1933 Act File No. 33-2010
1940 Act File No. 811-4510
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 28 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 29 X
EVERGREEN TAX FREE TRUST
(formerly FFB Lexicon Fund)
(Exact Name of Registrant as Specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices) (Zip Code)
(617) 210-3200
(Registrant's Telephone Number)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street,
Boston, MA 02116-5034
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/X/ Immediately upon filing pursuant to paragraph (b) or
/ / on (date) pursuant to paragraph (b) or
/ / 60 days after filing pursuant to paragraph (a)(i) or
/ / on (date) pursuant to paragraph (a)(i) or
/ / 75 days after filing pursuant to paragraph (a)(ii) or
/ / on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
Registrant has registered an indefinite number of shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. Registrant's Rule 24f-2 notice for the fiscal year ended March 31,
1997, was filed on May 28, 1997.
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITRIES ACT OF 1933
Proposed
Title of Maximum Proposed
Securities Amount Offering Maximum Amount of
Being Being Price Per Aggregate Registration
Registered Registered Share Offering Price* Fee
- ----------- --------- --------- -------------- ------------
Shares of
Beneficial
Interest
EVERGREEN
NEW JERSEY
TAX FREE
INCOME FUND 283,336 $10.87 $3,079,872 n/a
___________________________________________________________
* The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940. 344,635 shares of the
Fund were redeemed during its fiscal period ended March 31, 1997. Of such
shares, 61,299 were used for a reduction pursuant to Rule 24f-2 during the
current year.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
<PAGE>
CROSS REFERENCE SHEET
This Amendment to the Registration Statement of EVERGREEN TAX-FREE TRUST
(the "Trust"), relates to the EVERGREEN NEW JERSEY TAX FREE INCOME FUND, a
portfolio of the Trust.
CROSS REFERENCE SHEET
(as required by Rule 481(a))
N-1A Item No. Location in Prospectus(es)
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis and Fee Table Overview of the Fund(s);
Expense Information
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Cover Page; Description of
the Funds; General
Information
Item 5. Management of the Fund Management of the Fund;
General Information
Item 6. Capital Stock and Other Securities Dividends, Distributions and
Taxes; General
Information
Item 7. Purchase of Securities Being Offered Purchase and Redemption of
Shares
Item 8. Redemption or Repurchase Purchase and Redemption of
Shares
Item 9. Pending Legal Proceedings Not Applicable
Location in Statement of
Part B Additional Information
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
Item 13. Investment Objectives and Policies Investment Objectives and
Policies;Investment
Restrictions; Other
Restrictions and
Operating Policies
Item 14. Management of the Fund Management
Item 15. Control Persons and Principal Management
Holders of Securities
Item 16. Investment Advisory and Other Services Investment Adviser;
Purchase of Shares
Item 17. Brokerage Allocation Allocation of Brokerage
Item 18. Capital Stock and Other Securities Purchase of Shares
Item 19. Purchase, Redemption and Pricing of Distribution Plans; Purchase
Securities Being Offered of Shares; Net Asset Value
Item 20. Tax Status Additional Tax Information
Item 21. Underwriters Distribution Plans; Purchase
of Shares
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
<PAGE>
PART A. PROSPECTUS
<PAGE>
<PAGE>
PROSPECTUS July 21, 1997
EVERGREEN(SM) KEYSTONE STATE TAX FREE FUNDS
KEYSTONE CALIFORNIA TAX FREE FUND
KEYSTONE FLORIDA TAX FREE FUND
KEYSTONE MASSACHUSETTS TAX FREE FUND
KEYSTONE MISSOURI TAX FREE FUND
KEYSTONE NEW YORK TAX FREE FUND
KEYSTONE PENNSYLVANIA TAX FREE FUND
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
CLASS A SHARES
CLASS B SHARES
The Evergreen Keystone State Tax Free Funds (the "Funds") seek the
highest possible current income exempt from federal income taxes, while
preserving capital. In addition, each Fund, other than the Florida Fund,
seeks to provide a maximum level of income to its shareholders that is
exempt from the personal income taxes of the state for which such Fund is
named. Each Fund invests principally in municipal obligations exempt from
federal income tax and municipal obligations issued by the state for which
a Fund is named and its political subdivisions, agencies and
instrumentalities.
Each of the Funds is a nondiversified series of an open-end
management investment company, commonly known as a mutual fund. Each Fund,
except the Evergreen New Jersey Tax Free Income Fund, offers Class A, Class
B and Class C shares. The Evergreen New Jersey Tax Free Income Fund offers
Class A, Class B and Class Y shares. Information on share classes and their
fee and sales charge structures may be found in the "Expense Information,"
"Distribution Plans and Agreements," "How to Buy Shares," and "General
Information" sections of this prospectus.
This prospectus concisely states information about the Funds that
you should know before investing. Please read it and retain it for future
reference. The address of the Funds is 200 Berkeley Street, Boston,
Massachusetts 02116.
Additional information about the Funds is contained in a statement
of additional information dated July 21, 1997, as supplemented from time to
time, which has been filed with the Securities and Exchange Commission and
is incorporated by reference into this prospectus. For a free copy, or for
other information about the Funds, write to the address above or call the
Funds at (800) 343-2898.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OR AN OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND SHARES 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 RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
KEEP THIS PROSPECTUS FOR FUTURE REFERENCE
EVERGREEN(SM) is a Service Mark of Evergreen Keystone Investment Services,
Inc.
Copyright 1997, Evergreen Keystone Investment Services, Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
OVERVIEW.............................................. 2
EXPENSE INFORMATION................................... 3
FINANCIAL HIGHLIGHTS.................................. 5
DESCRIPTION OF THE FUNDS.............................. 14
Investment Objectives and Policies........... 14
Investment Restrictions...................... 18
Special Risk Considerations.................. 19
MANAGEMENT OF THE FUNDS............................... 21
Investment Advisers.......................... 21
Portfolio Managers........................... 22
Administrator................................ 22
Sub-Administrator............................ 23
Distribution Plans and Agreements............ 23
PURCHASE AND REDEMPTION OF SHARES..................... 24
How to Buy Shares............................ 24
How to Redeem Shares......................... 27
Exchange Privilege........................... 28
Shareholder Services......................... 29
Effect of Banking Laws....................... 30
OTHER INFORMATION..................................... 31
Dividends, Distributions and Taxes........... 31
General Information.......................... 33
ADDITIONAL INVESTMENT INFORMATION..................... i
APPENDIX A............................................ A-1
APPENDIX B............................................ B-1
</TABLE>
OVERVIEW
The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus. See "Description of the
Funds" and "Management of the Funds".
Each of the Funds is a nondiversified series of an open-end management
investment company. The Keystone Florida Tax Free Fund (the "Florida Fund"), the
Keystone Massachusetts Tax Free Fund (the "Massachusetts Fund"), the Keystone
New York Tax Free Fund (the "New York Fund") and the Keystone Pennsylvania Tax
Free Fund (the "Pennsylvania Fund") are investment series of Keystone State Tax
Free Fund ("KSTFF"). The Keystone California Tax Free Fund (the "California
Fund") and the Keystone Missouri Tax Free Fund (the "Missouri Fund") are
investment series of Keystone State Tax Free Fund -- Series II ("KSTFFII"). The
New Jersey Tax Free Income Fund (the "New Jersey Fund") is an investment series
of The Evergreen Tax Free Trust ("TETFT").
KSTFF and KSTFFII are two of the more than thirty funds advised and
managed by Keystone Investment Management Company ("Keystone"). The New Jersey
Fund is one of seven state-specific tax free funds for which the Capital
Management Group ("CMG") of First Union National Bank ("FUNB") serves as
investment adviser. Keystone is a subsidiary of FUNB, which is a subsidiary of
First Union Corporation ("First Union").
2
<PAGE>
EXPENSE INFORMATION
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of the Funds will bear
directly or indirectly. For more complete descriptions of the various costs and
expenses, see the following sections of this prospectus: "Management of The
Funds"; "Distribution Plans and Agreements"; "How to Buy Shares"; and
"Shareholder Services."
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
Front-End Back-End Level Load
SHAREHOLDER TRANSACTION EXPENSES Load Option Load Option(1) Option(2)
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a 4.75%(3) None None
percentage of offering price)
Deferred Sales Load 0.00%(4) 5.00% in the first year 1.00% in the first year
(as a percentage of the lesser of original purchase declining to 1.00% in and 0.00% thereafter
price or redemption proceeds, as applicable) the sixth year and 0.00%
thereafter
</TABLE>
The following tables show for each Fund the annual operating expenses (as
a percentage of average net assets) attributable to each Class of shares,
together with examples of the cumulative effect of such expenses on a
hypothetical $1,000 investment in each Class for the periods specified assuming
(i) a 5% annual return, and (ii) redemption at the end of each period and,
additionally, no redemption at the end of each period. In the following examples
(i) the expenses for Class A shares assume deduction of the maximum 4.75% sales
charge at the time of purchase, (ii) the expenses for Class B shares and Class C
shares assume deduction at the time of redemption (if applicable) of the maximum
contingent deferred sales charge applicable for that time period, and (iii) the
expenses for Class B shares reflects the conversion to Class A shares seven
years after purchase (years eight through ten, therefore, reflect Class A
expenses).
CALIFORNIA FUND
<TABLE>
<CAPTION>
EXAMPLES (8)
Assuming Redemption at End
ANNUAL FUND OPERATING EXPENSES (5) of Period Assuming no Redemption
Class A Class B Class C Class A Class B Class C Class A Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.45% 0.45% 0.45%
After 1 Year $ 55 $ 65 $ 25 $ 55 $ 15 $ 15
12b-1 Fees (7) 0.25% 1.00%(6) 1.00%(6)
After 3 Years $ 71 $ 78 $ 48 $ 71 $ 48 $ 48
Other Expenses 0.07% 0.07% 0.07%
After 5 Years $ 88 $ 103 $ 83 $ 88 $ 83 $ 83
After 10 Years $ 138 $ 151 $ 181 $ 138 $ 151 $ 181
Total 0.77% 1.52% 1.52%
</TABLE>
<TABLE>
<CAPTION>
FLORIDA FUND
EXAMPLES (8)
Assuming Redemption at End
ANNUAL FUND OPERATING EXPENSES (5) of Period Assuming no Redemption
Class A Class B Class C Class A Class B Class C Class A Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.42% 0.42% 0.42%
After 1 Year $ 55 $ 65 $ 25 $ 55 $ 15 $ 15
12b-1 Fees (7) 0.25% 1.00%(6) 1.00%(6)
After 3 Years $ 71 $ 78 $ 48 $ 71 $ 48 $ 48
Other Expenses 0.09% 0.09% 0.09%
After 5 Years $ 88 $ 102 $ 82 $ 88 $ 82 $ 82
After 10 Years $ 137 $ 150 $ 180 $ 137 $ 150 $ 180
Total 0.76% 1.51% 1.51%
</TABLE>
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
EXAMPLES (8)
Assuming Redemption at End
ANNUAL FUND OPERATING EXPENSES (5) of Period Assuming no Redemption
Class A Class B Class C Class A Class B Class C Class A Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.45% 0.45% 0.45%
After 1 Year $ 55 $ 65 $ 25 $ 55 $ 15 $ 15
12b-1 Fees (7) 0.25% 1.00%(6) 1.00%(6)
After 3 Years $ 71 $ 78 $ 48 $ 71 $ 48 $ 48
Other Expenses 0.06% 0.06% 0.06%
After 5 Years $ 88 $ 102 $ 82 $ 88 $ 82 $ 82
After 10 Years $ 137 $ 150 $ 180 $ 137 $ 150 $ 180
Total 0.76% 1.51% 1.51%
</TABLE>
3
<PAGE>
MISSOURI FUND
<TABLE>
<CAPTION>
EXAMPLES (8)
Assuming Redemption at End
ANNUAL FUND OPERATING EXPENSES (5) of Period Assuming no Redemption
Class A Class B Class C Class A Class B Class C Class A Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.45% 0.45% 0.45%
After 1 Year $ 55 $ 65 $ 25 $ 55 $ 15 $ 15
12b-1 Fees (7) 0.25% 1.00%(6) 1.00%(6)
After 3 Years $ 71 $ 78 $ 48 $ 71 $ 48 $ 48
Other Expenses 0.06% 0.06% 0.06%
After 5 Years $ 88 $ 102 $ 82 $ 88 $ 82 $ 82
After 10 Years $ 137 $ 150 $ 180 $ 137 $ 150 $ 180
Total 0.76% 1.51% 1.51%
</TABLE>
NEW JERSEY FUND
<TABLE>
<CAPTION>
EXAMPLES (8)
Assuming
Redemption at End Assuming no
ANNUAL OPERATING EXPENSES (5) of Period Redemption
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.00% 0.00%
After 1 Year $ 52 $ 64 $ 52 $ 14
12b-1 Fees (7) 0.08% 1.00%(6)
After 3 Years $ 61 $ 73 $ 61 $ 43
Other Expenses 0.36% 0.36%
After 5 Years $ 71 $ 94 $ 71 $ 74
After 10 Years $ 100 $ 126 $ 100 $ 126
Total 0.44% 1.36%
</TABLE>
NEW YORK FUND
<TABLE>
<CAPTION>
EXAMPLES (8)
Assuming Redemption at End
ANNUAL FUND OPERATING EXPENSES (5) of Period Assuming no Redemption
Class A Class B Class C Class A Class B Class C Class A Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.45% 0.45% 0.45%
After 1 Year $ 55 $ 65 $ 25 $ 55 $ 15 $ 15
12b-1 Fees (7) 0.25% 1.00%(6) 1.00%(6)
After 3 Years $ 71 $ 78 $ 48 $ 71 $ 48 $ 48
Other Expenses 0.06% 0.06% 0.06%
After 5 Years $ 88 $ 102 $ 82 $ 88 $ 82 $ 82
After 10 Years $ 137 $ 150 $ 180 $ 137 $ 150 $ 180
Total 0.76% 1.51% 1.51%
</TABLE>
PENNSYLVANIA FUND
<TABLE>
<CAPTION>
EXAMPLES (8)
Assuming Redemption at End
ANNUAL OPERATING EXPENSES (5) of Period Assuming no Redemption
Class A Class B Class C Class A Class B Class C Class A Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.43% 0.43% 0.43%
After 1 Year $ 55 $ 65 $ 25 $ 55 $ 15 $ 15
12b-1 Fees (7) 0.25% 1.00%(6) 1.00%(6)
After 3 Years $ 71 $ 78 $ 48 $ 71 $ 48 $ 48
Other Expenses 0.08% 0.08% 0.08%
After 5 Years $ 88 $ 102 $ 82 $ 88 $ 82 $ 82
After 10 Years $ 137 $ 150 $ 180 $ 137 $ 150 $ 180
Total 0.76% 1.51% 1.51%
</TABLE>
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(1) Class B shares convert tax free to Class A shares after seven years. See
"Class B Shares -- Deferred Sales Charge Alternative" for more information.
(2) Class C Shares are currently offered only by the California, Florida,
Massachusetts, Missouri, New York and Pennsylvania Funds and are available
only through broker-dealers who have entered into special distribution
agreements with Evergreen Keystone Distributor, Inc., each Fund's principal
underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Class A Shares -- Front-End Sales Charge
Alternative".
(4) Purchases of Class A shares in the amount of $1,000,000 or more are not
subject to a sales charge at the time of purchase, but may be subject to a
contingent deferred sales charge. See "Alternative Sales Options -- Class A
Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges"
for an explanation of the charge.
(5) Expense ratios for the California, Florida, Massachusetts, Missouri, New
York and Pennsylvania Funds are estimated for the fiscal year ended March
31, 1998 after giving effect to the reimbursement or waiver by Keystone
Investment Management Company ("Keystone") of expenses in accordance with
certain voluntary expense limitations. Currently, Keystone has voluntarily
limited annual expenses excluding indirectly paid expenses of Class A, B and
C shares to 0.75%, 1.50% and 1.50%, respectively, of average daily net
assets of each such class. The Funds expect that Keystone will continue to
voluntarily limit the expenses of each Fund through the current year.
However, since Keystone is under no obligation to continue these waivers,
the Funds cannot give complete assurance that they will continue to receive
such assistance. Absent voluntary expense limitations, expense ratios for
the fiscal year or period ended March 31, 1997 would have been 1.24%, 1.99%
and 1.99% for the California Fund's Class A, B and C shares, respectively;
0.92%, 1.68% and 1.68% for the Florida Fund's Class A, B and C shares,
respectively; 1.58%, 2.35% and 2.36% for the Massachusetts Fund's Class A, B
and C shares, respectively; 1.31%, 2.06% and 2.06% for the Missouri Fund's
Class A, B and C shares, respectively; 1.19%, 1.94% and 1.93% for the New
York Fund's Class A, B and C shares, respectively and 0.99%, 1.74% and 1.74%
for the Pennsylvania Fund's Class A, B and C shares, respectively. Expense
ratios for the fiscal period ended March 31, 1997 for New Jersey Fund's
Class A and B shares, absent the voluntary waiver and/or reimbursement of
its fee by CMG, would have been 1.13% and 1.88% respectively. Total Fund
Operating Expenses include indirectly paid expenses.
(6) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by rules adopted by the National
Association of Securities Dealers, Inc. (the "NASD").
(7) Prior to July 1, 1997, 12b-1 fees for the Keystone California, Florida,
Massachusetts, Missouri, New York and Pennsylvania Funds were voluntarily
limited by Keystone to 0.15%, 0.90% and 0.90% of average daily net asset
value of Class A, Class B and Class C shares, respectively. New Jersey Fund
Class A shares can pay up to 0.75% of average annual net assets as a 12b-1
fee. For the foreseeable future, the Class A Shares 12b-1 fees will be
limited to 0.25% of average annual net assets.
(8) The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual returns for the Funds may be
greater or less than 5%.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables contain important financial information relating to
each of the Funds and have been audited by KPMG Peat Marwick LLP, the
independent auditors of the Funds. The information in the table for the New
Jersey Fund for the year ended February 28, 1993, and the period July 16, 1991
to February 29, 1992, was audited by other auditors. The tables appear in each
Fund's Annual Report and should be read in conjunction with each Fund's
financial statements and related notes, which also appear, together with the
independent auditors' report, in each Fund's Annual Report. Each Fund's
financial statements, related notes, and independent auditors' report are
incorporated by reference into the statement of additional information.
Additional information about a Fund's performance is contained in a Fund's
Annual Report, which will be made available upon request and without charge.
(For a share outstanding throughout each year)
KEYSTONE CALIFORNIA TAX FREE FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
FOUR MONTHS ENDED YEAR ENDED NOVEMBER
MARCH 31, 1997 30,
(d) 1996 1995
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD................................ $9.73 $9.86 $8.70
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.16 0.48 0.49
Net realized and unrealized gain (loss) on investments and
closed futures contracts.......................................... (0.28) (0.11) 1.17
Total from investment operations................................... (0.12) 0.37 1.66
LESS DISTRIBUTIONS FROM:
Net investment income.............................................. (0.16) (0.48) (0.47)
In excess of net investment income................................. (0.01) (0.02) (0.03)
Total distributions................................................ (0.17) (0.50) (0.50)
NET ASSET VALUE END OF PERIOD...................................... $9.44 $9.73 $9.86
Total return (c)................................................... (1.29%) 3.99% 19.63%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 0.77%(a)(b) 0.77%(b) 0.72%(b)
Total expenses excluding reimbursement and waivers................ 1.24%(a) 1.19% 1.31%
Net investment income............................................. 4.91%(a) 5.06% 5.37%
Portfolio turnover rate............................................ 39% 120% 119%
NET ASSETS END OF PERIOD (THOUSANDS)............................... $ 4,192 $4,759 $4,555
<CAPTION>
FEBRUARY 1, 1994
(COMMENCEMENT
OF OPERATIONS) TO
NOVEMBER 30, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD................................ $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.44
Net realized and unrealized gain (loss) on investments and
closed futures contracts.......................................... (1.30)
Total from investment operations................................... (0.86)
LESS DISTRIBUTIONS FROM:
Net investment income.............................................. (0.44)
In excess of net investment income................................. --
Total distributions................................................ (0.44)
NET ASSET VALUE END OF PERIOD...................................... $8.70
Total return (c)................................................... (8.78%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 0.41%(a)
Total expenses excluding reimbursement and waivers................ 1.66%(a)
Net investment income............................................. 5.53%(a)
Portfolio turnover rate............................................ 104%
NET ASSETS END OF PERIOD (THOUSANDS)............................... $ 3,006
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 0.75% (annualized), 0.75% and 0.69% for the four months ended March 31,
1997 and the years ended November 30, 1996 and 1995, respectively.
(c) Excluding applicable sales charges.
(d) The Fund changed its fiscal year end from November 30 to March 31 during the
current period.
5
<PAGE>
KEYSTONE CALIFORNIA TAX FREE FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
FOUR MONTHS ENDED YEAR ENDED NOVEMBER
MARCH 31, 1997 30,
(d) 1996 1995
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD.............................. $9.69 $9.82 $8.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................ 0.13 0.41 0.44
Net realized and unrealized gain (loss) on investments and
closed futures contracts........................................ (0.28) (0.11) 1.17
Total from investment operations................................. (0.15) 0.30 1.61
LESS DISTRIBUTIONS FROM:
Net investment income............................................ (0.13) (0.41) (0.44)
In excess of net investment income............................... (0.01) (0.02) (0.03)
Total distributions.............................................. (0.14) (0.43) (0.47)
NET ASSET VALUE END OF PERIOD.................................... $9.40 $9.69 $9.82
Total return (c)................................................. (1.54%) 3.23% 18.95%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................. 1.52%(a)(b) 1.52%(b) 1.48%(b)
Total expenses excluding reimbursement and waivers.............. 1.99%(a) 1.94% 2.07%
Net investment income........................................... 4.16%(a) 4.31% 4.57%
Portfolio turnover rate.......................................... 39% 120% 119%
NET ASSETS END OF PERIOD (THOUSANDS)............................. $21,794 $22,719 $22,743
<CAPTION>
FEBRUARY 1, 1994
(COMMENCEMENT
OF OPERATIONS) TO
NOVEMBER 30, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD.............................. $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................ 0.40
Net realized and unrealized gain (loss) on investments and
closed futures contracts........................................ (1.28)
Total from investment operations................................. (0.88)
LESS DISTRIBUTIONS FROM:
Net investment income............................................ (0.40)
In excess of net investment income............................... (0.04)
Total distributions.............................................. (0.44)
NET ASSET VALUE END OF PERIOD.................................... $8.68
Total return (c)................................................. (9.00%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................. 1.16%(a)
Total expenses excluding reimbursement and waivers.............. 2.36%(a)
Net investment income........................................... 4.83%(a)
Portfolio turnover rate.......................................... 104%
NET ASSETS END OF PERIOD (THOUSANDS)............................. $11,415
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% (annualized), 1.50% and 1.45% for the four months ended March 31,
1997 and the years ended November 30, 1996 and 1995, respectively.
(c) Excluding applicable sales charges.
(d) The Fund changed its fiscal year end from November 30 to March 31 during the
current period.
KEYSTONE CALIFORNIA TAX FREE FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
FOUR MONTHS ENDED YEAR ENDED NOVEMBER
MARCH 31, 1997 30,
(d) 1996 1995
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD................................ $9.68 $9.80 $8.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.14 0.41 0.43
Net realized and unrealized gain (loss) on investments and
closed futures contracts.......................................... (0.30) (0.10) 1.15
Total from investment operations................................... (0.16) 0.31 1.58
LESS DISTRIBUTIONS FROM:
Net investment income.............................................. (0.13) (0.41) (0.43)
In excess of net investment income................................. (0.01) (0.02) (0.03)
Total distributions................................................ (0.14) (0.43) (0.46)
NET ASSET VALUE END OF PERIOD...................................... $9.38 $9.68 $9.80
Total return (c)................................................... (1.64%) 3.34% 18.69%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.52%(a)(b) 1.52%(b) 1.49%(b)
Total expenses excluding reimbursement and waivers................ 1.99%(a) 1.94% 2.07%
Net investment income............................................. 4.16%(a) 4.31% 4.51%
Portfolio turnover rate............................................ 39% 120% 119%
NET ASSETS END OF PERIOD (THOUSANDS)............................... $ 1,849 $1,521 $1,535
<CAPTION>
FEBRUARY 1, 1994
(COMMENCEMENT
OF OPERATIONS) TO
NOVEMBER 30, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD................................ $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.39
Net realized and unrealized gain (loss) on investments and
closed futures contracts.......................................... (1.29)
Total from investment operations................................... (0.90)
LESS DISTRIBUTIONS FROM:
Net investment income.............................................. (0.39)
In excess of net investment income................................. (0.03)
Total distributions................................................ (0.42)
NET ASSET VALUE END OF PERIOD...................................... $8.68
Total return (c)................................................... (9.08%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.16%(a)
Total expenses excluding reimbursement and waivers................ 2.38%(a)
Net investment income............................................. 4.96%(a)
Portfolio turnover rate............................................ 104%
NET ASSETS END OF PERIOD (THOUSANDS)............................... $624
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% (annualized), 1.50% and 1.46% for the four months ended March 31,
1997 and the years ended November 30, 1996 and 1995, respectively.
(c) Excluding applicable sales charges.
(d) The Fund changed its fiscal year end from November 30 to March 31 during the
current period.
6
<PAGE>
KEYSTONE FLORIDA TAX FREE FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR.................. $10.60 $10.33 $10.29 $10.94 $10.43 $10.17
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................. 0.55 0.56 0.56 0.58 0.61 0.72
Net realized and unrealized gain (loss) on
investments and
closed futures contracts.......................... (0.19) 0.27 0.07 (0.44) 0.64 0.30
Total from investment operations................... 0.36 0.83 0.63 0.14 1.25 1.02
LESS DISTRIBUTIONS FROM:
Net investment income.............................. (0.55) (0.54) (0.56) (0.58) (0.61) (0.72)
In excess of net investment income................. (0.01) (0.02) (0.03) (0.05) (0.03) 0.00
Net realized gain on investments................... 0.00 0.00 0.00 (0.16) (0.10) (0.04)
Total distributions................................ (0.56) (0.56) (0.59) (0.79) (0.74) (0.76)
NET ASSET VALUE END OF YEAR........................ $10.40 $10.60 $10.33 $10.29 $10.94 $10.43
TOTAL RETURN (C)................................... 3.50% 8.16% 6.42% 1.01% 12.32% 10.34%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................... 0.76%(b) 0.76%(b) 0.75% 0.75% 0.68% 0.65%
Total expenses excluding reimbursement............ 0.92% 0.92% 0.95% 1.00% 1.13% 1.21%
Net investment income............................. 5.26% 5.32% 5.60% 5.16% 5.60% 6.82%
Portfolio turnover rate............................ 104% 89% 129% 113% 95% 63%
NET ASSETS END OF YEAR (THOUSANDS)................. $29,305 $37,286 $42,239 $45,150 $42,997 $29,258
<CAPTION>
DECEMBER 28,
1990
(COMMENCEMENT OF
OPERATIONS) TO
MARCH 31, 1991
<S> <C>
NET ASSET VALUE BEGINNING OF YEAR.................. $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................. 0.18
Net realized and unrealized gain (loss) on
investments and
closed futures contracts.......................... 0.17
Total from investment operations................... 0.35
LESS DISTRIBUTIONS FROM:
Net investment income.............................. (0.18)
In excess of net investment income................. 0.00
Net realized gain on investments................... 0.00
Total distributions................................ (0.18)
NET ASSET VALUE END OF YEAR........................ $10.17
TOTAL RETURN (C)................................... 3.52%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................... 0.65%(a)
Total expenses excluding reimbursement............ 2.06%(a)
Net investment income............................. 6.33%(a)
Portfolio turnover rate............................ 5%
NET ASSETS END OF YEAR (THOUSANDS)................. $6,922
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding paid expenses, the expense ratio would have been 0.75%
and 0.75% for the years ended March 31, 1997 and 1996, respectively.
(c) Excluding applicable sales charges.
KEYSTONE FLORIDA TAX FREE FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR...................................... $10.48 $10.24 $10.27 $10.94
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................. 0.46 0.48 0.53 0.52
Net realized and unrealized gain (loss) on investments and closed
futures contracts..................................................... (0.18) 0.28 0.02 (0.47)
Total from investment operations....................................... 0.28 0.76 0.55 0.05
LESS DISTRIBUTIONS FROM:
Net investment income.................................................. (0.47) (0.50) (0.49) (0.48)
In excess of net investment income..................................... (0.01) (0.02) (0.09) (0.08)
Net realized gain on investment........................................ 0.00 0.00 0.00 (0.16)
Total distributions.................................................... (0.48) (0.52) (0.58) (0.72)
NET ASSET VALUE END OF YEAR............................................ $10.28 $10.48 $10.24 $10.27
TOTAL RETURN (C)....................................................... 2.75% 7.48% 5.61% 0.19%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................................................ 1.51%(b) 1.48%(b) 1.50% 1.50%
Total expenses excluding reimbursement................................ 1.68% 1.68% 1.68% 1.74%
Net investment income................................................. 4.51% 4.58% 4.81% 4.21%
Portfolio turnover rate................................................ 104% 89% 129% 113%
NET ASSETS END OF YEAR (THOUSANDS)..................................... $46,918 $54,433 $51,083 $19,984
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
PUBLIC OFFERING) TO
MARCH 31, 1993
<S> <C>
NET ASSET VALUE BEGINNING OF YEAR...................................... $10.81
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................. 0.08
Net realized and unrealized gain (loss) on investments and closed
futures contracts..................................................... 0.14
Total from investment operations....................................... 0.22
LESS DISTRIBUTIONS FROM:
Net investment income.................................................. (0.08)
In excess of net investment income..................................... (0.01)
Net realized gain on investment........................................ 0.00
Total distributions.................................................... (0.09)
NET ASSET VALUE END OF YEAR............................................ $10.94
TOTAL RETURN (C)....................................................... 2.06%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................................................ 1.50%(a)
Total expenses excluding reimbursement................................ 1.73%(a)
Net investment income................................................. 4.00%(a)
Portfolio turnover rate................................................ 95%
NET ASSETS END OF YEAR (THOUSANDS)..................................... $ 1,704
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% and 1.47% for the years ended March 31, 1997 and 1996,
respectively.
(c) Excluding applicable sales charges.
7
<PAGE>
KEYSTONE FLORIDA TAX FREE FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR....................................... $10.50 $10.26 $10.28 $10.93
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................... 0.45 0.48 0.47 0.51
Net realized and unrealized gain (loss) on investments and closed
futures contracts...................................................... (0.17) 0.28 0.08 (0.45)
Total from investment operations........................................ 0.28 0.76 0.55 0.06
LESS DISTRIBUTIONS FROM:
Net investment income................................................... (0.47) (0.50) (0.49) ((0.49)
In excess of net investment income...................................... (0.01) (0.02) (0.08) (0.06)
Net realized gain on investment......................................... 0.00 0.00 0.00 (0.16)
Total distributions..................................................... (0.48) (0.52) (0.57) (0.71)
NET ASSET VALUE END OF YEAR............................................. $10.30 $10.50 $10.26 $10.28
TOTAL RETURN (C)........................................................ 2.74% 7.47% 5.61% 0.27%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses......................................................... 1.51%(b) 1.48%(b) 1.50% 1.50%
Total expenses excluding reimbursement................................. 1.68% 1.68% 1.70% 1.84%
Net investment income.................................................. 4.51% 4.60% 4.86% 4.26%
Portfolio turnover rate................................................. 104% 89% 129% 113%
NET ASSETS END OF YEAR (THOUSANDS)...................................... $9,650 $11,795 $12,831 $13,096
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
PUBLIC OFFERING) TO
MARCH 31, 1993
<S> <C>
NET ASSET VALUE BEGINNING OF YEAR....................................... $10.81
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................... 0.07
Net realized and unrealized gain (loss) on investments and closed
futures contracts...................................................... 0.14
Total from investment operations........................................ 0.21
LESS DISTRIBUTIONS FROM:
Net investment income................................................... (0.07)
In excess of net investment income...................................... (0.02)
Net realized gain on investment......................................... 0.00
Total distributions..................................................... (0.09)
NET ASSET VALUE END OF YEAR............................................. $10.93
TOTAL RETURN (C)........................................................ 1.95%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses......................................................... 1.50%(a)
Total expenses excluding reimbursement................................. 1.63%(a)
Net investment income.................................................. 2.95%(a)
Portfolio turnover rate................................................. 95%
NET ASSETS END OF YEAR (THOUSANDS)...................................... $ 1,987
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% and 1.47% for the years ended March 31, 1997 and 1996,
respectively.
(c) Excluding applicable sales charges.
KEYSTONE MASSACHUSETTS TAX FREE FUND -- CLASS A AND B SHARES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
FEBRUARY 4, 1994
(COMMENCEMENT
YEAR ENDED MARCH 31, OF OPERATIONS) TO YEAR ENDED MARCH 31,
1997 1996 1995 MARCH 31, 1994 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR......... $9.29 $9.19 $9.17 $10.00 $9.22 $9.15 $9.19
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................... 0.47 0.51 0.53 0.08 0.41 0.43 0.48
Net realized and unrealized gain (loss) on
investments and closed futures
contracts................................ (0.03) 0.09 0.02 (0.82) (0.03) 0.09 (0.01)
Total from investment operations.......... 0.44 0.60 0.55 (0.74) 0.38 0.52 0.47
LESS DISTRIBUTIONS FROM:
Net investment income..................... (0.47) (0.48) (0.53) (0.08) (0.41) (0.43) (0.47)
In excess of net investment income........ (0.03) (0.02) 0 (0.01) (0.02) (0.02) (0.04)
Total distributions....................... (0.50) (0.50) (0.53) (0.09) (0.43) (0.45) (0.51)
NET ASSET VALUE END OF YEAR............... $9.23 $9.29 $9.19 $9.17 $9.17 $9.22 $9.15
TOTAL RETURN (C).......................... 4.92% 6.64% 6.23% (7.40%) 4.25% 5.77% 5.41%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................... 0.76%(b) 0.75%(b) 0.46% 0.35%(a) 1.51%(b) 1.49%(b) 1.24%
Total expenses excluding reimbursement... 1.58% 1.59% 1.93% 3.22%(a) 2.35% 2.38% 2.68%
Net investment income.................... 5.19% 5.36% 5.90% 5.07%(a) 4.45% 4.60% 5.15%
Portfolio turnover rate................... 110% 165% 77% 7% 110% 165% 77%
NET ASSETS END OF YEAR (THOUSANDS)........ $2,063 $1,786 $1,974 $1,472 $7,803 $7,274 $6,169
<CAPTION>
CLASS B SHARES
FEBRUARY 4, 1994
(COMMENCEMENT
OF OPERATIONS) TO
MARCH 31, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF YEAR......... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................... 0.08
Net realized and unrealized gain (loss) on
investments and closed futures
contracts................................ (0.80)
Total from investment operations.......... (0.72)
LESS DISTRIBUTIONS FROM:
Net investment income..................... (0.07)
In excess of net investment income........ (0.02)
Total distributions....................... (0.09)
NET ASSET VALUE END OF YEAR............... $9.19
TOTAL RETURN (C).......................... (7.20%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................... 1.10%(a)
Total expenses excluding reimbursement... 4.60%(a)
Net investment income.................... 3.23%(a)
Portfolio turnover rate................... 7%
NET ASSETS END OF YEAR (THOUSANDS)........ $1,817
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 0.75% and 0.74% for the years ended March 31, 1997 and March 31, 1996,
respectively, for Class A shares and 1.50% and 1.48%, respectively, for
Class B shares.
(c) Excluding applicable sales charges.
8
<PAGE>
KEYSTONE MASSACHUSETTS TAX FREE FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR................................................... $9.22 $9.14 $9.19
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................... 0.41 0.43 0.48
Net realized and unrealized gain (loss) on investments and closed futures
contracts.......................................................................... (0.04) 0.10 (0.02)
Total from investment operations.................................................... 0.37 0.53 0.46
LESS DISTRIBUTIONS FROM:
Net investment income............................................................... (0.41) (0.43) (0.47)
In excess of net investment income.................................................. (0.02) (0.02) (0.04)
Total distributions................................................................. (0.43) (0.45) (0.51)
NET ASSET VALUE END OF YEAR......................................................... $9.16 $9.22 $9.14
TOTAL RETURN (C).................................................................... 4.14% 5.89% 5.20%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................................... 1.51%(b) 1.49%(b) 1.23%
Total expenses excluding reimbursement............................................. 2.36% 2.39% 2.68%
Net investment income.............................................................. 4.46% 4.60% 5.11%
Portfolio turnover rate............................................................. 110% 165% 77%
NET ASSETS END OF YEAR (THOUSANDS).................................................. $2,066 $2,303 $1,971
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT
OF OPERATIONS) TO
MARCH 31, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF YEAR................................................... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................... 0.08
Net realized and unrealized gain (loss) on investments and closed futures
contracts.......................................................................... (0.80)
Total from investment operations.................................................... (0.72)
LESS DISTRIBUTIONS FROM:
Net investment income............................................................... (0.07)
In excess of net investment income.................................................. (0.02)
Total distributions................................................................. (0.09)
NET ASSET VALUE END OF YEAR......................................................... $9.19
TOTAL RETURN (C).................................................................... (7.21%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................................... 1.10%(a)
Total expenses excluding reimbursement............................................. 4.91%(a)
Net investment income.............................................................. 4.28%(a)
Portfolio turnover rate............................................................. 7%
NET ASSETS END OF YEAR (THOUSANDS).................................................. $369
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% and 1.48% for the years ended March 31, 1997 and March 31, 1996,
respectively.
(c) Excluding applicable sales charges.
KEYSTONE MISSOURI TAX FREE FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
FOUR MONTHS ENDED YEAR ENDED
MARCH 31, 1997 NOVEMBER 30,
(e) 1996 1995
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD................................ $9.86 $9.91 $8.72
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.16 0.50 0.50
Net realized and unrealized gain (loss) on investments and
closed futures contracts.......................................... (0.22) (0.06) 1.19
Total from investment operations................................... (0.06) 0.44 1.69
LESS DISTRIBUTIONS FROM:
Net investment income.............................................. (0.16) (0.47) (0.47)
In excess of net investment income................................. 0.00(d) (0.02) (0.03)
Total distributions................................................ (0.16) (0.49) (0.50)
NET ASSET VALUE END OF PERIOD...................................... $9.64 $9.86 $9.91
Total return (c)................................................... (0.57%) 4.66% 19.86%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 0.76%(a)(b) 0.76%(b) 0.72%(b)
Total expenses excluding reimbursement and waivers................ 1.31%(a) 1.22% 1.32%
Net investment income............................................. 5.05%(a) 4.93% 5.26%
Portfolio turnover rate............................................ 12% 126% 74%
NET ASSETS END OF PERIOD (THOUSANDS)............................... $ 2,627 $2,610 $4,848
<CAPTION>
FEBRUARY 1, 1994
(COMMENCEMENT OF
OPERATIONS) TO
NOVEMBER 30, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD................................ $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.44
Net realized and unrealized gain (loss) on investments and
closed futures contracts.......................................... (1.28)
Total from investment operations................................... (0.84)
LESS DISTRIBUTIONS FROM:
Net investment income.............................................. (0.44)
In excess of net investment income................................. 0.00(d)
Total distributions................................................ (0.44)
NET ASSET VALUE END OF PERIOD...................................... $8.72
Total return (c)................................................... (8.55%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 0.43%(a)
Total expenses excluding reimbursement and waivers................ 1.54%(a)
Net investment income............................................. 5.38%(a)
Portfolio turnover rate............................................ 25%
NET ASSETS END OF PERIOD (THOUSANDS)............................... $ 3,581
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 0.75% (annualized), 0.75% and 0.69% for the four months ended March 31,
1997 and the years ended November 30, 1996 and 1995, respectively.
(c) Excluding applicable sales charges.
(d) Amount represents less than $0.01 per share.
(e) The Fund changed its fiscal year end from November 30 to March 31 during the
current period.
9
<PAGE>
KEYSTONE MISSOURI TAX FREE FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
FOUR MONTHS ENDED YEAR ENDED
MARCH 31, 1997 NOVEMBER 30,
(e) 1996 1995
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD.............................. $9.74 $9.80 $8.67
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................ 0.13 0.40 0.44
Net realized and unrealized gain (loss) on investments and
closed futures contracts........................................ (0.21) (0.04) 1.15
Total from investment operations................................. (0.08) 0.36 1.59
LESS DISTRIBUTIONS FROM:
Net investment income............................................ (0.14) (0.40) (0.43)
In excess of net investment income............................... 0.00(d) (0.02) (0.03)
Total distributions.............................................. (0.14) (0.42) (0.46)
NET ASSET VALUE END OF PERIOD.................................... $9.52 $9.74 $9.80
Total return (c)................................................. (0.83%) 3.83% 18.79%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................. 1.51%(a)(b) 1.52%(b) 1.47%(b)
Total expenses excluding reimbursement and waivers.............. 2.06%(a) 2.00% 2.08%
Net investment income........................................... 4.31%(a) 4.20% 4.56%
Portfolio turnover rate.......................................... 12% 126% 74%
NET ASSETS END OF PERIOD (THOUSANDS)............................. $20,127 $21,925 $21,231
<CAPTION>
FEBRUARY 1, 1994
(COMMENCEMENT OF
OPERATIONS) TO
NOVEMBER 30, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD.............................. $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................ 0.40
Net realized and unrealized gain (loss) on investments and
closed futures contracts........................................ (1.29)
Total from investment operations................................. (0.89)
LESS DISTRIBUTIONS FROM:
Net investment income............................................ (0.40)
In excess of net investment income............................... (0.04)
Total distributions.............................................. (0.44)
NET ASSET VALUE END OF PERIOD.................................... $8.67
Total return (c)................................................. (9.06%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................. 1.16%(a)
Total expenses excluding reimbursement and waivers.............. 2.49%(a)
Net investment income........................................... 4.70%(a)
Portfolio turnover rate.......................................... 25%
NET ASSETS END OF PERIOD (THOUSANDS)............................. $12,906
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% (annualized), 1.50% and 1.44% for the four months ended March 31,
1997 and the years ended November 30, 1996 and 1995, respectively.
(c) Excluding applicable sales charges.
(d) Amount represents less than $0.01 per share.
(e) The Fund changed its fiscal year end from November 30 to March 31 during the
current period.
KEYSTONE MISSOURI TAX FREE FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
FOUR MONTHS ENDED YEAR ENDED
MARCH 31, 1997 NOVEMBER 30,
(e) 1996 1995
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD................................ $9.73 $9.79 $8.66
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.13 0.39 0.43
Net realized and unrealized gain (loss) on investments and
closed futures contracts.......................................... (0.20) (0.03) 1.16
Total from investment operations................................... (0.07) 0.36 1.59
LESS DISTRIBUTIONS FROM:
Net investment income.............................................. (0.14) (0.40) (0.43)
In excess of net investment income................................. 0.00(d) (0.02) (0.03)
Total distributions................................................ (0.14) (0.42) (0.46)
NET ASSET VALUE END OF PERIOD...................................... $9.52 $9.73 $9.79
Total return (c)................................................... (0.73%) 3.83% 18.78%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.51%(a)(b) 1.52%(b) 1.46%(b)
Total expenses excluding reimbursement and waivers................ 2.06%(a) 1.99% 2.07%
Net investment income............................................. 4.30%(a) 4.18% 4.56%
Portfolio turnover rate............................................ 12% 126% 74%
NET ASSETS END OF PERIOD (THOUSANDS)............................... $ 1,306 $1,387 $1,788
<CAPTION>
FEBRUARY 1, 1994
(COMMENCEMENT OF
OPERATIONS) TO
NOVEMBER 30, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD................................ $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................................. 0.39
Net realized and unrealized gain (loss) on investments and
closed futures contracts.......................................... (1.29)
Total from investment operations................................... (0.90)
LESS DISTRIBUTIONS FROM:
Net investment income.............................................. (0.39)
In excess of net investment income................................. (0.05)
Total distributions................................................ (0.44)
NET ASSET VALUE END OF PERIOD...................................... $8.66
Total return (c)................................................... (9.25%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................... 1.15%(a)
Total expenses excluding reimbursement and waivers................ 2.60%(a)
Net investment income............................................. 4.72%(a)
Portfolio turnover rate............................................ 25%
NET ASSETS END OF PERIOD (THOUSANDS)............................... $ 1,045
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% (annualized), 1.50% and 1.44% for the four months ended March 31,
1997 and the years ended November 30, 1996 and 1995, respectively.
(c) Excluding applicable sales charges.
(d) Amount represents less than $0.01 per share.
(e) The Fund changed its fiscal year end from November 30 to March 31 during the
current period.
10
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
SEVEN
MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED
MARCH 31, AUGUST 31, FEBRUARY 29, YEAR ENDED FEBRUARY 28,
1997** 1996* 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..................... $10.75 $11.01 $10.53 $10.99 $11.01 $10.22
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income.................................... 0.31 0.28 0.56 0.57 0.60 0.63
Net realized and unrealized gain (loss) on investments
and
closed futures contracts................................ (0.01) (0.26) 0.48 (0.46) (0.02) 0.79
Total from investment operations........................ 0.30 0.02 1.04 0.11 0.58 1.42
Less distributions
From net investment income.............................. (0.31) (0.28) (0.56) (0.57) (0.60) (0.63)
In excess of net investment income...................... -- -- -- -- -- --
Total distributions..................................... (0.31) (0.28) (0.56) (0.57) (0.60) (0.63)
Net asset value, end of period.......................... $10.74 $10.75 $11.01 $10.53 $10.99 $11.01
TOTAL RETURN (B)......................................... 2.83% 0.19% 10.08% 1.41% 5.30% 14.39%
RATIOS & SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses.......................................... 0.44%( )(c) 0.34%(a) 0.36% 0.25% 0.14% 0.00%
Total expenses excluding reimbursement and waivers...... 1.13%(a) 1.11%(a) 1.03% 1.04% 1.05% 1.16%
Net investment income**................................. 5.02%(a) 5.08%(a) 5.15% 5.52% 5.31% 5.97%
Portfolio turnover rate.................................. 15% 0% 4% 8% 2% 5%
NET ASSETS, END OF PERIOD (THOUSANDS).................... $31,434 $ 32,377 $ 41,762 $34,852 $42,783 $30,863
<CAPTION>
JULY 16, 1991*
THROUGH
FEBRUARY 29,
1992
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..................... $10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income.................................... 0.38
Net realized and unrealized gain (loss) on investments
and
closed futures contracts................................ 0.22
Total from investment operations........................ 0.60
Less distributions
From net investment income.............................. (0.38)
In excess of net investment income...................... --
Total distributions..................................... (0.38)
Net asset value, end of period.......................... $10.22
TOTAL RETURN (B)......................................... 6.03%
RATIOS & SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses.......................................... 0.01%(a)
Total expenses excluding reimbursement and waivers...... 1.20%
Net investment income**................................. 5.89%(a)
Portfolio turnover rate.................................. 5%
NET ASSETS, END OF PERIOD (THOUSANDS).................... $13,129
</TABLE>
(a) Annualized.
(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 0.44% annualized for the seven months ended March 31, 1997.
* The Fund changed its fiscal year end from February 28 to August 31.
** During the current period, the Fund changed its fiscal year end from August
31 to March 31.
EVERGREEN NEW JERSEY TAX FREE INCOME FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
CLASS B SHARES
SEVEN
MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, AUGUST 31,
1997** 1996*
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................................................... $10.75 $11.01
INCOME FROM INVESTMENT OPERATIONS:
Net investment income......................................................................... 0.25 0.24
Net realized and unrealized loss on investments............................................... -- (0.26)
Total from investment operations............................................................. 0.25 (0.02)
Less distributions from net investment income................................................. (0.26) (0.24)
In excess of net investment income........................................................... -- --
Total distributions.......................................................................... (0.26) (0.24)
Net asset value, end of period............................................................... $10.74 $10.75
TOTAL RETURN (B).............................................................................. 2.29% (0.20%)
RATIOS & SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses............................................................................... 1.36%( )(c) 1.28%
Total expenses excluding reimbursement and waivers........................................... 1.88%(a) 1.85%(a)
Net investment income........................................................................ 4.07%(a) 4.14%(a)
Portfolio turnover rate....................................................................... 15% 0%
NET ASSETS, END OF PERIOD (THOUSANDS)......................................................... $ 7,847 $ 2,709
<CAPTION>
CLASS B SHARES
JANUARY 30,
1996*
THROUGH
FEBRUARY 29,
1996
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................................................... $11.08
INCOME FROM INVESTMENT OPERATIONS:
Net investment income......................................................................... 0.05
Net realized and unrealized loss on investments............................................... (0.07)
Total from investment operations............................................................. (0.02)
Less distributions from net investment income................................................. (0.05)
In excess of net investment income........................................................... --
Total distributions.......................................................................... (0.05)
Net asset value, end of period............................................................... $11.01
TOTAL RETURN (B).............................................................................. (0.22%)
RATIOS & SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses............................................................................... 0.31%
Total expenses excluding reimbursement and waivers........................................... 1.66%(a)
Net investment income........................................................................ 5.23%(a)
Portfolio turnover rate....................................................................... 4%
NET ASSETS, END OF PERIOD (THOUSANDS)......................................................... $186
</TABLE>
(a) Annualized.
(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 1.36% (annualized) for the seven months ended March 31, 1997, for Class
B shares.
* The Fund changed its fiscal year end from February 28 to August 31.
** During the current period, the Fund changed its fiscal year end from August
31 to March 31.
11
<PAGE>
KEYSTONE NEW YORK TAX FREE FUND -- CLASS A AND B SHARES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
FEBRUARY 4, 1994
(COMMENCEMENT
YEAR ENDED MARCH 31, OF OPERATIONS) TO YEAR ENDED MARCH 31,
1997 1996 1995 MARCH 31, 1994 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR...... $9.67 $9.44 $9.32 $10.00 $9.59 $9.38 $9.32
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.49 0.48 0.52 0.09 0.41 0.41 0.47
Net realized and unrealized gain (loss)
on investments and closed futures
contracts............................. (0.03) 0.24 0.12 (0.68) (0.03) 0.24 0.09
Total from investment operations....... 0.46 0.72 0.64 (0.59) 0.38 0.65 0.56
LESS DISTRIBUTIONS FROM:
Net investment income.................. (0.48) (0.47) (0.52) (0.08) (0.41) (0.42) (0.45)
In excess of net investment income..... (0.01) (0.02) 0.00 (0.01) (0.01) (0.02) (0.05)
Total distributions.................... (0.49) (0.49) (0.52) (0.09) (0.42) (0.44) (0.50)
NET ASSET VALUE END OF YEAR............ $9.64 $9.67 $9.44 $9.32 $9.55 $9.59 $9.38
TOTAL RETURN (C)....................... 4.87% 7.73% 7.08% (5.91%) 4.03% 7.02% 6.28%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................ 0.76%(b) 0.75%(b) 0.50% 0.35%(a) 1.51%(b) 1.50%(b) 1.25%
Total expenses excluding
reimbursement....................... 1.19% 1.31% 1.59% 4.44%(a) 1.94% 2.05% 2.35%
Net investment income................. 5.00% 4.95% 5.48% 3.85%(a) 4.25% 4.19% 4.78%
Portfolio turnover rate................ 62% 53% 77% 14% 62% 53% 77%
NET ASSETS END OF YEAR (THOUSANDS)..... $3,693 $3,947 $3,323 $680 $19,064 $17,151 $11,907
<CAPTION>
CLASS B SHARES
FEBRUARY 4, 1994
(COMMENCEMENT
OF OPERATIONS) TO
MARCH 31, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF YEAR...... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.08
Net realized and unrealized gain (loss)
on investments and closed futures
contracts............................. (0.67)
Total from investment operations....... (0.59)
LESS DISTRIBUTIONS FROM:
Net investment income.................. (0.06)
In excess of net investment income..... (0.03)
Total distributions.................... (0.09)
NET ASSET VALUE END OF YEAR............ $9.32
TOTAL RETURN (C)....................... (5.91%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................ 1.10%(a)
Total expenses excluding
reimbursement....................... 5.60%(a)
Net investment income................. 3.01%(a)
Portfolio turnover rate................ 14%
NET ASSETS END OF YEAR (THOUSANDS)..... $2,276
</TABLE>
(a) Annualized.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 0.75% and 0.74% for the years ended March 31, 1997 and 1996,
respectively, for Class A shares and 1.50% and 1.49%, respectively, for
Class B shares.
(c) Excluding applicable sales charges.
KEYSTONE NEW YORK TAX FREE FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR................................................... $9.58 $9.37 $9.31
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................... 0.40 0.41 0.48
Net realized and unrealized gain (loss) on investments and closed futures
contracts.......................................................................... (0.01) 0.24 0.07
Total from investment operations.................................................... 0.39 0.65 0.55
LESS DISTRIBUTIONS FROM:
Net investment income............................................................... (0.41) (0.42) (0.46)
In excess of net investment income.................................................. (0.01) (0.02) (0.03)
Total distributions................................................................. (0.42) (0.44) (0.49)
NET ASSET VALUE END OF YEAR......................................................... $9.55 $9.58 $9.37
TOTAL RETURN (C).................................................................... 4.14% 7.02% 6.18%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................................... 1.51%(b) 1.50%(b) 1.26%
Total expenses excluding reimbursement............................................. 1.93% 2.07% 2.32%
Net investment income.............................................................. 4.25% 4.24% 4.88%
Portfolio turnover rate............................................................. 62% 53% 77%
NET ASSETS END OF YEAR (THOUSANDS).................................................. $1,871 $2,296 $2,890
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT
OF OPERATIONS) TO
MARCH 31, 1994
<S> <C>
NET ASSET VALUE BEGINNING OF YEAR................................................... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................... 0.07
Net realized and unrealized gain (loss) on investments and closed futures
contracts.......................................................................... (0.67)
Total from investment operations.................................................... (0.60)
LESS DISTRIBUTIONS FROM:
Net investment income............................................................... (0.07)
In excess of net investment income.................................................. (0.02)
Total distributions................................................................. (0.09)
NET ASSET VALUE END OF YEAR......................................................... $9.31
TOTAL RETURN (C).................................................................... (6.02%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................................... 1.10%(a)
Total expenses excluding reimbursement............................................. 5.13%(a)
Net investment income.............................................................. 3.71%(a)
Portfolio turnover rate............................................................. 14%
NET ASSETS END OF YEAR (THOUSANDS).................................................. $255
</TABLE>
(a) Annualized.
(b) The ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% and 1.48% for the years ended March 31, 1997 and 1996,
respectively.
(c) Excluding applicable sales charges.
12
<PAGE>
KEYSTONE PENNSYLVANIA TAX FREE FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR.................. $11.15 $10.91 $11.01 $11.42 $10.71 $10.25
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................. 0.59 0.60 0.61 0.62 0.63 0.74
Net realized and unrealized gain (loss) on
investments and closed futures contracts.......... (0.01) 0.23 (0.09) (0.30) 0.75 0.46
Total from investment operations................... 0.58 0.83 0.52 0.32 1.38 1.20
LESS DISTRIBUTIONS FROM:
Net investment income.............................. (0.59) (0.57) (0.61) (0.62) (0.63) (0.74)
In excess of net investment income................. 0.00 (0.02) (0.01) (0.04) (0.02) 0.00
Net realized gain on investments................... 0.00 0.00 0.00 (0.06) (0.02) 0.00
In excess of net realized gain on investments...... 0.00 0.00 0.00 (0.01) 0.00 0.00
Total distributions................................ (0.59) (0.59) (0.62) (0.73) (0.67) (0.74)
NET ASSET VALUE END OF YEAR........................ $11.14 $11.15 $10.91 $11.01 $11.42 $10.71
TOTAL RETURN (C)................................... 5.30% 7.66% 4.91% 2.58% 13.30% 12.07%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................... 0.76%(b) 0.76%(b) 0.75% 0.75% 0.68% 0.65%
Total expenses excluding reimbursement............ 0.99% 0.99% 1.05% 1.06% 1.16% 1.68%
Net investment income............................. 5.26% 5.29% 5.65% 5.27% 5.66% 6.92%
Portfolio turnover rate............................ 84% 55% 97% 37% 20% 13%
NET ASSETS END OF YEAR (THOUSANDS)................. $24,535 $28,710 $30,450 $30,560 $35,502 $12,914
<CAPTION>
DECEMBER 27,
1990
(COMMENCEMENT OF
OPERATIONS) TO
MARCH 31, 1991
<S> <C>
NET ASSET VALUE BEGINNING OF YEAR.................. $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................. 0.18
Net realized and unrealized gain (loss) on
investments and closed futures contracts.......... 0.25
Total from investment operations................... 0.43
LESS DISTRIBUTIONS FROM:
Net investment income.............................. (0.18)
In excess of net investment income................. 0.00
Net realized gain on investments................... 0.00
In excess of net realized gain on investments...... 0.00
Total distributions................................ (0.18)
NET ASSET VALUE END OF YEAR........................ $10.25
TOTAL RETURN (C)................................... 4.37%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................... 0.65%(a)
Total expenses excluding reimbursement............ 3.19%(a)
Net investment income............................. 6.84%(a)
Portfolio turnover rate............................ 8%
NET ASSETS END OF YEAR (THOUSANDS)................. $2,979
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 0.75% and 0.75% for the years ended March 31, 1997 and 1996,
respectively.
(c) Excluding applicable sales charges.
KEYSTONE PENNSYLVANIA TAX FREE FUND -- CLASS B AND C SHARES
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
FEBRUARY 1, 1993
(DATE OF INITIAL
YEAR ENDED MARCH 31, PUBLIC OFFERING) TO YEAR ENDED MARCH 31,
1997 1996 1995 1994 MARCH 31, 1993 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF
YEAR......................... $11.00 $10.81 $10.98 $11.42 $11.20 $11.03 $10.83 $11.00 $11.42
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... 0.49 0.51 0.54 0.56 0.08 0.47 0.51 0.53 0.54
Net realized and unrealized
gain (loss) on investments
and closed futures
contracts.................... (0.01) 0.22 (0.10) (0.34) 0.24 0.01 0.23 (0.10) (0.32)
Total from investment
operations................... 0.48 0.73 0.44 0.22 0.32 0.48 0.74 0.43 0.22
LESS DISTRIBUTIONS FROM:
Net investment income......... (0.49) (0.52) (0.53) (0.52) (0.08) (0.49) (0.52) (0.53) ((0.52)
In excess of net investment
income....................... 0.00 (0.02) (0.08) (0.07) (0.02) 0.00 (0.02) (0.07) (0.05)
Net realized gain on
investment................... 0.00 0.00 0.00 (0.03) 0.00 0.00 0.00 0.00 (0.03)
In excess of net realized gain
on investments............... 0.00 0.00 0.00 (0.04) 0.00 0.00 0.00 0.00 (0.04)
Total distributions........... (0.49) (0.54) (0.61) (0.66) (0.10) (0.49) (0.54) (0.60) (0.64)
NET ASSET VALUE END OF YEAR... $10.99 $11.00 $10.81 $10.98 $11.42 $11.02 $11.03 $10.83 $11.00
TOTAL RETURN (C).............. 4.50% 6.84% 4.15% 1.70% 2.82% 4.49% 6.92% 4.05% 1.78%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............... 1.51%(b) 1.48%(b) 1.50% 1.50% 1.50%(a) 1.51%(b) 1.48%(b) 1.50% 1.50%
Total expenses excluding
reimbursement.............. 1.74% 1.74% 1.80% 1.81% 1.69%(a) 1.74% 1.74% 1.80% 1.90%
Net investment income........ 4.50% 4.55% 4.89% 4.32% 3.44%(a) 4.52% 4.57% 4.90% 4.33%
Portfolio turnover rate....... 84% 55% 97% 37% 20% 84% 55% 97% 37%
NET ASSETS END OF YEAR
(THOUSANDS).................. $37,215 $37,719 $30,657 $21,958 $ 2,543 $ 6,830 $ 9,675 $ 9,559 $ 9,385
<CAPTION>
CLASS C SHARES
FEBRUARY 1, 1993
(DATE OF INITIAL
PUBLIC OFFERING) TO
MARCH 31, 1993
<S> <C>
NET ASSET VALUE BEGINNING OF
YEAR......................... $11.20
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... 0.07
Net realized and unrealized
gain (loss) on investments
and closed futures
contracts.................... 0.24
Total from investment
operations................... 0.31
LESS DISTRIBUTIONS FROM:
Net investment income......... (0.07)
In excess of net investment
income....................... (0.02)
Net realized gain on
investment................... 0.00
In excess of net realized gain
on investments............... 0.00
Total distributions........... (0.09)
NET ASSET VALUE END OF YEAR... $11.42
TOTAL RETURN (C).............. 2.81%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............... 1.50%(a)
Total expenses excluding
reimbursement.............. 1.60%(a)
Net investment income........ 2.50%(a)
Portfolio turnover rate....... 20%
NET ASSETS END OF YEAR
(THOUSANDS).................. $952
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% and 1.47% for the years ended March 31, 1997 and 1996,
respectively, for Class B shares and Class C shares.
(c) Excluding applicable sales charges.
13
DESCRIPTION OF THE FUNDS
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
Each of the Funds seeks the highest possible current income exempt from
federal income taxes, while preserving capital.
Since each Fund considers preservation of capital as well as the level of
tax-exempt income, each Fund may realize less income than a mutual fund willing
to expose shareholders' capital to greater risk.
The investment objectives of each Fund and the requirement that each Fund
invest, under ordinary circumstances, at least 80% of its assets in federally
tax-exempt municipal obligations that are also exempt from certain taxes in the
state for which it is named, as set forth below, are fundamental and may not be
changed without the approval of a majority of the affected Fund's outstanding
shares as defined in the Investment Company Act of 1940 ("1940 Act"), which
means 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 (a "1940 Act Majority").
There can be no assurance that a Fund will achieve its investment
objectives since there is uncertainty in every investment.
THE FUNDS' PRINCIPAL INVESTMENTS
Under ordinary circumstances, each Fund invests substantially all and at
least 80% of its assets in federally tax-exempt obligations, including municipal
bonds, notes and commercial paper obligations that are obligations issued by or
on behalf of states, territories and possessions of the United States ("U.S."),
the District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest from which is exempt from federal income taxes,
including the alternative minimum tax. Thus, it is possible that up to 20% of a
Fund's assets could be in securities subject to the alternative minimum tax
and/or in taxable obligations.
Municipal bonds include fixed, variable or floating rate general
obligation and revenue bonds (including municipal lease obligations, resource
recovery bonds and zero coupon bonds). Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes and project notes.
Municipal commercial paper obligations are unsecured promissory notes issued by
municipalities to meet short-term credit needs.
CALIFORNIA FUND
Under ordinary circumstances, the California Fund invests at least 80% of
its assets in securities, the interest from which is exempt from federal taxes
and California state income taxes. The California Fund invests in debt
obligations of the State of California and its political subdivisions, agencies,
authorities and instrumentalities and debt obligations of other qualifying
issuers, such as U.S. territories.
The California Fund invests only in investment grade municipal
obligations -- bonds rated at the date of investment within the four highest
grades by Standard & Poor's Ratings Group ("S&P") (AAA, AA, A and BBB), Moody's
Investors Service ("Moody's") (Aaa, Aa, A and Baa), or Fitch Investors Service,
L.P. ("Fitch") (AAA, AA, A and BBB) or, if not rated or rated under a different
system, are of comparable quality to obligations so rated as determined by
Keystone. Securities that are in the lowest investment grade (BBB or Baa) may
have speculative characteristics.
As more fully discussed below in the section entitled "Insurance," at
least 80% of the municipal securities in the investment portfolio of the
California Fund will be insured as to timely payment of both principal and
interest. The purpose of insuring these investments is to minimize credit risks
associated with defaults in municipal securities owned by the Fund. Such
insurance, however, does not insure against market risk and therefore will not
14
guarantee the market value of the securities in the Fund's portfolio upon which
the net asset value of the Fund's shares is based.
For a further discussion of California tax treatment and the factors
affecting investment in California municipal obligations, see Appendix A.
FLORIDA FUND
Under ordinary circumstances, the Florida Fund invests substantially all
and at least 80% of its assets in municipal obligations the interest from which
is exempt from federal taxes and the Florida intangibles tax.
For a further discussion of Florida tax treatment and the factors
affecting investment in Florida municipal obligations, see Appendix A.
MASSACHUSETTS FUND
Under ordinary circumstances, the Massachusetts Fund invests
substantially all and at least 80% of its assets in securities the interest from
which is exempt from federal taxes and Massachusetts state income taxes. The
Massachusetts Fund invests in debt obligations of The Commonwealth of
Massachusetts and its political subdivisions, agencies, authorities and
instrumentalities and debt obligations of other qualifying issuers, such as U.S.
territories.
The Massachusetts Fund invests at least 80% of its assets in investment
grade municipal obligations -- bonds rated at the date of investment within the
four highest grades by S&P (AAA, AA, A and BBB), by Moody's (Aaa, Aa, A and
Baa), by Fitch (AAA, AA, A and BBB), or, if not rated or rated under a different
system, are of comparable quality to obligations so rated as determined by
Keystone. Securities that are in the lowest investment grade (BBB or Baa) may
have speculative characteristics.
The Fund may seek to maximize return by investing up to 20% of its assets
in high yield, high risk municipal bonds in the lower rating categories of the
recognized rating agencies or that are unrated. Such high yield, high risk bonds
generally involve greater volatility of price and risk of principal and income
than bonds in the higher rating categories and are, on balance, considered
predominantly speculative. High yield bonds are also commonly known as "junk
bonds."
For a further discussion of Massachusetts tax treatment and the factors
affecting investment in Massachusetts municipal obligations, see Appendix A.
MISSOURI FUND
Under ordinary circumstances, the Missouri Fund invests at least 80% of
its assets in securities, the interest from which is exempt from federal taxes,
Missouri state income taxes and Missouri personal property taxes. The Missouri
Fund invests in debt obligations of the State of Missouri and its political
subdivisions, agencies, authorities and instrumentalities and debt obligations
of other qualifying issuers, such as U.S. territories.
The Missouri Fund invests at least 80% of its assets in investment grade
municipal obligations -- bonds rated at the date of investment within the four
highest grades by S&P (AAA, AA, A and BBB), Moody's (Aaa, Aa, A and Baa), or
Fitch (AAA, AA, A and BBB) or, if not rated or rated under a different system,
are of comparable quality to obligations so rated as determined by Keystone.
Securities that are in the lowest investment grade (BBB or Baa) may have
speculative characteristics.
The Fund may seek to maximize return by investing up to 20% of its assets
in high yield, high risk municipal bonds in the lower rating categories of the
recognized rating agencies or that are unrated. Such high yield, high risk bonds
generally involve greater volatility of price and risk of principal and income
than bonds in the higher rating categories and are, on balance, considered
predominantly speculative. High yield bonds are also commonly known as "junk
bonds."
For a further discussion of Missouri tax treatment and the factors
affecting investment in Missouri municipal obligations, see Appendix A.
15
NEW JERSEY FUND
The objective of the New Jersey Fund is to seek a high level of income,
exempt from federal and New Jersey personal income taxes. The Fund is available
only to investors who reside in New Jersey.
To attain its objective, the New Jersey Fund invests at least 80% of its
net assets in municipal securities issued by the State of New Jersey or its
counties, municipalities, authorities or other political subdivisions and
municipal securities issued by territories or possessions of the United States,
such as Puerto Rico, the interest on which is exempt from federal and New Jersey
personal income taxes. The New Jersey Fund normally invests in intermediate and
long-term municipal securities. Intermediate-term municipal securities generally
mature in three to ten years. Long-term municipal securities generally mature in
ten to thirty years.
The New Jersey Fund will only purchase securities rated within the three
highest rating categories by Moody's or by S&P and unrated securities of
equivalent quality as determined by the investment adviser pursuant to
guidelines established by the Trustees. See the Statement of Additional
Information for further information in regard to ratings.
The New Jersey Fund will seek to invest substantially all of its assets
in intermediate and long-term municipal securities. However, under certain
circumstances the New Jersey Fund may invest up to 20% of its assets in
short-term municipal securities issued outside of New Jersey (the income from
which may be subject to New Jersey income taxes) or certain taxable fixed income
securities (the income from which may be subject to federal and New Jersey
personal income taxes).
NEW YORK FUND
Under ordinary circumstances, the New York Fund invests substantially all
and at least 80% of its assets in securities the interest from which is exempt
from federal taxes and New York state income taxes. The New York Fund invests in
debt obligations of the State of New York and its political subdivisions,
agencies, authorities and instrumentalities and debt obligations of other
qualifying issuers, such as U.S. territories.
As more fully discussed below in the section entitled "Insurance," at
least 80% of the municipal securities in the investment portfolio of the New
York Fund will be insured as to timely payment of both principal and interest.
The purpose of insuring these investments is to minimize credit risks associated
with defaults in municipal securities owned by the Fund. Such insurance,
however, does not insure against market risk and therefore will not guarantee
the market value of the securities in the Fund's portfolio upon which the net
asset value of the Fund's shares is based.
For a further discussion of New York tax treatment and the factors
affecting investment in New York municipal obligations, see Appendix A.
PENNSYLVANIA FUND
Under ordinary circumstances, the Pennsylvania Fund invests substantially
all and at least 80% of its assets in municipal obligations the interest from
which is exempt from federal taxes and Pennsylvania state income taxes. The
securities include debt obligations of the Commonwealth of Pennsylvania and its
political subdivisions, agencies, authorities and instrumentalities and debt
obligations of other qualifying issuers, such as Puerto Rico and the Virgin
Islands. In addition, the Pennsylvania Fund attempts to invest in municipal
obligations exempt from Pennsylvania local income taxes and seeks to hold, on
the annual assessment date, municipal obligations exempt from Pennsylvania
personal property taxes.
For a further discussion of Pennsylvania tax treatment and the factors
affecting investment in Pennsylvania municipal obligations, see Appendix A.
MUNICIPAL OBLIGATIONS
Municipal obligations 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 obligations
include certain types of industrial development bonds that have been or may be
issued by or on behalf of public
16
authorities to finance privately operated facilities. General obligation bonds
involve the credit of an issuer possessing taxing power and are payable from the
issuer's general unrestricted revenues. Their payment may be dependent upon an
appropriation by the issuer's legislative body and may be subject to
quantitative limitations on the issuer's taxing power. Limited obligation or
revenue bonds are payable only from the revenues of a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source, such as the user of the facility.
While each Fund may invest in securities of any maturity, it is currently
expected that a Fund will not invest in securities with maturities of more than
30 years or less than 5 years (other than certain money market securities).
OTHER ELIGIBLE INVESTMENTS
Each Fund may invest up to 20% of its assets under ordinary circumstances
and up to 100% of its assets for temporary defensive purposes in the following
types of instruments: (1) commercial paper, including master demand notes, that
at the date of investment is rated A-1 (the highest grade by S&P), PRIME-1 (the
highest grade by Moody's) or, if not rated by such services, is issued by a
company that at the date of investment has an outstanding issue rated A or
better by S&P or Moody's; (2) obligations, including certificates of deposit and
bankers' acceptances, of banks or savings and loan associations that have at
least $1 billion in assets as of the date of their most recently published
financial statements and are members of the Federal Deposit Insurance
Corporation, including U.S. branches of foreign banks and foreign branches of
U.S. banks; (3) corporate obligations (maturing in 13 months or less) that at
the date of investment are rated A or better by S&P or Moody's; (4) obligations
issued or guaranteed by the U.S. government or by any agency or instrumentality
of the U.S. government; (5) qualified "private activity" industrial development
bonds, the income from which, while exempt from federal income tax under Section
103 of the Internal Revenue Code of 1986, as amended (the "Code"), is includable
in the calculation of the federal alternative minimum tax; and (6) municipal
obligations, the income from which is exempt from federal income tax, but not
exempt from income tax, personal property tax or intangibles tax in a state for
which a Fund is named and where such taxes apply.
Each Fund may assume a temporary defensive position upon its investment
adviser's determination that market conditions so warrant. When a Fund invests
for defensive purposes, it seeks to limit the loss of principal and is not
pursuing its investment objectives.
Each Fund may enter into repurchase agreements. The California, Florida,
Massachusetts, Missouri, New York and Pennsylvania Funds may also enter into
reverse repurchase agreements, purchase and sell securities on a when-issued and
delayed-delivery basis, write covered call and put options and purchase call and
put options, including purchasing call and put options to close out existing
positions. Each Fund, except the New Jersey Fund, may also engage in financial
futures contracts and related options transactions for hedging purposes, but not
for speculation. Each Fund, except the New Jersey Fund, may invest in municipal
obligations denominated in foreign currencies. Each Fund may use subsequently
developed investment techniques that are related to any of its investment
policies. The Funds will supplement their prospectus as appropriate in the event
that the employment of such techniques is determined to constitute a material
change in investment policy for a Fund. None of the Funds is expected to enter
into repurchase agreements in the ordinary course of business.
In addition to the options and futures mentioned above, each Fund, with
the exception of the New Jersey Fund, may, if consistent with its investment
objectives, also invest in certain other types of "derivative investments,"
including structured securities.
For further information about the types of investments and investment
techniques available to the Funds, including the associated risks, see the
"Special Risk Considerations" and "Additional Investment Information" sections
of this prospectus and the statement of additional information.
INSURANCE
At least 80% of the municipal securities in the portfolio of the
California and New York Funds will consist of obligations that at all times are
fully insured as to the payment of all principal and interest when due ("Insured
Securities"). Each Insured Security in the portfolio will be covered by either a
"New Issue Insurance Policy,"
17
"Portfolio Insurance Policy" issued by a qualified municipal bond insurer, or a
"Secondary Insurance Policy." The insurance does not insure against market risk
and therefore does not guarantee the market value of the securities in each
Fund's portfolio. Similarly, because the net asset values of the California and
New York Funds' shares are based upon the market value of the securities in the
portfolio, such insurance does not cover or guarantee the net asset value of
each Fund's shares.
NEW ISSUE INSURANCE POLICIES
New Issue Insurance Policies are obtained by the respective issuers of
municipal securities, and all premiums respecting such securities have been paid
in advance by such issuers. Such policies are noncancellable and will continue
in force so long as the municipal securities are outstanding and the respective
insurers remain in business. Since New Issue Insurance Policies remain in effect
as long as the securities are outstanding, the insurance may have an effect on
the resale value of the Insured Securities. Therefore, New Issue Insurance
Policies may be considered to represent an element of market value with regard
to the Insured Securities, but the exact effect, if any, of this insurance on
such market value cannot be estimated. The New York Fund will purchase municipal
securities subject to New Issue Insurance Policies only if the claims paying
ability of the insurer thereof is rated AAA by S&P or Aaa by Moody's.
PORTFOLIO INSURANCE POLICIES
Portfolio Insurance Policies are obtained by the California and New York
Funds from a qualified municipal bond insurer and are effective only so long as
a Fund is in existence, the insurer is still in business and meeting its
obligations, and the Insured Securities described in the policy are held by each
Fund. Premium rates for each issue of securities covered by the policy are fixed
for the life of each Fund and are periodically adjusted to reflect purchases and
sales of covered securities. The premium on the Portfolio Insurance Policy is an
expense of each Fund and will be reflected in its average annual expenses.
Premiums are paid from each Fund's assets and reduce the current yield on its
portfolio by the amount thereof. The insurer cannot cancel coverage already in
force with respect to Insured Securities owned by each Fund and covered by the
policy, except for nonpayment of premiums.
SECONDARY INSURANCE POLICIES
The California and New York Funds may, at any time, purchase Secondary
Insurance on any municipal security held by a Fund. Such insurance coverage will
be noncancellable and will ordinarily continue in force so long as the
securities so insured are outstanding. Secondary Insurance will likely be
purchased by a Fund if, in the opinion of Keystone, the market value or net
proceeds of the sale of a security by a Fund would exceed the current value of
such security (without insurance) plus the cost of such insurance. When a Fund
purchases Secondary Insurance, the single premium is added to the cost basis of
the security and is not considered an item of expense of the Fund. One of the
purposes of such insurance is to enable the securities covered by such insurance
to be sold as "AAA" or "Aaa" rated Insured Securities at a market price higher
than that which might otherwise be obtainable if the securities were sold
without the insurance coverage. Therefore, such insurance may be considered to
represent an element of market value of such Insured Securities, although the
exact effect, if any, on such market value cannot be estimated. Any difference
between the excess of such a security's market value as an AAA or Aaa rated
security over its market value without such rating, including the single premium
cost thereof, would inure to each Fund in determining the net capital gain or
loss realized by the Fund upon the sale of such Insured Security.
INVESTMENT RESTRICTIONS
Each Fund has adopted the fundamental restrictions summarized below,
which may not be changed without the vote of a 1940 Act Majority of such Fund's
outstanding shares. These restrictions and certain other fundamental and
nonfundamental restrictions are set forth in the statement of additional
information. Unless otherwise stated, all references to a Fund's assets are in
terms of current market value.
Each Fund may not:
(1) borrow money or enter into reverse repurchase agreements, except that
each Fund, with the exception of the New Jersey Fund, may enter into reverse
repurchase agreements and may borrow money from banks for
18
temporary or emergency purposes in aggregate amounts up to one-third of the
value of a Fund's net assets; provided that while borrowings from banks (not
including reverse repurchase agreements) exceed 5% of a Fund's net assets, any
such borrowings will be repaid before additional investments are made. The New
Jersey Fund may borrow from banks up to 10% of the value of its total net assets
for temporary or emergency purposes only to meet anticipated redemption
requirements; and
(2) make loans, except that each Fund may purchase or hold debt
securities consistent with its investment objectives. The California, Florida,
Massachusetts, New York and Pennsylvania Funds may lend portfolio securities
valued at not more than 15% of its total assets to broker-dealers while the New
Jersey Fund will only lend up to 5% of the value of its assets. All Funds may
enter into repurchase agreements.
The Funds are nondiversified under the 1940 Act. As a result, there is no
restriction under the 1940 Act on the percentage of assets that may be invested
at any time in the securities of any one issuer. The Funds intend to comply,
however, with the Code's diversification requirements and other requirements
applicable to a "regulated investment company" (a "RIC") to ensure they will not
be subject to U.S. federal income tax on income and capital gain distributions
to shareholders. For this reason, each Fund has adopted the investment
restriction set forth below, which may not be changed without the approval of a
majority of its outstanding shares. Specifically, a Fund may not purchase a
security if more than 25% of the Fund's total assets would be invested in the
securities of a single issuer (other than the U.S. government, its agencies and
instrumentalities) or, with respect to 50% of the Fund's total assets, if more
than 5% of such assets would be invested in the securities of a single issuer
(other than the U.S. government, its agencies and instrumentalities).
The foregoing is only a summary of the Funds' investment restrictions and
policies. See the statement of additional information for details and the full
text of the Funds' investment restrictions and related policies.
SPECIAL RISK CONSIDERATIONS
Like any investment, your investment in a Fund involves an element of
risk. Before you invest in a Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses.
Certain risks related to the Funds are discussed below. To the extent not
discussed in this section, specific risks attendant upon individual securities
or investment practices are discussed in "Additional Investment Information."
GENERAL
By itself, a Fund does not constitute a balanced investment program and
is not designed for investors seeking capital appreciation or maximum tax-exempt
income irrespective of fluctuations in principal or marketability. Shares of a
Fund would not be suitable for tax-exempt institutions and may not be suitable
for certain retirement plans that are unable to benefit from the Fund's
federally tax-exempt dividends. In addition, the Funds may not be appropriate
investments for entities that are "substantial users" of facilities financed by
industrial development bonds or related persons thereof.
To the extent that the Funds are not fully diversified, they may be more
susceptible to adverse economic, political or regulatory developments affecting
a single issuer than would be the case if the Funds were more broadly
diversified.
Should a Fund need to raise cash to meet a large number of redemptions it
might have to sell portfolio securities at a time when it would be
disadvantageous to do so.
In addition, the market value of the fixed income securities in which a
Fund may invest may vary inversely to changes in prevailing interest rates.
MUNICIPAL OBLIGATIONS
A Fund's ability to achieve its objectives depends partially on the
prompt payment by issuers of the interest on and principal of the municipal
obligations held by the Fund. A moratorium, default or other nonpayment of
interest or principal when due on any municipal obligation could affect the
market value and liquidity of that
19
particular security in addition to that of other municipal obligations held by a
Fund. In addition, the market for municipal obligations is often thin and can be
temporarily affected by large purchases and sales, including those by a Fund.
An action by the U.S. Congress restricting or eliminating the federal
income tax exemption for interest on municipal obligations could materially
affect the availability of municipal obligations for investment by each Fund and
the value of the Fund's securities. In such an event, a Trust would reevaluate
its Funds' investment objectives and policies and consider changes in the
structure of the Funds or dissolution.
If and when a Fund invests in municipal lease obligations, the
possibility exists that a municipality may not appropriate the funds for lease
payments. Each Trust's Board of Trustees will be responsible for determining, on
an ongoing basis, the credit quality of such leases, including an assessment of
the likelihood of cancellation of any such lease.
NONINVESTMENT GRADE BONDS
The Massachusetts and Missouri Funds may each invest up to 20% of their
assets in high yield, high risk municipal bonds (commonly known as "junk
bonds"). The degree to which a Fund will hold such securities will, among other
things, depend upon Keystone's economic forecast and its judgment as to the
comparative values offered by high yield, high risk bonds and higher quality
bonds. Each Fund may invest in high yield, high risk bonds to maximize return
over time from a combination of many factors, including high current income and
capital appreciation.
Investing in high yield, high risk involves risks that are greater than
the risks of investing in higher quality debt securities. These risks are
discussed in greater detail below and include risks from (1) interest rate
fluctuation; (2) changes in credit status, including weaker overall credit
condition of issuers and risks of default; (3) industry, market and economic
risk; (4) volatility of price resulting from broad and rapid changes in the
value of underlying securities; and (5) greater price variability and credit
risks of such high yield, high risk securities as zero coupon bonds and
payment-in-kind ("PIK") securities.
Specifically, investors should be aware of the following:
(1) securities rated BB or lower by S&P 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;
(2) the value of high yield, high risk securities may be more susceptible
to real or perceived adverse economic, company or industry conditions than is
the case for higher quality securities;
(3) adverse market, credit or economic conditions could make it difficult
at certain times to sell certain high yield, high risk securities held by the
Fund;
(4) the secondary market for high yield, high risk securities may be less
liquid than the secondary market for higher quality securities, which may affect
the value of certain high yield, high risk securities held by the Fund at
certain times; and
(5) high yield, high risk zero coupon securities may be subject to
greater changes in value due to market conditions, the absence of a cash
interest payment and the tendency of issuers of such securities to have weaker
overall credit conditions than other high yield, high risk securities.
These risks generally make high yield, high risk securities more
appropriate for long-term investment.
These risks provide the opportunity for maximizing return over time on a
portion of the Massachusetts and Missouri Funds' assets, but may result in
greater upward and downward movement of the net asset value per share of the
Fund. As a result, they should be carefully considered by investors.
Such high yield, high risk securities are generally rated BB or lower by
S&P or BA or lower by Moody's. Each Fund may invest in securities that are rated
as low as D by S&P and C- by Moody's. These rating categories are described in
the section of this prospectus entitled "Additional Investment Information." The
Funds intend to invest in D rated debt only in cases where, in Keystone's
judgment, there is a distinct prospect of improvement in
20
the issuer's financial position as a result of the completion of reorganization
or otherwise. The Funds may also invest in unrated securities that, in
Keystone's judgment, offer comparable yields and risks to those of securities
that are rated as well as non-investment quality zero coupon and PIK securities.
Since the Funds take an aggressive approach to investing a portion of its
assets, Keystone tries to maximize the return by controlling the risk associated
with those investments through diversification, credit analyses, review of
sector and industry trends, interest rate forecasts and economic analysis.
Keystone's analysis of securities focuses on factors such as asset values,
earnings prospects and the quality of management of the company. In making
investment recommendations, Keystone also considers current income, potential
for capital appreciation, maturity structure, quality guidelines, coupon
structure, average yield, percentage of zeros and PIKs, percentage of
non-accruing items and yield to maturity.
Keystone also considers the ratings of Moody's and S&P assigned to
various securities, but does not rely solely on such ratings because (1) Moody's
and S&P assigned ratings are based largely on historical financial data and may
not accurately reflect the current financial outlook of municipalities; and (2)
there can be large differences among the current financial conditions of issuers
within the same rating category.
TAX CONSIDERATIONS
For a discussion of the tax considerations for each state and special
factors, including the risks associated with investing in the municipal
securities of a single state, see Appendix A to this prospectus and Appendix A
to the statement of additional information.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISERS
The management of each Fund is supervised by the Trustees of the Trust
under which each Fund has been established. Keystone serves as investment
adviser to the California, Florida, Massachusetts, Missouri, New York and
Pennsylvania Funds. Keystone has provided investment advisory and management
services to investment companies and private accounts since 1932. Keystone is
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
CMG serves as investment adviser to the New Jersey Fund.
First Union is headquartered in Charlotte, North Carolina, and had $143
billion in consolidated assets as of June 30, 1997. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the United States. CMG and the other investment advisory
affiliates of FUNB manage or otherwise oversee the investment of over $61.9
billion in assets belonging to a wide range of clients, including all the
Evergreen Keystone mutual funds. First Union Brokerage Services, Inc., a
wholly-owned subsidiary of FUNB, is a registered broker-dealer that is
principally engaged in providing retail brokerage services consistent with its
federal banking authorizations. First Union Capital Markets Corp., a
wholly-owned subsidiary of First Union, is a registered broker-dealer
principally engaged in providing, consistent with its federal banking
authorizations, private placement, securities dealing, and underwriting
services.
Pursuant to separate Investment Advisory and Management Agreements with
KSTFF and KSTFF II (the "Advisory Agreements"), Keystone manages the investment
and reinvestment of the California, Florida, Massachusetts, Missouri, New York
and Pennsylvania Funds' assets, supervises the operation of the Trusts and each
Fund and provides all necessary office space, facilities and equipment.
21
Each Fund pays Keystone a fee for its services at the annual rate set
forth below:
<TABLE>
<CAPTION>
AGGREGATE
NET ASSET VALUE
MANAGEMENT OF THE SHARES
FEE OF THE FUND
<S> <C>
0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000.
</TABLE>
Keystone's fee is computed as of the close of business each business day and
payable monthly.
CMG manages investments and supervises the daily business affairs of the
New Jersey Fund and, as compensation therefor, is entitled to receive an annual
fee equal to 0.50 of 1% of the average daily net assets up to $500 million, 0.45
of 1% of the next $500 million of assets, 0.40 of 1% of assets in excess of $1
billion but not exceeding $1.5 billion, and 0.35 of 1% of assets in excess of
$1.5 billion.
The total expenses as a percentage of average daily net assets on an
annual basis of the Funds for the fiscal year or period ended March 31, 1997,
are set forth in the section entitled "Financial Highlights." Such expenses
reflect all voluntary advisory fee waivers and expense reimbursements which may
be revised or terminated at any time.
PORTFOLIO MANAGERS
George J. Kimball is responsible for the day-to-day management of the
California, Florida, Massachusetts, Missouri and New York Funds. Mr. Kimball has
been employed by Keystone or one of its affiliates since 1991, and was an
Analyst prior to becoming a Vice President and Portfolio Manager. He has more
than 10 years of investment experience.
Betsy A. Hutchings, a Keystone Senior Vice President and group leader of
Keystone's Municipal Bond Team, is the portfolio manager of the Pennsylvania
Fund. Ms. Hutchings joined Keystone in 1988, and has more than 15 years of
investment experience.
Jocelyn Turner is a Vice President and a Municipal Bond Portfolio Manager
for CMG. She has managed the New Jersey Fund since 1992. Ms. Turner was
previously employed as a Vice President, Municipal Bond Portfolio Manager at One
Federal Asset Management, Boston, Massachusetts prior to 1992.
ADMINISTRATOR
EKIS serves as administrator to the New Jersey Fund, subject to the
supervision and control of the Trustees of TETFT. EKIS provides facilities,
equipment and personnel to the New Jersey Fund and is entitled to receive a fee
based on the average daily net assets of the Fund at a rate based on the
aggregate average daily net assets of the mutual funds for which CMG, Evergreen
Asset or Keystone serve as investment adviser, calculated in accordance with the
following schedule:
Administration Fee
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% on assets in excess of $30 billion
22
SUB-ADMINISTRATOR
BISYS Fund Services ("BISYS"), an affiliate of EKD, serves as
sub-administrator to the Funds and is entitled to receive a fee calculated on
the aggregate average daily net assets of all the mutual funds for which FUNB
affiliates serve as investment adviser. The sub-administrator fee is calculated
in accordance with the following schedule:
Sub-Administration Fee
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
The total assets of the mutual funds for which FUNB affiliates also serve
as investment advisers were approximately $29 billion as of March 31, 1997.
DISTRIBUTION PLANS AND AGREEMENTS
Distribution Plans. Each Fund's Class A, Class B and Class C shares pay for the
expenses associated with the distribution of its shares according to a
distribution plan that it has adopted pursuant to Rule 12b-1 under the 1940 Act
(each a "Plan" or collectively the "Plans"). Under the Plans, each Fund may
incur distribution-related and shareholder servicing-related expenses which are
based upon a maximum annual rate as a percent of each Fund's average daily net
assets attributable to the Class, as follows:
<TABLE>
<S> <C>
Class A shares 0.75%, currently limited to 0.25%
Class B shares 1.00%
Class C shares 1.00%
</TABLE>
Of the amount that each Class may pay under its respective Plan, up to
0.25% may constitute a service fee to be used to compensate organizations, which
may include each Fund's investment adviser or their affiliates, for personal
services rendered to shareholders and/or the maintenance of shareholder
accounts. The Funds may not pay any distribution or services fees during any
fiscal period in excess of the amounts set forth above.
Distribution Agreements. Each Fund has also entered into a distribution
agreement (each a "Distribution Agreement" or collectively the "Distribution
Agreements") with Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds
Distributor, Inc.) ("EKD"). Pursuant to the Distribution Agreements, each Fund
will compensate EKD for its services as distributor based upon the maximum
annual rate as a percent of each Fund's average daily net assets attributable to
the Class, as follows:
<TABLE>
<S> <C>
Class A shares 0.25%
Class B shares 1.00%
Class C shares 1.00%
</TABLE>
EKD replaces Evergreen Keystone Investment Services, Inc. (formerly
Keystone Investment Distributors Company) ("EKIS") as principal underwriter of
KSTFF and KSTFF II. EKIS may no longer act as principal underwriter of KSTFF and
KSTFF II 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 or distributors of mutual fund shares. While
EKIS may no longer act as principal underwriter of KSTFF and KSTFF II, EKIS may
continue to receive compensation from KSTFF, KSTFF II 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.
The Distribution Agreements provide that EKD will use the distribution
fee received from a Fund for payments (i) to compensate broker-dealers or other
persons for distributing shares of the Fund, including interest and principal
payments made in respect of amounts paid to broker-dealers or other persons that
have been financed (EKD may assign its rights to receive compensation under the
Plans to secure such financings), (ii) to otherwise promote the sale of shares
of the Fund, and (iii) to compensate broker-dealers, depository institutions and
other financial intermediaries for providing administrative, accounting and
other services with respect to the
23
Funds' shareholders. FUNB or its affiliates may finance the payments made by EKD
to compensate broker-dealers or other persons for distributing shares of the
Fund.
Since EKD's compensation under the Distribution Agreements is not
directly tied to the expenses incurred by EKD, the amount of compensation
received by it under the Distribution Agreements during any year may be more or
less than its actual expenses and may result in a profit to EKD. Distribution
expenses incurred by EKD in one fiscal year that exceed the level of
compensation paid to EKD for that year may be paid from distribution fees
received from a Fund in subsequent fiscal years.
The Plans are in compliance with the Conduct Rules of the National
Association of Securities Dealers, Inc. which effectively limit the annual
asset-based sales charges and service fees that a mutual fund may pay on a class
of shares to an annual rate of 0.75% and 0.25%, respectively, of the average
aggregate annual net assets attributable to that class. The rules also limit the
aggregate of all front-end, deferred and asset-based sales charges imposed with
respect to a class of shares by a mutual fund that also charges a service fee to
6.25% of cumulative gross sales of shares of that class, plus interest on the
unpaid amount at the prime rate plus 1% per annum.
PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
You may purchase shares of each Fund through broker-dealers, banks or
other financial intermediaries or directly through EKD. In addition, you may
purchase shares of a Fund by mailing to each Trust, c/o Evergreen Keystone
Service Company ("EKSC"), P.O. Box 2121, Boston, Massachusetts 02106-2121, a
completed account application and a check payable to the Trust. You may also
telephone 1-800-343-2898 to obtain the number of an account to which you can
wire or electronically transfer funds and then send in a completed account
application. The minimum initial investment is $1,000, which may be waived in
certain situations. Subsequent investments in any amount may be made by check,
by wiring Federal funds, by direct deposit or by an electronic funds transfer
("EFT").
There is no minimum amount for subsequent investments. Investments of $25
or more are allowed under the Systematic Investment Plan. Share certificates are
not issued. See the Application for more information. Only Class A, Class B and
Class C shares are offered through this Prospectus (see "General
Information" -- "Other Classes of Shares").
Class A Shares-Front-End Sales Charge Alternative. You may purchase Class A
shares of each Fund at net asset value plus an initial sales charge on purchases
under $1,000,000. You may purchase $1,000,000 or more of Class A shares without
a front-end sales charge; however, a contingent deferred sales charge ("CDSC")
equal to the lesser of 1% of the purchase price or the redemption value will be
imposed on shares redeemed during the month of purchase and the 12- month period
following the month of purchase. The schedule of charges for Class A shares is
as follows:
24
Initial Sales Charge
<TABLE>
<CAPTION>
As a % of the Net As a % of the Commission to Dealer/Agent
Amount of Purchase Amount Invested Offering Price as a % of Offering Price
<S> <C> <C> <C>
Less than $ 50,000 4.99% 4.75% 4.25%
$ 50,000 - $ 99,999 4.71% 4.50% 4.25%
$ 100,000 - $ 249,999 3.90% 3.75% 3.25%
$ 250,000 - $ 499,999 2.56% 2.50% 2.00%
$ 500,000 - $ 999,999 2.04% 2.00% 1.75%
1.00% of the amount invested up
to $2,999,999;
.50% of the amount invested over
$1,000,000 or more None None $2,999,999, up to $4,999,999;
and
.25% of the excess over
$4,999,999
</TABLE>
No front-end sales charges are imposed on Class A shares purchased by (a)
institutional investors, which may include bank trust departments and registered
investment advisers; (b) investment advisers, consultants or financial planners
who place trades for their own accounts or the accounts of their clients and who
charge such clients a management, consulting, advisory or other fee; (c) clients
of investment advisers or financial planners who place trades for their own
accounts if the accounts are linked to the master account of such investment
advisers or financial planners on the books of the broker-dealer through whom
shares are purchased; (d) institutional clients of broker-dealers, including
retirement and deferred compensation plans and the trusts used to fund these
plans, which place trades through an omnibus account maintained with a Fund by
the broker-dealer; (e) shareholders of record on October 12, 1990 in any series
of Evergreen Investment Trust in existence on that date, and the members of
their immediate families; (f) current and retired employees of FUNB and its
affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Funds, and members of the immediate families of
such employees; (g) and upon the initial purchase of an Evergreen Keystone Fund
by investors reinvesting the proceeds from a redemption within the preceding
thirty days of shares of other mutual funds, provided such shares were initially
purchased with a front-end sales charge or subject to a CDSC. Certain
broker-dealers or other financial institutions may impose a fee on transactions
in shares of the Funds.
Class A shares may also be purchased at net asset value by a corporation
or certain other qualified retirement plan or a non-qualified deferred
compensation plan or a Title I tax sheltered annuity or TSA plan sponsored by an
organization having 100 or more eligible employees or a TSA plan sponsored by a
public education entity having 5,000 or more eligible employees.
In connection with sales made to plans of the type described in the
preceding sentence EKD will pay broker-dealers and others concessions at the
rate of 0.50% of the net asset value of the shares purchased. These payments are
subject to reclaim in the event the shares are redeemed within twelve months
after purchase.
When Class A shares are sold, EKD will normally retain a portion of the
applicable sales charge and pay the balance to the broker-dealer or other
financial intermediary through whom the sale was made. EKD may also pay fees to
banks from sales charges for services performed on behalf of the customers of
such banks in connection with the purchase of shares of the Funds. Certain
purchases of Class A shares may qualify for reduced sales charges in accordance
with a Fund's Concurrent Purchases, Rights of Accumulation, Letter of Intent,
certain Retirement Plans and Reinstatement Privilege. Consult the Application
for additional information concerning these reduced sales charges.
Class B Shares -- Deferred Sales Charge Alternative. You may purchase Class B
shares at net asset value without an initial sales charge. However, you may pay
a CDSC if you redeem shares within six years after the month of purchase. The
amount of the CDSC will vary according to the number of years from the month of
purchase of Class B shares as set forth below.
25
<TABLE>
<CAPTION>
CDSC
Redemption Timing Imposed
<S> <C>
Month of purchase and the first twelve-month period following the month of purchase............................... 5.00%
Second twelve-month period following the month of purchase........................................................ 4.00%
Third twelve-month period following the month of purchase......................................................... 3.00%
Fourth twelve-month period following the month of purchase........................................................ 3.00%
Fifth twelve-month period following the month of purchase......................................................... 2.00%
Sixth twelve-month period following the month of purchase......................................................... 1.00%
No CDSC is imposed on amounts redeemed thereafter.
</TABLE>
The CDSC is deducted from the amount of the redemption and is paid to EKD
or its predecessor. Class B shares are subject to higher distribution and/or
shareholder service fees than Class A shares for a period of seven years after
the month of purchase (after which it is expected that they will convert to
Class A shares without imposition of a front-end sales charge). 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. The Funds
will not normally accept any purchase of Class B shares in the amount of
$250,000 or more.
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 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.
Class C Shares (California, Florida, Massachusetts, Missouri, New York and
Pennsylvania Funds Only). Class C shares are offered only through broker-dealers
who have special distribution agreements with the Principal Underwriter. Class C
shares are offered at net asset value, without an initial sales charge. With
certain exceptions, each Fund imposes a CDSC of 1.00% on shares redeemed during
the month of purchase and the 12-month period following the month of purchase.
No CDSC is imposed on amounts redeemed thereafter. If imposed, the CDSC is
deducted from the redemption proceeds otherwise payable to you. The CDSC is
retained by EKD or its predecessor. See "Contingent Deferred Sales Charge and
Waiver of Sales Charges" below.
Contingent Deferred Sales Charge. Shares obtained from dividend or distribution
reinvestment are not subject to a CDSC. Any CDSC imposed upon the redemption of
Class A, Class B or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net asset value at the time of
purchase of such shares.
No CDSC is imposed on a redemption of shares of the Fund in the event of
(1) death or disability of the shareholder; (2) a lump-sum distribution from a
401(k) plan or other benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if
the shareholder is at least 59 1/2 years old; (4) involuntary redemptions of
accounts having an aggregate net asset value of less than $1,000; (5) automatic
withdrawals under the Systematic Withdrawal Plan of up to 1.00% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.
The Funds may also sell Class A, Class B or Class C shares at net asset
value without any initial sales charge or a CDSC to certain Directors, Trustees,
officers and employees of the Funds, Keystone, FUNB, Evergreen Asset, EKD and
certain of their affiliates, and to members of the immediate families of such
persons, to registered representatives of firms with dealer agreements with EKD,
and to a bank or trust company acting as a trustee for a single account.
How the Funds Value their Shares. The net asset value of each Class of shares of
a Fund is calculated by dividing the value of the amount of the Fund's net
assets attributable to that Class by the number of outstanding shares of that
Class. Shares are valued each day the New York Stock Exchange (the "Exchange")
is open as of the close of regular trading (currently 4:00 p.m. Eastern time).
The securities in a Fund are valued at their current market value
26
determined on the basis of market quotations or, if such quotations are not
readily available, such other methods as the Trustees believe would accurately
reflect fair value. Non-dollar denominated securities will be valued as of the
close of the Exchange at the closing price of such securities in their principal
trading markets.
General. The decision as to which Class of shares is more beneficial to you
depends on the amount of your investment and the length of time you will hold
it. If you are making a large investment, thus qualifying for a reduced sales
charge, you might consider Class A shares. If you are making a smaller
investment, you might consider Class B shares since 100% of your purchase is
invested immediately and since such shares will convert to Class A shares, which
incur lower ongoing distribution and/or shareholder service fees, after seven
years. If you are unsure of the time period of your investment, you might
consider Class C shares since there are no initial sales charges and, although
there is no conversion feature, the CDSC only applies to redemptions made during
the first year. Consult your financial intermediary for further information. The
compensation received by dealers and agents may differ depending on whether they
sell Class A, Class B or Class C shares. There is no size limit on purchases of
Class A shares.
In addition to the discount or commission paid to broker-dealers, EKD and
EKIS may from time to time pay to broker-dealers additional cash or other
incentives that are conditioned upon the sale of a specified minimum dollar
amount of shares of a Fund and/or other Evergreen Keystone Funds. Such
incentives will take the form of payment for attendance at seminars, lunches,
dinners, sporting events or theater performances, or payment for travel, lodging
and entertainment incurred in connection with travel by persons associated with
a broker-dealer and their immediate family members to urban or resort locations
within or outside the United States. Such a dealer may elect to receive cash
incentives of equivalent amount in lieu of such payments. EKD may also limit the
availability of such incentives to certain specified dealers. EKD from time to
time sponsors promotions involving First Union Brokerage Services, Inc.
("FUBS"), an affiliate of each Fund's investment adviser, and select
broker-dealers, pursuant to which incentives are paid, including gift
certificates and payments in amounts up to 1% of the dollar amount of shares of
a Fund sold. Awards may also be made based on the opening of a minimum number of
accounts. Such promotions are not being made available to all broker-dealers.
Certain broker-dealers may also receive payments from EKD or a Fund's investment
adviser over and above the usual trail commissions or shareholder servicing
payments applicable to a given Class of shares.
Additional Purchase Information. As a condition of this offering, if a purchase
is canceled due to nonpayment or because an investor's check does not clear, the
investor will be responsible for any loss a Fund or the Fund's investment
adviser incurs. If such investor is an existing shareholder, a Fund may redeem
shares from an investor's account to reimburse the Fund or its investment
adviser for any loss. In addition, such investors may be prohibited or
restricted from making further purchases in any of the Evergreen Keystone Funds.
The Funds will not accept third party checks other than those payable directly
to a shareholder whose account has been in existence at least thirty days.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net redemption value on any
day the Exchange is open, either by writing to each Trust, c/o EKSC, or through
your financial intermediary. The amount you will receive is based on the net
asset value adjusted for fractions of a cent (less any applicable CDSC for Class
B or Class C shares) next calculated after the Fund receives your request in
proper form. Proceeds generally will be sent to you within seven days. However,
for shares recently purchased by check, a Fund will not send proceeds until it
is reasonably satisfied that the check has been collected (which may take up to
15 days). Once a redemption request has been telephoned or mailed, it is
irrevocable and may not be modified or canceled.
Redeeming Shares Through Your Financial Intermediary. A Fund must receive
instructions from your financial intermediary before 4:00 p.m. (Eastern time)
for you to receive that day's net asset value (less any applicable CDSC). Your
financial intermediary is responsible for furnishing all necessary documentation
to a Fund and may charge you for this service. Certain financial intermediaries
may require that you give instructions earlier than 4:00 p.m. (Eastern time).
Redeeming Shares Directly by Mail or Telephone. Send a signed letter of
instruction or stock power form to the Trust, c/o EKSC, the registrar, transfer
agent and dividend-disbursing agent for each Trust. Stock power forms are
available from your financial intermediary, EKSC, and many commercial banks.
Additional documentation is
27
required for the sale of shares by corporations, financial intermediaries,
fiduciaries and surviving joint owners. Signature guarantees are required for
all redemption requests for shares with a value of more than $50,000. Currently,
the requirement for a signature guarantee has been waived on redemptions of
$50,000 or less when the account address of record has been the same for a
minimum period of 30 days. Each Trust and EKSC reserve the right to withdraw
this waiver at any time. A signature guarantee must be provided by a bank or
trust company (not a Notary Public), a member firm of a domestic stock exchange
or by other financial institutions whose guarantees are acceptable under the
Securities Exchange Act of 1934 and EKSC's policies.
Shareholders may withdraw amounts of $1,000 or more (up to $50,000) from
their accounts by calling the telephone number on the front page of this
Prospectus between the hours of 8:00 a.m. and 5:30 p.m. (Eastern time) each
business day (i.e., any weekday exclusive of days on which the Exchange or
EKSC's offices are closed). The Exchange is closed on New Year's Day, Presidents
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Redemption requests received after 4:00 p.m. (Eastern time)
will be processed using the net asset value determined on the next business day.
Such redemption requests must include the shareholder's account name, as
registered with a Trust, and the account number. During periods of drastic
economic or market changes, shareholders may experience difficulty in effecting
telephone redemptions. If you cannot reach the Fund by telephone, you should
follow the procedures for redeeming by mail or through a broker-dealer as set
forth herein. The telephone redemption service is not made available to
shareholders automatically. Shareholders wishing to use the telephone redemption
service must complete the appropriate sections on the Application and choose how
the redemption proceeds are to be paid. Redemption proceeds will either (i) be
mailed by check to the shareholder at the address in which the account is
registered or (ii) be wired to an account with the same registration as the
shareholder's account in a Trust at a designated commercial bank.
In order to insure that instructions received by EKSC are genuine when
you initiate a telephone transaction, you will be asked to verify certain
criteria specific to your account. At the conclusion of the transaction, you
will be given a transaction number confirming your request, and written
confirmation of your transaction will be mailed the next business day. Your
telephone instructions will be recorded. Redemptions by telephone are allowed
only if the address and bank account of record have been the same for a minimum
period of 30 days. Each Trust reserves the right at any time to terminate,
suspend, or change the terms of any redemption method described in this
Prospectus, except redemption by mail, and to impose fees.
Except as otherwise noted, the Trusts, EKSC and EKD will not assume
responsibility for the authenticity of any instructions received by any of them
from a shareholder in writing, over the Evergreen Keystone Express Line, or by
telephone. EKSC will employ reasonable procedures to confirm that instructions
received over the Evergreen Keystone Express Line or by telephone are genuine.
The Trusts, EKSC and EKD will not be liable when following instructions received
over the Evergreen Keystone Express Line or by telephone that EKSC reasonably
believes are genuine.
Evergreen Keystone Express Line. The Evergreen Keystone Express Line offers you
specific fund account information and price and yield quotations as well as the
ability to do account transactions, including investments, exchanges and
redemptions. You may access the Evergreen Keystone Express Line by dialing toll
free 1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a
week.
General. The sale of shares is a taxable transaction for federal income tax
purposes. The Funds may temporarily suspend the right to redeem their shares
when (1) the Exchange is closed, other than customary weekend and holiday
closings; (2) trading on the Exchange is restricted; (3) an emergency exists and
the Funds cannot dispose of their investments or fairly determine their value;
or (4) the Securities and Exchange Commission ("SEC") so orders. The Funds
reserve the right to close an account that through redemption has fallen below
$1,000 and has remained so for thirty days. Shareholders will receive sixty
days' written notice to increase the account value to at least $1,000 before the
account is closed. The Funds have elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which each Fund is obligated to redeem shares solely in
cash, up to the lesser of $250,000 or 1% of a Fund's total net assets, during
any ninety day period for any one shareholder.
EXCHANGE PRIVILEGE
How to Exchange Shares. You may exchange some or all of your shares for shares
of the same Class in the other Evergreen Keystone Funds through your financial
intermediary by calling or writing to EKSC or by using the
28
Evergreen Keystone Express Line as described above. Once an exchange request has
been telephoned or mailed, it is irrevocable and may not be modified or
canceled. Exchanges will be made on the basis of the relative net asset values
of the shares exchanged next determined after an exchange request is received.
An exchange which represents an initial investment in another Evergreen Keystone
fund is subject to the minimum investment and suitability requirements of each
Fund.
Each of the Evergreen Keystone funds has different investment objectives
and policies. For complete information, a prospectus of the fund into which an
exchange will be made should be read prior to the exchange. An exchange order
must comply with the requirement for a redemption or repurchase order and must
specify the dollar value or number of shares to be exchanged. An exchange is
treated for federal income tax purposes as a redemption and purchase of shares
and may result in the realization of a capital gain or loss. Shareholders are
limited to five exchanges per calendar year, with a maximum of three per
calendar quarter. This exchange privilege may be modified or discontinued at any
time by the Fund upon sixty days' notice to shareholders and is only available
in states in which shares of the fund being acquired may lawfully be sold.
No CDSC will be imposed in the event Class B or Class C shares are
exchanged for Class B or Class C shares, respectively, of other Evergreen
Keystone funds. If you redeem shares, the CDSC applicable to the Class B or
Class C shares of the Evergreen or Keystone fund originally purchased for cash
is applied. Also, Class B shares will continue to age following an exchange for
the purpose of conversion to Class A shares and for the purpose of determining
the amount of the applicable CDSC.
Exchanges Through Your Financial Intermediary. A Fund must receive exchange
instructions from your financial intermediary before 4:00 p.m. (Eastern time)
for you to receive that day's net asset value. Your financial intermediary is
responsible for furnishing all necessary documentation to a Fund and may charge
you for this service.
Exchanges By Telephone And Mail. Exchange requests received by a Fund after 4:00
p.m. (Eastern time) will be processed using the net asset value determined at
the close of the next business day. During periods of drastic economic or market
changes, shareholders may experience difficulty in effecting telephone
exchanges. You should follow the procedures outlined below for exchanges by mail
if you are unable to reach EKSC by telephone. If you wish to use the telephone
exchange service you should indicate this on the Application. As noted above,
each Fund will employ reasonable procedures to confirm that instructions for the
redemption or exchange of shares communicated by telephone are genuine. A
telephone exchange may be refused by a Fund or EKSC if it is believed advisable
to do so. Procedures for exchanging Fund shares by telephone may be modified or
terminated at any time. Written requests for exchanges should follow the same
procedures outlined for written redemption requests in the section entitled "How
to Redeem Shares"; however, no signature guarantee is required.
SHAREHOLDER SERVICES
The Funds offer the following shareholder services. For more information
about these services or your account, contact your financial intermediary, EKSC
or call the toll-free number on the front page of this Prospectus. Some services
are described in more detail in the Application.
Systematic Investment Plan. Under a Systematic Investment Plan, you may invest
as little as $25 per month to purchase shares of a Fund with no minimum initial
investment required.
Telephone Investment Plan. You may invest not less than $100 or more than
$10,000 per investment into an existing account. Telephone investment requests
received by 4:00 p.m. (Eastern time) will be credited to a shareholder's account
the day the request is received. Shares purchased under the Systematic
Investment Plan or Telephone Investment Plan may not be redeemed for ten days
from the date of investment.
Systematic Withdrawal Plan. When an account of $10,000 or more is opened or when
an existing account reaches that size, you may participate in the Systematic
Withdrawal Plan by filling out the appropriate part of the Application. Under
this Plan, you may receive (or designate a third party to receive) payments in a
stated amount of at least $75, or a maximum of 1.0% per month or 3.0% per
quarter of the total net asset value of your account when the Plan was
established. Fund shares will be redeemed as necessary to meet withdrawal
payments. All participants must elect to have their dividends and capital gain
distributions reinvested automatically. Any
29
applicable CDSC will be waived with respect to redemptions occurring under a
Systematic Withdrawal Plan during a calendar year to the extent that such
redemptions do not exceed 12% of (i) the initial value of the account plus (ii)
the value, at the time of purchase, of any subsequent investments. Excessive
withdrawals may decrease or deplete the value of your account. Moreover, because
of the effect of the applicable sales charge, a Class A investor should not make
continuous purchases of a Fund's shares while participating in a Systematic
Withdrawal Plan.
Investments Through Employee Benefit and Savings Plans. Certain qualified and
non-qualified benefit and savings plans may make shares of the Funds and the
other Evergreen Keystone funds available to their participants. Investments made
by such employee benefit plans may be exempt from front-end sales charges if
they meet the criteria set forth under "Class A Shares-Front End Sales Charge
Alternative". Evergreen Asset, Keystone or CMG may provide compensation to
organizations providing administrative and recordkeeping services to plans which
make shares of the Evergreen Keystone Funds available to their participants.
Automatic Reinvestment Plan. For the convenience of investors, all dividends and
distributions are automatically reinvested in full and fractional shares of a
Fund at the net asset value per share at the close of business on the record
date, unless otherwise requested by a shareholder in writing. If the transfer
agent does not receive a written request for subsequent dividends and/or
distributions to be paid in cash at least three full business days prior to a
given record date, the dividends and/or distributions to be paid to a
shareholder will be reinvested.
Dollar Cost Averaging. Through dollar cost averaging you can invest a fixed
dollar amount each month or each quarter in any Evergreen Keystone fund. This
results in more shares being purchased when the selected Fund's net asset value
is relatively low and fewer shares being purchased when the Fund's net asset
value is relatively high and may result in a lower average cost per share than a
less systematic investment approach.
Prior to participating in dollar cost averaging, you must establish an
account in an Evergreen Keystone fund. You should designate on the Application
(i) the dollar amount of each monthly or quarterly investment you wish to make
and (ii) the Fund in which the investment is to be made. Thereafter, on the
first day of the designated month, an amount equal to the specified monthly or
quarterly investment will automatically be redeemed from your initial account
and invested in shares of the designated fund.
If you are a Class A investor and paid a sales charge on your initial
purchase, the shares purchased will be eligible for Rights of Accumulation and
the sales charge applicable to the purchase will be determined accordingly. In
addition, the value of shares purchased will be included in the total amount
required to fulfill a Letter of Intent. If a sales charge was not paid on the
initial purchase, a sales charge will be imposed at the time of subsequent
purchases, and the value of shares purchased will become eligible for Rights of
Accumulation and Letters of Intent.
Two Dimensional Investing. You may elect to have income and capital gains
distributions from any class of Evergreen Keystone fund shares you own
automatically invested to purchase the same class of shares of any other
Evergreen Keystone fund. You may select this service on your Application and
indicate the Evergreen Keystone fund(s) into which distributions are to be
invested. The value of shares purchased will be ineligible for Rights of
Accumulation and Letters of Intent.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations also
presently prohibit member banks of the Federal Reserve System ("Member Banks")
or their non-bank affiliates from sponsoring, organizing, controlling, or
distributing the shares of registered open-end investment companies such as the
Funds. Such laws and regulations also prohibit banks from issuing, underwriting
or distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer. Keystone
and its affiliates, since they are direct or indirect subsidiaries of FUNB and
CMG, are subject to and in compliance with the aforementioned laws and
regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in CMG or Evergreen Asset being prevented
from continuing to perform the services required under the investment
30
advisory agreements or from acting as agent in connection with the purchase of
shares of a Fund by its customers. If CMG or Evergreen Asset were prevented from
continuing to provide the services called for under the investment advisory
agreements, it is expected that the Trustees would identify, and call upon each
Fund's shareholders to approve, new investment advisers. If this were to occur,
it is not anticipated that the shareholders of any Fund would suffer any adverse
financial consequences.
OTHER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund intends to declare dividends from net investment income daily
and distribute to its shareholders such dividends monthly. Each Fund intends to
declare and distribute all net realized long-term capital gains at least
annually. Shareholders receive Fund distributions in the form of additional
shares of that class of shares upon which the distribution is based or, at the
shareholder's option, in cash. Shareholders of a Fund who have not opted to
receive cash prior to the payable date for any dividend from net investment
income or the record date for any capital gains distribution will have the
number of such shares determined on the basis of the Fund's net asset value per
share computed at the end of that day after adjustment for the distribution. Net
asset value is used in computing the number of shares in both capital gains and
income distribution reinvestments. There is a possibility that shareholders may
lose the tax-exempt status on accrued income on municipal bonds if shares of the
Funds are redeemed before a dividend has been declared.
Because Class A shares bear most of the costs of distribution of such
shares through payment of a front end sales charge while Class B and, when
applicable, Class C shares bear such expenses through a higher annual
distribution fee, expenses attributable to Class B shares and Class C shares
will generally be higher than those of Class A shares and income distributions
paid by a Fund with respect to Class A shares will generally be greater than
those paid with respect to Class B and Class C shares.
Account statements and/or checks, as appropriate, will be mailed within
seven days after the Fund pays a distribution. Unless a Fund receives
instructions to the contrary before the record or payable date, as the case may
be, it will assume that a shareholder wishes to receive that distribution and
future capital gains and income distributions in shares. Instructions continue
in effect until changed in writing.
Each of the Funds has qualified and intends to continue to qualify as a
RIC under the Code. Each Fund is a separate taxable entity for purposes of Code
provisions applicable to RICs. Each of the Funds qualifies if, among other
things, it distributes to its shareholders at least 90% of its net investment
income for its fiscal year. Each Fund also intends to make timely distributions,
if necessary, sufficient in amount to avoid the nondeductible 4% excise tax
imposed on a RIC to the extent that it fails to distribute, with respect to each
calendar year, at least 98% of its ordinary income for such calendar year and
98% of its net capital gains for the one-year period ending on October 31 of
such calendar year.
If a Fund qualifies as a RIC and if it distributes substantially all of
its net investment income and net capital gains, if any, to shareholders, it
will be relieved of any federal income tax liability.
Any taxable dividend declared in October, November or December to
shareholders of record in such a month and paid by the following January 31 will
be includable in the taxable income of shareholders as if paid on December 31 of
the year in which the dividend was declared.
Each Fund expects that substantially all of its dividends will be "exempt
interest dividends," which should be treated as excludable from federal gross
income. In order to pay exempt interest dividends, at least 50% of the value of
the Fund's assets must consist of federally tax-exempt obligations at the close
of each quarter. An exempt interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by the Fund with respect to its net
federally excludable municipal obligation interest and designated as an exempt
interest dividend in a written notice mailed to each shareholder not later than
60 days after the close of its taxable year. 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
31
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.
Any shareholder of a Fund who may be a "substantial user" of a facility
financed with an issue of tax-exempt obligations or a "related person" to such a
user should consult his tax adviser concerning his qualification to receive
exempt interest dividends should the Fund hold obligations financing such
facility.
Under regulations to be promulgated, to the extent attributable to
interest paid on certain private activity bonds, a Fund's exempt interest
dividends, while otherwise tax-exempt, will be treated as a tax preference item
for alternative minimum tax purposes. Corporate shareholders should also be
aware that the receipt of exempt interest dividends could subject them to
alternative minimum tax under the provisions of Section 56(g) of the Code
(relating to "adjusted current earnings").
Under particularly unusual circumstances, such as when a Fund is in a
prolonged defensive investment position, it is possible that no portion of a
Fund's distributions of income to its shareholders for a fiscal year would be
exempt from federal income tax. The Trusts do not presently anticipate, however,
that such unusual circumstances will occur.
Since none of a Fund's income will consist of corporate dividends, no
distributions will qualify for the 70% corporate dividends received deduction.
Each Fund intends to distribute its net capital gains as capital gains
dividends. Shareholders should treat such dividends as long-term capital gains.
Each Fund will designate capital gains distributions as such by a written notice
mailed to each shareholder no later than 60 days after the close of the Fund's
taxable year. If a shareholder receives a capital gain dividend and holds his
shares for six months or less, then any allowable loss on disposition of such
shares will be treated as a long-term capital loss to the extent of such capital
gain dividend.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of a Fund will not be deductible for federal income tax
purposes to the extent of the portion of the interest expense relating to exempt
interest dividends. Such portion is determined by multiplying the total amount
of interest paid or accrued on the indebtedness by a fraction, the numerator of
which is the exempt interest dividends received by a shareholder in his taxable
year and the denominator of which is the sum of the exempt interest dividends
and the taxable distributions out of the Fund's investment income and long-term
capital gains received by the shareholder.
The Funds, with the exception of the New Jersey Fund, may acquire options
to "put" specified securities to municipal bond dealers or issuers from whom the
securities are purchased. It is expected that each Fund will be treated for
federal income tax purposes as the owner of the municipal bonds acquired subject
to the put. The interest on the municipal bonds will be tax-exempt to the Funds,
and the purchase price must be allocated between such securities and the puts
based upon their respective fair market values. The Internal Revenue Service has
not issued a published ruling on this matter and could reach a different
conclusion.
STATE INCOME TAXES
The exemption of interest on municipal bonds for federal income tax
purposes does not necessarily result in exemption under the income, corporate or
personal property tax laws of any state or city. Generally, individual
shareholders of the Funds receive tax-exempt treatment at the state level for
distributions derived from municipal securities of their state of residency.
Florida does not currently impose any individual income tax, although it does
impose a tax on corporate income. Each Fund will report to shareholders on a
state by state basis the sources of its exempt interest dividends. For a further
discussion of state tax treatment relating to each Fund, see Appendix A to this
prospectus.
The foregoing is only a summary of some of the important tax
considerations generally affecting the Trusts, its Funds and their shareholders.
No attempt is made to present a detailed explanation of the federal or state
income or other tax treatment of the Trusts, their Funds or their shareholders,
and this discussion is not intended as a substitute for careful tax planning.
Accordingly, shareholders are urged to consult their tax advisers with specific
reference to their tax situation.
32
GENERAL INFORMATION
Portfolio Transactions. Consistent with the Conduct Rules of the National
Association of Securities Dealers, Inc., and subject to seeking best price and
execution, a Fund may consider sales of its shares as a factor in the selection
of dealers to enter into portfolio transactions with the Fund.
Organization. The Funds do not intend to hold annual shareholder meetings;
shareholder meetings will be held only when required by applicable law.
Shareholders have available certain procedures for the removal of Trustees,
including the right to demand that a meeting of shareholders be called for the
purpose of voting thereon if 10% of the shareholders so request in writing.
A shareholder in each Class of a Fund will be entitled to his or her
share of all dividends and distributions from a Fund's assets, based upon the
relative value of such shares to those of other Classes of the Fund and, upon
redeeming shares, will receive the then current net asset value of the Class of
shares of the Fund represented by the redeemed shares less any applicable CDSC.
Each Trust named above is empowered to establish, without shareholder approval,
additional investment series, which may have different investment objectives,
and additional Classes of shares for any existing or future series. If an
additional series or Class were established in a Fund, each share of the series
or Class would normally be entitled to one vote for all purposes. Generally,
shares of each series and Class would vote together as a single class on
matters, such as the election of Trustees, that affect each series and Class in
substantially the same manner. Class A, Class B, Class C and Class Y shares have
identical voting, dividend, liquidation and other rights, except that each Class
bears, to the extent applicable, its own distribution and shareholder service
expenses as well as any other expenses applicable only to a specific Class. Each
Class of shares votes separately with respect to Rule 12b-1 distribution plans
and other matters for which separate Class voting is appropriate under
applicable law. Shares are entitled to dividends as determined by the Trustees
and, in liquidation of a Fund, are entitled to receive the net assets of the
Fund.
Custodian. State Street Bank and Trust Company, P.O. Box 9021, Boston,
Massachusetts 02205-9827 acts as each Fund's custodian.
Registrar, Transfer Agent and Dividend-Disbursing Agent. Evergreen Keystone
Service Company, P.O. Box 2121, Boston, Massachusetts 02106-2121, acts as
registrar, transfer agent and dividend-disbursing agent for each of the Funds.
Principal Underwriter. EKD, an affiliate of BISYS Fund Services, is located at
125 W. 55th Street, New York, New York 10019, and is the principal underwriter
of the Funds. BISYS Fund Services also acts as sub-administrator to the Funds
and provides personnel to serve as officers of the Funds.
Other Classes of Shares. KSTFF currently issues shares of four separate series
evidencing interests in different portfolio securities. Each Fund currently
issues Class A, Class B and Class C shares. KSTFF II currently issues Class A,
Class B and Class C shares of two separate series. TETFT currently issues shares
of two series, one of which, the New Jersey Fund, offers Class A, Class B and
Class Y shares. Each Trust is authorized to issue additional series or classes
of shares.
Class Y shares are not offered by this prospectus and are only available
to (i) persons who at or prior to December 31, 1994, owned shares in a mutual
fund advised by Evergreen Asset (ii) certain institutional investors and (iii)
investment advisory clients of CMG, Evergreen Asset or their affiliates. The
dividends payable with respect to Class A and Class B shares will be less than
those payable with respect to Class Y shares due to the distribution and
distribution related expenses borne by Class A and Class B shares and the fact
that such expenses are not borne by Class Y shares.
Performance Information. From time to time, the Funds may quote their "total
return" or "yield" for a specified period in advertisements, reports or other
communications to shareholders. Total return and yield are computed separately
for Class A, Class B, Class C and Class Y shares. A Fund's total return for each
such 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 the investment at the
end of the period. For purposes of computing total return, dividends and capital
gains distributions paid on shares of a Fund are assumed to have been reinvested
when paid and the maximum sales charges applicable to
33
purchases of a Fund's shares are assumed to have been paid. Yield is a way of
showing the rate of income the Fund earns on its investments as a percentage of
the Fund's share price. The Fund's yield is calculated according to accounting
methods that are standardized by the SEC for all stock and bond funds. Because
yield accounting methods differ from the method used for other accounting
purposes, the Fund's yield may not equal its distribution rate, the income paid
to your account or the net investment income reported in the Fund's financial
statements. To calculate yield, the Fund takes the interest and dividend income
it earned from its portfolio of investments (as defined by the SEC formula) for
a 30-day period (net of expenses), divides it by the average number of shares
entitled to receive dividends, and expresses the result as an annualized
percentage rate based on the Fund's share price at the end of the 30-day period.
This yield does not reflect gains or losses from selling securities.
Performance data for each class of shares will be included in any
advertisement or sales literature using performance data of a Fund. These
advertisements may quote performance rankings or ratings of a Fund by financial
publications or independent organizations such as Lipper Analytical Services,
Inc. and Morningstar, Inc. or compare a Fund's performance to various indices.
The Fund may also advertise in items of sales literature an "actual distribution
rate" which is computed by dividing the total ordinary income distributed (which
may include the excess of short-term capital gains over losses) to shareholders
for the latest twelve month period by the maximum public offering price per
share on the last day of the period. Investors should be aware that past
performance may not be reflective of future results.
In marketing a Fund's shares, information may be provided that is
designed to help individuals understand their investment goals and explore
various financial strategies. Such information may include publications
describing general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting; a questionnaire designed to
help create a personal financial profile; and an action plan offering investment
alternatives. The information provided to investors may also include discussions
of other Evergreen Keystone Funds, products, and services, which may include:
retirement investing; brokerage products and services; the effects of periodic
investment plans and dollar cost averaging; saving for college; and charitable
giving. In addition, the information provided to investors may quote financial
or business publications and periodicals, including model portfolios or
allocations, as they relate to fund management, investment philosophy, and
investment techniques. The Principal Underwriter may also reprint, and use as
advertising and sales literature, articles from EVERGREEN KEYSTONE EVENTS, a
quarterly magazine provided to Evergreen Keystone Fund shareholders.
Liability Under Massachusetts Law. Under Massachusetts law, Trustees and
shareholders of a business trust may, in certain circumstances, be held
personally liable for its obligations. The Declarations of Trust under which the
Funds operate provide that no Trustee or shareholder will be personally liable
for the obligations of the Trust and that every written contract made by the
Trust shall contain a provision to that effect. If any Trustee or shareholder
were required to pay any liability of the Trust, that person would be entitled
to reimbursement from the general assets of the Trust.
Additional Information. This Prospectus and the Statement of Additional
Information, which has been incorporated by reference herein, do not contain 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
Statements 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.
34
ADDITIONAL INVESTMENT INFORMATION
CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. Municipal Notes. An S&P note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria are used in making that
assessment:
1. amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note); and
2. source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 -- Strong capacity to pay principal and interest. Those
issues determined to possess a very strong capacity to pay debt service are
given a plus (+) designation.
2. SP-2 -- Satisfactory capacity to pay principal and interest,
with some vulnerability to adverse financial and economic changes over the
terms of the notes.
3. SP-3 -- Speculative capacity to pay principal and interest.
B. Tax Exempt Demand Bonds. S&P assigns "dual" ratings to all long-term debt
issues that have as part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+").
C. Corporate and Municipal Bond Ratings. An S&P corporate or municipal bond
rating is a current assessment of the creditworthiness of an obligor, including
obligors outside the U.S., with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees. Ratings of foreign obligors do not take into account currency exchange
and related uncertainties. The ratings are based on current information
furnished by the issuer or obtained by S&P from other sources it considers
reliable.
The ratings are based, in varying degrees, on the following
considerations:
1. likelihood of default capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. nature of and provisions of the obligation; and
3. protection afforded by and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the successful
completion of the project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit
i
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion.
Bond ratings are as follows:
1. AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
2. AA -- Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB -- Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
A. Municipal Notes. A Moody's rating for municipal short-term obligations will
be designated Moody's Investment Grade or ("MIG"). These ratings recognize the
difference between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and the short-term cyclical elements are critical
in short-term ratings.
A short-term rating may also be assigned on issues with a demand
feature -- variable rate demand obligation ("VRDO"). Such ratings will be
designated as VMIG. Short-term ratings on issues with demand features are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payment
relying on the external liquidity.
The note ratings are as follows:
1. MIG1/VMIG1 This designation denotes the best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
2. MIG2/VMIG2 This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
3. MIG3/VMIG3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
4. MIG4/VMIG4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
B. Corporate and Municipal Bond Ratings. 1. AAA -- Bonds rated AAA are judged to
be of the best quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt-edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
2. AA -- Bonds rated AA are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long term risks appear somewhat larger than in AAA securities.
ii
3. A -- Bonds rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
4. BAA -- Bonds rated BAA are considered to be medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through BAA in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
CON. ( -- ) -- Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (1) earnings of projects under
construction, (2) earnings of projects unseasoned in operation experience, (3)
rentals that begin when facilities are completed, or (4) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the AA, A, and BAA groups that Moody's believes
possess the strongest investment attributes are designated by the symbols AA 1,
A 1, and BAA 1.
FITCH CORPORATE AND MUNICIPAL RATINGS
A. Municipal Notes. Fitch's short-term ratings apply to debt obligations that
are payable on demand or have original maturities of generally three years or
less. These include commercial paper, certificates of deposit, medium-term
notes, and municipal and investment notes. The short-term rating places greater
emphasis on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
The note ratings are as follows:
1. F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
2. F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
3. F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned the two higher ratings.
4. F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near-term adverse changes could cause these securities to be
rated below investment grade.
B. Corporate and Municipal Bond Ratings. AAA -- Bonds considered to be
investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA.
A -- Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely
iii
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
PLUS (+) OR MINUS (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA category.
A CONDITIONAL rating is premised on the successful completion of a
project or the occurrence of a specific event.
Debt rated BB, B, CCC, CC and C by S&P is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Debt rated C1 by S&P is debt (income bonds) on which no interest is being paid.
Debt rated D by S&P is in default and payment of interest and/ or repayment of
principal is in arrears. Bonds that are rated CAA by Moody's are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds that are rated CA by Moody's
represent obligations that are speculative in a high degree. Such issues are
often in default or have other market shortcomings. Bonds that are rated C by
Moody's are the lowest rated bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Debt rated BB, B, CCC, CC, and C by Fitch is regarded as speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
represents the highest degree of speculation. Debt rated DDD, DD, and D are in
default on interest and/or principal payments.
DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND
INVESTMENT TECHNIQUES AVAILABLE TO THE FUNDS
A Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by government regulation.
Payment of interest and principal upon these obligations may also be affected by
governmental action in the country of domicile of the branch (generally referred
to as sovereign risk). In addition, evidences of ownership of such securities
may be held outside the U.S., and a Fund may be subject to the risks associated
with the holding of such property overseas. Examples of governmental actions
would be the imposition of currency controls, interest limitations, withholding
taxes, seizure of assets or the declaration of a moratorium. Various provisions
of federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment
of fluctuating amounts by a Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. A Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement,
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes acquired by a Fund permit a Fund to demand payment
of principal and accrued interest at any time (on not more than seven days'
notice). Notes acquired by a Fund may have maturities of more than one year,
provided that (1) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days
iv
notice, and (2) the rate of interest on such notes is adjusted automatically at
periodic intervals which normally will not exceed 31 days, but may extend up to
one year. The notes will be deemed to have a maturity equal to the longer of the
period remaining to the next interest rate adjustment or the demand notice
period. Because these types of notes are direct lending arrangements between the
lender and borrower, such instruments are not normally traded and there is no
secondary market for these notes, although they are redeemable and thus
repayable by the borrower at face value plus accrued interest at any time.
Accordingly, a Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. In connection with master
demand note arrangements, Keystone considers, under standards established by the
Board of Trustees, earning power, cash flow and other liquidity ratios of the
borrower and will monitor the ability of the borrower to pay principal and
interest on demand. These notes are not typically rated by credit rating
agencies. Unless rated, a Fund may invest in them only if at the time of an
investment the issuer meets the criteria established for commercial paper
discussed in the statement of additional information.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. government securities or other financial institutions believed by Keystone
to be creditworthy. Such persons must be registered as U.S. government
securities dealers with appropriate regulatory organizations. Under such
agreements, the bank, primary dealer or other financial institution agrees upon
entering into the contract to repurchase the security at a mutually agreed upon
date and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations during
such period. Under a repurchase agreement, the seller must maintain the value of
the securities subject to the agreement at not less than the repurchase price,
such value being determined on a daily basis by marking the underlying
securities to their market value. Although the securities subject to the
repurchase agreement might bear maturities exceeding a year, the Funds only
intend to enter into repurchase agreements that provide for settlement within a
year and usually within seven days. Securities subject to repurchase agreements
will be held by the Trust's custodian or in the Federal Reserve book entry
system. The Funds do not bear the risk of a decline in the value of the
underlying security unless the seller defaults under its repurchase obligation.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, a Fund could experience both delays in liquidating the underlying
securities and losses, including (1) possible declines in the value of the
underlying securities during the period while the Fund seeks to enforce its
rights thereto; (2) possible subnormal levels of income and lack of access to
income during this period; and (3) expenses of enforcing its rights. The Board
of Trustees has established procedures to evaluate the creditworthiness of each
party with whom each Fund enters into repurchase agreements by setting
guidelines and standards of review for Keystone and monitoring Keystone's
actions with regard to repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, a Fund (other than the New Jersey
Fund) would sell securities and agree to repurchase them at a mutually agreed
upon date and price. Each Fund intends to enter into reverse repurchase
agreements to avoid otherwise having to sell securities during unfavorable
market conditions in order to meet redemptions. At the time a Fund enters into a
reverse repurchase agreement, it will establish a segregated account with the
Trust's custodian containing liquid assets such as U.S. government securities or
other high grade debt securities having a value not less than the repurchase
price (including accrued interest) and will subsequently monitor the account to
ensure such value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities that a Fund is obligated to repurchase
may decline below the repurchase price. Reverse repurchase agreements magnify
the potential for gain or loss on the portfolio securities of a Fund and,
therefore, increase the possibility of fluctuation in the Fund's net asset
value. In the event the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver
may receive an extension of time to determine whether to enforce a Fund's
obligation to repurchase the securities and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
determination.
v
"WHEN ISSUED" SECURITIES
Each Fund (other than the New Jersey Fund) may also purchase and sell
securities and currencies on a when issued and delayed delivery basis. When
issued or delayed delivery transactions arise when securities or currencies are
purchased or sold by a Fund with payment and delivery taking place in the future
in order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. When a Fund engages in
when issued and delayed delivery transactions, the Fund relies on the buyer or
seller, as the case may be, to consummate the sale. Failure to do so may result
in a Fund missing the opportunity to obtain a price or yield considered to be
advantageous. When issued and delayed delivery transactions may be expected to
occur a month or more before delivery is due. However, no payment or delivery is
made by a Fund until it receives payment or delivery from the other party to the
transaction. A separate account of liquid assets equal to the value of such
purchase commitments will be maintained until payment is made. When issued and
delayed delivery agreements are subject to risks from changes in value based
upon changes in the level of interest rates, currency rates and other market
factors, both before and after delivery. A Fund does not accrue any income on
such securities or currencies prior to their delivery. To the extent each Fund
engages in when issued and delayed delivery transactions, it will do so
consistent with its investment objective and policies and not for the purpose of
investment leverage.
LOANS OF SECURITIES TO BROKER-DEALERS
Each Fund may lend securities to brokers and dealers pursuant to
agreements requiring that the loans be continuously secured by cash or
securities of the U.S. government, its agencies or instrumentalities, or any
combination of cash and such securities, as collateral equal at all times in
value to at least the market value of the securities loaned. Such securities
loans will not be made with respect to a Fund if as a result the aggregate of
all outstanding securities loans exceeds 15% of the value of the Fund's total
assets taken at their current value. A Fund continues to receive interest or
dividends on the securities loaned and simultaneously earns interest on the
investment of the cash loan collateral in U.S. Treasury notes, certificates of
deposit, other high-grade, short-term obligations or interest bearing cash
equivalents. Although voting rights attendant to securities loaned pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by a Fund if, in the opinion of the Fund, a material
event affecting the investment is to occur. There may be risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. Loans may only be made to borrowers deemed to be of good standing,
under standards approved by each Trust's Board of Trustees, when the income to
be earned from the loan justifies the attendant risks.
DERIVATIVES
Each Fund (other than the New Jersey Fund) may use derivatives in
furtherance of its investment objective. Derivatives are financial contracts
whose value depends on, or is derived from, the value of an underlying asset,
reference rate or index. These assets, rates, and indices may include bonds,
stocks, mortgages, commodities, interest rates, currency exchange rates, bond
indices and stock indices. Derivatives can be used to earn income or protect
against risk, or both. For example, one party with unwanted risk may agree to
pass that risk to another party who is willing to accept the risk, the second
party being motivated, for example, by the desire either to earn income in the
form of a fee or premium from the first party, or to reduce its own unwanted
risk by attempting to pass all or part of that risk to the first party.
Derivatives can be used by investors such as the Funds to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. Each Fund is permitted to use derivatives for
one or more of these purposes. Each of these uses entails greater risk than if
derivatives were used solely for hedging purposes. The Funds use futures
contracts and related options for hedging purposes. Derivatives are a valuable
tool which, when used properly, can provide significant benefit to a Fund's
shareholders. Keystone is not an aggressive user of derivatives with respect to
the Funds. However, a Fund may take positions in those derivatives that are
within its investment policies if, in Keystone's judgement, this represents an
effective response to current or anticipated market conditions. Keystone's use
of derivatives is subject to continuous risk assessment and control from the
standpoint of a Fund's investment objectives and policies.
vi
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options,
futures, forwards and swaps -- from which virtually any type of derivative
transaction can be created. Further information regarding options and futures,
is provided later in this section and is provided in the statement of additional
information.
Debt instruments that incorporate one or more of these building blocks
for the purpose of determining the principal amount of and/or rate of interest
payable on the debt instruments are often referred to as "structured
securities." An example of this type of structured security is indexed
commercial paper. The term is also used to describe certain securities issued in
connection with the restructuring of certain foreign obligations. See
"Structured Securities" below. The term "derivative" is also sometimes used to
describe securities involving rights to a portion of the cash flows from an
underlying pool of mortgages or other assets from which payments are passed
through to the owner of, or that collateralize, the securities.
While the judicious use of derivatives by experienced investment managers
such as Keystone can be beneficial, derivatives also involve risks different
from, and, in certain cases, greater than, the risks presented by more
traditional investments. Following is a general discussion of important risk
factors and issues concerning the use of derivatives that investors should
understand before investing in a Fund.
* MARKET RISK -- This is the general risk attendant to all investments
that the value of a particular investment will decline or otherwise change in a
way detrimental to a Fund's interest.
* MANAGEMENT RISK -- Derivative products are highly specialized
instruments that require investment techniques and risk analyses different from
those associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the derivative
itself, without the benefit of observing the performance of the derivative under
all possible market conditions. In particular, the use and complexity of
derivatives require the maintenance of adequate controls to monitor the
transactions entered into, the ability to assess the risk that a derivative adds
to a Fund's portfolio and the ability to forecast price, interest rate or
currency exchange rate movements correctly.
* CREDIT RISK -- This is the risk that a loss may be sustained by a Fund
as a result of the failure of another party to a derivative (usually referred to
as a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange traded derivatives is generally less than for privately
negotiated derivatives, since the clearing house, which is the issuer or
counterparty to each exchange-traded derivative, provides a guarantee of
performance. This guarantee is supported by a daily payment system (i.e., margin
requirements) operated by the clearing house in order to reduce overall credit
risk. For privately negotiated derivatives, there is no similar clearing agency
guarantee. Therefore, a Fund considers the creditworthiness of each counterparty
to a privately negotiated derivative in evaluating potential credit risk.
* LIQUIDITY RISK -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly large
or if the relevant market is illiquid (as is the case with many privately
negotiated derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous price.
* LEVERAGE RISK -- Since many derivatives have a leverage component,
adverse changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* OTHER RISKS -- Other risks in using derivatives include the risk of
mispricing or improper valuation and the inability of derivatives to correlate
perfectly with underlying assets, rates and indices. Many derivatives, in
particular privately negotiated derivatives, are complex and often valued
subjectively. Improper valuations can result in increased cash payment
requirements to counterparties or a loss of value to a Fund. Derivatives do not
always perfectly or even highly correlate or track the value of the assets,
rates or indices they are designed to
vii
closely track. Consequently, a Fund's use of derivatives may not always be an
effective means of, and sometimes could be counterproductive to, furthering the
Fund's investment objective.
OPTIONS TRANSACTIONS
Writing Covered Options. A Fund (other than the New Jersey Fund) may write
(i.e., sell) covered call and put options. By writing a call option, the Fund
becomes obligated during the term of the option to deliver the securities
underlying the option upon payment of the exercise price. By writing a put
option, a Fund becomes obligated during the term of the option to purchase the
securities underlying the option at the exercise price if the option is
exercised. A Fund also may write straddles (combinations of covered puts and
calls on the same underlying security).
Each Fund may only write "covered" options. This means that so long as a
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
a Fund has written options against all of its securities which are available for
writing options, the Fund may be unable to write additional options unless it
sells a portion of its portfolio holdings to obtain new securities against which
it can write options. If this were to occur, higher portfolio turnover and
correspondingly greater brokerage commissions and other transaction costs may
result. However, the Funds do not expect that this will occur.
Each Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains with its custodian in a segregated account liquid assets
having a value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be realized
on the underlying securities alone. A Fund receives a premium from writing a
call or put option, which it retains whether or not the option is exercised. By
writing a call option, a Fund might lose the potential for gain on the
underlying security while the option is open, and by writing a put option the
Fund might become obligated to purchase the underlying security for more than
its current market price upon exercise.
Purchasing Options. Each Fund (other than the New Jersey Fund) may purchase put
or call options, including purchasing put or call options for the purpose of
offsetting previously written put or call options of the same series.
If a Fund is unable to effect a closing purchase transaction with respect
to covered options it has written, the Fund will not be able to sell the
underlying security or dispose of assets held in a segregated account until the
options expire or are exercised.
An option position may be closed out only in a secondary market for an
option of the same series. Although a Fund generally will write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any particular time, and for some options no secondary market may exist. In such
event, it might not be possible to effect a closing transaction in a particular
option.
Options on some securities are relatively new, and it is impossible to
predict the amount of trading interest that will exist in such options. There
can be no assurance that viable markets will develop or continue. The failure of
such markets to develop or continue could significantly impair a Fund's ability
to use such options to achieve its investment objective.
Options Trading Markets. Options in which each Fund will trade generally are
listed on national securities exchanges. Exchanges on which such options
currently are traded include the Chicago Board Options Exchange and the New
York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any Exchange, but traded in the over-the-counter
market. Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions could fail to
meet their obligations to a Fund. In addition to the limits on its use of
options discussed herein, each Fund is subject to the investment restrictions
described in this prospectus and in the statement of additional information.
The staff of the Commission is of the view that the premiums that a Fund
pays for the purchase of unlisted options, and the value of securities used to
cover unlisted options written by a Fund, are considered to be invested
viii
in illiquid securities or assets for the purpose of calculating whether the Fund
is in compliance with its investment restriction relating to illiquid
investments.
FUTURES TRANSACTIONS
Each Fund except the New Jersey Fund may enter into currency and other
financial futures contracts and write options on such contracts. Each Fund
except the New Jersey Fund intends to enter into such contracts and related
options for hedging purposes. Each Fund will enter into futures on securities or
currencies or index-based futures contracts in order to hedge against changes in
interest or exchange rates or securities prices. A futures contract on
securities or currencies is an agreement to buy or sell securities or currencies
at a specified price during a designated month. A futures contract on a
securities index does not involve the actual delivery of securities, but merely
requires the payment of a cash settlement based on changes in the securities
index. A Fund does not make payment or deliver securities upon entering into a
futures contract. Instead, it puts down a margin deposit, which is adjusted to
reflect changes in the value of the contract and which continues until the
contract is terminated.
Each Fund except the New Jersey Fund may sell or purchase futures
contracts. When a futures contract is sold by a Fund, the value of the contract
will tend to rise when the value of the underlying securities or currencies
declines and to fall when the value of such securities or currencies increases.
Thus, each Fund sells futures contracts in order to offset a possible decline in
the value of its securities or currencies. If a futures contract is purchased by
a Fund, the value of the contract will tend to rise when the value of the
underlying securities or currencies increases and to fall when the value of such
securities or currencies declines. Each Fund intends to purchase futures
contracts in order to establish what is believed by Keystone to be a favorable
price and rate of return for securities or favorable exchange rate for
currencies the Fund intends to purchase.
Each Fund except the New Jersey Fund also intends to purchase put and
call options on futures contracts for hedging purposes. A put option purchased
by a Fund would give it the right to assume a position as the seller of a
futures contract. A call option purchased by a Fund would give it the right to
assume a position as the purchaser of a futures contract. The purchase of an
option on a futures contract requires a Fund to pay a premium. In exchange for
the premium, a Fund becomes entitled to exercise the benefits, if any, provided
by the futures contract, but is not required to take any action under the
contract. If the option cannot be exercised profitably before it expires, a
Fund's loss will be limited to the amount of the premium and any transaction
costs.
Each Fund except the New Jersey Fund may enter into closing purchase and
sale transactions in order to terminate a futures contract and may sell put and
call options for the purpose of closing out its options positions. A Fund's
ability to enter into closing transactions depends on the development and
maintenance of a liquid secondary market. There is no assurance that a liquid
secondary market will exist for any particular contract or at any particular
time. As a result, there can be no assurance that a Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If a Fund is not able to enter into an offsetting transaction,
the Fund will continue to be required to maintain the margin deposits on the
contract and to complete the contract according to its terms, in which case it
would continue to bear market risk on the transaction.
Although futures and options transactions are intended to enable a Fund
to manage market, interest rate or exchange rate risk, unanticipated changes in
interest rates, exchange rates or market prices could result in poorer
performance than if it had not entered into these transactions. Even if Keystone
correctly predicts interest or exchange rate movements, a hedge could be
unsuccessful if changes in the value of a Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between a Fund's futures and securities or currencies positions may be caused by
differences between the futures and securities or currencies markets or by
differences between the securities or currencies underlying a Fund's futures
position and the securities or currencies held by or to be purchased for a Fund.
Keystone will attempt to minimize these risks through careful selection and
monitoring of the Fund's futures and options positions.
The Funds do not intend to use futures transactions for speculation or
leverage. Each Fund except the New Jersey Fund has the ability to write options
on futures, but currently intends to write such options only to close out
options purchased by a Fund. The Funds will not change these policies without
supplementing the information in the Fund's prospectus and statement of
additional information.
ix
FOREIGN CURRENCY TRANSACTIONS
As discussed above, the California, Massachusetts, Missouri, New York and
Pennsylvania Funds may invest in securities denominated in foreign currencies,
and the Fund temporarily may hold funds in foreign currencies. Thus, the value
of Fund shares will be affected by changes in exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, a Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency a Fund will
deliver or receive when the contract is completed) is fixed when a Fund enters
into the contract. A Fund usually will enter into these contracts to stabilize
the U.S. dollar value of a security it has agreed to buy or sell. Each Fund
intends to use these contracts to hedge the U.S. dollar value of a security it
already owns, particularly if a Fund expects a decrease in the value of the
currency in which the foreign security is denominated. Although a Fund will
attempt to benefit from using forward contracts, the success of its hedging
strategy will depend on Keystone's ability to predict accurately the future
exchange rates between foreign currencies and the U.S. dollar. The value of a
Fund's investments denominated in foreign currencies will depend on the relative
strength of those currencies and the U.S. dollar, and a Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by a Fund. Each Fund
may also purchase and sell options related to foreign currencies in connection
with hedging strategies.
Structured Securities. Structured securities generally represent interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of structured securities backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
securities to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured securities is dependent
on the extent of the cash flow on the underlying instruments. Because structured
securities typically involve no credit enhancement, their credit risk generally
will be equivalent to that of the underlying instruments. Structured securities
of a given class may be either subordinated or unsubordinated to the right of
payment of another class. Subordinated structured securities typically have
higher yields and present greater risks than unsubordinated structured
securities.
x
APPENDIX A
KEYSTONE CALIFORNIA INSURED TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Dividends paid by the California Fund that are derived from interest on
debt obligations that is exempt from California personal income tax will not be
subject to California personal income tax when received by the California Fund's
shareholders assuming that the California Fund qualifies as a RIC for federal
income tax purposes. The pass through of exempt-interest dividends is allowed
only if the California Fund meets its federal and California requirements that
at least 50% of its total assets are invested in such exempt obligations at the
end of each quarter of its fiscal year. Distributions to individual shareholders
derived from interest on state or municipal obligations issued by governmental
authorities in states other than California, short term capital gains and other
taxable income will be taxed as dividends for purposes of California personal
income taxation. The Fund's long term capital gains distributed to shareholders
will be taxed as long term capital gains to individual shareholders of the
California Fund for purposes of California personal income taxation. Present
California law taxes both long term and short term capital gains at the rates
applicable to ordinary income. Generally, for corporate taxpayers subject to the
California franchise tax, all distributions will be fully taxable.
RISKS FACTORS AFFECTING CALIFORNIA
Through popular initiative and legislative activity, the ability of the
State and its local governments to raise money through property taxes and other
taxes, fees or charges and to increase spending has been the subject of
considerable debate and change in recent years. Various state Constitutional
amendments, for example, have been adopted that have the effect of limiting
increases in property taxes and other taxes, fees or charges and spending, while
legislation has sometimes added to these limitations and has at other times
sought to reduce their impact. It can be expected that similar types of State
legislation or Constitutional proposals will continue to be introduced. To date,
these developments do not appear to have severely decreased the ability of the
State and local governments to pay principal and interest on their obligations.
Because of the uncertain impact of the aforementioned efforts and legislation,
the possible inconsistencies in the terms of existing statutes, and the
impossibility of predicting the level of future appropriations and applicability
of related statutes to such questions, it is not currently possible to predict
the results of such legislation and policies on the long term ability of State
and municipal issuers to pay principal and interest on their obligations.
California's economy is large and diverse, accounting for over 12% of
national personal income. Growth was rapid in the 1980s and is expected to
continue, although more moderately. California's economy is one of the largest
in the world and the State ranks number one among the fifty states in
manufacturing, foreign trade, agriculture, construction and tourism. Through the
1980s, the rate of state population growth was more than twice that for the
nation, but it has slowed since 1990.
California suffered a severe economic recession between 1990-1993,
largely as a result of deep federal defense budget cuts, which resulted in
broad-based revenue shortfalls for the State and many local governments.
Southern California was particularly hard-hit. California's fiscal condition has
improved as its economy has been in a sustained recovery since 1994, which is
expected to continue. During the recession, the State substantially reduced
local assistance, and further reductions could adversely affect the financial
condition of cities, counties and other government agencies facing constraints
in their own revenue collections.
KEYSTONE FLORIDA TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Florida does not presently impose an income tax on individuals and thus
individual shareholders of the Florida Fund will not be subject to any Florida
state income tax on distributions received from the Florida Fund. Shares of the
Florida Fund may, however, be subject to Florida intangible personal property
tax imposed on certain property held on January 1 of each year. Corporate
shareholders, depending on the domicile of the corporation, may be subject to
Florida corporate income taxes depending on the portion of the Florida Fund's
income that is allocable to Florida under applicable Florida law.
According to a technical assistance advisement from the State of Florida,
Department of Revenue, shares of the Florida Fund owned by a Florida resident
will be exempt from the intangible personal property tax so long as its
portfolio assets consist 100% of securities that are exempt from the intangible
personal property tax, including Florida municipal bonds and/or municipal bonds
issued by the U.S. Government or the governments of Puerto Rico or Guam. The
technical assistance advisement will not be binding on the Department of Revenue
for any shareholder of the Fund; however, such advisements are considered
helpful in understanding the Department's position on any particular tax issue.
SPECIAL FACTORS AFFECTING THE FLORIDA FUND
Under current law, the State of Florida is required to maintain a
balanced budget so that current expenses are met from current revenues. Florida
does not currently impose a tax on personal income. It does impose a tax on
corporate income derived from activities within the State. In addition, Florida
imposes an ad valorem tax on certain intangible property (see above) as well as
sales and use taxes. These taxes are the principal source of funds to meet State
expenses, including repayment of, and interest on, obligations backed solely by
the full faith and credit of the State.
Florida's Constitution permits the issuance of state or municipal
obligations pledging the full faith and credit of the State, with a concurring
vote by the respective electors, to finance or refinance capital projects
authorized by the Legislature. The State Constitution also provides that the
Legislature shall appropriate monies sufficient to pay debt service on state
bonds pledging the full faith and credit of the State as they become due. All
State tax revenues, other than trust funds dedicated by the State Constitution
for other purposes, are available for such an appropriation, if required.
On the other hand, municipalities and other political subdivisions of the
State principally rely on a combination of ad valorem taxes on real property,
user fees and occupational license fees to meet their day-to-day expenses
including the repayment of principal of, and interest on, their obligations
backed by their full faith and credit. (Revenue bonds, of course, are dependent
on the revenue generated by a specific facility or enterprise.)
Florida has experienced substantial population increases as a result of
migration to Florida from other areas of the U.S. and from foreign countries.
This population growth is expected to continue, and it is anticipated that
corresponding increases in State revenues will be necessary during the next
decade to meet increased burdens on the various public and social services
provided by the State.
Florida's ability to meet increasing expenses will be dependent in part
upon the State's continued ability to foster business and economic growth.
Florida has experienced significant increases in the technology-based and other
light industries and in the service sector. This growth has diversified the
State's overall economy, which at one time was dominated by the citrus and
tourism industries. The State's economic and business growth could be
restricted, however, by the natural limitations on Florida's water supplies.
A-2
KEYSTONE MASSACHUSETTS TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Under Massachusetts law, individual shareholders of the Massachusetts
Fund who are subject to Massachusetts personal income tax will not be subject to
Massachusetts personal income tax on dividends paid by the Massachusetts Fund to
the extent such dividends are exempt from federal income tax and are derived
from interest payments on Massachusetts municipal securities. Long term capital
gains distributions are taxable as long term capital gains, except that such
distributions derived from the sale of certain Massachusetts obligations are
exempt from Massachusetts personal income tax. These obligations, which are few
in number, are those issued pursuant to legislation that specifically exempts
gain on their sale from Massachusetts income taxation. Dividends and other
distributions are not exempt from Massachusetts corporate excise tax.
SPECIAL FACTORS AFFECTING THE MASSACHUSETTS FUND
Because it invests primarily in Massachusetts municipal securities, the
Massachusetts Fund may be affected by any political, economic, regulatory, legal
or other developments that constrain the taxing, spending, and revenue
collection authority of issuers of Massachusetts municipal securities or
otherwise affect the ability of such issuers to pay interest or repay principal
or any premium. Several statutes limit the taxing authority of certain
Massachusetts governmental entities and may impair the ability of some issuers
of Massachusetts municipal securities to maintain debt service on their
obligations. Any significant imbalance in revenues and expenditures is likely to
affect the bond ratings and credit standing of the public authorities and
municipalities within Massachusetts as well as of The Commonwealth itself.
The Commonwealth of Massachusetts and certain of its cities and towns and
public bodies have experienced in the past, and may experience in the future,
financial difficulties that may adversely affect their credit standing. The
prolonged effects of such financial difficulties could adversely affect the
market value of the municipal securities held by the Massachusetts Fund. The
information summarized below describes some of the more significant factors that
could affect the Massachusetts Fund or the ability of the obligors to pay debt
service on certain of the securities. The sources of such information are the
official statements of issuers located in The Commonwealth of Massachusetts as
well as other publicly available documents, and statements of public officials.
The Massachusetts Fund is presently not aware of facts which would render such
information inaccurate.
The Massachusetts economy shifted from labor intensive manufacturing to
services, especially in the health services areas. Although The Commonwealth
experienced an economic slowdown during the recession of 1990 to 1991,
indicators such as retail sales, housing permits, construction and employment
levels suggest a strong and continued economic recovery. While total employment
declined 10.7% between 1988 and 1992, especially in construction, manufacturing
and trade, employment rose by 1.6% and by 2.2% in 1993 and 1994 respectively,
when employment levels increased in all sectors except manufacturing. Total
employment increased by 2.4% in 1995, and by 1.3% from November 1995 to November
1996. Although job losses continued in manufacturing and finance during 1995,
strong gains were registered in services and construction. The November 1996
unemployment rate was 3.9% compared to 5.4% for the nation. In addition, per
capita personal income averaged 118% of the national average in 1995.
The Commonwealth's budgeted expenditures for fiscal 1992 were
approximately $13.416 billion, while budgeted revenues and other sources for
that year were approximately $13.728 billion, including tax revenues of
approximately $9.484 billion. Budgeted expenditures in fiscal 1992 were
approximately $300 million higher than July 1991 estimates of budgeted
expenditures. The budgeted operating funds ended fiscal 1992 with a combined
balance of $549.4 million.
Budgeted revenues and other sources in fiscal 1993 were approximately
$14.710 billion, including tax revenues of approximately $9.930 billion.
Budgeted expenditures and other uses in fiscal 1993 were approximately $14.696
billion. Furthermore, total revenues and other sources for fiscal 1993 increased
approximately 6.9% from fiscal 1992, while tax revenues increased by 4.7% for
the same period. Budgeted expenditures and other uses in
A-3
fiscal 1993 were approximately 9.6% higher than fiscal 1992 expenditures and
other uses. Fiscal 1993 budgeted expenditures were $23 million lower than
estimated in July 1992. Fiscal 1993 ended with positive fund balances of $562.5
million, including a combined balance of $452.1 million in the stabilization and
undesignated general funds.
In June 1993, new comprehensive education reform legislation was enacted.
This legislation required annual increases in expenditures for education
purposes above fiscal 1993 base spending of $1.289 billion, estimated at
approximately $175 million in fiscal 1994, $396 million in fiscal 1995, $629
million in fiscal 1996, and $881 million in fiscal 1997, with additional annual
increases anticipated in later years. The fiscal 1994, 1995, 1996 and 1997
budgets have fully funded the requirements imposed by this legislation.
The fiscal 1994 budget provided for expenditures and other uses of
approximately $15.523 billion, an increase of 5.6% over fiscal 1993 levels.
Budgeted revenues and other sources for fiscal 1994 were approximately $15.55
billion. This amount included tax revenues of approximately $10.607 billion,
which is 6.8% higher than fiscal 1993 tax revenues. 1994 tax revenues were
approximately $87 million below the Department of Revenue's estimate of $10.694
billion. Total revenues and other sources were approximately 5.7% higher than
fiscal 1993 levels. Fiscal 1994 ended with a combined balance of approximately
$589.3 million in the budgeted operating funds.
Fiscal 1995 tax revenue collections were approximately $11.163 billion,
approximately $12 million above the Department of Revenue's revised fiscal year
1995 tax revenue estimate of $11.151 billion and approximately $556 million, or
5.2%, above fiscal 1994 tax revenues of $10.607 billion. Budgeted revenues and
other sources, including non-tax revenues, collected in fiscal 1995 were
approximately $16.387 billion, approximately $837 million or 5.4%, above the
fiscal 1994 budgeted revenues of $15.55 billion. Budgeted expenditures and other
uses of funds in fiscal 1995 were approximately $16.251 billion, approximately
$728 million or 4.7%, above fiscal 1994 budgeted expenditures and uses of
$15.523 billion. The Commonwealth ended fiscal 1995 with a combined fund balance
of $726 million. As calculated by the Comptroller, the amount of surplus funds
(as so defined) for fiscal 1995 was approximately $94.9 million, of which $55.9
million was available to be carried forward as a beginning balance for fiscal
1996. Of the balance, approximately $27.9 million was deposited in the
Stabilization Fund, and approximately $11.1 million was deposited in the Cost
Relief Fund.
Budgeted revenues and other sources for fiscal 1996 totaled approximately
$17.328 billion, including tax revenues of approximately $12.049 billion. From
fiscal 1995 to fiscal 1996, budgeted revenues and other sources increased by
approximately 5.7%, while tax revenues increased by approximately 7.9% for the
same period. The Department of Revenue believes that the strong tax revenue
growth in fiscal 1996 was due partly to one-time factors which may not recur in
fiscal 1997 and which have been incorporated into the Department's forecast for
fiscal 1997 tax revenues. Such factors include the rise in the stock and bond
markets in calendar 1995, which may have created unusually large capital gains
and corresponding increases in personal income tax payments in fiscal 1996.
Budgeted expenditures and other uses in fiscal 1996 were approximately $16.881
billion, an increase of approximately $630.6 million, or 3.9%, over fiscal 1995
budgeted expenditures and other uses of $16.251 billion. The Commonwealth ended
the 1996 fiscal year with a combined balance of approximately $1.172 billion in
the budgeted operating funds.
Approximately $177.4 million was transferred to the Stabilization Fund at
the end of fiscal 1996, bringing that Fund balance to approximately $625.0
million, which exceeded the amount of $543.3 million that can remain in the
Stabilization Fund by law. Under state law, year-end surplus amounts in excess
of the amount that can remain in the Stabilization Fund are transferred to the
Tax Reduction Fund, to be applied, subject to legislative appropriation, to the
reduction of personal income taxes. Of the $177.4 million transferred to the
Stabilization Fund in fiscal 1996, $81.7 million was subsequently transferred to
the Tax Reduction Fund and the 1996 balance in the Tax Reduction Fund, as
calculated by the Comptroller, was approximately $231.7 million. Pursuant to
fiscal 1996 supplemental appropriations legislation signed by the Governor on
July 30, 1996, approximately $150 million was appropriated from the Tax
Reduction Fund for personal income tax reductions in fiscal 1997, to be
implemented by a temporary increase in the amount of the personal exemption
allowable for the 1996 taxable year. On September 15, 1996 the Governor filed
legislation proposing to use the full amount in the Tax Reduction Fund to
increase the personal income tax exemption for the 1996 tax year, but this
legislation was not enacted in the 1996 legislative session.
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The final fiscal 1996 appropriation bills approved by the Governor on
July 30, 1996 and August 10, 1996 contained approximately $246.9 million in
fiscal 1996 appropriations, $38.2 million in fiscal 1997 appropriations and
$221.7 million in fiscal 1996 appropriations continued for use in fiscal 1997.
Amounts carried forward from fiscal 1995 and deposited in the Cost Relief Fund
were appropriated in these bills for further subsidies to local government
units.
The fiscal 1997 budget, as signed into law by the Governor on June 30,
1996, provides for estimated expenditures and other uses of approximately
$17.704 billion, an $823 million, or 4.9%, increase over fiscal 1996 spending.
The fiscal 1997 budget includes a spending increase of approximately $254
million to continue funding the comprehensive educational reform legislation
enacted in 1993. Budgeted revenues and other sources to be collected in fiscal
1997 are estimated to be approximately $17.394 billion. This amount includes a
revised estimate of fiscal 1997 tax revenues of $12.307 billion, which is
approximately $257 million, or 2.1%, higher than fiscal 1996 tax revenues, and
is $184 million higher than the October 1996 estimate of $12.123 billion. The
combined ending fund balances for fiscal year 1997 are estimated at
approximately $863 million, which is $309 million below the fiscal 1996 year-end
fund balance. Approximately $255 million of the $309 million is attributable to
non-recurring factors, the largest of which is the $150 million personal income
tax reduction.
On January 23, 1997, the Governor filed legislation to appropriate the
remaining balance of approximately $85 million in the Tax Reduction Fund for an
additional temporary personal exemption increase during the 1997 taxable year.
As a result, the $85 million in tax cuts initially proposed by the Governor for
fiscal 1997 are now estimated to occur in fiscal 1998. Based on preliminary
figures, through February 1997, fiscal 1997 tax revenue collections have totaled
approximately $7.903 billion, approximately $602 million, or 8.3%, greater than
tax revenue collections for the same period in fiscal 1996. Tax revenue
collections to date are approximately $227 million above the mid-point of the
benchmark range set by the Department of Revenue based on the current fiscal
1997 tax collection estimate of $12.307 billion, and are approximately $155
million above the top of such benchmark range.
The Governor's fiscal 1998 budget recommendation, which was submitted to
the Legislature on January 22, 1997, calls for budgeted expenditures of
approximately $18.15 billion or total spending of $18.224 billion, which
represents a $520 million, or 2.9%, increase over estimated fiscal 1997
expenditures and other uses of $17.704 billion. Budgeted revenues for fiscal
1998 are estimated at $17.998 billion or total revenues of $18.072 billion,
which is a $219 million, or 1.2%, increase over the $17.853 total revenues and
other sources forecast for fiscal 1997. The budget recommendation is based on a
tax revenue estimate of $12.667 billion, a 2.9% increase over fiscal 1997
projected tax revenues of $12.307 billion. The fiscal 1998 tax revenue estimate
incorporates $82 million in personal and business tax cuts proposed by the
Governor and includes an $85 million income tax reduction for the taxable year
1997, the second consecutive tax cut of this kind. The Governor's proposal
projects a fiscal 1998 ending balance of approximately $711 million, including a
Stabilization Fund balance of $585.8 billion, assuming passage of legislation
filed on January 23, 1997 which would increase the statutory cap on the
Stabilization Fund from 5% of tax revenues (less debt service) to 5% of total
budgeted revenues. The budget proposal also recommends an increase of $259
million in local education aid to fund the 1993 education reform legislation.
The Governor has begun to phase in a plan to provide permanent passenger
vehicle registration and lifetime operating licenses. These proposals are not
estimated to affect revenues until fiscal 1998, when the elimination of vehicle
registration fees is estimated to reduce state revenues by approximately $13.75
million, and by approximately $55 million in fiscal 1999. Lifetime operating
licenses are estimated to reduce revenues by approximately $5 million in fiscal
2001 and by $31 million in fiscal 2002.
On November 28, 1995, the Governor approved a modified version of the
legislation he had filed in September to establish a "single sales factor"
apportionment formula for the business corporations tax. As finally enacted, the
legislation applies the new formula, effective January 1, 1996, to certain
federal defense contractors and phases the new formula in over five years to
manufacturing firms generally. The Department of Revenue estimates that the new
law reduced revenues by $44 million in fiscal 1996 and will reduce revenues by
$90 million in fiscal 1997. If the new formula were fully effective for all
covered businesses, the Department estimates that the annual revenue reduction
would be $100 million to $150 million. On August 8, 1996, the Governor approved
legislation changing the apportionment formula for the business corporations tax
payable by certain mutual fund service corporations. The legislation changes the
computation of the sales factor effective January 1, 1997 and
A-5
adopts the "single sales factor" formula effective July 1, 1997 with respect to
these companies. It also requires the affected corporations to increase their
numbers of employees by 5% per year for five years, subject to certain
exceptions. The Department of Revenue estimates that the changes will reduce
revenues by $10 million in fiscal 1997 and by approximately $39 million to $53
million per year beginning in fiscal 1998.
On January 7, 1997 the Governor filed legislation to abolish county
government on July 1, 1998. Most county functions and properties, including
jails, houses of correction and courts, would be transferred to the
Commonwealth, and all liabilities, debts, leases and contracts of any county
would become obligations of the Commonwealth. Under legislation enacted in 1996,
Franklin County government will terminate on July 1, 1997 in favor of a regional
council of governments. On December 13, 1996 Middlesex County defaulted on a
required payment of revenue anticipation notes. The legislature is currently
considering legislation that would abolish Middlesex County government on final
approval of the legislation and transfer its functions to the Commonwealth. The
county's debts and liabilities would be assumed by the Commonwealth.
The Commonwealth is evaluating the impact upon the Commonwealth of
federal welfare reform legislation enacted on August 22, 1996. Current estimates
indicate no fiscal 1997 spending impact associated with the federal legislation
and an increase of approximately $86 million in federal revenues for the
Commonwealth in fiscal 1997.
In November 1980, voters in The Commonwealth approved a state-wide
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain the levels of property taxation and to limit the charges and fees
imposed on cities and towns by certain governmental entities. Many communities
have responded to the limitations of Proposition 2 1/2 through statutorily
permitted overrides and exclusions. Override activity peaked in fiscal 1991 and
decreased thereafter. In fiscal 1992, 65 communities had successful votes,
adding $31.0 million to their levy limits. During fiscal year 1993, 59
communities had successful votes totalling $16.3 million and in fiscal 1994, 48
communities had successful override referenda which added $8.4 million to their
levy limits. In fiscal 1995, 32 communities added $8.8 million, and in fiscal
1996, 30 communities added $5.8 million to their levy limits. Although
Proposition 2 1/2 will continue to constrain local property tax revenues,
significant capacity exists for overrides in nearly all cities and towns.
A-6
KEYSTONE MISSOURI FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Dividends paid by the Missouri Fund that qualify as tax exempt dividends
under Section 852(b)(5) of the Code will be exempt from Missouri income tax to
the extent that such dividends are derived from interest on obligations issued
by the State of Missouri or any of its political subdivisions, or interest on
obligations of the U.S. and its territories and possessions to the extent exempt
from Missouri income taxes under the laws of the U.S.
Dividends paid by the Missouri Fund, if any, that do not qualify as tax
exempt dividends under Section 852(b)(5) of the Code, will be exempt from
Missouri income tax only to the extent that such dividends are derived from
interest on certain U.S. obligations that the State of Missouri is expressly
prohibited from taxing under the laws of the U.S. The portion of such dividends
that is not subject to taxation by the State of Missouri may be reduced by
interest, or other expenses, in excess of $500 paid or incurred by a shareholder
in any taxable year to purchase or carry shares of the Missouri Fund or other
investments producing income that is includable in federal gross income, but
exempt from Missouri income tax.
Dividends and distributions derived from the Missouri Fund's other
investment income and its capital gains, to the extent includable in federal
adjusted gross income, will be subject to Missouri income tax. Dividends and
distributions paid by the Missouri Fund, including dividends that are exempt
from Missouri income tax as described above, may be subject to state taxes in
states other than Missouri or to local taxes. Shares in the Missouri Fund are
not subject to Missouri personal property taxes.
SPECIAL FACTORS AFFECTING MISSOURI
Missouri's economic base is diversified and includes agriculture,
commerce, manufacturing, services, trade and mining. The State's proximity to
the geographical and population centers of the nation makes the State an
attractive location for business and industry. The State has experienced a
significant increase in tourism.
In recent years, Missouri's wealth indicators have grown at a rate below
the 1980s. The State's per capita personal income has been growing at a somewhat
slower rate than the nation as a whole. Missouri's unemployment levels have
equaled or exceeded the national average in recent years. Defense contracts are
important to the State's economy and adverse changes in military appropriations
could contribute to the continuation of this pattern.
The State operates from a General Revenue Fund. The General Fund includes
funds received from tax revenues and federal grants. The Missouri Constitution
imposes a limit on the amount of taxes that may be imposed by the General
Assembly during any fiscal year. No assurances can be given that the amount of
revenue derived from taxes will remain at its current level or that the amount
of federal grants previously provided to the State will continue.
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EVERGREEN NEW JERSEY TAX FREE INCOME FUND
STATE TAX TREATMENT
For individual shareholders in any year in which the Fund satisfies the
requirements for treatment as a "qualified investment fund" under New Jersey
law, distributions from the Fund will be exempt from the New Jersey Gross Income
Tax to the extent such distributions are attributable to interest or gains from
(i) obligations issued by or on behalf of the State of New Jersey or any county,
municipality, school or other district, agency, authority, commission,
instrumentality, public corporation, body corporate and politic or political
subdivision of New Jersey or (ii) obligations that are otherwise statutorily
exempt from state or local taxation or under the laws of the United States. Any
gains realized on the sale or redemption of shares held in a qualified
investment fund are also exempt from the New Jersey Gross Income Tax. Corporate
shareholders will be subject to a corporate franchise tax on distributions from
and on gains from sales of the shares of the Fund.
ECONOMIC FACTORS
The New Jersey Fund consists of a portfolio of New Jersey bonds. The
Trust is therefore susceptible to political, economic or regulatory factors
affecting issuers of the New Jersey bonds. The following information provides
only a brief summary of some of the complex factors affecting the financial
situation in New Jersey (the "State") and is derived from sources that are
generally available to investors and is believed to be accurate. It is based in
part on information obtained from various State and local agencies in New
Jersey. No independent verification has been made of any of the following
information.
New Jersey is the ninth largest state in population and the fifth
smallest in land area. With an average of 1,062 people per square mile, it is
the most densely populated of all the states. The State's economic base is
diversified, consisting of a variety of manufacturing, construction and service
industries, supplemented by rural areas with selective commercial agriculture.
Historically, New Jersey's average per capita income has been well above the
national average, and in 1994 the State ranked second among the states in per
capita personal income ($27,742).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and 1989
employment in New Jersey's manufacturing sector failed to benefit from the
export boom experienced by many Midwest states and the State's service sectors,
which had fueled the State's prosperity since 1982, lost momentum. In the
meantime, the prolonged fast growth in the State in the mid 1980s resulted in a
tight labor market situation, which has led to relatively high wages and housing
prices. This means that, while the incomes of New Jersey residents are
relatively high, the State's business sector has become more vulnerable to
competitive pressures.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration of
New Jersey's job losses in construction and manufacturing. In addition, the
national recession caused an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State rose
from a low of 3.6% during the first quarter of 1989 to an estimated 5.5% in
March 1997, which is higher than the national average of 5.2% in March 1997.
Economic recovery is likely to be slow and uneven in New Jersey, with
unemployment receding at a correspondingly slow pace, due to the fact that some
sectors may lag due to continued excess capacity. In addition, employers even in
rebounding sectors can be expected to remain cautious about hiring until they
become convinced that improved business will be sustained. Also, certain firms
will continue to merge or downsize to increase profitability.
DEBT SERVICE. The primary method for State financing of capital projects
is through the sale of the general obligation bonds of the State. These bonds
are backed by the full faith and credit of the State tax revenues and certain
other fees are pledged to meet the principal and interest payments and if
provided, redemption premium
A-8
<PAGE>
payments, if any, required to repay the bonds. As of June 30, 1995, there was a
total authorized bond indebtedness of approximately $9.48 billion, of which
$3.65 billion was issued and outstanding, $4.0 billion was retired (including
bonds for which provision for payment has been made through the sale and
issuance of refunding bonds) and $1.83 billion was unissued. The appropriation
for the debt service obligation on such outstanding indebtedness is $466.3
million for Fiscal Year 1996.
NEW JERSEY'S BUDGET AND APPROPRIATION SYSTEM. The State operates on a
fiscal year beginning July 1 and ending June 30. At the end of Fiscal Year 1989,
there was a surplus in the State's general fund (the fund into which all State
revenues not otherwise restricted by statute are deposited and from which
appropriations are made) of $411.2 million. At the end of Fiscal Year 1990,
there was a surplus in the general fund of $1 million. At the end of Fiscal Year
1991, there was a surplus in the general fund of $1.4 million. New Jersey closed
is Fiscal Year 1992 with a surplus of $760.8 million, Fiscal Year 1993 with a
surplus of $937.4 million, Fiscal Year 1994 with a surplus of $926.0 million,
and Fiscal Year 1995 with a surplus of $569.2 million. It is estimated that New
Jersey closed its Fiscal Year 1996 with a surplus of $607.0 million and Fiscal
Year 1997 is estimated to close with a surplus of $275.7 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting of
$1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that receipts
and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the
increase in the State's sales and use tax rate from 6% to 7% and the elimination
of exemptions for certain products and services not previously subject to the
tax, such as telephone calls, paper products (which has since been reinstated),
soaps and detergents, janitorial services, alcoholic beverages and cigarettes.
At the time of enactment, it was projected that these taxes would raise
approximately $1.5 billion in additional revenue. Projections and estimates of
receipts from sales and use taxes, however, have been subject to variance in
recent fiscal years.
The second part of the tax hike took effect on January 1, 1991, in the
form of an increased state income tax on individuals. At the time of enactment
it was projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead rebate
program and state assumption of welfare and social services costs. Projections
and estimates of receipts from income taxes, however, have also been subject to
variance in recent fiscal years. Under the legislation, income tax rates
increased from their previously range of 2% to 3.5% to a new range of 2% to 7%,
with the higher rates applying to married couples with incomes exceeding $70,000
who file joint returns, and to individuals filing single returns with income of
more than $35,000.
The Florio administration had contended that the income tax package will
help reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State will assume
approximately $289 million in social services costs that previously were paid by
counties and municipalities and funded by property taxes. In addition, under the
new formula for funding school aid, an extra $1.1 billion is proposed to be sent
by the State to school districts beginning in 1991, thus reducing the need for
property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from
7% to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995, further reductions
ranging from 1% up to 10% in income tax rates took effect. Governor Whitman
recently signed into law further reductions up to 15% for some taxpayers
effective January 1, 1996, completing her campaign promise to reduce income
taxes by up to 30% within three years for most taxpayers.
On June 30, 1995, Governor Whitman signed the New Jersey Legislature's
$16.0 billion budget for Fiscal Year 1996. The balanced budget, which includes
$541 million in surplus, is $300 million more than the 1995 budget. Whether the
State can achieve a balanced budget depends on its ability to enact and
implement expenditure reductions and to collect estimated tax revenues.
A-9
FISCAL YEAR 1996 AND 1997 REVENUE ESTIMATES
SALES AND USE TAX. The revised estimate as shown in the Governor's Fiscal
year 1997 Budget Message forecasts Sales and Use tax collections for Fiscal Year
1996 as $4,310.0 million, a 4.3% increase from the Fiscal Year 1995 revenue. The
Fiscal Year 1997 estimate of $4,403.0 million, is a 2.2% increase from the
Fiscal Year 1996 estimate.
GROSS INCOME TAX. The revised estimate as shown in the Governor's Fiscal
year 1997 Budget Message forecasts Gross Income Tax collections for Fiscal Year
1996 of $4,547.0 million, a 0.2% increase from Fiscal Year 1995 revenue.
Included in the Fiscal Year 1995 revenue is a 5% reduction of personal income
tax rates effective January 1, 1994 and a further 10% reduction of personal
income tax rates effective January 1, 1995 (on joint incomes under $80
thousand). The estimate for Fiscal Year 1997 as shown in the Governor's Fiscal
Year 1997 Budget Message of $4,610.0 million, is a 1.4% increase from the Fiscal
Year 1996 estimate. Included in the Fiscal Year 1996 forecast is the 10%
reduction of personal income tax rates effective January 1, 1995 and a further
15% reduction of personal income tax rates effective January 1, 1996 (on joint
incomes under $80 thousand).
CORPORATE BUSINESS TAX. The revised estimate as shown in the Governor's
Fiscal Year 1997 Budget Message forecasts Corporation Business Tax collection
for Fiscal Year 1996 as $1,198.0 million, a 10.4% increase from Fiscal Year 1995
revenue. Included in the Corporation Business Tax forecast in a reduction in the
Corporation Business Tax rate from 9.375% to 9.0% of net New Jersey income. The
Fiscal Year 1997 forecast as shown in the Governor's Fiscal Year 1997 Budget
Message of $1,210.0 million, is a 1.0% increase from the Fiscal Year 1996
estimate.
TAX AMNESTY PROGRAM. The Fiscal Year 1996 revised estimates include an
estimate for a Tax Amnesty program, which has been enacted. It is estimated that
a 90-day tax amnesty will yield $70.0 million.
GENERAL CONSIDERATIONS. Estimated receipts from State taxes and revenues,
including the three principal taxes set forth above, are forecasts based on the
best information available at the time of such forecasts. Changes in economic
activity in the State and the nation, consumption of durable goods, corporate
financial performance and other factors that are difficult to predict may result
in actual collections being more or less than forecasted.
Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may, pursuant to statutory authority, prevent any
expenditure under any appropriation. There are additional means by which the
Governor may ensure that the State is operated efficiently and does not incur a
deficit. No supplemental appropriation may be enacted after adoption of an
appropriations act except where there are sufficient revenues on hand or
anticipated, as certified by the Governor, to meet such appropriation. In the
past when actual revenues have been less than the amount anticipated in the
budget, the Governor has exercised her plenary powers leading to, among other
actions, implementation of a hiring freeze for all State departments and the
discontinuation of programs for which appropriations were budgeted but not yet
spent.
LITIGATION. The State is a party in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and federal Laws. Included in
the State's outstanding litigation are cases challenging the following: the
funding of teachers' pension funds, the adequacy of Medicaid reimbursement for
hospital services, the hospital assessment authorized by the Health Care Reform
Act of 1992, various provisions, and the constitutionality, of the Fair
Automobile Insurance Reform Act of 1990, the State's role in a consent order
concerning the construction of a resource facility in Passaic County, actions
taken by the New Jersey Bureau of Securities against an individual, the State's
actions regarding alleged chromium contamination of State-owned property in
Hudson County, the issuance of emergency redirection orders and a draft permit
by the Department of Environmental Protection and Energy, refusal of the State
to share with Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric facilities,
and the constitutionality of annual A-901 hazardous and solid waste licensure
renewal fees collected by the Department of Environmental Protection and Energy.
Adverse judgments in these and other matters could have the potential for either
a significant loss of revenue or a significant unanticipated expenditure by the
State.
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The New Jersey State Supreme Court on May 14, 1997 struck down Governor
Whitman's school funding plan as unconstitutional. The Court ruled that school
spending in the poorest economic districts should equal the average spent per
pupil in the wealthiest economic districts, and ordered that such spending be
equalized by September, 1997. At this time, the effects of the Court's ruling
are unknown.
At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking recovery
of monetary damages. The State is unable to estimate its exposure for these
claims.
DEBT RATINGS. For many years prior to 1991, both Moody's Investors
Service, Inc. and Standard and Poor's Corporation had rated New Jersey general
obligation bonds "Aaa" and "AAA," respectively. On July 3, 1991, however, S&P
Ratings Group downgraded New Jersey general obligation bonds to "AA+." On June
4, 1992, S&P placed New Jersey general obligation bonds on CreditWatch with
negative implications, citing as its principal reason for its caution the
unexpected denial by the Federal Government of New Jersey's request for $450
million in retroactive Medicaid payments for psychiatric hospitals. These funds
were critical to closing a $1 billion gap in the State's $15 billion budget for
fiscal year 1992 which ended on June 30, 1992. Under New Jersey state law, the
gap in the current budget must be closed before the new budget year began on
July 1, 1992. S&P suggested the State could close fiscal 1992's budget gap and
help fill fiscal 1993's hole by a reversion of $700 million of pension
contributions to its general fund under a proposal to change the way the State
calculates its pension liability. On July 6, 1992, S&P reaffirmed its "AA+"
rating for New Jersey general obligation bonds and removed the debt from its
CreditWatch list, although it stated that New Jersey's long-term financial
outlook was negative. S&P was concerned that the State was entering the 1993
fiscal year that began July 1, 1992, with a slim $26 million surplus and
remained concerned about whether the sagging State economy would recover quickly
enough to meet lawmakers' revenue projections. It also remained concerned about
the recent federal ruling leaving in doubt how much the State was due in
retroactive Medicaid reimbursements and a ruling by a federal judge, now on
appeal, of the State's method for paying for uninsured hospital patients.
However, on July 27, 1994, S&P announced that it was changing the State's
outlook from negative to stable due to a brightening of the State's prospects as
a result of Governor Whitman's effort to trim spending and cut taxes, coupled
with an improving economy. S&P reaffirmed its "AA+" rating at the same time.
On August 24, 1992, Moody's downgraded New Jersey general obligation
bonds to "Aa1," stating that the reduction reflected a developing pattern of
reliance on nonrecurring measures to achieve budgetary balance, four years of
financial operations marked by revenue shortfalls and operating deficits, and
the likelihood that serious financial pressures would persist. On August 5,
1994, Moody's reaffirmed its "Aa1" rating, citing on the positive side New
Jersey's broad-based economy, high income levels, history of maintaining a
positive financial position and moderate (albeit rising) debt ratios, and, on
the negative side, a continued reliance on one-time revenues and a dependence on
pension-related savings to achieve budgetary balance.
A-11
KEYSTONE NEW YORK TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Individual shareholders of the New York Fund who are subject to New York
State and New York City personal income tax will not be subject to New York
State or City personal income tax on dividends paid by the New York Fund to the
extent that they are derived from interest on obligations of the State of New
York and its political subdivisions that is exempt from federal income tax. In
addition, dividends derived from interest on debt obligations issued by certain
other governmental entities (for example, U.S. territories) will be similarly
exempt.
For New York State and City personal income tax purposes, long term
capital gain distributions are taxable as long term capital gains regardless of
the length of time shareholders have owned their shares. Short term capital
gains and any other taxable distribution of income are taxable as ordinary
income.
To the extent that investors are obligated to pay state or local taxes
outside of the State of New York, dividends earned by an investment in the New
York Fund may represent taxable income. Distributions from investment income and
capital gains, including exempt-interest dividends, may be subject to New York
State franchise taxes and to the New York City General Corporation Tax, if
received by a corporation subject to those taxes, to state taxes in states other
than New York and to local taxes in cities other than New York City.
SPECIAL FACTORS AFFECTING THE NEW YORK INSURED FUND
As described in the prospectus, the New York Fund will generally invest
in New York municipal obligations. The New York Insured Fund is therefore
susceptible to political, economic, or regulatory factors affecting New York
State and governmental bodies within New York State. Some of the more
significant events and conditions relating to the financial situation in New
York are summarized below. The following information provides only a brief
summary of the complex factors affecting the financial situation in New York, is
derived from sources that are generally available to investors and is believed
to be accurate. It is based on information drawn from official statements and
prospectuses issued by, and other information reported by, the State of New York
by its various public bodies, and by other entities located within the State,
including the City of New York, in connection with the issuance of their
respective securities.
New York State historically has been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. Statewide, urban
centers have experienced significate changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
New York City has also had to face great competition as other major cities have
developed financial and business capabilities which make them less dependent on
the specialized services traditionally available almost exclusively in New York
City.
During the 1982-83 recession, overall economic activity in the State
declined less than that of the nation as a whole. However, in the calendar years
1984 through 1991, the State's rate of economic expansion was somewhat slower
than that of the nation. In the 1990-91 recession, the economy of the State, and
that of the rest of the Northeast, was more heavily damaged than that of the
nation as a whole and has been slower to recover. The total employment growth
rate in the State has been below the national average since 1984. The
unemployment rate in the State dipped below the national rate in the second half
of 1981 and remained lower until 1991; since then, it has been higher. According
to data published by the U.S. Bureau of Economic Analysis, during the past ten
years, total personal income in the State rose slightly faster than the national
average only from 1986 through 1988.
The State has the second highest combined state and local tax burden in
the United States. The burden of State and local taxation, in combination with
the many other causes of regional economic dislocation, may have contributed to
the decisions of some businesses and individuals to relocate outside, or not
locate within, the State.
A-12
In recent years, State actions affecting the level of receipts and
disbursements, as well as the relative strength of the State and regional
economy, actions of the Federal government and other factors, have created
structural budget gaps for the State. These gaps resulted from a significant
disparity between recurring revenues and the costs of maintaining or increasing
the level of support for State programs. The 1995-96 enacted budget combines
significant tax and program reductions, which will, in the current and future
years, lower both the recurring receipts base (before the effect of any economic
stimulus from such tax reductions) and the historical annual growth in State
program spending. Notwithstanding these changes, the State can expect to
continue to confront structural deficits in future years.
The State's current fiscal year commenced on April 1, 1996, and ends on
March 31, 1997, and is referred to herein as the State's 1996-97 Fiscal Year. As
of May 22, 1996, the State's budget for the 1996-97 Fiscal Year was not yet
enacted by the State Legislature.
The 1996-97 Financial Plan projects balance on a cash basis in the
General Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $31.32 billion, a
decrease of $1.4 billion from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to their funds are
projected to be $31.22 billion, a decrease of $1.5 billion from spending totals
projected for the current fiscal year. After adjustments and transfers for
comparability between the 1995-96 and 1996-97 State Financial Plans, the
Executive Budget proposes an absolute year-to-year decline in General Fund
spending of 5.8 percent. Spending from all funding sources (including federal
aid) is proposed to increase by 0.4 percent from the prior fiscal year after
adjustments and transfers for comparability.
On May 15, 1996, it was announced that the State owed local governments
approximately $430 million for services provided to handicapped children in 1994
and earlier. Funds to cover such payments were not included in the 1996-97
Financial Plan.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. For example, various proposals relating
to Federal tax and spending policies that are currently being publicly discussed
and debated could, if enacted, have a significant impact on the State's
financial condition in the current and future fiscal years. Because of the
uncertainty and unpredictability of the changes, their impact cannot, as a
practical matter, be included in the assumptions underlying the State's
projections of this time.
The fiscal health of the State is closely related to the fiscal health of
its localities, particularly New York City, which has required and continues to
require significant financial assistance from the State.
New York City depends on State Aid both to enable it to balance its
budget and to meet its cash requirements. New York City has achieved balanced
operating results for each of its fiscal years since 1981 as reported in
accordance with the then-applicable GAP Standards.
During the 1990 and 1991 fiscal years, New York City experienced
significant shortfalls in almost all of its major tax sources and increases in
social service costs, and was required to take actions to close substantial
budget gaps in order to maintain balanced budgets n accordance with its
financial plan.
New York State's authorities are generally responsible for financing,
constructing and operating revenue-producing public benefit facilities. The
fiscal stability of the State is related, in part, to the fiscal stability of
its public authorities. Public authorities are not subject to the constitutional
restrictions on the incurrence of debt which applies to the State itself and may
issue bonds and notes within the amounts permitted by, and as otherwise
restricted by, their legislative authorization. The State's access to the public
credit markets could be impaired, and the market price of its outstanding debt
may be materially adversely affected, if any of its public authorities were to
default on their respective obligations, particularly those using the financing
techniques referred to as State-supported or State-related.
A-13
As of September 30, 1994, the date of the latest data available, there
were 18 public authorities that had outstanding debt of $100 million or more,
and the aggregate outstanding debt including refunding bonds, of the these 18
public authorities was $70.3 billion.
As of March 31, 1995, aggregate public authority debt outstanding as
State-supported debt was $27.9 billion and as State-related debt was $36.1
billion.
Public authority operating expenses and debt service costs are generally
paid by revenues generated by the projects financed or operated, such as tolls
charged for the use of highways, bridges or tunnels, rentals charged for housing
units, and charges for occupancy at medical care facilities. In addition, State
legislation authorizes several financing techniques for public authorities.
Also, there are statutory arrangements providing for state local assistance
payments, otherwise payable to localities, to be made under certain
circumstances to public authorities. Although the state has no obligation to
provide additional assistance to localities whose local assistance payments have
been paid to public authorities under those arrangements if local assistance
payments are so diverted, the affected localities could seek additional state
assistance. Some authorities also received monies from state appropriations to
pay for the operating costs of certain programs.
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance during the State's
1995-1996 fiscal year and thereafter. The potential impact on the State of such
requests by localities is not included in the projections of the State receipts
and disbursements in the State's 1995-1996 fiscal year.
Certain litigation pending against the State by its officers or employees
could affect adversely the financial condition of the State in the 1995-1996
fiscal year or thereafter. Adverse developments in these proceedings or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced 1995-1996 State Financial Plan. The State believes that the 1995-1996
State Financial Plan includes sufficient reserves for the payment of judgments
that may be required during the 1995-1996 fiscal year. There can be no
assurance, however, that an adverse decision in any of these proceedings would
not exceed the amount of the 1995-1996 State Financial Plan reserves for the
payment of judgments and, thereby, affect the ability of the State to maintain a
balanced 1995-1996 State Financial Plan.
An expanded discussion is contained in the statement of additional
information.
A-14
KEYSTONE PENNSYLVANIA TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Individual shareholders of the Pennsylvania Fund who are subject to the
Pennsylvania personal income tax, as either residents or non-residents of the
Commonwealth of Pennsylvania, will not be subject to Pennsylvania personal
income tax on distributions of interest made by the Pennsylvania Fund that are
attributable to (1) obligations issued by the Commonwealth of Pennsylvania, any
public authority, commission, board or agency created by the Commonwealth of
Pennsylvania, any political subdivision of the Commonwealth of Pennsylvania or
any public authority created by any such political subdivision (collectively,
"Pennsylvania Obligations"); and (2) obligations of the United States and
certain qualifying agencies, instrumentalities, territories and possessions of
the U.S., the interest from which are statutorily free from state taxation in
the Commonwealth of Pennsylvania under the laws of the Commonwealth or the U.S.
(collectively, "U.S. Obligations"). Distributions attributable to most other
sources will not be exempt from Pennsylvania personal income tax. Distributions
of gains attributable to Pennsylvania Obligations and U.S. Obligations
(collectively "Exempt Obligations") will be subject to the Pennsylvania personal
income tax.
Shares of the Pennsylvania Fund that are held by individual shareholders
who are Pennsylvania residents subject to the Pennsylvania county personal
property tax will be exempt from such tax to the extent that the Pennsylvania
Fund's portfolio consists of Exempt Obligations on the annual assessment date.
Nonresidents of the Commonwealth of Pennsylvania are not subject to the
Pennsylvania county personal property tax. Corporations are not subject to
Pennsylvania personal property taxes. For shareholders who are residents of the
City of Philadelphia, distributions of interest derived from Exempt Obligations
are not taxable for purposes of the Philadelphia School District investment
income tax provided that the Pennsylvania Fund reports to its investors the
percentage of Exempt Obligations held by it for the year. The Pennsylvania Fund
will report such percentage to its shareholders.
Distributions of interest, but not gains, realized on Exempt Obligations
are not subject to the Pennsylvania corporate net income tax. The Pennsylvania
Department of Revenue also takes the position that shares of funds similar to
the Pennsylvania Fund are not considered exempt assets of a corporation for the
purpose of determining its capital stock value subject to the Commonwealth's
capital stock and franchise taxes.
SPECIAL FACTORS AFFECTING THE PENNSYLVANIA FUND
Historically, Pennsylvania is among the leading states in manufacturing
and mining, and its steel and coal industries have been of national importance.
However, due in part to the decline in the steel and coal industries,
Pennsylvania's economy has become more diversified, with major new sources of
growth in the service and trade sectors. The Commonwealth's unemployment rate is
below the national average, and its per capita income is slightly above the
national average. The Commonwealth's General Fund, through which taxes are
received and debt service is made, had unappropriated balance surpluses for the
years ended June 30, 1995 and June 30, 1996.
The Pennsylvania Fund's yield and share price stability are tied in part
to conditions within the Commonwealth. Changes in economic conditions in or
governmental policies of the Commonwealth could have a significant impact on the
performance of Pennsylvania Obligations held by the Pennsylvania Fund. For
example, the Commonwealth's continued dependence on manufacturing, mining and
steel has made the Commonwealth vulnerable to cyclical industry fluctuations,
foreign imports and environmental concerns. Growth in the service and trade
sectors, however, has helped diversify the Commonwealth's economy and reduce its
unemployment rate below the national average. Changes in local economic
conditions or local governmental policies within the Commonwealth, which can
vary substantially by region, could also have a significant impact on the
performance of municipal obligations held by the Pennsylvania Fund. Also, the
Pennsylvania Fund will invest in obligations that are secured by obligors other
than the Commonwealth or its political subdivisions (such as hospitals,
universities, corporate obligors and corporate credit and liquidity providers)
and obligations limited to specific revenue pledges (such as sewer authority
bonds). The creditworthiness of these obligors may be wholly or partly
independent of the creditworthiness of the Commonwealth or its municipal
authorities. The Trustees of the Pennsylvania Fund have the power, however, to
eliminate unsafe investments.
An expanded discussion is contained in the statement of additional
information.
A-15
APPENDIX B
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of other Evergreen Keystone funds. Only Class A shares subject to
an initial or deferred sales charge are eligible for inclusion in reduced sales
charge programs.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may
combine concurrent direct purchases of Class A shares of two or more of the
"Eligible Funds," as defined below. For example, if a Purchaser concurrently
invested $75,000 in one of the other "Eligible Funds" and $75,000 in the Fund,
the sales charge would be that applicable to a $150,000 purchase, i.e., 3.75% of
the offering price, as indicated in the Sales Charge Schedule in the prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of the
Fund's Class A shares, a Purchaser is entitled to accumulate current purchases
with the current value of previously purchased Class A shares of the Fund and
Class A shares of certain other eligible funds that are still held in (or
exchanged for shares of and are still held in) the same or another eligible fund
("Eligible Fund(s)"). The Eligible Funds are the Evergreen Keystone funds.
For example, if a Purchaser held shares valued at $99,999 and purchased
an additional $5,000, the sales charge for the $5,000 purchase would be at the
next lower sales charge of 3.75% of the offering price as indicated in the Sales
Charge schedule. EKSC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class
A shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor the Fund to sell, the amount
indicated.
After the Letter of Intent is received by EKSC, each investment made will
be entitled to the sales charge applicable to the level of investment indicated
on the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if
B-1
purchases exceed the amount specified in the Letter of Intent. Income and
capital gains distributions taken in additional shares will not apply toward
completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than
the amount specified, the Purchaser will be required to remit an amount equal to
the difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary) 5% of the dollar amount specified on the application will be held
in escrow by EKSC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is
completed (either prior to or by the end of the thirteen-month period), the
Purchaser will be notified and the escrowed shares will be released. If the
intended investment is not completed, the Purchaser will be asked to remit to
EKD any difference between the sales charge on the amount specified and on the
amount actually attained. If the Purchaser does not within 20 days after written
request by EKD or his dealer pay such difference in sales charge, EKSC will
redeem an appropriate number of the escrowed shares in order to realize such
difference. Shares remaining after any such redemption will be released by EKSC.
Any redemptions made by the Purchaser during the thirteen-month period will be
subtracted from the amount of the purchases for purposes of determining whether
the Letter of Intent has been completed. In the event of a total redemption of
the account prior to completion of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption and the balance
will be forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and
appoints EKSC his attorney to surrender for redemption any or all escrowed
shares with full power of substitution.
The Purchaser or his dealer must inform EKD or EKSC that a Letter of
Intent is in effect each time a purchase is made.
B-2
INVESTMENT ADVISERS
Capital Management Group of First Union National Bank, 210 South College
Street, Charlotte, North Carolina, 28228
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116-5034
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827
TRANSFER AGENT
Evergreen Keystone Service Company, P.O. Box 2121, Boston, Massachusetts
02106-2121
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C.
20036
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110
DISTRIBUTOR
Evergreen Keystone Distributor, Inc., 125 West 55th Street, New York, New York
10019
49538 536115REV02
<PAGE>
PROSPECTUS July 21, 1997
EVERGREEN(SM) KEYSTONE STATE TAX FREE FUNDS (EVERGREEN LOGO APPEARS HERE)
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
CLASS Y SHARES
The Evergreen Keystone State Tax Free Funds (the "Funds") seek the
highest possible current income exempt from federal income taxes, while
preserving capital. In addition, each Fund also seeks to provide a maximum
level of income to its shareholders that is exempt from the personal income
taxes of the state for which such Fund is named by investing principally in
municipal obligations exempt from federal income tax and municipal
obligations issued by the state for which a Fund is named and its political
subdivisions, agencies and instrumentalities. This Prospectus provides
information regarding the Class Y shares offered by the Evergreen New
Jersey Tax Free Income Fund (the "Fund"). The Fund is a series of an
open-end, non-diversified, management investment company. This Prospectus
sets forth concise information about the Fund that a prospective investor
should know before investing. The address of the Fund is 200 Berkeley
Street, Boston, Massachusetts 02116.
A "Statement of Additional Information" for the Fund and certain
other funds in the Evergreen Keystone funds dated July 21, 1997, as
supplemented from time to time, has been filed with the Securities and
Exchange Commission and is incorporated by reference herein. The Statement
of Additional Information provides information regarding certain matters
discussed in this Prospectus and other matters which may be of interest to
investors, and may be obtained without charge by calling the Fund at (800)
343-2898. There can be no assurance that the investment objective of the
Fund will be achieved. Investors are advised to read this Prospectus
carefully.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR AN OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND SHARES 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
INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
KEEP THIS PROSPECTUS FOR FUTURE REFERENCE
EVERGREENSM is a Service Mark of Evergreen Asset Management Corp.
Copyright 1995, Evergreen Asset Management Corp.
59798A
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
OVERVIEW 2
EXPENSE INFORMATION 3
FINANCIAL HIGHLIGHTS 4
DESCRIPTION OF THE FUND
Investment Objectives and Policies 5
Investment Practices and Restrictions 5
MANAGEMENT OF THE FUND
Investment Adviser 8
Portfolio Manager 8
Administrator 9
Sub-Administrator 9
PURCHASE AND REDEMPTION OF SHARES
How to Buy Shares 9
How to Redeem Shares 10
Exchange Privilege 11
Shareholder Services 12
Effect of Banking Laws 12
OTHER INFORMATION
Dividends, Distributions and Taxes 13
General Information 14
</TABLE>
OVERVIEW OF THE FUNDS
The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus. See "Description of the
Fund" and "Management of the Fund".
The Fund is a nondiversified series of an open-end management investment
company, The Evergreen Tax Free Trust (the "Trust").
The Capital Management Group of First Union National Bank ("FUNB") serves
as investment adviser to the Fund. FUNB is a subsidiary of First Union
Corporation, the sixth largest bank holding company in the United States.
The Fund seeks a high level of income, exempt from federal and New Jersey
personal income taxes.
THERE IS NO ASSURANCE THE INVESTMENT OBJECTIVE OF THE FUND WILL BE
ACHIEVED.
2 59798A
<PAGE>
EXPENSE INFORMATION
The table set forth below summarizes the shareholder transaction costs
associated with an investment in the Class Y Shares of the Fund. For further
information see "Purchase and Redemption of Shares".
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases None
Sales Charge on Dividend Reinvestments None
Contingent Deferred Sales Charge None
Redemption Fee None
</TABLE>
The following table shows for the Fund the annual operating expenses (as
a percentage of average net assets) attributable to Class Y Shares, together
with examples of the cumulative effect of such expenses on a hypothetical $1,000
investment for the periods specified assuming (i) a 5% annual return and (ii)
redemption at the end of each period.
EVERGREEN NEW JERSEY TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
ANNUAL OPERATING EXAMPLE
EXPENSES+ Class Y
<S> <C> <C> <C>
Management Fees 0.00%
After 1 Year $ 4
12b-1 Fees None
After 3 Years $12
Other Expenses 0.36%
After 5 Years $20
After 10 Years $46
Total .36%
</TABLE>
+ The annual operating expenses and examples do not reflect fee waivers and
reimbursements for the most recent fiscal period. Actual expenses for Class Y
Shares of the Fund, net of fee waivers and expense reimbursements for the
period ended March 31, 1997 would have been 0.88%. Total Fund Operating
Expenses include indirectly paid expenses.
From time to time, the Fund's investment adviser may, at its discretion,
reduce or waive its fees or reimburse the Funds for certain of their expenses in
order to reduce their expense ratios. The Fund's investment adviser may cease
these waivers and reimbursements at any time.
The purpose of the foregoing table is to assist an investor in
understanding the various costs and expenses that an investor in Class Y Shares
of the Fund will bear directly or indirectly. The amounts set forth both in the
tables and in the examples are estimated amounts based on the experience of each
Fund for the most recent fiscal period. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RETURN. ACTUAL EXPENSES AND
ANNUAL RETURN MAY BE GREATER OR LESS THAN THOSE SHOWN. For a more complete
description of the various costs and expenses borne by the Fund see "Management
of the Fund".
3 59798A
<PAGE>
FINANCIAL HIGHLIGHTS
The following table contains important financial information relating to
the Fund and has been audited by KPMG Peat Marwick LLP, the current independent
auditors of the Fund. The table appears in the Fund's Annual Report and should
be read in conjunction with each Fund's financial statements and related notes,
which also appear, together with the independent auditors' report, in the Fund's
Annual Report. The Fund's financial statements, related notes, and independent
auditors' report are incorporated by reference into the statement of additional
information. Additional information about the Fund's performance is contained in
a Fund's Annual Report, which will be made available upon request and without
charge.
(For a share outstanding throughout each year)
EVERGREEN NEW JERSEY TAX FREE INCOME FUND -- CLASS Y SHARES
<TABLE>
<CAPTION>
CLASS Y SHARES
SEVEN
MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, AUGUST 31,
1997*** 1996**
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................................................... $10.75 $11.01
INCOME FROM INVESTMENT OPERATIONS:
Net investment income......................................................................... 0.32 0.28
Net realized and unrealized loss on investments............................................... (0.01) (0.26)
Total from investment operations............................................................. 0.31 0.02
Less distributions from net investment income................................................. (0.32) (0.28)
Total distributions.......................................................................... (0.32) (0.28)
Net asset value, end of period............................................................... $10.74 $10.75
TOTAL RETURN.................................................................................. 2.88% 0.20%
RATIOS & SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses............................................................................... 0.36%( )(b) 0.31%(a)
Total expenses excluding reimbursement and waivers........................................... 0.88%(a) 0.87%(a)
Net investment income........................................................................ 5.08%(a) 5.12%(a)
Portfolio turnover rate....................................................................... 15% 0%
NET ASSETS, END OF PERIOD (THOUSANDS)......................................................... $9,436 $9,076
<CAPTION>
FEBRUARY 8,
1996*
THROUGH
FEBRUARY 29,
1996
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................................................... $11.14
INCOME FROM INVESTMENT OPERATIONS:
Net investment income......................................................................... 0.03
Net realized and unrealized loss on investments............................................... (0.13)
Total from investment operations............................................................. (0.10)
Less distributions from net investment income................................................. (0.03)
Total distributions.......................................................................... (0.03)
Net asset value, end of period............................................................... $11.01
TOTAL RETURN.................................................................................. (0.87%)
RATIOS & SUPPLEMENTAL DATA:
Ratios to average net assets:
Total expenses............................................................................... 0.31%(a)
Total expenses excluding reimbursement and waivers........................................... 0.88%(a)
Net investment income........................................................................ 5.28%(a)
Portfolio turnover rate....................................................................... 4%
NET ASSETS, END OF PERIOD (THOUSANDS)......................................................... $18
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 0.36% (annualized) for the seven months ended March 31, 1997, for Class
Y shares, respectively.
* Commencement of Operations.
** The Fund changed its fiscal year end from February 28 to August 31.
*** During the current period, the Fund changed its fiscal year end from August
31 to March 31.
4 59798A
<PAGE>
DESCRIPTION OF THE FUND
INVESTMENT OBJECTIVES AND POLICIES
The objective of the Fund is to seek a high level of income, exempt from
federal and New Jersey personal income taxes. The Fund is available only to
investors who reside in New Jersey. There is no assurance that the Fund will
achieve its stated objective. The investment objective of the Fund is
fundamental and so may not be changed without the approval of a majority of the
Fund's shareholders.
To attain its objective, the Fund invests at least 80% of its net assets
in municipal securities issued by the State of New Jersey or its counties,
municipalities, authorities or other political subdivisions and municipal
securities issued by territories or possessions of the United States, such as
Puerto Rico, the interest on which, in the opinion of bond counsel, is exempt
from federal and New Jersey personal income taxes. The Fund normally invests in
intermediate and long-term municipal securities. Intermediate-term municipal
securities generally mature in three to ten years. Long-term municipal
securities generally mature in ten to thirty years. The Fund has no maximum or
minimum maturity for any individual municipal securities, however, it will
maintain a dollar-weighted average portfolio maturity of twenty years or less.
If its investment adviser determines that market conditions warrant a shorter
average maturity, the Fund's investments will be adjusted accordingly.
The Fund will only purchase securities rated within the three highest
rating categories by Standard & Poor's Ratings Group ("S&P") or by Moody's
Investors Service, Inc. ("Moody's") and unrated securities of equivalent quality
as determined by the investment adviser pursuant to guidelines established by
the Trustees. See the Statement of Additional Information for further
information in regard to ratings.
The Fund will seek to invest substantially all of its assets in
intermediate and long-term municipal securities. However, under certain
circumstances, such as a temporary decline in the issuance of New Jersey
obligations, the Fund may invest up to 20% of its assets in the following:
short-term municipal securities issued outside of New Jersey (the income from
which may be subject to New Jersey income taxes) or certain taxable fixed income
securities (the income from which may be subject to federal and New Jersey
personal income taxes).
In addition, under unusual circumstances the Fund reserves the right to
invest more than 20% of its net assets in securities other than New Jersey
municipal securities such as taxable fixed income securities, the interest from
which may be subject to federal and New Jersey personal income taxes. In most
instances, however, the Fund will seek to avoid holdings in an effort to provide
income that is fully exempt from federal and New Jersey personal income taxes.
The Fund may also invest in municipal securities issued to finance
private activities, whose interest is a preference item for purposes of the
Federal alternative minimum tax. Such "private activity bonds" might include
industrial development bonds and securities issued to finance projects such as
solid waste disposal facilities, student loans or water and sewage projects. The
Fund currently intends to treat "private activity bonds" as not federally
tax-exempt and accordingly to limit income from "private activity bonds" to no
more than 20%. See "Other Information-Dividends, Distributions and Taxes" for
further information. The Fund may invest in other municipal securities and may
employ additional investment strategies which are discussed in "Investment
Practices and Restrictions" below.
INVESTMENT PRACTICES AND RESTRICTIONS
Risk Factors. Bond yields are dependent on several factors including market
conditions, the size of an offering, the maturity of the bond, ratings of the
bond and the ability of issuers to meet their obligations. There is no limit on
the maturity of the bonds purchased by the Funds. Because the prices of bonds
fluctuate inversely in relation to the direction of interest rates, the prices
of longer term bonds fluctuate more widely in response to market interest rate
changes. A Fund's concentration in securities issued by its designated state and
that state's political subdivisions provides a greater level of risk than a fund
which is diversified across numerous states and municipal entities.
Although the Fund will not purchase securities rated below BBB by S&P or
Baa by Moody's (i.e., junk bonds), the Fund is not required to dispose of
securities that have been downgraded subsequent to their purchase. If the
municipal obligations held by the Fund (because of adverse economic conditions
in a particular state, for
5 59798B
example) are downgraded, the Fund's concentration in securities of that state
may cause the Fund to be subject to the risks inherent in holding material
amounts of low-rated debt securities in its portfolio.
Portfolio Turnover. A portfolio turnover rate of 100% would occur if all of the
Fund's portfolio securities were replaced in one year. The portfolio turnover
rate experienced by the Fund directly affects the transaction costs relating to
the purchase and sale of securities which the Fund bears directly. A high rate
of portfolio turnover will increase such costs. See the Statement of Additional
Information for further information regarding the practices of the Fund
affecting portfolio turnover.
Non-Diversification. The Fund is a non-diversified portfolio of an investment
company and, as such, there is no limit on the percentage of assets which can be
invested in any single issuer. An investment in the Fund, therefore, will entail
greater risk than would exist in a diversified investment company because the
higher percentage of investments among fewer issuers may result in greater
fluctuation in the total market value of the Fund's portfolio. The Fund intends
to comply with Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code") which requires that at the end of each quarter of each taxable
year, with regard to at least 50% of the Fund's total assets, no more than 5% of
the total assets may be invested in the securities of a single issuer and that
with respect to the remainder of the Fund's total assets, no more than 25% of
its total assets are invested in the securities of a single issuer.
Repurchase Agreements. The Fund may invest in repurchase agreements. Repurchase
agreements are agreements by which the Fund purchases a security (usually U.S.
government securities) for cash and obtains a simultaneous commitment from the
seller (usually a bank or broker/dealer) to repurchase the security at an
agreed-upon price and specified future date. The repurchase price reflects an
agreed-upon interest rate for the time period of the agreement. The Fund risks
is the inability of the seller to pay the agreed-upon price on the delivery
date. However, this risk is tempered by the ability of the Fund to sell the
security in the open market in the case of a default. In such a case, the Fund
may incur costs in disposing of the security which would increase Fund expenses.
The Fund's investment adviser will monitor the creditworthiness of the firms
with which the Fund enters into repurchase agreements.
When-Issued And Delayed Delivery Transactions. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more or less than the market value of the
securities on the settlement date. The Fund may dispose of a commitment prior to
settlement if the Fund's investment adviser deems it appropriate to do so. In
addition, the Fund may enter into transactions to sell their purchase
commitments to third parties at current market values and simultaneously acquire
other commitments to purchase similar securities at later dates. The Fund may
realize short-term profits or losses upon the sale of such commitments.
Lending Of Portfolio Securities. In order to generate additional income, the
Fund may lend its portfolio securities on a short-term or long-term basis to
broker/dealers, banks, or other institutional borrowers of securities. The Fund
will only enter into loan arrangements with creditworthy borrowers and will
receive collateral in the form of cash or U.S. government securities equal to at
least 100% of the value of the securities loaned. As a matter of fundamental
investment policy, which cannot be changed without shareholder approval, the
Fund will not lend any of their assets except portfolio securities up to 5% of
the value of its net assets. There is the risk that when lending portfolio
securities, the securities may not be available to the Fund on a timely basis
and the Fund may, therefore, lose the opportunity to sell the securities at a
desirable price. In addition, in the event that a borrower of securities would
file for bankruptcy or become insolvent, disposition of the securities may be
delayed pending court action.
Investing In Securities Of Other Investment Companies. The Fund may invest in
the securities of other investment companies. This is a short-term measure to
invest cash which has not yet been invested in other portfolio instruments and
is subject to the following limitations: (1) the Fund will not own more than 3%
of the total outstanding voting stock of any one investment company, (2) the
Fund may not invest more than 5% of its total assets in any one investment
company, and (3) the Fund may not invest more than 10% of its total assets in
investment companies in general. The Fund's investment adviser will waive its
investment advisory fee on assets invested in securities of other open end
investment companies.
Borrowing. As a matter of fundamental policy, which may not be changed without
shareholder approval, the Fund may not borrow money except as a temporary
measure to facilitate redemption requests which might otherwise
6 59798B
require the untimely disposition of portfolio investments and for extraordinary
or emergency purposes, provided that the aggregate amount of such borrowings
shall not exceed one-third of the value of the total net assets at the time of
such borrowing.
Illiquid Securities. The Fund may invest up to 15% of its net assets in illiquid
securities and other securities which are not readily marketable. Repurchase
agreements with maturities longer than seven days will be included for the
purpose of the foregoing 15% limit. Securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933, which have been determined to be
liquid, will not be considered by the Fund's investment adviser to be illiquid
or not readily marketable and, therefore, are not subject to the aforementioned
15% limit. The inability of the Fund to dispose of illiquid or not readily
marketable investments readily or at a reasonable price could impair the Fund's
ability to raise cash for redemptions or other purposes. The liquidity of
securities purchased by the Fund which are eligible for resale pursuant to Rule
144A will be monitored by the Fund's investment adviser on an ongoing basis,
subject to the oversight of the Trustees. In the event that such a security is
deemed to be no longer liquid, the Fund's holdings will be reviewed to determine
what action, if any, is required to ensure that the retention of such security
does not result in the Fund having more than 15% of its net assets invested in
illiquid or not readily marketable securities.
Unseasoned Issuers. The Fund will not invest more than 5% of the value of its
total assets in securities of issuers (or guarantors, where applicable) which
have records of less than three years of continuous operations, including the
operation of any predecessor.
Municipal Lease Obligations. The Fund may purchase municipal leases, which are
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. The Fund may purchase municipal securities in the
form of participation interests which represent undivided proportional interests
in lease payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease obligations may
be subject to periodic appropriation. If the entity does not appropriate funds
for future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they become due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment or that the substitute source of payment
would generate tax-exempt income.
Resource Recovery Bonds. The Fund may purchase resource recovery bonds, which
may be general obligations of the issuing municipality or supported by corporate
or bank guarantees. The viability of the resource recovery project,
environmental protection regulations and project operator tax incentives may
affect the value and credit quality of resource recovery bonds.
Zero Coupon Debt Securities. The Fund may purchase zero coupon debt securities.
These securities do not make regular interest payments. Instead, they are sold
at a deep discount from their face value. In calculating their daily dividends,
each day the Fund takes into account as income a portion of the difference
between these securities' purchase price and their face value. Because they do
not pay current income, the prices of zero coupon debt securities can be very
volatile when interest rates change.
Securities with Put or Demand Rights. The Fund has the ability to enter into put
transactions, sometimes referred to as stand-by commitments, with respect to
Municipal Obligations held in their portfolio or to purchase securities which
carry a demand feature or put option which permit the Fund, as holder, to tender
them back to the issuer or a third party prior to maturity and receive payment
within seven days. Segregated accounts will be maintained by the Fund for all
such transactions. For a detailed description of put transactions, see
"Investment Policies -- Securities with Put Rights" in the Statement of
Additional Information.
The amount payable to a Fund by the seller upon its exercise of a put
will normally be (i) the Fund's acquisition cost of the securities (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (ii) all interest accrued
on the securities since the last interest payment date during the period the
securities were owned by the Fund. Accordingly, the amount payable by a
broker-dealer or bank during the time a put is exercisable will be substantially
the same as the value of the underlying securities.
The Fund's right to exercise a put is unconditional and unqualified. A
put is not transferable by the Fund, although the Fund may sell the underlying
securities to a third party at any time. The Fund expects that puts will
7 59798B
generally be available without any additional direct or indirect cost. However,
if necessary and advisable, the Fund may pay for certain puts either separately
in cash or by paying a higher price for portfolio securities which are acquired
subject to such a put (thus reducing the yield to maturity otherwise available
to the same securities). Thus, the aggravate price paid for securities with put
rights may be higher than the price that would otherwise be paid.
The Fund may enter into put transactions only with broker-dealers (in
accordance with the rules of the Securities and Exchange Commission) and banks
which, in the opinion of the Fund's investment adviser, present minimal credit
risks. The Fund's investment adviser will monitor periodically the
creditworthiness of issuers of such obligations held by the Fund. The Fund's
ability to exercise a put will depend on the ability of the broker-dealer or
bank to pay for the underlying securities at the time the put is exercised. In
the event that a broker-dealer should default on its obligation to purchase an
underlying security, the Fund might be unable to recover all or a portion of any
loss sustained from having to sell the security elsewhere. The Fund intends to
enter into put transactions solely to maintain portfolio liquidity and do not
intend to exercise their rights thereunder for trading purposes.
SPECIAL RISK FACTORS RELATED TO INVESTING IN MUNICIPAL SECURITIES
It should be noted that municipal securities may be adversely affected by
local political and economic conditions and developments within a state. For
example, adverse conditions in a significant industry within New Jersey may from
time to time have a correspondingly adverse effect on specific issuers within
New Jersey or on anticipated revenue to the State itself; conversely, an
improving economic outlook for a significant industry may have a positive effect
on such issuers or revenues.
The value of municipal securities may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal and state income tax rates, the supply of tax-exempt bonds, the size of
the particular offering, the maturity of the obligation, the credit quality and
rating of the issue, and perceptions with respect to the level of interest
rates. In general, the value of bonds tends to appreciate when interest rates
decline and depreciate when interest rates rise. An expanded discussion of the
risks associated with the purchase of securities issued in certain states is
contained in the Statement of Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
The management of the Fund is supervised by the Trustees of the Trust
under which the Fund has been established ("Trustees"). The Capital Management
Group of First Union National Bank ("CMG") serves as investment adviser to the
Fund. FUNB is a subsidiary of First Union Corporation ("First Union"). First
Union is headquartered in Charlotte, North Carolina, and had $143 billion in
consolidated assets as of June 30, 1997. First Union and its subsidiaries
provide a broad range of financial services to individuals and businesses
throughout the United States. CMG and its affiliates manage or otherwise oversee
the investment of over $62 billion in assets belonging to a wide range of
clients, including all of the Evergreen Keystone funds. First Union Brokerage
Services, Inc., a wholly-owned subsidiary of FUNB, is a registered broker-dealer
that is principally engaged in providing retail brokerage services consistent
with its federal banking authorizations. First Union Capital Markets Corp., a
wholly-owned subsidiary of First Union, is a registered broker-dealer
principally engaged in providing, consistent with its federal banking
authorizations, private placement, securities dealing, and underwriting
services.
CMG manages investments and supervises the daily business affairs of the
Fund and, as compensation therefor, is entitled to receive an annual fee equal
to .50 of 1% of average daily net assets up to $500 million, .45 of 1% of the
next $500 million of assets, .40 of 1% of assets in excess of $1 billion but not
exceeding $1.5 billion, and .35 of 1% of assets in excess of $1.5 billion. The
total annualized operating expenses of the Fund for the fiscal period ended
March 31, 1997 are set forth in the section entitled "Financial Highlights".
PORTFOLIO MANAGER
Jocelyn Turner is a Vice President and Municipal Bond Portfolio Manager
for CMG and has managed the Fund since 1992. Ms. Turner was previously employed
as a Vice President, Municipal Bond Portfolio Manager at One Federal Asset
Management, Boston, MA prior to 1992.
8 59798B
ADMINISTRATOR
Evergreen Keystone Investment Services, Inc. ("EKIS") serves as
administrator to the Fund subject to the supervision and control of the Trustees
of the Trust. As administrator EKIS provides facilities, equipment and personnel
to the Fund and is entitled to receive an administration fee from the Fund based
on the aggregate average daily net assets of all the mutual funds for which CMG,
or its affiliates serve as investment adviser, calculated in accordance with the
following schedule:
<TABLE>
<CAPTION>
Administration Fee
<S> <C>
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% on assets in excess of $30 billion
</TABLE>
SUB-ADMINISTRATOR
BISYS Fund Services ("BISYS"), an affiliate of Evergreen Keystone
Distributor, Inc. ("EKD"), distributor for the Evergreen Keystone Funds, serves
as sub-administrator to the Funds and is entitled to receive a fee from EKIS
based on the aggregate average daily net assets of all the mutual funds
administered by EKIS for which CMG, or its affiliates serve as investment
adviser, calculated in accordance with the following schedule:
<TABLE>
<CAPTION>
Sub-Administration Fee
<S> <C>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
</TABLE>
The total assets of the mutual funds administered by EKIS for which FUNB
affiliates also serve as investment advisers were approximately $29 billion as
of June 30, 1997.
PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
Class Y shares are offered at net asset value without a front-end sales
charge or a contingent deferred sales load. Class Y shares are only offered to
(i) persons who at or prior to December 31, 1994, owned shares in a mutual fund
advised by Evergreen Asset Management, (ii) certain institutional investors and
(iii) investment advisory clients of CMG or its affiliates.
Eligible investors may purchase Class Y shares of any of the Funds
through broker-dealers, banks or other financial intermediaries, or directly
through EKD. In addition, you may purchase Class Y shares of any of the Funds by
mailing to that Fund, c/o Evergreen Keystone Service Company ("EKSC"), P.O. Box
2121, Boston, Massachusetts 02106-2121, a completed Application and a check
payable to the Fund. You may also telephone 1-800-343-2898 to obtain the number
of an account to which you can wire or electronically transfer funds and then
send in a completed Application. The minimum initial investment is $1,000, which
may be waived in certain situations. Subsequent investments in any amount may be
made by check, by wiring federal funds, by direct deposit or by an electronic
funds transfer.
There is no minimum amount for subsequent investments. Investments of $25
or more are allowed under the Systematic Investment Plan. Share certificates are
not issued. See the Application for more information. Only Class Y shares are
offered through this Prospectus (see "General Information" -- "Other Classes of
Shares").
How the Fund Values Its Shares. The net asset value of each Class of shares of
the Fund is calculated by dividing the value of the amount of the Fund's net
assets attributable to that Class by the outstanding shares of that Class.
Shares are valued each day the New York Stock Exchange (the "Exchange") is open
as of the close of regular trading (currently 4:00 p.m. Eastern time). The
Exchange is closed on New Year's Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The securities
in the
9 59798B
Fund are valued at their current market value determined on the basis of market
quotations or, if such quotations are not readily available, such other methods
as the Trustees of each Trust under which the Fund operates believe would
accurately reflect fair market value.
Additional Purchase Information. As a condition of this offering, if a purchase
is canceled due to nonpayment or because an investor's check does not clear, the
investor will be responsible for any loss the Fund or the Fund's investment
adviser incurs. If such investor is an existing shareholder, a Fund may redeem
shares from an investor's account to reimburse the Fund or the Fund's investment
adviser for any loss. In addition, such investors may be prohibited or
restricted from making further purchases in any of the Evergreen Keystone mutual
funds. The Fund will not accept third party checks other than those payable
directly to an account which has been in existence at least thirty days.
HOW TO REDEEM SHARES
You may "redeem" (i.e., sell) your Class Y shares in a Fund to the Fund
for cash, (at the net redemption value) on any day the Exchange is open, either
directly by writing to the Fund, c/o EKSC, or through your financial
intermediary. The amount you will receive is the net asset value adjusted for
fractions of a cent next calculated after the Fund receives your request in
proper form. Proceeds generally will be sent to you within seven days. However,
for shares recently purchased by check, a Fund will not send proceeds until it
is reasonably satisfied that the check has been collected (which may take up to
15 days). Once a redemption request has been telephoned or mailed, it is
irrevocable and may not be modified or canceled.
Redeeming Shares Through Your Financial Intermediary. A Fund must receive
instructions from your financial intermediary before 4:00 p.m. (Eastern time)
for you to receive that day's net asset value. Your financial intermediary is
responsible for furnishing all necessary documentation to a Fund and may charge
you for this service. Certain financial intermediaries may require that you give
instructions earlier than 4:00 p.m. (Eastern time).
Redeeming Shares Directly by Mail or Telephone. Send a signed letter of
instruction or stock power form to the Fund, c/o EKSC; the registrar, transfer
agent and dividend-disbursing agent for each Fund. Stock power forms are
available from your financial intermediary, EKSC, and many commercial banks.
Additional documentation is required for the sale of shares by corporations,
financial intermediaries, fiduciaries and surviving joint owners. Signature
guarantees are required for all redemption requests for shares with a value of
more than $50,000. Currently, the requirement for a signature guarantee has been
waived on redemptions of $50,000 or less when the account address of record has
been the same for a minimum period of 30 days. Each Fund and EKSC reserve the
right to withdraw this waiver at any time. A signature guarantee must be
provided by a bank or trust company (not a Notary Public), a member firm of a
domestic stock exchange or by other financial institutions whose guarantees are
acceptable under the Securities Exchange Act of 1934 and EKSC's policies.
Shareholders may withdraw amounts of $1,000 or more (up to $50,000) from
their accounts by calling the telephone number on the front page of this
Prospectus between the hours of 8:00 a.m. and 5:30 p.m. (Eastern time) each
business day (i.e., any weekday exclusive of days on which the Exchange or EKSCs
offices are closed). The Exchange is closed on New Years Day, Presidents Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Redemption requests received after 4:00 p.m. (Eastern time) will
be processed using the net asset value determined on the next business day. Such
redemption requests must include the shareholder's account name, as registered
with a Fund, and the account number. During periods of drastic economic or
market changes, shareholders may experience difficulty in effecting telephone
redemptions. If you cannot reach the Fund by telephone, you should follow the
procedures for redeeming by mail or through a broker-dealer as set forth herein.
The telephone redemption service is not made available to shareholders
automatically. Shareholders wishing to use the telephone redemption service must
complete the appropriate sections on the Application and choose how the
redemption proceeds are to be paid. Redemption proceeds will either (i) be
mailed by check to the shareholder at the address in which the account is
registered or (ii) be wired to an account with the same registration as the
shareholder's account in a Fund at a designated commercial bank.
In order to insure that instructions received by EKSC are genuine when
you initiate a telephone transaction, you will be asked to verify certain
criteria specific to your account. At the conclusion of the transaction, you
will be given a transaction number confirming your request, and written
confirmation of your transaction will be mailed the next business day. Your
telephone instructions will be recorded. Redemptions by telephone are allowed
only if the address and bank account of record have been the same for a minimum
period of 30 days. Each Fund
10 59798B
reserves the right at any time to terminate, suspend, or change the terms of any
redemption method described in this Prospectus, except redemption by mail, and
to impose fees.
Except as otherwise noted, the Funds, EKSC, and EKD will not assume
responsibility for the authenticity of any instructions received by any of them
from a shareholder in writing, over the Evergreen Keystone Express Line, or by
telephone. EKSC will employ reasonable procedures to confirm that instructions
received over the Evergreen Keystone Express Line or by telephone are genuine.
The Funds, EKSC, and EKD will not be liable when following instructions received
over the Evergreen Keystone Express Line or by telephone that EKSC reasonably
believes are genuine.
Evergreen Keystone Express Line. The Evergreen Keystone Express Line offers you
specific fund account information and price and yield quotations as well as the
ability to do account transactions, including investments, exchanges and
redemptions. You may access the Evergreen Keystone Express Line by dialing toll
free 1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a
week.
General. The sale of shares is a taxable transaction for federal income tax
purposes. The Funds may temporarily suspend the right to redeem their shares
when (1) the Exchange is closed, other than customary weekend and holiday
closings; (2) trading on the Exchange is restricted; (3) an emergency exists and
the Funds cannot dispose of their investments or fairly determine their value;
or (4) the Securities and Exchange Commission ("SEC") so orders. The Funds
reserve the right to close an account that through redemption has fallen below
$1,000 and has remained so for thirty days. Shareholders will receive sixty
days' written notice to increase the account value to at least $1,000 before the
account is closed. The Funds have elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which each Fund is obligated to redeem shares solely in
cash, up to the lesser of $250,000 or 1% of a Fund's total net assets, during
any ninety day period for any one shareholder.
EXCHANGE PRIVILEGE
How to Exchange Shares. You may exchange some or all of your Class Y shares for
shares of the same Class in the other Evergreen Keystone Funds through your
financial intermediary, by calling or writing to EKSC or by using the Evergreen
Keystone Express Line as described above. Once an exchange request has been
telephoned or mailed, it is irrevocable and may not be modified or canceled.
Exchanges will be made on the basis of the relative net asset values of the
shares exchanged next determined after an exchange request is received. An
exchange which represents an initial investment in another Evergreen Keystone
Fund is subject to the minimum investment and suitability requirements of each
Fund.
Each of the Evergreen Keystone Funds has different investment objectives
and policies. For complete information, a prospectus of the fund into which an
exchange will be made should be read prior to the exchange. An exchange order
must comply with the requirement for a redemption or repurchase order and must
specify the dollar value or number of shares to be exchanged. An exchange is
treated for federal income tax purposes as a redemption and purchase of shares
and may result in the realization of a capital gain or loss. Shareholders are
limited to five exchanges per calendar year, with a maximum of three per
calendar quarter. This exchange privilege may be modified or discontinued at any
time by the Fund upon sixty days' notice to shareholders and is only available
in states in which shares of the fund being acquired may lawfully be sold.
Exchanges Through Your Financial Intermediary. The Fund must receive exchange
instructions from your financial intermediary before 4:00 p.m. (Eastern time)
for you to receive that day's net asset value. Your financial intermediary is
responsible for furnishing all necessary documentation to the Fund and may
charge you for this service.
Exchanges by Telephone and Mail. Exchange requests received by the Fund after
4:00 p.m. (Eastern time) will be processed using the net asset value determined
at the close of the next business day. During periods of drastic economic or
market changes, shareholders may experience difficulty in effecting telephone
exchanges. You should follow the procedures outlined below for exchanges by mail
if you are unable to reach EKSC by telephone. If you wish to use the telephone
exchange service you should indicate this on the Application. As noted above,
each Fund will employ reasonable procedures to confirm that instructions for the
redemption or exchange of shares communicated by telephone are genuine. A
telephone exchange may be refused by the Fund or EKSC if it is believed
advisable to do so. Procedures for exchanging Fund shares may be modified,
including the right to charge for exchanges, or terminated at any time. Written
requests for exchanges should follow the same procedures outlined for written
redemption requests in the section entitled "How to Redeem Shares", however, no
signature guarantee is required.
11 59798B
SHAREHOLDER SERVICES
The Fund offers the following shareholder services. For more information
about these services or your account, contact your financial intermediary, EKSC
or call the toll-free number on the front page of this Prospectus. Some services
are described in more detail in the Application.
Systematic Investment Plan. Under a Systematic Investment Plan, you may invest
as little as $25 per month to purchase shares of a Fund with no minimum initial
investment required.
Telephone Investment Plan. You may make investments into an existing account
electronically in amounts of not less than $100 or more than $10,000 per
investment. Telephone investment requests received by 3:00 p.m. (Eastern time)
will be credited to a shareholder's account the day the request is received.
Shares purchased under the Funds Systematic Investment Plan or Telephone
Investment Plan may not be redeemed for ten days from the date of investment.
Systematic Withdrawal Plan. When an account of $10,000 or more is opened or when
an existing account reaches that size, you may participate in the Fund's
Systematic Withdrawal Plan by filling out the appropriate part of the
Application. Under this plan, you may receive (or designate a third party to
receive) a monthly or quarterly fixed-withdrawal payment in a stated amount of
at least $75 and may be as much as 1.0% per month or 3.0% per quarter of the
total net asset value of the Fund shares in your account when the Plan was
opened. Fund shares will be redeemed as necessary to meet withdrawal payments.
All participants must elect to have their dividends and capital gain
distributions reinvested automatically.
Automatic Reinvestment Plan. For the convenience of investors, all dividends and
distributions are automatically reinvested in full and fractional shares of a
Fund at the net asset value per share at the close of business on the record
date, unless otherwise requested by a shareholder in writing. If the transfer
agent does not receive a written request for subsequent dividends and/or
distributions to be paid in cash at least three full business days prior to a
given record date, the dividends and/or distributions to be paid to a
shareholder will be reinvested.
Dollar Cost Averaging. Through dollar cost averaging you can invest a fixed
dollar amount each month or each quarter in any Evergreen Keystone fund. This
results in more shares being purchased when the selected fund's net asset value
is relatively low and fewer shares being purchased when the fund's net asset
value is relatively high and may result in a lower average cost per share than a
less systematic investment approach.
Prior to participating in dollar cost averaging, you must establish an
account in an Evergreen Keystone fund. You should designate on the application
(1) the dollar amount of each monthly or quarterly investment you wish to make
and (2) the fund in which the investment is to be made. Thereafter, on the first
day of the designated month, an amount equal to the specified monthly or
quarterly investment will automatically be redeemed from your initial account
and invested in shares of the designated fund.
Two Dimensional Investing. You may elect to have income and capital gains
distributions from any class of Evergreen Keystone fund shares you may own
automatically invested to purchase the same class of shares of any other
Evergreen Keystone fund. You may select this service on your application and
indicate the Evergreen Keystone fund(s) into which distributions are to be
invested.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Fund. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser, transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer. CMG and its
affiliates are subject to and in compliance with the aforementioned laws and
regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in CMG being prevented from continuing to
perform the services required under the investment advisory agreements or from
acting as agent in connection with the purchase of shares of a Fund by its
customers. If CMG or Evergreen Asset were prevented from continuing to provide
the services called for under the investment advisory agreements, it is expected
that the Trustees would identify, and call upon each Fund's shareholders to
approve, new investment advisers. If this were to occur, it is not anticipated
that the shareholders of any Fund would suffer any adverse financial
consequences.
12 59798B
OTHER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
Income dividends are declared daily and paid monthly. Distributions of
any net realized gains of a Fund will be made at least annually. Shareholders
will 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. The Fund has
qualified and intends to continue to qualify to be treated as a regulated
investment company under the Code. While so qualified, so long as the Fund
distributes all of its investment company taxable income and any net realized
gains to shareholders, it is expected that the Fund will not be required to pay
any Federal income taxes. A 4% nondeductible excise tax will be imposed on the
Fund if it does not meet certain distribution requirements by the end of each
calendar year. The Fund anticipates meeting such distribution requirements.
The Fund will designate and pay exempt-interest dividends derived from
interest earned on qualifying tax-exempt obligations. Such exempt-interest
dividends may be excluded by shareholders of the Fund from their gross income
for Federal income tax purposes, however (1) all or a portion of such
exempt-interest dividends may be a specific preference item for purposes of the
Federal individual and corporate alternative minimum taxes to the extent that
they are derived from certain types of private activity bonds issued after
August 7, 1986, and (2) all exempt-interest dividends will be a component of the
"adjusted current earnings" for purposes of the Federal corporate alternative
minimum tax.
Dividends paid from taxable income, if any, and distributions of any net
realized short-term capital gains (whether from tax exempt or taxable
obligations) are taxable as ordinary income and long-term capital gain
distributions are taxable as long-term capital gains, even though received in
additional shares of the Fund, and regardless of the investors holding period
relating to the shares with respect to which such gains are distributed. Market
discount recognized on taxable and tax-exempt bonds is taxable as ordinary
income, not as excludable income. Under current law, the highest federal income
tax rate applicable to net long-term gains realized by individuals is 28%. The
rate applicable to corporations is 35%.
Since the Fund's gross income is ordinarily expected to be tax exempt
interest income, it is not expected that the 70% dividends-received deduction
for corporations will be applicable. Specific questions should be addressed to
the investor's own tax adviser.
The Fund is required by Federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions (if any) and
redemptions) paid to certain shareholders. In order to avoid this backup
withholding requirement, each investor must certify on the Share Purchase
Application, or on a separate form supplied by State Street, that the investor's
social security or taxpayer identification number is correct and that the
investor is not currently subject to backup withholding or is exempt from backup
withholding.
For individual shareholders in any year in which the Fund satisfies the
requirements for treatment as a "qualified investment fund" under New Jersey
law, distribution from the Fund will be exempt from the New Jersey Gross Income
Tax to the extent such distributions are attributable to interest or gains from
(i) obligations issued by or on behalf of the State of New Jersey or any
country, municipality, school or other district, agency, authority, commission,
instrumentality, public corporation, body corporate and politic or political
subdivision of New Jersey or (ii) obligations that are otherwise statutorily
exempt from state or local taxation or under the laws of the United States. Any
gains realized on the sale or redemption of shares held in a qualified
investment fund are also exempt from the New Jersey Gross Income Tax. Corporate
shareholders will be subject to a corporate franchise tax on distributions from
and on gains from sales of shares of the Fund.
Statements describing the tax status of shareholders' dividends and
distributions will be mailed annually by the Fund. These statements will set
forth the amount of income exempt from federal and if applicable, state
taxation, and the amount, if any, subject to federal and state taxation.
Moreover, to the extent necessary, these statements will indicate the amount of
exempt-interest dividends which are a specific preference item for purposes of
the federal individual and corporate alternative minimum taxes. The exemption of
interest income for federal income tax purposes does not necessarily result in
exemption under the income or other tax law of any state or local taxing
authority. Investors should consult their own tax advisers about the status of
distributions from the
13 59798B
Fund in their states and localities. The Fund notifies shareholders annually as
to the interest exempt from Federal taxes earned by the Fund.
A shareholder who acquires Class A shares of the Fund and sells or
otherwise disposes of such shares within ninety days of acquisition may not be
allowed to include certain sales charges incurred in acquiring such shares for
purposes of calculating gain and loss realized upon a sale or exchange of shares
of the Fund.
GENERAL INFORMATION
Portfolio Transactions. Consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., and subject to seeking best
price and execution, a Fund may consider sales of its shares as a factor in the
selection of dealers to enter into portfolio transactions with the Fund.
Organization. The Fund is a separate investment series of The Evergreen Tax Free
Trust (formerly FFB Funds Trust), a Massachusetts business trust organized in
1985.
A shareholder in each Class of the Fund will be entitled to his or her
share of all dividends and distributions from the Fund's assets, based upon the
relative value of such shares to those of other Classes of the Fund, and, upon
redeeming shares, will receive the then current net asset value of the Class of
shares of the Fund represented by the redeemed shares less any applicable CDSC.
The Trust is empowered to establish, without shareholder approval, additional
investment series, which may have different investment objectives, and
additional Classes of shares for any existing or future series. If an additional
series or Class were established in the Fund, each share of the series or Class
would normally be entitled to one vote for all purposes. Generally, shares of
each series and Class would vote together as a single Class on matters, such as
the election of Trustees, that affect each series and Class in substantially the
same manner. Class A, B and Y shares have identical voting, dividend,
liquidation and other rights, except that each Class bears, to the extent
applicable, its own distribution, shareholder service and transfer agency
expenses as well as any other expenses applicable only to a specific Class. Each
Class of shares votes separately with respect to Rule 12b-1 distribution plans
and other matters for which separate Class voting is appropriate under
applicable law. Shares are entitled to dividends as determined by the Trustees
and, in liquidation of a Fund, are entitled to receive the net assets of the
Fund.
Transfer Agent and Dividend Disbursing Agent. Evergreen Keystone Service
Company, 200 Berkeley Street, Boston, Massachusetts 02116 acts as the Fund's
transfer agent and dividend disbursing agent. EKSC is an indirect, wholly-owned
subsidiary of FUNB.
Custodian. State Street Bank and Trust Company, P.O. Box 9021, Boston,
Massachusetts 02205-9827 acts as the Fund's custodian.
Principal Underwriter. EKD, an affiliate of BISYS, located 125 West 55th Street,
New York, New York 10019, is the principal underwriter of the Funds. BISYS also
acts as sub-administrator to the Funds.
Other Classes of Shares. The Fund currently offers three classes of shares,
Class A, Class B and Class Y, and may in the future offer additional classes.
Class Y shares are the only class of shares offered by this Prospectus and are
only available to (i) persons who at or prior to December 31, 1994, owned shares
in a mutual fund advised by Evergreen Asset, (ii) certain institutional
investors and (iii) investment advisory clients of CMG or its affiliates. The
dividends payable with respect to Class A and Class B shares will be less than
those payable with respect to Class Y shares due to the distribution and
distribution related expenses borne by Class A and Class B shares and the fact
that such expenses are not borne by Class Y shares.
Performance Information. The Fund's performance may be quoted in advertising in
terms of yield or total return. Both types of performance are based on
Securities and Exchange Commission (the "Commission") formulas and are not
intended to indicate future performance.
Yield is a way of showing the rate of income the Fund earns on its
investments as a percentage of the Fund's share price. The Fund's yield is
calculated according to accounting methods that are standardized by the SEC for
all stock and bond funds. Because yield accounting methods differ from the
method used for other accounting purposes, the Fund's yield may not equal its
distribution rate, the income paid to your account or the income reported in the
Fund's financial statements. To calculate yield, the Fund takes the interest
income it earned from its portfolio of investments (as defined by the SEC
formula) for a 30-day period (net of expenses), divides it by the average number
of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on the Fund's share price at the end of the
30-day period. This yield does not reflect gains or losses from selling
securities.
14 59798B
Total returns are based on the overall dollar or percentage change in the
value of a hypothetical investment in the Fund. The Fund's total return shows
its overall change in value including changes in share prices and assumes all a
Fund's distributions are reinvested. A cumulative total return reflects the
Fund's performance over a stated period of time. An average annual total return
reflects the hypothetical annually compounded return that would have produced
the same cumulative total return if the Fund's performance had been constant
over the entire period. Because average annual total returns tend to smooth out
variations in the Fund's return, you should recognize that they are not the same
as actual year-by-year results. To illustrate the components of overall
performance, the Fund may separate its cumulative and average annual total
returns into income results and realized and unrealized gain or loss.
The Fund may also quote tax-equivalent yields, which show the taxable
yields an investor would have to earn before taxes to equal the Fund's tax-free
yields. A tax-equivalent yield is calculated by dividing the Fund's tax-exempt
yield by the result of one minus a stated federal tax rate. If only a portion of
the Fund's income was tax-exempt, only that portion is adjusted in the
calculation.
Comparative performance information may also be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Morningstar and other industry publications. The Fund
may also advertise in items of sales literature an "actual distribution rate"
which is computed by dividing the total ordinary income distributed (which may
include the excess of short-term capital gains over losses) to shareholders for
the latest twelve month period by the maximum public offering price per share on
the last day of the period. Investors should be aware that past performance may
not be reflective of future results.
In marketing the Fund's shares, information may be provided that is
designed to help individuals understand their investment goals and explore
various financial strategies. Such information may include publications
describing general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting; a questionnaire designed to
help create a personal financial profile; and an action plan offering investment
alternatives. The information provided to investors may also include discussions
of other Evergreen Keystone mutual funds, products, and services, which may
include: retirement investing; brokerage products and services; the effects of
periodic investment plans and dollar cost averaging; saving for college; and
charitable giving. In addition, the information provided to investors may quote
financial or business publications and periodicals, including model portfolios
or allocations, as they relate to fund management, investment philosophy, and
investment techniques. The Principal Underwriter may also reprint, and use as
advertising and sales literature, articles from EVERGREEN KEYSTONE EVENTS, a
quarterly magazine provided to Evergreen Keystone fund shareholders.
Liability Under Massachusetts Law. Under Massachusetts law, trustees and
shareholders of a business trust may, in certain circumstances, be held
personally liable for its obligations. The Declaration of Trust under which the
Fund operates provide that no Trustee or shareholder will be personally liable
for the obligations of the Trust and that every written contract made by the
Trust contain a provision to that effect. If any Trustee or shareholder were
required to pay any liability of the Trust, that person would be entitled to
reimbursement from the general assets of the Trust.
Additional Information. This Prospectus and the Statement of Additional
Information, which have been incorporated by reference herein, do not contain
all the information set forth in the Registration Statements filed by the Trusts
with the SEC under the Securities Act of 1933, as amended. Copies of the
Registration Statements 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.
15 59798B
INVESTMENT ADVISER
Capital Management Group of First Union National Bank, 201 South College
Street, Charlotte, North Carolina 28288
CUSTODIAN
State Street Bank and Trust Company, Box 9021, Boston, Massachusetts
02205-9827
TRANSFER AGENT
Evergreen Keystone Service Company, 200 Berkeley Street, Boston,
Massachusetts, 02119
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C.
20036
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110
DISTRIBUTOR
Evergreen Keystone Distributor, Inc., 125 West 55th Street, New York, New York
10019
<PAGE>
PART B. STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
EVERGREEN KEYSTONE STATE TAX FREE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
JULY 21, 1997
Keystone California Tax Free Fund
Keystone Florida Tax Free Fund
Keystone Massachusetts Tax Free Fund
Keystone Missouri Tax Free Fund
Evergreen New Jersey Tax Free Income Fund
Keystone New York Tax Free Fund
Keystone Pennsylvania Tax Free Fund
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of the
Evergreen Keystone State Tax Free Funds comprised of the Keystone California Tax
Free Fund (the "California Fund"), the Keystone Florida Tax Free Fund (the
"Florida Fund"), the Keystone Massachusetts Tax Free Fund (the "Massachusetts
Fund"), the Keystone Missouri Tax Free Fund (the "Missouri Fund"), the Evergreen
New Jersey Tax Free Income Fund (the "New Jersey Fund"), the Keystone New York
Tax Free Fund (the "New York Fund"), and the Keystone Pennsylvania Tax Free Fund
(the "Pennsylvania Fund") (each a "Fund" and, collectively, the "Funds") dated
July 21, 1997, as supplemented from time to time. You may obtain a copy of
the prospectus from the Funds' principal underwriter, Evergreen
Keystone Distributor, Inc., or your broker-dealer. See "Service Providers"
below.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
The Trusts and Their Funds....................................................2
Service Providers.............................................................2
Investment Policies...........................................................3
Investment Restrictions.......................................................6
Valuation of Securities.......................................................8
Brokerage.....................................................................9
Sales Charges................................................................10
Distribution Plans...........................................................13
Trustees and Officers........................................................16
Investment Advisers..........................................................19
Principal Underwriter........................................................21
Administrator................................................................22
Sub-administrator............................................................22
Declarations of Trust........................................................23
Expenses ....................................................................24
Standardized Total Return and Yield Quotations...............................26
Financial Statements.........................................................28
Additional Information.......................................................28
Appendix A..................................................................A-1
Appendix B..................................................................B-1
20445
<PAGE>
2
- --------------------------------------------------------------------------------
THE TRUSTS AND THEIR FUNDS
- --------------------------------------------------------------------------------
Each of the Funds is a series of an open-end, nondiversified management
investment company, commonly known as a mutual fund. The Florida, Massachusetts,
New York and Pennsylvania Funds are investment series evidencing interests in
different portfolios of securities of the Keystone State Tax Free Fund
("KSTFF"). The California and Missouri Funds are investment series evidencing
interests in different portfolios of securities of the Keystone State Tax Free
Fund - Series II ("KSTFFII"). The New Jersey Fund is an investment series of The
Evergreen Tax Free Trust (formerly FFB Funds Trust) ("TETFT"). KSTFF, KSTFFII
and TETFT were formed as Massachusetts business trusts in 1990, 1993 1985,
respectively.
The essential information about the Trusts and their Funds is contained
in their prospectus. This statement of additional information (the "SAI")
provides additional information about each Trust and its Fund(s) that may be of
interest to some investors.
For special factors affecting each Fund, see Appendix A to this
statement of additional information.
- --------------------------------------------------------------------------------
SERVICE PROVIDERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Service Provider
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Investment adviser to the Keystone Investment Management Company, 200 Berkeley
Florida, Massachusetts, New Street, Boston, Massachusetts 02116. Keystone is a wholly-
York and Pennsylvania Funds owned subsidiary of First Union Keystone, Inc., (formerly
(referred to in this SAI as Keystone Investments, Inc.) ("First Union Keystone") also
"Keystone") located at 200 Berkeley Street, Boston, Massachusetts
02116.
Investment adviser to the New The Capital Management Group of First Union National
Jersey Fund (referred to Bank of North Carolina, located at 301 So. College Street,
in this SAI as "CMG") Charlotte, North Carolina 28288.
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
administrator to the New Jersey Keystone Investment Distributors Company and
Fund (referred to in this SAI as predecessor to EKD with regard to the California, Florida,
"EKIS") Massachusetts, Missouri, New York and Pennsylvania
Funds), 200 Berkeley 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 (formerly Keystone
this SAI as "EKSC") Investor Resource Center). (EKSC is a wholly-owned
subsidiary of First Union 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 POLICIES
- --------------------------------------------------------------------------------
Each Fund invests primarily in municipal obligations that are exempt
from federal income tax and are also exempt from certain specified taxes in the
state for which it is named. In addition, the Funds invest in certain other
securities as described below.
MUNICIPAL OBLIGATIONS
Municipal obligations include debt obligations issued by or on behalf
of a state, a territory or a possession of the United States ("U.S."), the
District of Columbia or any political subdivision, agency or instrumentality
thereof (for example, counties, cities, towns, villages, districts, authorities)
to obtain funds for various public purposes, including the construction of a
wide range of public facilities such as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which municipal obligations may be issued include the
refunding of outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to lend to public or private institutions for the
construction of facilities, such as educational, hospital and housing
facilities. In addition, certain types of industrial development bonds have been
or may be issued by or on behalf of public authorities to finance certain
privately-operated facilities, and certain local facilities for water supply,
gas, electricity or sewage or solid waste disposal. Such obligations are
included within the term municipal obligations if the interest paid thereon
qualifies as fully exempt from federal income tax. The income of certain types
of industrial development bonds used to finance certain privately-operated
facilities (qualified private activity bonds) issued after August 7, 1986, while
exempt from federal income tax, is includable for the purposes of the
calculation of the alternative minimum tax. Other types of industrial
development bonds, the proceeds from which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities, may constitute municipal obligations, although the current federal
tax laws place substantial limitations on the size of such issues.
The two principal classifications of municipal obligations are "general
obligation" and limited obligation or "revenue" bonds. General obligation bonds
are obligations involving the credit of an issuer possessing taxing power and
are payable from the issuer's general unrestricted revenues and not from any
particular fund or revenue source. Their payment may be dependent upon an
appropriation by the issuer's legislative body and may be subject to
quantitative limitations on the issuer's taxing power. The
<PAGE>
4
characteristics and methods of enforcement of general obligation bonds vary
according to the law applicable to the particular issuer. Limited obligation or
revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, such as the user of the
facility. Industrial development bonds that are municipal obligations are, in
most cases, revenue bonds and generally are not payable from the unrestricted
revenues of the issuer. The credit quality of industrial development revenue
bonds is usually directly related to the credit standing of the owner or user of
the facilities. There are, of course, variations in the security of municipal
obligations, both within a particular classification and between
classifications, depending on numerous factors.
The yields on municipal obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the municipal obligations market, size of a
particular offering, and the maturity of the obligation and rating of the issue.
The ratings of Standard & Poor's Ratings Group ("S&P"), Moody's Investors
Service ("Moody's") and Fitch Investor Services, L.P. ("Fitch"), as described
herein and in the prospectus, represent their opinions as to the quality of the
municipal obligations that they undertake to rate. It should be emphasized,
however, that ratings are general and not absolute standards of quality.
Consequently, municipal obligations with the same maturity, interest rate and
rating may have different yields while municipal obligations of the same
maturity and interest rate with different ratings may have the same yield. It
should also be noted that the standards of disclosure applicable to and the
amount of information relating to the financial condition of issuers of
municipal obligations are not generally as extensive as those generally relating
to corporations.
Subsequent to its purchase by a Fund, a municipal obligation or other
investment may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Fund. Neither event requires a Fund to sell
such obligation from its portfolio, but its investment adviser will consider
such an event in its determination of whether the Fund should continue to hold
such obligation in its portfolio.
The ability of each Fund to achieve its investment objective depends
upon the continuing ability of issuers of municipal obligations to pay interest
and principal when due. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the federal Bankruptcy Act, and laws, if any, that may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that the result of litigation
or other conditions may materially affect the power or ability of an issuer to
pay principal of and interest on its municipal obligations when due. In
addition, the market for municipal obligations 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 Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations, and similar proposals may well be introduced
in the future. The enactment of such a proposal could materially affect the
availability of municipal obligations for investment by the Funds and the value
of the Funds' portfolios. In which event, each Trust would reevaluate the
investment objectives and policies of its Fund(s) and consider changes in the
structure of the Fund(s) or dissolution.
The Tax Reform Act of 1986 made significant changes in the federal tax
status of certain obligations that were previously fully federally tax-exempt.
As a result, three categories of such obligations issued after August 7, 1986
now exist: (1)"public purpose" bonds, the income from which remains fully exempt
from federal income tax; (2) qualified "private activity" industrial development
<PAGE>
5
bonds, the income from which, while exempt from federal income tax under Section
103 of the Internal Revenue Code of 1986, as amended (the "Code"), is includable
in the calculation of the federal alternative minimum tax; and (3) "private
activity" (private purpose) bonds, the income from which is not exempt from
federal income tax. A Fund will not invest in private purpose bonds and, except
as described under "Other Eligible Investments," will not invest in qualified
"private activity" industrial development bonds whose distributions are subject
to the alternative minimum tax.
OTHER ELIGIBLE INVESTMENTS
A Fund may invest up to 20% of its assets under ordinary circumstances,
and up to 100% of its assets for temporary defensive purposes in the following
types of instruments: (1) commercial paper, including master demand notes, that
at the date of investment is rated A-1 (the highest grade by S&P), Prime-1 (the
highest grade by Moody's) or, if not rated by such services, is issued by a
company that at the date of investment has an outstanding issue rated A or
better by S&P or Moody's; (2) obligations, including certificates of deposit and
bankers' acceptances, of banks, or savings and loan associations, that have at
least $1 billion in assets as of the date of their most recently published
financial statements that are members of the Federal Deposit Insurance
Corporation, including U.S. branches of foreign banks and foreign branches of
U.S. banks; (3) corporate obligations (maturing in 13 months or less) that at
the date of investment are rated A or better by S&P or Moody's; (4) obligations
issued or guaranteed by the U.S. government or by any agency or instrumentality
of the U.S.; (5) qualified "private activity" industrial development bonds the
income from which, while exempt from federal income tax under Section 103 of the
Code, is includable in the calculation of the federal alternative minimum tax;
and (6) municipal obligations, the income of which is exempt from federal income
tax, personal property tax or intangibles tax in a state for which a Fund is
named and where such taxes apply.
Each Fund may assume a temporary defensive position upon its investment
adviser's determination that market conditions so warrant. If a Fund is
investing defensively, it is not pursuing its investment objectives.
From time to time, the Massachusetts Fund and the New Jersey Fund may
invest in zero coupon bonds. The Funds do not expect to have enough zero coupon
bonds to have a material effect on dividends. Zero coupon securities pay no
interest to holders prior to maturity, and the interest on these securities is
reported as income to a Fund and distributed to its shareholders. These
distributions must be made from a Fund's cash assets or, if necessary, from the
proceeds of sales of portfolio securities. The Funds will not be able to
purchase additional income producing securities with cash used to make such
distributions, and its current income ultimately may be reduced as a result.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVES
The investment objective of each Fund is fundamental and may not be
changed without approval of the holders of a majority of such Fund's outstanding
voting shares (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act") i.e., 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).
<PAGE>
6
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions as summarized below are fundamental for
each Fund and may not be changed without the approval of a 1940 majority of such
Fund's outstanding shares. Unless otherwise stated, all references to the assets
of a Fund are in terms of current market value.
Each Fund may not do the following:
(1) purchase any security of any issuer (other than issues of the U.S.
government, its agencies or instrumentalities) if as a result more than 25% of
its total assets would be invested in a single industry, (for the California,
Florida, Massachusetts, Missouri, New York and Pennsylvania Funds) 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 a Fund may invest more than 25% of its assets in industrial
development bonds and, (for the New Jersey Fund) in certificates of deposit and
banker's acceptances issued by domestic branches of U.S. banks or New Jersey
municipal obligations;
(2) (for the California, Florida, Massachusetts, Missouri, New York and
Pennsylvania Funds only) invest more than 10% of its 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;
(3) 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 the issuance of a senior security;
(4) (for the California, Florida, Massachusetts, Missouri, New York and
Pennsylvania Funds only) borrow money or enter into reverse repurchase
agreements, except that a Fund may enter into reverse repurchase agreements or
borrow money from banks for temporary or emergency purposes in aggregate 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;
(5) purchase securities on margin except that it may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities;
(6) make loans, except that a Fund may purchase or hold debt securities
consistent with its investment objectives, lend portfolio securities valued at
not more than 15% of its total assets to broker-dealers and enter into
repurchase agreements;
(7) purchase securities of other investment companies (for the
California, Florida, Massachusetts, Missouri, New York and Pennsylvania Funds)
except as part of a merger, consolidation, purchase of assets or similar
transaction; and, for the New Jersey Fund, except to the extent susch purchases
are not prohibited by applicable law.
(8) 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
<PAGE>
7
estate, and, with the exception of the New Jersey Fund) may engage in currency
or other financial futures contracts and related options transactions; and
(9) underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
For the New Jersey Fund only:
(10) issue senior securities, borrow money or pledge or mortgage its
assets, except that the Fund may borrow from banks up to 10% of the value of its
total net assets for temporary or emergency purposes only to meet anticipated
redemption requirements. The Fund will not purchase securities while any such
borrowings are outstanding.
(11) write, purchase or sell put or call options, or combinations
thereof, except that the Fund may purchase securities with rights to put
securities to the seller in accordance with its investment program.
(12) purchase restricted securities, which are securities that must be
registered under the Securities Act of 1933 before they may be offered or sold
to the public. This restriction does not apply to restricted securities which
are determined to be liquid by the Fund's investment adviser under supervision
of the Board of Trustees.
(13) purchase equity securities or securities convertible into equity
securities.
The Funds are nondiversified under the federal securities laws. The
1940 Act does not restrict the percentage of a nondiversified fund's assets that
may be invested at any time in the securities of any one issuer. The Funds
intend to comply, however, with the Code's diversification requirements and
other requirements applicable to "regulated investment companies" so that they
will not be subject to U.S. federal income tax on income and capital gain
distributions to shareholders. For this reason, each Fund, with the exception of
the New Jersey Fund, has adopted the additional investment restriction set forth
below, which may not be changed without the approval of shareholders.
Specifically, a Fund may not purchase a security if more than 25% of the Fund's
total assets would be invested in the securities of a single issuer (other than
the U.S. government, its agencies and instrumentalities); or, with respect to
50% of the Fund's total assets, if more than 5% of such assets would be invested
in the securities of a single issuer (other than the U.S. government, its
agencies and instrumentalities).
To the extent the Funds are not fully diversified, they may be more
susceptible to adverse economic, political or regulatory developments affecting
a single issuer than would be the case if the Funds were more broadly
diversified.
As a matter of practice, each Fund permitted to enter into repurchase
agreements treats reverse repurchase agreements as borrowings for purposes of
compliance with the limitations of the 1940 Act. Reverse repurchase agreements
will be taken into account along with borrowings from banks for purposes of the
5% limit set forth in the fourth fundamental investment restriction above.
None of the Funds presently intends to invest more than 25% of its
total assets in municipal obligations the payment of which depends on revenues
derived from a single facility or similar types of facilities. Since certain
municipal obligations 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.
<PAGE>
8
For the purposes of the first and ninth fundamental investment
restrictions set forth above, each Fund will treat (1) 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
multi state authority or agency) of the foregoing as an issuer of all securities
that are backed primarily by its assets or revenues; (2) each company as an
issuer of all securities that are backed primarily by its assets or revenues;
and (3) each of the foregoing entities as an issuer of all securities that it
guarantees; provided, however, that for the purpose of the first fundamental
investment restriction no entity shall be deemed to be an issuer of a security
that it guarantees so long as no more than 10% of a 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.
If a percentage limit is satisfied at the time of investment, a later
increase or decrease resulting from a change in asset value is not a violation
of the limit.
- --------------------------------------------------------------------------------
VALUATION OF SECURITIES
- --------------------------------------------------------------------------------
Current values for each Fund's portfolio securities may be determined
in the following manner:
1. short-term investments with maturities of sixty days or less when
purchased 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;
2. short-term investments having maturities of more than sixty days for
which market quotations are readily available are valued at current market
value; and
3. short-term investments having maturities of 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;
All other investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
according to procedures established by a Trust's Board of Trustees.
The Trusts believe that reliable market quotations are generally not
readily available for purposes of valuing municipal obligations. As a result,
depending on the particular municipal obligations owned by a Fund, it is likely
that most of the valuations for such obligations will be based upon their fair
value determined under procedures approved by each respective Board of Trustees.
The Boards of Trustees have authorized the use of a pricing service to determine
the fair value of each Fund's municipal obligations and certain other
securities.
Taxable securities for which market quotations are readily available
are valued on a consistent basis at that price quoted that, in the opinion of
the Boards of Trustees or the person designated by the Boards of Trustees to
make the determination, most nearly represents the market value of the
particular security.
<PAGE>
9
- --------------------------------------------------------------------------------
BROKERAGE
- --------------------------------------------------------------------------------
SELECTION OF BROKERS
In effecting transactions in portfolio securities for a Fund, Keystone
or CMG seeks the best execution of orders at the most favorable prices. Keystone
or CMG determines whether a broker-dealer has provided a 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 such Fund;
2. the efficiency with which the transaction is effected;
3. the broker-dealer's ability to effect the transaction where a
large block is involved;
4. the broker-dealer's readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker-dealer; 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.
The Funds' management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should a Fund, Keystone or CMG receive research and other statistical
and factual information from a broker, such Fund would consider such services to
be in addition to, and not in lieu of, the services Keystone or CMG is required
to perform under their respective Advisory Agreements (as defined below).
Keystone and CMG believe that the cost, value and specific application of such
information are indeterminable and cannot be practically allocated between a
Fund and its other clients who may indirectly benefit from the availability of
such information. Similarly, a Fund may indirectly benefit from information made
available as a result of transactions effected for Keystone or CMG's other
clients. Under the Advisory Agreements, Keystone and CMG are permitted to pay
higher brokerage commissions for brokerage and research services in accordance
with Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone
and CMG follow such a practice, they will do so on a basis that is fair and
equitable to the Funds.
Each Trust's Board of Trustees has determined that a Fund may consider
sales of such Fund's shares as a factor in the selection of brokers to execute
portfolio transactions, subject to the requirements of best execution described
above.
BROKERAGE COMMISSIONS
Each Trust expects that purchases and sales of municipal obligations
and temporary instruments usually will be principal transactions. Municipal
obligations and temporary instruments are normally
<PAGE>
10
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually will be no brokerage commissions paid by a Fund
for such purchases. Purchases from underwriters will include the underwriting
commission or concession, and purchases from broker-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, each 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, a Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone and CMG make investment decisions for each Fund independently
from those of their other clients. It may frequently develop, however, that
Keystone or CMG 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 or
CMG 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 a Fund's securities, each Trust
believes that in other cases its ability to participate in volume transactions
will produce better executions.
A Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, CMG, EKD or any of their affiliated persons, as defined
in the 1940 Act.
Each Board of Trustees will, from time to time, review that Trust's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the
respective Board of Trustees may change, modify or eliminate any of the
foregoing practices.
- --------------------------------------------------------------------------------
SALES CHARGES
- --------------------------------------------------------------------------------
Each Fund offers three classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, a Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. A 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 Plans"). If imposed, a Fund deducts CDSCs 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. See the prospectus for additional
information on a particular class.
<PAGE>
11
CLASS DISTINCTIONS
CLASS A SHARES
With certain exceptions, when you purchase Class A shares you will pay
a maximum sales charge of 4.75%, payable at the time of purchase. (The
prospectus contains a complete table of applicable sales charges and a
discussion of sales charge reductions or waivers that may apply to purchases.)
If you purchase Class A shares in the amount of $1 million or more, without an
initial sales charge, the Fund will charge a CDSC of 1.00% if you redeem during
the month of your purchase and the 12-month period following the month of your
purchase. See "Calculation of Contingent Deferred Sales Charge" below.
CLASS B SHARES
Each Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares, each Fund charges a CDSC on
shares redeemed as follows:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase..................5.00%
Second twelve-month
period following the month of purchase..................4.00%
Third twelve-month
period following the month of purchase..................3.00%
Fourth twelve-month
period following the month of purchase..................3.00%
Fifth twelve-month
period following the month of purchase..................2.00%
Sixth twelve-month
period following the month of purchase..................1.00%
Thereafter...................................................0.00%
Class B shares that have been outstanding for seven years after the
month of purchase, will automatically convert to Class A shares without
imposition of a front-end sales charge or exchange fee. (Conversion of Class B
shares represented by stock certificates will require the return of the stock
certificate to Evergreen Keystone Service Company ("EKSC") each Trust's transfer
and dividend disbursing agent.)
CLASS C SHARES - CALIFORNIA, FLORIDA, MASSACHUSETTS, MISSOURI, NEW YORK AND
PENNSYLVANIA FUNDS ONLY
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. Each Fund
offers Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, a Fund will charge a CDSC of 1.00%, if you redeem
shares during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net cost of such shares. Upon request for redemption, a Fund
will redeem shares not subject to the CDSC first. Thereafter, a Fund will redeem
shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
<PAGE>
12
EXCHANGES
A Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Evergreen Keystone Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, a Fund will compute any future
CDSC based upon the date you originally purchased the shares you tendered for
exchange.
WAIVER OF SALES CHARGES
Purchases of Class A (i) in the amount of $1 million or more; (ii) by a
corporate or certain other qualified retirement plan or a non-qualified deferred
compensation plan or a Title 1 tax sheltered annuity or TSA plan sponsored by an
organization having 100 or more eligible employees (a "Qualifying Plan") or a
TSA plan sponsored by a public educational entity having 5,000 or more eligible
employees (an "Educational TSA Plan"); or (iii) by (a) institutional investors,
which may include bank trust departments and registered investment advisers; (b)
investment advisers, consultants or financial planners who place trades for
their own accounts or the accounts of their clients and who charge such clients
a management, consulting, advisory or other fee; (c) clients of investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment advisers or
financial planners on the books of the broker-dealer through whom shares are
purchased; (d) institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with a Fund by the broker-dealer;
and (e) employees of First Union National Bank of North Carolina ("FUNB") and
its affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of a Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.
Shares of a Fund may also be sold, to the extent permitted by
applicable law, regulations, interpretations, or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees or sales representatives of the Fund,
FUNB, Keystone, EKD, and certain of their affiliates who have been such for not
less than ninety days, and to members of the immediate families of such persons;
(2) a pension and profit-sharing plan established by such companies, their
subsidiaries and affiliates, for the benefit of their Directors, Trustees,
officers, full-time employees, and sales representatives; or (3) a registered
representative of a firm with a dealer agreement with EKD; provided, however,
that all such sales are made upon the written assurance that the purchase is
made for investment purposes and that the securities will not be resold except
through redemption by a Fund.
No initial sales charge or CDSC is imposed on purchases or redemptions
of shares of a Fund 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
a Fund or any fund in the Evergreen Keystone Funds, purchased pursuant to this
waiver is at least $500,000 and any commission paid at the time of such purchase
is not more than 1.00% of the amount invested.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC
will be imposed on any redemptions made specifically by an individual
participant in the Qualifying Plan. This waiver is not available in the event a
Qualifying Plan, as a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of a Fund in
the event of (1) death or disability of the shareholder; (2) a lump-sum
distribution from a benefit plan qualified under the Employee Retirement Income
Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA
<PAGE>
13
plans if the shareholder is at least 59 1/2 years old; (4) involuntary
redemptions of an account having an aggregate net asset value of less than
$1,000; (5) automatic withdrawals under a Systematic Income Plan of up to 1.0%
per month of the shareholder's initial account balance; (6) withdrawals
consisting of loan proceeds to a retirement plan participant; (7) financial
hardship withdrawals made by a retirement plan participant; or (8) withdrawals
consisting of returns of excess contributions or excess deferral amounts made to
a retirement plan participant.
- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Funds, to use their assets to bear 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 (a "Distribution Plan").
The Funds' Class A, Class B, and Class C (as applicable) Distribution
Plans have been approved by the appropriate Trust's Board of Trustees, including
a majority of the Trustees who are not interested persons of each Trust, as
defined in the 1940 Act, and who have no direct or indirect financial interest
in the Distribution Plans or any agreement related thereto (the "Independent
Trustees").
The NASD limits the amount that a Fund may pay annually in distribution
costs for sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1.00% of the aggregate average daily net asset value of
its shares, 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 a Fund may pay for such distribution costs to 6.25% of gross share
sales since the inception of the Distribution Plan, plus interest at the prime
rate plus 1% on such amounts (less any CDSCs paid by shareholders to EKD)
remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that a Fund may expend daily
amounts at an annual rate, which is currently limited to 0.25% of such Fund's
average daily net asset value attributable to Class A shares, to finance any
activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to EKD to
enable EKD to pay or to have paid to others who sell Class A shares a service or
other fee, at any such intervals as EKD may determine, in respect of Class A
shares maintained by any such recipient and outstanding on the books of such
Fund for specified periods.
Amounts paid by a Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.25% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of such Fund for specified periods.
<PAGE>
14
CLASS B DISTRIBUTION PLANS
The Class B Distribution Plans provide that a Fund may expend daily
amounts at an annual rate of up to 1.00% of such Fund's average daily net asset
value attributable to Class B shares to finance any activity that is primarily
intended to result in the sale of Class B shares, including, without limitation,
expenditures consisting of payments to EKD and/or, in the case of the
California, Florida, Massachusetts, Missouri, New York and Pennsylvania Funds,
its predecessor. Payments are made to EKD (1) to enable EKD to pay to others
(broker-dealers) commissions in respect of Class B shares sold since inception
of a Distribution Plan; (2) to enable EKD to pay or to have paid to others a
service fee, at such intervals as EKD may determine, in respect of Class B
shares maintained by any such recipient and outstanding on the books of such
Fund for specified periods; and (3) as interest.
EKD generally reallows to broker-dealers or others a commission equal
to 4.00% of the price paid for each Class B share sold. The broker-dealer or
other party may also receive service fees at an annual rate of 0.15% of the
average daily net asset value of such Class B share maintained by the recipient
and outstanding on the books of a Fund for specified periods.
EKD intends, but is not obligated, to continue to pay or accrue
distribution charges incurred in connection with the Class B Distribution Plans
that exceed current annual payments permitted to be received by EKD from a Fund
("Advances"). EKD intends to seek full reimbursement of such Advances from such
Fund (together with annual interest thereon at the prime rate plus 1.00%) at
such time in the future as, and to the extent that, payment thereof by such Fund
would be within the permitted limits. If a Trust's Independent Trustees
authorize such reimbursements of Advances, the effect would be to extend the
period of time during which such Fund incurs the maximum amount of costs allowed
by the Class B Distribution Plans.
In connection with financing its distribution costs relating to the
California, Florida, Massachusetts, Missouri, New York and Pennsylvania Funds,
including commission advances to broker-dealers and others, EKIS, the
predecessor to EKD, sold to a financial institution substantially all of its
12b-1 fee collection rights and CDSC collection rights in respect of Class B
shares sold during the period beginning approximately June 1, 1995 through
November 30, 1996. KSTFF and KSTFFII have agreed not to reduce the rate of
payment of 12b-1 fees in respect of such Class B shares unless it terminates
such shares' Distribution Plan completely. If it terminates such Distribution
Plans, the Funds may be subject to adverse distribution consequences.
The financing of payments made by EKD to compensate broker-dealers or
other persons for distributing shares of the Funds will be provided by FUNB or
its affiliates.
CLASS C DISTRIBUTION PLAN - CALIFORNIA, FLORIDA, MASSACHUSETTS, MISSOURI, NEW
YORK AND PENNSYLVANIA FUNDS ONLY
The Class C Distribution Plan provides that a Fund may expend daily
amounts at an annual rate of up to 1.00% of such Fund's average daily net asset
value attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to EKD and/or its predecessor. Payments are
made to EKD (1) to enable EKD to pay to others (broker-dealers) commissions in
respect of Class C shares sold since inception of the Distribution Plan; (2) to
enable EKD to pay or to have paid to others a service fee, at such intervals as
EKD may determine, in respect of Class C shares maintained
<PAGE>
15
by any such recipient and outstanding on the books of such Fund for specified
periods; and (3) as interest.
EKD generally reallows to broker-dealers or others a commission in the
amount of 0.75% of the price paid for each Class C share sold plus the first
year's service fee in advance in the amount of 0.25% of the price paid for each
Class C share sold. Beginning approximately fifteen months after purchase,
broker-dealers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25%,
respectively, of the average daily net asset value of each Class C share
maintained by the recipient and outstanding on the books of a Fund for specified
periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by a Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by a Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
At March 31, 1997, total unpaid distribution costs were as follows:
CLASS B CLASS C
(% OF CLASS B NET ASSETS) (% OF CLASS C NET ASSETS)
- ------------------ -------------------------------- ----------------------------
California Fund $1,556,143 (7.14%) $ 130,741 (7.07%)
Florida Fund 3,352,712 (7.15%) 1,350,164 (13.99%)
Massachusetts Fund 446,206 (5.72%) 140,981 (6.83%)
Missouri Fund 1,287,330 (6.40%) 137,003 (10.49%)
New York Fund 1,184,099 (6.21%) 228,676 (12.22%)
Pennsylvania Fund 2,464,474 (6.62%) 831,646 (12.18%)
Broker-dealers or others may receive different levels of compensation
depending on which class of shares they sell. Payments pursuant to a
Distribution Plan are included in the operating expenses of the class.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, EKD and if appropriate, EKIS, will ask the Independent Trustees
to take whatever action they deem appropriate under the circumstances with
respect to payment of such Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of a Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by votes of
the majority of both (1) the Trust's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the Trust will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
<PAGE>
16
The Independent Trustees of each Trust have determined that the sales
of the Funds' shares resulting from payments under the Distribution Plans have
benefited the respective Fund.
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
Trustees and officers, their principal occupations and some of their
affiliations over the last five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
FREDERICK AMLING: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone 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 Trusts; Trustee or Director of all Evergreen Keystone
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 Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Investment Counselor to Appleton Partners,
Inc.; and former Managing Director, Seaward Management Corporation
(investment advice).
FOSTER BAM: Trustee of the Trusts; Trustee or Director of all other Evergreen
Keystone 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: Chairman of the Board and Chief Executive Officer and Trustee of,
other than TETFT, 28 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: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Principal, Padanaram Associates, Inc.; and
former Executive Director, Coalition of Essential Schools, Brown
University.
<PAGE>
17
CHARLES F. CHAPIN: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; and former Director, Peoples Bank
(Charlotte, NC).
K. DUN GIFFORD: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone 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. and
Keystone.
JAMES S. HOWELL: Trustee of the Trusts; Chairman and Trustee or Director of 12 other
Evergreen Keystone 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 Trusts, other than TETFT; Trustee or Director of 28 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.: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 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: Trustee of the Trusts; Trustee or Director of all other Evergreen
Keystone 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 Trusts; Trustee or Director of all other Evergreen
Keystone funds; former Vice President and Director of Rexham
<PAGE>
18
Corporation; and former Director of Carolina Cooperative Federal Credit
Union.
*WILLIAM WALT PETTIT: Trustee of the Trusts; Trustee or Director of all other Evergreen
Keystone funds; and Partner in the law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone 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 Trusts; 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: Trustee of the Trusts; Trustee or Director of all other Evergreen
Keystone funds; and Attorney, Law Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone 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 Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone 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.
ROBERT J. JEFFRIES: Trustee Emeritus of 12 Evergreen Keystone Funds and Corporate
Consultant since 1967.
JOHN J. PILEGGI: 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.
<PAGE>
19
GEORGE O. MARTINEZ: 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.
</TABLE>
* This Trustee may be considered an "interested person" of the Funds within the
meaning of the 1940 Act.
For the fiscal year ended March 31, 1997, none of the Trustees or
officers of the Funds received any direct remuneration from the California,
Florida, Massachusetts, Missouri, New York and Pennsylvania Funds. For the
fiscal period ending March 31, 1997, Independent Trustees of the New Jersey Fund
received $2,148 in retainers and fees. For the year ending March 31, 1997, fees
paid to Independent Trustees on a fund complex wide basis (which included
approximately 60 mutual funds) were approximately $846,350. With the exception
of the Massachsuetts Fund, on June 30, 1997, the Trustees and officers of the
Trusts, as a group, beneficially owned less than 1% of each Funds' then
outstanding shares. Trustees and officers of the Trusts, as a group,
beneficially owned 2.8% of the Massachsuetts Fund's outstanding shares as of
June 30, 1997.
Except as set forth above, the address of all the Trusts' 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 April 1, 1996 through March 31, 1997 is the aggregate
compensation paid to such Trustee by the EvergreenKeystone Funds:
Total Compensation
From Fund Complex
NAME PD. TO TRUSTEE
James S. Howell $66,000
Russell A Salton, III M.D. $61,000
Michael S. Scofield $61,000
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS
- --------------------------------------------------------------------------------
Subject to the general supervision of each Trust's Board of Trustees,
the Funds' investment advisers provide investment advice, management and
administrative services to each 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 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, each Fund other than the New Jersey Fund
entered into a new investment advisory agreement with Keystone and into a
principal underwriting agreement with EKD, a wholly-owned subsidiary of The
BYSIS Group, Inc. The new investment advisory agreements between KSTFF, KSTFFII
and Keystone
<PAGE>
20
were approved by the shareholders of each Fund on December 9, 1996, and became
effective on December 11, 1996.
First Union Keystone (and each of its subsidiaries, including Keystone)
is indirectly owned by First Union. First Union is headquartered in Charlotte,
North Carolina, and had $137 billion in consolidated assets as of March 31,
1997. First Union and its subsidiaries provide a broad range of financial
services to individuals and businesses throughout the United States. CMG,
Keystone and Evergreen Asset Management Corp., a wholly-owned subsidiary of
FUNB, manage or otherwise oversee the investment of over $62 billion in assets
as of March 31, 1997 belonging to a wide range of clients, including the
Evergreen Keystone funds.
Pursuant to the advisory agreements (the "Advisory Agreements") between
the Trusts and their respective investment advisers, and subject to the
supervision of the appropriate Trust's Board of Trustees, Keystone and CMG
furnishes to each Fund investment advisory, management and administrative
services, office facilities, and equipment in connection with its services for
managing the investment and reinvestment of each Fund's assets. Keystone and CMG
pay for all of the expenses incurred in connection with the provision of its
services.
Each Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone or CMG, 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 Plan; (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 such Fund and its shares with the SEC 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 such Fund; (12) expenses of shareholders' and
Trustees' meetings; (13) charges and expenses of legal counsel for such Fund and
for the Independent Trustees of the Trust on matters relating to such Fund; (14)
charges and expenses of filing annual and other reports with the SEC and other
authorities; and all extraordinary charges and expenses of such Fund.
The California, Florida, Massachusetts, Missouri, New York and
Pennsylvania Funds each pay Keystone a fee for its services at the annual rate
of:
Aggregate Net Asset
Management Value of the
FEE SHARES OF THE FUND
0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000.
Keystone's fee is computed as of the close of business each business day and
payable monthly.
<PAGE>
21
Under its Advisory Agreements, 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 New Jersey Fund pays CMG a fee for its services equal to 0.50 of 1%
of the average daily net asets up to $500 million, 0.45 of 1% of the next $500
million of assets, 0.40 of 1% of assets in excess of $1 billion but not
exceeding $1.5 billion, and 0.35 of 1% of assets in excess of $1.5 billion.
The Advisory Agreements continue in effect for two years from their
respective effective dates and, thereafter, from year to year only if approved
at least annually by the Board of Trustees of a Trust or by a vote of a majority
of a Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of a 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. An Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Trust's Board of
Trustees or by a vote of a majority of outstanding shares. An Advisory Agreement
will terminate automatically upon its "assignment" as that term is defined in
the 1940 Act.
Keystone has voluntarily limited the expenses of the Class A, Class B
and Class C shares of each Fund advised by it to 0.75%, 1.50%, and 1.50% of
average daily net assets, respectively. Keystone currently intends to continue
the foregoing expense limitations on a calendar month-by-month basis. Keystone
will periodically evaluate the expense limitations and may modify or terminate
them in the future. Keystone would not be required to make such reimbursement to
any Fund to the extent it would result in the Fund's inability to qualify as a
regulated investment company under the Code.
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
Each Trust has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaces EKIS as KSTFF's and KSTFFII's principal
underwriter. EKIS may no longer act as principal underwriter of such Trusts 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 Trusts as discussed above, EKIS may continue to
receive compensation from KSTFF and KSTFFII 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 .75% of the average daily net assets of a 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
Agreements provide that EKD will bear the expense of preparing, printing, and
distributing advertising and sales literature and prospectuses used by it. EKD
or EKIS, its predecessor, may receive payments from the Trusts pursuant to the
Distribution Plans.
All subscriptions and sales of shares by EKD are at the public offering
price of the shares, which is determined in accordance with the provisions of
each Trust's Declaration of Trust, By-Laws, current
<PAGE>
22
prospectuses and statement of additional information. All orders are subject to
acceptance by the respective Trust and each Trust reserves the right, in its
sole discretion, to reject any order received. Under the Underwriting
Agreements, a Trust is not liable to anyone for failure to accept any order.
Each Trust has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the Securities
and Exchange Commission (the "Commission") and auditing and filing fees in
connection with the registration of its shares under the various state "blue-
sky" laws.
EKD has agreed that it will, in all respects, duly conform with all
state and federal laws applicable to the sale of the shares. EKD has also agreed
that it will indemnify and hold harmless each Trust and each person who has
been, is, or may be a Trustee or officer of a Trust against expenses reasonably
incurred by any of them in connection with any claim, action, suit, or
proceeding to which any of them may be a party that arises out of or is alleged
to arise out of any misrepresentation or omission to state a material fact on
the part of EKD or any other person for whose acts EKD is responsible or is
alleged to be responsible, unless such misrepresentation or omission was made in
reliance upon written information furnished by the respective Trust.
Each 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 respective Trust's Independent Trustees, and (ii) by vote of a
majority of the respective Trust's Trustees, in each case, cast in person at a
meeting called for that purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the respective Board of Trustees or by a vote of a
majority of outstanding shares subject to such agreement. Each Underwriting
Agreement will terminate automatically upon its "assignment," as that term is
defined in the 1940 Act.
From time to time, if, in EKD's judgment, it could benefit the sales of
shares, EKD may provide to selected broker-dealers promotional materials and
selling aids, including, but not limited to, personal computers, related
software, and data files.
- --------------------------------------------------------------------------------
ADMINISTRATOR
- --------------------------------------------------------------------------------
EKIS, a subsidiary of First Union Keystone, serves as administrator to
the New Jersey Fund and is entitled to receive a fee based on the average daily
net assets of the Fund at a rate based on the total assets of the mutual funds
administered by Evergreen Asset for which CMG, Keystone or Evergreen Asset also
serve as investment adviser, calculated in accordance with the following
schedule: .050% of 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.
- --------------------------------------------------------------------------------
SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
<PAGE>
23
BISYS provides personnel to serve as officers of the Funds, and
provides certain administrative services to the Funds pursuant to a
sub-administrator agreement. For its services under that agreement, BISYS
receives a fee based on the aggregate average daily net assets of the Funds. The
subadministrator fee is calculated in accordance with the following schedule:
Aggregate Average Daily Net Assets Of Funds For
Which Any Affiliate Of FUNB Serves As
Investment Adviser or Administrator
Sub-Administrator Fee And for Which BISYS Serves as Sub- Administrator
- --------------------------------------------------------------------------------
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
The total assets of the mutual funds for which FUNB affiliates also
serve as investment advisers were approximately $29 billion as of March 31,
1997.
- --------------------------------------------------------------------------------
DECLARATIONS OF TRUST
- -------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
Each Trust is a Massachusetts business trust established under a
Declaration of Trust (the "Declaration of Trust" or "Declarations of Trust"). A
Trust is similar in most respects to a business corporation. The principal
distinction between a Trust and a corporation relates to the shareholder
liability described below. A copy of each Trust's Declaration of Trust was filed
as an exhibit to the Trust's Registration Statement. This summary is qualified
in its entirety by reference to the Declarations of Trust.
DESCRIPTION OF SHARES
Each Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest of classes of shares. Each share of a
Fund represents an equal proportionate interest in such Fund with each other
share of the Fund. Upon liquidation, Fund shares are entitled to a pro rata
share of the Fund based on the relative net assets of each class.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners
<PAGE>
24
for the obligations of the trust. If a Trust were held to be a partnership, the
possibility of the shareholders incurring financial loss for that reason appears
remote because each Trust's Declaration of Trust (1) contains an express
disclaimer of shareholder liability for obligations of the Trust; (2) requires
that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Trust or its Trustees; and (3)
provides for indemnification out of Trust property for any shareholder held
personally liable for the obligations of the Trust.
VOTING RIGHTS
Under the terms of its Declaration of Trust, a Trust does not hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matter, shares of a Fund are entitled to one vote per share.
Shares generally vote together as one class on all matters, except that each
Fund has exclusive voting rights with respect to matters which affect only that
Fund. Classes of shares of a Fund have equal voting rights except that each
class of shares has exclusive voting rights with respect to its respective
Distribution Plan. No amendment may be made to a Declaration of Trust that
adversely affects any class of shares without the approval of a majority of the
shares of that class. Shares have non-cumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of Trustees
can elect 100% of the Trustees to be elected at a meeting and, in such event,
the holders of the remaining 50% or less of the shares voting will not be able
to elect any Trustees.
After the initial meeting to elect Trustees no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and 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 shareholders' meeting for 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 be removed from or cease to hold office (as the case may
be) (1) at any time by 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
Each Declaration of Trust provides that a Trustee shall be liable only
for his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person; provided, however, that
nothing in the Declaration of Trust shall protect a Trustee against any
liability for his willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties.
The Trustees have absolute and exclusive control over the management
and disposition of all assets of the Funds and may perform such acts as in their
sole judgment and discretion are necessary and proper for conducting the
business and affairs of a Trust or promoting the interests of a Trust and its
Funds and the shareholders.
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
<PAGE>
25
The tables below list the total dollar amounts paid by the Funds for
services rendered for the periods specified. For more information on specific
expenses, see the "Investment Advisers", "Distribution Plans", "Principal
Underwriter" and "Sales Charges" sections of the SAI.
1997 FUND EXPENSES
<TABLE>
<CAPTION>
AGGREGATE DOLLAR
AMOUNT OF
AGGREGATE DOLLAR UNDERWRITING
PERCENTAGE OF AMOUNT OF COMMISSIONS
ADVISORY FUND AVERAGE CLASS A CLASS B CLASS C UNDERWRITING RETAINED BY EKIS
FEES NET ASSETS 12B-1 FEES 12B-1 FEES 12B-1 FEES COMMISSIONS OR EKD
========== ============== ============ ============== ========== ================= ==================
<S> <C> <C> <C> <C> <C> <C> <C>
CALIFORNIA FUND(1) $51,555 0.55% $2,121 $66,054 $4,972 $133,966 $60,931
FLORIDA FUND(2) $507,576 0.55% $46,410 $469,958 $97,209 $683,260 $452,797
MASSACHUSETTS FUND(2) $63,584 0.55% $2,689 $67,185 $19,460 $97,579 $29,745
MISSOURI FUND(1) $46,447 0.55% $1,259 $64,269 $3,949 $96,918 $55,982
NEW JERSEY FUND(3) $135,196 0.50% $47,320 $25,809 N/A N/A N/A
- ------------------------ ---------- -------------- ------------ -------------- ---------- ----------------- ------------------
NEW YORK FUND(2) $135,473 0.55% $5,586 $166,682 $19,837 $236,114 $20,175
PENNSYLVANIA FUND(2) $390,366 0.53% $39,570 $343,818 $71,610 $504,459 $106,694
======================== ========== ============== ============ ============== ========== ================= ==================
</TABLE>
(1) For fiscal period of December 1, 1996 to March 31, 1997 (2) For fiscal year
ended March 31, 1997 (3) For fiscal period of September 1, 1996 to March 31,
1997
1996 FUND EXPENSES
AGGREGATE
DOLLAR AMOUNT
AGGREGATE OF
PERCENTAGE DOLLAR AMOUNT UNDERWRITING
OF FUND OF COMMISSIONS
ADVISORY AVERAGE NET UNDERWRITING RETAINED BY
FEES ASSETS COMMISSIONS EKIS OR EKD
============== ============= =============== ===============
CALIFORNIA FUND $163,334(1) 0.55% $341,589 $67,534
FLORIDA FUND $557,537(2) 0.52% $771,514 $213,167
MASSACHUSETTS
FUND $62,760(2) 0.55% $108,131 $18,234
MISSOURI FUND $146,922(1) 0.55% $230,925 $94,279
NEW JERSEY
FUND $107,212(3) 0.50% N/A N/A
- ----------------- -------------- ------------- --------------- ---------------
MASSACHUSETTS
FUND $62,760(2) 0.55% $108,131 $18,234
-------------- ------------- --------------- ---------------
NEW YORK FUND $118,589(2) 0.55% $201,162 $201,162
PENNSYLVANIA $402,467(2) 0.53% $482,423 $482,423
FUND
1995 FUND EXPENSES
AGGREGATE
DOLLAR AMOUNT
AGGREGATE OF
PERCENTAGE DOLLAR AMOUNT UNDERWRITING
OF FUND OF COMMISSIONS
ADVISORY AVERAGE NET UNDERWRITING RETAINED BY
FEES ASSETS COMMISSIONS EKIS OR EKD
============== ============= =============== =================
$113,353(4) 0.55% $170,600 $170,600
$515,205(5) 0.52% $740,118 $740,118
$43,636(5) 0.55% $88,538 $88,538
$120,166(4) 0.55% $165,772 $65,153
$190,195(6) 0.50% N/A N/A
-------------- ------------- --------------- -----------------
$43,636(5) 0.55% $88,538 $88,538
-------------- ------------- --------------- -----------------
$63,808(5) 0.55% $88,538 $88,538
$357,852(5) 0.54% $474,847 $353,409
<PAGE>
26
(1) For fiscal year ended November 30, 1996
(2) For fiscal year ended March 31, 1996
(3) For fiscal period of March 1, 1996 to August 31, 1996 (4) For fiscal year
ended November 30, 1995 (5) For fiscal year ended March 31, 1995 (6) For fiscal
period of March 1, 1995 to February 28, 1996
In accordance with voluntary expense limitations in effect during the
fiscal year or period ended March 31, 1997, Keystone or CMG voluntarily
reimbursed or waived fees for the California, Florida, Massachusetts, Missouri,
New Jersey, New York, Pennsylvania and Funds in the amounts of $43,885,
$160,819, $97,150, $46,528, $135,196, $106,560, and $169,740, respectively.
BROKERAGE COMMISSIONS
The Funds paid no brokerage commissions during the fiscal years ended
March 31, 1997 and 1996 and 1995.
- --------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
TOTAL RETURN
Total return quotations for a class of shares of a Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class 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 relevant periods.
The annual total returns for Class A shares of the Funds (including
applicable sales charge) are as follows for the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Commencement
Five Years Three Years One Year Of Operations
NAME OF FUND ended 03/31/97 ended 03/31/97 ended 03/31/97 to 03/31/97
- ------------ -------------- -------------- -------------- -----------
California Fund(1) N/A 4.28% (0.55)% 2.07%
Florida Fund(2) 5.19% 4.30% (1.41)% 6.35%
Massachusetts Fund(3) N/A 4.23% (0.07)% 1.51%
Missouri Fund(1) N/A 4.50% 0.22% 2.66%
New Jersey Fund(4) 5.74% 4.51% (0.29)% 6.03%
New York Fund(3) N/A 4.84% (0.11)% 2.60%
Pennsylvania Fund(5) 5.66% 4.25% 0.30% 7.14%
</TABLE>
<PAGE>
27
- -------------
(1) Commenced operations on February 1, 1994 (2) Commenced operations on
December 28, 1990 (3) Commenced operations on February 4, 1994 (4) Commenced
operations on July 16, 1991 (5) Commenced operations on December 27, 1990
The average annual total returns for Class B shares of the Funds are as
follows for the periods indicated:
Commencement
Three Years One Year Of Operations
NAME OF FUND ended 03/31/97 ended 03/31/97 to 03/31/97
- ------------ -------------- ---------------- -----------
California Fund(1) 4.33% (1.31)% 2.22%
Florida Fund(2) 4.35% (2.16)% 3.92%
Massachusetts Fund(3) 4.23% (0.72)% 1.59%
Missouri Fund(1) 4.45% (0.51)% 2.57%
New Jersey Fund(4) N/A (1.25)% (1.72)%
New York Fund(3) 4.87% (0.95)% 2.61%
Pennsylvania Fund(2) 4.24% (0.50)% 4.40%
- -------------
(1) Commenced operations on February 1, 1994 (2) Commenced operations on
February 1, 1993 (3) Commenced operations on February 4, 1994 (4) Commenced
operations on January 30, 1996
The average annual total returns for Class C shares of the Funds that
offer Class C are as follows for the periods indicated:
Commencement
Three Years One Year Of Operations
NAME OF FUND ended 03/31 97 ended 03/31/97 to 03/31/97
- ------------ ------------- ---------------- -----------
California Fund(1) 5.10% 2.55% 2.96%
Florida Fund(2) 5.26% 1.76% 4.31%
Massachusetts Fund(3) 5.07% 3.14% 2.36%
Missouri Fund(1) 5.33% 3.49% 3.39%
New York Fund(3) 5.77% 3.14% 3.42%
Pennsylvania Fund(2) 5.15% 3.49% 4.82%
- -------------
(1) Commenced operations on February 1, 1994
(2) Commenced operations on February 1, 1993
(3) Commenced operations on February 4, 1994
CURRENT YIELD AND TAX EQUIVALENT YIELD
20571
<PAGE>
28
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 a 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. Such yield will include
income from sources other than municipal obligations, if any. For the 30-day
period ended March 31, 1997, the current and tax-equivalent yields of the Funds
are shown below. 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 yields for each class of the Funds for the an
investor in the 31% federal tax bracket are as follows:
<TABLE>
<CAPTION>
30-DAY YIELD TAX-EQUIVALENT YIELD
Class A Class B Class C Class A Class B Class C
=================== ============ ============= ============= =============== ============== ==============
<S> <C> <C> <C> <C> <C> <C>
California Fund 4.80% 4.28% 4.28% 6.96% 6.20% 6.20%
Florida Fund 5.06% 4.56% 4.56% 7.33% 6.61% 6.61%
Massachusetts 4.91% 4.38% 4.39% 7.12% 6.35% 6.36%
Fund
Missouri Fund 4.99% 4.48% 4.47% 7.23% 6.49% 6.48%
New Jersey Fund 4.94% 4.01% N/A 7.16% 5.81% N/A
New York Fund 4.80% 4.28% 4.27% 6.96% 6.20% 6.19%
Pennsylvania 4.96% 4.46% 4.46% 7.19% 6.46% 6.46%
Fund
=================== ============ ============= ============= =============== ============== ==============
</TABLE>
Any given yield or total return quotation should not be considered
representative of the Fund's yield or total return for any future period.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Funds' financial statements for the fiscal year or period ended
March 31, 1997, and the report thereon of KPMG Peat Marwick LLP, are
incorporated by reference herein from the Funds' 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 each 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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
REDEMPTIONS IN KIND
20571
<PAGE>
29
If conditions arise that would make it undesirable for the Funds to pay
for all redemptions in cash, the Funds may authorized payment to be made in
portfolio securities or other property. The Funds have obligated themselves,
however, under the 1940 Act, to redeem for cash all shares presented for
redemption by any one shareholder up to the lesser of $250,000 or 1% of the
Fund's net assets in any 90-day period. Securities delivered in payment of
redemptions would be valued at the same value assigned to them in computing the
net asset value per share and would, to the extent permitted by law, be readily
marketable. Shareholders receiving such securities would incur brokerage costs
upon the securities' sale.
GENERAL
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian (the "Custodian") of all securities and
cash of the Trusts. The Custodian performs no investment management functions
for the Trusts, but, in addition to its custodial services, is responsible for
accounting and related record keeping on behalf of the Trusts.
Except as otherwise stated in its prospectus or required by law, each
Trust 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.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in each Trust's
prospectus, statement of additional information or in supplemental sales
literature issued by the Trust or EKD, and no person is entitled to rely on any
information or representation not contained therein.
The Funds' prospectus and statement of additional information omit
certain information contained in the registration statement filed with the
Commission, a copy of 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.
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 each
Class' total outstanding shares as of June 30, 1997.
Fund Name and Address Class % of Class
California MLPF & S for the Sole Benefit A 11.80%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
California MLPF & S for the Sole Benefit B 15.63%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
California MLPF & S for the Sole Benefit C 36.38%
20571
<PAGE>
30
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
California Victor Edward Rylander C 9.32%
Lucille Rylander Co-TTEES
Victor & Lucille Rylander Trust
U/A DTD 09-18-96
4102 Caflur Ave
San Diego, CA 92117
California Prudential Securities FBO C 5.96%
Rakesh C Gupta
Neelam Gupta CO-TTEES
FBO Gupta Family Living Trust 12/22/94
Hemet, CA 92544
California Alex Brown & Sons Incorporated C 5.68%
FBO 489-31533-14
PO Box 1346
Baltimore, MD 21203-1346
California Smith Barney Inc. C 5.56%
00154933343
388 Greenwich Street
New York, NY 10013
California Alex Brown & Sons Incorporated C 5.53%
FBO 489-30559-15
P O Box 1346
Baltimore, MD 21203-1346
California Richard B Smith C 5.33%
Doris M. Smith TTEE
Smith Trust
U/A DTD 4/8/93
4853 Mt Royal Court
San Diego, CA 92117-2917
Florida MLPF&S for the sole benefit A 9.98%
of it customers
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
20571
<PAGE>
31
Florida MLPF&S for the sole benefit B 20.75%
of it customers
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
Florida MLPF&S for the sole benefit C 34.65%
of it customers
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
Florida Painewebber for the benefit of C 6.74%
Betty J. Puskar Ttee
Betty J. Puskar Rev. Trust
708 Ocean Drive
Juno Beach, FL 33408-1911
Massachusetts Richard Nakashian A 9.89%
P O Box 3150
Pocasset, MA 02559-3150
Massachusetts Ida R Rodriguez A 5.78%
TR # 21528
Keystone Trust Company TTEE
58 Helen Rd
Needham, MA 02192-3934
Massachusetts Robert M. Buddington A 7.51%
P.O. Box 549
S. Orleans, MA 02662-0549
Massachusetts Bertha M. Beauchemin A 6.45%
TR #21843
Keystone Trust Company TTEE
299 Cambridge St.
Winchester, MA 0189-2389
Massachusetts Margaret Vogel A 8.10%
TR #21720
Keystone Trust Company TTEE
865 Central Ave H403
Needham, MA 02192-1341
Massachusetts Anthony H Cincotta C 10.65%
13 Shipway Place
Charlestown, MA 02129-4301
20571
<PAGE>
33
Massachusetts Salvatore M Moscariello C 7.29%
Irene A Moscariello JT TEN
24 Van Norden Road
Reading, MA 01867-1244
Massachusetts Malcolm F. Groves & Jean C 5.41%
N Groves Ttee Malcolm F
Groves Rev Liv Trust
U/A Dtd 05-18-94
80 Indian Hill Road.
Cummaquid, MA 02637
Missouri MLPF & S for the Sole Benefit A 9.67%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Missouri Painewebber for the Benefit of A 5.37%
Fred C Klingbeil TTEE
FBO Fred C Klingbeil Trust
DTD 6/15/70
15500 Hwy 72
Rolla, MO 65401
Missouri BHC Securities, Inc. A 5.53%
FAO 54356697
Attn: Mutual Funds Dept.
One Commerce Square
2005 Market STreet, Suite 1200
Philadelphia, PA 19103
Missouri MLPF & S for the Sole Benefit B 26.98%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Missouri Painewebber for the Benefit of C 14.22%
Dorothy K. Pruett Trustee
Dorothy K. Pruett Revocable
C/O Mid America Mortgage
8645 College Blvd
Overland Park, KS 66210
Missouri Painewebber for the Benefit of C 15.29%
Lorraine Wilder TTEE
Lorraine Wilder Rev Tr
U/A DTD 7-26-88
220 16th Street
Chillicothe, MO 64601
Missouri Painewebber for the Benefit of C 11.63%
20571
<PAGE>
34
Jeannette M Holz Trust Fund
Jeannette M Holz TTEE
U/A DTD 10/15/83
Box 698 Lake Ozark, MO 65049-0698
Missouri MLPF & S for the Sole Benefit C 12.36%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
New Jersey First Union National Bank Y 87.51%
Trust Accounts
Attn: Ginny Batten CMG-1151-2
401 S. Tryon St., 3rd Floor
Charlotte, NC 28202-1911
New Jersey First Union National Bank Y 11.44%
Trust Accounts
Attn: Ginny Batten
11th Floor, CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
New York Prudential Securities Inc FBO A 5.13%
Ms. Sandra M. Franck
345 W. 70th St., Apt 6F
New York, NY 10023-3554
New York MLPF & S for the Sole Benefit B 13.36%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
New York Painewebber for the benefit of C 6.88%
Laurie D. Wax Ttee
Irrevocable Trust of 1995
UA Dtd 5/2/95
Via Di Monterinaldi 14
Florence, Italy
New York Bear Stearns Securities Corp. C 16.61%
FBO 626-60277-10
1 Metrotech Center North
20571
<PAGE>
35
Brooklyn, NY 11201-3857
New York Carol T Whitman C 11.08%
P O Box 43
Whippleville, NY 12995
New York Carol L Moore C 8.31%
Rt 2 Box 1055
Chateaugay, NY 12920-9522
New York MLPF&S for the sole C 5.82%
Benefit of its customers
Attn: Fund Administration
4800 Deer Lake Dr E, 3rd Fl.
Jacksonville, FL 32246-6484
Pennsylvania MLPF&S for the sole A 5.87%
benefit of its customers.
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Pennsylvania MLPF&S for the sole B 9.66%
benefit of its customers.
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Pennsylvania MLPF&S for the sole C 29.16%
benefit of its customers.
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Pennsylvania Painewebber FBO C 6.14%
Robert Couble
Debra K. Couble JT WROS
10506 old 22
Kutztown, PA 19530-8551
A-1
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
KEYSTONE CALIFORNIA TAX FREE FUND
GENERAL
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of over 32 million represents over
12% of the total U.S. population and grew by 27% in the 1980's, and at about
half that rate in the first half of the 1990s. Total personal income in the
State, at an estimated $815 billion in 1996 -- a 13% increase in the last two
years -- accounts for more than 12% of all personal income in the nation. Total
civilian employment is over 14.3 million, the majority of which is in the
service, trade and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the
worst economic, fiscal and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Job losses were the
worst of any post-war recession. Employment levels stabilized by late 1993 and
steady growth has occurred since the start of 1994; pre-recession job levels
were reached in 1996. Unemployment, while higher than the national average, has
come down significantly from the January, 1994 peak of 10% and is now at the
pre-recession level. Economic indicators show a steady recovery underway in
California since the start of 1994, with greatest strength in manufacturing,
high technology, exports, services, entertainment and tourism. However, the
residential housing sector has been weaker than in previous recoveries. Any
delay or reversal of the economic recovery may cause a recurrence of revenue
shortfalls for the State.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
LIMITATION ON PROPERTY TAXES. Certain California municipal obligations
may be obligations of issuers that rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full cash
value the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme Court
announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through
ad valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed non-voter approved levy of "general taxes" that were
not dedicated to a specific use.
20445
<PAGE>
A-2
LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased without voter approval after December 31, 1994 must be
approved by a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
APPROPRIATION LIMITS. The State and its local governments are subject
to an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" excludes most State subventions to local governments. No limit is imposed
on appropriations of funds that are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
20445
<PAGE>
A-3
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population and any transfers of service
responsibilities between governmental units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% paid to schools and community colleges. With more liberal annual adjustment
factors since 1988, and depressed revenues for several years after 1990 because
of the recession, few governments, including the State, are currently operating
near their spending limits, but this condition may change over time. The State's
1996-97 Budget Act provides for State appropriations of more than $7 billion
under the Article XIIIB limit. Local governments may by voter approval exceed
their spending limits for up to four years.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and
XIIID, of the California Constitution, the ambiguities and possible
inconsistencies of their terms, and the impossibility of predicting future
appropriations or changes in population and cost of living, and the probability
of continuing legal challenges, it is not currently possible to determine fully
the impact of these articles on California municipal obligations. It is not
presently possible to predict the outcome of any pending litigation with respect
to the ultimate scope, impact or constitutionality of these articles, or the
impact of any such determinations upon State agencies or local governments, or
upon their ability to pay debt service on their obligations. Future initiatives
or legislative changes in laws or the California Constitution may also affect
the ability of the State or local issuers to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
As of March 1, 1997, the State had approximately $17.7 billion of
general obligation bonds outstanding, and $8.4 billion remained authorized but
unissued. The State also had outstanding at March 1, 1997 $368 million of
general obligation commercial paper notes which will be refunded into long-term
bonds at a later date. In addition, at March 1, 1997, the State had
lease-purchase obligations, payable from the State's General Fund, of
approximately $6.1 billion. State voters approve $7.1 billion of new bond
authorizations during 1996. In fiscal year 1995-1996, debt service on general
obligation bonds and lease-purchase debt was approximately 5.2% of General Fund
revenues. The State has paid the principal of and interest on its general
obligation bonds, lease-purchase debt and short-term obligations when due.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues in 1995-1996 were the
California personal income tax (45% of total revenues), the sales tax (34%),
bank and corporation taxes (13%), and the gross
A-4
premium tax on insurance (3%). The State maintains a Special Fund for Economic
Uncertainties ("SFEU"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund. Because of the recession, the SFEU has not been
funded for the past four years.
GENERAL. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently 35%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal, and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for health
and welfare programs. The State is also facing a structural imbalance in its
budget with the largest programs supported by the General Fund (education,
health, welfare and corrections) growing at rates higher than the growth rates
for the principal revenue sources of the General Fund. These structural concerns
will continue in future years with the expected need to increase capital and
operating costs of the correctional system in response to a "Three Strikes" law
enacted in 1994 which mandates life imprisonment for certain felony offenders.
RECENT BUDGETS. As a result of these factors, among others, from the
late 1980's until 1992-93, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years, and
the State accumulated and sustained a budget deficit in the budget reserve, the
SFEU approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for five years thereafter, each budget required
multi-billion dollar actions to bring projected revenues and expenditures into
balance and to close large "budget gaps" which were identified. The Legislature
and Governor eventually agreed on a number of different steps to produce Budget
Acts in the Years 1991-92 to 1995-96 (although not all these actions occurred in
each year), including:
* significant cuts in health and welfare program expenditures;
* transfers of program responsibilities and some funding sources from
the state to local governments, coupled with some reduction in mandates on local
government;
* transfer of about $3.6 billion in annual local property tax revenues
from cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools;
* reduction in growth of support for higher education programs, coupled
with increases in student fees;
* revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
* increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
<PAGE>
A-5
* various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to large
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures,
and the turnaround of the economy by late 1993, finally led to the restoration
of positive financial results. While General Fund revenues and expenditures were
essentially equal in FY 1992-93 (following two years of excess expenditures over
revenues), the General Fund had positive operating results in FY 1993-94 through
FY 1995-96, which have reduced the accumulated budget deficit to less than $100
million as of June 30, 1996.
The State Department of Finance estimated that the General Fund
received revenues of about $46.3 billion in FY 1995-96, more than $2 billion
higher than was originally expected, as a result of the strengthening economy.
Expenditures totaled about $45.4 billion, also about $2 billion higher than
budgeted, because, among other factors, the State Constitution requires
disbursement of a percentage of revenues to local school districts and federal
actions to reduce welfare costs and to pay for costs of illegal immigrants were
not forthcoming to the extent expected.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the state's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
state to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller was forced to issue approximately $3.8 billion of
registered warrants ("IOUs") over a 2-month period to pay a variety of
obligations representing prior years' or continuing appropriations, and mandates
from court orders. Available funds were used to make constitutionally-mandated
payments such as debt service on bonds and warrants.
The State's cash condition became so serious that from late spring 1992
until 1995, the State had to rely on issuance of short-term notes which matured
in a subsequent fiscal year to finance its ongoing deficit and pay current
obligations. With the repayment of the last of these deficit notes in April,
1996, the State does not plan to rely further on external borrowing across
fiscal years, but will continue its normal cash flow borrowing during a fiscal
year.
CURRENT BUDGET. The 1996-97 Budget Act was signed by the Governor on
July 15, 1996, along with various implementing bills. The Legislature rejected
the Governor's proposed 15% cut in personal income taxes (to be phased over
three years), but did approve a 5% cut in bank and corporation taxes, to be
effective for income years starting on January 1, 1997. Revenues for the Fiscal
Year were estimated to total $47.643 billion, a 3.3 percent increase over the
final estimated 1995-96 revenues. The Budget Act contains General Fund
appropriations totaling $47.251 billion, a 4.0 percent increase over the final
estimated 1995-96 expenditures.
<PAGE>
A-6
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts
increased by $1.65 billion total above revised 1995-96 levels. Almost half of
this money was budgeted to fund class-size reductions in kindergarten and grades
1-3. Also, for the second year in a row, the full cost of living allowance (3.2
percent) was funded. The funding increases have brought K-12 expenditures to
almost $4,800 per pupil, an almost 15% increase over the level prevailing during
the recession years.
2. Proposed cuts in health and welfare totaling $660 million.
All of these cuts required federal law changes (including welfare reform, which
was enacted), federal waivers, or federal budget appropriations in order to be
achieved. Ultimate federal actions after enactment of the Budget Act will allow
the State to save only about $360 million of this amount.
3. A 4.9 percent increase in funding for the University of
California and the California State University system, with no increases in
student fees for the second consecutive year.
4. The Budget Act assumed the federal government would provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash
flow borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The General Fund
balance, however, still reflects $1.6 billion of "loans" which the General Fund
made to local schools in the recession years, representing cash outlays above
the mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund and
from schools' entitlements. The 1996-97 Budget Act contained a $150 million
appropriation from the General Fund toward this settlement.
The Department of Finance projected, when the Budget Act was passed,
that, on June 30, 1997, the State's available internal borrowable (cash)
resources will be $2.9 billion, after payment of all obligations due by that
date, so that no external cross-fiscal year borrowing will be needed. The State
will continue to rely on internal borrowing and intra-year external note
borrowing to meet its cash flow requirements.
The Department of Finance has reported that, based on stronger than
expected revenues during the first six months of the 1996-97 fiscal year,
reflecting the continued strength of the State's economic recovery, General Fund
revenues for the full 1996-97 fiscal year will be almost $1 billion above
projections, at about $48.4 billion. This is expected to be offset by required
increased payments to schools, and lower than expected savings resulting from
federal welfare reform actions and federal aid for illegal immigrants. As a
result, the expected balance of the SFEU at June 30, 1997 has been slightly
reduced to about $197 million, still the first positive balance in the decade of
the 90's. The State has not yet given any prediction of how the federal welfare
reform law will impact the State's finances, or those of its local agencies; the
State is in the midst of making many decisions concerning implementation of the
new welfare law.
PROPOSED 1997-98 BUDGET. On January 9, 1997, the Governor released his
proposed budget for FY 1997-98. Assuming continuing strength in the economy, the
Governor projects General Fund revenues of $50.7 billion, and proposes
expenditures of $50.3 billion, to leave a budget reserve in the SFEU of $550
million at June 30, 1998. The Governor proposed further programs to reduce class
size in lower primary grades, using excess revenues from FY 1996-97. He also
proposed a further cut in
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corporate taxes, and sweeping changes in public assistance programs to respond
to the new federal welfare reform law.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
BOND RATINGS
The ratings on California's long-term general obligation bonds were
reduced in the early 1990's from "AAA" levels which had existed prior to the
recession. In 1996, Fitch and Standard & Poor's raised their ratings of
California's general obligation bonds, which are currently assigned ratings of
"A+" from Standard & Poor's, "A1" from Moody's and "A+" from Fitch. There can be
no assurance that such ratings will be maintained in the future. It should be
noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and that there is no obligation on the part of the State to
make payment on such obligations in the event of default.
LEGAL PROCEEDINGS
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues.
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number
of state agencies, instrumentalities and political subdivisions of the State
that issue municipal obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
STATE ASSISTANCE. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Through
1990-91, local assistance (including public schools) accounted for around 75% of
General Fund spending. To reduce State General Fund support for school
districts, the 1992-93 and 1993-94 Budget Acts caused local governments to
transfer a total of $3.9 billion of property tax revenues to school districts,
representing loss of all the post-Proposition 13 "bailout" aid. The largest
share of these transfers came from counties, and the balance from cities,
special districts and redevelopment agencies. In order to make up part of this
shortfall, the Legislature proposed, and voters approved, dedicating 0.5% of the
sales tax to counties and cities for public safety purposes. In addition, the
Legislature has changed laws to relieve local governments of certain mandates,
allowing them to reduce costs.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of
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growth, of State assistance to local governments may continue to be reduced. Any
such reductions in State aid could compound the serious fiscal constraints
already experienced by many local governments, particularly counties. A number
of other counties have indicated that their budgetary condition is extremely
serious. In the 1995-96 and 1996-97 fiscal years, Los Angeles County, the
largest in the State, had to make significant cuts in services and personnel,
particularly in the health care system, in order to balance its budget. The
County's debt was downgraded by Moody's and S&P in the summer of 1995. Orange
County, which recently emerged from federal bankruptcy protection, has
substantially reduced services and personnel in order to live within much
reduced means.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which will have to be enacted
by June, 1997 in order to comply with the federal welfare reform law. It is now
yet known how the State's legislation will turn out and what its overall impact
will be on local government finances.
ASSESSMENT BONDS. California municipal obligations that are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land that is undeveloped at the time of issuance, but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
CALIFORNIA LONG-TERM LEASE OBLIGATIONS. Certain California long-term
lease obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being leased
is unavailable for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common cases of abatement are failure to
complete construction of the facility before the end of the period during which
lease payments have been capitalized and uninsured casualty losses to the
facility (e.g. due to earthquake). In the event abatement occurs with respect to
a lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not be
paid when due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a State receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State was a named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the District's lease. The trial court upheld
the validity of the lease, and the case has subsequently been settled. Any
judgment in a similar case against the position taken by the Trustee may have
adverse implications for lease transactions of a similar nature by other
California entities.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to health
care
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providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on AD VALOREM property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
that increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which typically are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced that would modify existing taxes or other revenue raising
measures or that either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to predict the extent to which any
such legislation will be enacted. Nor is it presently possible to determine the
impact of any such legislation on California municipal obligations in which the
Fund may invest, future allocations of state revenues to local governments or
the abilities of state or local governments to pay the interest on, or repay the
principal of, such California municipal obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the California Fund could be affected by an
interruption of revenues because of damaged facilities, or, consequently, income
tax deductions for casualty losses or property tax assessment reductions.
Compensatory financial assistance could be constrained by the inability of (i)
an issuer to have obtained earthquake insurance coverage at reasonable rates;
(ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State governments to appropriate
sufficient funds within their respective budget limitations.
KEYSTONE FLORIDA TAX FREE FUND
REVENUES
The State accounts for its receipts using fund accounting. It has
established the General Revenue Fund, the Working Capital Fund and various other
trust funds, which are maintained for the receipt of monies which under law or
trust agreements must be maintained separately.
The General Revenue Fund consists of all monies received by the State
from every source whatsoever which are not allocable to the other funds. Major
sources of tax revenues for the General Revenue Fund are the sales and use tax,
the corporate income tax, and the intangible personal property
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tax, which are projected for fiscal year 1997-98 to amount to 71%, 8% and 4%,
respectively, of the total receipts of that fund.
The Florida Constitution and its statutes mandate that the State budget
as a whole and each separate fund within the State budget be kept in balance
from currently available revenues for each fiscal year.
SALES AND USE TAX
The greatest single source of tax receipts in Florida is the sales and
use tax, which is projected to amount to $11.7 billion for fiscal year 1997-98.
The sales tax is 6% of the sales price of tangible personal property sold at
retail in the state. The use tax is 6% of the cash price or fair market value of
tangible personal property when it is not sold but is used, or stored for use,
in the State. In other words, the use tax applies to the use of tangible
personal property in Florida, which was purchased in another state but would
have been subject to the sales tax if purchased in Florida. Approximately 10% of
the sales tax is designated for local governments and is distributed to the
respective counties in which collected for use by such counties and
municipalities therein. In addition to this distribution, local governments may
(by referendum) assess a 1% sales surtax within their county. Proceeds from this
local option sales surtax can be earmarked for funding countywide bus and rapid
transit systems, local infrastructure construction and maintenance, medical care
for indigents and capital projects for county school districts as set forth in
Section 212.055(2), of the Florida Statutes.
The two taxes, sales and use, stand as complements to each other, and
taken together provide a uniform tax upon either the sale at retail or the use
of all tangible personal property irrespective of where it may have been
purchased. The sales tax also includes a levy on the following: (I) rentals on
tangible personal property and accommodations in hotels, motels, some
apartments, offices, real estate, parking and storage places in parking lots,
garages and marinas for motor vehicles or boats; (ii) admissions to places of
amusements, most sports and recreation events; (iii) utilities, except those
used in homes; and (iv) restaurant meals and expendables used in radio and
television broadcasting. Exemptions include: groceries; medicines; hospital
rooms and meals; seeds, feeds, fertilizers and farm crop protection materials;
purchases by religious, charitable and educational nonprofit institutions;
professional services, insurance and certain personal service transactions;
newspapers; apartments used as permanent dwellings; and kindergarten through
community college athletic contests or amateur plays.
OTHER STATE TAXES
Other taxes which Florida levies include the motor fuel tax, corporate
income tax, intangible property tax, documentary stamp tax, gross receipts
utilities tax and severance tax on the production of oil and gas and the mining
of solid minerals, such as phosphate and sulfur.
LOCAL GOVERNMENT DEBT
Numerous government units, counties, cities, school districts and
special taxing districts, issue general obligation bonds backed by their taxing
power. State and local government units may issue revenue obligations, which are
supported by the revenues generated from the particular projects or enterprises.
Examples include obligations issued to finance the construction of water and
sewer systems, health care facilities and educational facilities. In some cases,
sewer or water revenue obligations may be additionally secured by the full faith
and credit of the State.
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OTHER FACTORS
The performance of the obligations issued by Florida, its
municipalities, subdivisions and instrumentalities are in part tied to
state-wide, regional and local conditions within Florida. Adverse changes to
state-wide, regional or local economies may adversely affect the
creditworthiness of Florida, its municipalities, etc. Also, some revenue
obligations may be issued to finance construction of capital projects which are
leased to nongovernmental entities. Adverse economic conditions might affect
those lessees' ability to meet their obligations to the respective governmental
authority which in turn might jeopardize the repayment of the principal of, or
the interest on, the revenue obligations.
KEYSTONE MASSACHUSETTS TAX FREE FUND
The Commonwealth of Massachusetts and certain of its cities and towns
and public bodies have experienced in the past, and may experience in the
future, financial difficulties that may adversely affect their credit standing.
The prolonged effects of such financial difficulties could adversely affect the
market value of the municipal securities held by the Massachusetts Fund. The
information summarized below describes some of the more significant factors that
could affect the Massachusetts Fund or the ability of the obligors to pay debt
service on certain of the securities. The sources of such information are the
official statement of issuers located in the Commonwealth of Massachusetts as
well as other publicly available documents, and statements of public officials.
The Massachusetts Fund has not independently verified any of the information
contained in such statements and documents but the Massachusetts Fund is not
aware of facts which would render such information inaccurate.
GENERAL
The Commonwealth's constitution requires, in effect, that its budget,
though not necessarily its operating expenditures and revenue, be balanced each
year. In addition, the Commonwealth has certain budgetary procedures and fiscal
controls in place that are designed to ensure that sufficient cash is available
to meet the Commonwealth's obligations, that state expenditures are consistent
with periodic allotments of annual appropriations and that funds are expended
consistent with statutory and public purposes. The condition of the three
principal operating funds (the General Fund, the Local Aid Fund and the Highway
Fund), viewed on a consolidated basis, is generally regarded as the principal
indicator of whether the Commonwealth's operating revenues and expenses are in
balance.
Although the Commonwealth experienced an economic slowdown during the
recession of 1990 to 1991, budgeted expenditures for fiscal 1992 were
approximately $13.416 billion, while budgeted revenues and other sources for
that year were approximately $13.728 billion, including tax revenues of
approximately $9.484 billion. Budgeted expenditures in fiscal 1992 were
approximately $300 million higher than July, 1991 estimates of budgeted
expenditures. The budgeted operating funds ended fiscal 1992 with a combined
balance of $549.4 million.
Budgeted revenues and other sources in fiscal 1993 were approximately
$14.710 billion, including tax revenues of approximately $9.930 billion.
Budgeted expenditures and other uses in fiscal 1993 were approximately $14.696
billion. Furthermore, total revenues and other sources for fiscal 1993 increased
approximately 6.9% from fiscal 1992, while tax revenues increased by 4.7% for
the same period. Budgeted expenditures and other uses in fiscal 1993 were
approximately 9.6% higher than fiscal 1992 expenditures and other uses. Fiscal
1993 budgeted expenditures were $23 million lower than estimated in July 1992.
As of 1993 fiscal year end, the Commonwealth had aggregated balances of
approximately $562.5 million in the budgeted operating funds, including a
combined balance of $452.1 million in the stabilization and undesignated general
funds.
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In June 1993, new comprehensive education reform legislation was
enacted. This legislation required annual increases in expenditures for
education purposes above fiscal 1993 base spending of $1.289 billion, estimated
at approximately $175 million in fiscal 1994, $396 million in fiscal 1995, $629
million in fiscal 1996, and $881 million in fiscal 1997, with additional annual
increases anticipated in later years. The fiscal 1994, 1995, 1996 and 1997
budgets have fully funded the requirements imposed by this legislation.
Municipalities and agencies of the Commonwealth are experiencing the same
economic effects. Moreover, they are affected by the financial condition of the
Commonwealth, because they receive substantial funding from the Commonwealth.
The fiscal 1994 budget provided for expenditures and other uses of
approximately $15.523 billion, an increase of 5.6% over fiscal 1993 levels.
Budgeted revenues and other sources for fiscal 1994 were approximately $15.55
billion. This amount included tax revenues of approximately $10.607 billion,
which is 6.8% higher than fiscal 1993 tax revenues. 1994 tax revenues were
approximately $87 million below the Department of Revenue's estimate of $10.694
billion. Total revenues and other sources were approximately 5.7% higher than
fiscal 1993 levels. Fiscal 1994 ended with a combined balance of approximately
$589.3 million in the budgeted operating funds.
Fiscal 1995 tax revenue collections were approximately $11.163 billion,
approximately $12 million above the Department of Revenue's revised fiscal year
1995 tax revenue estimate of $11.151 billion and approximately $556 million, or
5.2%, above fiscal 1994 tax revenues of $10.607 billion. Budgeted revenues and
other sources, including non-tax revenues, collected in fiscal 1995 were
approximately $16.387 billion, approximately $837 million, or 5.4%, above the
fiscal 1994 budgeted revenues of $15.55 billion. Budgeted expenditures and other
uses of funds in fiscal 1995 were approximately $16.251 billion, approximately
$728 million, or 4.7%, above fiscal 1994 budgeted expenditures and uses of
$15.523 billion. The Commonwealth ended fiscal 1995 with a combined fund balance
of $726 million. As calculated by the Comptroller, the amount of surplus funds
(as so defined) for fiscal 1995 was approximately $94.9 million, of which $55.9
million was available to be carried forward as a beginning balance for fiscal
1996. Of the balance approximately $27.9 million was deposited in the
Stabilization Fund, and approximately $11.1 million was deposited in the Cost
Relief Fund.
Budgeted revenues and other sources for fiscal 1996 totaled
approximately $17.328 billion, including tax revenues of approximately $12.049
billion. From fiscal 1995 to fiscal 1996, budgeted revenues and other sources
increased by approximately 5.7%, while tax revenues increased by approximately
7.9% for the same period. The Department of Revenue believes that the strong tax
revenue growth in fiscal 1996 was due partly to one-time factors which may not
recur in fiscal 1997 and which have been incorporated into the Department's
forecast for fiscal 1997 tax revenues. Such factors include the rise in the
stock and bond markets in calendar 1995, which may have created unusually large
capital gains and corresponding increases in personal income tax payments in
fiscal 1996. Budgeted expenditures and other uses in fiscal 1996 were
approximately $16.881 billion, an increase of approximately $630.6 million, or
3.9%, over fiscal 1995 budgeted expenditures and other uses of $16.251 billion.
The Commonwealth ended the 1996 fiscal year with a combined balance of
approximately $1.172 billion in the budgeted operating funds.
Approximately $177.4 million was transferred to the Stabilization Fund
at the end of fiscal 1996, bringing that Fund balance to approximately $625.0
million, which exceeded the amount of $543.3 million that can remain in the
Stabilization Fund by law. Under state law, year-end surplus amounts in excess
of the amount that can remain in the Stabilization Fund are transferred to the
Tax Reduction Fund, to be applied, subject to legislative appropriation, to the
reduction of personal income taxes. Of the $177.4 million transferred to the
Stabilization Fund in fiscal 1996, $81.7 million was subsequently transferred to
the Tax Reduction Fund and the 1996 balance in the Tax Reduction Fund as
calculated by the Comptroller, was approximately $231.7 million. Pursuant to
fiscal 1996 supplemental
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appropriations legislation signed by the Governor on July 30, 1996,
approximately $150 million was appropriated from the Tax Reduction Fund for
personal income tax reductions in fiscal 1997, to be implemented by a temporary
increase in the amount of the personal exemption allowable for the 1996 taxable
year. On September 15, 1996 the Governor filed legislation proposing to use the
full amount in the Tax Reduction Fund to increase the personal income tax
exemption for the 1996 tax year, but this legislation was not enacted in the
1996 legislative session.
The final fiscal 1996 appropriation bills approved by the Governor on
July 30, 1996 and August 10, 1996 contained approximately $246.9 million in
fiscal 1996 appropriations, $38.2 million in fiscal 1997 appropriations and
$221.7 million in fiscal 1996 appropriations continued for use in fiscal 1997.
Amounts carried forward from fiscal 1995 and deposited in the Cost Relief Fund
were appropriated in these bills for further subsidies to local government
units.
The fiscal 1997 budget, as signed into law by the Governor on June 30,
1996, provides for estimated expenditures and other uses of approximately
$17.704 billion, an $823 million, or 4.9%, increase over fiscal 1996 spending.
The fiscal 1997 budget includes a spending increase of approximately $254
million to continue funding the comprehensive educational reform legislation
enacted in 1993. Budgeted revenues and other sources to be collected in fiscal
1997 are estimated to be approximately $17.394 billion. This amount includes a
revised estimate of fiscal 1997 tax revenues of $12.307 billion, which is
approximately $257 million, or 2.1%, higher than fiscal 1996 tax revenues, and
is $184 million higher than the October 1996 estimate of $12.123 billion. The
combined ending fund balances for fiscal year 1997 are estimated at
approximately $863 million, which is $309 million below the fiscal 1996 year-end
fund balance. Approximately $255 million of the $309 million is attributable to
non-recurring factors, the largest of which is the $150 million personal income
tax reduction.
On January 23, 1997, the Governor filed legislation to appropriate the
remaining balance of approximately $85 million in the Tax Reduction Fund for an
additional temporary personal exemption increase during the 1997 taxable year.
As a result, the $85 million in tax cuts initially proposed by the Governor for
fiscal 1997 are now estimated to occur in fiscal 1998. Based on preliminary
figures, through February 1997, fiscal 1997 tax revenue collections have totaled
approximately $7.903 billion, approximately $602 million, or 8.3%, greater than
tax revenue collections for the same period in fiscal 1996. Tax revenue
collections to date are approximately $227 million above the midpoint of the
benchmark range set by the Department of Revenue, based on the current fiscal
1997 tax collection estimate of $12.307 billion, and are approximately $155
million above the top of such benchmark range.
The Governor's fiscal 1998 budget recommendation, which was submitted
to the Legislature on January 22, 1997, calls for budgeted expenditures of
approximately $18.15 billion or total spending of $18.224 billion, which
represents a $520 million, or 2.9%, increase over estimated fiscal 1997
expenditures and other uses of $17.704 billion. Budgeted revenues for fiscal
1998 are estimated at $17.998 billion or total revenues of $18.072 billion,
which is a $219 million, or 1.2%, increase over the $17.853 total revenues and
other sources forecast for fiscal 1997. The budget recommendation is based on a
tax revenue estimate of $12.667 billion, a 2.9% increase over fiscal 1997
projected tax revenues of $12.307 billion. The fiscal 1998 tax revenue estimate
incorporates $82 million in personal and business tax cuts proposed by the
Governor and includes an $85 million income tax reduction for the taxable year
1997, the second consecutive tax cut of this kind. The Governor's proposal
projects a fiscal 1998 ending balance of approximately $711 million, including a
Stabilization Fund balance of $585.8 billion, assuming passage of legislation
filed on January 23, 1997 which would increase the statutory cap on the
Stabilization Fund from 5% of tax revenues (less debt service) to 5% of total
budgeted revenues. The budget proposal also recommends an increase of $259
million in local education aid to fund the 1993 education reform legislation.
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The Governor has begun to phase in a plan to provide permanent
passenger vehicle registration and lifetime operating licenses. These proposals
are not estimated to affect revenues until fiscal 1998, when the elimination of
vehicle registration fees is estimated to reduce state revenues by approximately
$13.75 million, and by approximately $55 million in fiscal 1999. Lifetime
operating licenses are estimated to reduce revenues by approximately $5 million
in fiscal 2001 and by $31 million in fiscal 2002.
On November 28, 1995 the Governor approved a modified version of the
legislation he had filed in September to establish a "single sales factor"
apportionment formula for the business corporations tax. As finally enacted, the
legislation applies the new formula, effective January 1, 1996, to certain
federal defense contractors and phases the new formula in over five years to
manufacturing firms generally. The Department of Revenue estimates that the new
law reduced revenues by $44 million in fiscal 1996 and will reduce revenues by
$90 million in fiscal 1997. If the new formula were fully effective for all
covered businesses, the Department estimates that the annual revenue reduction
would be $100 million to $150 million. On August 8, 1996, the Governor approved
legislation changing the apportionment formula for the business corporations tax
payable by certain mutual fund service corporations. The legislation changes the
computation of the sales factor effective January 1, 1997 and adopts the "single
sales factor" formula effective July 1, 1997 with respect to these companies. It
also requires the affected corporations to increase their numbers of employees
by 5% per year for five years, subject to certain exceptions. The Department of
Revenue estimates that the changes will reduce revenues by $10 million in fiscal
1997 and by approximately $39 million to $53 million per year beginning in
fiscal 1998.
On January 7, 1997 the Governor filed legislation to abolish county
government on July 1, 1998. Most county functions and properties, including
jails, houses of correction and courts, would be transferred to the
Commonwealth, and all liabilities, debts, leases and contracts of any county
would become obligations of the Commonwealth. Under legislation enacted in 1996,
Franklin County government will terminate on July 1, 1997 in favor of a regional
council of governments. On December 13, 1996 Middlesex County defaulted on a
required payment of revenue anticipation notes. The legislature is currently
considering legislation that would abolish Middlesex County government on final
approval of the legislation and transfer its functions to the Commonwealth. The
county's debts and liabilities would be assumed by the Commonwealth.
The Commonwealth is evaluating the impact upon the Commonwealth of
federal welfare reform legislation enacted on August 22, 1996. Current estimates
indicate no fiscal 1997 spending impact associated with the federal legislation
and an increase of approximately $86 million in federal revenues for the
Commonwealth in fiscal 1997.
LIMITATIONS ON TAX REVENUES
In Massachusetts, efforts to limit and reduce levels of taxation have
been underway for several years. Limits were established on state tax revenues
by legislation enacted on October 25, 1986 and by an initiative petition
approved by the voters on November 4, 1986. The two measures are inconsistent in
several respects.
Chapter 62F, which was added to the General Laws by initiative petition
in November 1986, establishes a state tax revenue growth limit for each fiscal
year equal to the average positive rate of growth in total wages and salaries in
the Commonwealth, as reported by the federal government, during the three
calendar years immediately preceding the end of such fiscal year. Chapter 62F
also requires that allowable state tax revenues be reduced by the aggregate
amount received by local governmental units from any newly authorized or
increased local option taxes or excises. Any excess in state tax revenue
collections for a given fiscal year over the prescribed limit, as determined by
the State Auditor, is to be applied as a credit against the then current
personal income tax liability of all taxpayers in the
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Commonwealth in proportion to the personal income tax liability of all taxpayers
in the Commonwealth for the immediately preceding tax year.
Unlike Chapter 29B, as described below, the initiative petition did not
exclude principal and interest payments on Commonwealth debt obligations from
the scope of its tax limit. However, the preamble contained in Chapter 62F
provides that "although not specifically required by anything contained in this
chapter, it is assumed that from allowable state tax revenues as defined herein
the Commonwealth will give priority attention to the funding of state financial
assistance to local governmental units, obligations under the state governmental
pension systems, and payment of principal and interest on debt and other
obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However, rather than
utilizing a three-year average wage and salary growth rate, as used by Chapter
62F, Chapter 29B utilizes an allowable state revenue growth factor equal to 1/3
of the positive percentage gain in Massachusetts wages and salaries, as reported
by the federal government during the three calendar years immediately preceding
the end of a given fiscal year. Additionally, unlike Chapter 62F, Chapter 29B
allows for an increase in maximum state tax revenues to fund the increase in
local aid and excludes from its definition of state tax revenues (i) income
derived from local option taxes and excises, and (ii) revenues needed to fund
debt service costs.
Tax revenues in fiscal 1992 through fiscal 1996 were lower than the
limit set by either Chapter 62F or Chapter 29B. The Executive Office for
Administration and Finance currently estimates that state tax revenues in fiscal
1997 will not reach the limit imposed by either of these statutes.
PROPOSITION 2 1/2
In November 1980, voters in the Commonwealth approved a statewide tax
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain levels of property taxation and to limit the charges and fees imposed
on cities and towns by certain governmental entities, including county
governments. Proposition 2 1/2 is not a provision of the state constitution and
accordingly is subject to amendment or repeal by the legislature. Proposition 2
1/2, as amended to date, limits the property taxes that may be levied by any
city or town in any fiscal year to the lesser of (i) 2.5% of the full and fair
cash valuation of the real estate and personal property therein, and (ii) 2.5%
over the previous year's levy limit plus any growth in the tax base from certain
new construction and parcel subdivisions. Proposition 2 1/2 also limits any
increase in the charges and fees assessed by certain governmental entities,
including county governments, on cities and towns to the sum of (i) 2.5% of the
total charges and fees imposed in the preceding fiscal year, and (ii) any
increase in charges for services customarily provided locally or services
obtained by the city or town at its option. The law contains certain override
provisions and, in addition, permits debt service on specific bonds and notes
and expenditures for identified capital projects to be excluded from the limits
by a majority vote at a general or special election.
Many communities have responded to the limitations imposed by
Proposition 2 1/2 through statutorily permitted overrides and exclusions.
Override activity peaked in fiscal 1991 and decreased thereafter. In fiscal
1992, 65 communities approved one of the three types of referenda questions
(override of levy limit, exclusion of debt service, or exclusion of capital
expenditures), adding $31.0 million to their levy limits.
In fiscal 1993, 59 communities added $16.3 million through override
votes and in fiscal 1994, only 48 communities had successful override referenda
which added $8.4 million to their levy limits. In fiscal 1995, 32 communities
added $8.8 million, and in fiscal 1996, 30 communities added $5.8 million
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to their levy limits. Although Proposition 2 1/2 will continue to constrain
local property tax revenues, significant capacity exists for overrides in nearly
all cities and towns.
In addition to overrides, Proposition 2 1/2 allows a community, through
voter approval, to assess taxes in excess of its levy limit for the payment of
certain capital projects (capital outlay expenditure exclusions) and for the
payment of specified debt service costs (debt exclusions). Capital exclusions
were passed by 19 communities in fiscal 1996 and totaled $1.5 million. In fiscal
1996, the impact of successful debt exclusion votes going back as far as fiscal
1983, was to raise the levy limits of 229 communities by $125.8 million.
LOCAL AID
During the 1980's, the Commonwealth increased payments to its cities,
towns, and regional school districts ("Local Aid") to mitigate the impact of
Proposition 2 1/2 on local programs and services. In fiscal 1997, approximately
20% of the Commonwealth's budget is estimated to be allocated to direct Local
Aid. Local Aid payments to cities, towns, and regional school districts take the
form of both direct and indirect assistance.
Direct Local Aid increased from $2.359 billion in fiscal 1992 to $2.547
billion in fiscal 1993 and increased to $2.727 billion in fiscal 1994. Fiscal
1995 expenditures for direct Local Aid were $2.976 billion, which was an
increase of approximately 9.1% above the fiscal 1994 level. Fiscal 1996
expenditures for direct Local Aid were $3.246 billion, an increase of
approximately 9.1% above the fiscal 1995 level. It is estimated that fiscal 1997
expenditures for direct Local Aid will be $3.538 billion, which is an increase
of approximately 9.0% above the fiscal 1996 level.
A statute adopted by voter initiative petition at the November 1990
statewide election regulates the distribution of Local Aid to cities and towns,
by requiring, subject to appropriation, that no less than 40% of collections
from personal income taxes, sales and use taxes, corporate excise taxes, and
lottery fund proceeds be distributed to cities and towns. Under the law, the
Local Aid distribution to each city or town would equal no less than 100% of the
total Local Aid received for fiscal 1989. Distributions in excess of fiscal 1989
levels would be based on new formulas. By its terms, the new formula would have
called for a substantial increase in direct Local Aid in fiscal 1992, and would
call for such an increase in fiscal 1993 and in subsequent years. However, Local
Aid payments expressly remain subject to annual appropriation, and fiscal 1992,
fiscal 1993, fiscal 1994, fiscal 1995 and fiscal 1996 appropriations for Local
Aid did not meet, and fiscal 1997 appropriations for Local Aid do not meet, the
levels set forth in the initiative law.
COMMONWEALTH EXPENDITURES
Fiscal 1992 budgeted expenditures were $13.416 billion. For fiscal
1993, budgeted expenditures were $14.696 billion, representing a 9.6% increase
from fiscal 1992. Fiscal 1994 budgeted expenditures were $15.523 billion, an
increase of 5.6% from fiscal 1993. Fiscal 1995 budgeted expenditures were
$16.251 billion, an increase of 4.7% from fiscal 1994. Fiscal 1996 budgeted
expenditures were $16.881 billion, an increase of 3.9% from fiscal 1995. It is
estimated that fiscal 1997 budgeted expenditures will be $17.704 billion, an
increase of 4.9% over fiscal 1996 levels.
Commonwealth expenditures since fiscal 1992 largely reflect significant
growth in several programs and services provided by the Commonwealth,
principally Local Aid, Medicaid and group health insurance, public assistance
programs, debt service, pensions, higher education and assistance to the
Massachusetts Bay Transportation Authority and regional transit authorities.
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The Commonwealth is responsible for the payment of pension benefits for
state employees and for school teachers throughout the state. The Commonwealth
is also responsible for cost of living increases payable to local government
retirees. State pension expenditures have risen dramatically as the Commonwealth
has appropriated moneys to partially address the unfunded liabilities that had
accumulated over several decades of "pay-as-you-go" administration of the
pension systems for which it is responsible. For several years during the 1980s,
the Commonwealth made substantial direct appropriations to pension reserves, in
addition to paying current benefits. In 1988, the Commonwealth adopted a funding
schedule under which it is required to fund future pension liabilities currently
and to amortize the accumulated unfunded liabilities over 40 years. Total
pension expenditures increased at an average annual rate of 7.6% from $751.5
million in fiscal 1992 to $1.005 billion in fiscal 1996. Total pension
expenditures are estimated at $1.067 billion for fiscal 1997. In fiscal 1996, a
number of reform measures affecting pensions were enacted into law. Among the
most notable were a measure consolidating the assets of the state employees' and
teachers' retirement systems into a single investment fund and another that will
reform the disability pension system. On November 6, 1996 the Governor filed
with the legislature a proposed revised pension funding schedule under which the
Commonwealth's unfunded liability for its pension obligations would be amortized
more rapidly and would be eliminated by fiscal 2019, ten years earlier than
under the current schedule.
LITIGATION
There are pending in state and federal courts within the Commonwealth
and in the U.S. Supreme Court various suits in which the Commonwealth is a
party. In the opinion of the Attorney General, no litigation is pending or, to
his knowledge, threatened which is likely to result, either individually or in
the aggregate, in final judgments against the Commonwealth that would affect
materially its financial condition.
OTHER FACTORS
Many factors affect the financial condition of the Commonwealth,
including many social, environmental, and economic conditions, which are beyond
the control of the Commonwealth. As with most urban states, the continuation of
many of the Commonwealth's programs, particularly its human service programs,
is, in significant part, dependent upon continuing federal reimbursements, which
are expected to decline in fiscal 1997.
KEYSTONE MISSOURI TAX FREE FUND
GENERAL
Missouri's economy includes manufacturing, commerce, trade, services,
agriculture, tourism and mining. The State's economy is diversified and closely
resembles that of the nation's although growth prospects are less favorable than
in the past. It is the nation's fifteenth largest state. The State employment
sectors, services, trade and manufacturing, also account for the primary sources
of national employment. Recent growth in the manufacturing sector has outpaced
the nation as a whole. Labor force growth has remained steady, totaling 2.65
million in 1993, up from 2.3 million in 1980. Through the 1980's and early
1990's the State's unemployment rate essentially mirrored that of the nation;
however, adverse changes in military appropriations, which play an important
role in the State's economy, could contribute to a significant increase in
unemployment. In 1996, according to the Bureau of Labor Statistics, the State
ranked seventeenth among the states in unadjusted nonagricultural employment. In
November 1996, the State's unemployment rate was estimated to be 4.0% as against
the national rate of 5.3%. In recent years, Missouri's wealth indicators have
grown at a slower rate than
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national levels and in 1995 the State's per capita personal income was
approximately 94.0% of the average for the nation as a whole.
Missouri displayed strong fiscal performance during most of the 1980's.
However, Missouri has recently experienced difficulties in balancing its budget
as a result of increased expenses and declining sources of revenues. Other
factors contributing to Missouri's weak fiscal position relate to the reduction
of large manufacturing companies, including those in aerospace and the auto
industry. The Missouri portions of the St. Louis and Kansas City metropolitan
areas together contain over 50% of Missouri's population. Economic reversals in
either of these two areas would have a major impact on the overall economic
condition of the State of Missouri. Additionally, the State of Missouri has a
significant agricultural sector, which may experience problems comparable to
those which are occurring in other states. To the extent that any such problems
intensify, there could possibly be an adverse impact on the overall economic
condition of the State.
Currently, general obligations of Missouri are rated "AAA," "Aaa" and
"AAA," by S&P, Moody's and Fitch, respectively. There can be no assurance that
the economic conditions on which these ratings are based will continue or that
particular bond issues may not be adversely affected by changes in economic,
political or other conditions.
REVENUE AND LIMITATIONS THEREON
Article X, Section 16-24 of the Constitution of Missouri (the "Hancock
Amendment"), imposes limitations on the amount of State taxes which may be
imposed by the General Assembly of Missouri (the "General Assembly") as well as
on the amount of local taxes, licenses and fees (including taxes, licenses and
fees used to meet debt service commitments on debt obligations) which may be
imposed by local governmental units (such as cities, counties, school districts,
fire protection districts and other similar bodies) in the State of Missouri in
any fiscal year.
The State limit on taxes is tied to total State revenues for fiscal
year 1980-81, as defined in the Hancock Amendment, adjusted annually in
accordance with the formula set forth in the amendment, which adjusts the limit
based on increases in the average personal income of Missouri for certain
designated periods. The details of the Amendment are complex and clarification
from subsequent legislation and further judicial decisions may be necessary.
Generally, if the total State revenues exceed the State revenue limit imposed by
Section 18 of Article X by more than one percent, the State is required to
refund the excess. The State revenue limitation imposed by the Hancock Amendment
does not apply to taxes imposed for the payment of principal and interest on
bonds, approved by the voters and authorized by the Missouri constitution. The
revenue limit also can be exceeded by a constitutional amendment authorizing new
or increased taxes or revenue adopted by the voters of the State of Missouri.
The Hancock Amendment also limits new taxes, licenses and fees and
increases in taxes, licenses and fees by local governmental units in Missouri.
It prohibits counties and other political subdivisions (essentially all local
governmental units) from levying new taxes, licenses and fees or increasing the
current levy of an existing tax, license or fee without the approval of the
required majority of the qualified voters of that county or other political
subdivision voting thereon.
When a local government unit's tax base with respect to certain fees or
taxes is broadened, the Hancock Amendment requires the tax levy or fees to be
reduced to yield the same estimated gross revenue as on the prior base. It also
effectively limits any percentage increase in property tax revenues to the
percentage increase in the general price level (plus the value of new
construction and improvements), even if the assessed valuation of property in
the local governmental unit, excluding the
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value of new construction and improvements, increases at a rate exceeding the
increase in the general price level.
INDUSTRY AND EMPLOYMENT
While Missouri has a diverse economy with a distribution of earnings
and employment among manufacturing, trade and service sectors closely
approximating the average national distribution, the national economic recession
of the early 1980's had a disproportionately adverse impact on the economy of
Missouri. During the 1970's, Missouri characteristically had a pattern of
unemployment levels well below the national averages. However, since the 1980 to
1983 recession periods Missouri unemployment levels generally approximated or
slightly exceeded the national average. A return to a pattern of high
unemployment could adversely affect the Missouri debt obligations acquired by
the Missouri Fund and, consequently, the value of the shares of the Fund.
The Missouri portions of the St. Louis and Kansas City metropolitan
areas contain approximately 1,945,813 and 1,016,457 residents, respectively,
constituting over fifty percent of Missouri's 1995 population census of
approximately 5,339,041. St. Louis is an important site for banking and
manufacturing activity, as well as a distribution and transportation center,
with nine Fortune 500 industrial companies (as well as other major educational,
financial, insurance, retail, wholesale and transportation companies and
institutions) headquartered there. Kansas City is a major agribusiness center
and an important center for finance and industry. Economic reversals in either
of these two areas would have a major impact on the overall economic condition
of the State of Missouri. Additionally, the State of Missouri has a significant
agricultural sector which is experiencing farm-related problems comparable to
those which are occurring in other states. To the extent that these problems
were to intensify, there could possibly be an adverse impact on the overall
economic condition of the State of Missouri.
Defense related business plays an important role in Missouri's economy.
There are a large number of civilians employed at the various military
installations and training bases in the state and recent action of the Defense
Base Closure and Realignment Commission will result in the loss of a substantial
number of civilian jobs in the St. Louis Metropolitan area. Further, aircraft
and related businesses in Missouri are the recipients of substantial annual
dollar volumes of defense contract awards. The contractor receiving the second
largest dollar volume of defense contracts in the United States in 1995 was
McDonnell Douglas Corporation which lost the number one position it held in 1994
by reason of the merger of the Lockheed and Martin Companies. McDonnell Douglas
Corporation is the State's largest employer, currently employing approximately
20,000 employees in Missouri. Recent changes in the levels of military
appropriations and the cancellation of the A-12 program has affected McDonnell
Douglas Corporation in Missouri and over the last four years it has reduced its
Missouri work force by approximately 30%. There can be no assurances that there
will be further changes in the levels of military appropriations, and, to the
extent that further changes in military appropriations are enacted by the United
States Congress, Missouri could be disproportionately affected. On December 15,
1996, The Boeing Company and McDonnell Douglass Corporation announced that The
Boeing Company planned to acquire McDonnell Douglas Corporation. It is
impossible to determine what effect, if any, completion of the acquisition will
have on the operations of McDonnell Douglas Corporation. However, any shift or
loss of production now conducted in Missouri would have a negative impact on the
economy of the state and particularly the economy of the St. Louis metropolitan
area.
OTHER FACTORS
Desegregation lawsuits in St. Louis and Kansas City continue to require
significant levels of state funding and are sources of uncertainty. Litigation
continues on many issues, court orders are unpredictable, and school district
spending patterns have proven difficult to predict. A recent Supreme
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Court decision favorable to the State may decrease the level of State funding
required in the future, but the impact of this decision is uncertain. The State
paid $282 million for desegregation costs in fiscal 1994, $315 million for
fiscal 1995 and $274 million for fiscal 1996. This expense accounted for close
to 7% of total state General Revenue Fund spending in fiscal 1994 and 1995, and
close to 5% in fiscal 1996.
KEYSTONE NEW YORK TAX FREE FUND
As described in the prospectus, the New York Fund will generally invest
in New York municipal obligations. The New York Fund is therefore susceptible to
political, economical, or regulatory factors affecting New York State and
governmental bodies within New York State. Some of the more significant events
and conditions relating to the financial situation in New York are summarized
below. The following information provides only a brief summary of the complex
factors affecting the financial situation in New York, is derived from sources
that are generally available to investors and is believed to be accurate. It is
based on information drawn from official statements and prospectuses issued by,
and other information reported by, the State of New York by its various public
bodies, and by other entities located within the State, including the City of
New York, in connection with the issuance of their respective securities.
THE STATE
New York State (for purposes of this section of the Appendix, "the
State") historically has been one of the wealthiest states in the nation. For
decades, however, the State has grown more slowly than the nation as a whole,
gradually eroding its relative economic affluence. Statewide, urban centers have
experienced significate changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business. New York City
(for purposes of this section of the Appendix, "the City") has also had to face
great competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
During the 1982-83 recession, overall economic activity in the State
declined less than that of the nation as a whole. However, in calendar years
1984 through 1991, the State's rate of economic expansion was somewhat slower
than that of the nation. In the 1990-91 recession, the economy of the State, and
that of the rest of the Northeast, was more heavily damaged than that of the
nation as a whole and has been slower to recover. The total employment growth
rate in the State has been below the national average since 1984. The
unemployment rate in the State dipped below the national rate in the second half
of 1981 and remained lower until 1991; since then, it has been higher. According
to data published by the U.S. Bureau of Economic Analysis, during the past ten
years, total personal income in the State rose slightly faster than the national
average only from 1986 through 1988.
Between 1975 and 1990 total employment grew by 21.3 percent while the
labor force grew only by 15.7 percent, unemployment fell from 9.5 percent to 5.2
percent of the labor force. In 1991 and 1992, however, total employment in the
State fell by 457,000, or 5.5 percent. As a result, the unemployment rate rose
to 8.5 percent, reflecting a recession that has had a particularly strong impact
on the entire Northeast. Calendar years 1993 and 1994 saw only a partial
recovery.
Although the State ranks 22nd in the nation for its state tax burden,
the State has the second highest combined state and local tax burden in the
United States. The burden of State and local taxation, in combination with the
many other causes of regional economic dislocation, may have contributed to the
decisions of some businesses and individuals to relocate outside, or not locate
within, the State. To stimulate economic growth, the State has developed
programs, including the provision of
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direct financial assistance, designed to assist businesses to expand existing
operations located within the State and to attract new businesses to the State.
In addition, the State has provided various tax incentives to encourage business
relocation and expansion.
The 1995-96 budget reflected significant actions to reduce the burden
of State taxation, including adoption of a 3-year, 20 percent reduction in the
State's personal income tax and a variety of more modest changes in other
levies. In combination with business tax reductions enacted in 1994, these
actions will reduce State taxes by over $5.5 billion by the 1997-98 fiscal year,
when compared to the estimated yield in that year of the State tax structure as
it applied in 1993-94.
In recent years, State actions affecting the level of receipts and
disbursements, as well as the relative strength of the State and regional
economy, actions of the Federal government and other factors, have created
structural budget gaps for the State. These gaps resulted from a significant
disparity between recurring revenues and the costs of maintaining or increasing
the level of support for State programs. The 1995-96 enacted budget combined
significant tax and program reductions which will, in the current and future
years, lower both the recurring receipts base (before the effect of any economic
stimulus from such tax reductions) and the historical annual growth in State
program spending. Notwithstanding these changes, the State can expect to
continue to confront structural deficits in future years.
1997-98 FISCAL YEAR (EXECUTIVE BUDGET FORECAST)
The governor presented his 1997-98 Executive Budget to the Legislature
on January 14, 1997. The Executive Budget also contains financial projections
for the State's 1998-99 and 1999-2000 fiscal years, detailed estimates of
receipts and an updated Capital Plan. There can be no assurance that the
Legislature will enact the Executive Budget as proposed by the Governor into
law, or that the State's adopted budget projections will not differ materially
and adversely from the projections as set forth in the Update.
The 1997-98 Financial Plan projects balance on a cash basis in the
General Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers to other funds are projected to be $32.88 billion, a
decrease of $88 million from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to other funds are
projected to be $32.84 billion, a decrease of $56 million from spending totals
projected for the current fiscal year. As compared to the 1996-97 State
Financial Plan, the Executive Budget proposes a year-to-year decline in General
Fund spending of 0.2 percent. State funds spending (i.e., General Fund plus
other dedicated funds with the exception of federal aid) is projected to grow by
1.2 percent. Spending from All Governmental Funds (excluding transfers) is
proposed to increase by 2.2 percent from the prior fiscal year.
The Executive Budget proposes $2.3 billion in actions to balance the
1997-98 Financial Plan. Before reflecting any actions proposed by the Governor
to restrain spending, General Fund disbursements for 1997-98 were projected to
grow by approximately 4 percent. This increase would have resulted from growth
in Medicaid, higher fixed costs such as pensions and debt service, collective
bargaining agreements, inflation, and the loss of non-recurring resources that
offset spending in 1996-97. General Fund receipts were projected to fall by
roughly 3 percent. This reduction would have been attributable to modest growth
in the State's economy and underlying tax base, the loss of non-recurring
revenues available in 1996-97 and implementation of previously enacted tax
reduction programs
The Executive Budget proposes to close this gap primarily though a
series of spending reductions and Medicaid cost containment measures, the use of
a portion of the 1996-97 projected budget surplus,
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and other actions. The 1997-98 Financial Plan projects receipts of the $32.88
billion and spending of $32.84 billion, allowing for a deposit of $24 million
into the CRF and a year-ending CRF reserve of $65 million, and a required
repayment of $15 million to the TSRF. Detailed explanations of the 1997-98
Financial Plan follow a discussion of the economic outlook.
ECONOMIC OUTLOOK
U.S. Economy
The State has updated its mid-year forecast of national and State
economic activity through the end of calendar year 1998. The current projection
is for slightly slower growth than expected in the MidYear Update. The revised
forecast projects real Domestic Gross National Product (GDP) growth of 2.3
percent in 1997, which is the same rate now estimated for 1996, followed by a
2.4 percent increase in 1998. The growth of nominal GDP is expected to rise from
4.3 percent in 1996 to 4.5 percent in 1997 and 4.8 percent in 1998. The
inflation rate is expected to remain stable at 2.9 percent in 1997 and decrease
to 2.8 percent in 1998. The annual rate of job growth is expected to slow to 1.6
percent in both 1997 and 1998, down from the 2.0 percent increase in 1996.
Growth in personal income and wages are expected to slow accordingly in 1997 and
1998.
State Economy
The State economic forecast has been changed only slightly from the one
formulated with the Mid-Year Update. Moderate growth is projected to continue in
1997 for employment, wages, and personal income, followed by a slight slowing in
1998. Personal income is estimated to have grown by 5.2 percent in 1996, fueled
in part by an unusually large increase in financial sector bonus payments, and
is projected to grow 4.5 percent in 1997 and 4.2 percent in 1998. Overall
employment growth will continue at a modest rate, reflecting the moderate growth
of the national economy, continued spending restraint in government, and
restructuring in the health care, social service, and banking sectors.
1996-97 FISCAL YEAR
The State is required to issue Financial Plan updates to the cash-basis
State Financial Plan in July, October, and January, respectively. These
quarterly updates reflect analysis of actual receipts and disbursements for each
respective period, and revise estimates of receipts and disbursements for the
then current fiscal year. The First Quarter Update was incorporated into the
cash-basis State Financial Plan of July 25, 1996.
The State issued its first update to the cash-basis 1996-97 State
Financial Plan (the "Mid-Year Update") on October 25, 1996. Revisions have been
made to estimates of both receipts and disbursements based on: (1) updated
economic forecasts for both the nation and the State, (2) an analysis of actual
receipts and disbursements through the first six months of the fiscal year, and
(3) an assessment of changing program requirements. The Mid-Year Update reflects
a balanced 1996=97 State Financial Plan, and a projected reserve in the General
Fund of $300 million.
The State also updated its forecast of national and State economic
activity through the end of calendar year 1997 to reflect the
stronger-than-expected growth in the first half of 1996. The national economic
forecast has been changed slightly from the initial forecast on which the
original 1996-97 State Financial Plan was based. The revised forecast projects
real Gross Domestic Product growth in the nation of 2.5 percent for 1996 and 2.4
percent in 1997. The inflation rate is expected to be 3.0 percent in 1996 and
2.9 percent in 1997. The annual rate of job growth is expected to slow gradually
to about
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1.8 percent in 1997, down from 2.2 percent in 1996. Growth in personal income
and wages are expected to slow accordingly.
The State economic forecast haws been changed slightly from the one
formulated with the July 1996-97 State Financial Plan. Moderate growth is
projected to continue through the second half of 1996, with employment wages and
incomes continuing their modest rise. Personal income is projected to increase
by 5.2 percent in 1996 and 4.7 percent in 1997, reflecting robust projected wage
growth fueled in part by financial sector bonus payments. Overall employment
growth will continue at a modest rate, reflecting the slowdown in the national
economy, continued spending restraint in government, and restructuring in the
health care and financial sectors.
Actual receipts thought the first two quarters of the 1996-97 State
fiscal year reflected strongerthan-expected growth in most taxes, with actual
receipts exceeding expectations by $250 million. Based on the revised economic
outlook and actual receipts for the first six months of 1996-97, projected
General Fund receipts for the 1996-97 State fiscal years were increased by $420
million. Most of this projected increase was in the yield of the personal income
tax ($241 million), with additional increases expected in business taxes ($124
million) and other tax receipts ($49 million). Projected collections from user
taxes and fees were revised downward slightly ($5 million). Revisions were also
made to both miscellaneous receipts and in transfers from other funds (an $11
million combined projected increase).
The 1996-97 General Fund Financial Plan continues to be balanced. The
Division of the Budget projects that, prior to taking the actions described
below, the General Fund Financial Plan would have shown an operating surplus or
approximately $1.3 billion. These actions include implementing reduced personal
income tax withholding to reflect the impact of tax reduction actions which took
effect on January 1, 1997. This has the effect of raising taxpayer's current
take-home pay rather than requiring taxpayers to wait until the spring of 1998
for larger refunds. The Financial Plan assumes the use of $250 million for this
purpose. In addition, $943 million is projected to be used to pay tax refunds
during the 1996-97 fiscal year or reserved to pay refunds during the 1997-98
fiscal year, which produces a benefit for the 1997-98 Financial Plan. Finally,
$65 million is projected to be deposited into the TSRF (in addition to the
required deposit of $15 million), increasing the cash balance in that fund to
$317 million by the end of 1996-97.
Projected General Fund disbursements are reduced by a total of $348
million from the Mid-Year Update, with changes made in most categories of the
Financial Plan. Most of this savings is attributable to reductions in local
assistance spending, primarily due to significant reestimates in social services
spending to reflect lower case load growth, yielding savings of $226 million.
General State Charges are reduced $76 million to reflect lower pension and
fringe benefit costs. The General State Charges estimate includes savings
achieved from the refinancing of certain pension liabilities through the
issuance of long-term debt as planned, and the payment of that liability to the
State Retirement System. Transfers for the Capital Projects Fund have been
reduced $31 million to reflect slower-than-expected capital disbursements for
the balance of the fiscal year. Reductions in debt service costs of $21 million
reflect savings from refundings undertaken in the current fiscal year, as well
as savings from improved interest rates in the financial markets.
The General Fund closing balance is expected to be $358 million at the
end of 1996-97. Of this amount, $317 million would be on deposit in the TSRF,
while another $41 million would remain on deposit in the CRF as a reserve for
litigation or other unbudgeted costs to the Financial Plan. The TSRF had an
opening balance of $237 million, to be supplemented by a required payment of $15
million and an extraordinary deposit of $645 million from surplus 1996-97
monies. The $9 million on deposit in the Review Accumulation fund will be drawn
down as planned. A planned deposit if $85 million to the CRF, projected to be
received from contractual efforts to maximize federal revenue, is no longer
expected to be deposited this year.
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1995-96 FISCAL YEAR
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995- 96 fiscal year was formulated on June 20, 1995 and
was based on the State's budget as enacted by the Legislature and signed into
law by the Governor. The State Financial Plan is updated quarterly pursuant to
law in July, October and January.
The 1995-96 budget was the first to be enacted in the administration of
the Governor, who assumed office on January 1, 1995. It was the first budget in
over half a century which proposed and, as enacted, projected an absolute
year-over-year decline in General Fund disbursements. Spending for State
operations was projected to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (I.E., excluding Federal aid) was
proposed to increase by only 2.5 percent from the prior fiscal year, in contrast
to the prior decade when such spending growth averaged more than 6.0 percent
annually.
In his Executive Budget, the Governor indicated that in the 1995-96
fiscal year, the State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts, to
spur economic growth and provide relief for low and middle-income taxpayers,
which were larger than those ultimately adopted, and which added $240 million to
the then projected imbalance or budget gap, bringing the total to approximately
$5 billion.
This gap was projected to be closed in the 1995-96 State Financial Plan
based on the enacted budget, through a series of actions, mainly spending
reductions and cost containment measures and certain reestimates that are
expected to be recurring, but also through the use of one-time solutions. The
State Financial Plan projected (I) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State workforce, SUNY and CUNY, mental hygiene programs, capital
projects, the prison system and fringe benefits; (iii) $300 million in savings
from local assistance reforms, including actions affecting school aid and
revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in revenue
measures, primarily a new Quick Draw Lottery game, changes to tax payment
schedules, and the sale of assets; and (v) $300 million from reestimates in
receipts.
There are risks and uncertainties concerning the future-year impact of
tax reductions and other measures in the 1995-96 budget.
The 1995-96 State Financial Plan included actions that will have an
effect on the budget outlook for State fiscal year 1996-97 and beyond. The DOB
estimated that the 1995-96 State Financial Plan contains actions that provide
nonrecurring resources or savings totaling approximately $900 million. These
included the use of balances set aside originally for mass transportation aid
($220 million), the use of a reserve established to fund pension supplementation
cost ($110 million) and the use of lottery
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balances ($62 million) The Comptroller believed that the amount of nonrecurring
resources or savings exceeds $1.0 billion. The DOB also estimates that the
1995-96 State Financial Plan contained nonrecurring expenditures totaling nearly
$250 million. These include the payment of social services litigation ($65
million), the deposit to the Contingency Reserve Fund ($40 million), the payment
of 1993- 94 pension charges ($56 million) and aid for maintenance costs of local
schools ($45 million). The net amount of nonrecurring resources used in the
1995-96 State Financial Plan, accordingly, was estimated by the DOB at over $600
million.
In addition to this use of nonrecurring resources, the 1995-96 State
Financial Plan reflected actions that will directly affect the State' 1996-97
fiscal year baseline receipts and disbursements. The three-year plan to reduce
State personal income taxes will decrease State tax receipts by an estimated
$1.7 billion in State fiscal year 1996-97, in addition to the amount of
reduction in State fiscal year 1995- 96. Further significant reductions in the
personal income tax are scheduled for the 1997-98 State fiscal year. Other tax
reductions enacted in 1994 and 1995 are estimated to cause an additional
reduction in receipts of over $500 million in 1996-97, as compared to the level
of receipts in 1995-96. Similarly, many actions taken to reduce disbursements in
the State's 1995-96 fiscal year are expected to provide greater reductions in
State fiscal year 1996-97. These include actions to reduce the State workforce,
reduce Medicaid and welfare expenditures and slow community mental hygiene
program development. The net impact of these factors is expected to produce a
potential imbalance in receipts and disbursements in State fiscal year 1996-97
As part of the early release of the 1996-97 Executive Budget, the State
updated its 1995-96 cash-basis State Financial Plan (the "Financial Plan
Update") on December 15, 1995, as a part of the Governor's Executive Budget
presentation.
The State updated its forecast of national and State economic activity
through the end of calendar year 1996. The national economic forecast remained
basically unchanged from the initial forecast on which the original 1995-96
State Financial Plan was based, while the State economic forecast was marginally
weaker.
Actual receipts through the first two quarters of the 1995-96 State
fiscal year fell short of expectations by $101 million. Much of this shortfall
was due to timing-related delays in sources other than taxes. Based on the
revised economic outlook and actual receipts for the first six months of 1995-
96, projected General Fund receipts for the 1995-96 State fiscal year were
reduced by $73 million, offset by $2 million in increased revenues and transfers
associated with actions taken in the Management Review Plan. Actual
disbursements through the first six months of the fiscal year were $89 million
less than projected, primarily because of delays in processing payments
following delayed enactment of the State budget. No savings were included in the
Mid-Year Update from this slower-than-expected spending. Projected disbursements
for the 1995-96 State fiscal year were reduced by $30 million because spending
increases in local assistance and State operations was more than offset by debt
service savings and the reductions from the Management Review Plan.
The 1995-96 General Fund Financial Plan continued to be balanced, with
reductions in projected receipts offset by an equivalent reduction in projected
disbursements. Modest changes were made to the Mid-Year Update, reflecting two
more months of actual results, deficiency requests by State agencies (the
largest of which is for school aid resulting from revisions to data submitted by
school districts), and administrative efficiencies achieved by State agencies.
Total General Fund receipts are expected to be approximately $73 million lower
than estimated at the time of the Mid-Year Update. Tax receipts were projected
to be $29.57 billion, $8 million less than in the earlier plan. Miscellaneous
receipts and transfers from other funds were estimated at $3.15 billion, $65
million lower than in the Mid-Year Update. The largest single change in these
estimates is attributable to the lag in achieving $50 million
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in proceeds from sales of State assets, which are unlikely to be completed prior
to the end of the fiscal year.
Projected General Fund disbursements were reduced by a total of $73
million, with changes made in most major categories of the 1995-96 State
Financial Plan. The reduction in overall spending masks the impact of deficiency
requests totaling more than $140 million, primarily for school aid and tuition
assistance to college students. Offsetting reductions in spending are
attributable to the continued maintenance of strict controls on spending through
the fiscal year by State agencies, yielding savings of $50 million. Reductions
of $49 million in support for capital projects reflect a stringent review of all
capital spending. Reductions of $30 million in debt service costs reflect
savings from refundings undertaken in the current fiscal year, as well as
savings from lower interest rates in the financial market. Finally, the 1995-96
Financial Plan reflected reestimates based on actual results through November,
the largest of which is a reduction of $70 million in projected costs for income
maintenance.
This reduction is consistent with declining caseload projections.
The balance in the General Fund at the close of the 1995-96 fiscal year
was expected to be $172 million, entirely attributable to monies in the Tax
Stabilization Reserve Fund following the required $15 million payment into that
Fund. A $40 million deposit to the Contingency Reserve Fund included as part of
the enacted 1995-96 budget will not be made, and the minor balance of $1 million
currently in the Fund will be transferred to the General Fund. These Contingency
Reserve Fund monies are expected to support payments from the General Fund for
litigation related to the State's Medicaid program, and for federal
disallowances.
Changes in federal aid programs currently pending in Congress were not
expected to have a material impact on the State's 1995-96 Financial Plan,
although prolonged interruptions in the receipt of federal grants could create
adverse developments, the scope of which can not be estimated at this time. The
major remaining uncertainties in the 1995-96 State Financial Plan continue to be
those related to the economy and tax collections, which could produce either
favorable or unfavorable variances during the balance of the year.
PAST YEARS
New York State's financial operations have improved during recent
fiscal years. During the period 1989-90 through 1991-92, the State incurred
General Fund operating deficits that were closed with receipts from the issuance
of tax and revenue anticipation notes ("TRANs"). First, the national recession,
and then the lingering economic slowdown in the New York and regional economy,
resulted in repeated shortfalls in receipts and three budget deficits. For its
1992-93, 1993-94 and 1994-95 fiscal years, the State recorded balanced budgets
on a cash basis, with substantial fund balances in 1992-93 and 1993-94, and a
smaller fund balance in 1994-95 as described below.
1994-95 FISCAL YEAR
New York State ended its 1994-95 fiscal year with the General Fund in
balance. The closing fund balance of $158 million reflects $157 million in the
Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund
("CRF"). The CRF was established in State fiscal year 1993-94, funded partly
with surplus moneys, to assist the State in financing the 1994-95 fiscal year
costs of extraordinary litigation known or anticipated at that time; the opening
fund balance in State fiscal year 1994-95 was $265 million. The $241 million
change in the fund balance reflects the use of $264 million in the CRF as
planned, as well as the required deposit of $23 million to the Tax Stabilization
Reserve Fund. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited at the end of the State's 1994-95
fiscal year to continue the process of restructuring the State's cash flow as
part of the Local Governmental Assistance Corporation ("LGAC") program.
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Compared to the State Financial Plan for 1994-95 as formulated on June
16, 1994, reported receipts fell short of original projections by $1.163
billion, primarily in the categories of personal income and business taxes. Of
this amount, the personal income tax accounts for $800 million, reflecting weak
estimated tax collections and lower withholding due to reduced wage and salary
growth, more severe reductions in brokerage industry bonuses than projected
earlier, and deferral of capital gains realizations in anticipation of potential
Federal tax changes. Business taxes fell short by $373 million, primarily
reflecting lower payments from banks as substantial overpayments of 1993
liability depressed net collections in 1994-95 fiscal year. These shortfalls
were offset by better performance in the remaining taxes, particularly the user
taxes and fees, which exceeded projections by $210 million. Of this amount, $227
million was attributable to certain restatements for accounting treatment
purposes pertaining to the CRF and LGAC; these restatements had no impact on
balance in the General Fund.
Disbursements were also reduced from original projections by $848
million. After adjusting for the net impact of restatements relating to the CRF
and LGAC which raised disbursements by $38 million, the variance is $886
million. Well over two-thirds of this variance is in the category of grants to
local governments, primarily reflecting the conservative nature of the original
estimates of projected costs for social services and other programs. Lower
education costs are attributable to the availability of $110 million in
additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated
in January 1995 by the Governor to reduce spending to avert a potential gap in
the 1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
non-essential capital projects. These actions, together with $71 million in
other measures comprised the Governor's $159 million gap-closing plan, submitted
to the Legislature in connection with the 1995- 96 Executive Budget.
1993-94 FISCAL YEAR
The State ended its 1993-94 fiscal year with a balance of $1.140
billion in the tax refund reserve account, $265 million in the CRF and $134
million in its Tax Stabilization Reserve Fund. These fund balances were
primarily the result of an improving national economy, State employment growth,
tax collections that exceeded earlier projections and disbursements that were
below expectations. Deposits to the personal income tax refund reserve have the
effect of reducing reported personal income tax receipts in the fiscal year when
made and withdrawals from such reserve increase receipts in the fiscal year when
made. The balance in the tax refund reserve account was used to pay taxpayer
refunds.
Of the $1.140 billion deposited in the tax refund reserve account,
$1.026 billion was available for budgetary planning purposes in the 1994-95
fiscal year. The remaining $114 million was redeposited in the tax refund
reserve account at the end of the State's 1993-94 fiscal year to continue the
process of restructuring the State's cash flow as part of the LGAC program. The
balance in the CRF was reserved to meet the cost of litigation facing the State
in its 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in 1993-94 exceeded those originally projected when the
State Financial Plan for that year was formulated on April 16, 1993 by $1.002
billion. Greater-than-expected receipts in the personal income tax, the bank
tax, the corporation franchise tax and the estate tax accounted for most of this
variance, and more than offset weaker-than-projected collections from the sales
and use tax and miscellaneous receipts. Collections from individual taxes were
affected by various factors including changes in Federal business laws,
sustained profitability of banks, strong performance of securities firms, and
higher-than-expected consumption of tobacco products following price cuts.
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The higher receipts resulted, in part, because the New York economy
performed better than forecasted. Employment growth started in the first quarter
of the State's 1993-94 fiscal year, and, although this lagged behind the
national economic recovery, the growth in New York began earlier than
forecasted. The New York economy exhibited signs of strength in the service
sector, in construction, and in trade. Long Island and the Mid-Hudson Valley
continued to lag behind the rest of the State in economic growth. The DOB
believes that approximately 100,000 jobs were added during the 1993-94 fiscal
year.
Disbursements and transfers from the General Fund were $303 million
below the level projected in April 1993, an amount that would have been $423
million had the State not accelerated the payment of Medicaid billings, which in
the April 1993 State Financial Plan were planned to be deferred into the 1994-95
fiscal year. Compared to the estimates included in the State Financial Plan
formulated in April 1993, lower disbursements resulted form lower spending for
Medicaid, capital projects, and debt service (due to refundings) and $114
million used to restructure the State's cash flow as part of the LGAC program.
Disbursements were higher than expected for general support for public schools,
the State share of income maintenance, overtime for prison guards, and highway
snow and ice removal. The State also made the first of six required payments to
the State of Delaware related to the settlement of Delaware's litigation against
the State regarding the disposition of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded
the CRF as a way to assist the State in financing the cost of litigation
affecting the State. The CRF was initially funded with a transfer of $100
million attributable to the positive margin recorded in the 1992-93 fiscal year.
In addition, the State augmented this initial deposit with $132 million in debt
service savings attributable to the refinancing of State and public authority
bonds during 1993-94. A year-end transfer of $36 million was also made to the
CRF, which, after a disbursement for authorized fund purposes, brought the CRF
balance a the end of 1993-94 to $265 million. This amount was $165 million
higher than the amount originally targeted for this reserve fund.
1992-93 FISCAL YEAR
The State ended its 1992-93 fiscal year with a balance of $671 million
in the tax refund reserve account and $67 million in the Tax Stabilization
Reserve Fund.
The State's 1992-93 fiscal year was characterized by performance that
was better than projected for the national and regional economies. National
gross domestic product, State personal income, and State employment and
unemployment performed better than originally projected in April 1992. This
favorable economic performance, particularly at year end, combined with a
tax-induced acceleration of income into 1992, was the primary cause of the
General Fund surplus. Personal income tax collections were more than $700
million higher than originally projected (before reflecting the tax refund
reserve account transaction), primarily in the withholding and estimated payment
components of the tax.
There were large, but mainly offsetting, variances in other categories
of receipts. Significantly higher-than-projected business tax collections and
the receipt of unbudgeted payments from the Medical Malpractice Insurance
Association ("MMIA") and the New York Racing Association approximately offset
the loss of an anticipated $200 million Federal reimbursement, the loss of
certain budgeted hospital differential revenue as a result of unfavorable court
decisions, and shortfalls in certain miscellaneous revenues.
Disbursements and transfers to other funds were $45 million above
projections in April 1992, although this includes a $150 million payment to
health insurers (financed with a receipt from the MMIA made pursuant to
legislation passed in January 1992). All other disbursements were $105 million
lower than projected. This reduction primarily reflected lower costs in
virtually all categories of
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spending, including Medicaid, local health programs, agency operations, fringe
benefits, capital projects and debt service as partially offset by
higher-than-anticipated costs for education programs.
LOCAL GOVERNMENT ASSISTANCE CORPORATION
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. The legislation authorized LGAC
to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a period
of years, the issuance of these long-term obligations, which are to be amortized
over no more than 30 years, was expected to eliminate the need for continued
short-term seasonal borrowing. The legislation also dedicated revenues equal to
one-quarter of the four cent State sales and use tax to pay debt service on
these bonds. The legislation also imposed a cap on the annual seasonal borrowing
of the State at $4.7 billion, less net proceeds of bonds issued by LGAC and
bonds issued to provide for capitalized interest, except as cases where the
Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing above
the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
This provision capping the seasonal borrowing was included as a covenant with
LGAC's bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net
proceeds of $4.7 billion, completing the program. The impact of LGAC's borrowing
is that the State is able to meet its cash flow needs in the first quarter of
the fiscal year without relying on short-term seasonal borrowings. The 1995- 96
State Financial Plan includes no spring borrowing nor did the 1994-95 State
Financial Plan, which was the first time in 35 years there was no short-term
seasonal borrowing. This reflects the success of the LGAC program in permitting
the State to accelerate local aid payments form the first quarter of the current
fiscal year to the fourth quarter of the previous fiscal year.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State funds dedicated for transportation purposes), and not
by the full faith and credit of the State. In addition, the proposed
constitutional amendment would (i) permit multiple purpose general obligation
bond proposals to be proposed on the same ballot, (ii) require that State debt
be incurred only for capital projects included in a multi-year capital financing
plan, and (iii) prohibit, after its effective date, lease-purchase and
contractual-obligation financings mechanisms for State facilities.
The State anticipates that its capital programs will be financed, in
part, through borrowings by the State and public authorities in the 1995-96
fiscal year. The State expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming outstanding BANs) and $186
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $33 million in COPs during the State's 1995-96
fiscal year for equipment purchases and $14 million for capital purposes. The
projection of the State regarding its borrowings for the 1995-96 fiscal year may
change if circumstances require.
LGAC is authorized to provide net proceeds of up to $529 million during
the State's 1995-96 fiscal year, to redeem notes sold in June 1995, completing
its financing program as discussed above.
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RATINGS
On July 13, 1995, Standard & Poor's confirmed its rating on the State's
general obligation bonds of A-. On July 3, 1995 Moody's confirmed its rating on
the State's general obligation long-term indebtedness of A.
THE CITY OF NEW YORK
The fiscal health of the State is closely related to the fiscal health
of its localities, particularly the City of New York, which has required and
continues to require significant financial assistance from the State. The City
depends on State Aid both to enable the City to balance its budget and to meet
its cash requirements. The City has achieved balanced operating results for each
of its fiscal years since 1981 as reported in accordance with the
then-applicable GAAP Standards. During the 1990 and 1991 fiscal years, the City
experienced significant shortfalls in almost all of its major tax sources and
increases in social service costs, and was required to take actions to close
substantial budget gaps in order to maintain balanced budgets in accordance with
its financial plan. For fiscal 1993, the City achieved balanced operating
results.
In response to the City's financial crisis in 1975, the State took
action to assist the City in returning to fiscal stability. Among these actions,
the State created the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for the City of New York ( the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs, the Office of the State Deputy Comptroller for New York ("OSDC") in the
Office of the State Comptroller to assist the Control Board in exercising its
powers and responsibilities, and a "Control Period" which existed from 1975 to
1986 during which the City was subject to certain statutorily-prescribed fiscal
controls. Although the Control Board terminated the Control Period in 1986 when
certain statutory conditions were met, thus suspending certain Control Board
powers, the Control Board, MAC and OSDC continue to exercise various fiscal
monitoring functions over the City, and upon the occurrence or "substantial
likelihood and imminence" of the occurrence of certain events, including, but
not limited to, a City operating budget deficit of more than $100 million, the
Control Board is required by law to reimpose a "Control Period." Currently, the
City and its "Covered Organizations" (i.e., those which receive or may receive
monies from the City directly, indirectly or contingently) operate under a
four-year financial plan which the City prepares annually and periodically
updates. The City's Financial Plan includes its capital, revenue and expense
projections and outlines proposed gap-closing programs for years with projected
budget gaps.
The City submits its financial plans as well as the periodic updates to
the Control Board for its review. In August 1993, the City submitted to the
Control Board its 1994-1997 Financial Plan. The Financial Plan projected a
balanced budget in fiscal 1994, based on revenues of approximately $31.250
billion. The Financial Plan also predicted budget gaps of approximately $1.3
billion in fiscal year 1995, $1.8 billion in fiscal year 1996 and $2.0 billion
in fiscal year 1997.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid are not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided for
in the City's Financial Plan or if other uncertainties materialize that reduce
expected revenues or increase projected expenditures, then, to avoid operating
deficits, the City may be required to implement additional actions, including
increases in taxes and reductions in essential City services. The City might
also seek additional assistance from the State.
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On July 10, 1995, Standard & Poor's revised downward its rating on City
general obligation bonds from A- to BBB+ and removed City bonds from
CreditWatch. Standard & Poor's stated that "structural budgetary balance remains
elusive because of persistent softness in the City's economy, highlighted by
weak job growth and a growing dependence on the historically volatile financial
services sector." Other factors identified by Standard & Poor's in lowering its
rating on City bonds included a trend of using one-time measures, including debt
refinancings, to close projected budget gaps, dependence on unratified labor
savings to help balance the Financial Plan, optimistic projections of additional
federal and State aid or mandate relief, a history of cash flow difficulties
caused by State budget delays and continued high debt levels. Fitch Investors
Service, Inc. continues to rate City general obligation bonds A-. Moody's rating
for City general obligation bonds is Baa1.
AUTHORITIES
New York State's authorities are generally responsible for financing,
constructing and operating revenue-producing public benefit facilities. The
fiscal stability of the State is related, in part, to the fiscal stability of
its public authorities. Public authorities are not subject to the constitutional
restrictions on the inccurrence of debt which applies to the State itself and
may issue bonds and notes within the amounts permitted by, and as otherwise
restricted by, their legislative authorization. The State's access to the public
credit markets could be impaired, and the market price of its outstanding debt
may be materially adversely affected, if any of its public authorities were to
default on their respective obligations, particularly those using the financing
techniques referred to as State-supported or State-related.
As of September 30, 1994, the date of the latest data available, there
were 18 public authorities that had outstanding debt of $100 million or more,
and the aggregate outstanding debt including refunding bonds, of the these 18
public authorities was $70.3 billion.
As of March 31, 1995, aggregate public authority debt outstanding as
State-supported debt was $27.9 billion and as State-related debt was $36.1
billion.
Public authority operating expenses and debt service costs are
generally paid by revenues generated by the projects financed or operated, such
as tolls charged for the use of highways, bridges or tunnels, rentals charged
for housing units, and charges for occupancy at medical care facilities. In
addition, State legislation authorizes several financing techniques for public
authorities. Also, there are statutory arrangements providing for state local
assistance payments, otherwise payable to localities, to be made under certain
circumstances to public authorities. Although the state has no obligation to
provide additional assistance to localities whose local assistance payments have
been paid to public authorities under those arrangements if local assistance
payments are so diverted, the affected localities could seek additional state
assistance. Some authorities also received monies from state appropriations to
pay for the operating costs of certain programs.
The Metropolitan Transportation Authority (the "MTA") oversees the
operation of New York City's bus and subway systems and, through its affiliates
and subsidiaries, operates certain commuter rail and bus lines and a rapid
transit line. Through an affiliate, the MTA operates certain intrastate toll
bridges and tunnels. The MTA has depended and will continue to depend upon
Federal, State, local government and agency support to operate the mass transit
portion of these operations because fare revenues are insufficient. If current
revenue projections are not realized and/or operating expenses exceed current
projections, the MTA may be required to seek additional state assistance, raise
fares or take other actions.
Since 1980, the State has enacted several taxes that provide revenues
for mass transit purposes, including assistance to the MTA. In addition, since
1987, State law has required that the proceeds of
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1/4 of 1% of mortgage recording tax paid on certain mortgages in the
Metropolitan Transportation Region served by the MTA be deposited in a special
MTA fund for operating or capital expenses. Further, in 1993, the State
dedicated a portion of certain additional state petroleum business tax receipts
to fund operating or capital assistance to the MTA. For the 1995-1996 State
Fiscal Year, total state assistance to the MTA is estimated at approximately
$1.1 billion.
In 1993, State legislation authorized the funding of a 5-year $9.56
billion MTA Capital Plan for the 5-year period, 1993 through 1996 (the
"1992-1996 Capital Program"). The MTA has received approval of the 1992-1996
Capital Program based on this legislation from the MTA Capital Program Review
Board, as state law requires. This is the third 5-year plan since the
legislature authorized procedures for the adoption, approval and amendment of a
5-year plan in 1981 for a capital program designed to upgrade the performance of
the MTA's transportation system and to supplement, replace and rehabilitate
facilities and equipment. The MTA and its affiliates are collectively authorized
to issue an aggregate of $3.1 billion of bonds (net of certain statutory
exclusion) to finance a portion of the 1992- 1996 Capital Program.
There can be no assurance that all the necessary governmental actions
for the 1992-1996 Capital Program or future capital programs will be taken, that
funding sources currently identified will not be decreased or eliminated, or
that the 1992-1996 Capital Program, or parts thereof, will not be delayed or
reduced. If the Capital Program is delayed or reduced, ridership and fair
revenues may decline, which could, among other things, impair the MTA's ability
to meet its operating expenses without additional state assistance.
AGENCIES AND LOCALITIES
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance during the State's
1995-1996 fiscal year and thereafter. The potential impact on the State of such
requests by localities is not included in the projections of the State receipts
and disbursements in the State's 1995-1996 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board of the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the State to
assist Yonkers could result in allocation of State resources in amounts that
cannot yet be determined.
Municipalities and school districts have engaged in substantial short
term and long term borrowing. In 1993, the total indebtedness of all localities
in the State other than New York City was approximately $17.7 billion. A small
portion of this indebtedness represented borrowing to finance budgetary deficits
and was issued pursuant to enabling State legislation. State law requires the
Comptroller to review and make recommendations concerning the budgets of these
local government units other than New York City authorized by State law to issue
debt to finance deficits during the period that such deficit financing is
outstanding. Fifteen localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending 1993.
From time to time, Federal expenditure reductions could reduce, or in
some cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, New York City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities face anticipated and
potential problems resulting from certain pending litigation, judicial
decisions, and long-range economic trends. Long range potential problems of
declining urban population,
<PAGE>
A-33
increasing expenditures and other economic trends could adversely affect
localities and require increasing State assistance in the future.
LITIGATION
Certain litigation pending against the State or its officers or
employees could affect adversely the financial condition of the State in the
1995-1996 fiscal year or thereafter. Adverse developments in these proceedings
or the initiation of new proceedings could affect the ability of the State to
maintain a balanced 1995-1996 State Financial Plan. The State believes that the
1995-1996 State Financial Plan includes sufficient reserves for the payment of
judgments that may be required during the 1995-1996 fiscal year. There can be no
assurance, however, that an adverse decision in any of these proceedings would
not exceed the amount of the 1995-1996 State Financial Plan reserves for the
payment of judgments and, thereby, affect the ability of the State to maintain a
balanced 1995-1996 State Financial Plan. Among the more significant of these
cases are those that involve: (1) the validity of agreements and treaties by
which various Indian tribes transferred title to the state of certain land in
central and upstate New York; (2) certain aspects of the State's Medicaid rates
and regulations; (3) treatment provided at several state mental health
facilities; (4)alleged responsibility of State officials to assist in remedying
racial segregation in the City of Yonkers;(5) the validity of certain surchages
on hospital bills and (6) the assessment of petroleum business taxes on fuel
purchased out of state.
KEYSTONE PENNSYLVANIA TAX FREE FUND
GENERAL
The Commonwealth of Pennsylvania, the fifth most populous state,
historically has been identified as a heavy industry state, although that
reputation has changed with the decline of the coal, steel and railroad
industries and the resulting diversification of the Commonwealth's industrial
composition. The major new sources of growth are in the service sector,
including trade, medical and health services, educational and financial
institutions. Manufacturing has fallen behind in both the service sector and the
trade sector as a source of employment in Pennsylvania. The Commonwealth is the
headquarters for 58 major corporations. Pennsylvania's average annual
unemployment rate for the years 1990 has generally not been more than one
percent greater or lesser than the nation's annual average unemployment rate.
The seasonally adjusted unemployment rate for Pennsylvania for March, 1997 was
5.1% and for the United States for March, 1997 was 5.2%. The population of
Pennsylvania, 12,056 million people in 1996 according to the U.S. Bureau of the
Census, represents an increase from the 1987 estimate of 11,811 million. Per
capita income in Pennsylvania for 1995 of $23,558 was higher than the per capita
income of the United States of $23,208. . The Commonwealth's General Fund, which
receives all tax receipts and most other revenues and through which debt service
on all general obligations of the Commonwealth are made, closed fiscal years
ended June 30, 1994, June 30, 1995 and June 30, 1996 with positive fund balances
of $892,940, $688,304 and $635,182, respectively.
DEBT
The Commonwealth may incur debt to rehabilitate areas affected by
disaster, debt approved by the electorate, debt for certain capital projects
(for projects such as highways, public improvements, transportation assistance,
flood control, redevelopment assistance, site development and industrial
development) and tax anticipation debt payable in the fiscal year of issuance.
The Commonwealth had outstanding general obligation debt of $5,054 million at
June 30, 1996. The Commonwealth is not permitted to fund deficits between fiscal
years with any form of debt. All year-end deficit balances must be funded within
the succeeding fiscal year's budget. At March 11, 1997, all outstanding general
obligation bonds of the Commonwealth were rated AA- by Standard & Poor's
Corporation and A-1 by
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A-34
Moody's Investors Service, Inc. (see Appendix A). There can be no assurance that
these ratings will remain in effect in the future. Over the five-year period
ending June 30, 2001, the Commonwealth has projected that it will issue notes
and bonds totaling $2,325 million and retire bonded debt in the principal amount
of $2,239 million.
Certain agencies created by the Commonwealth have statutory
authorization to incur debt for which Commonwealth appropriations to pay debt
service thereon are not required. As of December 31, 1996, total combined debt
outstanding for these agencies was $8,356 million. The debt of these agencies is
supported by assets of, or revenues derived from, the various projects financed
and is not an obligation of the Commonwealth. Some of these agencies, however,
are indirectly dependent on Commonwealth appropriations. The only obligations of
agencies in the Commonwealth that bear a moral obligation of the Commonwealth
are those issued by the Pennsylvania Housing Finance Agency ("PHFA"), a
statecreated agency which provides housing for lower and moderate income
families, and The Hospitals and Higher Education Facilities Authority of
Philadelphia (the "Hospital Authority"), an agency created by the City of
Philadelphia to acquire and prepare various sites for use as intermediate care
facilities for the mentally retarded.
LOCAL GOVERNMENT DEBT
Numerous local government units in Pennsylvania issue general
obligation (i.e., backed by taxing power) debt, including counties, cities,
boroughs, townships and school districts. School district obligations are
supported indirectly by the Commonwealth. The issuance of non-electoral general
obligation debt is limited by constitutional and statutory provisions. Electoral
debt, i.e., that approved by the voters, is unlimited. In addition, local
government units and municipal and other authorities may issue revenue
obligations that are supported by the revenues generated from particular
projects or enterprises. Examples include municipal authorities (frequently
operating water and sewer systems), municipal authorities formed to issue
obligations benefitting hospitals and educational institutions, and industrial
development authorities, whose obligations benefit industrial or commercial
occupants. In some cases, sewer or water revenue obligations are guaranteed by
taxing bodies and have the credit characteristics of general obligations debt.
LITIGATION
Pennsylvania is currently involved in certain litigation where adverse
decisions could have an adverse impact on its ability to pay debt service. For
example, in BABY NEAL V. COMMONWEALTH, the American Civil Liberties Union filed
a lawsuit against the Commonwealth seeking an order that would require the
Commonwealth to provide additional funding for child welfare services. COUNTY OF
ALLEGHENY V. COMMONWEALTH OF PENNSYLVANIA involves litigation regarding the
state constitutionality of the statutory scheme for county funding of the
judicial system. In PENNSYLVANIA ASSOCIATION OF RURAL AND SMALL SCHOOLS V.
CASEY, the constitutionality of Pennsylvania's system for funding local school
districts has been challenged. No estimates for the amount of these claims are
available.
OTHER FACTORS
The performance of the obligations held by the Fund issued by the
Commonwealth, its agencies, subdivisions and instrumentalities are in part tied
to state-wide, regional and local conditions within the Commonwealth and to the
creditworthiness of certain non-Commonwealth related obligers, depending upon
the Pennsylvania Fund's portfolio mix at any given time. Adverse changes to the
state-wide, regional or local economies or changes in government may adversely
affect the creditworthiness of the Commonwealth, its agencies and
municipalities, and certain other non-government related obligers of
Pennsylvania tax-free obligations (e.g., a university, a hospital or a corporate
obligor). The City of Philadelphia, for example, experienced severe financial
problems which impaired its ability to
<PAGE>
A-35
borrow money and adversely affected the ratings of its obligations and their
marketability. Conversely, some obligations held by the Fund will be almost
exclusively dependent on the creditworthiness of one underlying obligor, such as
a project occupant or provider of credit or liquidity support.
<PAGE>
B-1
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APPENDIX B
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CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria are used in making that
assessment:
a. Amortization schedule (the larger the final maturity relative to
other maturities the more likely it will be treated as a note), and
b. Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 - Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
2. SP-2 - Satisfactory capacity to pay principal and interest.
3. SP-3 - Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as
part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+" ).
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of
the creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
<PAGE>
B-2
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default and capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the
successful completion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
C. BOND RATINGS ARE AS FOLLOWS:
a. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
b. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay prncipal in accordance with the terms of teh obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D. MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
Moody's ratings are as follows:
1. 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
<PAGE>
B-3
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
2. AA - Bonds 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 fluctuation 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.
3. 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.
4. 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. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. 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 both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
6. 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.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through BAA in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
CON. (---) - Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the AA, A, and BAA groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols AA 1, A 1, and BAA 1.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes), and obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
some of which may be subject to repurchase agreements.
<PAGE>
B-4
COMMERCIAL PAPER
Commercial paper will consist of issues rated at the time of purchase
A-1, by Standard & Poor's Ratings Group (S&P), or PRIME-1 by Moody's Investors
Service, Inc., (Moody's) or F-1 by Fitch Investors Services, L.P. (Fitch's); or,
if not rated, will be issued by companies which have an outstanding debt issue
rated at the time of purchase AAA, AA or A by Moody's, or AAA, AA or A by S&P,
or will be determined by a Fund's investment adviser to be of comparable
quality.
A. S&P RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1. A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
2. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
1. The rating PRIME-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated PRIME-1 (or related supporting institutions) are
deemed to have a superior capacity for repayment of short term promissory
obligations. Repayment capacity of PRIME-1 issuers is normally evidenced by the
following characteristics:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate reliance
on debt and ample asset protection;
4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and
5) well established access to a range of financial markets and
assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
<PAGE>
B-5
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks or of savings and loan associations, including their
branches abroad, and of U.S. branches of foreign banks, which are members of the
Federal Reserve System or the Federal Deposit Insurance Corporation, and have at
least $1 billion in deposits as of the date of their most recently published
financial statements.
The Funds will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Funds do not
currently intend to purchase foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by a Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance and securities issued by the Government
National Mortgage Association (GNMA). Treasury bills have maturities of one year
or less. Treasury notes have maturities of one to ten years and Treasury bonds
generally have maturities of greater than ten years at the date of issuance.
GNMA securities include GNMA mortgage pass-through certificates. Such securities
are supported by the full faith and credit of the U.S. government.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the U.S.,
Small Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration,
The Tennessee Valley Authority, District of Columbia Armory Board and Federal
National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, a Fund will invest in
the securities issued by
<PAGE>
B-6
such an instrumentality only when a Fund's investment adviser determines under
standards established by the Board of Trustees that the credit risk with respect
to the instrumentality does not make its securities unsuitable investments. U.S.
government securities do not include international agencies or instrumentalities
in which the U.S. government, its agencies or instrumentalities participate,
such as the World Bank, Asian Development Bank or the Inter-American Development
Bank, or issues insured by the Federal Deposit Insurance Corporation.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations purchased primarily through Certificates of
Participation ("COPs") are used by state and local governments to finance the
purchase of property, and function much like installment purchase obligations.
The payments made by the municipality under the lease are used to repay interest
and principal on the bonds issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. The lessor is, in effect, a lender secured by the property being
leased. A feature which distinguishes CPOs from municipal debt is that the lease
which is the subject of the transaction must contain a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that provides that, while
the municipality will use its best efforts to make lease payments, the
municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds. Local administrations,
being faced with increasingly tight budgets, therefore have more discretion to
curtail payments under COPs than they do to curtail payments on traditionally
funded debt obligations. If the government lessee does not appropriate
sufficient monies to make lease payments, the lessor or its agent is typically
entitled to repossess the property. In most cases, however, the private sector
value of the property will be less than the amount the government lessee was
paying.
Criteria considered by the rating agencies and a Fund's investment
adviser in assessing the risk of appropriation include the issuing
municipality's credit rating, evaluation of how essential the leased property is
to the municipality and term of the lease compared to the useful life of the
leased property. The Board of Trustees reviews the COPs held in each Fund's
portfolio to assure that they constitute liquid investments based on various
factors reviewed by the Fund's investment adviser and monitored by the Board.
Such factors include (a) the credit quality of such securities and the extent to
which they are rated or, if unrated, comply with existing criteria and
procedures followed to ensure that they are of quality comparable to the ratings
required for each Fund's investment, including an assessment of the likelihood
that the leases will not be cancelled; (b) the size of the municipal securities
market, both in general and with respect to COPs; and (c) the extent to which
the type of COPs held by each Fund trade on the same basis and with the same
degree of dealer participation as other municipal bonds of comparable credit
rating or quality.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Funds (with the exception of the New Jersey Fund) intend to enter
into financial futures contracts as a hedge against changes in prevailing levels
of interest rates to seek relative stability of principal and to establish more
definitely the effective return on securities held or intended to be acquired by
a Fund or as a hedge against changes in the prices of securities held by a Fund
or to be acquired by a Fund. A Fund's hedging may include sales of futures as an
offset against the effect of expected increases in interest rates or securities
prices and purchases of futures as an offset against the effect of expected
declines in interest rates.
For example, when a Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when a Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
<PAGE>
B-7
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, a Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by doing so, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Funds intend to engage in options transactions which are related to
financial futures contracts for hedging purposes and in connection with the
hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Funds' exposure to
interest rate and/or market fluctuations, the Funds may be able to hedge their
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Funds do not intend to
take delivery of the instruments underlying futures contracts they hold, the
Funds do not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify financial instruments or financially
based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the United States are The Board of
Trade of the City of Chicago, the Chicago Mercantile Exchange, the International
Monetary Market (a division of the Chicago Mercantile Exchange), the New York
Futures Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
a Fund, as seller, to deliver the type of financial instrument specified in the
contract at a specified future time for a specified price. The purchase of an
interest rate futures contract creates an obligation by a Fund, as purchaser, to
accept delivery of the type of financial instrument specified at a specified
future time for a specified price. The specific securities delivered or
accepted, respectively, at settlement date, are not determined until at or near
that date. The determination is in accordance with the rules of the exchange on
which the futures contract sale or purchase was made.
<PAGE>
B-8
Currently, interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, Government National Mortgage Association
(GNMA) certificates, 90-day domestic bank certificates of deposit, 90-day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S. government securities are not obligations of the U.S.
Treasury.
INDEX BASED FUTURES CONTRACTS, OTHER THAN STOCK INDEX BASED
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed, the Funds will sell interest rate index
and other index based futures contracts to hedge against changes which are
expected to affect the Funds' portfolios.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by a Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to a Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from
the Broker, are made on a daily basis as the value of the underlying instrument
or index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when a
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, a Fund may elect to close the position. A final determination
of variation margin is then made, additional cash is required to be paid to or
released by the Broker, and the Fund realizes a loss or gain.
Each Trust intends to enter into arrangements with its custodian and
with Brokers to enable the initial margin of a Fund and any variation margin to
be held in a segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before
<PAGE>
B-9
the settlement date without the making or taking of delivery. Closing out a
futures contract sale is effected by an offsetting transaction in which a Fund
enters into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument or index and same delivery date. If the
price in the sale exceeds the price in the offsetting purchase, the Fund is paid
the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Fund pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by an
offsetting transaction in which a Fund enters into a futures contract sale. If
the offsetting sale price exceeds the purchase price, the Fund realizes a gain.
If the purchase price exceeds the offsetting sale price the Fund realizes a
loss. The amount of the Fund's gain or loss on any transaction is reduced or
increased, respectively, by the amount of any transaction costs incurred by the
Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e. on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to a Fund.
There can be no assurance, however, that a Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If a Fund is not able to enter into an offsetting transaction,
the Fund will continue to be required to maintain the margin deposits on the
contract and to complete the contract according to its terms.
OPTIONS ON FINANCIAL FUTURES
The Funds intend to purchase call and put options on financial futures
contracts and sell such options to terminate an existing position. Options on
futures are similar to options on stocks except that an option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) rather than to purchase or sell
stock at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account. This amount
represents the amount by which the market price of the futures contract at
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and value of the futures contract.
The Funds intend to use options on financial futures contracts in
connection with hedging strategies. In the future the Funds may use such options
for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on financial futures contracts
is analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by a Fund. Put options may be purchased to hedge a portfolio
of stocks or debt instruments or a position in the futures contract upon which
the put option is based.
<PAGE>
B-10
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of call options on financial futures contracts represents
a means of obtaining temporary exposure to market appreciation at limited risk.
It is analogous to the purchase of a call option on an individual stock, which
can be used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the futures contract upon which it is
based, or upon the price of the underlying financial instrument or index itself,
purchase of a call option may be less risky than the ownership of the interest
rate or index based futures contract or the underlying securities. Call options
on commodity futures contracts may be purchased to hedge against an interest
rate increase or a market advance when a Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING FINANCIAL FUTURES CONTRACTS OR
RELATED OPTIONS
The Funds may employ new investment techniques involving financial
futures contracts and related options. The Funds intend to take advantage of new
techniques in these areas which may be developed from time to time and which are
consistent with the Fund's investment objective. Each Trust believes that no
additional techniques have been identified for employment by the Funds in the
foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
A Fund will not enter into a futures contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin deposits on such
futures contracts.
The Funds intend that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that a Fund owns, or futures contracts will be purchased to protect a
Fund against an increase in the price of securities it intends to purchase. The
Funds do not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts will be deposited in a segregated account with each Trust's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, a Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for a Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of a Fund's annual gross
<PAGE>
B-11
income. The 1986 Tax Act added a provision which effectively treats both
positions in certain hedging transactions as a single transaction for the
purpose of the 30% requirement. The provision provides that, in the case of any
"designated hedge," increases and decreases in the value of positions of the
hedge are to be netted for the purposes of the 30% requirement. However, in
certain situations, in order to avoid realizing a gain within a three month
period, a Fund may be required to defer the closing out of a contract beyond the
time when it would otherwise be advantageous to do so.
RISKS OF FUTURES CONTRACTS
Financial futures contracts prices are volatile and are influenced,
among other things, by changes in stock prices, market conditions, prevailing
interest rates and anticipation of future stock prices, market movements or
interest rate changes, all of which in turn are affected by economic conditions,
such as government fiscal and monetary policies and actions, and national and
international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in a Fund's portfolio. In addition,
futures contract transactions involve the remote risk that a party be unable to
fulfill its obligations and that the amount of the obligation will be beyond the
ability of the clearing broker to satisfy. A decision of whether, when and how
to hedge involves the exercise of skill and judgment, and even a well conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, a Fund would presumably have sustained comparable losses if, instead of
entering into the futures contract, it had invested in the underlying financial
instrument. Furthermore, in order to be certain that a Fund has sufficient
assets to satisfy its obligations under a futures contract, the Fund will
establish a segregated account in connection with its futures contracts which
will hold cash or cash equivalents equal in value to the current value of the
underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
<PAGE>
B-12
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for financial futures
contracts, there are several special risks relating to options on futures
contracts. The ability to establish and close out positions on such options will
be subject to the development and maintenance of a liquid secondary market.
There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. A Fund will not purchase options
on any futures contract unless and until it believes that the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to a Fund, even though the use of a futures contract would not,
such as when there is no movement in the level of the futures contract.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
The audited financial statements listed below are incorporated by reference
from the New Jersey Tax Free Income Fund's Annual Report dated March 31, 1997.
Schedule of Investments March 31, 1997
Financial Highlights
Class A Shares For the seven-month period
ended March 31, 1997, the six-month
period ended August 31, 1996, the
year ended February 28, 1996, each
of the years in the three-year
period ended February 28, 1995 and
the period from July 16, 1991
(Commencement of Operations)
through February 29, 1992
Class B Shares For the seven-month period
ended March 31, 1997, the six-month
period ended August 31, 1996 and
the period from January 30, 1996
(Commencement of Operations)
through February 28, 1996.
Class C Shares For the seven-month period
ended March 31, 1997, the six
month-period ended August 31, 1996
and the period from February 8,
1996 (Commencement of Operations)
through February 29, 1996 1995
Statement of Assets and Liabilities March 31, 1997
Statement of Operations Seven-month period ended March 31,
1997 and the six-month period
ended August 31, 1996
Statement of Changes In Net Assets For the seven-month period ended
March 31, 1997, the six-month
period ended August 31, 1996 and
the year ended February 29, 1995
Notes to Financial Statements
Independent Auditors' Report May 2, 1997
(b) Exhibits
(1)(a) Declaration of Trust of Registrant (the "Declaration of
Trust"(1)
(1)(b) Amendment to Declaration of Trust of Registrant(2)
(2) By-Laws of Registrant (the "By-Laws")(1)
(3) Not applicable
(4(a) Specimen certificate of shares of beneficial interest of
Registrant(3)
(b) Declaration of Trust, Article IV, Section 4.1; Article V,
Sections 5.2 and 5.9(1)
(c) By-Laws, Article III(1)
(5) Form of Advisory Contract(2)
(6)(a) Distribution Contract(2)
(b) Form of Dealer Agreement(4)
(7) Not applicable
(8) Form of Custodian Agreement(2)
(i) Transfer Agency
(9)(a) Form of Administration Agreement
(b) Form of Sub-Administrator Agreement
(10) Opinion of Counsel(4)
(11) Consent of Independant Auditors(4)
(12) Not Applicable
(13) Not applicable
(14) Not applicable
(15)(a) Distribution Plan(5)
(b) Form of Class B Distribution Plan(2)
(16)(a) Performance calculations(4)
(17) Financial Data Schedules(4)
- -----------------
(1) Filed with Post-Effective Amendment No. 2 to Registration Statement No.
33-2010 (the "Registration Statement") on March 25, 1987 ("Post-Effective
Amendment No. 2") .
(2) Filed with Post-Effective Amendment No. 25 to the Registration Statement
on January 22, 1996 ("Post-Effective Amendment No. 25").
(3) Filed with Pre-Effective Amendment No. 1 to the Registration Statement
on March 10, 1986 ("Pre-Effective Amendment No. 1) and with Pre-Effective
Amendments No. 1 of predecessors FFB Equity Trust (Registration Statement
No. 33-2012) and FFB Tax-Free Trust (Registration Statement No. 33-2011)
on April 30, 1986, and August 13, 1986, respectively.
(4) Filed herewith.
(5) Filed with Post-Effective Amendment No. 8 to the Registration Statement
on June 30, 1991 ("Post-Effective Amendment No. 8").
- --------------------
Item 25. Persons Controlled by or Under Common Control with Registrant
No person is controlled by or under common control with the
Registrant.
Item 26. Number of Holders of Securities (as of June 30, 1997)
(1) (2)
Title of Class Number of Record
Shareholders
Evergreen New Jersey Tax-Free Income Fund
-----------------------------------------
Class Y Shares of Beneficial Interest ($0.0001 par value) 5
Class A Shares of Beneficial interest ($0.0001 par value) 674
Class B Shares of Beneficial Interest ($0.0001 par value) 231
Item 27. Indemnification
Reference is made to Article IV of the Registrant's Declaration of Trust.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant by the Registrant pursuant to the Declaration of Trust or
otherwise, the Registrant is aware that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and, therefore, is unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful
defense of any act, suit or proceeding) is asserted by such trustees,
officers or controlling persons in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issues.
Item 28. Business or Other Connections of Investment Adviser
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the investment
adviser, see the section entitled "Management of the
Funds-Investment Adviser" in Part A.
The Trustees and principal executive officers of the Fund's
Investment Adviser, and the Directors of the Fund's Manager, are
set forth in the following tables:
FIRST UNION NATIONAL BANK
BOARD OF DIRECTORS
Edward E. Crutchfield
Anthony P. Terracciano
John R. Georgius
Marion A. Cowell, Jr.
Robert T. Atwood
All of the Directors are located at the following address:
First Union National Bank, 301 South College Street,
Charlotte, NC 28288
FIRST UNION NATIONAL BANK
EXECUTIVE OFFICERS
Edward E. Crutchfield, Chairman & CEO, First Union Corporation
John R. Georgius, Vice Chairman, First Union Corporation
Marion A. Cowell, Jr., Secretary and EVP, First Union Corporation
Robert T. Atwood, EVP & CFO, First Union Corporation
Anthony P. Terracciano, President, First Union Corporation
All of the Executive Officers are located at the following
address: First Union National Bank, 301 South College Street,
Charlotte, NC 28288
Item 29. Principal Underwriters
Evergreen Keystone Distributor, Inc.(formerly known as Evergreen Funds
Distributor, Inc.) The Director and principal executive officers are:
Director Michael C. Petrycki
Officers Lynn J. Mangum Chairman/CEO
Robert J. McMullan Executive Vice President/Treasurer
J. David Huber President
Kevin J. Dell Vice President/General Counsel/Secretary
Mark J. Rybarczyk Senior Vice President
Dennis Sheehan Senior Vice President
Mark Dillon Senior Vice President
George Martinez Senior Vice President
D'Ray Moore Vice President
Dale Smith Vice President
Michael Burns Vice President
Bruce Treff Assistant Secretary
Annamaria Porcaro Assistant Secretary
Evergreen Keystone Distributor, Inc. acts as Distributor for the
following registered investment companies or separate series thereof:
Evergreen Trust:
Evergreen Fund
Evergreen Aggressive Growth Fund
Evergreen Income and Growth Fund (formerly Evergreen Total Return Fund)
Evergreen Limited Market Fund, Inc.
Evergreen Growth and Income Fund
Evergreen Money Market Trust:
Evergreen Money Market Fund
Evergreen Institutional Money Market Fund
Evergreen Institutional Treasury Money Market Fund
Evergreen American Retirement Trust:
Evergreen American Retirement Fund
Evergreen Small Cap Equity Income Fund
Evergreen Municipal Trust:
Evergreen Tax Exempt Money Market Fund
Evergreen Short-Intermediate Municipal Fund
Evergreen Short-Intermediate Municipal Fund-California
Evergreen Florida High Income Municipal Bond Fund
Evergreen Institutional Tax Exempt Money Market Fund
Evergreen Equity Trust:
Evergreen Global Real Estate Equity Fund
Evergreen U.S. Real Estate Equity Fund
Evergreen Global Leaders Fund
Evergreen Foundation Trust:
Evergreen Foundation Fund
Evergreen Tax Strategic Foundation Fund
Evergreen Investment Trust:
Evergreen Emerging Markets Growth Fund
Evergreen International Equity Fund
Evergreen Balanced Fund
Evergreen Value Fund
Evergreen Utility Fund
Evergreen Short-Intermediate Bond Fund
Evergreen U.S. Government Fund
Evergreen Florida Municipal Bond Fund
Evergreen Georgia Municipal Bond Fund
Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund
Evergreen Virginia Municipal Bond Fund
Evergreen High Grade Tax Free Fund
Evergreen Treasury Money Market Fund
Evergreen Lexicon Trust:
Evergreen Intermediate Term Government Securities Fund
Evergreen Intermediate Term Bond Fund
Evergreen Tax Free Trust:
Evergreen Pennsylvania Tax Free Money Market Fund
Evergreen New Jersey Tax Free Income Fund
Evergreen Variable Trust:
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
Evergreem VA Global Leaders Fund
Evergreen VA Strategic Income Fund
Evergreen VA Aggressive Growth Fund
<PAGE>
Keystone America Hartwell Emerging Growth Fund
Keystone Balanced Fund II
Keystone Capital Preservation and Income Fund
Keystone Fund for Total Return
Keystone Fund of the Americas
Keystone Global Opportunities Fund
Keystone Global Resources and Development Fund
Keystone Government Securities Fund
Keystone Intermediate Term Bond Fund
Keystone Liquid Trust
Keystone Omega Fund
Keystone Small Company Growth Fund II
Keystone State Tax Free Fund:
Florida Tax Free Fund
Massachusetts Tax Free Fund
Pennsylvania Tax Free Fund
New York Insured Tax Free Fund
Keystone State Tax Free Fund- Series II:
California Insured Tax Free Fund
Missouri Tax Free Fund
Keystone Strategic Income Fund
Keystone Tax Free Income Fund
Keystone World Bond Fund
Keystone Quality Bond Fund (B-1)
Keystone Diversified Bond Fund (B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Strategic Growth Fund (K-2)
Keystone Growth and Income Fund (S-1)
Keystone Mid-Cap Growth Fund (S-3)
Keystone Small Company Growth Fund (S-4)
Keystone Institutional Adjustable Rate Fund
Keystone Institutional Trust
Keystone International Fund Inc.
Keystone Precious Metals Holdings, Inc.
Keystone Tax Free Fund
Keystone World Bond Fund
Item 30. Location of Accounts and Records
First Union Keystone, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, Massachusetts 02171
Iron Mountain
3431 Sharp Slot Road
Swansea, Massachusetts 02777
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
has duly caused this Post-Effective Amendment No. 28 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 18th day of
July, 1997.
The Evergreen Tax-Free Trust
/s/ John J. Pileggi
by -----------------------------
John J. Pileggi, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 28 to the Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
Signatures Title Date
- ----------- ----- ----
/s/John J. Pileggi
- ----------------------- President and July 18,1997
John J. Pileggi Treasurer
by James P. Wallin
Attorney - In - Fact
/s/ Laurence B. Ashkin
- ----------------------- Trustee July 18, 1997
Laurence B. Ashkin
by James P. Wallin
Attorney - In - Fact
/s/Foster Bam
- ----------------------- Trustee July 18, 1997
Foster Bam
by James P. Wallin
Attorney - In - Fact
/s/James S. Howell
- ----------------------- Trustee July 18, 1997
James S. Howell
by James P. Wallin
Attorney - In - Fact
/s/Gerald M. McDonnell
- ----------------------- Trustee July 18, 1997
Gerald M. McDonnell
by James P. Wallin
Attorney - In - Fact
/s/Thomas L. McVerry
- ----------------------- Trustee July 18, 1997
Thomas L. McVerry
by James P. Wallin
Attorney - In - Fact
/s/William Walt Pettit
- ----------------------- Trustee July 18, 1997
William Walt Pettit
by James P. Wallin
Attorney - In - Fact
/s/Russell A. Salton, III, M.D
- ------------------------------ Trustee July 18, 1997
Russell A. Salton, III, M.D
by James P. Wallin
Attorney - In - Fact
/s/Michael S. Scofield
- ----------------------- Trustee July 18, 1997
Michael S. Scofield
by James P. Wallin
Attorney - In - Fact
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------- -------
(1)(a) Declaration of Trust of Registrant(1)
(b) Amendment to Declaration of Trust of Registrant(2)
(2) By-Laws of Registrant(1)
(4)(a) Specimen certificate of shares of beneficial interest of
Registrant(3)
(5) Form of Advisory Contract(2)
(6)(a) Distribution Contract(2)
(b) Form of Dealer Agreement(4)
(8) Form of Custodian Agreement(2)
(i) Transfer Agency
(9)(a) Form of Administration Agreement
(b) Form of Sub-Administrator Agreement
(10) Opinion of Counsel(4)
(11) Consent of Independant Auditors(4)
(15)(a) Distribution Plan(5)
(b) Form of Class B Distribution Plan(2)
(16) Performance calculations(4)
(17) Financial Data Schedules(4)
- -----------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 2.
(2) Incorporated herein by reference to Post-Effective Amendment No. 25.
(3) Incorporated herein by reference to Pre-Effective Amendment No. 1 and to
Pre-Effective Amendments No. 1 of predecessors FFB Equity Trust
and FFB Tax-Free Trust.
(4) Filed herewith.
(5) Incporated herein by reference to Post-Effective Amendment No. 8.
- ---------------------
EVERGREEN KEYSTONE
- ---------------------
[logo] FUNDS [logo]
- ---------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC.
230 PARK AVENUE
NEW YORK, NEW YORK 10169
December 12, 1996
Effective January 1, 1997
To Whom It May Concern:
You currently have a dealer agreement ("Agreement") with Evergreen
Keystone Distributor, Inc. ("Company"). Effective January 1, 1997 the
Agreement is amended and restated in its entirety as set forth below.
The Company, principal underwriter, invites you to participate in the
distribution of shares, including separate classes of shares, ("Shares") of
the Keystone Fund Family, the Keystone America Fund Family, the Evergreen Fund
Family and to the extent applicable their separate investment series
(collectively "Funds" and each individually a "Fund") designated by us which
are currently or hereafter underwritten by the Company, subject to the
following terms:
1. You will offer and sell Shares of the Funds at the public offering price
with respect to the applicable class described in the then current prospectus
and/or statement of additional information ("Prospectus") of the Fund whose
Shares you offer. You will offer Shares only on a forward pricing basis, i.e.
orders for the purchase, repurchase or exchange of Shares accepted by you
prior to the close of the New York Stock Exchange and placed with us the same
day prior to the close of our business day, 5:00 p.m. Eastern Time, shall be
confirmed at the closing price for that business day. You agree to place
orders for Shares only with us and at such closing price. In the event of a
difference between verbal and written price confirmation, the written
confirmations shall be considered final. Prices of a Fund's Shares are
computed by and are subject to withdrawal by each Fund in accordance with its
Prospectus. You agree to place orders with us only through your central order
department unless we accept your written Power of Attorney authorizing others
to place orders on your behalf. This Agreement on your part runs to us and the
respective Fund and is for the benefit and enforceable by each.
2. In the distribution and sale of Shares, you shall not have authority to act
as agent for the Fund, the Company or any other dealer in any respect in such
transactions. All orders are subject to acceptance by us and become effective
only upon confirmation by us. The Company reserves the unqualified right not
to accept any specific order for the purchase or exchange of Shares.
3. In addition to the distribution services provided by you with respect to a
Fund you may be asked to render administrative, account maintenance and other
services as necessary or desirable for shareholders of such Fund ("Shareholder
Services").
4. Notwithstanding anything else contained in this Agreement or in any other
agreement between us, the Company hereby acknowledges and agrees that any
information received from you concerning your customer in the course of this
arrangement is confidential. Except as requested by the customer or as
required by law and except for the respective Fund, its officers, directors,
employees, agents or service providers, the Company will not provide nor
permit access to such information by any person or entity, including any First
Union Corporation bank or First Union Brokerage Services, Inc.
5. So long as this Agreement remains in effect, we will pay you commissions on
sales of Shares of the Funds and service fees for Shareholder Services, in
accordance with the Schedule of Commissions and Service Fees ("Schedule")
attached hereto and made a part hereof, which Schedule may be modified from
time to time or rescinded by us, in either case without prior notice. You have
no vested right to receive any continuing service fees, other fees, or other
commissions which we may elect to pay to you from time to time on Shares
previously sold by you or by any person who is not a broker or dealer actually
engaged in the investment banking or securities business. You will receive
commissions in accordance with the attached Schedule on all purchase
transactions in shareholder accounts (excluding reinvestment of income
dividends and capital gains distributions) for which you are designated as
Dealer of Record except where we determine that any such purchase was made
with the proceeds of a redemption or repurchase of Shares of the same Fund or
another Fund, whether or not the transaction constitutes the exercise of the
exchange privilege. Commissions will be paid to you twice a month. You will
receive service fees for shareholder accounts for which you are designated
Dealer of Record as provided in the Schedule. You hereby represent that
receipt of such service fees by you will be disclosed to your customers.
You hereby authorize us to act as your agent in connection with all
transactions in shareholder accounts in which you are designated as Dealer of
Record. All designations of Dealer of Record and all authorizations of the
Company to act as your agent shall cease upon the termination of this
Agreement or upon the shareholder's instruction to transfer his or her account
to another Dealer of Record.
6. Payment for all Shares purchased from us shall be made to the Company and
shall be received by the Company within three business days after the
acceptance of your order or such shorter time as may be required by law. If
such payment is not received by us, we reserve the right, without prior
notice, forthwith to cancel the sale, or, at our option, to sell such Shares
back to the respective Fund in which case we may hold you responsible for any
loss, including loss of profit, suffered by us or by such Fund resulting from
your failure to make payment as aforesaid.
7. You agree to purchase Shares of the Funds only from us or from your
customers. If you purchase Shares from us, you agree that all such purchases
shall be made only to cover orders already received by you from your
customers, or for your own bonafide investment without a view to resale. If
you purchase Shares from your customers, you agree to pay such customers the
applicable net asset value per Share less any contingent deferred sales charge
("CDSC") that would be applicable under the Prospectus ("repurchase price").
8. You will sell Shares only (a) to your customers at the prices described in
paragraph 2 above; or (b) to us as agent for a Fund at the repurchase
price. In such a sale to us, you may act either as principal for your own
account or as agent for your customer. If you act as principal for your own
account in purchasing Shares for resale to us, you agree to pay your
customer not less nor more than the repurchase price which you receive from
us. If you act as agent for your customer in selling Shares to us, you
agree not to charge your customer more than a fair commission for handling
the transaction. You shall not withhold placing with us orders received
from your customers so as to profit yourself as a result of such
withholding.
10. We will not accept from you any conditional orders for Shares.
11. If any Shares sold to you under the terms of this Agreement are
repurchased by a Fund, or are tendered for redemption, within seven business
days after the date of our confirmation of the original purchase by you, it is
agreed that you shall forfeit your right to any commissions on such sales even
though the shareholder may be charged a CDSC by the Fund.
We will notify you of any such repurchase or redemption within the next
ten business days after the date on which the certificate or written request
for redemption is delivered to us or to the Fund, and you shall forthwith
refund to us the full amount of any commission you received on such sale. We
agree, in the event of any such repurchase or redemption, to refund to the
Fund any commission we retained on such sale and, upon receipt from you of the
commissions paid to you, to pay such commissions forthwith to the Fund.
12. Shares sold to you hereunder shall not be issued until payment has been
received by the Fund concerned. If transfer instructions are not received from
you within 15 days after our acceptance of your order, the Company reserves
the right to instruct the transfer agent for the Fund concerned to register
Shares sold to you in your name and notify you of such. You agree to hold
harmless and indemnify the Company, the Fund and its transfer agent for any
loss or expense resulting from such registration.
13. You agree to comply with any compliance standards that may be furnished to
you by us regarding when each class of Shares of a Fund may appropriately be
sold to particular customers.
14. No person is authorized to make any representations concerning Shares of a
Fund except those contained in the Prospectus and in sales literature issued
by us supplemental to such Prospectus. In purchasing Shares from us you shall
rely solely on the representations contained in the appropriate Prospectus and
in such sales literature. We will furnish additional copies of such
Prospectuses and sales literature and other releases and information issued by
us in reasonable quantities upon request. You agree that you will in all
respects duly conform with all laws and regulations applicable to the sales of
Shares of the Funds and will indemnify and hold harmless the Funds, their
directors and trustees and the Company from any damage or expenses on account
of any wrongful act by you, your representatives, agents or sub-agents in
connection with any orders or solicitation or orders of Shares of the Funds by
you, your representatives, agents or sub-agents.
15. Each party hereto represents that it is (1) a member of the National
Association of Securities Dealers, Inc., and agrees to notify the other should
it cease to be a member of such Association and agrees to the automatic
termination of this Agreement at that time or (2) excluded from the definition
of broker-dealer under the Securities Exchange Act of 1934. It is further
agreed that all rules or regulations of the Association now in effect or
hereafter adopted, including its Business Conduct Rule 2830(d), which are
binding upon underwriters and dealers in the distribution of the securities of
open-end investment companies, shall be deemed to be a part of this Agreement
to the same extent as if set forth in full herein.
16. You will not offer the Funds for sale in any State where they are not
qualified for sale under the blue sky laws and regulations of such State or
where you are not qualified to act as a dealer except for States in which they
are exempt from qualification.
17. This Agreement supersedes and cancels any prior agreement with respect to
the sales of Shares of any of the Funds underwritten by the Company. The
Agreement may be amended by us at any time upon written notice to you.
18. This amendment to the Agreement shall be effective on January 1, 1997 and
all sales hereunder are to be made, and title to Shares of the Funds shall
pass in The Commonwealth of Massachusetts. This Agreement shall be interpreted
in accordance with the laws of The Commonwealth of Massachusetts.
19. All communications to the Company should be sent to the above address. Any
notice to you shall be duly given if mailed or telegraphed to you at the
addressed specified by you.
20. Either part may terminate this Agreement at any time by written notice to
the other party.
- --------------------------- EVERGREEN KEYSTONE DISTRIBUTOR, INC.
Dealer or Broker Name
- --------------------------- /s/ Robert A. Hering
Address
ROBERT A. HERING, President
<PAGE>
- ---------------------
EVERGREEN KEYSTONE
- ---------------------
[logo] FUNDS [logo]
- ---------------------
EVERGREEN KEYSTONE DISTRIBUTOR, INC. ROBERT A. HERING
230 PARK AVENUE President
NEW YORK, NEW YORK 10169
December 12, 1996
Effective January 1, 1997
Dear Financial Professional:
This Schedule of Commissions and Service Fees ("Schedule") supersedes any
previous Schedules, is hereby made part of our dealer agreement ("Agreement")
with you effective January 1, 1997 and will remain in effect until modified or
rescinded by us. Capitalized terms used in this Schedule and not defined
herein have the same meaning as such terms have in the Agreement. All
commission rates and service fee rates set forth in this Schedule may be
modified by us from time to time without prior notice.
I. KEYSTONE FUNDS
KEYSTONE QUALITY BOND FUND (B-1) KEYSTONE MID-CAP GROWTH FUND (S-3)
KEYSTONE DIVERSIFIED BOND FUND (B-2) KEYSTONE SMALL COMPANY GROWTH FUND (S-4)
KEYSTONE HIGH INCOME BOND FUND (B-4) KEYSTONE INTERNATIONAL FUND INC.
KEYSTONE BALANCED FUND (K-1) KEYSTONE PRECIOUS METALS HOLDINGS, INC.
KEYSTONE STRATEGIC GROWTH FUND (K-2) KEYSTONE TAX FREE FUND
KEYSTONE GROWTH AND INCOME FUND (S-1) (COLLECTIVELY "KEYSTONE FUNDS")
1. COMMISSIONS FOR THE KEYSTONE FUNDS (OTHER THAN KEYSTONE PRECIOUS METALS
HOLDINGS, INC.)
Except as otherwise provided in our Agreement, we will pay you commissions
on your sales of Shares of such Keystone Funds rtds d such er tv amrr
rdKeystone Fundat the rate of 4.0% of the aggregate public offering price of
such Shares as described in the Fund's Prospectus ("Offering Price") when sold
in an eligible sale.
2. COMMISSIONS FOR KEYSTONE PRECIOUS METALS HOLDINGS, INC.
Except as otherwise provided for in our Agreement, we will pay you
commissions on your sale of Shares of Keystone Precious Metals Holdings, Inc.
as the rate of the Offering Price when sold in an eligible sale as follows:
AMOUNT OF PURCHASE COMMISSION AMOUNT OF PURCHASE COMMISSION
Less than $100,000 4% $250,000-$499,999 1%
$100,000-$249,999 2% $500,000 and above 0.5%
3. SERVICE FEES
We will pay you service fees based on the aggregate net asset value of
Shares of the Keystone Funds (other than Keystone Precious Metals Holdings,
Inc.) you have sold on or after June 1, 1983 and of Keystone Precious Metals
Holdings, Inc. you have sold on or after November 19, 1984, which remain
issued and outstanding on the books of such Funds on the fifteenth day of the
third month of each calendar quarter (March 15, June 15, September 15 and
December 15, each hereinafter a "Service Fee Record Date") and which are
registered in the names of customers for whom you are dealer of record
("Eligible Shares"). Such service fees will be calculated quarterly at the
rate of 0.0625% per quarter of the aggregate net asset value of all such
Eligible Shares (approximately 0.25% annually) on the Service Fee Record Date;
provided, however, that in any calendar quarter in which service fees earned
by you on Eligible Shares of all Funds (except Keystone Liquid Trust Class A
Shares) are less than $50.00 in the aggregate, no service fees will be paid to
you nor will such amounts be carried over for payment in a future quarter.
Service fees will be payable within five business days after the Service Fee
Record Date. Service fees will only be paid by us to the extent that such
amounts have been paid to us by the Funds.
4. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of additional commissions to certain dealers. Such
incentives may, at our discretion, be limited to dealers who allow their
individual selling representatives to participate in such additional
commissions.
<TABLE>
<CAPTION>
II. KEYSTONE AMERICA FUNDS AND EVERGREEN FUNDS
KEYSTONE AMERICA FUNDS
<S> <C>
KEYSTONE GOVERNMENT SECURITIES FUND KEYSTONE OMEGA FUND
KEYSTONE STATE TAX FREE FUND KEYSTONE SMALL COMPANY GROWTH FUND - II
KEYSTONE STATE TAX FREE FUND - SERIES II KEYSTONE FUND FOR TOTAL RETURN
KEYSTONE STRATEGIC INCOME FUND KEYSTONE BALANCED FUND - II
KEYSTONE TAX FREE INCOME FUND (COLLECTIVELY "KEYSTONE EQUITY AND LONG TERM INCOME FUNDS")
KEYSTONE WORLD BOND FUND KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
KEYSTONE FUND OF THE AMERICAS KEYSTONE INTERMEDIATE TERM BOND FUND
KEYSTONE GLOBAL OPPORTUNITIES FUND (COLLECTIVELY "KEYSTONE INTERMEDIATE INCOME FUNDS")
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. KEYSTONE LIQUID TRUST
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND
EVERGREEN FUNDS
EVERGREEN U.S. GOVERNMENT FUND EVERGREEN AMERICAN RETIREMENT FUND
EVERGREEN HIGH GRADE TAX FREE FUND EVERGREEN FOUNDATION FUND
EVERGREEN FLORIDA MUNICIPAL BOND FUND EVERGREEN TAX STRATEGIC FOUNDATION FUND
EVERGREEN GEORGIA MUNICIPAL BOND FUND EVERGREEN UTILITY FUND
EVERGREEN NEW JERSEY MUNICIPAL BOND FUND EVERGREEN TOTAL RETURN FUND
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND EVERGREEN SMALL CAP EQUITY INCOME FUND
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND (COLLECTIVELY "EVERGREEN EQUITY AND LONG TERM INCOME FUNDS")
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
EVERGREEN FLORIDA HIGH INCOME MUNICIPAL BOND FUND EVERGREEN MONEY MARKET FUND
EVERGREEN FUND EVERGREEN TAX EXEMPT MONEY MARKET FUND
EVERGREEN U.S. REAL ESTATE EQUITY FUND EVERGREEN TREASURY MONEY MARKET FUND
EVERGREEN LIMITED MARKET FUND EVERGREEN PENNSYLVANIA TAX FREE MONEY MARKET FUND
EVERGREEN AGGRESSIVE GROWTH FUND (COLLECTIVELY "EVERGREEN MONEY MARKET FUNDS")
EVERGREEN INTERNATIONAL EQUITY FUND EVERGREEN SHORT-INTERMEDIATE BOND FUND
EVERGREEN GLOBAL LEADERS FUND EVERGREEN INTERMEDIATE-TERM BOND FUND
EVERGREEN EMERGING MARKETS FUND EVERGREEN INTERMEDIATE-TERM GOVERNMENT SECURITIES FUND
EVERGREEN GLOBAL REAL ESTATE EQUITY FUND EVERGREEN SHORT-INTERMEDIATE MUNICIPAL FUND
EVERGREEN BALANCED FUND EVERGREEN SHORT-INTERMEDIATE MUNICIPAL FUND -- CALIFORNIA
EVERGREEN GROWTH & INCOME FUND (COLLECTIVELY "EVERGREEN INTERMEDIATE INCOME AND
EVERGREEN VALUE FUND MONEY MARKET FUNDS")
</TABLE>
A. CLASS A SHARES
1. COMMISSIONS
Except as otherwise provided in our Agreement, in paragraph 2 below or in
connection with certain types of purchases at net asset value which are
described in the Prospectuses for the Keystone America Funds and the Evergreen
Funds, we will pay you commissions on your sales of Shares of such Funds in
accordance with the following sales charge schedules* on sales where we
receive a commission from the shareholder:
KEYSTONE AMERICA AND EVERGREEN EQUITY AND LONG TERM INCOME FUNDS
SALES CHARGE AS COMMISSION AS
AMOUNT OF A PERCENTAGE OF A PERCENTAGE OF
PURCHASE OFFERING PRICE OFFERING PRICE
Less than $50,000 4.75% 4.25%
$50,000-$99,999 4.50% 4.25%
$100,000-$249,999 3.75% 3.25%
$250,000-$499,999 2.50% 2.00%
$500,000-$999,999 2.00% 1.75%
Over $1,000,000 None See paragraph 2
KEYSTONE AMERICA AND EVERGREEN INTERMEDIATE INCOME FUNDS
SALES CHARGE AS COMMISSION AS
AMOUNT OF A PERCENTAGE OF A PERCENTAGE OF
PURCHASE OFFERING PRICE OFFERING PRICE
Less than $50,000 3.25% 2.75%
$50,000-$99,999 3.00% 2.75%
$100,000-$249,999 2.50% 2.25%
$250,000-$499,999 2.00% 1.75%
$500,000-$999,999 1.50% 1.25%
Over $1,000,000 None See paragraph 2
KEYSTONE LIQUID TRUST AND EVERGREEN MONEY MARKET FUNDS
No sales charge for any amount of purchase.
2. COMMISSIONS FOR CERTAIN TYPES OF PURCHASES
With respect to (a) purchases of Class A Shares in the amount of $1 million
or more and/or (b) purchases of Class A Shares made by a corporate or certain
other qualified retirement plan or a non-qualified deferred compensation plan
or a Title I tax sheltered annuity or TSA Plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan"), (each such
purchase a "NAV Purchase"), we will pay you commissions as follows:
<TABLE>
<CAPTION>
a. Purchases described in 2(a) above
AMOUNT OF COMMISSION AS A PERCENTAGE
PURCHASE OF OFFERING PRICE
<S> <C>
$1,000,000-$2,999,999 1.00% of the first $2,999,999, plus
$3,000,000-$4,999,999 0.50% of the next $2,000,000, plus
$5,000,000 0.25% of amounts equal to or over $5,000,000
b. Purchases described in 2(b) above .50% of amount of purchase (subject to recapture
upon early redemption)
</TABLE>
* These sales charge schedules apply to purchases made at one time or pursuant
to Rights of Accumulation or Letters of Intent. Any purchase which is made
pursuant to Rights of Accumulation or Letter of Intent is subject to the
terms described in the Prospectus(es) for the Fund(s) whose Shares are being
purchased.
3. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of up to the entire sales charge to certain
dealers. Such incentives may, at our discretion, be limited to dealers who
allow their individual selling representatives to participate in such
additional commissions.
4. SERVICE FEES FOR EVERGREEN FUNDS (OTHER THAN EVERGREEN MONEY MARKET FUNDS)
AND KEYSTONE AMERICA FUNDS (OTHER THAN KEYSTONE STATE TAX FREE FUND,
KEYSTONE STATE TAX FREE FUND - SERIES II, KEYSTONE CAPITAL PRESERVATION AND
INCOME FUND AND KEYSTONE LIQUID TRUST)
a. Keystone America Funds Only. Until March 31, 1997, we will pay you
service fees based on the aggregate net asset value of Shares of such Funds
you have sold which remain issued and outstanding on the books of such Funds
on the fifteenth day of the third month of each calendar quarter (March 15,
June 15, September 15 and December 15, each hereinafter a "Service Fee Record
Date") and which are registered in the names of customers for whom you are
dealer of record ("Eligible Shares"). Such service fees will be calculated
quarterly at the rate of 0.0625% per quarter of the aggregate net asset value
of all such Eligible Shares (approximately 0.25% annually) on the Service Fee
Record Date; provided, however, that in any calendar quarter in which total
service fees earned by you on Eligible Shares of all Keystone Funds (except
Keystone Liquid Trust Class A Shares) are less than $50.00 in the aggregate,
no service fees will be paid to you nor will such amounts be carried over for
payment in a future quarter. Service fees will be paid within five days after
the Service Fee Record Date. Service fees will only be paid by us to the
extent that such amounts have been paid to us by the Funds.
b. Evergreen Funds and Keystone America Funds (after March 31, 1997). We
will pay you service fees based on the average daily net asset value of Shares
of such Funds you have sold which are issued and outstanding on the books of
such Funds during each calendar quarter and which are registered in the names
of customers for whom you are dealer of record ("Eligible Shares"). Such
service fees will be calculated quarterly at the rate of 0.0625% per quarter
of the daily average net asset value of all such Eligible Shares
(approximately 0.25% annually) during such quarter; provided, however, that in
any calendar quarter in which total service fees earned by you on Eligible
Shares of all Funds (except Keystone Liquid Trust Class A Shares) are less
than $50.00 in the aggregate, no service fees will be paid to you nor will
such amounts be carried over for payment in a future quarter. Service fees
will be paid by the twentieth day of the month before the end of the
respective quarter. Service fees will only be paid by us to the extent that
such amounts have been paid to us by the Funds.
5. SERVICE FEES FOR KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE
FUND - SERIES II
a. Until March 31, 1997, we will pay you service fees based on the aggregate
net asset value of Shares of such Funds you have sold which remain issued and
outstanding on the books of the Funds on the fifteenth day of the third month
of each calendar quarter (March 15, June 15, September 15 and December 15,
each hereinafter a "Service Fee Record Date") and which are registered in the
names of customers for whom you are dealer of record ("Eligible Shares"). Such
service fees will be calculated quarterly at the rate of 0.0375% per quarter
of the aggregate net asset value of all such Eligible Shares (approximately
0.15% annually) on the Service Fee Record Date; provided, however, that in any
calendar quarter in which total service fees earned by you on Eligible Shares
of all Funds (except Keystone Liquid Trust Class A Shares) are less than
$50.00 in the aggregate, no service fees will be paid to you nor will such
amounts be carried over for payment in a future quarter. Service fees will be
paid within five days after the Service Fee Record Date. Service fees will
only be paid by us to the extent that such amounts have been paid to us by the
Funds.
b. After March 31, 1997 we will pay you service fees calculated as provided
in section II (A)(4)(b) except that the quarterly rate will be 0.0375%
(approximately 0.15% annually).
c. After June 30, 1997, we will pay you service fees calculated as provided
in section II (A)(4)(b) above on Shares sold on or after July 1, 1997.
6. SERVICE FEES FOR KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
a. Until March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(4)(a) except that for Eligible Shares sold after January 1,
1997 the quarterly rate will be 0.025% (approximately 0.10% annually).
b. After March 31, 1997 we will pay you service fees calculated as provided
in section II (A)(4)(b) except that for Eligible Shares sold after January 1,
1997 the quarterly rate will be 0.025% (approximately 0.10% annually).
7. SERVICE FEES FOR KEYSTONE LIQUID TRUST
We will pay you service fees based on the aggregate net asset value of all
Shares of such Fund you have sold which remain issued and outstanding on the
books on the Fund on the fifteenth day of the third month of each calendar
quarter (March 15, June 15, September 15 and December 15, each hereinafter a
"Service Fee Record Date") and which are registered in the names of customers
for whom you are dealer of record ("Eligible Shares"). Such service fees will
be calculated at the rates set forth below and based on the aggregate net
asset value of all such Eligible Shares on the Service Fee Record Date;
provided, however, that no such service fees will be paid to you for any
quarter if the aggregate net asset value of such Eligible Shares on the last
business day of the quarter is less than $2 million; and provided further,
however, that service fees will only be paid to us to the extent that such
amounts have been paid to us by the Fund. Service fees will be paid within 5
days after the Service Fee Record Date. The quarterly rates at which such
service fees are payable and the net asset value to which such rates will be
applied are set forth below:
ANNUAL QUARTERLY AGGREGATE NET ASSET
RATE PAYMENT RATE VALUE OF SHARES
0.00000% 0.00000% of the first $1,999,999, plus
0.15000% 0.03750% of the next $8,000,000, plus
0.20000% 0.05000% of the next $15,000,000, plus
0.25000% 0.06250% of the next $25,000,000, plus
0.30000% 0.07500% of amounts over $50,000,000
8. SERVICE FEES FOR EVERGREEN MONEY MARKET FUNDS
We will pay you service fees calculated as provided in section II (A)(4)(b)
except that the quarterly rate will be 0.075% (approximately 0.30% annually.)
<PAGE>
B. CLASS B SHARES
ALL KEYSTONE AMERICA AND EVERGREEN FUNDS
1. COMMISSIONS
Except as otherwise provided in our Agreement, we will pay you commissions
on your sales of Class B Shares of the Keystone America Funds and the
Evergreen Funds at the rate of 4.00% of the aggregate Offering Price of such
Shares, when sold in an eligible sale.
2. PROMOTIONAL INCENTIVES
We may, from time to time, provide promotional incentives, including
reallowance and/or payment of additional commissions, to certain dealers. Such
incentives may, at our discretion, be limited to dealers who allow their
individual selling representatives to participate in such additional
commissions.
3. SERVICE FEES FOR EVERGREEN FUNDS AND KEYSTONE AMERICA FUNDS (OTHER THAN
KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE FUND - SERIES II)
a. Keystone America Funds - Until March 31, 1997, we will pay you service
fees calculated as provided in section II (A)(4)(a) above.
b. Evergreen Funds and Keystone America Funds (after March 31. 1997). We
will pay you service fees calculated as provided in section II (A)(4)(b)
above.
4. SERVICE FEES FOR KEYSTONE STATE TAX FREE FUND AND KEYSTONE STATE TAX FREE
FUND - SERIES II
a. Until March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(a) above.
b. After March 31, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(b) above.
c. After June 30, 1997, we will pay you service fees calculated as provided
in section II (A)(5)(c) above.
C. CLASS C SHARES
ALL KEYSTONE AMERICA AND EVERGREEN FUNDS
1. COMMISSIONS
Except as provided in our Agreement, we will pay you initial commissions on
your sales of Class C Shares of the Keystone America and the Evergreen Funds
at the rate of 0.75% of the aggregate Offering Price of such Shares sold in
each eligible sale.
We will also pay you commissions based on the average daily net asset value
of Shares of such Funds you have sold which have been on the books of the
Funds for a minimum of 14 months from the date of purchase (plus any
reinvested distributions attributable to such Shares), which have been issued
and outstanding on the books of such Funds during the calendar quarter and
which are registered in the names of customers for whom you are dealer of
record ("Eligible Shares"). Such commissions will be calculated quarterly at
the rate of 0.1875% per quarter of the average daily net asset value of all
such Eligible Shares (approximately 0.75% annually) during such quarter. Such
commissions will be paid by the twentieth day of the month before the end of
the respective quarter. Such commissions will continue to be paid to you
quarterly so long as aggregate payments do not exceed applicable NASD
limitations and other governing regulations.
2. SERVICE FEES
We will pay you a full year's service fee in advance on your sales of Class
C Shares of such Funds at the rate of 0.25% of the aggregate net asset value
of such Shares.
We will pay you service fees based on the average daily net asset value of
Shares of such Funds you have sold which have been on the books of the Funds
for a minimum of 14 months from the date of purchase (plus any reinvested
distributions attributable to such Shares), which have been issued and
outstanding during the respective quarter and which are registered in the
names of customers for whom you are the dealer of record ("Eligible Shares").
Such service fees will be calculated quarterly at the rate of 0.0625% per
quarter of the average daily net asset value of all such Eligible Shares
(approximately 0.25% annually); provided, however, that in any calendar
quarter in which total service fees earned by you on Eligible Shares of Funds
(except Keystone Liquid Trust Class A Shares) are less than $50.00 in the
aggregate, no service fees will be paid to you nor will such amounts be
carried over for payment in a future quarter. Service fees will be paid by the
twentieth day of the month before the end of the respective quarter. Service
fees other than those paid in advance will only be paid by us to the extent
that such amounts have been paid to us by the Funds.
ADMINISTRATIVE SERVICES AGREEMENT
This Administrative Services Agreement is made as of this day of ,
1997 between , a Massachusetts business trust (herein
called the "Trust"), and Evergreen Keystone Investment Services, Inc. (herein
called "EKIS").
WHEREAS, the Trust is a Massachusetts business trust consisting of one or
more portfolios which operates as an open-end management investment company and
is so registered under the Investment Company Act of 1940; and
WHEREAS, the Trust desires to retain EKIS as its Administrator to provide
it with administrative services, and EKIS is willing to render such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties hereto agree as follows:
1. Appointment of Administrator. The Trust hereby appoints EKIS as
Administrator of the Trust and each of its portfolios on the terms and
conditions set forth in this Agreement; and EKIS hereby accepts such appointment
and agrees to perform the services and duties set forth in Section 2 of this
Agreement in consideration of the compensation provided for in Section 4 hereof.
2. Services and Duties. As Administrator, and subject to the supervision
and control of the Trustees of the Trust, EKIS will hereafter provide
facilities, equipment and personnel to carry out the following administrative
services for operation of the business and affairs of the Trust and each of its
portfolios:
(a) prepare, file and maintain the Trust's governing documents, including
the Declaration of Trust (which has previously been prepared and filed), the By-
laws, minutes of meetings of Trustees and shareholders, and proxy statements for
meetings of shareholders;
(b) prepare and file with the Securities and Exchange Commission and the
appropriate state securities authorities the registration statements for the
Trust and the Trust's shares and all amendments thereto, reports to regulatory
authorities and shareholders, prospectuses, proxy statements, and such other
documents as may be necessary or convenient to enable the Trust to make a
continuous offering of its shares;
(c) prepare, negotiate and administer contracts on behalf of the Trust
with, among others, the Trust's distributor, custodian and transfer agent;
(d) supervise the Trust's fund accounting agent in the maintenance of the
Trust's general ledger and in the preparation of the Trust's financial
statements, including oversight of expense accruals and payments and the
determination of the net asset value of the Trust's assets and of the Trust's
shares, and of the declaration and payment of dividends and other distributions
to shareholders;
(e) calculate performance data of the Trust for dissemination to
information services covering the investment company industry;
(f) prepare and file the Trust's tax returns;
(g) examine and review the operations of the Trust's custodian and transfer
agent;
(h) coordinate the layout and printing of publicly disseminated
prospectuses and reports;
(i) prepare various shareholder reports;
(j) assist with the design, development and operation of new portfolios of
the Trust;
(k) coordinate shareholder meetings;
(l) provide general compliance services; and
(m) advise the Trust and its Trustees on matters concerning the Trust and
its affairs.
The foregoing, along with any additional services that EKIS shall agree in
writing to perform for the Trust hereunder, shall hereafter be referred to as
"Administrative Services." Administrative Services shall not include any duties,
functions, or services to be performed for the Trust by the Trust's investment
adviser, distributor, custodian or transfer agent pursuant to their agreements
with the Trust.
3. Expenses. EKIS shall be responsible for expenses incurred in providing
office space, equipment and personnel as may be necessary or convenient to
provide the Administrative Services to the Trust. The Trust shall be responsible
for all other expenses incurred by EKIS on behalf of the Trust, including
without limitation postage and courier expenses, printing expenses, registration
fees, filing fees, fees of outside counsel and independent auditors, insurance
premiums, fees payable to Trustees who are not EKIS employees, and trade
association dues.
4. Compensation. For the Administrative Services provided, the Trust hereby
agrees to pay and EKIS hereby agrees to accept as full compensation for its
services rendered hereunder an administrative fee, calculated daily and payable
monthly, at an annual rate determined in accordance with the table below.
Aggregate Daily Net Assets of
Funds Administered by EKIS
For Which any Affiliate of First Union
Administrative National Bank of North Carolina
Fee Serves as Investment Adviser
.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
.010% on assets in excess of $30 billion
Each portfolio of the Trust shall pay a portion of the administrative fee
equal to the rate determined above times that portfolios average annual daily
net assets.
5. Responsibility of Administrator. EKIS shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the matters to which this Agreement relates, except a loss
resulting from wilful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. EKIS shall be entitled to rely on
and may act upon advice of counsel (who may be counsel for the Trust) on all
matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice. Any person, even though also an officer,
director, partner, employee or agent of EKIS, who may be or become an officer,
trustee, employee or agent of the Trust, shall be deemed, when rendering
services to the Trust or acting on any business of the Trust (other than
services or business in connection with the duties of EKIS hereunder) to be
rendering such services to or acting solely for the Trust and not as an officer,
director, partner, employee or agent or one under the control or direction of
EKIS even though paid by EKIS.
6. Duration and Termination.
(a) This Agreement shall be in effect until June 30, 1998, and shall
continue in effect from year to year thereafter, provided it is approved, at
least annually, by a vote of a majority of Trustees of the Trust including a
majority of the disinterested Trustees.
(b) This Agreement may be terminated at any time, without payment of any
penalty, on sixty (60) day's prior written notice by a vote of a majority of the
Trust's Trustees or by EKIS.
7. Amendment. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which an enforcement of the change, waiver, discharge or
termination is sought.
8. Notices. Notices of any kind to be given to the Trust hereunder by EKIS
shall be in writing and shall be duly given if delivered to the Trust and to its
investment adviser at the following address: First Union National Bank of North
Carolina, One First Union Center, Charlotte, NC 28288. Notices of any kind to be
given to EKIS hereunder by the Trust shall be in writing and shall be duly given
if delivered to EKIS at 200 Berkeley Street, Boston MA, Attention: Chief
Administrative Officer.
9. Limitation of Liability. EKIS is hereby expressly put on notice of the
limitation of liability as set forth in Article IX of the Declaration of Trust
and agrees that the obligations pursuant to this Agreement of a particular
portfolio and of the Trust with respect to that particular portfolio be limited
solely to the assets of that particular portfolio, and EKIS shall not seek
satisfaction of any such obligation from the assets of any other portfolio, the
shareholders of any portfolio, the Trustees, officers, employees or agents of
the Trust, or any of them.
10. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court or
regulatory agency decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. Subject to the provisions of Section 5
hereof, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and shall be governed by New
York law; provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or regulation
promulgated by the Securities and Exchange Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
NAME OF FUND
By_____________________ Its: President
Attest:____________________
Its:_______________________
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
By_____________________ Its:__________________
Attest:____________________
Its:_______________________
SUB-ADMINISTRATOR AGREEMENT
This Sub-Administrator Agreement is made as of this 1st day of January,
1997 between Evergreen Keystone Investment Services, a Delaware Corporation
(herein called "EKIS"), and BISYS Fund Services Limited Partnership DBA as BISYS
Fund Services, an Ohio Limited Partnership (herein called "BISYS").
WHEREAS, EKIS has been appointed as investment adviser or administrator to
certain open-end management investment companies, or to one or more separate
investment series thereof, listed on Schedule A, as the same may be amended from
time to time to reflect additions or deletions of such companies or series,
which are registered under the Investment Company Act of 1940 (the "Funds");
WHEREAS, in its capacity as investment adviser or administrator to the
Funds, EKIS has the obligation to provide, or engage others to provide, certain
administrative services to the Funds; and
WHEREAS, EKIS desires to retain BISYS as Sub-Administrator to the Funds for
the purpose of providing the Funds with personnel to act as officers of the
Funds and to provide certain administrative services in addition to those
provided by EKIS ("Sub-Administrative Services"), and BISYS is willing to render
such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties hereto agree as follows:
1. Appointment of Sub-Administrator. EKIS hereby appoints BISYS as
Sub-Administrator for the Funds on the terms and conditions set forth in this
Agreement and BISYS hereby accepts such appointment and agrees to perform the
services and duties set forth in Section 2 of this Agreement in consideration of
the compensation provided for in Section 4 hereof.
2. Services and Duties. As Sub-Administrator, and subject to the
supervision and control of EKIS and the Trustees or Directors of the Funds,
BISYS will hereafter provide facilities, equipment and personnel to carry out
the following Sub-Administrative services to assist in the operation of the
business and affairs of the Funds:
(a) provide individuals reasonably acceptable to the Funds for nomination,
appointment or election as officers of the Funds and who will be responsible for
the management of certain of each Fund's affairs as determined from time to time
by the Trustees or Directors of the Funds;
(b) review filings with the Securities and Exchange Commission and state
securities authorities that have been prepared on behalf of the Funds by the
administrator and take such actions as may be reasonably requested by the
administrator to effect such filings;
(c) verify, authorize and transmit to the custodian, transfer agent and
dividend disbursing agent of each Fund all necessary instructions for the
disbursement of cash, issuance of shares, tender and receipt of portfolio
securities, payment of expenses and payment of dividends; and
(d) advise the Trustees or Directors of the Funds on matters concerning the
Funds and their affairs.
BISYS may, in addition, agree in writing to perform additional
Sub-Administrative Services for the Funds. Sub-Administrative Services shall not
include investment advisory services or any duties, functions, or services to be
performed for the Funds by their distributor, custodian or transfer agent
pursuant to their agreements with the Funds.
3. Expenses. BISYS shall be responsible for expenses incurred in providing
office space, equipment and personnel as may be necessary or convenient to
provide the Sub-Administrative Services to the Funds. EKIS and/or the Funds
shall be responsible for all other expenses incurred by BISYS on behalf of the
Funds pursuant to this Agreement at the direction of EKIS, including without
limitation postage and courier expenses, printing expenses, registration fees,
filing fees, fees of outside counsel and independent auditors, insurance
premiums, fees payable to Trustees or Directors who are not BISYS employees, and
trade association dues.
4. Compensation. For the Sub-Administrative Services provided, EKIS hereby
agrees to pay and BISYS hereby agrees to accept as full compensation for its
services rendered hereunder a sub- administrative fee, calculated daily and
payable monthly at an annual rate based on the aggregate average daily net
assets of the Funds, or separate series thereof, set forth on Schedule A and
determined in accordance with the table below.
Aggregate Daily Net Assets of Funds For
Which KIMCO, Evergreen Asset Management
Sub-Administrative Corp., First Union National Bank of North
Fee as a % of Carolina or any Affiliates Thereof Serve as
Average Annual Investment Adviser or Administrator And For
Daily Net Assets Which BISYS Serves as Sub-Administrator
.0100% on the first $7 billion
.0075% on the next $3 billion
.0050% on the next $15 billion
.0040% on assets in excess of $25 billion
5. Indemnification and Limitation of Liability of BISYS. The duties of
BISYS shall be limited to those expressly set forth herein or later agreed to in
writing by BISYS, and no implied duties are assumed by or may be asserted
against BISYS hereunder. BISYS shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any act or omission in carrying
out its duties hereunder, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder, except as may otherwise be
provided under provisions of applicable law which cannot be waived or modified
hereby. (As used in this Section, the term "BISYS" shall include partners,
officers, employees and other agents of BISYS as well as BISYS itself).
So long as BISYS acts in good faith and with due diligence and without
negligence, EKIS shall indemnify BISYS and hold it harmless from any and all
actions, suits and claims, and from any and all losses, damages, costs, charges,
reasonable counsel fees and disbursements, payments, expenses and liabilities
(including reasonable investigation expenses) arising directly or indirectly out
of BISYS' actions taken or nonactions with respect to the performance of
services hereunder. The indemnity and defense provisions set forth herein shall
survive the termination of this Agreement for a period of three years.
The rights hereunder shall include the right to reasonable advances of
defense expenses in the event of any pending or threatened litigation with
respect to which indemnification hereunder may ultimately be merited. In order
that the indemnification provision contained herein shall apply, however, it is
understood that if in any case EKIS maybe asked to indemnify or hold BISYS
harmless, EKIS shall be fully and promptly advised of all pertinent facts
concerning the situation in question, and it is further understood that BISYS
will use all reasonable care to identify and notify EKIS promptly concerning any
situation which presents or appears likely to present the probability of such a
claim for indemnification against EKIS.
EKIS shall be entitled to participate at its own expense or, if it so
elects, to assume the defense of any suit brought to enforce any claims subject
to this indemnity provision. If EKIS elects to assume the defense of any such
claim, the defense shall be conducted by counsel chosen by EKIS and satisfactory
to BISYS, whose approval shall not be unreasonably withheld. In the event that
EKIS elects to assume the defense of any suit and retain counsel, BISYS shall
bear the fees and expenses of any additional counsel retained by it. If EKIS
does not elect to assume the defense of a suit, it will reimburse BISYS for the
reasonable fees and expenses of any counsel retained by BISYS.
BISYS may apply to EKIS at any time for instructions and may consult
counsel for EKIS or its own counsel and with accountants and other experts with
respect to any matter arising in connection with BISYS' duties, and BISYS shall
not be liable or accountable for any action taken or omitted by it in good faith
in accordance with such instruction or with the opinion of such counsel,
accountants or other experts.
Any person, even though also an officer, director, partner, employee or
agent of BISYS, who may be or become an officer, trustee, employee or agent of
the Funds, shall be deemed, when rendering services to a Fund or acting on any
business of a Fund (other than services or business in connection with the
duties of BISYS hereunder) to be rendering such services to or acting solely for
the Fund and not as an officer, director, partner, employee or agent or one
under the control or direction of BISYS even though paid by BISYS.
6. Duration and Termination.
(a) The initial term of this Agreement (the "Initial Term") shall commence
on the date this Agreement is executed by both parties, shall continue until
April 30, 1998, and shall continue in effect for a Fund from year to year
thereafter, provided it is approved, at least annually, by a vote of a majority
of Directors/Trustees of the Funds, including a majority of the disinterested
Directors/Trustees. In the event of' any breach of this Agreement by either
party, the non-breaching party shall notify the breaching party in writing of
such breach and upon receipt of such notice, the breaching party shall have 45
days to remedy the breach except in the case of a breach resulting from fraud or
other acts which materially and adversely affects the operations or financial
position of the Funds. In the event any material breach is not remedied within
such time period, the nonbreaching party may immediately terminate this
Agreement.
Notwithstanding the foregoing, after such termination for so long as BISYS,
with the written consent of EKIS, in fact continues to perform any one or more
of the services contemplated by this Agreement or any schedule or exhibit
hereto, the provisions of this Agreement, including without limitation the
provisions dealing with indemnification, shall continue in full force and
effect. Compensation due BISYS and unpaid by EKIS upon such termination shall be
immediately due and payable upon and notwithstanding such termination. BISYS
shall be entitled to collect from EKIS, in addition to the compensation
described herein, all costs reasonably incurred in connection with BISYS's
activities in effecting such termination, including without limitation, the
delivery to the Funds and/or their designees of each Fund's property, records,
instruments and documents, or any copies thereof. To the extent that BISYS may
retain in its possession copies of any Fund documents or records subsequent to
such termination which copies had not been requested by or on behalf of a Fund
in connection with the termination process described above, BISYS will provide
such Fund with reasonable access to such copies; provided, however, that, in
exchange therefor, EKIS shall reimburse BISYS for all costs reasonably incurred
in connection therewith.
(b) Subject to (c) below, this Agreement may be terminated at any time,
without payment of any penalty, on sixty (60) day's prior written notice by
KIMCO, or by BISYS and, with respect to one or more of the Funds a vote of a
majority of such Fund's or Funds' Directors/Trustees.
(c) If, during the first six months this Agreement is in effect it is
terminated for a Fund or Funds in accordance with (b) above, for any reason
other than a material breach of this Agreement, the merger of a Fund or Funds
for which KIMCO, Evergreen Asset Management Corp., First Union National Bank of
North Carolina or any affiliates thereof act as investment adviser, or any other
event that leads to the termination of the existence of a Fund or Funds, and
BISYS is replaced as sub-administrator, then EKIS shall make a one-time cash
payment to BISYS equal to the unpaid balance due BISYS for the first six-months
this Agreement in effect, assuming for purposes of calculation of the payment
that the asset level of each Fund on the date BISYS is replaced will remain
constant for the balance of such term. Once this Agreement has been in effect
for more than six months from the commencement date, this paragraph (c) shall be
null, void and of no further effect.
7. Amendment. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which an enforcement of the change, waiver, discharge or
termination is sought.
8. Notices. Notices of any kind to be given to EKIS hereunder by BISYS
shall be in writing and shall be duly given if delivered to EKIS at the
following address: Evergreen Asset Management Corp., 2500 Westchester Avenue,
Purchase, New York 10577, ATT: Legal Department. Notices of any kind to be given
to BISYS hereunder by EKIS or the Funds shall be in writing and shall be duly
given if delivered to BISYS at 3435 Stelzer Road, Columbus, Ohio 43219
Attention: George O. Martinez, Senior Vice President.
9. Limitation of Liability. BISYS is hereby expressly put on notice of the
limitations of liability as set forth in the Declarations of Trust of the Funds
that are Massachusetts business trusts or series thereof and agrees that the
obligations pursuant to this Agreement of a particular Fund be limited solely to
the assets of that particular Fund, and BISYS shall not seek satisfaction of any
such obligation from the assets of any other Fund, the shareholders of any Fund,
the Trustees, officers, employees or agents of any Fund, or any of them.
10. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court or
regulatory agency decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. Subject to the provisions of Section 5
hereof, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and shall be governed by New
York law; provided, however, that nothing herein shall be construed in a manner
inconsistent with the Investment Company Act of 1940 or any rule or regulation
promulgated by the Securities and Exchange Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
NAME OF FUND
By__________________________________________
Its:________________________________________
Attest:_________________
BISYS FUND SERVICES LIMITED PARTNERSHIP
By___________________________________________
BISYS FUND SERVICES, INC., its General Partner
Attest:________________________
<PAGE>
SCHEDULE A
Evergreen Trust on behalf of:
Evergreen Fund
The Evergreen Aggressive Growth Fund
The Evergreen Total Return Fund
The Evergreen Limited Market Fund, Inc.
Evergreen Growth and Income Fund
Evergreen Money Market Trust on behalf of:
Evergreen Money Market Fund
Evergreen Institutional Money Market Fund
Evergreen Institutional Treasury Money Market Fund
The Evergreen American Retirement Trust on behalf of:
Evergreen American Retirement Fund
Evergreen Small Cap Equity Income Fund
The Evergreen Municipal Trust on behalf of:
Evergreen Short-Intermediate Municipal Fund
Evergreen Short-Intermediate Municipal Fund-CA
Evergreen Tax Exempt Money Market Fund
Evergreen Florida High Income Municipal Bond Fund
Evergreen Institutional Tax-Exempt Money Market Fund
Evergreen Equity Trust on behalf of:
Evergreen Global Real Estate Equity Fund
Evergreen U.S. Real Estate Equity Fund
Evergreen Global Leaders Fund
Evergreen Foundation Trust on behalf of:
Evergreen Foundation Fund
Evergreen Tax Strategic Foundation Fund
Evergreen Investment Trust on behalf of:
Evergreen Emerging Markets Growth Fund
Evergreen International Equity Fund
Evergreen Balanced Fund
Evergreen Value Fund
Evergreen Utility Fund
Evergreen Short-Intermediate Bond Fund
Evergreen Florida Municipal Bond Fund
Evergreen Georgia Municipal Bond Fund
Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund
Evergreen Virginia Municipal Bond Fund
Evergreen High Grade Tax Free Fund
Evergreen Treasury Money Market Fund
Evergreen U.S. Government Fund
Evergreen Variable Trust on behalf of:
Evergreen VA Foundation Fund
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Global Leaders Fund
Evergreen VA Strategic Income Fund
Evergreen VA Aggressive Growth Fund
Evergreen Tax Free Trust on behalf of:
Evergreen New Jersey Tax-Free Income Fund
Evergreen Pennsylvania Tax-Exempt Money Market Fund
Evergreen Lexicon Fund on behalf of:
Evergreen Fixed Income Fund
Evergreen Short-Intermediate U.S. Government Securities Fund
Keystone America Hartwell Emerging Growth Fund ("Emerging Growth")
Keystone Balanced Fund II ("Balanced Fund")
Keystone Capital Preservation and Income Fund ("Capital Preservation and
Income")
Keystone Emerging Markets Fund ("Emerging Markets")
Keystone Fund For Total Return ("Total Return")
Keystone Fund of the Americas ("Fund of the Americas")
Keystone Global Opportunities Fund ("Global Opportunities")
Keystone Global Resources and Development Fund ("Global Resources")
Keystone Government Securities Fund ("Government Securities")
Keystone Intermediate Term Bond Fund ("Intermediate Term")
Keystone Liquid Trust ("Liquid Trust")
Keystone Omega Fund ("Omega")
Keystone Small Company Growth Fund II ("Small Company Growth")
Keystone State Tax Free Fund ("State Tax Free")
- Florida Tax Free Fund ("Florida Tax Free")
- Massachusetts Tax Free Fund ("Massachusetts Tax Free")
- Pennsylvania Tax Free Fund ("Pennsylvania Tax Free")
- New York Insured Tax Free Fund ("New York Insured")
Keystone State Tax Free Fund-Series II ("State Tax Free II")
- California Insured Tax Free Fund ("California Insured")
- Missouri Tax Free Fund ("Missouri Tax Free")
Keystone Strategic Income Fund ("Strategic Income")
Keystone Tax Free Income Fund ("Tax Free Income")
Keystone Quality Bond Fund (B-1) ("B-1")
Keystone Diversified Bond Fund (B-2) ("B-2")
Keystone High Income Bond Fund (B-4) ("B-4")
Keystone Balanced Fund (K-1) ("K-1")
Keystone Strategic Growth Fund (K-2) ("K-2")
Keystone Growth and Income Fund (S-1) ("S-1")
Keystone Mid-Cap Growth Fund (S-3) ("S-3")
Keystone Small Company Growth Fund (S-4) ("S-4")
Keystone Institutional Adjustable Rate Fund ("Adjustable Rate")
Keystone Institutional Trust ("Institutional")
Keystone International Fund Inc. ("International")
Keystone Precious Metals Holdings, Inc. ("Precious Metals")
Keystone Tax Free Fund ("Tax Free")
James P. Wallin
2500 Westchester Avenue
Purchase, New York 10577
Evergreen Tax Free Trust
200 Berkeley Street
Boston, Massachusetts 02110
Dear Sirs:
Evergreen Tax Free Trust, a Massachusetts business trust (the "Fund"), is
filing with the Securities and Exchange Commission a Post-Effective Amendment to
its Registration Statement on Form N-!A (the "Amendment") for the purpose of
registering additional shares pursuant to Rule 24e-2 under the Investment
Company Act of 1940 (the "Rule"). The effect of the Amendment, when accompanied
by the filing fee payable as prescribed by paragraph (c) of the Rule and by this
Opinion, will be to register additional shares of beneficial interest of the
EVERGREEN NEW JERSEY TAX FEE INCOME FUND series of the Fund (the "Shares") in
the amounts set forth on the facing page of the Amendment.
I have, as counsel, participated in various proceedings relating to the
Fund and to the Amendment. I have examined copies, either certified or otherwise
proved to our satisfaction to be genuine, of the Fund's Declaration of Trust, as
now in effect, the minutes of meetings of the Trustees of the Fund and other
documents relating to the organization and operation of the Fund. I have also
reviewed the form of the Amendment being filed by the Fund. I am generally
familiar with the business affairs of the Fund.
The Fund has advised me that the Shares will only be sold in the manner
contemplated by the prospectus of the Fund current at the time of sale, and that
the Shares will only be sold for a consideration not less than the net asset
value thereof as required by th4 Investment Company Act of 1940 and not less
than the par value thereof.
Based upon the foregoing, it is my opinion that the shares will be, when
issued, fully paid and non-assessable. However, I note that as set forth in the
Registration Statement, the Fund's shareholders might, under certain
circumstances, be liable for transactions effected by the Fund.
I hereby consent to the filing of this Opinion with the Securites and
Exchange Commission together with the Amendment, and to the filing of this
Opinion under the securities laws of any state.
I am a member of the Bar of the State of New York and do not hold myself
out as being conversant with the laws of any jurisdiction other than those of
the United States of America and the State of New York. I note that I am not
licensed to practice law in The Commonwealth of Massachusetts, and to the extent
that any opinion expressed herein involves the law of Massachusetts, such
opinion would be understood to be to be based solely upon my review of the
documents referred to above, the published statues of that Commonwealth and,
where applicable, published cases, rules or regulations or regularly bodies of
that Commonwealth.
Very truly yours,
/s/ James P. Wallin
-------------------
James P. Wallin
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Keystone State Tax Free Fund - Series II
Keystone State Tax Free Fund
Evergreen Tax Free Trust
We consent to the use of our reports dated May 2, 1997 incorporated by
reference herein and to the reference to our firm under the caption "Financial
Highlights" in the prospectus.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachsuetts
July 11, 1997
NJ
A
PRICING DATE 03/31/97
.........
30 DAY YTM 4.74996%
.........
...........................................................................
PRICE ST VARIABLE ZERO COUP LONG TERM AMORTIATION TOTAL DIV
DATE INCOME AND DIV INC INCOME INCOME INCOME FACTOR
...........................................................................
1 03/02/97 227.77 6931.66 7,159.43 65.36589370
2 03/03/97 227.77 6931.66 7,159.43 65.36589370
3 03/04/97 230.34 6931.08 7,161.42 65.33817820
4 03/05/97 235.91 6932.98 7,168.89 65.33817820
5 03/06/97 232.88 6939.69 7,172.57 65.33817820
6 03/07/97 228.10 6937.36 7,165.46 65.14716865
7 03/08/97 228.10 6937.36 7,165.46 65.14716865
8 03/09/97 228.10 6937.36 7,165.46 65.14716865
9 03/10/97 229.99 6939.94 7,169.93 65.15396510
10 03/11/97 231.65 6943.78 7,175.43 65.16884224
11 03/12/97 230.36 6944.86 7,175.22 65.15682150
12 03/13/97 147.93 7104.42 7,252.35 65.11548580
13 03/14/97 99.37 7197.53 7,296.90 65.08851550
14 03/15/97 99.37 7197.53 7,296.90 65.08851550
15 03/16/97 99.37 7197.53 7,296.90 65.08851550
16 03/17/97 115.08 7182.30 7,297.38 65.07087610
17 03/18/97 101.74 7182.30 7,284.04 65.37895126
18 03/19/97 112.98 7183.15 7,296.13 65.20640400
19 03/20/97 120.43 7192.07 7,312.50 65.10587730
20 03/21/97 115.99 7192.07 7,308.06 65.02605810
21 03/22/97 115.99 7192.07 7,308.06 65.02605810
22 03/23/97 115.99 7192.07 7,308.06 65.02605810
23 03/24/97 116.02 7196.17 7,312.19 65.03287975
24 03/25/97 128.54 7196.73 7,325.27 64.91937764
25 03/26/97 149.51 7211.88 7,361.39 64.79731714
26 03/27/97 151.36 7231.15 7,382.51 64.74404270
27 03/28/97 151.36 7230.34 7,381.70 64.74404270
28 03/29/97 151.36 7230.34 7,381.70 64.74404270
29 03/30/97 151.36 7230.34 7,381.70 64.74404270
30 03/31/97 76.49 7234.33 7,310.82 64.71294078
4,851.21 0.00 213,082.05 0.00 217,933.26
TOTAL INCOME FOR PERIOD 142,030.00
TOTAL EXPENSES FOR PERIOD 12,967.95
AVERAGE SHARES OUTSTANDING 2,919,027.46
LAST PRICE DURING PERIOD 11.28
.............................................................................
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSE SHARES PRICE INCOME EXPENSES SHARES
............................................................................
1 4,679.83 436.12 2,923,344.721 11.43 4,679.83 436.12 2,923,344.721
2 4,679.83 436.12 2,923,344.721 11.43 9,359.66 872.24 5,846,689.442
3 4,679.14 434.40 2,919,768.694 11.44 14,247.00 1,306.64 8,766,458.136
4 4,684.02 434.40 2,919,722.822 11.44 18,931.02 1,741.04 11,686,180.958
5 4,686.43 434.40 2,919,731.548 11.44 23,617.45 2,175.44 14,605,912.506
6 4,668.09 433.92 2,919,731.548 11.43 28,285.54 2,609.36 17,525,644.054
7 4,668.09 433.92 2,919,731.548 11.43 32,953.63 3,043.29 20,445,375.602
8 4,668.09 433.92 2,919,731.548 11.43 37,621.72 3,477.21 23,365,107.150
9 4,671.49 434.40 2,920,605.674 11.43 42,293.21 3,911.61 26,285,712.824
10 4,676.14 434.57 2,922,359.945 11.43 46,969.35 4,346.18 29,208,072.769
11 4,675.15 434.10 2,921,813.464 11.42 51,644.50 4,780.28 32,129,886.233
12 4,722.40 434.14 2,921,813.464 11.38 56,366.90 5,214.42 35,051,699.697
13 4,749.44 432.49 2,920,915.034 11.39 61,116.34 5,646.91 37,972,614.731
14 4,749.44 432.49 2,920,915.034 11.39 65,865.78 6,079.40 40,893,529.765
15 4,749.44 432.49 2,920,915.034 11.39 70,615.22 6,511.89 43,814,444.799
16 4,748.47 432.56 2,918,665.880 11.36 75,363.69 6,944.45 46,733,110.679
17 4,762.23 431.34 2,918,665.880 11.36 80,125.92 7,375.79 49,651,776.559
18 4,757.54 431.43 2,918,665.880 11.35 84,883.46 7,807.22 52,570,442.439
19 4,760.87 431.07 2,919,177.955 11.35 89,644.33 8,238.29 55,489,620.394
20 4,752.14 429.54 2,909,911.533 11.35 94,396.47 8,667.83 58,399,531.927
21 4,752.14 429.54 2,909,911.533 11.35 99,148.61 9,097.37 61,309,443.460
22 4,752.14 429.54 2,909,911.533 11.35 103,900.75 9,526.91 64,219,354.993
23 4,755.33 429.53 2,909,920.336 11.35 108,656.08 9,956.44 67,129,275.329
24 4,755.52 430.22 2,914,372.696 11.35 113,411.60 10,386.66 70,043,648.025
25 4,769.98 431.56 2,923,614.138 11.33 118,181.58 10,818.22 72,967,262.163
26 4,779.74 430.31 2,920,712.320 11.28 122,961.32 11,248.53 75,887,974.483
27 4,779.21 430.31 2,920,712.320 11.28 127,740.53 11,678.84 78,808,686.803
28 4,779.21 430.31 2,920,712.320 11.28 132,519.74 12,109.14 81,729,399.123
29 4,779.21 430.31 2,920,712.320 11.28 137,298.95 12,539.45 84,650,111.443
30 4,731.05 428.50 2,920,712.320 11.28 142,030.00 12,967.95 87,570,823.763
141,821. 12,967.95 2,919,027.459
<PAGE>
B
PRICING DATE 03/31/97
..........
30 DAY YTM 4.19042%
..........
..............................................................................
PRICE ST VARIABL ZERO COUPO LONG TERM AMORTIATION TOTAL DIV
DATE INCOME AND DIV INC INCOME INCOME INCOME FACTOR
..............................................................................
1 03/02/97 227.77 0.00 6,931.66 0.00 7,159.43 14.53342500
2 03/03/97 227.77 0.00 6,931.66 0.00 7,159.43 14.53334250
3 03/04/97 230.34 0.00 6,931.08 0.00 7,161.42 14.54497260
4 03/05/97 235.91 0.00 6,932.98 0.00 7,168.89 14.54497260
5 03/06/97 232.88 0.00 6,939.69 0.00 7,172.57 14.54497260
6 03/07/97 228.10 0.00 6,937.36 0.00 7,165.46 14.72184589
7 03/08/97 228.10 0.00 6,937.36 0.00 7,165.46 14.72184589
8 03/09/97 228.10 0.00 6,937.36 0.00 7,165.46 14.72184589
9 03/10/97 229.99 0.00 6,939.94 0.00 7,169.93 14.71897510
10 03/11/97 231.65 0.00 6,943.78 0.00 7,175.43 14.76878770
11 03/12/97 230.36 0.00 6,944.86 0.00 7,175.22 14.78112320
12 03/13/97 147.93 0.00 7,104.42 0.00 7,252.35 14.83518630
13 03/14/97 99.37 0.00 7,197.53 0.00 7,296.90 14.86429660
14 03/15/97 99.37 0.00 7,197.53 0.00 7,296.90 14.86429660
15 03/16/97 99.37 0.00 7,197.53 0.00 7,296.90 14.86429660
16 03/17/97 115.08 0.00 7,182.30 0.00 7,297.38 14.87192458
17 03/18/97 101.74 0.00 7,182.30 0.00 7,284.04 14.94233513
18 03/19/97 112.98 0.00 7,183.15 0.00 7,296.13 15.17026110
19 03/20/97 120.43 0.00 7,192.07 0.00 7,312.50 15.30104050
20 03/21/97 115.99 0.00 7,192.07 0.00 7,308.06 15.34256420
21 03/22/97 115.99 0.00 7,192.07 0.00 7,308.06 15.34256420
22 03/23/97 115.99 0.00 7,192.07 0.00 7,308.06 15.34256420
23 03/24/97 116.02 0.00 7,196.17 0.00 7,312.19 15.36475360
24 03/25/97 128.54 0.00 7,196.73 0.00 7,325.27 15.52056693
25 03/26/97 149.51 0.00 7,211.88 0.00 7,361.39 15.74111637
26 03/27/97 151.36 0.00 7,231.15 0.00 7,382.51 15.79107180
27 03/28/97 151.36 0.00 7,230.34 0.00 7,381.70 15.79107180
28 03/29/97 151.36 0.00 7,230.34 0.00 7,381.70 15.79107180
29 03/30/97 151.36 0.00 7,230.34 0.00 7,381.70 15.79107180
30 03/31/97 76.49 0.00 7,234.33 0.00 7,310.82 15.83152427
4,851.21 0.00 213,082.05 0.00 217,933.26
TOTAL INCOME FOR PERIOD 32,881.14
TOTAL EXPENSES FOR PERIOD 8,490.87
AVERAGE SHARES OUTSTANDING 655,987.76
LAST PRICE DURING PERIOD 10.74
................................................................................
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
................................................................................
1 1,040.51 273.93 649,971.530 10.890 1,040.51 273.93 649,971.530
2 1,040.50 273.93 649,971.530 10.890 2,081.01 547.86 1,299,943.060
3 1,041.63 273.15 649,971.530 10.900 3,122.64 821.01 1,949,914.590
4 1,042.71 273.15 649,971.530 10.900 4,165.35 1,094.16 2,599,886.120
5 1,043.25 273.15 649,971.530 10.900 5,208.60 1,367.31 3,249,857.650
6 1,054.89 277.04 659,795.948 10.890 6,263.49 1,644.35 3,909,653.598
7 1,054.89 277.04 659,795.948 10.890 7,318.38 1,921.38 4,569,449.546
8 1,054.89 277.04 659,795.948 10.890 8,373.27 2,198.42 5,229,245.494
9 1,055.34 277.26 659,795.948 10.890 9,428.61 2,475.68 5,889,041.442
10 1,059.72 278.30 662,275.286 10.890 10,488.33 2,753.98 6,551,316.728
11 1,060.58 278.26 662,826.757 10.880 11,548.91 3,032.24 7,214,143.485
12 1,075.90 278.46 665,673.405 10.840 12,624.81 3,310.70 7,879,816.890
13 1,084.63 279.05 510,640.967 10.850 13,709.44 3,589.75 8,390,457.857
14 1,084.63 279.05 510,640.967 10.850 14,794.07 3,868.80 8,901,098.824
15 1,084.63 279.05 515,211.351 10.850 15,878.70 4,147.85 9,416,310.175
16 1,085.26 279.30 667,060.004 10.820 16,963.96 4,427.1510,083,370.179
17 1,088.41 278.53 667,060.007 10.820 18,052.37 4,705.6810,750,430.186
18 1,106.84 283.56 524,428.134 10.810 19,159.21 4,989.2411,274,858.320
19 1,118.89 286.23 686,578.669 10.810 20,278.10 5,275.4711,961,436.989
20 1,121.24 286.40 686,578.669 10.810 21,399.34 5,561.8712,648,015.658
21 1,121.24 286.40 686,578.669 10.810 22,520.58 5,848.2713,334,594.327
22 1,121.24 286.40 686,578.669 10.810 23,641.82 6,134.6714,021,172.996
23 1,123.50 286.79 687,501.601 10.810 24,765.32 6,421.4614,708,674.597
24 1,136.92 290.62 696,752.158 10.810 25,902.24 6,712.0815,405,426.755
25 1,158.76 296.26 710,229.256 10.790 27,061.00 7,008.3416,115,656.011
26 1,165.78 296.59 712,361.726 10.740 28,226.78 7,304.9316,828,017.737
27 1,165.65 296.59 712,361.726 10.740 29,392.43 7,601.5217,540,379.463
28 1,165.65 296.59 712,361.726 10.740 30,558.08 7,898.1118,252,741.189
29 1,165.65 296.59 712,361.726 10.740 31,723.73 8,194.7118,965,102.915
30 1,157.41 296.16 714,529.852 10.740 32,881.14 8,490.8719,679,632.767
32,881.14 8,490.87 634,826.863
<PAGE>
C
PRICING DATE 03/31/97
..........
30 DAY YTM 5.07153%
..........
..............................................................................
PRICE ST FIXED ZERO COUPO LONG TERM AMORTIATION TOTAL DIV
DATE INCOME AND DIV INC INCOME INCOME INCOME FACTOR
..............................................................................
1 03/02/97 227.77 0.00 6,931.66 0.00 7,159.43 20.10076380
2 03/03/97 227.77 0.00 6,931.66 0.00 7,159.43 20.10076380
3 03/04/97 230.34 0.00 6,931.08 0.00 7,161.42 20.11684920
4 03/05/97 235.91 0.00 6,932.98 0.00 7,168.89 20.11684920
5 03/06/97 232.88 0.00 6,939.69 0.00 7,172.57 20.11684920
6 03/07/97 228.10 0.00 6,937.36 0.00 7,165.46 20.13098546
7 03/08/97 228.10 0.00 6,937.36 0.00 7,165.46 20.13098546
8 03/09/97 228.10 0.00 6,937.36 0.00 7,165.46 20.13098546
9 03/10/97 229.99 0.00 6,939.94 0.00 7,169.93 20.12705980
10 03/11/97 231.65 0.00 6,943.78 0.00 7,175.43 20.06237007
11 03/12/97 230.36 0.00 6,944.86 0.00 7,175.22 20.06205530
12 03/13/97 147.93 0.00 7,104.42 0.00 7,252.35 20.04932780
13 03/14/97 99.37 0.00 7,197.53 0.00 7,296.90 20.04718790
14 03/15/97 99.37 0.00 7,197.53 0.00 7,296.90 20.04718790
15 03/16/97 99.37 0.00 7,197.53 0.00 7,296.90 20.04718790
16 03/17/97 115.08 0.00 7,182.30 0.00 7,297.38 20.05719935
17 03/18/97 101.74 0.00 7,182.30 0.00 7,284.04 19.67871360
18 03/19/97 112.98 0.00 7,183.15 0.00 7,296.13 19.62333490
19 03/20/97 120.43 0.00 7,192.07 0.00 7,312.50 19.59308230
20 03/21/97 115.99 0.00 7,192.07 0.00 7,308.06 19.63137770
21 03/22/97 115.99 0.00 7,192.07 0.00 7,308.06 19.63137770
22 03/23/97 115.99 0.00 7,192.07 0.00 7,308.06 19.63137770
23 03/24/97 116.02 0.00 7,196.17 0.00 7,312.19 19.60236665
24 03/25/97 128.54 0.00 7,196.73 0.00 7,325.27 19.56005543
25 03/26/97 149.51 0.00 7,211.88 0.00 7,361.39 19.46156649
26 03/27/97 151.36 0.00 7,231.15 0.00 7,382.51 19.46488550
27 03/28/97 151.36 0.00 7,230.34 0.00 7,381.70 19.46488550
28 03/29/97 151.36 0.00 7,230.34 0.00 7,381.70 19.46488550
29 03/30/97 151.36 0.00 7,230.34 0.00 7,381.70 19.46488550
30 03/31/97 76.49 0.00 7,234.33 0.00 7,310.82 19.45553495
4,851.21 0.00 213,082.05 0.00 217,933.26
TOTAL INCOME FOR PERIOD 43,252.63
TOTAL EXPENSES FOR PERIOD 3,245.50
AVERAGE SHARES OUTSTANDING 890,672.65
LAST PRICE DURING PERIOD 10.74
.............................................................................
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
.............................................................................
1 1,461.46 109.91 898,962.112 10.89 1,461.46 109.91 898,962.112
2 1,439.10 109.91 898,962.112 10.89 2,900.56 219.82 1,797,924.224
3 1,440.65 109.60 898,962.112 10.90 4,341.21 329.42 2,696,886.336
4 1,442.15 109.60 898,962.112 10.90 5,783.36 439.02 3,595,848.448
5 1,442.90 109.60 898,962.112 10.90 7,226.26 548.62 4,494,810.560
6 1,442.48 109.877 902,219.921 10.89 8,668.74 658.50 5,397,030.481
7 1,442.48 109.877 902,219.921 10.89 10,111.22 768.37 6,299,250.402
8 1,442.48 109.877 902,219.921 10.89 11,553.70 878.25 7,201,470.323
9 1,443.10 109.970 902,219.921 10.89 12,996.80 988.22 8,103,690.244
10 1,439.56 109.620 899,654.876 10.89 14,436.36 1,097.84 9,003,345.120
11 1,439.50 109.640 899,638.470 10.88 15,875.86 1,207.48 9,902,983.590
12 1,454.05 109.550 896,659.774 10.84 17,329.91 1,317.0310,799,643.364
13 1,462.82 109.170 896,659.774 10.94 18,792.73 1,426.2011,696,303.138
14 1,462.82 109.870 896,659.774 10.95 20,255.55 1,536.0712,592,962.912
15 1,462.82 109.940 896,659.774 10.98 21,718.37 1,646.0113,489,622.686
16 1,463.65 109.250 899,638.470 10.82 23,182.02 1,755.2614,389,261.156
17 1,433.41 106.380 878,502.773 10.82 24,615.43 1,861.6415,267,763.929
18 1,431.74 106.390 896,568.366 10.81 26,047.17 1,968.0316,164,332.295
19 1,432.74 106.310 878,502.773 10.81 27,479.91 2,074.3417,042,835.068
20 1,434.67 106.263 878,502.773 10.81 28,914.58 2,180.6017,921,337.841
21 1,434.67 106.263 878,502.773 10.81 30,349.25 2,286.8718,799,840.614
22 1,434.67 110.510 896,568.366 10.81 31,783.92 2,397.3819,696,408.980
23 1,433.36 106.090 877,115.169 10.81 33,217.28 2,503.4720,573,524.149
24 1,432.83 106.210 878,093.623 10.81 34,650.11 2,609.6821,451,617.772
25 1,432.64 106.210 878,093.623 10.79 36,082.75 2,715.8922,329,711.395
26 1,437.00 106.010 878,093.623 10.74 37,519.75 2,821.9023,207,805.018
27 1,436.84 106.010 878,093.623 10.74 38,956.59 2,927.9124,085,898.641
28 1,436.84 106.010 878,093.623 10.74 40,393.43 3,033.9224,963,992.264
29 1,436.84 106.010 878,093.623 10.74 41,830.27 3,139.9325,842,085.887
30 1,422.36 105.57 878,093.623 10.74 43,252.63 3,245.5026,720,179.510
43,252.63 3,245.50 861,941.275
<PAGE>
Y
PRICING DATE 03/31/97
.........
30 DAY YTM #DIV/0!
.........
..............................................................................
PRICE ST FIXED ZERO COUP LONG TERM TOTAL DIV
DATE INCOME AND DIV INC INCOME INCOME FACTOR
..............................................................................
1 03/02/97 227.77 0.00 6,931.66 0.00 7,159.43 0.00000000
2 03/03/97 227.77 0.00 6,931.66 0.00 7,159.43
3 03/04/97 230.34 0.00 6,931.08 0.00 7,161.42
4 03/05/97 235.91 0.00 6,932.98 0.00 7,168.89
5 03/06/97 232.88 0.00 6,939.69 0.00 7,172.57
6 03/07/97 228.10 0.00 6,937.36 0.00 7,165.46 0.00000000
7 03/08/97 228.10 0.00 6,937.36 0.00 7,165.46 0.00000000
8 03/09/97 228.10 0.00 6,937.36 0.00 7,165.46 0.00000000
9 03/10/97 229.99 0.00 6,939.94 0.00 7,169.93
10 03/11/97 231.65 0.00 6,943.78 0.00 7,175.43 0.00000000
11 03/12/97 230.36 0.00 6,944.86 0.00 7,175.22
12 03/13/97 147.93 0.00 7,104.42 0.00 7,252.35
13 03/14/97 99.37 0.00 7,197.53 0.00 7,296.90
14 03/15/97 99.37 0.00 7,197.53 0.00 7,296.90
15 03/16/97 99.37 0.00 7,197.53 0.00 7,296.90
16 03/17/97 115.08 0.00 7,182.30 0.00 7,297.38 0.00000000
17 03/18/97 101.74 0.00 7,182.30 0.00 7,284.04 0.00000000
18 03/19/97 112.98 0.00 7,183.15 0.00 7,296.13
19 03/20/97 120.43 0.00 7,192.07 0.00 7,312.50
20 03/21/97 115.99 0.00 7,192.07 0.00 7,308.06
21 03/22/97 115.99 0.00 7,192.07 0.00 7,308.06
22 03/23/97 115.99 0.00 7,192.07 0.00 7,308.06
23 03/24/97 116.02 0.00 7,196.17 0.00 7,312.19 0.00000000
24 03/25/97 128.54 0.00 7,196.73 0.00 7,325.27 0.00000000
25 03/26/97 149.51 0.00 7,211.88 0.00 7,361.39 0.00000000
26 03/27/97 151.36 0.00 7,231.15 0.00 7,382.51
27 03/28/97 151.36 0.00 7,230.34 0.00 7,381.70
28 03/29/97 151.36 0.00 7,230.34 0.00 7,381.70
29 03/30/97 151.36 0.00 7,230.34 0.00 7,381.70
30 03/31/97 76.49 0.00 7,234.33 0.00 7,310.82 0.00000000
4,851.21 0.00 213,082.05 0.00 217,933.26
<TABLE>
<CAPTION>
$952.50
A NAV A A
TIME ACCOUNT A AVERAGE A/C VALUE A AVERAGE
YEARS PERIOD VALUE CLASS ANNNUAL W/LOAD CLASS ANNNUAL
<S> <C> <C> <C> <C> <C> <C> <C>
31-Mar-97 BLANK 1,467.34 0.00% 952.5 -4.75% -4.75%
31-Aug-96 1 MO 1,426.92 2.83% 2.83% 979.48 -2.05% -2.05%
31-Dec-96 QTR 1,473.40 -0.41% -0.41% 948.58 -5.14% -5.14%
31-Dec-96 YTD 1,473.40 -0.41% -0.41% 948.58 -5.14% -5.14%
31-Mar-96 1 1,401.74 4.68% 4.68% 997.08 -0.29% -0.29%
31-Mar-94 3 1,224.24 19.86% 6.22% 1,141.64 14.16% 4.51%
31-Mar-92 5 1,057.55 38.75% 6.77% 1,321.58 32.16% 5.74%
31-Mar-87 10 0 0 0% 0 0 0%
16-Jul-91 INCEPT 1,000.00 46.73% 6.94% 1,397.64 39.76% 6.03%
INCEPTION FACTOR: 5.7151 5.7151
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
B B NAV LEVEL VALUE OF VALUE OF B
TIME ACCOUNT B AVERAGE LOAD CLASS B CLASS B INIT. B AVERAGE
YEARS PERIOD VALUE CLASS ANNNUAL COMP INVESTMENT INVESTMENT CUMULATIVE ANNUAL
31-Mar-97 BLANK 1,018.71 0.00% 50 1000.00 1000.00 0.00%
31-Aug-96 1 MO 995.89 2.29% 2.29% 49.95 1022.91 999.07 -2.70% -2.70%
31-Dec-96 QTR 1,025.22 -0.64% -0.64% 49.18 993.65 983.52 -5.55% -5.55%
31-Dec-96 YTD 1,025.22 -0.64% -0.64% 49.18 993.65 983.52 -5.55% -5.55%
31-Mar-96 1 982.08 3.73% 3.73% 49.77 1037.29 995.37 -1.25% -1.25%
31-Mar-94 3 0 0 0 0 0 0 0 0
31-Mar-92 5 0 0 0 0 0 0 0 0
31-Mar-87 10 0 0 0 0 0 0 0 0
30-Jan-96 INCEPT. 1,000.00 1.87% 1.60% 38.77 1018.71 969.31 -2.01% -1.72%
INCEPTION FACTOR: 1.1699 1.1699
</TABLE>
<TABLE>
<S> <C> <C> <C>
Y
ACCOUNT Y AVERAGE
YEARS VALUE CLASS ANNNUAL
31-Mar-97 BLANK 1,021.92 0 0.00%
31-Aug-96 1 MO 993.33 2.88% 2.88%
31-Dec-96 QTR 1,025.93 -0.39% -0.39%
31-Dec-96 YTD 1,025.93 -0.39% -0.39%
31-Mar-96 1 975.67 4.74% 4.74%
31-Mar-94 3 0 0 0
31-Mar-92 5 0 0 0
31-Mar-87 10 0 0 0
8-Feb-96 INCEPT. 1,000.00 2.19% 1.91%
INCEPTION FACTOR: 1.1452 1.1452
</TABLE>
CALCULATION OF FEDERAL TAX EQUIVALENT YIELD
Fund: Evergreen New Jersey Tax Free Income Fund/Class A
Calculation Period: 30 days ended March 31, 1997
Yield:
The Evergreen New Jersey Tax Free Income Fund intends to advertise tax
equivalent yield based on the yield of the Fund over a 30-day period. The
calculation includes the tax equivalent yield from an investment which is exempt
from federal taxes.
Calculation below assumes:
Joint Return, 31% tax bracket
Method:
Subtract federal rate from 1 and divide yield by the result:
1.00
0.31
----
0.69
30 day yield 4.94 = 7.16% Federal Tax Equivalent Yield
----
0.69
<PAGE>
CALCULATION OF FEDERAL TAX EQUIVALENT YIELD
Fund: Keystone Florida Tax Free Fund/Class B
Calculation Period: 30 days ended March 31, 1997
Yield:
The Keystone Florida Tax Free Fund intends to advertise tax equivalent
yield based on the yield of the Fund over a 30-day period. The calculation
includes the tax equivalent yield from an investment which is exempt from
federal taxes.
Calculation below assumes:
Joint Return, 31% tax bracket
Method:
Subtract federal rate from 1 and divide yield by the
result:
1.00
0.31
----
0.69
30 day yield 4.01 = 5.81% Federal Tax Equivalent Yield
----
0.69
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> EVERGREEN NEW JERSEY TAX FREE INCOME FUND CLASS A
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 48,328,452
<INVESTMENTS-AT-VALUE> 49,067,831
<RECEIVABLES> 874,261
<ASSETS-OTHER> 8,767
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49,950,859
<PAYABLE-FOR-SECURITIES> 1,070,618
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 163,132
<TOTAL-LIABILITIES> 1,233,750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 30,786,946
<SHARES-COMMON-STOCK> 2,926,484
<SHARES-COMMON-PRIOR> 3,010,604
<ACCUMULATED-NII-CURRENT> 6,659
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (263,837)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 904,292
<NET-ASSETS> 31,434,060
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,030,846
<OTHER-INCOME> 0
<EXPENSES-NET> (82,946)
<NET-INVESTMENT-INCOME> 947,900
<REALIZED-GAINS-CURRENT> 132,546
<APPREC-INCREASE-CURRENT> (158,330)
<NET-CHANGE-FROM-OPS> 922,116
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (951,954)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 152,942
<NUMBER-OF-SHARES-REDEEMED> (287,177)
<SHARES-REINVESTED> 50,115
<NET-CHANGE-IN-ASSETS> (943,068)
<ACCUMULATED-NII-PRIOR> 10,620
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (94,641)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (82,946)
<AVERAGE-NET-ASSETS> 32,519,827
<PER-SHARE-NAV-BEGIN> 10.75
<PER-SHARE-NII> 0.31
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.31)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.74
<EXPENSE-RATIO> 0.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 102
<NAME> EVERGREEN NEW JERSEY TAX FREE INCOME FUND CLASS B
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 48,328,452
<INVESTMENTS-AT-VALUE> 49,067,831
<RECEIVABLES> 874,261
<ASSETS-OTHER> 8,767
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49,950,859
<PAYABLE-FOR-SECURITIES> 1,070,618
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 163,132
<TOTAL-LIABILITIES> 1,233,750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,919,961
<SHARES-COMMON-STOCK> 730,515
<SHARES-COMMON-PRIOR> 251,931
<ACCUMULATED-NII-CURRENT> 913
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,344
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (88,507)
<NET-ASSETS> 7,846,711
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 140,738
<OTHER-INCOME> 0
<EXPENSES-NET> (35,355)
<NET-INVESTMENT-INCOME> 105,383
<REALIZED-GAINS-CURRENT> 15,977
<APPREC-INCREASE-CURRENT> (89,856)
<NET-CHANGE-FROM-OPS> 31,504
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (106,102)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 488,639
<NUMBER-OF-SHARES-REDEEMED> (17,415)
<SHARES-REINVESTED> 7,360
<NET-CHANGE-IN-ASSETS> 5,137,354
<ACCUMULATED-NII-PRIOR> 1,827
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (12,902)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (35,355)
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.75
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.26)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.74
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 103
<NAME> EVERGREEN NEW JERSEY TAX FREE INCOME FUND CLASS C
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 48,328,452
<INVESTMENTS-AT-VALUE> 49,067,831
<RECEIVABLES> 874,261
<ASSETS-OTHER> 8,767
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49,950,859
<PAYABLE-FOR-SECURITIES> 1,070,618
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 163,132
<TOTAL-LIABILITIES> 1,233,750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,475,902
<SHARES-COMMON-STOCK> 878,516
<SHARES-COMMON-PRIOR> 843,932
<ACCUMULATED-NII-CURRENT> 1,953
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 34,889
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (76,406)
<NET-ASSETS> 9,436,338
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 301,314
<OTHER-INCOME> 0
<EXPENSES-NET> (19,863)
<NET-INVESTMENT-INCOME> 281,451
<REALIZED-GAINS-CURRENT> 38,056
<APPREC-INCREASE-CURRENT> (54,530)
<NET-CHANGE-FROM-OPS> 264,977
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (282,668)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 70,718
<NUMBER-OF-SHARES-REDEEMED> (40,043)
<SHARES-REINVESTED> 3,909
<NET-CHANGE-IN-ASSETS> 360,452
<ACCUMULATED-NII-PRIOR> 3,068
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (27,653)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (19,863)
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.75
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> (0.32)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.74
<EXPENSE-RATIO> 0.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>