,007,620
ARIZONA
Central Arizona, Water Conservation District, Contract
Revenue, Central Arizona Project, Series A 5.500 11/01/2008 4,250,000 4,369,467
Central Arizona, Water Conservation District, Contract
Revenue, Central Arizona Project, Series A 5.500 11/01/2009 11,000,000 11,267,190
Chandler, Arizona, Water and Sewer Revenue (FGIC) 6.750 07/01/2006 850,000 920,193
Maricopa County, Arizona, Elementary School District
#008, Osborn Refunding (MBIA) 7.500 07/01/2007 2,000,000 2,410,100
Maricopa County, Arizona, Elementary School District
#068, Series A (AMBAC) 6.750 07/01/2014 3,750,000 4,180,537
Maricopa County, Arizona, Unified School District (MBIA) 8.125 01/01/2010 6,000,000 6,918,060
Northern Arizona University, College and University
Revenue (FGIC) 6.300 06/01/2005 2,770,000 2,980,742
Pima County, Arizona, Industrial Development Authority,
Health Care Corporation Revenue (MBIA) 8.000 07/01/2013 370,000 396,337
Pima County, Arizona, Unified School District, Tucson
Refunding (FGIC) 7.500 07/01/2003 2,030,000 2,356,769
Santa Cruz County, Arizona, Unified School District,
Capital Appreciation (AMBAC) (effective yield 5.95%)
(b) 0.000 01/01/2008 1,100,000 621,115
Santa Cruz County, Arizona, Unified School District,
Capital Appreciation (AMBAC) (effective yield 5.95%)
(b) 0.000 07/01/2008 1,100,000 605,187
ARKANSAS
Arkansas State Development Finance Authority, Single
Family Mortgage Revenue Refunding 8.000 08/15/2011 1,985,000 2,127,920
CALIFORNIA
California Educational Facilities Authority, Stanford
University Project, Series H 5.000 01/01/2015 250,000 234,938
California Health Facilities Financing, St. Francis
Medical Center, Series A 5.500 10/01/2009 200,000 207,158
California Housing Finance Agency, Revenue Bonds, Home
Mortgage, Series H 6.250 08/01/2027 2,000,000 2,019,520
(continued on next page)
<PAGE>
PAGE 10
- --------------------
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
CALIFORNIA (continued)
California State Department of Water Reserves, Series O 5.000% 12/01/2022 $ 6,360,000 $ 5,825,251
California State Public Works Board, Lease Department
Correctional State Prison, Series E 5.500 06/01/2015 3,700,000 3,652,973
California State Public Works Board, Various California
University Projects, Series B 5.500 06/01/2019 350,000 333,515
East Bay, California, Municipal Utility District,
Wastewater Treatment System Revenue (FGIC) 5.000 06/01/2026 3,500,000 3,213,175
Eden Township, California, Hospital District Revenue 7.400 11/01/2019 5,615,000 5,904,509
Los Angeles, California, Transportation Commission,
Series A (MBIA) 6.250 07/01/2013 6,800,000 7,139,184
Metropolitan Water District, Southern California
Waterworks Revenue, Series B 4.750 07/01/2021 6,000,000 5,346,540
Oakland, California, Revenue Refunding, Series A (FGIC) 7.600 08/01/2021 4,265,000 4,565,427
San Francisco, California, City and County Airport
Commission, International Airport Revenue, Second
Series, Issue 12B (FGIC) 5.625 05/01/2021 5,000,000 4,970,300
Southern California Public Power Authority, Transmission
Project Revenue (FGIC) (effective yield 5.93%) (b) 0.000 07/01/2015 10,000,000 3,431,500
Walnut Valley, California, Unified School District,
Series A (MBIA) 6.000 08/01/2014 190,000 202,361
COLORADO
Arapahoe County, Colorado, Single Family Mortgage
Revenue, Capital Appreciation, Series A (effective
yield 6.00%) (b) 0.000 09/01/2010 4,000,000 1,825,240
City and County of Denver, Colorado, Airport System,
Series A 7.000 11/15/1999 2,000,000 2,120,980
City and County of Denver, Colorado, Airport System,
Series A 7.500 11/15/2023 6,625,000 7,376,540
City and County of Denver, Colorado, Airport System,
Series A 8.500 11/15/2023 7,750,000 8,909,943
City and County of Denver, Colorado, Airport System,
Series A 8.750 11/15/2023 23,830,000 28,280,967
City and County of Denver, Colorado, Airport System,
Series A 8.000 11/15/2025 525,000 594,142
City and County of Denver, Colorado, Airport System,
Series B 7.250 11/15/2012 3,500,000 3,829,140
City and County of Denver, Colorado, Airport System,
Series C 6.650 11/15/2005 5,980,000 6,362,840
City and County of Denver, Colorado, Airport System,
Series C 5.600 11/15/2011 5,000,000 4,963,450
City and County of Denver, Colorado, Airport System,
Series C 6.000 12/01/2025 5,000,000 5,019,400
City and County of Denver, Colorado, Airport System,
Series D 7.750 11/15/2013 7,100,000 8,733,000
City and County of Denver, Colorado, Airport System,
Series D 7.750 11/15/2021 12,250,000 13,593,825
Colorado Health Facilities Authority, Sisters Charity
Health Care,
Series A (MBIA) 6.250 05/15/2009 1,880,000 2,061,213
El Paso County, Colorado, School District #11, Colorado
Springs 6.500 12/01/2012 2,310,000 2,588,817
El Paso County, Colorado, School District #11, Colorado
Springs 7.100 12/01/2013 2,000,000 2,371,120
El Paso County, Colorado, School District #11, Colorado
Springs 7.100 12/01/2016 1,000,000 1,190,880
Larimer County, Colorado, School District (MBIA) 7.000 12/15/2016 2,250,000 2,736,923
CONNECTICUT
Connecticut State Special Tax Obligation, Series B 6.500 10/01/2012 1,600,000 1,786,256
Connecticut State Resources Recovery Authority,
Bridgeport Resco Company Project 8.500 01/01/2000 1,375,000 1,424,692
<PAGE>
PAGE 11
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
DELAWARE
Delaware State Health Facilities Authority, Medical
Center of Delaware (MBIA) 7.000% 10/01/2015 $ 1,600,000 $ 1,712,064
Delaware State Housing Authority Revenue, Residential
Mortgage, Series A 9.375 06/01/2012 120,000 120,334
FLORIDA
Broward County, Florida, Professional Sports Facilities
Tax Revenue, Series A (MBIA) 5.625 09/01/2028 2,500,000 2,477,075
Broward County, Florida, Resource Recovery, South
Project 7.950 12/01/2008 8,400,000 9,238,572
City of Tarpon Springs Health Facilities Authority,
Florida, Hospital Refunding, Tarpon Springs Hospital
Foundation, Inc., 8.750 05/01/2012 500,000 526,825
Dade County, Florida, General Obligation (FGIC) 5.125 10/01/2016 7,650,000 7,322,886
Dade County, Florida, Solid Waste System, Special
Obligation Revenue (AMBAC) 5.250 10/01/2004 2,025,000 2,074,127
Escambia County, Florida, Pollution Control Revenue,
Champion International Corporation Project 6.400 09/01/2030 2,500,000 2,530,400
Florida Housing Finance Agency, GNMA Collateralized Home
Mortgage 8.000 12/01/2020 640,000 673,856
Florida State, Bond Finance Department, Environmental
Preservation 5.250 07/01/2010 5,925,000 5,914,809
Florida State, Jacksonville Transportation Authority 9.200 01/01/2015 3,580,000 4,859,492
Hillsborough County, Florida, Housing Finance Agency,
Single Family Mortgage Revenue 7.300 04/01/2022 495,000 511,167
Indian River County, Florida, Water and Sewer Revenue
(FGIC) 5.250 09/01/2020 2,860,000 2,758,642
Jacksonville, Florida, Health Facilities Authority, New
Children's Hospital (MBIA) 7.000 06/01/2021 1,800,000 1,971,036
Lakeland, Florida, Electric and Water Revenue 5.625 10/01/2036 4,000,000 3,942,600
Lee County, Florida, Hospital Board of Directors,
Hospital Revenue, Linked RIBs/SAVRs (d) 6.350 03/26/2020 12,500,000 13,028,375
Lee County, Florida, Solid Waste System, Series B 7.000 10/01/2011 300,000 330,732
Martin County, Florida, Industrial Development
Authority, Indiantown Cogeneration Project--Series A 7.875 12/15/2025 9,000,000 10,260,180
Orlando-Orange County, Florida, Expressway Authority 8.250 07/01/2014 3,000,000 3,960,330
Orlando-Orange County, Florida, Expressway Authority
(FGIC) 8.250 07/01/2015 2,960,000 3,918,803
Palm Beach County, Florida, Health Revenue, John F.
Kennedy Hospital 9.500 08/01/2013 2,985,000 3,859,665
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project 6.700 02/15/2015 3,000,000 2,764,890
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project 6.850 02/15/2021 7,500,000 6,964,125
Palm Beach County, Florida, Solid Waste, Osceola Power
Project, Series A 6.950 01/01/2022 7,500,000 7,042,575
St. Petersburg, Florida, Health Facilities Authority
(MBIA) 7.000 12/01/2015 3,250,000 3,588,683
Sunrise, Florida, Utility Systems Revenue, Series A
(AMBAC) 5.750 10/01/2026 9,000,000 9,026,640
Tampa, Florida, Allegheny Health Systems 6.500 12/01/2023 500,000 550,155
Tampa, Florida, Guaranteed Entitlement, Series A 8.375 10/01/2008 3,145,000 3,367,760
Tampa, Florida, Subordinate Guaranteed Entitlement,
Series B (Pre-refunded) 8.500 10/01/2018 1,825,000 1,958,042
(continued on next page)
<PAGE>
PAGE 12
- --------------------
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
GEORGIA
Forsyth County, Georgia, School District 6.750% 07/01/2016 $ 3,000,000 $ 3,465,000
Georgia Municipal Electric Authority Power Revenue,
Series B 6.375 01/01/2016 9,800,000 10,716,986
Georgia State, General Obligation, Series B 6.800 03/01/2011 10,000,000 11,595,900
Georgia State, General Obligation, Series C 5.250 04/01/2011 11,700,000 11,763,180
Georgia State, General Obligation, Series D 6.700 08/01/2010 1,500,000 1,725,960
Metropolitan Atlanta Rapid Transit Authority, Georgia,
Sales Tax Revenue, Series P (AMBAC) 6.250 07/01/2011 4,255,000 4,700,371
HAWAII
Hawaii State Department of Budget and Finance, Special
Purpose Revenue, Hawaii Electric Company (MBIA) 7.375 12/01/2020 8,000,000 8,776,560
IDAHO
Idaho Housing Finance Authority, Single Family Mortgage
Bonds, Series D-1 8.000 01/01/2020 1,110,000 1,182,827
ILLINOIS
Chicago, Illinois, Gas Supply Revenue, People's Gas
Light and Coke Company, Series A 8.100 05/01/2020 15,860,000 17,552,421
Cook County, Illinois, General Obligation, District
Number 508, Lease Certificates, Series C (MBIA) 7.700 12/01/2005 5,970,000 7,061,734
Illinois Development Finance Authority, Pollution
Control Revenue Refunding, Commonwealth Edison Company
Project, Series D 6.750 03/01/2015 4,000,000 4,379,280
Illinois State, Sales Tax, Series P 6.500 06/15/2022 9,000,000 10,042,290
Kankakee, Illinois, Sewer Revenue (FGIC) 6.875 05/01/2011 2,965,000 3,260,018
Metropolitan Fair and Exposition Authority, Illinois,
Series A 5.000 06/01/2015 3,000,000 2,717,310
Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue, McCormick Place Expansion
Project (FGIC) (effective yield 6.70%) (b) 0.000 06/15/2015 19,440,000 6,736,349
Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue, McCormick Place Expansion
Project (MBIA) (effective yield 6.60%) (b) 0.000 06/15/2013 5,625,000 2,204,212
Metropolitan Pier and Exposition Authority, Illinois,
McCormick Place Expansion Project 7.250 06/15/2005 10,180,000 11,670,352
Quincy, Illinois, Blessing Hospital Revenue 6.000 11/15/2018 4,950,000 4,813,727
INDIANA
Indianapolis, Indiana, Local Public Improvement Bond
Bank, Series 1992D 6.750 02/01/2020 2,000,000 2,142,600
KANSAS
Burlington, Kansas, Pollution Control, Kansas Gas and
Electric Company (MBIA) 7.000 06/01/2031 2,000,000 2,202,580
KENTUCKY
Carroll County, Kentucky, Kentucky Utility Company,
Series A 7.450 09/15/2016 8,000,000 9,073,200
Jefferson County, Kentucky, Hospital Revenue, Linked
ACES/Inverse Floaters (MBIA) (d) 6.435 10/23/2014 6,000,000 6,311,580
<PAGE>
PAGE 13
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
KENTUCKY (continued)
Kentucky Housing Corporation, Housing Revenue Bond,
Series C 7.900% 01/01/2021 $ 4,610,000 $ 4,857,050
Trimble County, Kentucky, Pollution Control, Louisville
Gas and Electric Company 7.625 11/01/2020 2,725,000 3,009,735
Trimble County, Kentucky, Pollution Control, Louisville
Gas and Electric Company, Series A (Pre-refunded) 7.625 11/01/2020 545,000 612,275
LOUISIANA
Louisiana Public Facilities Authority, Hospital Revenue,
Woman Hospital Foundation Project 7.250 10/01/2022 1,750,000 1,869,000
New Orleans, Louisiana, Capital Appreciation (AMBAC)
(effective yield 5.77%) (b) 0.000 09/01/2011 5,000,000 2,210,150
New Orleans, Louisiana, Capital Appreciation (AMBAC)
(effective yield 5.82%) (b) 0.000 09/01/2012 4,700,000 1,944,108
New Orleans, Louisiana, Capital Appreciation (AMBAC)
(effective yield 6.05%) (b) 0.000 09/01/2014 6,960,000 2,549,866
Orleans Parish, Louisiana, School Board (ETM) 9.050 02/01/2010 5,175,000 6,870,485
Orleans Parish, Louisiana, School Board, Refunding
Bonds, Series B 5.200 02/01/2014 3,000,000 2,893,530
Ouachita Parish, Louisiana, Louisiana Hospital Service
Revenue, Glenwood Regional Medical Center 7.500 07/01/2021 2,000,000 2,265,280
MAINE
Maine State Housing Authority, Mortgage Purchase,
Series A3 7.800 11/15/2015 2,580,000 2,643,881
Regional Waste System, Maine, Solid Waste Resources
Recovery Revenue 8.150 07/01/2011 2,500,000 2,706,150
MARYLAND
Maryland State Community Development Administration,
Multi-Family Housing 8.750 05/15/2012 3,345,000 3,363,732
Maryland State and Local Facilities Loan, 3rd Series 5.000 10/15/2010 11,250,000 11,055,938
MASSACHUSETTS
Lawrence, Massachusetts, General Obligation (AMBAC) 6.250 02/15/2009 550,000 592,564
Massachusetts Bay Transportation Authority, Refunding,
General Transportation Systems, Series A 7.000 03/01/2008 4,550,000 5,266,625
Massachusetts Bay Transportation Authority, General
Transportation Systems, Series A 7.000 03/01/2007 5,000,000 5,775,650
Massachusetts Bay Transportation Authority, Series A 7.000 03/01/2011 6,110,000 7,105,808
Massachusetts Bay Transportation Authority, Series A 6.250 03/01/2012 7,600,000 8,309,232
Massachusetts Bay Transportation Authority, Series B 6.200 03/01/2016 2,125,000 2,315,506
Massachusetts Bay Transportation Authority, Series B 5.250 03/01/2020 4,500,000 4,302,315
Massachusetts Industrial Finance Agency, Harvard
Community Health Plan, Incorporated, Series B 8.125 10/01/2017 13,750,000 14,602,362
Massachusetts Industrial Finance Agency, Solid Waste
Disposal Revenue, Senior Lien, Massachusetts Recycling
Association, Series A 9.000 08/01/2016 8,000,000 4,000,000
Massachusetts Municipal Wholesale Electric, Power Supply
Systems Revenue, Series B 6.750 07/01/2008 6,050,000 6,465,393
Massachusetts State Consumer Loan, Series B (FGIC) 5.500 06/01/2012 6,385,000 6,438,762
(continued on next page)
<PAGE>
PAGE 14
- --------------------
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
MASSACHUSETTS (continued)
Massachusetts State, General Obligation, Consolidated
Loan, Series C (FGIC) 6.600% 11/01/2008 $ 8,000,000 $ 8,952,960
Massachusetts State Health and Educational Facilities
Authority, Brigham & Women's Hospital (MBIA) 6.750 07/01/2024 2,000,000 2,159,400
Massachusetts State Health and Educational Facilities
Authority, Capital Asset Program (MBIA) 7.300 10/01/2018 2,000,000 2,181,040
Massachusetts State Health and Educational Facilities
Authority, Massachusetts General Hospital, Series F
(AMBAC) 6.250 07/01/2012 5,000,000 5,457,200
Massachusetts State Health and Educational Facilities
Authority, McLean Hospital Issue, Series C 6.500 07/01/2010 500,000 539,710
Massachusetts State Health and Educational Facilities
Authority, Milton Hospital, Series B 7.250 07/01/2005 700,000 767,494
Massachusetts State Health and Educational Facilities
Authority, New England Deaconess Hospital 6.875 04/01/2022 500,000 527,665
Massachusetts State Health and Educational Facilities
Authority, New England Deaconess Hospital (AMBAC) 6.875 04/01/2022 2,980,000 3,252,640
Massachusetts State, Water Pollution Abatement Trust,
Pooled Loan Program, Series 2 6.125 02/01/2008 85,000 92,837
Massachusetts State Water Resources Authority, Series A 7.125 04/01/2000 1,500,000 1,620,480
Massachusetts State Water Resources Authority, Series A
(MBIA) 6.000 08/01/2014 1,500,000 1,549,140
Massachusetts State Water Resources Authority, Series B 4.000 12/01/2018 19,870,000 15,353,748
Massachusetts State Water Resources Authority, Series B
(MBIA) 5.000 12/01/2016 250,000 233,490
MICHIGAN
Monroe County, Michigan, Economic Development
Corporation, Detroit Edison Company (FGIC) 6.950 09/01/2022 9,500,000 11,383,850
Okemos, Michigan, Public School District, Series I
(effective yield 7.35%) (b) 0.000 05/01/2021 51,525,000 11,080,966
Romulus, Michigan, Community Schools, Capital
Appreciation, Series I (effective yield 8.02%) (b) 0.000 05/01/2017 39,490,000 11,206,472
West Ottawa, Michigan, Public School District, Capital
Appreciation (effective yield 7.55%) (b) 0.000 05/01/2015 35,490,000 11,505,148
MINNESOTA
Dakota County, Minnesota, Single Family Mortgage 8.100 09/01/2012 1,285,000 1,344,611
Minnesota State Housing Finance Agency, Single Family
Mortgage, Series D 8.000 01/01/2023 1,385,000 1,434,625
MISSISSIPPI
Harrison County, Mississippi, Wastewater Treatment
Management 8.500 02/01/2013 1,000,000 1,352,510
MISSOURI
Kansas City, Missouri, Municipal Assistance Corporation,
Refunding Leasehold, H Roe Bartle, Revenue Bonds,
Series A 5.000 04/15/2020 11,500,000 10,663,720
Missouri State Health and Educational Facilities
Authority, Barnes Jewish Hospital (MBIA) 5.150 05/15/2010 5,000,000 4,908,150
<PAGE>
PAGE 15
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
MISSOURI (continued)
Missouri State Housing Development Commission, Mortgage
Revenue, Single Family, Series B 6.450% 09/01/2027 $ 1,000,000 $ 1,018,750
University of Missouri, University Improvement Systems
Facilities 5.500 11/01/2023 25,000 24,693
NEBRASKA
Nebraska Higher Education Loan Program 6.450 06/01/2018 8,320,000 8,643,981
NEVADA
Clark County, Nevada, School District, Series A (MBIA) 6.750 03/01/2007 3,000,000 3,245,370
Clark County, Nevada, Series A (AMBAC) 7.500 06/01/2009 6,000,000 7,203,780
NEW HAMPSHIRE
New Hampshire Higher Education & Health Facilities
Authority, Frisbie Memorial Hospital, Revenue Bonds 6.125 10/01/2013 8,155,000 8,136,325
NEW JERSEY
Camden County, New Jersey, Municipal Utilities
Authority, Sewer Revenue 5.125 07/15/2017 4,650,000 4,343,890
Gloucester County, New Jersey Improvement Authority,
Solid Waste Resource Recovery Revenue, Gloucester
County Project A 8.125 07/01/2010 1,000,000 1,027,070
New Jersey Health Care Facilities Financing Authority,
Jersey Shore Medical Center (AMBAC) 6.125 07/01/2012 1,000,000 1,036,460
New Jersey Health Care Facilities Financing Authority,
Kimball Medical Center, Series C 8.000 07/01/2013 3,000,000 3,211,530
New Jersey Health Care Facilities Financing Authority,
St. Elizabeth's Hospital, Series B 7.750 07/01/1998 1,200,000 1,227,876
NEW MEXICO
Albuquerque, New Mexico, Joint Water and Sewer System
Revenue, Series A (FGIC) (effective yield 6.90%) (b) 0.000 07/01/2008 2,950,000 1,590,581
City of Albuquerque, New Mexico, Hospital System,
Series A (MBIA) 6.375 08/01/2007 1,500,000 1,613,190
New Mexico Educational Assistance Foundation, Series B 6.300 12/01/2004 2,225,000 2,401,687
University of New Mexico, University Revenues,
Subordinate Lien (MBIA) 5.375 06/01/2026 3,750,000 3,598,012
NEW YORK
Battery Park City Authority, New York, Junior Bonds,
Series A (AMBAC) 5.500 11/01/2029 2,000,000 1,946,920
Metropolitan Transportation Authority, New York,
Dedicated Tax Fund, Series A (MBIA) 5.500 04/01/2015 4,500,000 4,493,925
Metropolitan Transportation Authority, New York,
Dedicated Tax Fund, Series A (MBIA) 5.250 04/01/2026 10,250,000 9,751,338
New York City, New York, City Municipal Water Finance
Authority, Water & Sewer System, Revenue Bonds,
Series B (MBIA) 5.750 06/15/2026 10,000,000 10,041,600
New York City, New York, City Municipal Water Finance
Authority, Water and Sewer System Revenue (FGIC) 7.000 06/15/2015 4,270,000 4,672,618
New York City, New York, City Municipal Water Finance
Authority, Water and Sewer System Revenue, Series B 5.875 06/15/2026 7,500,000 7,501,200
New York City, New York, General Obligation, Fiscal
1992, Series A 5.875 03/15/2011 6,000,000 5,881,620
(continued on next page)
<PAGE>
PAGE 16
- --------------------
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
NEW YORK (continued)
New York City, New York, General Obligation, Fiscal
1992, Series A 7.750% 08/15/2014 $ 5,125,000 $ 5,885,038
New York City, New York, General Obligation, Prerefunded
Balance, Series A 7.750 08/15/2008 8,475,000 9,712,774
New York City, New York, General Obligation, Refunding,
Series A (FGIC) 5.750 08/01/2010 400,000 405,104
New York City, New York, General Obligation, Series E
(FGIC) 6.000 08/01/2016 4,500,000 4,620,960
New York City, New York, General Obligation, Unrefunded
Balance, Series A 7.750 08/15/2008 1,525,000 1,705,880
New York City, New York, General Obligation, Unrefunded
Balance, Series A 7.750 08/15/2014 335,000 372,979
New York City, New York, Industrial Special Facility,
Terminal One Group Association Project 6.000 01/01/2015 2,500,000 2,496,825
New York City, New York, Prerefunded, Series A 7.750 08/15/2015 7,980,000 9,163,434
New York State Care Facilities, New York Hospital,
Series A 6.800 08/15/2024 3,800,000 4,181,976
New York State Dormitory Authority Revenue, City
University Educational Facilities 6.000 07/01/2026 9,500,000 9,424,095
New York State Dormitory Authority Revenue, City
University Educational Facilities (FGIC) 7.000 07/01/2009 3,780,000 4,447,019
New York State Dormitory Authority Revenue, City
University Educational Facilities (FGIC) 5.375 07/01/2014 1,000,000 984,810
New York State Dormitory Authority Revenue, Mental
Health Facility (MBIA) 5.125 02/15/2021 7,535,000 7,064,213
New York State Dormitory Authority Revenue, State
University Educational Facilities, Refunding, Series B 7.500 05/15/2011 10,500,000 12,274,815
New York State Dormitory Authority Revenue, State
University Educational Facilities, Series B (FGIC) 5.250 05/15/2013 9,500,000 8,947,385
New York State Dormitory Authority Revenue, State
University Educational Facilities, Series B 5.250 05/15/2019 3,850,000 3,535,956
New York State Dormitory Authority Revenue, State
University Educational Facilities, Series C 7.375 05/15/2010 1,100,000 1,267,805
New York State Energy Research and Development
Authority, Consolidated Edison Project 7.750 01/01/2024 7,400,000 7,721,678
New York State Energy Research and Development
Authority, Gas Facilities Revenue, Brooklyn Union Gas
Company Project, Series A 5.500 01/01/2021 1,000,000 977,880
New York State Environmental Facilities Corporation,
State Water Pollution Control (New York City Water
Finance Authority) Series E 6.875 06/15/2010 5,000,000 5,489,450
New York State Local Government Assistance Corporation,
Series C 5.500 04/01/2017 2,000,000 1,997,220
New York State Local Government Assistance Corporation,
Series D 6.750 04/01/2021 900,000 1,005,462
New York State Medical Care Facilities, Finance Agency
Revenue (AMBAC) 6.375 11/15/2019 2,255,000 2,388,947
New York State Medical Care Facilities, Finance Agency
Revenue (FGIC) 6.375 08/15/2014 2,900,000 3,072,463
New York State Medical Care Facilities, Finance Agency
Revenue, Health Center Projects, Series A 6.375 11/15/2019 1,250,000 1,311,275
<PAGE>
PAGE 17
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
NEW YORK (continued)
New York State Medical Care Facilities, Finance Agency
Revenue, New York Hospital, Series A 6.750% 08/15/2014 $ 2,000,000 $ 2,194,560
New York State Medical Care Facilities, Finance Agency
Revenue, Series A 7.700 02/15/2009 5,300,000 5,986,880
New York State Mortgage Agency, Homeowner Mortgage,
Series 27 6.900 04/01/2015 4,500,000 4,792,545
New York State Mortgage Agency, Series A 6.875 04/01/2017 1,565,000 1,580,321
New York State Power Authority Revenue and General
Purpose Revenue 7.000 01/01/2018 1,125,000 1,301,479
New York State Urban Development Corporation Revenue,
Correctional Capital Facilities, Series 6 5.375 01/01/2025 4,690,000 4,289,005
New York State Urban Development Corporation Revenue,
Correctional Facilities, Refunding, Series A 6.500 01/01/2010 15,920,000 17,052,549
New York State Urban Development Corporation Revenue,
Correctional Facilities, Series A 6.500 01/01/2009 575,000 618,821
New York State Urban Development Corporation Revenue,
Correctional Facilities, Series A 7.500 04/01/2011 9,500,000 10,764,165
New York, New York, Unrefunded Balance, Series A 7.750 08/15/2015 270,000 300,375
Niagara Falls, New York, Public Improvement (MBIA) 7.500 03/01/2014 300,000 369,879
Port Authority, New York and New Jersey, Consolidated
104th Series (AMBAC) 4.750 01/15/2026 3,000,000 2,632,500
Port Authority, New York and New Jersey, Special
Obligation Revenue 6.750 10/01/2011 4,500,000 4,641,120
Triborough Bridge and Tunnel Authority, New York,
General Purpose, Series X 6.625 01/01/2012 12,750,000 14,565,855
OHIO
Adams County, Ohio Valley Local School District 7.000 12/01/2015 2,000,000 2,378,960
Cleveland, Ohio, Parking Facilities Revenue (MBIA) 5.500 09/15/2022 7,430,000 7,369,446
Cleveland, Ohio, Public Power Systems, First Mortgage,
Series A (MBIA) 7.000 11/15/2016 7,000,000 8,070,370
Cleveland, Ohio, Public Power Systems, First Mortgage,
Series A (MBIA) 7.000 11/15/2024 1,000,000 1,163,470
Columbus, Ohio, General Obligation 12.375 02/15/2006 1,285,000 1,963,313
Montgomery County, Ohio, Hospital Revenue, Kettering
Medical Center (MBIA) 6.250 04/01/2020 1,500,000 1,642,440
Ohio State Building Authority, State Facilities, Adult
Correctional, Series A (AMBAC) 5.500 04/01/2016 2,000,000 1,998,960
Ohio State Higher Educational Facility Commission (MBIA) 6.125 11/15/2017 1,000,000 1,055,870
Ohio State Housing Finance Agency, Single Family
Mortgage Revenue, Series C (GNMA) 9.000 09/01/2018 10,000,000 11,120,500
Ohio State Turnpike Commission, Turnpike Revenue,
Series A (MBIA) 5.500 02/15/2026 5,000,000 4,914,950
Ohio State Water Development Authority (AMBAC) 9.375 12/01/2018 30,000 30,975
OKLAHOMA
Oklahoma State Industrial Authority, Baptist Medical
Center 7.000 08/15/2014 2,250,000 2,493,495
OREGON
Oregon Health Sciences University, Revenue Bonds,
Series A 5.250 07/01/2025 5,000,000 4,671,900
Western Generation Agency, Oregon, Wauna Cogeneration
Project, Series B (c) 7.400 01/01/2016 3,300,000 3,447,213
(continued on next page)
<PAGE>
PAGE 18
- --------------------
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
PENNSYLVANIA
Allegheny County, Pennsylvania, Sewer Revenue Refunding
(FGIC) (effective yield 6.10%) (b) 0.000% 06/01/2015 $2,500,000 $ 866,700
Beaver County, Pennsylvania, Industrial Development
Authority, Ohio Edison Project, Series A 7.750 09/01/2024 80,000 83,880
Beaver County, Pennsylvania, Ohio Edison (FGIC) 7.000 06/01/2021 4,390,000 4,736,371
Delaware County, Pennsylvania, Hospital Revenue, Crozier
Chester Medical Center (Pre-refunded) 7.500 12/15/2020 2,545,000 2,875,366
Delaware County, Pennsylvania, Industrial Development
Authority 7.375 04/01/2021 500,000 542,225
Delaware County, Pennsylvania, Industrial Development
Authority, Resource Recovery Project, Series A (LOC
Security Pacific) 8.100 12/01/2013 7,500,000 7,843,575
Lebanon County, Pennsylvania, Good Samaritan Hospital
Authority, Project Revenue 6.000 11/15/2018 2,000,000 1,956,640
McKeesport, Pennsylvania, Hospital Authority Revenue,
McKeesport Hospital 6.500 07/01/2008 875,000 877,380
Montgomery County, Pennsylvania, Industrial Development
and Pollution Control, Philadelphia Electric Company 7.600 04/01/2021 900,000 965,151
North Penn, Pennsylvania, Water Authority (FGIC) 6.875 11/01/2019 2,500,000 2,860,700
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project (c) 6.400 01/01/2009 9,500,000 9,405,570
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project (c) 6.500 01/01/2013 4,000,000 3,954,680
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project (c) 6.600 01/01/2019 3,800,000 3,751,322
Pennsylvania Housing Finance Agency, Multi-Family,
Section 8 8.200 07/01/2024 8,000,000 8,547,120
Pennsylvania Housing Finance Agency, Residential
Development, Section 8, Series A 7.600 07/01/2013 5,545,000 5,936,532
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series P 8.000 04/01/2016 3,000,000 3,081,390
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series T 7.750 10/01/2009 4,000,000 4,185,920
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series V 7.800 04/01/2016 3,950,000 4,097,177
Pennsylvania Intergovernmental Cooperative Authority,
Philadelphia Funding (FGIC) 6.750 06/15/2021 1,910,000 2,158,854
Pennsylvania State Higher Educational Facilities
Authority, Allegheny General Hospital, Series A 7.125 09/01/2007 4,000,000 4,355,040
Pennsylvania State Higher Educational Facilities
Authority, Thomas Jefferson University, Series A 6.625 08/15/2009 150,000 163,605
Pennsylvania State Industrial Development Authority 7.000 01/01/2006 500,000 573,780
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Albert Einstein Medical Center 7.625 04/01/2011 2,350,000 2,490,459
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Albert Einstein Medical Center 7.000 10/01/2021 3,000,000 3,181,260
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Community College, Series B
(MBIA) 6.500 05/01/2007 280,000 309,117
<PAGE>
PAGE 19
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
PENNSYLVANIA (continued)
Philadelphia, Pennsylvania, Municipal Development
Authority, Criminal Justice Center, Series A (MBIA) 7.100% 11/15/2006 $ 4,095,000 $ 4,575,466
Philadelphia, Pennsylvania, Water and Wastewater, Linked
Bull/Bear Forward BPO (FGIC) (d) 10.000 06/15/2005 10,000,000 13,293,600
Philadelphia, Pennsylvania, Water and Wastewater (MBIA) 6.250 08/01/2012 1,750,000 1,906,887
Pittsburgh, Pennsylvania, Urban Redevelopment Authority,
Multi-Family Housing Mortgage, 1985 Series A 9.250 12/01/2027 3,175,000 3,307,842
Sayre, Pennsylvania, Health Care Facilities Authority,
Guthrie Healthcare, Series A 7.100 03/01/2017 6,350,000 6,849,872
Westmoreland County, Pennsylvania, Municipal Authority,
Capital Appreciation, Series C (effective yield 5.69%)
(b) 0.000 08/15/2015 5,000,000 1,738,050
PUERTO RICO
Puerto Rico Commonwealth Aquaduct and Sewer Authority
Revenue Bond 5.000 07/01/2019 6,000,000 5,463,780
Puerto Rico Commonwealth Highway and Transportation
Authority Revenue, Series Y (FSA) 5.250 07/01/2015 500,000 487,810
Puerto Rico Commonwealth, General Obligation, Linked BPO
(MBIA) (d) 7.000 07/01/2010 13,300,000 15,519,105
Puerto Rico Commonwealth, General Obligation, Linked BPO
(AMBAC) (d) 7.000 07/01/2010 5,000,000 5,834,250
Puerto Rico Commonwealth, General Obligation, Refunding 6.450 07/01/2017 3,000,000 3,206,790
Puerto Rico Electric Power Authority, Refunding,
Series S 7.000 07/01/2007 2,000,000 2,270,040
Puerto Rico Electric Power Authority, Series Y (MBIA) 6.500 07/01/2006 4,000,000 4,509,760
Puerto Rico Industrial, Tourist, Educational, Medical,
Environmental Control Facilities Finance Authority
(MBIA) 6.250 07/01/2024 1,500,000 1,578,945
Puerto Rico Industrial, Tourist, Educational, Medical,
Environmental Control Facilities Finance Authority 5.500 08/01/2024 1,000,000 879,320
Puerto Rico Public Buildings Authority, Guaranteed
Public Education
and Health Facilities, Series M 5.700 07/01/2009 1,800,000 1,857,888
Puerto Rico Public Buildings Authority, Guaranteed
Public Education and Health Facilities, Series M, Step
Bond (effective yield 5.74%) (b) 3.750 07/01/2016 6,250,000 5,779,875
RHODE ISLAND
Rhode Island State Health and Educational Building
Corporation, Hospital Financing Revenue, Roger
Williams General Hospital 9.500 07/01/2016 5,710,000 5,819,575
SOUTH CAROLINA
South Carolina State Ports Authority, Ports Revenue
(AMBAC) 6.750 07/01/2021 9,000,000 9,604,980
South Carolina State Public Services Authority, Fixed
Option Bonds (MBIA) 5.342 06/30/2006 10,400,000 10,508,160
TENNESSEE
Bristol, Tennessee, Health and Education Authority,
Bristol Memorial Hospital (FGIC) 6.750 09/01/2010 4,200,000 4,820,676
Knox County, Tennessee, Health and Educational
Facilities, Fort Sanders Hospital Alliance, Series B
(MBIA) 7.250 01/01/2010 7,000,000 8,253,630
Knox County, Tennessee, Health and Educational
Facilities, Fort Sanders Hospital Alliance, Series C
(MBIA) 5.250 01/01/2015 3,500,000 3,373,195
(continued on next page)
<PAGE>
PAGE 20
- --------------------
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TENNESSEE (continued)
Metro Government, Nashville & Davidson Counties,
Tennessee, Step Bond (FGIC) (effective yield 4.26%)
(b) 0.000% 01/01/2012 $ 9,000,000 $ 9,716,220
Tennessee Housing Development Authority, Home Ownership
Program, Issue H 7.825 07/01/2015 5,655,000 5,782,860
TEXAS
Alliance Airport Authority Income, Texas, Federal
Express Corporation Project 6.375 04/01/2021 14,500,000 14,525,375
Austin, Texas, Utility Systems Capital Appreciation
(AMBAC) (effective yield 6.80%) (b) 0.000 11/15/2011 12,000,000 5,221,200
Bexar, Texas, Metropolitan Water District Waterworks
Systems, Prerefunded (AMBAC) 6.625 05/01/2014 1,825,000 2,026,133
Bexar, Texas, Metropolitan Water District Waterworks
Systems, Unrefunded Balance (AMBAC) 6.625 05/01/2014 25,000 26,839
Brazos River Authority, Texas Revenue Refunding, Houston
Light and Power Company, Project C 8.100 05/01/2019 8,500,000 9,061,935
Brownsville, Texas, Utility System Revenue (MBIA) 6.250 09/01/2014 2,400,000 2,632,848
Cypress-Fairbanks, Texas, Independent School District,
Capital Appreciation, Series A (effective yield 6.03%)
(b) 0.000 02/15/2013 6,675,000 2,707,981
Fort Bend County, Texas, Levee Improvement (MBIA) 6.900 09/01/2020 1,165,000 1,277,224
Fort Bend County, Texas, Levee Improvement District # 11
(MBIA) 6.900 09/01/2018 1,245,000 1,364,931
Fort Bend County, Texas, Levee Improvement District # 11
(MBIA) 6.900 09/01/2019 1,000,000 1,093,040
Harris County, Texas, Flood Control District (effective
yield 7.20%) (b) 0.000 10/01/2006 7,000,000 3,798,200
Harris County, Texas, Health Facilities Development
Corporation 6.600 06/01/2014 5,000,000 5,225,900
Harris County, Texas, Health Facilities Development
Corporation, Hermann Hospital Project (MBIA) 6.375 10/01/2017 2,480,000 2,623,344
Harris County, Texas, Health Facilities, Memorial
Hospital System 7.125 06/01/2015 2,525,000 2,714,956
Harris County, Texas, Senior Lien, Toll Road, Series A
(MBIA) 6.375 08/15/2024 4,000,000 4,307,080
Harris County, Texas, Toll Road 7.000 08/15/2010 3,000,000 3,504,660
Houston, Texas, Airport System Revenue, Senior Lien 8.200 07/01/2017 4,565,000 4,885,189
Houston, Texas, General Obligation 7.000 03/01/2008 15,000,000 17,460,000
Houston, Texas, Hotel Occupancy Tax, Refunding, Senior
Lien, Revenue Bonds 5.500 07/01/2015 3,000,000 2,982,420
Houston, Texas, Water and Sewer System Revenue,
Refunding, Junior Lien, Series C (effective yield
6.85%) (b) 0.000 12/01/2010 2,700,000 1,257,930
Houston, Texas, Water and Sewer System Revenue, Series C
(effective yield 6.90%) (b) 0.000 12/01/2011 13,000,000 5,699,980
Lower Colorado River Authority, Texas, Series B (AMBAC)
(effective yield 7.05%) (b) 0.000 01/01/2005 2,135,000 1,436,492
Northwest Texas, Independent School District, Capital
Appreciation (AMBAC) (effective yield 7.28%) (b) 0.000 08/15/2010 3,690,000 1,744,853
Rio Grande Valley, Texas, Health Facilities Corporation,
Hospital Revenue, Baptist Medical Center Project
(MBIA) 8.000 08/01/2017 1,085,000 1,159,355
<PAGE>
PAGE 21
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TEXAS (continued)
Tarrant County, Texas, Health Facilities Development
Revenue, Harris Methodist Health System, Series A
(AMBAC) 5.125% 09/01/2018 $ 5,000,000 $ 4,638,300
Tarrant County, Texas, Housing Finance Corporation,
Series A (MBIA) (effective yield 11.00%) (b) 0.000 09/15/2016 6,415,000 2,010,397
Texas Housing Agency, Residential Development, Series D 8.400 01/01/2021 4,085,000 4,260,369
Texas Housing Agency, Single Family Mortgage 8.200 03/01/2016 2,525,000 2,590,423
Texas Municipal Power Agency, Capital Appreciation
(effective yield 9.62%) (b) 0.000 09/01/2008 4,500,000 2,426,670
Texas Municipal Power Agency (effective yield 9.13%) (b) 0.000 09/01/2006 4,455,000 2,721,426
Texas Municipal Power Agency, Refunding Bonds (MBIA) 5.250 09/01/2012 175,000 170,933
Texas Municipal Power Agency, Revenue Bonds 6.100 09/01/2009 130,000 140,574
Texas State, Linked RIBs/SAVRs (d) 6.200 09/30/2011 5,000,000 5,377,350
Titus County, Texas, Water District #1, Southwest
Electric Power 8.200 08/01/2011 9,000,000 10,296,090
Tomball, Texas, Hospital Authority, Tomball Regional
Hospital 6.125 07/01/2023 11,000,000 10,698,270
University of Texas, University Revenues, Prerefunded
Balance, Series B 6.750 08/15/2013 705,000 781,796
University of Texas, University Revenues, Unrefunded
Balance, Series B 6.750 08/15/2013 1,475,000 1,604,240
Waller, Texas, General Obligation, Independent School
District 5.250 02/15/2021 3,450,000 3,278,086
UTAH
Intermountain Power Agency, Utah, Power Supply, Series B 10.375 07/01/2011 3,000,000 3,593,820
Intermountain Power Agency, Utah, Power Supply, Series C
(effective yield 21.29%) (b) 0.000 07/01/2020 6,500,000 1,033,240
Intermountain Power Agency, Utah, Power Supply, Series D 8.375 07/01/2012 3,020,000 3,151,189
Intermountain Power Agency, Utah, Power Supply,
Series G, Step Bond (effective yield 7.65%) (b) 0.000 07/01/2012 24,350,000 24,311,040
Murray City, Utah, Hospital Revenue, Health Services
Incorporated (MBIA) 4.750 05/15/2020 4,145,000 3,605,611
Utah State Housing Finance Agency, Single Family
Mortgage, Series C 2 7.950 07/01/2010 325,000 344,058
VERMONT
Vermont Housing Finance Agency, Single Family, Series 1 8.150 05/01/2025 1,485,000 1,566,526
VIRGINIA
Fairfax County, Virginia, Industrial Development
Authority 5.000 08/15/2023 9,355,000 8,463,375
Fredericksburg, Virginia, Industrial Development
Authority, Hospital Facilities Revenue, Medicorp
Health System Obligation (AMBAC) 5.250 06/15/2023 3,500,000 3,309,075
Hampton Roads, Virginia, Regional Jail Authority,
Regional Jail Facilities Revenue, Series A (MBIA) 5.625 07/01/2016 5,850,000 5,904,288
Pittsylvania County, Virginia, Industrial Development
Authority, Series A (c) 7.450 01/01/2009 2,000,000 2,089,560
Virginia State Housing Development Authority,
Residential Mortgage, Series B (effective yield
10.62%) (b) 0.000 09/01/2014 790,000 126,866
Virginia State Transportation Board Revenue, North
Virginia Transportation District, Series A 5.125 05/15/2016 2,600,000 2,493,270
Winchester, Virginia, Industrial Development Hospital
Revenue, Winchester Medical Center (AMBAC) 6.150 01/01/2015 2,300,000 2,170,303
(continued on next page)
<PAGE>
PAGE 22
- --------------------
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
VIRGINIA (continued)
Winchester, Virginia, Industrial Development Hospital
Revenue, Winchester Medical Center (AMBAC) 6.300% 01/01/2015 $ 3,200,000 $ 3,033,024
WASHINGTON
Tacoma, Washington, Electric Systems Revenue, Linked
RIBs/SAVRs (AMBAC) (d) 6.514 01/02/2015 12,000,000 12,747,480
Washington Public Power Supply System, Nuclear Project
#3 (effective yield 10.09%) (b) 0.000 07/01/2012 4,000,000 1,642,680
Washington State General Obligation, Series A 5.375 07/01/2021 10,000,000 9,664,000
Washington State General Obligation, Series B 5.500 05/01/2018 14,000,000 13,946,240
Washington State Health Care Facilities Authority,
Multi-Care Medical Center of Tacoma (FGIC) 7.875 08/15/2011 1,300,000 1,393,132
WISCONSIN
Wisconsin Health and Education Facilities Authority,
Bellin Memorial Hospital, Incorporated (Pre-refunded) 7.625 04/01/2019 5,000,000 5,452,500
Wisconsin Housing and Economic Development Authority,
Home Ownership 8.000 03/01/2021 1,195,000 1,248,883
Wisconsin State, General Obligation, Series 2 5.125 11/01/2011 5,000,000 4,938,500
WYOMING
Wyoming Community Development Authority, Housing
Revenue, Series 5 6.250 06/01/2027 10,000,000 10,021,300
Wyoming Community Development Authority, Single Family
Mortgage, Series B 8.125 06/01/2021 2,610,000 2,737,759
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TOTAL MUNICIPAL BONDS (Cost--$1,448,532,894) 1,527,775,935
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TEMPORARY TAX-EXEMPT INVESTMENTS (1.0%)
California Health Facilities Financing Authority
Revenue, St. Joseph Health, Series A (a) 5.000 07/01/2013 295,000 295,000
Dade County, Florida, Water & Sewer System Revenue
(FGIC) (a) 4.000 10/05/2022 2,235,000 2,235,000
Los Angeles County, California, Pension, Series C (a) 3.900 06/30/2007 975,000 975,000
Massachusetts State Health and Educational Facilities
Authority Revenue, Capital Assets Program, Series D
(MBIA) (a) 4.900 01/01/2035 2,240,000 2,240,000
Missouri State Health and Educational Facilities
Authority Revenue, Christian Health Services, Series B
(a) 4.050 12/01/2019 1,635,000 1,635,000
New York City, New York, General Obligation, Series B,
Subseries B3 (a) 5.000 08/15/2004 160,000 160,000
New York City, New York, General Obligation, Subseries
A8 (a) 5.000 06/15/2024 5,000 5,000
Peninsula Ports Authority, Virginia, Ports Authority
Revenue (a) 5.000 12/01/2005 2,000,000 2,000,000
Perry County, Mississippi, Pollution Control Revenue,
Leaf River Forest Project (a) 5.000 03/01/2002 2,000,000 2,000,000
Sayre, Pennsylvania, Health Care Facilities Authority
Revenue, Series K (AMBAC) (a) 4.000 12/01/2020 1,495,000 1,495,000
Uinta County, Wyoming, Pollution Control Revenue,
Chevron USA Incorporated Project (a) 5.000 08/15/2020 1,000,000 1,000,000
<PAGE>
PAGE 23
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TEMPORARY TAX-EXEMPT INVESTMENTS (continued)
Washington State Health Care Facilities Authority
Revenue, Sisters of Providence, Series D (a) 5.000% 10/01/2005 $850,000 $ 850,000
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (Cost--$14,890,000) 14,890,000
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TOTAL INVESTMENTS (Cost--$1,463,422,894) (e) 1,542,665,935
OTHER ASSETS AND LIABILITIES--NET (1.0%) 15,219,857
- ---------------------------------------------------------- ------ ---------- ---------- --------------
NET ASSETS (100.0%) $1,557,885,792
- ---------------------------------------------------------- ------ ---------- ---------- --------------
</TABLE>
(a) Security is a variable or floating rate instrument with periodic demand
features. The Fund is entitled to full payment of principal and accrued
interest upon surrendering the security to the issuing agent.
(b) Effective yield (calculated at date of purchase) is the annual yield at
which the bond accretes until its maturity date.
(c) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as mended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(d) At the discretion of the portfolio manager, these securities may be
separated into securities with interest or principal payments that are
linked to another rate or index and therefore would be considered
derivative securities (see Note 1).
(e) The cost of investments for federal income tax purposes amounted to
$1,463,520,567. Gross unrealized appreciation and unrealized depreciation
of investments, based on identified tax cost, at December 31, 1996 are as
follows:
Gross unrealized appreciation $86,747,523
Gross unrealized depreciation (7,602,155)
-------------
Net unrealized appreciation $79,145,368
-------------
Legend of Portfolio Abbreviations:
AMBAC--American Municipal Bond Assurance Corp.
ETM--Escrowed to Maturity
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assurance
GNMA--Government National Mortgage Association
LOC--Line of Credit
MBIA--Municipal Bond Investors Assurance Corp.
BPO--Bond Payment Obligation
SAVRs--Select Auction Variable Rate Securities
RIBs--Residual Interest Bonds
ACES--Auction Rate Securities
See Notes to Financial Statements.
<PAGE>
PAGE 24
- --------------------
Keystone Tax Free Fund
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1996 1995 1994 1993 1992 1991
================================ ========= ========= ========= ========= ========= ===========
Net asset value beginning of
year $ 7.86 $ 7.10 $ 8.12 $ 8.04 $ 8.07 $ 7.90
-------------------------------- ------- ------- ------- ------- ------- ---------
Income from investment
operations:
Net investment income 0.41 0.41 0.37 0.39 0.46 0.46
Net realized and unrealized gain
(loss) on investments and
closed futures contracts (0.17) 0.74 (0.96) 0.48 0.12 0.36
-------------------------------- ------- ------- ------- ------- ------- ---------
Total from investment operations 0.24 1.15 (0.59) 0.87 0.58 0.82
-------------------------------- ------- ------- ------- ------- ------- ---------
Less distributions from:
Net investment income (0.39) (0.39) (0.37) (0.39) (0.46) (0.46)
In excess of net investment
income 0.00 0.00 (0.06) (0.06) (0.04) (0.07)
Net realized gain on investments 0.00 0.00 0.00 (0.33) (0.11) (0.12)
In excess of net realized gain
on investments 0.00 0.00 0.00 (0.01) 0.00 0.00
-------------------------------- ------- ------- ------- ------- ------- ---------
Total distributions (0.39) (0.39) (0.43) (0.79) (0.61) (0.65)
-------------------------------- ------- ------- ------- ------- ------- ---------
Net asset value end of year $ 7.71 $ 7.86 $ 7.10 $ 8.12 $ 8.04 $ 8.07
================================ ======= ======= ======= ======= ======= =========
Total Return (b) 3.15% 16.61% (7.34%) 11.15% 7.55% 10.80%
================================ ======= ======= ======= ======= ======= =========
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.87%(c) 0.95%(c) 1.55% 1.66% 1.38% 1.75%
Net investment income 5.34% 5.41% 4.92% 4.72% 5.71% 5.78%
Portfolio turnover rate 69% 56% 84% 76% 78% 77%
-------------------------------- ------- ------- ------- ------- ------- ---------
Net assets end of year
(thousands) $1,557,886 $1,204,468 $1,197,727 $1,548,503 $1,453,199 $1,146,185
================================ ======= ======= ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year Ended December 31,
1990 (a) 1989 1988 1987
================================ ========= ========= ========= ===========
Net asset value beginning of
year $ 8.06 $ 8.18 $ 8.09 $ 8.85
-------------------------------- ------- ------- ------- ---------
Income from investment
operations:
Net investment income 0.52 0.57 0.55 0.56
Net realized and unrealized gain
(loss) on investments and
closed futures contracts (0.01) 0.15 0.30 (0.58)
-------------------------------- ------- ------- ------- ---------
Total from investment operations 0.51 0.72 0.85 (0.02)
-------------------------------- ------- ------- ------- ---------
Less distributions from:
Net investment income (0.52) (0.60) (0.63) (0.64)
In excess of net investment
income (0.03) 0.00 0.00 0.00
Net realized gain on investments (0.12) (0.24) (0.13) (0.10)
In excess of net realized gain
on investments 0.00 0.00 0.00 0.00
-------------------------------- ------- ------- ------- ---------
Total distributions (0.67) (0.84) (0.76) (0.74)
-------------------------------- ------- ------- ------- ---------
Net asset value end of year $ 7.90 $ 8.06 $ 8.18 $ 8.09
================================ ======= ======= ======= =========
Total Return (b) 6.66% 9.11% 10.89% (0.14%)
================================ ======= ======= ======= =========
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.18% 1.23% 1.79% 1.70%
Net investment income 6.54% 6.94% 6.74% 6.80%
Portfolio turnover rate 64% 69% 61% 43%
-------------------------------- ------- ------- ------- ---------
Net assets end of year
(thousands) $1,060,826 $901,912 $903,132 $894,768
================================ ======= ======= ======= =========
</TABLE>
(a) Calculation based on average shares outstanding.
(b) Excluding applicable sales charges.
(c) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would
have been 0.86% and 0.94% for the years ended December 31, 1996 and 1995,
respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 25
- --------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
Assets (Note 2)
Investments at market value
(identified cost--$1,463,422,894) $1,542,665,935
Receivable for:
Investments sold 3,000,875
Fund shares sold 161,661
Interest 25,970,285
Other assets 166,675
- ------------------------------------------------- ----------
Total assets 1,571,965,431
- ------------------------------------------------- ----------
Liabilities (Note 2)
Payable for:
Investments purchased 4,919,751
Fund shares redeemed 2,049,565
Distributions to shareholders 6,333,173
Accrued Trustees' fees and expenses 3,006
Other accrued expenses 774,144
- ------------------------------------------------- ----------
Total liabilities 14,079,639
- ------------------------------------------------- ----------
Net assets $1,557,885,792
- ------------------------------------------------- ----------
Net assets represented by
Paid-in capital $1,489,589,329
Undistributed net investment income 2,957,507
Accumulated net realized loss on investments and
closed futures contracts (13,904,085)
Net unrealized appreciation on investments 79,243,041
- ------------------------------------------------- ----------
Total net assets $1,557,885,792
- ------------------------------------------------- ----------
Net asset value per share (Note 2)
Net asset value of $1,557,885,792 / 201,937,602
outstanding shares of beneficial interest $ 7.71
================================================= ==========
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
Investment income
Interest $ 97,670,668
- ------------------------------------ --------- ----------
Expenses (Notes 4, 5 and 6)
Investment management fee $ 6,642,609
Distribution Plan expenses 4,706,968
Transfer agent fees 1,591,303
Other administrative service fees 666,547
Trustees' fees and expenses 48,506
Reimburseable accounting expenses 19,501
- ------------------------------------ --------- ----------
Total expenses 13,675,434
Less: Expenses paid indirectly (172,145)
- ------------------------------------ --------- ----------
Net expenses 13,503,289
- ------------------------------------ --------- ----------
Net investment income 84,167,379
- ------------------------------------ --------- ----------
Net realized and unrealized loss on
investments (Note 3)
Net realized gain on investments 15,476,735
Net change in unrealized
appreciation or depreciation on
investments (Note 7) (48,955,108)
- ------------------------------------ --------- ----------
Net realized and unrealized loss on
investments (33,478,373)
- ------------------------------------ --------- ----------
Net increase in net assets resulting
from operations $ 50,689,006
==================================== ========= ==========
See Notes to Financial Statements.
<PAGE>
PAGE 26
- --------------------
Keystone Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December
31, 1996 1995
===================================================================== ================ ==================
Operations
Net investment income $ 84,167,379 $ 65,921,672
Net realized gain on investments and closed futures contracts 15,476,735 8,930,765
Net change in unrealized appreciation or depreciation on
investments (48,955,108) 113,250,664
- ------------------------------------------------------------------- ------------ --------------
Net increase in net assets resulting from operations 50,689,006 188,103,101
- ------------------------------------------------------------------- ------------ --------------
Distributions to shareholders from net investment income (Note 1) (79,617,449) (63,827,615)
- ------------------------------------------------------------------- ------------ --------------
Capital share transactions (Notes 2 and 7)
Shares issued in connection with the acquisition of Keystone
Tax Exempt Trust 658,278,376 0
Proceeds from shares sold 107,614,922 133,114,586
Payment for shares redeemed (424,558,360) (283,907,474)
Net asset value of shares issued in reinvestment of dividends and
distributions 41,011,255 33,258,548
- ------------------------------------------------------------------- ------------ --------------
Net increase (decrease) in net assets resulting from capital share
transactions 382,346,193 (117,534,340)
- ------------------------------------------------------------------- ------------ --------------
Total increase in net assets 353,417,750 6,741,146
Net assets
Beginning of year 1,204,468,042 1,197,726,896
- ------------------------------------------------------------------- ------------ --------------
End of year [including undistributed net investment income
(accumulated distributions in excess of net investment income)
as follows: 1996--$2,957,507 and 1995--($1,663,086)] $1,557,885,792 $1,204,468,042
=================================================================== ============ ==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 27
- --------------------
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Keystone Tax Free Fund (the "Fund") is a Massachusetts business trust for
which Keystone Investment Management Company ("Keystone") is the Investment
Adviser and Manager. Keystone was formerly a wholly-owned subsidiary of
Keystone Investments, Inc. ("KII") and is currently a subsidiary of First
Union Keystone, Inc. First Union Keystone, Inc. is a wholly-owned subsidiary
of First Union National Bank of North Carolina which in turn is a
wholly-owned subsidiary of First Union Corporation ("First Union"). The Fund
is registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a diversified, open-end investment company. The Fund's investment
objective is to provide shareholders with the highest possible current
income, exempt from federal income taxes, while preserving capital by
investing in high quality municipal bonds.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles,
which require management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. Valuation of Securities
Tax-exempt bonds are valued at prices provided by an independent pricing
service. In determining value for normal institutional-size transactions, the
pricing service uses methods based on market transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. Securities for which valuations are not
available from an independent pricing service (including restricted
securities) are valued at fair value as determined in good faith according to
procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Futures Contracts
In order to gain exposure to or protect against changes in security values,
the Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the
value of the contract changes. Such changes are recorded as unrealized gains
or losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other
party will not fulfill their obligations under the contract. Futures
contracts also involve elements of market risk in excess of the amount
reflected in the statement of assets and liabilities.
C. Derivative Securities
The Fund may invest in derivative securities. A derivative security is any
investment that derives its value from an underlying security, asset or
market index. Greater market fluctuations may result if these securities are
leveraged. The Fund invests in these
<PAGE>
PAGE 28
- --------------------
Keystone Tax Free Fund
types of securities as it is consistent with its investment objectives.
D. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are computed on the
identified cost basis. Interest income is recorded on the accrual basis and
includes amortization of discounts and premiums.
E. Federal Income Taxes
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 (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly,
no provision for federal income taxes is required.
F. Distributions
The Fund declares dividends from net investment income daily and distributes
such dividends monthly. The Fund distributes net capital gains, if any, at
least, annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment of market discount on securities.
2. Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest with no par value. Transactions in
shares of the Fund were as follows:
Year ended December 31,
1996 1995
================================= ============ ==============
Shares issued in connection with
the acquisition of Keystone Tax
Exempt Trust (Note 7) 84,656,452 -0-
Shares sold 14,063,760 17,669,831
Shares redeemed (55,439,349) (37,618,182)
Shares issued in reinvestment of
dividends and distributions 5,361,695 4,437,352
--------------------------------- ------------ --------------
Net increase (decrease) 48,642,558 (15,510,999)
================================= ============ ==============
3. Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and U.S. government securities) for the year ended
December 31, 1996 were $1,379,241,478 and $1,041,052,842, respectively.
As of December 31, 1996, the Fund has a capital loss carryover for federal
income tax purposes of approximately $13,723,000 which expires as follows:
$10,370,000--2002 and $3,353,000--2003.
4. Distribution Plans
The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted pursuant to Rule 12b-1 under the 1940 Act. Under the
Distribution Plan, the Fund pays its principal underwriter amounts which are
calculated and paid monthly.
Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(formerly, Keystone Investment Distributors Company) ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the Fund's principal underwriter. On
December 11, 1996, the Fund entered into a principal underwriting agreement
with Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds
Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of
<PAGE>
PAGE 29
- --------------------
BISYS Group Inc. At that time, EKD replaced EKIS as the Fund's principal
underwriter.
Under the Distribution Plan, the Fund pays a distribution fee which may not
exceed 1.00% of the Fund's average daily net assets, of which 0.75% is used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees.
During the year ended December 31, 1996, the Fund received $696,350 in
contingent deferred sales charges. Contingent deferred sales charges paid by
redeeming shareholders may be paid to EKIS and/or EKD.
The Distribution Plan may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
shares. However, after the termination of the Distribution Plan, and subject
to the discretion of the Independent Trustees, payments to EKIS and/or EKD
may continue as compensation for services which had been earned while the
Distribution Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs
that exceed the current annual payments from the Fund. EKD intends to seek
full payment of such distribution costs from the Fund at such time in the
future as, and to the extent that, payment thereof by the Fund would be
within permitted limits.
5. Investment Management Agreement and Other Affiliated Transactions
Under an investment advisory agreement dated December 11, 1996, Keystone
serves as the Investment Adviser and Manager to the Fund. Keystone provides
the Fund with investment advisory and management services. In return,
Keystone is paid a management fee, computed and paid daily, at an annual rate
of 2.00% of the Fund's gross investment income plus an amount determined by
applying percentage rates starting at 0.50% and declining as net assets
increase to 0.25% per annum, to the average daily net asset value of the
Fund.
Prior to December 11, 1996, Keystone Management, Inc. ("KMI"), a
wholly-owned subsidiary of Keystone, served as Investment Manager to the Fund
and provided investment management and administrative services. Under an
investment advisory agreement between KMI and Keystone, Keystone served as
the Investment Adviser and provided investment advisory and management
services to the Fund. In return for its services, Keystone received an annual
fee equal to 85% of the management fee received by KMI.
In providing or obtaining additional operating services, facilities and
supplies to the Fund, KMI had incurred administrative expenses of $666,547
which consisted of $533,237 for custodian fees, $18,769 for audit and legal
and $114,541 for printing, registration, insurance and other miscellaneous
expenses. KMI has been reimbursed for these expenses by the Fund.
During the year ended December 31, 1996, the Fund paid or accrued $19,501 to
Keystone for certain accounting services.
Officers of the Fund and affiliated Trustees receive no compensation
directly from the Fund.
6. Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended December 31, 1996, the Fund incurred total custody fees of
$533,237 and received a credit of $172,145 pursuant to this expense offset
arrangement, resulting in a net custody expense of $361,092. The assets
deposited with the custodian under this expense offset arrangement could have
been invested in income-producing assets.
7. Fund Reorganization
On February 29, 1996, the Fund acquired the net assets of Keystone Tax Exempt
Trust in exchange for
<PAGE>
PAGE 30
- --------------------
Keystone Tax Free Fund
shares of the Fund pursuant to a plan of reorganization approved by the
shareholders of Keystone Tax Exempt Trust on February 29, 1996. The
acquisition was accomplished by a tax-free exchange of shares of the Fund for
the net assets of Keystone Tax Exempt Trust. The net assets of Keystone Tax
Exempt Trust on that date, including $40,609,975 of unrealized appreciation
on investments, were combined with the Fund. The aggregate net assets of the
Fund and Tax Exempt Trust immediately before the acquisition were
$1,142,691,716 and $658,278,376, respectively. The net assets of the Fund
immediately after the acquisition were $1,800,970,092.
<PAGE>
PAGE 31
- --------------------
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Tax Free Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Tax Free Fund, including the schedule of investments, as of December
31, 1996, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the two-year
period then ended and the financial highlights for each of the years in the
ten-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Tax Free Fund, as of December 31, 1996 the results of its operations
for the year then ended, the changes in its net assets for each of the years
in the two-year period then ended, and the financial highlights for each of
the years in the ten-year period then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 31, 1997
<PAGE>
PAGE 32
- --------------------
Keystone Tax Free Fund
FEDERAL TAX STATUS-FISCAL 1996 DISTRIBUTIONS
(Unaudited)
The per share distributions paid to you for fiscal 1996, whether taken in
shares or cash, are as follows:
Income Dividends
Tax-exempt Taxable
- ------------ -----------
$0.39 $0.00
============ ===========
In January 1997 complete information on calendar year 1996 distributions was
forwarded to you to assist in completing your 1996 federal income tax return.
<PAGE>
PAGE 33
- --------------------
Additional Information
(Unaudited)
Shareholders of the Fund considered and acted upon the proposals listed below
at a special meeting of shareholders held Monday, December 9, 1996. In
addition, next to each proposal are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
============================ =========== ===========
Frederick Amling 144,022,770 4,053,136
Laurence B. Ashkin 143,990,875 4,085,031
Charles A. Austin III 144,085,020 3,990,886
Foster Bam 143,983,688 4,092,218
George S. Bissell 143,979,383 4,096,523
Edwin D. Campbell 144,015,759 4,060,147
Charles F. Chapin 144,037,486 4,038,420
K. Dun Gifford 144,088,419 3,987,487
James S. Howell 143,983,258 4,092,648
Leroy Keith, Jr. 144,096,560 3,979,346
F. Ray Keyser, Jr. 143,988,564 4,087,342
Gerald M. McDonell 144,031,045 4,044,861
Thomas L. McVerry 144,024,241 4,051,665
William Walt Pettit 144,010,323 4,065,583
David M Richardson 144,101,685 3,974,221
Russell A. Salton, III M.D. 144,092,464 3,983,442
Michael S. Scofield 144,026,816 4,049,090
Richard J. Shima 144,066,939 4,008,967
Andrew J. Simons 144,068,774 4,007,132
2. To approve an Investment Advisory and Management Agreement between the
Fund and Keystone Investment Management Company.
Affirmative 139,291,841
Against 3,308,095
Abstain 5,475,971
<PAGE>
PAGE 34
- --------------------
Keystone Tax Free Fund
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free,
1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your
Keystone account is available 24 hours a day through KARL. To speak with a
Shareholder Services representative about your account, call toll-free
1-800-343-2898 between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan
investors should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account
at any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net
asset value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same
Keystone family quickly and easily for a nominal service fee. KARL gives you
the added ability to move your money any time of day, any day of the week.
Keystone offers a variety of funds with different investment objectives for
your changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to
move money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the
check writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours
a day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined
contribution plans. For more information, please call Retirement Plan
Services, toll-free at 1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
[wrap cover]
KEYSTONE
FAMILY OF FUNDS
[diamond]
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
[GRAPHIC] Evergreen Keystone Logo
P.O. Box 2121
Boston, Massachusetts 02106-2121
KTF-R-2/97
48M [recycle symbol]
KEYSTONE
[GRAPHIC] U.S. flag
TAX FREE
FUND
[GRAPHIC] Evergreen Keystone Logo
ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>
PAGE 1
KEYSTONE TAX FREE FUND
Dear Shareholder:
We are pleased to report on the performance of Keystone Tax Free Fund for the
six-month fiscal period that ended on June 30, 1997. Following this letter is a
discussion with your Fund's manager, discussing portfolio strategy.
PERFORMANCE
For the six-month period your Fund returned 2.52%; for the twelve months period
it returned 7.07%. These results include price changes and reinvestment of
dividends. The Lehman Municipal Bond Index-- a widely recognized benchmark of
municipal bond performance-- returned 3.20% for the same six-month period and
7.81% for the same twelve-month period.
We believe your Fund performed satisfactorily in a difficult interest rate
environment over the past six months. While interest rates ended the period
relatively unchanged, they rose during much of the first half of 1997 and later
declined. Investors continued to be concerned about stronger-than-expected
economic growth, future inflation and higher interest rates. This created an
atmosphere of uncertainty and gave the market a vigilant tone.
Interest rates declined late in the period as employment growth showed signs
of slowing. Throughout the year's first half, inflation remained well contained.
We managed your Fund conservatively during this changing environment. We
improved the overall quality of the portfolio, primarily by reducing positions
in BBB-rated securities and increasing holdings in AAA-rated bonds. We increased
your Fund's net assets invested in AAA-rated bonds from 46% on December 31, 1996
to 54% on June 30, 1997. Your Fund's average quality was AA+, also as of the end
of the reporting period.
In the last half of this period, we increased your Fund's sensitivity to
interest rate changes, as it appeared interest rates would decline and bond
prices would rise. We did this by selling bonds with 5-10 year maturities and
reinvesting proceeds in bonds with 15-20 year maturities.
We also focused on bonds with lower coupons, as well as some attractively
priced zero-coupon bonds. We believe these changes enhanced your Fund's total
return when interest rates fell.
OUTLOOK
Going forward, we are cautiously optimistic about the municipal bond market.
Supply/demand technicals remain favorable. The stronger economic growth has
benefited many municipalities by increasing tax revenues and strengthening their
credit outlook. Higher revenues also have reduced the need for debt financing,
which has restricted the supply of municipal bonds. Meanwhile, demand has
remained steady. This reduced supply and steady demand has helped support
municipal bond prices.
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE TAX FREE FUND
We also expect the economy to grow at a moderate pace and inflation to remain
low, an environment which historically has been favorable for fixed-income
investments. Improvements in productivity have increased efficiency throughout
the world. We believe that, combined with the steadfast efforts of the Federal
Reserve Board to thwart inflation, this will enable the economic expansion to
continue without a resurgence of higher prices.
Thank you for your support of Keystone Tax Free Fund.
Sincerely,
Albert H. Elfner, III
(Signature of Albert H. Elfner, III)
CHAIRMAN AND PRESIDENT
KEYSTONE INVESTMENT MANAGEMENT COMPANY
(Signature of George S. Bissell)
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
<TABLE>
<S> <C>
(Photo of (Photo of George S. Bissell)
Albert H. Elfner,III)
ALBERT H. ELFNER, III GEORGE S. BISSELL
</TABLE>
August 1997
<PAGE>
PAGE 3
A Discussion With
Your Fund's Manager
(Photo of Betsy A. Hutchings)
BETSY A. HUTCHINGS, A SENIOR VICE PRESIDENT AND GROUP LEADER OF THE
MUNICIPAL BOND TEAM OF KEYSTONE INVESTMENT MANAGEMENT COMPANY, IS
PORTFOLIO MANAGER OF THE FUND. A PROFESSIONAL WITH MORE THAN 15 YEARS OF
EXPERIENCE IN INVESTMENT MANAGEMENT, MS. HUTCHINGS ALSO IS PORTFOLIO
MANAGER OF KEYSTONE TAX FREE INCOME FUND. PRIOR TO JOINING KEYSTONE IN
1988, MS. HUTCHINGS SERVED IN PORTFOLIO MANAGER AND RESEARCH POSITIONS AT
SCUDDER, STEVENS & CLARK, NY; AND JOHN NUVEEN & COMPANY, CHICAGO. MS.
HUTCHINGS IS ACTIVE IN BOSTON MUNICIPAL ANALYSTS FORUM AND THE MUNICIPAL
BOND BUYERS CONFERENCE. SHE IS A GRADUATE OF WHEATON COLLEGE.
Q WHY IS THE FUND ATTRACTIVE TO INVESTORS?
A Keystone Tax Free Fund is appropriate for tax-sensitive investors. The Fund is
designed to provide a high level of current income that is exempt from federal
income tax and capital preservation. A portion of income may be subject to the
federal alternative minimum tax (AMT). The Fund offers professional management
and diversification. We believe this is especially important, since many
investors do not have the time or resources to monitor credit quality, the
economy and interest rates. We diversify the Fund by selecting securities with
various maturities from across the nation. We believe this can help reduce the
potential for wide fluctuations in the Fund's share price.
Q HOW DO YOU SELECT THE FUND'S SECURITIES?
A Our management team employs an intensive research process, emphasizing credit
quality and financial stability. The bonds we select must meet our high credit
standards and possess attributes that we believe will enable them to perform
well in our anticipated interest rate and economic environment. We also focus on
diversification and maximizing the Fund's income.
Q WHAT WAS THE INTEREST RATE ENVIRONMENT LIKE OVER THE PAST SIX MONTHS?
A Interest rates rose for much of the first half of 1997 and later declined,
ending the period relatively unchanged. Faster-than-expected economic growth
during the year's first quarter caused investors to become concerned about
future inflation, a trend we witnessed throughout 1996. The Federal Reserve
Board confirmed those concerns in March 1997 by raising the federal funds rate,
the rate at which banks lend to each other overnight, by 1/4%. Interest rates
reversed course as signs of slower employment growth began to appear in early
May. Inflation remained low throughout the first half of the year.
Q HOW DID THAT SPECIFICALLY AFFECT MUNICIPAL BONDS?
A The economy's strength benefited municipal bond investors in several ways.
State and local governments enjoyed higher tax revenues, which helped improve
the fiscal conditions and credit standings of many municipalities. Higher
revenues also enabled these governments to reduce their need for debt financing,
which then restricted supply in the tax-exempt market. During 1996, new
municipal supply issuance stood at $185 billion, compared to $292 billion in
1993. This steady demand and thinner supply gave support to municipal bond
prices.
<PAGE>
PAGE 4
KEYSTONE TAX FREE FUND
Q WHAT STRATEGIES DID YOU USE IN MANAGING THE FUND?
A We used two main strategies. First, we focused on relative value. We did this
by increasing assets in AAA-rated bonds and bonds not subject to the alternative
minimum tax (AMT); and reducing BBB-rated and AMT positions. The yields of
BBB-rated bonds have moved closer to those of AAA-rated bonds, so that we were
able to upgrade the portfolio without giving up much yield. As of June 30, 1997,
approximately 54% of the portfolio's net assets were invested in AAA-rated
securities, versus 46% on December 31, 1996. The Fund's average quality was AA+
also as of June 30, 1997. Similarly, AMT bonds have higher yields than non-AMT
bonds. The yields of the AMT bonds have fallen to the point that they provided
little additional yield compared to non-AMT bonds. We believed that the non-AMT
and higher-rated securities provided better relative value.
We also increased the Fund's sensitivity to interest rate changes. The first
part of this strategy was to invest in bonds with lower coupons. These so-called
"discount" coupons typically generate higher total returns in a declining
interest rate environment. A second part of this strategy was to target new
investments in the 15-20 year maturity range, selling positions that had 5-10
year maturities and buying zero-coupon bonds. As of June 30, 1997, the Fund's
average maturity stood at 18.6 years. We believe these changes enhanced total
return in the latter part of the reporting period.
Q WHAT IS YOUR OUTLOOK OVER THE NEXT SIX MONTHS?
A We are cautiously optimistic in our outlook for municipal bonds, expecting to
see a continuation of many of the trends that have existed over the past six
months. We anticipate steady economic growth, low inflation and a positive
relationship between supply and demand.
We believe that improvements in productivity-- specifically from investment in
computers and information processing-- can enable the economy to grow at a
steady pace without a resurgence in inflation. In our opinion, this type of
environment should continue to benefit municipalities by producing higher tax
revenues, which reduces their need to issue bonds while improving the credit
quality on their outstanding bonds.
Investors also have responded positively to news out of Washington. The
federal deficit continues to decline; and many investors believe that members of
Congress are making progress on settling their differences.
Longer term, we also think demographics could have a favorable effect on
municipal bonds. The first of the baby-boomers have reached fifty and may be
looking for a greater portion of their portfolios to be income-producing,
tax-advantaged investments.
--
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 400
CHARLOTTE, N.C. 28288-1195
<PAGE>
PAGE 5
Your Fund's Performance
(Chart appears below with the following plot points)
Tax Value $19,746
Keystone Tax Free Fund
(In thousands)
Dividend Initial
Reinvestment Investment
6/87 10,000 10,000
6/89 11,859 10,024
6/91 13,484 9,495
6/93 16,588 10,036
6/95 17,478 9,063
6/97 19,746 9,255
The cumulative and average annual total returns with sales charge calculations
reflect the deduction of the 3% contingent deferred sales charge (CDSC) for
those investors who sold Fund shares after one calendar year. Investors who
retained their investment earned the returns in the without sales charge lines.
HISTORICAL RECORD
CUMULATIVE TOTAL RETURN
6 mos w/o sales charge 2.52%
1 yr w/o sales charge 7.07%
1 yr w/ sales charge 4.07%
5 years 31.39%
10 years 97.46%
AVERAGE ANNUAL TOTAL RETURN
1 yr w/o sales charge 7.07%
1 yr w/ sales charge 4.07%
5 years 5.61%
10 years 7.04%
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone Classic fund by phone or in
writing. The Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 6
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- 97.9%
ALABAMA-- 0.9%
$ 2,035,000 Alabama Agricultural and
Mechanic University
6.50%, 11/1/25, (MBIA)...... $ 2,211,211
2,065,000 Alabama Housing Finance
Authority, Single Family,
Collateralized Home
Mortgage, Series D1
6.00%, 10/1/16.............. 2,110,554
4,000,000 Jefferson County, Alabama,
Sewer Revenue, Warrants,
Series D
5.70%, 2/1/18, (FGIC)....... 4,011,600
3,500,000 Mobile, Alabama, Industrial
Development Board, Solid
Waste Disposal, Mobile
Energy Serv. Co. Project
6.95%, 1/1/20............... 3,733,625
12,066,990
ALASKA-- 1.2%
15,000,000 Alaska Energy Authority,
Utilities Revenue, Linked
Bulls/Bears Floaters (c)
6.60%, 7/1/15, (FGIC)....... 16,437,150
265,000 Alaska State Housing Finance
Corporation, Collateralized
Home Mortgage, Series A
8.00%, 12/1/13.............. 273,976
16,711,126
ARIZONA-- 2.3%
11,000,000 Central Arizona, Water
Conservation District,
Contract Revenue, Central
Arizona Project, Series A
5.50%, 11/1/09.............. 11,353,760
850,000 Chandler, Arizona, Water and
Sewer Revenue
6.75%, 7/1/06, (FGIC)....... 916,309
Maricopa County, Arizona,
Elementary School District:
2,000,000 #008, Osborn Refunding
7.50%, 7/1/07, (MBIA)......... 2,420,440
3,750,000 #068, Series A
6.75%, 7/1/14, (AMBAC)........ 4,177,012
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
ARIZONA-- CONTINUED
$ 6,000,000 Maricopa County, Arizona,
Unified School District
8.13%, 1/1/10, (MBIA)....... $ 7,232,220
3,785,000 Northern Arizona University,
College and University
Revenue
5.00%, 6/1/15, (FGIC)....... 3,590,981
370,000 Pima County, Arizona,
Industrial Development
Authority, Health Care
Corporation Revenue
8.00%, 7/1/13, (MBIA)....... 390,613
2,030,000 Pima County, Arizona, Unified
School District, Tucson
Refunding
7.50%, 7/1/03, (FGIC)....... 2,339,717
32,421,052
ARKANSAS-- 0.1%
1,725,000 Arkansas State Development
Finance Authority, Single
Family Mortgage Revenue
Refunding
8.00%, 8/15/11.............. 1,851,753
CALIFORNIA-- 7.6%
California Health Facilities
Financing Authority Revenue:
9,800,000 Children's Hospital
5.38%, 7/1/20, (MBIA)......... 9,443,182
2,500,000 Pomona Valley Hospital,
Series A
5.63%, 7/1/19, (MBIA)......... 2,489,050
200,000 St. Francis Medical Center,
Series A
5.50%, 10/1/09................ 208,434
1,995,000 California Housing Finance
Agency, Revenue Bonds, Home
Mortgage, Series H
6.25%, 8/1/27............... 2,034,681
California State Public Works
Board, Lease Department
Correctional State Prison:
9,000,000 Series A
5.25%, 1/1/21, (AMBAC)........ 8,602,470
3,700,000 Series E
5.50%, 6/1/15................. 3,699,334
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
CALIFORNIA-- CONTINUED
California State Public Works
Board, Various California
University Projects:
$ 4,000,000 Series A
5.35%, 12/1/15................ $ 3,925,840
350,000 Series B
5.50%, 6/1/19................. 346,027
Central Coast Water Authority
California Revenue, State
Water Project, Regional
Facilities, Series A:
6,420,000 5.00%, 10/1/16, (AMBAC)....... 6,004,241
5,000,000 5.00%, 10/1/22, (AMBAC)....... 4,603,100
5,615,000 Eden Township, California,
Hospital District Revenue
7.40%, 11/1/19.............. 5,948,531
5,000,000 Los Angeles County,
California, Public Works
Financing Authority Lease
Revenue, Series A
5.25%, 9/1/13, (MBIA)....... 4,913,150
6,800,000 Los Angeles, California,
Transportation Commission,
Series A
6.25%, 7/1/13, (MBIA)....... 7,164,888
6,015,000 Oakland, California, Revenue
Refunding, Series A
7.60%, 8/1/21, (FGIC)....... 6,346,306
Riverside County, California,
Asset Leasing Corp.,
Leasehold Revenue, Riverside
County Hospital Project:
1,750,000 (effective yield 5.80%) (b)
0.00%, 6/1/15, (MBIA)......... 631,785
1,395,000 (effective yield 5.85%) (b)
0.00%, 6/1/16, (MBIA)......... 471,398
5,000,000 San Diego, California, Public
Facilities Financing
Authority, Sewer Revenue,
Series A
5.25%, 5/15/22, (FGIC)...... 4,760,000
22,500,000 San Francisco, California,
State Building Authority,
Lease Revenue, San Francisco
Civic Center Complex, Series
A
5.25%, 12/1/21, (AMBAC)..... 21,429,450
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
CALIFORNIA-- CONTINUED
$ 7,050,000 San Jose, California,
Redevelopment Agency Tax
Allocation, Merged Area
Redevelopment Project
6.00%, 8/1/09, (MBIA)....... $ 7,687,602
10,000,000 Southern California Public
Power Authority,
Transmission Project Revenue
(effective yield 5.93%) (b)
0.00%, 7/1/15, (FGIC)....... 3,741,200
Victor Valley, California,
Joint Unified High School
District, Capital
Appreciation:
2,635,000 (effective yield 6.20%) (b)
0.00%, 9/1/10, (MBIA)......... 1,306,881
3,780,000 (effective yield 6.25%) (b)
0.00%, 9/1/11, (MBIA)......... 1,753,202
107,510,752
COLORADO-- 6.0%
4,000,000 Araphoe County, Colorado,
Single Family Mortgage
Revenue, Capital
Appreciation, Series A
(effective yield 6.00%) (b)
0.00%, 9/1/10............... 1,963,560
City and County of Denver,
Colorado, Airport System:
Series A:
6,625,000 7.50%, 11/15/23............... 7,507,251
525,000 8.00%, 11/15/25............... 584,740
7,750,000 8.50%, 11/15/23............... 8,729,445
23,830,000 8.75%, 11/15/23............... 27,895,160
3,500,000 Series B
7.25%, 11/15/12............... 3,823,785
Series D:
7,100,000 7.75%, 11/15/13............... 8,729,734
12,250,000 7.75%, 11/15/21............... 13,671,245
1,880,000 Colorado Health Facilities
Authority, Sisters Charity
Health Care, Series A
6.25%, 5/15/09, (MBIA)...... 2,080,596
El Paso County, Colorado,
School District #11,
Colorado Springs:
2,310,000 6.50%, 12/1/12................ 2,612,125
2,000,000 7.10%, 12/1/13................ 2,391,180
1,000,000 7.10%, 12/1/16................ 1,202,940
<PAGE>
PAGE 8
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
COLORADO-- CONTINUED
$ 2,250,000 Larimer County, Colorado,
School District
7.00%, 12/15/16, (MBIA)..... $ 2,748,397
83,940,158
CONNECTICUT-- 0.2%
1,375,000 Connecticut State Resources
Recovery Authority,
Bridgeport Project, Series B
8.50%, 1/1/00............... 1,419,082
1,600,000 Connecticut State Special Tax
Obligation, Series B
6.50%, 10/1/12.............. 1,798,688
3,217,770
DELAWARE-- 0.1%
1,600,000 Delaware State Health
Facilities Authority,
Medical Center of Delaware
7.00%, 10/1/15, (MBIA)...... 1,700,544
110,000 Delaware State Housing
Authority Revenue,
Residential Mortgage, Series
A
9.38%, 6/1/12............... 110,372
1,810,916
FLORIDA-- 6.5%
9,400,000 Broward County, Florida,
Resource Recovery, South
Project
7.95%, 12/1/08.............. 10,231,712
7,440,000 Dade County, Florida, School
District
5.00%, 2/15/15, (MBIA)...... 7,078,416
Dade County, Florida, Water
and Sewer Systems Revenue:
5,000,000 5.25%, 10/1/21, (FGIC)........ 4,794,700
10,000,000 5.25%, 10/1/26, (FGIC)........ 9,527,300
2,500,000 Escambia County, Florida,
Pollution Control Revenue,
Champion International
Corporation Project
6.40%, 9/1/30............... 2,564,825
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
FLORIDA-- CONTINUED
$ 580,000 Florida Housing Finance
Agency, GNMA Collateralized
Home Mortgage
8.00%, 12/1/20.............. $ 608,437
12,000,000 Florida State, Bond Finance
Department, Environmental
Preservation, Series A
5.00%, 7/1/10, (AMBAC)...... 11,726,880
3,580,000 Florida State, Jacksonville
Transportation Authority
9.20%, 1/1/15............... 4,947,918
Gainesville, Florida,
Utilities System Revenue:
7,250,000 Series A
5.20%, 10/1/22................ 6,869,592
435,000 Series B
7.50%, 10/1/08................ 527,503
495,000 Hillsborough County, Florida,
Housing Finance Agency,
Single Family Mortgage
Revenue
7.30%, 4/1/22............... 513,142
1,860,000 Indian River County, Florida,
Water and Sewer Revenue
5.25%, 9/1/20, (FGIC)....... 1,801,782
1,800,000 Jacksonville, Florida, Health
Facilities Authority, New
Children's Hospital
7.00%, 6/1/21, (MBIA)....... 1,959,372
300,000 Lee County, Florida, Solid
Waste System, Series B
7.00%, 10/1/11.............. 330,180
North Broward, Florida,
Hospital District Revenue,
Refunding & Improvement:
4,525,000 5.25%, 1/15/17................ 4,337,756
2,250,000 5.38%, 1/15/24................ 2,165,580
Orlando-Orange County,
Florida, Expressway
Authority:
3,000,000 8.25%, 7/1/14................. 3,979,620
2,960,000 8.25%, 7/1/15, (FGIC)......... 3,940,263
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
FLORIDA-- CONTINUED
$ 2,985,000 Palm Beach County, Florida,
Health Revenue, John F.
Kennedy Hospital
9.50%, 8/1/13................. $ 3,873,127
3,250,000 St. Petersburg, Florida,
Health Facilities Authority
7.00%, 12/1/15, (MBIA)...... 3,578,315
500,000 Tampa, Florida, Allegheny
Health Systems Revenue
6.50%, 12/1/23.............. 549,310
3,145,000 Tampa, Florida, Guaranteed
Entitlement, Series A
8.38%, 10/1/08.............. 3,305,772
1,825,000 Tampa, Florida, Subordinate
Guaranteed Entitlement,
Series B (Pre-refunded)
8.50%, 10/1/18.............. 1,921,032
500,000 Tarpon Springs, Florida,
Health Facilities Authority,
Hospital Revenue, Tarpon
Springs Hospital
8.75%, 5/1/12............... 522,925
91,655,459
GEORGIA-- 3.5%
3,000,000 Forsyth County, Georgia,
School District
6.75%, 7/1/16............... 3,450,240
9,800,000 Georgia Municipal Electric
Authority Power Revenue,
Series B
6.38%, 1/1/16............... 10,703,168
Georgia State, General
Obligation:
10,000,000 Series B
6.80%, 3/1/11................. 11,676,900
10,700,000 Series C
5.25%, 4/1/11................. 10,874,731
Series D:
1,500,000 6.70%, 8/1/10................. 1,737,540
3,425,000 6.25%, 9/1/08................. 3,823,704
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
GEORGIA-- CONTINUED
$ 4,255,000 Metropolitan Atlanta Rapid
Transit Authority, Georgia,
Sales Tax Revenue, Series P
6.25%, 7/1/11, (AMBAC)...... $ 4,672,118
2,370,000 Private Colleges and
University Facilities
Authority Revenue, Georgia,
Mercer University Project
6.40%, 11/1/11, (MBIA)...... 2,641,412
49,579,813
HAWAII-- 0.6%
8,000,000 Hawaii State Department of
Budget and Finance, Special
Purpose Revenue, Hawaii
Electric Company
7.38%, 12/1/20, (MBIA)...... 8,713,200
IDAHO-- 0.1%
1,055,000 Idaho Housing Finance
Authority, Single Family
Mortgage Bonds, Series D-1
8.00%, 1/1/20............... 1,139,495
ILLINOIS-- 3.0%
15,860,000 Chicago, Illinois, Gas Supply
Revenue, People's Gas Light
and Coke Company, Series A
8.10%, 5/1/20............... 17,402,385
4,000,000 Illinois Development Finance
Authority, Pollution Control
Revenue Refunding,
Commonwealth Edison Company
Project, Series D,
6.75%, 3/1/15............... 4,380,280
9,000,000 Illinois State, Sales Tax,
Series P
6.50%, 6/15/22.............. 10,135,800
2,965,000 Kankakee, Illinois, Sewer
Revenue
6.88%, 5/1/11, (FGIC)....... 3,251,893
<PAGE>
PAGE 10
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
ILLINOIS-- CONTINUED
$ 3,000,000 Metropolitan Fair and
Exposition Authority,
Illinois, Series A
5.00%, 6/1/15............... $ 2,724,660
4,950,000 Quincy, Illinois, Blessing
Hospital Revenue
6.00%, 11/15/18............. 4,878,869
42,773,887
KANSAS-- 0.2%
2,000,000 Burlington, Kansas, Pollution
Control, Kansas Gas and
Electric Company
7.00%, 6/1/31, (MBIA)....... 2,190,560
KENTUCKY-- 1.6%
8,000,000 Carroll County, Kentucky,
Kentucky Utility Company,
Series A
7.45%, 9/15/16.............. 9,020,320
6,000,000 Jefferson County, Kentucky,
Hospital Revenue, Linked
ACES/Inverse Floaters (c)
6.44%, 10/23/14, (MBIA)..... 6,301,200
4,360,000 Kentucky Housing Corporation,
Housing Revenue Bond,
Series C
7.90%, 1/1/21............... 4,590,775
2,725,000 Trimble County, Kentucky,
Pollution Control,
Louisville Gas and Electric
Company
7.63%, 11/1/20.............. 2,990,388
22,902,683
LOUISIANA-- 1.7%
1,750,000 Louisiana Public Facilities
Authority, Hospital Revenue,
Woman's Hospital Foundation
Project
7.25%, 10/1/22.............. 1,986,040
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
LOUISIANA-- CONTINUED
New Orleans, Louisiana,
Capital Appreciation:
$ 6,960,000 (effective yield 6.05%) (b)
0.00%, 9/1/14, (AMBAC)........ $ 2,688,857
2,800,000 (effective yield 7.10%) (b)
0.00%, 9/1/15, (AMBAC)........ 1,014,384
3,755,000 (effective yield 7.15%) (b)
0.00%, 9/1/17, (AMBAC)........ 1,204,491
5,000,000 Orleans Parish, Louisiana,
Parishwide School District
5.38%, 9/1/21, (AMBAC)...... 4,845,300
5,175,000 Orleans Parish, Louisiana,
School Board
9.05%, 2/1/10, (ETM)........ 6,870,796
3,000,000 Orleans Parish, Louisiana,
School Board, Refunding
Bonds, Series B
5.20%, 2/1/14............... 2,914,920
2,000,000 Ouachita Parish, Louisiana,
Louisiana Hospital Service
Revenue, Glenwood Regional
Medical Center
7.50%, 7/1/21............... 2,245,920
23,770,708
MAINE-- 0.7%
Maine State Housing Authority,
Mortgage Purchase:
2,580,000 Series A3
7.80%, 11/15/15............... 2,637,663
4,000,000 Series C2
6.05%, 11/15/28............... 4,019,960
2,500,000 Regional Waste System, Maine,
Solid Waste Resources
Recovery Revenue
8.15%, 7/1/11............... 2,676,800
9,334,423
MARYLAND-- 0.0%
115,000 Maryland State Community
Development Administration,
Multi-Family Housing
8.75%, 5/15/12.............. 115,714
<PAGE>
PAGE 11
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
MASSACHUSETTS-- 9.2%
$ 225,000 Lawrence, Massachusetts,
General Obligation
6.25%, 2/15/09, (AMBAC)..... $ 243,893
Massachusetts Bay
Transportation Authority:
Series A:
7,550,000 6.25%, 3/1/12................. 8,321,610
6,110,000 7.00%, 3/1/11................. 7,180,961
2,125,000 Series B
6.20%, 3/1/16................. 2,339,030
Massachusetts Bay
Transportation Authority,
General Transportation
Systems, Series A:
8,000,000 5.00%, 3/1/23, (FGIC)......... 7,360,400
7,615,000 5.13%, 3/1/17, (FGIC)......... 7,281,996
5,000,000 7.00%, 3/1/07................. 5,785,400
4,550,000 Massachusetts Bay
Transportation Authority,
General Transportation
Systems, Refunding, Series A
7.00%, 3/1/08............... 5,301,159
13,750,000 Massachusetts Industrial
Finance Agency, Harvard
Community Health Plan,
Incorporated, Series B
8.13%, 10/1/17.............. 14,603,600
8,000,000 Massachusetts Industrial
Finance Agency, Solid Waste
Disposal Revenue, Senior
Lien, Massachusetts
Recycling Association,
Series A
9.00%, 8/1/16............... 3,200,000
26,000,000 Massachusetts Municipal
Wholesale Electric Company
Power Supply Systems
Revenue, Linked PARS and
INFLOS (c)
5.45%, 7/1/18............... 24,895,260
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
MASSACHUSETTS-- CONTINUED
Massachusetts State Health and
Educational Facilities
Authority:
$ 1,700,000 Brigham & Women's Hospital
6.75%, 7/1/24, (MBIA)......... $ 1,833,127
2,000,000 Capital Asset Program
7.30%, 10/1/18, (MBIA)........ 2,188,620
5,000,000 Massachusetts General
Hospital, Series F
6.25%, 7/1/12, (AMBAC)........ 5,546,800
600,000 McLean Hospital Issue,
Series C
6.50%, 7/1/10................. 651,582
400,000 Milton Hospital, Series B
7.25%, 7/1/05................. 435,964
New England Deaconess
Hospital:
1,000,000 6.88%, 4/1/22................. 1,069,960
2,980,000 6.88%, 4/1/22, (AMBAC)........ 3,252,551
Massachusetts State Water
Resources Authority:
1,500,000 Series A
7.13%, 4/1/00................. 1,598,040
5,000,000 Series B
5.00%, 12/1/16, (MBIA)........ 4,697,500
Massachusetts State, General
Obligation:
Consolidated Loan, Series C
8,000,000 6.60%, 11/1/08, (FGIC)........ 8,889,920
Series B
5,000,000 5.25%, 6/1/16, (FGIC)......... 4,859,050
Series C
7,600,000 6.00%, 8/1/09, (FGIC)......... 8,258,540
85,000 Massachusetts State, Water
Pollution Abatement Trust,
Pooled Loan Program,
Series 2
6.13%, 2/1/08............... 93,479
129,888,442
<PAGE>
PAGE 12
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
MICHIGAN-- 2.8%
$ 3,000,000 Detroit, Michigan, Sewage
Disposal Revenue, Series A
5.00%, 7/1/22, (MBIA)....... $ 2,770,800
2,450,000 Michigan State University
Revenues, Series A
5.13%, 2/15/16, (AMBAC)..... 2,326,863
9,500,000 Monroe County, Michigan,
Economic Development
Corporation, Detroit Edison
Company
6.95%, 9/1/22, (FGIC)....... 11,381,570
51,525,000 Okemos, Michigan, Public
School District, Series I
(effective yield 7.35%) (b)
0.00%, 5/1/21............... 11,499,349
35,490,000 West Ottawa, Michigan, Public
School District, Capital
Appreciation (effective
yield 7.55%) (b)
0.00%, 5/1/15............... 11,872,115
39,850,697
MINNESOTA-- 1.0%
1,220,000 Dakota County, Minnesota,
Single Family Mortgage
8.10%, 9/1/12............... 1,272,643
1,330,000 Minnesota State Housing
Finance Agency, Single
Family Mortgage, Series D
8.00%, 1/1/23............... 1,382,176
11,925,000 University of Minnesota,
University Revenue, Series A
5.50%, 7/1/21............... 11,973,415
14,628,234
MISSISSIPPI-- 0.1%
1,000,000 Harrison County, Mississippi,
Wastewater Treatment
Management
8.50%, 2/1/13............... 1,346,750
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
MISSOURI-- 0.6%
$ 4,725,000 Missouri State Health and
Educational Facilities
Authority, Barnes Jewish
Hospital
5.15%, 5/15/10, (MBIA)...... $ 4,701,186
945,000 Missouri State Housing
Development Commission,
Mortgage Revenue, Single
Family, Series B
6.45%, 9/1/27............... 977,546
2,500,000 Sikeston, Missouri, Electric
Revenue
5.00%, 6/1/22, (MBIA)....... 2,309,175
7,987,907
NEVADA-- 0.7%
3,000,000 Clark County, Nevada, School
District, Series A
6.75%, 3/1/07, (MBIA)....... 3,226,560
6,000,000 Clark County, Nevada, Series A
7.50%, 6/1/09, (AMBAC)...... 7,253,760
10,480,320
NEW HAMPSHIRE-- 0.3%
New Hampshire Higher Education
& Health Facilities
Authority, Frisbie Memorial
Hospital, Revenue Bonds:
3,155,000 6.13%, 10/1/13................ 3,171,974
1,000,000 Gloucester County Project,
Series A
8.13%, 7/1/10................. 1,014,080
4,186,054
NEW JERSEY-- 0.8%
8,750,000 New Jersey Economic
Development Authority, Water
Facilities Revenue, New
Jersey American Water
Company Incorporated Project
6.50%, 4/1/22, (FGIC)....... 9,275,875
<PAGE>
PAGE 13
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
NEW JERSEY-- CONTINUED
New Jersey Health Care
Facilities Financing
Authority:
$ 1,000,000 Jersey Shore Medical Center
6.13%, 7/1/12, (AMBAC)........ $ 1,044,790
1,200,000 St. Elizabeth's Hospital,
Series B
7.75%, 7/1/98................. 1,234,908
11,555,573
NEW MEXICO-- 0.2%
1,500,000 Albuquerque, New Mexico,
Hospital System Revenue,
Series A
6.38%, 8/1/07, (MBIA)....... 1,616,385
1,000,000 Albuquerque, New Mexico, Joint
Water and Sewer System
Revenue, Series A (effective
yield 6.90%) (b)
0.00%, 7/1/08, (FGIC)....... 565,010
1,230,000 New Mexico Educational
Assistance Foundation,
Series B
6.30%, 12/1/04.............. 1,328,781
3,510,176
NEW YORK-- 15.4%
4,500,000 Metropolitan Transportation
Authority, New York,
Dedicated Tax Fund, Series A
5.50%, 4/1/15, (MBIA)....... 4,493,925
3,050,000 Metropolitan Transportation
Authority, New York,
Transportation Facilities
Revenue, Series M
5.50%, 7/1/08, (FGIC)....... 3,192,374
7,980,000 New York City, New York,
General Obligation,
Prerefunded, Series A
7.75%, 8/15/15.............. 9,072,781
400,000 New York City, New York,
General Obligation,
Refunding, Series A
5.75%, 8/1/10, (FGIC)....... 409,512
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
NEW YORK-- CONTINUED
New York City, New York,
General Obligation,
Unrefunded Balance,
Series A :
$ 615,000 7.75%, 8/15/08................ $ 683,443
335,000 7.75%, 8/15/14................ 372,282
270,000 7.75%, 8/15/15................ 299,517
New York City, New York,
Municipal Water Finance
Authority, Water and Sewer
Systems Revenue:
Series A:
10,000,000 5.50%, 6/15/24................ 9,660,000
4,565,000 7.00%, 6/15/15, (FGIC)........ 4,960,146
Series B:
8,000,000 5.50%, 6/15/27, (MBIA)........ 7,783,520
5,000,000 5.75%, 6/15/26................ 4,986,550
New York State Dormitory
Authority Revenue, City
University Educational
Facilities:
1,000,000 5.38%, 7/1/14, (FGIC)......... 991,590
3,780,000 7.00%, 7/1/09, (FGIC)......... 4,421,164
4,535,000 New York State Dormitory
Authority Revenue, Mental
Health Facility
5.13%, 2/15/21, (MBIA)...... 4,254,374
New York State Dormitory
Authority Revenue, State
University Educational
Facilities:
3,000,000 5.25%, 5/15/15, (AMBAC)....... 2,941,500
4,000,000 5.50%, 5/15/13, (FSA)......... 4,062,600
7,000,000 Series A
5.25%, 5/15/15, (FSA)......... 6,887,090
9,500,000 Series B
5.25%, 5/15/13, (FSA)......... 9,446,990
Series C:
1,100,000 7.38%, 5/15/10................ 1,289,167
10,500,000 7.50%, 5/15/11................ 12,436,830
<PAGE>
PAGE 14
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
NEW YORK-- CONTINUED
$ 7,400,000 New York State Energy Research
and Development Authority,
Consolidated Edison Project
7.75%, 1/1/24............... $ 7,628,512
5,000,000 New York State Environmental
Facilities Corporation,
State Water Pollution
Control (New York City Water
Finance Authority), Series E
6.88%, 6/15/10.............. 5,446,350
2,000,000 New York State Local
Government Assistance
Corporation, Series C
5.50%, 4/1/17............... 2,011,720
New York State Medical Care
Facilities, Finance Agency
Revenue:
2,900,000 6.38%, 8/15/14, (FGIC)........ 3,110,569
2,255,000 6.38%, 11/15/19, (AMBAC)...... 2,397,133
1,250,000 Health Center Projects,
Series A
6.38%, 11/15/19............... 1,320,712
3,500,000 New York Hospital, FHA Insured
Mortgage, Series A
6.80%, 8/15/24, (AMBAC)....... 3,891,195
2,000,000 New York Hospital, Series A
6.75%, 8/15/14................ 2,217,320
4,000,000 New York State Mortgage
Agency, Homeowner Mortgage,
Series 27
6.90%, 4/1/15............... 4,317,000
1,565,000 New York State Mortgage
Agency, Series A
6.88%, 4/1/17............... 1,582,857
1,125,000 New York State Power
Authority, General Purpose
Revenue
7.00%, 1/1/18............... 1,305,698
New York State Thruway
Authority, Highway and
Bridge Trust Fund, Series A:
1,500,000 5.25%, 4/1/16, (AMBAC)........ 1,459,590
3,300,000 5.25%, 4/1/17, (AMBAC)........ 3,208,557
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
NEW YORK-- CONTINUED
$10,000,000 New York State Thruway
Authority, General Revenue,
Series D
5.25%, 1/1/21............... $ 9,621,600
New York State Urban
Development Corporation
Revenue, Correctional
Facilities:
15,920,000 Refunding, Series A
6.50%, 1/1/10................. 17,370,312
4,000,000 Series 7
5.70%, 1/1/16................. 3,972,360
Series A:
575,000 6.50%, 1/1/09................. 628,952
9,000,000 7.50%, 4/1/11................. 10,102,230
10,550,000 New York State, General
Obligation
5.25%, 3/1/17............... 10,111,331
500,000 Niagara Falls, New York,
Public Improvement
7.50%, 3/1/14, (MBIA)....... 618,780
3,000,000 Port Authority, New York and
New Jersey, Consolidated
104th Series
4.75%, 1/15/26, (AMBAC)..... 2,642,730
Triborough Bridge and Tunnel
Authority Revenue, New York,
General Purpose Bonds:
14,120,000 Series B
5.30%, 1/1/17................. 13,750,621
6,000,000 Series Q
5.00%, 1/1/17, (MBIA)......... 5,629,560
10,000,000 Series Y
5.50%, 1/1/17................. 10,095,000
217,086,044
OHIO-- 1.4%
2,000,000 Adams County, Ohio Valley
Local School District
7.00%, 12/1/15.............. 2,388,720
Cleveland, Ohio, Public Power
Systems, First Mortgage,
Series A:
7,000,000 7.00%, 11/15/16, (MBIA)....... 8,044,960
1,000,000 7.00%, 11/15/24, (MBIA)....... 1,158,660
<PAGE>
PAGE 15
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
OHIO-- CONTINUED
$ 1,285,000 Columbus, Ohio, General
Obligation
12.38%, 2/15/06............. $ 1,936,623
1,500,000 Montgomery County, Ohio,
Hospital Revenue, Kettering
Medical Center
6.25%, 4/1/20, (MBIA)....... 1,642,965
1,000,000 Ohio State Higher Educational
Facility Commission
6.13%, 11/15/17, (MBIA)..... 1,047,670
3,000,000 Ohio State Water Development
Authority Revenue, Safe
Water Series
6.00%, 12/1/07, (AMBAC)..... 3,272,940
19,492,538
OKLAHOMA-- 0.2%
2,250,000 Oklahoma State Industrial
Authority, Baptist Medical
Center
7.00%, 8/15/14.............. 2,463,997
PENNSYLVANIA-- 6.7%
2,500,000 Allegheny County,
Pennsylvania, Sewer Revenue
Refunding (effective yield
6.10%) (b)
0.00%, 6/1/15, (FGIC)....... 907,275
80,000 Beaver County, Pennsylvania,
Industrial Development
Authority, Ohio Edison
Project, Series A
7.75%, 9/1/24............... 84,547
4,390,000 Beaver County, Pennsylvania,
Ohio Edison
7.00%, 6/1/21, (FGIC)....... 4,716,923
500,000 Delaware County, Pennsylvania,
Industrial Development
Authority Pollution Control
Revenue
7.38%, 4/1/21............... 540,675
2,000,000 Lebanon County, Pennsylvania,
Good Samaritan Hospital
Authority, Project Revenue
6.00%, 11/15/18............. 1,998,680
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
PENNSYLVANIA-- CONTINUED
$ 900,000 Montgomery County,
Pennsylvania, Industrial
Development and Pollution
Control, Philadelphia
Electric Company
7.60%, 4/1/21............... $ 963,522
2,500,000 North Penn, Pennsylvania,
Water Authority
6.88%, 11/1/19, (FGIC)...... 2,849,675
7,500,000 Northumberland County,
Pennsylvania, Commonwealth
Lease Revenue, Capital
Appreciation (effective
yield 7.10%) (b)
0.00%, 10/15/10, (MBIA)..... 3,700,425
8,000,000 Pennsylvania Housing Finance
Agency, Multi-Family
Mortgage, Section 8
8.20%, 7/1/24............... 8,579,680
5,545,000 Pennsylvania Housing Finance
Agency, Residential
Development, Section 8,
Series A
7.60%, 7/1/13............... 5,940,691
Pennsylvania Housing Finance
Agency, Single Family
Mortgage:
3,000,000 Series P
8.00%, 4/1/16................. 3,089,310
4,000,000 Series T
7.75%, 10/1/09................ 4,179,200
3,950,000 Series V
7.80%, 4/1/16................. 4,084,695
1,260,000 Pennsylvania Intergovernmental
Cooperative Authority,
Philadelphia Funding
6.75%, 6/15/21, (FGIC)...... 1,424,304
4,000,000 Pennsylvania State Higher
Educational Facilities
Authority, Allegheny General
Hospital, Series A
7.13%, 9/1/07............... 4,345,560
3,750,000 Pennsylvania State Higher
Educational Facilities
Authority, State System
Higher Education, Series O
5.13%, 6/15/24, (AMBAC)..... 3,503,813
<PAGE>
PAGE 16
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
PENNSYLVANIA-- CONTINUED
Philadelphia, Pennsylvania,
Hospital and Higher
Education Facilities:
Albert Einstein Medical Center
$ 3,000,000 7.00%, 10/1/21................ $ 3,184,830
2,350,000 7.63%, 4/1/11................. 2,488,979
280,000 Community College, Series B
6.50%, 5/1/07................. 311,693
2,500,000 Temple University Hospital
5.50%, 11/15/15............... 2,402,125
3,350,000 Philadelphia, Pennsylvania,
School District, Series B
5.25%, 4/1/17............... 3,232,750
15,500,000 Philadelphia, Pennsylvania,
Water and Wastewater Revenue
5.00%, 6/15/16, (FSA)....... 14,368,345
3,175,000 Pittsburgh, Pennsylvania,
Urban Redevelopment
Authority, Multi-Family
Housing Mortgage, 1985
Series A
9.25%, 12/1/27.............. 3,316,923
6,350,000 Sayre, Pennsylvania, Health
Care Facilities Authority,
Guthrie Healthcare, Series A
7.10%, 3/1/17............... 6,896,481
3,000,000 South Fork Municipal
Authority, Pennsylvania,
Hospital Revenue, Good
Samaritan Medical Center,
Series B
5.25%, 7/1/26............... 2,826,060
2,500,000 Southeastern Pennsylvania
Transportation Authority,
Special Revenue
5.38%, 3/1/22, (FGIC)....... 2,428,450
5,000,000 Westmoreland County,
Pennsylvania, Municipal
Authority, Capital
Appreciation, Series C
(effective yield 5.69%) (b)
0.00%, 8/15/15.............. 1,832,050
94,197,661
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
RHODE ISLAND-- 0.4%
$ 5,710,000 Rhode Island State Health and
Educational Building
Corporation, Hospital
Financing Revenue, Roger
Williams General Hospital
9.50%, 7/1/16............... $ 5,848,296
SOUTH CAROLINA-- 1.2%
5,000,000 Piedmont Municipal Power
Agency, South Carolina
Electric Revenue
5.38%, 1/1/25, (MBIA)....... 4,877,950
1,610,000 South Carolina State Housing
Finance and Development
Authority, Homeownership
Mortgage Purchase, Series B
7.90%, 7/1/32, (FHA)........ 1,686,716
9,000,000 South Carolina State Port
Authority, Port Revenue
6.75%, 7/1/21, (AMBAC)...... 9,660,780
16,225,446
TENNESSEE-- 2.4%
5,465,000 Bristol, Tennessee, Health and
Education Authority, Bristol
Memorial Hospital
6.75%, 9/1/10, (FGIC)....... 6,235,237
Knox County, Tennessee, Health
and Educational Facilities,
Fort Sanders Hospital
Alliance:
8,000,000 Series B
7.25%, 1/1/10................. 9,466,880
3,500,000 Series C
5.25%, 1/1/15................. 3,417,295
9,000,000 Metro Government, Nashville
and Davidson Counties,
Tennessee, Step Bond
(effective yield 4.92%) (b)
0.00%, 1/1/12, (FGIC)....... 10,009,170
5,055,000 Tennessee Housing Development
Authority, Home Ownership
Program, Issue H
7.83%, 7/1/15............... 5,184,004
34,312,586
<PAGE>
PAGE 17
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
TEXAS-- 9.2%
$ 25,000 Bexar, Texas, Metropolitan
Water District Waterworks
Systems, Unrefunded Balance
6.63%, 5/1/14, (AMBAC)...... $ 26,849
8,500,000 Brazos River Authority, Texas
Revenue Refunding, Houston
Light and Power Company,
Project C
8.10%, 5/1/19............... 8,923,895
2,400,000 Brownsville, Texas, Utility
System Revenue
6.25%, 9/1/14, (MBIA)....... 2,645,928
6,675,000 Cypress-Fairbanks, Texas,
Independent School District,
Capital Appreciation, Series
A (effective yield 6.03%)
(b)
0.00%, 2/15/13.............. 2,821,990
Fort Bend County, Texas, Levee
Improvement:
1,165,000 6.90%, 9/1/20, (MBIA)......... 1,280,591
District # 11:
1,245,000 6.90%, 9/1/18, (MBIA)......... 1,364,632
1,000,000 6.90%, 9/1/19, (MBIA)......... 1,096,090
7,000,000 Harris County, Texas, Flood
Control District (effective
yield 7.20%) (b)
0.00%, 10/1/06.............. 3,902,080
Harris County, Texas, Health
Facilities Development
Corporation:
5,000,000 6.60%, 6/1/14................. 5,592,650
2,480,000 Hermann Hospital Project
6.38%, 10/1/17, (MBIA)........ 2,629,222
Memorial Hospital Project:
2,525,000 7.13%, 6/1/15................. 2,819,365
3,215,000 Series A
6.00%, 6/1/09................. 3,469,724
4,000,000 Harris County, Texas, Senior
Lien, Toll Road, Series A
6.38%, 8/15/24, (MBIA)...... 4,326,800
3,000,000 Harris County, Texas, Toll
Road
7.00%, 8/15/10.............. 3,529,980
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
TEXAS-- CONTINUED
$ 4,565,000 Houston, Texas, Airport System
Revenue, Senior Lien
8.20%, 7/1/17............... $ 4,819,134
15,000,000 Houston, Texas, General
Obligation
7.00%, 3/1/08............... 17,544,300
Houston, Texas, Water and
Sewer System Revenue, Junior
Lien:
2,700,000 Refunding, Series C
(effective yield 6.85%) (b)
0.00%, 12/1/10................ 1,311,093
2,000,000 Series C
5.25%, 12/1/22, (FGIC)........ 1,921,440
3,175,000 Port Arthur, Texas, General
Obligation
5.00%, 2/15/21, (MBIA)...... 2,962,339
1,085,000 Rio Grande Valley, Texas,
Health Facilities
Corporation, Hospital
Revenue, Baptist Medical
Project
8.00%, 8/1/17............... 1,143,948
11,250,000 San Antonio, Texas, Electric
and Gas Revenue
5.00%, 2/1/12............... 10,962,562
5,000,000 Tarrant County, Texas, Health
Facilities Development
Revenue, Harris Methodist
Health System, Series A
5.13%, 9/1/18, (AMBAC)...... 4,659,950
6,415,000 Tarrant County, Texas, Housing
Finance Corporation, Series
A (effective yield 11.00%)
(b)
0.00%, 9/15/16, (MBIA)...... 2,148,127
Texas Housing Agency:
3,940,000 Residential Development,
Series D
8.40%, 1/1/21................. 4,102,210
2,310,000 Single Family Mortgage
8.20%, 3/1/16................. 2,365,971
Texas Municipal Power Agency:
175,000 Refunding Bonds
5.25%, 9/1/12, (MBIA)......... 172,786
130,000 Revenue Bonds
6.10%, 9/1/09................. 141,254
<PAGE>
PAGE 18
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
TEXAS-- CONTINUED
$10,800,000 Texas State Turnpike
Authority, Dallas North
Thruway Revenue, President
George Bush Turnpike
5.00%, 1/1/16............... $ 10,285,056
5,000,000 Texas State, Linked
RIBs/SAVRs (c)
6.20%, 9/30/11.............. 5,472,100
9,000,000 Titus County, Texas, Water
District #1, Southwest
Electric Power
8.20%, 8/1/11............... 10,228,860
1,475,000 University of Texas,
University Revenues,
Unrefunded Balance, Series B
6.75%, 8/15/13.............. 1,599,564
3,450,000 Waller, Texas, General
Obligation, Independent
School District
5.25%, 2/15/21.............. 3,310,137
129,580,627
UTAH-- 1.7%
Intermountain Power Agency,
Utah, Power Supply:
6,500,000 Series C (effective yield
6.80%) (b)
0.00%, 7/1/20................. 1,059,695
3,020,000 Series D
8.38%, 7/1/12................. 3,080,400
9,145,000 Murray City, Utah, Hospital
Revenue, Health Services
Incorporated
4.75%, 5/15/20, (MBIA)...... 7,988,066
270,000 Utah State Housing Finance
Agency, Single Family
Mortgage, Series C2
7.95%, 7/1/10............... 285,485
11,350,000 Utah State, General Obligation
5.50%, 7/1/07............... 11,914,549
24,328,195
VERMONT-- 0.1%
1,485,000 Vermont Housing Finance
Agency, Single Family,
Series 1
8.15%, 5/1/25............... 1,530,931
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
VIRGINIA-- 1.0%
$ 9,355,000 Fairfax County, Virginia,
Industrial Development
Authority
5.00%, 8/15/23.............. $ 8,649,633
Winchester, Virginia,
Industrial Development
Hospital Revenue, Winchester
Medical Center:
2,300,000 6.15%, 1/1/15, (AMBAC)........ 2,200,088
3,200,000 6.30%, 1/1/15, (AMBAC)........ 3,059,584
13,909,305
WASHINGTON-- 2.3%
2,595,000 Snohomish County, Washington,
Series A
5.13%, 12/1/16, (MBIA)...... 2,473,424
Tacoma, Washington, Electric
Systems Revenue:
3,000,000 5.25%, 1/1/15, (AMBAC)........ 2,896,290
12,000,000 Linked RIBs/SAVRs (c)
6.51%, 1/2/15, (AMBAC)........ 13,005,000
1,700,000 Tacoma, Washington, Solid
Waste Utilities Revenue,
Series B
5.50%, 12/1/17, (AMBAC)..... 1,677,254
4,000,000 Washington Public Power Supply
System, Nuclear Project #3
(effective yield 10.09%) (b)
0.00%, 7/1/12............... 1,719,640
10,000,000 Washington State General
Obligation, Series A
5.38%, 7/1/21............... 9,769,800
1,300,000 Washington State Health Care
Facilities Authority, Multi-
Care Medical Center of
Tacoma
7.88%, 8/15/11, (FGIC)...... 1,374,841
32,916,249
WISCONSIN-- 0.1%
785,000 Wisconsin Housing and Economic
Development Authority, Home
Ownership
8.00%, 3/1/21............... 822,068
<PAGE>
PAGE 19
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
PUERTO RICO-- 3.8%
Puerto Rico Commonwealth
Highway and Transportation
Authority Revenue:
$ 400,000 Series Y
5.25%, 7/1/15, (FSA).......... $ 394,004
5,000,000 Series Z
6.00%, 7/1/18, (FSA).......... 5,440,550
Puerto Rico Commonwealth,
General Obligation, Linked
BPO (c):
12,800,000 7.00%, 7/1/10, (MBIA)......... 15,066,240
5,000,000 7.00%, 7/1/10, (AMBAC)........ 5,885,250
3,000,000 Puerto Rico Commonwealth,
General Obligation,
Refunding
6.45%, 7/1/17............... 3,223,230
Puerto Rico Electric Power
Authority Revenue:
2,000,000 Series AA
6.25%, 7/1/10, (MBIA)......... 2,218,100
2,000,000 Series S
7.00%, 7/1/07, (MBIA)......... 2,331,440
Puerto Rico Industrial,
Tourist, Educational,
Medical, Environmental
Control Facilities:
1,400,000 Finance Authority
6.25%, 7/1/24, (MBIA)......... 1,488,942
250,000 Hospital Auxilio Mutuo
Project, Series A
5.50%, 7/1/17, (MBIA)......... 250,338
4,000,000 Puerto Rico Municipal Finance
Agency, Series A
6.00%, 7/1/11, (FSA)........ 4,339,440
Puerto Rico Public Buildings
Authority Revenue,
Government Facilities,
Series B:
5,250,000 5.00%, 7/1/16, (MBIA)......... 4,983,877
2,000,000 5.25%, 7/1/21................. 1,883,560
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
PUERTO RICO-- CONTINUED
$ 6,250,000 Puerto Rico Public Buildings
Authority Revenue,
Guaranteed Public Education
and Health Facilities,
Series M, Step coupon
(effective yield 5.74%) (b)
3.75%, 7/1/16............... $ 5,932,875
53,437,846
TOTAL LONG-TERM INVESTMENTS
(COST $1,323,071,464)..................... 1,381,292,401
SHORT-TERM INVESTMENTS-- 1.3%
CALIFORNIA-- 0.2%
30,000 California Health Facilities
Financing Authority Revenue,
St. Joseph's Health System,
Series A
3.70%, 7/1/13 (a)........... 30,000
2,600,000 Irvine, California,
Improvement Board Act of
1915 Updates, Assessment
District #89-10 3.75%,
9/2/15 (a).................. 2,600,000
2,630,000
FLORIDA-- 0.1%
180,000 Dade County, Florida, Health
Facilities Authority,
Hospital Revenue, Miami
Chidren's Hospital Project
4.15%, 9/1/25, (AMBAC)
(a)......................... 180,000
1,450,000 Dade County, Florida, Water
and Sewer Systems Revenue
4.15%, 10/5/22, (FGIC)
(a)......................... 1,450,003
1,630,003
MASSACHUSETTS-- 0.1%
1,800,000 Massachusetts State Health and
Educational Facilities
Authority, Capital Assets
Program, Series D
3.90%, 1/1/35, (MBIA) (a)... 1,800,000
<PAGE>
PAGE 20
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS-- CONTINUED
MISSISSIPPI-- 0.2%
$ 3,300,000 Jackson County, Mississippi,
Pollution Control Revenue,
Chevron U.S.A. Incorporated
Project
4.00%, 12/1/16 (a).......... $ 3,300,000
MISSOURI-- 0.1%
895,000 Missouri State Health and
Educational Facilities
Authority, Christian Health
Services, Series B
4.05%, 11/1/19 (a).......... 895,000
NEW YORK-- 0.3%
New York City, New York,
Municipal Water Finance
Authority, Water and Sewer
Systems Revenue:
325,000 Series C
4.15%, 6/15/22, (FGIC) (a).... 325,000
3,700,000 Series G
4.05%, 6/15/24, (FGIC) (a).... 3,700,000
4,025,000
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS-- CONTINUED
PENNSYLVANIA-- 0.1%
$ 1,160,000 Sayre, Pennsylvania, Health
Care Facilities Authority,
Pennsylvania Capital
Financing Project, Series K
4.15%, 12/1/20,
(AMBAC) (a)................. $ 1,160,000
WYOMING-- 0.2%
3,500,000 Uinta County, Wyoming,
Pollution Control Revenue,
Chevron U. S. A.
Incorporated Project
4.00%, 4/1/10 (a)........... 3,500,000
TOTAL SHORT-TERM
INVESTMENTS--
(COST $18,940,003)..................... 18,940,003
TOTAL INVESTMENTS--
(COST $1,342,011,467) 99.2% 1,400,232,404
OTHER ASSETS AND
LIABILITIES-- NET 0.8 11,335,402
NET ASSETS 100.0% $1,411,567,806
(a) Security is a variable or floating rate instrument with periodic demand
features. The Fund is entitled to full payment of principal and accrued
interest upon surrendering the security to the issuing agent.
(b) Effective yield (calculated at date of purchase) is the annual yield at
which the bond accretes until its maturity date.
(c) At the discretion of the portfolio manager, these securities may be
separated into securities with interest or principal payments that are
linked to another rate or index and therefore would be considered
derivative securities.
LEGEND OF PORTFOLIO ABBREVIATIONS:
ACES-- Auction Rate Securities
AMBAC-- American Municipal Bond Assurance Corp.
BPO-- Bond Payment Obligation
ETM-- Escrowed to Maturity
FGIC-- Federal Guaranty Insurance Co.
FHA-- Federal Housing Authority
FSA-- Federal Security Assurance
GNMA-- Government National Mortgage Association
INFLOs-- Inverse Floating Rate Securities
MBIA-- Municipal Bond Investors Assurance Corp.
PARs-- Periodic Auction Reset Securities
RIBs-- Residual Interest Bonds
SAVRs-- Select Auction Variable Rate Securities
FUTURES CONTRACTS-- SHORT POSITIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
INITIAL CONTRACT UNREALIZED
EXPIRATION NUMBER OF CONTRACTS AMOUNT APPRECIATION
September 1997 195 U.S. Treasury Bond Index $ 429,000 $ 197,320
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 21
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED DECEMBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992
NET ASSET VALUE BEGINNING OF PERIOD $7.71 $7.86 $7.10 $8.12 $8.04 $8.07
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.20 0.41 0.41 0.37 0.39 0.46
Net realized and unrealized gain (loss)
on investments and closed futures contracts (0.01) (0.17) 0.74 (0.96) 0.48 0.12
Total from investment operations 0.19 0.24 1.15 (0.59) 0.87 0.58
LESS DISTRIBUTIONS FROM:
Net investment income (0.20) (0.39) (0.39) (0.37) (0.39) (0.46)
In excess of net investment income 0 0 0 (0.06) (0.06) (0.04)
Net realized gain on investments 0 0 0 0 (0.33) (0.11)
In excess of net realized gain on investments 0 0 0 0 (0.01) 0
Total distributions (0.20) (0.39) (0.39) (0.43) (0.79) (0.61)
NET ASSET VALUE END OF PERIOD $7.70 $7.71 $7.86 $7.10 $8.12 $8.04
TOTAL RETURN (B) 2.52% 3.15% 16.61% (7.34%) 11.15% 7.55%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.92%(c) 0.87% 0.95% 1.55% 1.66% 1.38%
Expenses excluding indirectly paid expenses 0.91%(c) 0.86% 0.94% -- -- --
Net investment income 5.19%(c) 5.34% 5.41% 4.92% 4.72% 5.71%
PORTFOLIO TURNOVER RATE 45% 69% 56% 84% 76% 78%
NET ASSETS END OF PERIOD (THOUSANDS) $ 1,411,568 $1,557,886 $1,204,468 $1,197,727 $1,548,503 $1,453,199
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1991 1990(A) 1989 1988 1987
NET ASSET VALUE BEGINNING OF PERIOD $7.90 $8.06 $8.18 $8.09 $8.85
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.46 0.52 0.57 0.55 0.56
Net realized and unrealized gain (loss)
on investments and closed futures contracts 0.36 (0.01) 0.15 0.30 (0.58)
Total from investment operations 0.82 0.51 0.72 0.85 (0.02)
LESS DISTRIBUTIONS FROM:
Net investment income (0.46) (0.52) (0.60) (0.63) (0.64)
In excess of net investment income (0.07) (0.03) 0 0 0
Net realized gain on investments (0.12) (0.12) (0.24) (0.13) (0.10)
In excess of net realized gain on investments 0 0 0 0 0
Total distributions (0.65) (0.67) (0.84) (0.76) (0.74)
NET ASSET VALUE END OF PERIOD $8.07 $7.90 $8.06 $8.18 $8.09
TOTAL RETURN (B) 10.80% 6.66% 9.11% 10.89% (0.14%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.75% 1.18% 1.23% 1.79% 1.70%
Expenses excluding indirectly paid expenses -- -- -- -- --
Net investment income 5.78% 6.54% 6.94% 6.74% 6.80%
PORTFOLIO TURNOVER RATE 77% 64% 69% 61% 43%
NET ASSETS END OF PERIOD (THOUSANDS) $1,146,185 $1,060,826 $ 901,912 $903,132 $894,768
</TABLE>
(a) Calculation based on average shares outstanding.
(b) Excluding applicable sales charges.
(c) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 22
KEYSTONE TAX FREE FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investments at market value
(identified cost-- $1,342,011,467 $1,400,232,404
Receivable for investments sold 40,051,550
Interest receivable 24,203,183
Receivable for Fund shares sold 484,054
Receivable for daily variation margin
on open futures contracts 118,101
Other assets 166,675
Total assets 1,465,255,967
LIABILITIES
Payable for investments purchased 46,455,680
Dividends payable 3,197,905
Payable for Fund shares redeemed 1,598,482
Due to custodian 1,558,378
Distribution fee payable 314,118
Due to related parties 80,713
Accrued expenses and other liabilities 482,885
Total liabilities 53,688,161
NET ASSETS $1,411,567,806
NET ASSETS REPRESENTED BY
Paid-in capital $1,347,068,254
Undistributed net investment income 2,255,240
Accumulated net realized gain on
investments and closed futures contracts 3,826,055
Net unrealized appreciation on investments
and futures contracts 58,418,257
Total net assets $1,411,567,806
NET ASSET VALUE PER SHARE
Net asset value of
$1,411,567,8064183,328,013 outstanding
shares of beneficial interest $ 7.70
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME
Interest $44,403,380
EXPENSES
Investment management fee $ 3,071,270
Distribution Plan expenses 2,489,761
Transfer agent fees 694,124
Custodian fees 254,748
Administrative services fees 92,109
Other administrative services
fees 81,403
Trustees' fees and expenses 36,813
Total expenses 6,720,228
Less: Expenses paid indirectly (94,355)
Net expenses 6,625,873
Net investment income 37,777,507
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS
Net realized gain on investments
and closed futures contracts 17,730,140
Net change in unrealized
appreciation (depreciation) on
investments and futures
contracts (20,824,784)
Net realized and unrealized loss
on investments and futures
contracts (3,094,644)
Net increase in net assets
resulting from operations $34,682,863
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 23
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
OPERATIONS
Net investment income $ 37,777,507 $ 84,167,379
Net realized gain on investments and closed futures contracts 17,730,140 15,476,735
Net change in unrealized appreciation (depreciation) on investments and futures
contracts (20,824,784) (48,955,108)
Net increase in net assets resulting from operations 34,682,863 50,689,006
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (38,479,774) (79,617,449)
CAPITAL SHARE TRANSACTIONS
Shares issued in connection with the acquisition of Keystone
Tax Exempt Trust 0 658,278,376
Proceeds from shares sold 16,555,496 107,614,922
Payment for shares redeemed (182,669,241) (424,558,360)
Net asset value of shares issued in reinvestment of dividends
and distributions 23,592,670 41,011,255
Net increase (decrease) in net assets resulting from capital share transactions (142,521,075) 382,346,193
Total increase (decrease) in net assets (146,317,986) 353,417,750
NET ASSETS
Beginning of period 1,557,885,792 1,204,468,042
End of period [including undistributed net investment income as follows:
1997-- $2,255,240 and 1996-- $2,957,507] $1,411,567,806 $ 1,557,885,792
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 24
KEYSTONE TAX FREE FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Tax Free Fund (the "Fund") is a Massachusetts business trust for which
Keystone Investment Management Company ("Keystone"), a subsidiary of First Union
Corporation ("First Union"), is the investment adviser and manager. The Fund is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a diversified, open-end management investment company.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
An independent pricing service values the Fund's municipal bonds at fair value
using a variety of factors which may include yield, liquidity, interest rate
risk, credit quality, coupon, maturity and type of issue. Securities for which
valuations are not available from an independent pricing service, including
restricted securities, are valued at fair value as determined in good faith
according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value.
B. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values, the
Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill their obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
C. DERIVATIVE SECURITIES
The Fund may invest in derivative securities. A derivative security is any
investment that derives its value from an underlying security, asset or market
index. Greater market fluctuations may result if these securities are leveraged.
The Fund invests in these types of securities as it is consistent with its
investment objectives.
D. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts (and amortization of premiums).
E. FEDERAL INCOME TAXES
The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund will not incur any federal income tax liability since it
is expected to distribute all of its net investment company taxable income, net
tax-exempt income and net capital gains, if any, to its shareholders. The Fund
also intends to avoid any excise tax liability by making the required
distributions under the Code. Accordingly, no provision for federal income taxes
is required. To the extent that realized capital gains can be offset by capital
loss carryforwards, it is the Fund's policy not to distribute such gains.
<PAGE>
PAGE 25
F. DISTRIBUTIONS
Distributions from net investment income for the Fund is declared daily and paid
monthly. Distributions from net realized capital gains, if any, are paid at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment of market
discount on securities.
2. CAPITAL SHARE TRANSACTIONS
The Fund has an unlimited number of shares of beneficial interest with no par
value authorized. Transactions in shares of the Fund were as follows:
SIX MONTHS ENDED
JUNE 30, 1997
SHARES AMOUNT
Shares sold 2,159,277 $ 16,555,496
Shares issued in
reinvestment of
distributions 3,077,289 23,592,670
Shares redeemed (23,846,155) (182,669,241)
Net decrease (18,609,589) $(142,521,075)
YEAR ENDED
DECEMBER 31, 1996
SHARES AMOUNT
Shares sold 14,063,760 $ 107,614,922
Shares issued in
connection with the
acquisition of Keystone
Tax Exempt Trust 84,656,452 658,278,376
Shares issued in
reinvestment of
distributions 5,361,695 41,011,255
Shares redeemed (55,439,349) (424,558,360)
Net increase 48,642,558 $ 382,346,193
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the six months ended June 30, 1997 were $651,620,791
and $796,554,777, respectively.
As of December 31, 1996, the Fund had capital loss carryovers for federal
income tax purposes of approximately $13,723,000 which expires as follows:
$10,370,000 expiring in 2002 and $3,353,000 expiring in 2003.
4. DISTRIBUTION PLAN
Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a
wholly-owned subsidiary of The BISYS Group Inc. ("BISYS"), has served as
principal underwriter to the Fund. Prior to December 11, 1996, Evergreen
Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of
Keystone, served as the Fund's principal underwriter.
The Fund has adopted a Distribution Plan as allowed by Rule 12b-1 of the 1940
Act. The Distribution Plan permits the Fund to reimburse its principal
underwriter for costs related to selling shares of the Fund and for various
other services. These costs, which consist primarily of commissions and services
fees to broker-dealers who sell shares of the Fund, are paid by shareholders
through expenses called "Distribution Plan expenses". Under the Distribution
Plan, the Fund pays a distribution fee which may not exceed 1.00% of the Fund's
average daily net assets, of which 0.75% is used to pay distribution expenses
and 0.25% may be used to pay shareholder service fees.
During the six months ended June 30, 1997, the Fund received $194,644 in
contingent deferred sales charges. Contingent deferred sales charges paid by
redeeming shareholders may be paid to EKIS and/or EKD.
The Distribution Plan may be terminated at any time by vote of the Independent
Trustees or by vote of a majority of the outstanding voting shares. However,
after the termination of the Distribution Plan, and subject to the discretion of
the Independent Trustees, payments to EKIS and/or EKD may continue as
compensation for services which had been provided while the Distribution Plan
was in effect.
<PAGE>
PAGE 26
KEYSTONE TAX FREE FUND
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Fund would be within permitted
limits.
5. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED
TRANSACTIONS
Keystone serves as the investment advisor and manager to the Fund. In return for
providing investment management and administrative services to the Fund, the
Fund pays Keystone a management fee that is calculated daily and paid monthly.
The management fee is computed at an annual rate of 2.00% of the Fund's gross
investment income plus an amount determined by applying percentage rates
starting at 0.50% and declining to 0.25% per annum as net assets increase, to
the average daily net asset value of the Fund. Effective January 1, 1997, BISYS
became sub-administrator to the Fund and is paid by Keystone for its services.
Prior to December 11, 1996, Keystone Management Inc. ("KMI"), a wholly-owned
subsidiary of Keystone, served as investment manager to the Fund and provided
investment management and administrative services. Under an investment advisory
agreement between KMI and Keystone, Keystone served as the investment adviser
and provided investment advisory and management services to the Fund. In return
for its services, Keystone received an annual fee equal to 85% of the management
fee received by KMI.
In providing or obtaining additional operating services, facilities and
supplies to the Fund, KMI had incurred administrative expenses of $935,920 which
consisted of $694,124 for transfer agent fees, $160,393 for net custodian fees,
$20,500 for audit and legal, $15,695 for printing, $35,039 for registration and
$10,169 for insurance and other miscellaneous expenses. KMI has been reimbursed
for these expenses by the Fund.
During the six months ended June 30, 1997, the Fund paid or accrued to EKIS
$92,109 for certain accounting services.
Evergreen Keystone Service Company ("EKSC"), a wholly-owned subsidiary of
Keystone, serves as the transfer and dividend disbursing agent for the Fund.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds. As sub-administrator, BISYS provides the officers of the Fund.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
7. FUND REORGANIZATION
On February 29, 1996, the Fund acquired the net assets of Keystone Tax Exempt
Trust in exchange for shares of the Fund pursuant to a plan of reorganization
approved by the shareholders of Keystone Tax Exempt Trust on February 29, 1996.
The acquisition was accomplished by a tax-free exchange of shares of the Fund
for the net assets of Keystone Tax Exempt Trust. The net assets of Keystone Tax
Exempt Trust on that date, including $40,609,975 of unrealized appreciation on
investments, were combined with the Fund. The aggregate net assets of the Fund
and Keystone Tax Exempt Trust immediately before the acquisition were
$1,142,691,716 and $658,278,376, respectively. The net assets of the Fund
immediately after the acquisition were $1,800,970,092.
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
KEYSTONE
FAMILY OF FUNDS
--
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
(Evergreen Keystone Funds Logo appears here)
P.O. Box 2121
Boston, Massachusetts 02106-2121
KTFF-R Rev01
KEYSTONE
TAX FREE
FUND
(Evergreen Keystone Funds(SM) Logo appears here)
SEMI-ANNUAL REPORT
JUNE 30, 1997
<PAGE>
<PAGE>
EVERGREEN MUNICIPAL TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
Number Description
1 Declaration of Trust (1)
2 By-Laws (1)
3 Not applicable
4 Agreements and Plans of Reorganization (included
as Exhibits A-1 and A-2 to the Prospectus
contained in Part A to this registration
statement)
5 Declaration of Trust Articles II, III.(6)(c),
IV.(3), IV.(8), V, VI, VII, VIII and By-Laws
Articles II, III and VIII
6 Investment Advisory Agreement between Keystone
Investment Management Company and the Registrant
(1)
7(A) Distribution Agreement between Evergreen Keystone
Distributor, Inc. and the Registrant (1)
(B) Form of Dealer Agreement for Class A, Class B and Class C
shares used by Evergreen Keystone Distributor, Inc. (1)
8 Deferred Compensation Plan (1)
9 Custody Agreement between State Street Bank and
Trust Company and Registrant (1)
10(A) Rule 12b-1 Distribution Plan (1)
(B) Multiple Class Plan (1)
11 Opinion and consent of counsel as to the legality
of the shares being issued (3)
12 Tax opinion and consent of counsel (2)
13 Not applicable
14 Consent of KPMG Peat Marwick LLP (3)
15 Not applicable
16 Powers of Attorney (3)
17(A) Forms of Proxy Card (2)
(B) Registrant's Rule 24f-2 Declaration (1)
<PAGE>
- ----------------------
(1) Incorporated by reference to Registrant's registration statement (File
Nos. 333-36033/811-08367) (the "Registration Statement") dated October
8, 1997.
(2) Filed herewith.
(3) Previously filed .
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, opinions of counsel or copies of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganizations within a
reasonable time after receipt of such opinions or rulings.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of New York and State
of New York, on the 9th day of November, 1997.
EVERGREEN MUNICIPAL TRUST
By: /s/ John J. Pileggi
----------------------
Name: John J. Pileggi
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Registration Statement in the capacities on the 9th day of November,
1997.
Signatures Title
- ---------- -----
/s/John J. Pileggi President and
- ------------------ Treasurer
John J. Pileggi
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
- ----------------------
Gerald M. McDonnell
<PAGE>
/s/Thomas L. McVerry* Trustee
- --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
12 Tax Opinion and Consent of Counsel
17(A) Forms of Proxy Cards
- --------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
November 7, 1997
Keystone Tax Free Fund
Keystone Tax Free Income Fund
Evergreen Tax Free Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Conversion of Keystone Tax Free Fund to a Series of
a Delaware Business Trust (Evergreen Tax Free Fund),
and Acquisition of Assets of Keystone Tax Free
Income Fund by Evergreen Tax Free Fund
Ladies and Gentlemen:
You have asked for our opinion as to certain Federal income tax
consequences of the transactions described below.
Parties to the Transaction. Keystone Tax Free Fund
("Target Fund I") is a Massachusetts business trust.
Keystone Tax Free Income Fund ("Target Fund II") is a Massachusetts
business trust.
Evergreen Tax Free Fund ("Acquiring Fund") is a series of Evergreen
Municipal Trust, a Delaware business trust.
Description of Proposed Transaction. The proposed transaction involves
two steps, Transaction 1 and Transaction 2. In Transaction 1, Acquiring Fund
will issue its shares to Target Fund I and assume certain stated liabilities of
Target Fund I, in exchange for all of the assets of Target Fund I. Target Fund I
will then immediately dissolve and distribute all of the Acquiring Fund shares
which it holds to its shareholders pro rata in proportion to their shareholdings
in Target Fund I, in complete redemption of all outstanding shares of Target
Fund I.
In Transaction 2, which will occur immediately following the closing of
Transaction 1, Acquiring Fund will acquire all of the assets of Target Fund II
in exchange for shares of Acquiring Fund of equivalent value and the assumption
of certain specified liabilities of Target Fund II. Target Fund
<PAGE>
II will then immediately dissolve and distribute all of the Acquiring Fund
shares which it holds to its shareholders pro
<PAGE>
rata in proportion to their shareholdings in Target Fund II, in complete
redemption of all outstanding shares of Target Fund II.
Scope of Review and Assumptions
In rendering our opinion, we have reviewed and relied upon the form of
Agreement and Plan of Reorganization (each, a "Reorganization Agreement")
between Acquiring Fund and Target Fund I (in the case of Transaction 1) and
between Acquiring Fund and Target Fund II (in the case of Transaction 2), each
of which is enclosed in a draft prospectus/proxy statement dated November 14,
1997 which describes the proposed transactions, and on the information provided
in such prospectus/proxy statement. We have relied, without independent
verification, upon the factual statements made therein, and assume that there
will be no change in material facts disclosed therein between the date of this
letter and the date of the closing of the Transactions. We further assume that
the Transactions will be carried out in accordance with the Reorganization
Agreements. We have also relied upon the following representations, each of
which has been made to us by officers of the Trusts of which Acquiring Fund,
Target Fund I and Target Fund II are series:
Representations as to Transaction 1
A. Target Fund I has not redeemed and will not redeem the shares of any
of its shareholders in connection with Transaction 1, except to the extent
necessary to comply with its legal obligation to redeem its shares.
B. The management of Acquiring Fund has no plan or intention to redeem
or reacquire any of the Acquiring Fund shares to be received by Target Fund I
shareholders in connection with Transaction 1, except to the extent necessary to
comply with its legal obligation to redeem its shares.
C. The management of Acquiring Fund has no plan or intention to sell or
dispose of any of the assets of Target Fund I which will be acquired by
Acquiring Fund in Transaction 1 except for dispositions made in the ordinary
course of business.
D. Following Transaction 1, Acquiring Fund will continue the historic
business of Target Fund I in a substantially unchanged manner as part of the
regulated investment company business of Acquiring Fund, or will use a
significant portion of Target Fund I's historic business assets in a business.
E. Acquiring Fund will not make any payment of cash or of property
other than shares to Target Fund I or to any shareholder of Target Fund I in
connection with Transaction 1.
F. To the best knowledge of management of Target Fund I, there is no
plan or intention on the part of the holders of
<PAGE>
shares of Target Fund I to sell, exchange or otherwise dispose of any of the
shares of Acquiring Fund received in the transaction.
G. Immediately following consummation of the transaction, Acquiring
Fund will possess the same assets and liabilities, except for assets used to pay
expenses incurred in connection with the transaction, as those possessed by
Target Fund I immediately prior to Transaction 1.
H. Neither Target Fund I nor Acquiring Fund expects to issue additional
shares other than in the ordinary course of its business as a regulated
investment company or in Transaction 2.
I. Acquiring Fund has never carried on a business and will not carry on
any business between the date of this letter and the date of closing of
Transaction 1.
Representations as to Transaction 2
A. Acquiring Fund will acquire from Target Fund II at least 90% of the
fair market value of the net assets and at least 70% of the fair market value of
the gross assets held by Target Fund II immediately prior to Transaction 2. For
purposes of this representation, assets of Target Fund II used to pay
reorganization expenses, cash retained to pay liabilities, and redemptions and
distributions (except for regular and normal distributions) made by Target Fund
II immediately preceding the transfer which are part of the plan of
reorganization will be considered as assets held by Target Fund II immediately
prior to the transfer.
B. To the best of the knowledge of management of Target Fund II, there
is no plan or intention on the part of the shareholders of Target Fund II to
sell, exchange, or otherwise dispose of a number of Acquiring Fund shares
received in Transaction 2 that would reduce the former Target Fund II
shareholders' ownership of Acquiring Fund shares to a number of shares having a
value, as of the date of closing of Transaction 2 (the "Closing Date"), of less
than 50 percent of the value of all of the formerly outstanding shares of Target
Fund II as of the same date. For purposes of this representation, Target Fund II
shares exchange for cash or other property will be treated as outstanding Target
Fund II shares on the Closing Date. There are no dissenters' rights in
Transaction 2 and no cash will be exchanged for Target Fund II shares in lieu of
fractional shares of Acquiring Fund. Moreover, shares of Target Fund II and
shares of Acquiring Fund held by Target Fund II shareholders and otherwise sold,
redeemed, or disposed of prior or subsequent to Transaction 2 will be considered
in making this representation.
C. Target Fund II has not redeemed and will not redeem the shares of
any of its shareholders in connection with Transaction 2 except to the extent
necessary to comply with its legal obligation to redeem its shares.
<PAGE>
D. The management of Acquiring Fund has no plan or intention to redeem
or reacquire any of the Acquiring Fund shares to be received by Target Fund II
shareholders in connection with Transaction 2 except to the extent necessary to
comply with its legal obligation to redeem its shares.
E. The management of Acquiring Fund has no plan or intention to sell or
dispose of any of the assets of Target Fund II which will be acquired by
Acquiring Fund in Transaction 2 except for dispositions made in the ordinary
course of business, and to the extent necessary to enable Acquiring Fund to
comply with its legal obligation to redeem its shares.
F. Following Transaction 2, Acquiring Fund will continue the historic
business of Target Fund II in a substantially unchanged manner as part of the
regulated investment company business of Acquiring Fund, or will use a
significant portion of Target Fund II's historic business assets in a business.
G. There is no intercorporate indebtedness between Acquiring Fund and
Target Fund II.
H. Acquiring Fund does not own, directly or indirectly, and has not
owned in the last five years, directly or indirectly, any shares of Target Fund
II. Acquiring Fund will not acquire any shares of Target Fund II prior to the
Closing Date.
I. Acquiring Fund will not make any payment of cash or of property
other than shares to Target Fund II or to any shareholder of Target Fund II in
connection with Transaction 2.
J. Pursuant to the Reorganization Agreement, the shareholders of Target
Fund II will receive solely Acquiring Fund voting shares in exchange for their
voting shares of Target Fund II.
K. The fair market value of the Acquiring Fund shares to be received by
the Target Fund II shareholders will be approximately equal to the fair market
value of the Target Fund II shares surrendered in exchange therefor.
L. Subsequent to the transfer of Target Fund II's assets to Acquiring
Fund pursuant to the Reorganization Agreement, Target Fund II will distribute
the shares of Acquiring Fund, together with other assets it may have, in final
liquidation as expeditiously as possible.
M. The sum of the liabilities of Target Fund II to be assumed by
Acquiring Fund and the expenses of Transaction 2 does not exceed twenty percent
of the fair market value of the assets of Target Fund II.
<PAGE>
General Representations
A. None of Acquiring Fund, Target Fund I or Target Fund II are under
the jurisdiction of a court in a Title 11 or similar case within the meaning of
Section 368(a)(3)(A) of the Internal Revenue Code of 1986, as amended (the
"Code").
B. Each of Acquiring Fund, Target Fund I and Target Fund II are treated
as a corporation for federal income tax purposes and at all times in its
existence has qualified as a regulated investment company, as defined in Section
851 of the Code.
C. The foregoing representations are true on the date of this letter
and will be true on the date of closing of Transaction 2.
Opinions
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, we have the following opinions:
Opinions as to Transaction 1:
1. The acquisition by Acquiring Fund of substantially all of the assets
of Target Fund I solely in exchange for shares of Acquiring Fund and the
assumption by Acquiring Fund of Target Fund I's liabilities, if any, followed by
the distribution by Target Fund I of said Acquiring Fund shares to the
shareholders of Target Fund I in exchange for their Target Fund I shares, will
constitute a reorganization within the meaning of Section 368(a)(1)(F) of the
Code, and Acquiring Fund and Target Fund I will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized to Target Fund I upon the
transfer of substantially all of its assets to Acquiring Fund solely in exchange
for Acquiring Fund shares and assumption by Acquiring Fund of any liabilities of
Target Fund I, or upon the distribution of such Acquiring Fund shares to the
shareholders of Target Fund I in exchange for all of their Target Fund I shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Target Fund I (including any cash retained initially by
Target Fund I to pay liabilities but later transferred) solely in exchange for
Acquiring Fund shares and assumption by Acquiring Fund of any liabilities of
Target Fund I.
4. The basis of the assets of Target Fund I acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Target Fund I
immediately prior to the transfer, and the holding period of the assets of
Target Fund
<PAGE>
I in the hands of Acquiring Fund will include the period during which those
assets were held by Target Fund I.
5. The shareholders of Target Fund I will recognize no gain or loss
upon the exchange of all of their Target Fund I shares solely for Acquiring Fund
shares.
6. The basis of the Acquiring Fund shares to be received by the Target
Fund I shareholders will be the same as the basis of the Target Fund I shares
surrendered in exchange therefor.
7. The holding period of the Acquiring Fund shares to be received by
the Target Fund I shareholders will include the period during which the Target
Fund I shares surrendered in exchange therefor were held, provided the Target
Fund I shares were held as a capital asset on the date of the exchange.
Opinions as to Transaction 2:
1. The acquisition by Acquiring Fund of substantially all of the assets
of Target Fund II solely in exchange for voting shares of Acquiring Fund and
assumption of certain specified liabilities of Target Fund II followed by the
distribution by Target Fund II of said Acquiring Fund shares to the shareholders
of Target Fund II in exchange for their Target Fund II shares will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
Acquiring Fund and Target Fund II will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized to Target Fund II upon the
transfer of substantially all of its assets to Acquiring Fund solely in exchange
for Acquiring Fund voting shares and assumption by Acquiring Fund of certain
specified liabilities of Target Fund II, or upon the distribution of such
Acquiring Fund voting shares to the shareholders of Target Fund II in exchange
for all of their Target Fund II shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Target Fund II (including any cash retained initially
by Target Fund II to pay liabilities but later transferred) solely in exchange
for Acquiring Fund voting shares and assumption by Acquiring Fund of any
liabilities of Target Fund II.
4. The basis of the assets of Target Fund II acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Target Fund II
immediately prior to the transfer, and the holding period of the assets of
Target Fund II in the hands of Acquiring Fund will include the period during
which those assets were held by Target Fund II.
5. The shareholders of Target Fund II will recognize no gain or loss
upon the exchange of all of their Target Fund II
<PAGE>
shares solely for Acquiring Fund voting shares. Gain, if any, will be realized
by Target Fund II shareholders who in exchange for their Target Fund II shares
receive other property or money in addition to Acquiring Fund shares, and will
be recognized, but not in excess of the amount of cash and the value of such
other property received. If the exchange has the effect of the distribution of a
dividend, then the amount of gain recognized that is not in excess of the
ratable share of undistributed earnings and profits of Target Fund II will be
treated as a dividend.
6. The basis of the Acquiring Fund voting shares to be received by the
Target Fund II shareholders will be the same as the basis of the Target Fund II
shares surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Target Fund II shareholders will include the period during which
the Target Fund II shares surrendered in exchange therefor were held, provided
the Target Fund II shares were held as a capital asset on the date of the
exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of each Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in such
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
EVERGREEN (FORMERLY KEYSTONE) TAX FREE INCOME FUND
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 6, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
Dorothy E. Bourassa, Terrence J. Cullen, Martin Wolin or Rosemary Van Antwerp or
any of them as Proxies of the undersigned, with full power of substitution, to
vote on behalf of the undersigned all shares of Evergreen (formerly Keystone)
Tax Free Income Fund ("Evergreen Tax Free Income") that the undersigned is
entitled to vote at the special meeting of shareholders of Evergreen Tax Free
Income to be held at 3:00 p.m. on Tuesday, January 6, 1998 at the offices of the
Evergreen Keystone Funds, 26th Floor, 200 Berkeley Street, Boston, Massachusetts
02116 and at any adjournments thereof, as fully as the undersigned would be
entitled to vote if personally present
.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S)
APPEAR ON THIS PROXY. If joint owners,
EITHER may sign this Proxy. When signing
as attorney, executor, administrator,
trustee, guardian, or custodian for a
minor, please give your full title. When
signing on behalf of a corporation or as a
partner for a partnership, please give the
full corporate or partnership name and
your title, if any.
Date , 199
----------------------------------------
<PAGE>
----------------------------------------
Signature(s) and Title(s), if applicable
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF EVERGREEN
TAX FREE INCOME. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE
ACTION TO BE TAKEN ON THE FOLLOWING PROSPOSALS. THE SHARES REPRESENTED HEREBY
WILL BE VOTED AS INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE
BOARD OF TRUSTEES OF EVERGREEN TAX FREE INCOME RECOMMENDS A VOTE FOR THE
PROPOSALS. PLEASE MARK YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT USE RED INK.
EXAMPLE: X
---
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Tax Free Fund, a series of Evergreen Municipal Trust, will (i) acquire all of
the assets of Evergreen Tax Free Income in exchange for shares of Evergreen Tax
Free Fund; and (ii) assume certain identified liabilities of Evergreen Tax Free
Income, as substantially described in the accompanying Prospectus/Proxy
Statement.
---- FOR ---- AGAINST ---- ABSTAIN
2. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
<PAGE>
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
KEYSTONE TAX FREE FUND
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 6, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
Dorothy E. Bourassa, Terrence J. Cullen, Martin Wolin or Rosemary Van Antwerp or
any of them as Proxies of the undersigned, with full power of substitution, to
vote on behalf of the undersigned all shares of Keystone Tax Free Fund
("Keystone Tax Free") that the undersigned is entitled to vote at the special
meeting of shareholders of Keystone Tax Free to be held at 3:00 p.m. on Tuesday,
January 6, 1998 at the offices of the Evergreen Keystone Funds, 26th Floor, 200
Berkeley Street, Boston, Massachusetts 02116 and at any adjournments thereof, as
fully as the undersigned would be entitled to vote if personally present
.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S)
APPEAR ON THIS PROXY. If joint owners,
EITHER may sign this Proxy. When signing
as attorney, executor, administrator,
trustee, guardian, or custodian for a
minor, please give your full title. When
signing on behalf of a corporation or as a
partner for a partnership, please give the
full corporate or partnership name and
your title, if any.
Date , 199
----------------------------------------
----------------------------------------
<PAGE>
Signature(s) and Title(s), if applicable
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF KEYSTONE TAX
FREE. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE ACTION TO
BE TAKEN ON THE FOLLOWING PROSPOSALS. THE SHARES REPRESENTED HEREBY WILL BE
VOTED AS INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE BOARD OF
TRUSTEES OF KEYSTONE TAX FREE RECOMMENDS A VOTE FOR THE PROPOSALS. PLEASE MARK
YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT USE RED INK. EXAMPLE: X
---
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Tax Free Fund, a series of Evergreen Municipal Trust, will (i) acquire all of
the assets of Keystone Tax Free in exchange for shares of Evergreen Tax Free
Fund; and (ii) assume certain identified liabilities of Keystone Tax Free, as
substantially described in the accompanying Prospectus/Proxy Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
<PAGE>
<PAGE>
