As filed with the Securities and Exchange Commission on February 2, 1996
Registration No. 33-_____
U.S SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ____
Post-Effective Amendment No. ____
KEYSTONE TAX FREE INCOME FUND
(Exact Name of Registrant as Specified in Charter)
200 BERKELEY STREET, BOSTON, MASSACHUSETTS 02116
(Address of Principal Executive Offices)
617-338-3200
(Area Code and Telephone Number)
Rosemary D. Van Antwerp, Esq.
Keystone Investments, Inc.
200 Berkeley Street
Boston, Massachusetts 02116
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as
practicable after this Registration Statement becomes effective.
The Registrant has registered an indefinite amount of securities under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940; accordingly, no fee is payable herewith. Registrant's Rule 24f-2
Notice for the fiscal year ended November 30, 1995 was filed with the Securities
and Exchange Commission on January 26, 1996.
It is proposed that this filing will become effective on March 3, 1996
pursuant to Rule 488.
#100100B0
<PAGE>
KEYSTONE TAX FREE INCOME FUND
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
Cross-Reference Sheet
PART A
Letter to Shareholders
Notice of Special Meeting of Shareholders
Prospectus/Proxy Statement
PART B
Statement of Additional Information
Part C - Other Information
Indemnification
List of Exhibits
Undertakings
Signatures
Exhibits
<PAGE>
KEYSTONE TAX FREE INCOME FUND
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Prospectus/Proxy Statement
Form N-14 Item No. Caption
Part A
1 Beginning of Registration Cross-Reference Sheet; Front
Statement and Outside Front Cover
Cover Page of Prospectus
2 Beginning and Outside Back Table of Contents
Cover Page of Prospectus
3 Fee Table, Synopsis Infor- Synopsis; Principal Risk
mation and Risk Factors Factors; The Reorganization
4 Information About the Synopsis; The Reorganization
Transaction
5 Information About the Information About the Funds;
Registrant Additional Information About
the Funds
6 Information About the Information About the Funds;
Company Being Acquired Additional Information About
the Funds
7 Voting Information Inside Front Cover Page; The
Reorganization; Additional
Information About the Funds
8 Interest of Certain Additional Information About
Persons and Experts the Funds
9 Additional Information Not Applicable
Required for Reoffering
by Persons Deemed to be
Underwriters
<PAGE>
Statement of Additional Information
Form N-14 Item No. Caption
Part B
10 Cover Page Cover Page
11 Table of Contents Cover Page
12 Additional Information Cover Page; Statement of
About the Registrant Additional Information of
Registrant, dated March
31,1995, as Supplemented June
1, 1995
13 Additional Information Not Applicable
About the Company Being
Acquired
14 Financial Statements Annual Report of Registrant
for the Fiscal Year ended
November 20, 1995; Annual
Report of Keystone State Tax
Free Fund for the Fiscal Year
ended March 31, 1995 and Semi-
Annual Report of Keystone
State Tax Free Fund for the
Fiscal Period ended September
30, 1995.
Other Information
Form N-14 Item No. Caption
Part C
15 Indemnification Indemnification
16 Exhibits Exhibits
17 Undertakings Undertakings
<PAGE>
PART A
<PAGE>
KEYSTONE TEXAS TAX FREE FUND
a Portfolio of
KEYSTONE STATE TAX FREE FUND
200 Berkeley Street
Boston, Massachusetts 02116
March __, 1996
Dear Keystone Texas Tax Free Fund Shareholder:
We are writing to inform you of a proposal to effectively merge Keystone Texas
Tax Free Fund into Keystone Tax Free Income Fund. The Board of Trustees are
recommending this action because we believe it will result in improved operating
efficiencies and reduced operating expenses for your Keystone investment. The
proposed reorganization will be a tax-free transaction.
Keystone Tax Free Income Fund and Keystone Texas Tax Free Fund both pursue the
same investment objective, which is to provide the highest possible income
exempt from federal taxes while preserving capital. Keystone Tax Free Income
Fund is also managed by the same team of investment professionals as Keystone
Texas Tax Free Fund. Both Funds follow a similar investment strategy, the
principal difference being that Keystone Texas Tax Free Fund invests primarily
in Texas municipal bonds while Keystone Tax Free Income Fund has the flexibility
to invest in municipal bonds issued throughout the nation.
Keystone Texas Tax Free Fund has not grown sufficiently in size to achieve the
economies of scale that increasingly are necessary for successful mutual funds.
At the same time, it appears unlikely that Texas will enact a state income tax,
which would increase the viability of a state tax free fund in Texas.
We believe Keystone Tax Free Income Fund offers Keystone Texas Tax Free Fund
shareholders the following advantages:
(bullet) improved operating efficiencies;
(bullet) potential for lower operating expenses; and
(bullet) national diversification.
The Trustees of Keystone Texas Tax Free Fund have carefully reviewed this
proposal and believe it is in the best interest of shareholders. They recommend
that you vote FOR the proposal.
It is extremely important that you vote, no matter how many shares you own. This
is an opportunity to voice your opinion on a matter that affects your Fund.
Voting promptly helps to reduce the cost of additional mailings.
The accompanying Prospectus/Proxy Statement describes the proposal in detail.
<PAGE>
To Vote Your Shares
A shareholder meeting has been scheduled for Tuesday, April 30, 1996, at 200
Berkeley Street, Boston, MA. You are welcome to attend this meeting. However, if
you do not intend to attend, you should vote by proxy well in advance. You may
vote by completing the enclosed proxy card and returning it in the postage-paid
envelope provided. We encourage you to exercise your rights as a shareholder by
voting promptly.
If you have any questions about this proposal, please call Keystone
Shareholder Services at 1-800-343-2898. Our representatives are
available Monday through Friday from 9 a.m. to 7 p.m. Central time
and would be happy to answer your questions.
Sincerely,
/s/George S. Bissell /s/Albert H. Elfner III
George S. Bissell Albert H. Elfner, III
Chairman President
<PAGE>
KEYSTONE TEXAS TAX FREE FUND
A Portfolio of
KEYSTONE STATE TAX FREE FUND
200 Berkeley Street
Boston, Massachusetts 02116
Telephone Number (800) 343-2898 or (617) 621-6100
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on April 30, 1996
To the Shareholders:
Notice is hereby given that a special meeting of the shareholders of
the Keystone Texas Tax Free Fund (the "Texas Fund"), a separate series or
portfolio of Keystone State Tax Free Fund, will be held at the offices of
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts, on the 26th Floor, on Tuesday, April 30, 1996 at 3:00 p.m.
Eastern time for the following purposes:
1. To approve an Agreement and Plan of Reorganization whereby Keystone
Tax Free Income Fund ("KTFIF") (a) will acquire substantially all of
the assets of the Texas Fund in exchange for shares of KTFIF; and (b)
will assume the liabilities of the Texas Fund, all as substantially
described in the accompanying Prospectus/Proxy Statement.
2. To transact such other business as may properly come
before the meeting and any adjournments thereof.
Shareholders of record at the close of business as of March 4, 1996 are
entitled to notice of and to vote at this meeting and any adjournments thereof.
By order of the Board of Trustees,
/s/ Rosemary D. Van Antwerp
Rosemary D. Van Antwerp
Secretary
March 11, 1996
Please complete, date and sign your proxy - NOW - and mail it TODAY - in the
stamped envelope enclosed for your convenience. In order to avoid unnecessary
expense or delay, we ask your cooperation in mailing in your proxy. Thank you.
<PAGE>
PROSPECTUS/PROXY STATEMENT
March 4, 1996
Acquisition of the Assets of
KEYSTONE TEXAS TAX FREE FUND
A Portfolio of
KEYSTONE STATE TAX FREE FUND
200 Berkeley Street, Boston, Massachusetts 02116
Telephone Number (800) 343-2898 or (617) 621-6100
By and in exchange for Shares of
KEYSTONE TAX FREE INCOME FUND
200 Berkeley Street, Boston, Massachusetts 02116
Telephone Number (800) 343-2898 or (617) 621-6100
This Prospectus/Proxy Statement is being furnished to the shareholders
of Keystone Texas Tax Free Fund (the "Texas Fund"), a separate series or
portfolio of Keystone State Tax Free Fund ("KSTFF"), in connection with the
proposed tax-free reorganization of the Texas Fund into Keystone Tax Free Income
Fund ("KTFIF"), whereby KTFIF will (i) acquire all of the assets of the Texas
Fund in exchange for Class A, B, and C Shares (as said term is hereinafter
defined) of KTFIF; and (ii) assume the liabilities of the Texas Fund.
Immediately following this transfer, Class A, B, and C Shares of KTFIF will be
distributed to the Class A, B, and C shareholders of the Texas Fund,
respectively, in place of their Shares of the Texas Fund. The Texas Fund will
then be terminated and its Shares cancelled. As a result of the proposed
transaction, each class of shareholder of the Texas Fund will receive that
number of full and fractional Shares of the corresponding class of Shares of
KTFIF having a total net asset value, on the effective date of the proposed
transaction, equal to the total net asset value of that shareholder's Shares in
the Texas Fund.
KTFIF is an open-end, diversified management investment company. KSTFF
is a open-end, non-diversified management investment company. The Texas Fund is
a non-diversified portfolio of KSTFF. Keystone Investment Management Company
("Keystone") serves as investment adviser to both Funds. Keystone Management,
Inc., a wholly-owned subsidiary of Keystone, provides certain administrative and
management services to KTFIF.
Both Funds seek the highest possible current income exempt from federal
income taxes while preserving capital. KTFIF pursues this objective by investing
primarily in a relatively diverse pool
- 1 -
<PAGE>
of municipal bonds, consisting of debt securities issued by or on behalf of a
number of different states, state agencies, or instrumentalities. In contrast,
the Texas Fund pursues the same objective by investing primarily in municipal
obligations of the State of Texas, its political subdivisions, agencies, and
instrumentalities. Texas does not impose an income tax on individuals.
Accordingly, unlike shareholders in other state municipal bond mutual funds
(such as mutual funds investing primarily in California or New York municipal
obligations), who are generally able to exclude their mutual fund earnings from
their state income taxes, shareholders in the Texas Fund have enjoyed no such
benefit. Consequently, the exchange of shares in the Texas Fund for shares in
KTFIF will not have any impact on the taxes an individual shareholder pays to
the State of Texas.
This Prospectus/Proxy Statement sets forth concisely the information
about KTFIF that a prospective investor should know before investing and should
be retained for future reference. This Prospectus/Proxy Statement is accompanied
by the Prospectus of KTFIF dated March 31, 1995, as supplemented June 1, 1995,
which has been filed with the Securities and Exchange Commission (the
"Commission") and is incorporated by reference herein. Additional information
about KTFIF is contained in KTFIF's Statement of Additional Information ("SAI")
dated March 31, 1995, as supplemented June 1, 1995, and in an SAI dated March 4,
1996 relating specifically to the proposed transaction, each of which has been
filed with the Commission and is incorporated by reference herein. KTFIF's most
recent Annual Report as filed with the Commission is also incorporated by
reference herein.
A Prospectus and SAI containing additional information about the Texas
Fund, each dated May 31, 1995, as supplemented June 1, 1995, have been filed
with the Commission and are incorporated by reference herein.
Copies of any of the Prospectuses, SAIs, or Reports referred to above
may be obtained without charge by writing to KTFIF at the address listed above
or by calling the telephone numbers listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- 2 -
<PAGE>
KEYSTONE TEXAS TAX FREE FUND
A Portfolio of
KEYSTONE STATE TAX FREE FUND
200 Berkeley Street
Boston, Massachusetts 02116
Special Meeting of Shareholders
To be Held April 30, 1996
This Prospectus/Proxy Statement is furnished to shareholders of
Keystone Texas Tax Free Fund (the "Texas Fund"), a separate series or portfolio
of Keystone State Tax Free Fund ("KSTFF"), in connection with the solicitation
of proxies by the Board of Trustees of KSTFF to be used at a special meeting of
the Texas Fund's shareholders (the "Meeting") to be held at the offices of
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts, on the 26th Floor, on Tuesday, April 30, 1996, at 3:00 p.m.
Eastern time. This document also serves as a prospectus of KTFIF and covers the
issuance of KTFIF Shares in connection with the proposed transaction.
For any proxy that is properly executed and returned in time to be
voted at the Meeting, the Texas Fund Shares represented thereby will be voted in
accordance with the instructions thereon. In the absence of such instructions,
the proxy will be voted in favor of the approval of the Agreement and Plan of
Reorganization (the "Reorganization Agreement") and the transaction described
therein, whereby Keystone Tax Free Income Fund ("KTFIF") will (i) acquire all of
the assets of the Texas Fund in exchange for Shares of KTFIF; and (ii) assume
the liabilities of the Texas Fund.
The individuals duly appointed as Proxies ("Proxies") may, in their
discretion, vote upon such other matters as may come before the Meeting or any
adjournments thereof. When voting proxies on a proposal to adjourn, the Proxies
will consider what is in the best interest of all shareholders at that time.
Any shareholder may revoke his or her proxy at any time before it is
voted by delivering written notice of revocation or by executing and delivering
a later-dated proxy to Rosemary D. Van Antwerp, Keystone Investment Management
Company, 200 Berkeley Street, Boston, Massachusetts 02116, or by appearing in
person at the Meeting to vote his or her Shares.
Each Texas Fund shareholder will be entitled to one vote for each Share
and a fractional vote for each fractional Share held by such shareholder.
Shareholders of the Texas Fund of record at the close of business on March 4,
1996 (the "Record Date") will be entitled to notice of and to vote at the
Meeting or any adjournment
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<PAGE>
thereof. On the Record Date, there were ___________ Shares of the
Texas Fund outstanding.
Proxy material is expected to be mailed to the Texas Fund shareholders
on or about March 11, 1996.
VOTE REQUIRED
Approval of the Reorganization Agreement will require the affirmative
vote of the holders of (i) 67% of the Shares represented at the Meeting, if the
holders of more than 50% of the outstanding Shares of the Texas Fund are
represented; or (ii) more than 50% of the Texas Fund's outstanding Shares,
whichever is less. Shareholders of KTFIF will not be voting on the approval of
the Reorganization Agreement since their approval is not required.
Abstentions and broker "non-votes" will be counted for purposes of
determining a quorum, but will not be counted in determining approval of the
Reorganization Agreement. Broker "non-votes" are proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owner or other persons entitled to vote shares on a particular matter
with respect to which the brokers or nominees do not have discretionary power.
IMPORTANT DEFINITIONS
"12b-1 Plan" A distribution plan
adopted pursuant to Rule
12b-1 under the Investment
Company Act of 1940, as
amended.
"1933 Act" The Securities Act of 1933, as
amended.
"1934 Act" The Securities Exchange Act of 1934,
as amended.
"1940 Act" The Investment Company Act of 1940,
as amended.
"Effective Date" The effective date of the
Reorganization as contemplated by
the Reorganization Agreement.
"Independent Trustees" Those members of
the Board of Trustees of
KSTFF or KTFIF who are not
"interested persons" of
such Funds, as said term is
defined in the 1940 Act.
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<PAGE>
"KSTFF" Keystone State Tax Free Fund, 200
Berkeley Street, Boston,
Massachusetts 02116
"KTFIF" Keystone Tax Free Income Fund, 200
Berkeley Street, Boston,
Massachusetts 02116.
"Keystone" Keystone Investment Management
Company (formerly named Keystone
Custodian Funds, Inc.), 200 Berkeley
Street, Boston, Massachusetts 02116,
a wholly-owned subsidiary of
Keystone Investments, Inc. Keystone
is the investment adviser of KSTFF
and KTFIF and of each of the other
Keystone Investments Funds.
"Keystone America Fund A group of 16 mutual funds with
Family" different investment objectives and
policies that hold
themselves out to investors
as being related for
purposes of investments,
investor services, and
exchange privileges.
"Keystone Investments" Keystone Investments, Inc. (formerly
named Keystone Group, Inc.), 200
Berkeley Street, Boston,
Massachusetts 02116. Keystone
Investments owns all of the
outstanding shares of Keystone.
Keystone Investments is
predominately owned by an investor
group composed of current and former
members of management and certain
employees of Keystone Investments
and its affiliates.
"Keystone Investments Funds" A family of mutual funds with
varying investment objectives and
policies, managed, advised, or
administered by Keystone and/or an
affiliate of Keystone. Currently,
there are more than 30 Keystone
Investments Funds, including KSTFF
and KTFIF.
"Keystone Management" Keystone Management, Inc., 200
Berkeley Street, Boston,
Massachusetts 02116, a wholly-owned
subsidiary of Keystone. Keystone
Management is the investment manager
- 3 -
<PAGE>
of 20 Keystone Investments Funds,
including KTFIF.
"KIRC" Keystone Investor Resource
Center,Inc., 101 Main Street,
Cambridge, Massachusetts 02142, a
wholly-owned subsidiary of Keystone.
KIRC is the transfer agent and
dividend disbursing agent for each
of the Keystone Investments Funds,
including KSTFF and KTFIF.
"Meeting" The Special Meeting of the Texas
Fund shareholders to be held on
Tuesday, April 30, 1996.
"Principal Underwriter" Keystone Investment Distributors
Company (formerly named Keystone
Distributors, Inc.), 200 Berkeley
Street, Boston, Massachusetts 02116,
a wholly-owned subsidiary of
Keystone. The Principal Underwriter
is the principal underwriter of
KSTFF and KTFIF and of each of the
other Keystone Investments Funds.
"Reorganization" The proposed transaction as
contemplated by the Reorganization
Agreement.
"Reorganization Agreement" The Agreement and Plan of
Reorganization between KSTFF and
KTFIF, dated _________, 1996,
pursuant to which KTFIF will acquire
all of the assets of the Texas Fund
in exchange for Shares of KTFIF and
will assume the liabilities of the
Texas Fund.
"Shares" The Class A, B, and C
shares of beneficial
interest of KTFIF and the
Texas Fund as well as
shares of the other
Keystone Investments Funds.
"Texas Fund" Keystone Texas Tax Free Fund, a
separate series or portfolio of
KSTFF, 200 Berkeley Street, Boston,
Massachusetts 02116.
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<PAGE>
SYNOPSIS
The following is a summary of certain information contained in or
incorporated by reference in this Prospectus/Proxy Statement. This summary is
not intended to be a complete statement of all material features of the
Reorganization and is qualified in its entirety by reference to the full text of
this Prospectus/Proxy Statement and the documents referred to herein.
DESCRIPTION OF THE PROPOSED TRANSACTION
The Board of Trustees of each Fund, including each Fund's Independent
Trustees, have unanimously approved the Reorganization Agreement, which provides
for the transfer of all of the assets of the Texas Fund to KTFIF in exchange for
Shares of KTFIF as well as the assumption of the Texas Fund's liabilities by
KTFIF.
The aggregate net asset value of KTFIF Shares to be issued in exchange
for the assets of the Texas Fund will be equal to the net asset value of the
Texas Fund on the Effective Date. Immediately following the transfer of assets
and liabilities of the Texas Fund to KTFIF, Class A, B, and C Shares of KTFIF
will be distributed to the respective Class A, B, and C shareholders of the
Texas Fund, and the Texas Fund will be dissolved. The Texas Fund Shares will be
cancelled, and the Texas Fund will be terminated. Each shareholder in the Texas
Fund will receive that percentage of the total number of the corresponding class
of KTFIF Shares received by the Texas Fund equal in amount to that shareholder's
percentage interest in the Texas Fund on the Effective Date. For example, Class
A shareholders of the Texas Fund would receive Class A shares of KTFIF.
The Reorganization will effectively combine the two Funds into a single
fund offering three classes of Shares.
For the reasons set forth below in "The Reorganization Reasons for the
Proposed Transaction," the Board of Trustees of KSTFF, including the Independent
Trustees, has concluded that the Reorganization would be in the best interests
of the shareholders of the Texas Fund and has further determined that the
interests of the existing shareholders of the Texas Fund will not be diluted as
a result of the Reorganization.
Accordingly, the Board of KSTFF recommends A VOTE FOR the approval of
the Reorganization.
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<PAGE>
COMPARISON OF THE FUNDS
Summary of Fees and Expenses/Fee Tables
The following tables show the current shareholder transaction fees, the
annual operating expenses applicable to each Fund on an individual basis, and
the annual operating expenses for KTFIF on a pro forma basis after giving effect
to the Reorganization. The purpose of the KTFIF pro forma expense table is to
assist a shareholder in understanding the costs and expenses that he or she may
bear directly or in directly in KTFIF after giving effect to the Reorganization.
SHAREHOLDER TRANSACTION EXPENSES APPLICABLE
TO
KEYSTONE TAX FREE INCOME FUND
AND
KEYSTONE TEXAS TAX FREE FUND*
Class A Shares Class B Shares Class C Shares
Front End Back End Level
SHAREHOLDER TRANSACTION Load Option Load Option(1) Load Option
EXPENSES FOR EACH FUND
Sales Charge . . . . . 4.75%(2) None None
(as a percentage of
offering price)
Contingent Deferred
Sales Charge . . . . 0.00%(3) 5.00% in the first 1.00% in the
(as a percentage year declining to first year and
of the lesser of 1.00% in the sixth 0.00% thereafter
cost or market year and 0.00%
value of shares thereafter
redeemed)
Exchange Fee $10.00 $10.00 $10.00
(per exchange)(4)
* Please see footnotes following pro forma fee table.
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<PAGE>
EXPENSE TABLES FOR
KEYSTONE TAX FREE INCOME FUND
AND
KEYSTONE TEXAS TAX FREE FUND*
Class A Class B Class C
Shares Shares Shares
Front End Back End Level Load
ANNUAL FUND OPERATING EXPENSES
KTFIF(5)
(as a percentage of average
net assets)
Management Fees . . . . . . . 0.61% 0.61% 0.61%
12b-1 Fees . . . . . . . . . . 0.25% 1.00%(6) 1.00%(6)
Other Expenses . . . . . . . . 0.33% 0.35% 0.35%
----- ----- -----
Total Fund Operating Expenses 1.19% 1.96% 1.96%
===== ===== =====
Examples(7) 1 Year 3 Years 5 Years 10 Years
---- ------- ------- --------
You would pay the following
expenses on a $1,000
investment, assuming
(1) 5% annual return and
(2) redemption at the end
of each period:
Class A . . . . . . . $59 $83 $110 $185
Class B . . . . . . . $70 $92 $126 N/A
Class C . . . . . . . $30 $62 $106 $229
You would pay the following
expenses on a $1,000
investment, assuming no
redemption at the end
of each period:
Class A . . . . . . . $59 $83 $110 $185
Class B . . . . . . . $20 $62 $106 N/A
Class C . . . . . . . $20 $62 $106 $229
Amounts shown in the example should not be considered a representation of past
or future expenses; actual expenses may be greater or less than those shown.
* Please see footnotes following pro forma fee table.
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<PAGE>
ANNUAL FUND OPERATING EXPENSES
KSTFF(5)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees . . . . . . . . . . . . 0.55% 0.55% 0.55%
12b-1 Fees . . . . . . . . . . . . . . . 0.15% 0.90%(6) 0.90%(6)
Other Expenses . . . . . . . . . . . . . 0.05% 0.05% 0.05%
----- ----- -----
Total Fund Operating Expenses . . . . . 0.75% 1.50% 1.50%
===== ===== =====
Examples7 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
You would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return
and (2) redemption at the end
of each period:
Class A . . . . . . . . . . $55 $70 $87 $136
Class B . . . . . . . . . . $65 $77 $102 N/A
Class C . . . . . . . . . . $25 $47 $82 $179
You would pay the following
expenses on a $1,000 investment,
assuming no redemption at the
end of each period:
Class A . . . . . . . . . . $55 $70 $87 $136
Class B . . . . . . . . . . $15 $47 $82 N/A
Class C . . . . . . . . . . $15 $47 $82 $179
Amounts shown in the example should not be considered a representation of past
or future expenses; actual expenses may be greater or less than those shown.
* Please see footnotes following pro forma fee table.
To summarize, for the fiscal year ended November 30, 1995, KTFIF's
Class A, B, and C Shares each paid 1.19%, 1.96%, and 1.96%, respectively, of
average daily net assets in expenses. After expense reimbursements made by
Keystone in connection with certain voluntary expense limitations, for the
fiscal year ended March 31, 1995, the Texas Fund's Class A, B, and C Shares each
paid 0.75%, 1.50%, and 1.50%, respectively, of average daily net assets in
expenses. Absent such voluntary expense limitations, expenses for the Texas
Fund's Class A, B, and C Shares would have been 2.57%, 3.36%, and 3.28%,
respectively .
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<PAGE>
PRO FORMA EXPENSE TABLE
FOR
KEYSTONE TAX FREE INCOME FUND
Class A Class B Class C
Shares Shares Shares
Front End Back End Level
Load Option Load Option(1) Load Option
ANNUAL FUND OPERATING EXPENSES(5)
(as a percentage of average
net assets)
Management Fees . . . . . . . . 0.61% 0.61% 0.61%
12b-1 Fees . . . . . . . . . . . 0.25% 1.00%(6) 1.00%(6)
Other Expenses . . . . . . . . . 0.32% 0.32% 0.32%
----- ----- -----
Total Fund Operating Expenses . 1.18% 1.93% 1.93%
===== ===== =====
Examples(7) 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
You would pay the following
expenses on a $1,000
investment, assuming
(1) 5% annual return and
(2) redemption
at the end of each period:
Class A . . . . . . . . $59 $83 $109 $184
Class B . . . . . . . . $70 $91 $124 N/A
Class C . . . . . . . . $30 $61 $104 $225
You would pay the following
expenses on a $1,000 investment,
assuming no redemption at the
end of each period:
Class A . . . . . . . . $59 $83 $109 $184
Class B . . . . . . . . $20 $61 $104 N/A
Class C . . . . . . . . $20 $61 $104 $225
Amounts shown in the example should not be considered a representation
of past or future expenses; actual expenses may be greater or less than those
shown.
1 Class B shares purchased on or after June 1, 1995 convert tax free to
Class A shares after eight years.
2 The sales charge applied to purchases of Class A declines as the amount
invested increases.
3 Purchases of Class A shares in the amount of $1,000,000 or more and/or
purchases made by certain qualifying retirement or other plans are not
subject to a sales charge, but may be subject to a contingent deferred
sales charge.
4 There is no fee for exchange orders received by a Fund directly from a
shareholder over the Keystone Automated Response Line.
5 Expense ratios for KTFIF are for the Fund's fiscal year ended November
30, 1995. Expense ratios for the Texas Fund are for the Fund's fiscal
year ended March 31, 1995 after giving effect to the reimbursement by
Keystone of expenses in accordance with certain voluntary expense
limitations. Currently, Keystone has voluntarily limited expenses of
the Texas Fund's Class A, B, and C shares to 0.75%, 1.50%, and 1.50%
(respectively) of average daily net assets of each such class. Keystone
is under no obligation to maintain these limits. Keystone currently
intends to continue the expense limits on a calendar month by month
basis. Keystone will periodically evaluate the foregoing expense limits
and may modify or terminate them in the future. Absent the voluntary
expense limits, expense ratios for the fiscal year ended March 31, 1995
for Texas Fund's Class A, B, and C shares would have been 2.57%, 3.36%,
and 3.28%, respectively. The pro forma expense ratios for KTFIF after
giving effect to the Reorganization are estimated for the Fund's fiscal
year ending November 30, 1996. KTFIF Total Fund Operating Expenses
include indirectly paid expenses.
6 Long term shareholders may pay more than the equivalent of the maximum
front end sales charges permitted by the National Association of
Securities Dealers, Inc. ("NASD").
7 The Securities and Exchange Commission requires use of a 5% annual
return figure for purposes of this example. Actual return for the Fund
may be greater or less than 5%.
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Investment Advisory and Management Fees
Keystone serves as the investment adviser to both Funds. Keystone
Management serves as the investment manager to KTFIF only.
KTFIF Advisory Fees
Keystone Management serves as the investment manager to KTFIF. Pursuant
to its Investment Advisory Agreement with Keystone (the "Advisory Agreement"),
Keystone Management has delegated its investment management functions, except
for certain administrative and management services, to Keystone.
KTFIF pays Keystone Management for its services at the annual rate set
forth below:
Aggregate Net Asset
Value of the Shares
Management Fee Income of the Fund
2% of Gross Dividend and
Interest Income plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
computed as of the close of business each business day and paid or
accrued daily.
For the fiscal year ended November 30, 1995, KTFIF paid Keystone
Management fees of $919,802 which represented 0.61% of KTFIF's average daily net
assets.
Pursuant to the Advisory Agreement, Keystone receives an annual fee
representing 85% of the management fee received by Keystone Management from
KTFIF. For the fiscal year ended November 30, 1995, for services rendered to
KTFIF, Keystone Management paid Keystone $781,832.
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Texas Fund Advisory Fees
Keystone serves as the investment adviser to the Texas Fund. Pursuant
to an Investment Advisory and Management Agreement with KSTFF, Keystone provides
investment advisory and management services to the Texas Fund.
The Texas Fund pays Keystone a fee for its services at the annual rate
set forth below:
Aggregate Net Asset
Value of the Shares
Management Fee of the Fund
0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
computed as of the close of business each business day and paid
daily.
For the fiscal year ended March 31, 1995, the Texas Fund paid or
accrued to Keystone investment management and service fees of $25,402, which
represented 0.55% of the Texas Fund's average daily net assets.
The Funds' investment advisory and management fees are
separate from and do not include the costs of custody, transfer
agency, and other expenses. See "Other Significant Fees and
Expenses" below.
Other Significant Fees and Expenses
In addition to the investment advisory and management fees described
above, each Fund's principal expenses include, but are not limited to, (i)
expenses of its transfer agent (KIRC), custodian bank (State Street Bank and
Trust Company ("State Street")), and independent auditors (KPMG Peat Marwick
LLP); (ii) expenses under its 12b-1 Plans; (iii) fees of its Independent
Trustees; (iv) fees payable to government agencies; (v) expenses of preparing,
printing, and mailing Fund prospectuses, notices, reports, and proxy material;
and (vi) certain extraordinary expenses. In addition to such expenses, each Fund
pays its brokerage commissions, interest charges, and taxes.
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Performance Data
The average annual total returns for the Texas Fund's Class A, B, and C
Shares for the fiscal year ended March 31, 1995 were 5.66%, 5.01%, and 5.14%,
respectively. Average annual total returns for KTFIF's Class A, B, and C Shares
for the fiscal year ended November 30, 1995 were 13.07%, 13.84%, and 17.84%,
respectively.
Investment Objectives and Policies
The Funds have the same investment objective: each Fund seeks the
highest possible current income, exempt from federal income taxes, while
preserving capital. The Funds principally differ in that Keystone Tax Free
Income Fund, unlike the Texas Fund, does not seek to achieve its investment
objective by investing primarily in Texas municipal bonds.
To achieve its investment objective, KTFIF generally invests in a
diverse portfolio of municipal bonds. More specifically, KTFIF invests
substantially all and, under ordinary circumstances, at least 80% of its assets
in federally tax-exempt obligations, including municipal bonds and notes and
tax-exempt commercial paper (municipal bonds), which are obligations issued by
or on behalf of states, territories, and possessions of the United States
("U.S."), the District of Columbia, and their political subdivisions, agencies,
and instrumentalities, the interest from which is, in the opinion of counsel to
the issuers of such bonds, exempt from federal income taxes.
To achieve the same investment objective, the Texas Fund generally
invests in Texas municipal bonds. More specifically, under ordinary
circumstances, the Texas Fund invests substantially all and at least 80% of its
assets in municipal obligations of the State of Texas that are exempt from
federal income taxes. Such securities include debt obligations of the State of
Texas and its political subdivisions, agencies, authorities, and
instrumentalities. Unlike KTFIF, the Texas Fund is not "diversified" as that
term is defined under the 1940 Act.
Texas does not currently impose an income tax on individuals.
Accordingly, the Texas Fund's emphasis on Texas municipal obligations does not
currently result in any tax savings on a state level to the Fund's individual
Texas shareholders.
Generally speaking, KTFIF generates comparable tax advantages to those
currently enjoyed by the Texas Fund shareholders through its investment in a
significantly larger portfolio of securities, which is diversified across a
nationwide spectrum of issuers.
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In addition, each Fund invests in municipal bonds only if, at the date
of investment, they are rated within the four highest grades by Standard &
Poor's Corporation (AAA, AA, A and BBB), by Moody's Investors Service, Inc.
(Aaa, Aa A and Baa), or by Fitch Investors Service, Inc. - Municipal Division
(AAA, AA, A and BBB), or, if not rated, are of comparable quality to obligations
so rated as determined by Keystone.
Moreover, in furtherance of their investment objectives, both Funds may
use certain "derivative instruments," including structured securities.
In summary, excepting the Texas Fund's strict geographic focus, both
Funds invest in the same kinds of securities and use the same types of
investment techniques.
For a more complete discussion of the Funds' investment objectives,
policies, restrictions, permitted investments, and investment techniques, see
"Investment Restrictions" below, "Information About the Funds" and each Fund's
Prospectus and SAI.
Investment Restrictions
Each of the Funds has certain fundamental investment restrictions that
may not be changed without the vote of a 1940 Act majority of the Fund's
outstanding voting shares. Except as noted below, KSTFF's and KTFIF's
fundamental investment restrictions are substantially the same. KTFIF differs
from KSTFF in that KTFIF is subject to the additional fundamental restrictions
set forth below.
KTFIF may not:
(1) purchase any security (other than U.S. government securities) of
any issuer if as a result more than 5% of its total assets would be invested in
securities of the issuer, except that up to 25% of its total assets may be
invested without regard to this limit;
(2) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or of securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short;
(3) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis, or collateral
arrangement with respect to the writing of options on securities, are not deemed
to be a pledge of assets; and
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<PAGE>
(4) invest in more than 5% of its total assets in securities of any
company having a record, together with its predecessors, of less than three
years of continuous operation.
For a more complete discussion of the Funds' investment restrictions,
see "Information About the Funds" and each Fund's Prospectus and SAI.
Purchase and Redemption Procedures, Deferred Sales Charges and
Exchange Rights
Generally, each Fund offers three classes of shares:
Class A Shares - Front End Load Option
Class A shares are sold with a sales charge at the time of purchase.
With certain exceptions, Class A shares are not subject to a deferred sales
charge when redeemed.
Class B Shares - Back End Load Option
Class B shares are sold without a sales charge at the time of purchase,
but are, with certain exceptions, subject to a contingent deferred sales charge
when redeemed. Class B shares purchased on or after June 1, 1995 are subject to
a deferred sales charge upon redemption during the 72 month period commencing
from and including the month of purchase at rates ranging from a maximum of 5%
of amounts redeemed during the first 12 month period to 1% of amounts redeemed
during the sixth twelve month period after purchase.
Class C Shares - Level Load Option
Class C shares are sold without a sales charge at the time of purchase,
but, with certain exceptions, are subject to a deferred sales charge if they are
redeemed within one year after the date of purchase. Class C shares are
available only through dealers who have entered into special distribution
agreements with the Principal Underwriter.
Shares of the Texas Fund and of KTFIF may be purchased in
exactly the same manner. See "How to Buy Shares" in the
accompanying KTFIF Prospectus.
With respect to Class B and Class C shares, no deferred sales charge is
imposed on amounts redeemed after the lapsing of the above described periods or
on shares purchased through reinvestment of dividends and distributions.
If imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to the shareholder.
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<PAGE>
Redemptions for both Funds may be made by submitting a redemption
request to KIRC or to the shareholder's broker-dealer. See "How to Redeem
Shares" in the accompanying KTFIF Prospectus.
The Texas Fund Shares and KTFIF Shares have the same exchange rights.
Subject to certain limitations, such Shares may be exchanged for Shares of any
of the other funds in the Keystone America Fund Family on the basis of their
respective net asset values. See "Shareholder Services" in the accompanying
KTFIF Prospectus.
In the proposed Reorganization, shareholders of the Texas Fund will
receive the corresponding class of Shares of KTFIF that they currently hold in
the Texas Fund. As indicated above, the Class A, B, and C Shares of KTFIF have
identical arrangements with respect to the imposition of initial and contingent
deferred sales charges as the comparable class of Shares of the Texas Fund.
Because the Reorganization will be effected at net asset value without the
imposition of an initial sales charge, Class A KTFIF Shares acquired by Class A
shareholders of the Texas Fund pursuant to the proposed Reorganization will not
be subject to any initial sales charge as a result of the Reorganization. KTFIF
Shares issued pursuant to the Reorganization that replace Texas Fund Shares
still subject to a contingent deferred sales charge will still be subject to
that charge.
Distribution Procedures and Payments
The Texas Fund and KTFIF have adopted substantially similar 12b-1
Distribution Plans with regard to their respective Class A, B, and C Shares,
pursuant to which they incur certain distribution related expenses.
Each Fund's Class A Distribution Plan provides for expenditures by the
Fund to pay costs related to sales of its Class A Shares, including shareholder
service fees. For KTFIF, expenses are currently limited to 0.25% annually of the
average daily net asset value of Class A Shares. For the Texas Fund, expenses
are currently limited to 0.15% annually of the average daily net asset value of
Class A Shares.
Each Fund's Class B Distribution Plans provide for expenditures by the
Fund at an annual rate of up to 1.00% of the average daily net asset value of
Class B Shares to pay costs related to sales of its Class B Shares, including
shareholder service fees. For the Texas Fund, expenses incurred under its Class
B Distribution Plans are currently limited to 0.90% annually of the average
daily net asset value of Class B Shares.
Each Fund's Class C Distribution Plan provides for expenditures by the
Fund at an annual rate of up to 1.00% of the average daily net asset value of
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Class C Shares to pay costs related to sales of its Class C Shares, including
shareholder service fees. For the Texas Fund, expenses incurred under its Class
C Distribution Plan are currently limited to 0.90% of the average daily net
asset value of Class C Shares.
The NASD limits annual distribution expenditures to 1.00%, of which
0.75% may be used to pay distribution costs and 0.25% may be used to pay
shareholder service fees. The aggregate amount that each Fund may pay for such
distribution costs is limited to 6.25% of gross Share sales since the inception
of the Fund's Distribution Plan, plus interest at the prime rate plus 1.00% on
such amounts (less any contingent deferred sales charges paid by shareholders to
the Principal Underwriter) remaining unpaid from time to time.
Payments under each Fund's Distribution Plans are currently made to the
Principal Underwriter (which may reallow all or part to others, such as dealers)
(1) as commissions for Fund Shares sold, and/or (2) as shareholder service fees
in respect of Shares maintained by the recipients on each of the Fund's books
for specified periods. Amounts paid or accrued to the Principal Underwriter
under (1) and (2) in the aggregate may not exceed the annual limitations
discussed above.
With respect to Class B Shares, the Principal Underwriter generally
reallows to brokers or others a commission in the amount of 4.00% of the price
paid for each Class B Share sold plus the first year's service fee in advance in
the amount of 0.25% of the price paid for each KTFIF Class B Share sold and
0.15% of the price paid for each Texas Fund Class B Share sold.
With respect to Class C Shares, the Principal Underwriter generally
reallows to brokers or others a commission in the amount of 0.75% of the price
paid for each Class C Share sold plus the first year's service fee in advance in
the amount of 0.25% of the price paid for each Class C Share sold.
After the Reorganization, it is anticipated that the commissions that
the Principal Underwriter will pay brokers or others for KTFIF Share sales and
shareholder service fees will remain the same as currently in effect for KTFIF
Shares.
For more information, see "Distribution Plans" in the accompanying
KTFIF Prospectus.
Dividends and Distributions
Each shareholder of the Texas Fund who becomes a shareholder of KTFIF
will be entitled to dividends and distributions of KTFIF.
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The Texas Fund declares dividends from net investment income daily and
distributes such dividends monthly and declares and distributes all net realized
long term capital gains annually.
KTFIF declares dividends from net investment income monthly and
declares and distributes all net realized long term capital gains annually.
For both Funds, distributions are payable in Shares of the relevant
Fund, or, at the shareholder's option (which must be exercised before the record
date for the distribution), in cash. Fund distributions in the form of
additional Shares are made at net asset value without the imposition of a sales
charge.
Unless a Texas Fund shareholder instructs or has instructed otherwise,
any distributions paid after the Effective Date will be automatically reinvested
in additional Shares of KTFIF without a sales charge. Texas Fund shareholders
will be deemed to have elected to receive dividends and distributions in the
same manner that he or she receives dividends and distributions on his or her
Texas Fund Shares. After the Reorganization, shareholders may elect, at any
time, to change the manner in which their dividends and distributions are paid.
See "Dividends and Taxes" in the accompanying KTFIF Prospectus.
Portfolio Manager
Daniel A. Rabasco, the current portfolio manager of the Texas
Fund, is also responsible for the day to day portfolio management
of KTFIF. Mr. Rabasco is a Keystone Vice President with more than
7 years of investment experience.
TAX CONSEQUENCES
Federal Income Taxes
In the opinion of Sullivan & Worcester, legal counsel to the Texas
Fund, the Reorganization will constitute a tax free reorganization pursuant to
Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). No gain or loss will be recognized by the Texas Fund
or its shareholders as a result of the Reorganization. The tax basis and holding
period of the KTFIF Shares received by the Texas Fund shareholders will be the
same as the tax basis and holding period of the Texas Fund Shares surrendered
therefor. In addition, the tax basis and holding period of the assets of the
Texas Fund in the hands of KTFIF will be the same as the tax basis and holding
period of such assets in the hands of the Texas Fund prior to the
Reorganization. See "The Reorganization -- Federal Income Tax Consequences."
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State Income Taxes
Texas does not impose an income tax on individuals. Accordingly, unlike
shareholders in other state municipal bond mutual funds (such as mutual funds
investing primarily in California or New York municipal obligations), who are
generally able to exclude their mutual fund earnings from their state income
taxes, shareholders in the Texas Fund have enjoyed no such benefit.
Consequently, the exchange of shares in the Texas Fund for shares in KTFIF will
not have any impact on the taxes an individual shareholder pays to the State of
Texas.
While Texas does not impose an income tax on corporations, it does
impose a corporate franchise tax on corporations that do business in Texas or
are chartered or authorized to do business in Texas. The corporate franchise tax
imposed on those corporations is based on the corporations "net taxable capital"
apportioned to Texas or the corporation's "net taxable earned surplus"
apportioned to Texas. Since neither earnings from the Texas Fund nor earnings
from KTFIF are considered gross receipts apportioned to Texas for purposes of
computing a corporation's "net taxable capital" apportioned to Texas, the
exchange of shares in the Texas Fund for shares in KTFIF will not have any
impact on the taxes a corporate shareholder pays to the State of Texas based on
"net taxable capital." The amount of "net taxable earned surplus" is based
generally on the corporation's "reportable federal taxable income" as computed
under the Internal Revenue Code. Since all "exempt interest dividends" excluded
from reportable federal taxable income by federal law are likewise excluded from
the net taxable earned surplus component upon which the Texas corporate
franchise tax may be imposed, the exchange of shares in the Texas Fund for
shares in KTFIF will not have any impact on the taxes a corporate shareholder
pays to the State of Texas based on "net taxable earned surplus."
PRINCIPAL RISK FACTORS
Excepting the Texas Fund's emphasis on Texas debt securities and its
non-diversified status, the investment objectives, policies, and techniques of
the Texas Fund and KTFIF are substantially similar. Both Funds invest in the
same kinds of securities and use the same types of investment techniques.
Accordingly, the investment risks for both Funds are substantially similar.
Indeed, KTFIF's more broadly diversified portfolio may make it less susceptible
than the Texas Fund to adverse economic, political, or regulatory developments.
The principal risk factor of investing in either the Texas Fund or
KTFIF is that the net asset value upon which the value of Shares is based will
increase or decrease in response to changes in
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economic conditions, interest rates, and the market's perception of the Fund's
underlying portfolio securities.
More specifically, the market value of the Funds' fixed income
securities investments may vary inversely to changes in prevailing interest
rates. In addition, the ability of each Fund to achieve its investment objective
is dependent upon the continuing ability of issuers of municipal bonds held in
the Fund's portfolio to meet their continuing obligation to pay interest and
principal when due. Furthermore, from time to time, proposals have been
introduced before Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on municipal bonds. Similar proposals
may be introduced in the future, which, if enacted, could materially affect the
availability of municipal bonds for investment by the Funds and the value of
each Fund's portfolio.
Both Funds invest in securities with similar maturities, and both Funds
use substantially identical procedures for the valuation of portfolio
securities.
Both Funds may enter into repurchase agreements and reverse repurchase
agreements, firm commitment agreements for securities and currencies, options
transactions, currency, and other financial futures contracts and related
options transactions for hedging purposes, and, in furtherance of their
investment objectives, certain other types of derivative instruments, including
structured securities. Both Funds may also invest in obligations denominated in
foreign currencies that are exempt from federal income tax. Each of these
investment techniques involve certain investment risks.
There are risks associated with any investment program, and there can
be no assurance that KTFIF will achieve its investment objective.
Each Fund's Prospectus contains a discussion of the Fund's investment
risks in the section entitled "Risk Factors." See also the "Additional
Investment Information" section at the back of the accompanying KTFIF
Prospectus.
THE REORGANIZATION
REASONS FOR THE PROPOSED TRANSACTION
The Board of Trustees of the Texas Fund, including all of the Fund's
Independent Trustees, has determined that the tax-free Reorganization would be
in the best interests of the Fund, would not dilute the interests of the Fund's
shareholders, and would not impose an unfair burden on the Fund.
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The Board of Trustees has proposed the transaction in the interest of
providing a cost effective investment alternative for the Texas Fund
shareholders. As KTFIF shareholders, the Texas Fund shareholders can continue to
pursue the highest possible current income, exempt from federal income taxes,
while preserving capital. Continuity of investment management as well as all
other investor services (including exchange privileges with the other funds in
the Keystone America Fund Family) currently provided to the Texas Fund will be
maintained.
The combination of the two Funds should permit the Texas Fund
shareholders, as shareholders of KTFIF, to pursue the same investment objective
in a larger fund with the following resulting advantages (although no assurance
can be given that these benefits will be obtained):
1. Economies of scale - The proposed reorganization is expected to
reduce operating expenses for the Texas Fund. Investment management and
custodial fees are reduced as the asset base reaches certain levels, thus
decreasing as assets increase. Fixed expenses such as accounting, legal, and
printing costs will be spread over a larger asset base resulting in per share
expense reductions or economies of scale. For example, KTFIF's Class A, B, and C
pro forma annual operating expense ratios, after giving effect to the
Reorganization, are estimated to be 1.18%, 1.93, and 1.93%, respectively, of
each class's average net assets. In contrast, the Texas Fund's unsubsidized
Class A, B, and C annual operating expense ratios for its most recently
completed fiscal year were 2.57%, 3.36%, and 3.28%, respectively, of each
class's average net assets.
As of December 31, 1995, the Texas Fund's net assets were approximately
$5.6 million, and KTFIF's net assets were approximately $147.0 million.
2. Increased investment opportunities - It is expected that the
combined Fund will be more easily and efficiently managed. A larger single asset
base reduces transaction costs, might result in reduced portfolio turnover, and
provides the opportunity to obtain a wider variety of investments.
3. Facilitate marketing and distribution efforts - It is expected that
the combined Fund will facilitate marketing and distribution efforts with a view
toward increasing the asset base, which in turn will benefit shareholders as
described in (1) and (2) above.
The Board of Trustees of KSTFF based their decision to recommend the
Reorganization on a number of factors, including the following:
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1. projected expense ratios and information regarding fees
and expenses of the Texas Fund and KTFIF;
2. the terms and conditions of the Reorganization and
whether it would result in dilution of the interests of
the Texas Fund shareholders;
3. the compatibility of the Texas Fund, its investment
objective, policies, and restrictions with those of
KTFIF;
4. the costs to the Texas Fund of the Reorganization;
5. the tax consequences to the Texas Fund and its
shareholders resulting from the Reorganization;
6. the availability to KTFIF shareholders of shareholder
services identical to those available to the Texas Fund
shareholders; and
7. the possible investment benefits to be gained from a
single larger fund.
The above-cited benefits offset any loss to Texas Fund shareholders
that might arise from their ownership of Shares of KTFIF, which is not devoted
to investments in Texas municipal bonds, as opposed to their ownership of Shares
of the Texas Fund, which focuses primarily on such Texas bonds.
AGREEMENT ON THE TRANSFER OF ASSETS
The terms and conditions under which the Reorganization are to be
consummated are set forth in the Reorganization Agreement. Significant
provisions of the Reorganization Agreement are summarized below. This summary,
however, is qualified in its entirety by reference to the Reorganization
Agreement, a copy of which is attached hereto as Exhibit A.
The Reorganization Agreement provides that all of the assets of the
Texas Fund will be transferred to KTFIF in exchange for Shares of KTFIF and the
liabilities of the Texas Fund will be assumed by KTFIF on the Effective Date
(the later of (i) receipt of all necessary regulatory approvals, (ii) final
adjournment of the meeting of the shareholders of the Texas Fund at which the
Reorganization Agreement will be considered so long as the Reorganization
Agreement is approved by the shareholders, or (iii) such later date as the
parties to the Reorganization Agreement may mutually agree upon).
The number of full and fractional Class A, B, and C KTFIF Shares to be
delivered to the Texas Fund shareholders will be determined on the basis of the
relative net asset values of the
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Class A, B, and C Shares of KTFIF and the Texas Fund as of the close of business
on the New York Stock Exchange on the Effective Date. The net asset value of a
KTFIF Share will be determined in the manner set forth in KTFIF's Prospectus, a
copy of which accompanies this Prospectus/Proxy Statement, except that such
computation will be made to the nearest hundredth of a cent. The valuation
practices of KTFIF are described under "Pricing Shares" in KTFIF's Prospectus.
The assets and liabilities of the Texas Fund will be valued in the same manner
as that used with respect to the valuation of the assets and liabilities of
KTFIF. The valuation procedures of both Funds are substantially identical. The
value of the Shares of the Texas Fund will be computed to the nearest hundredth
of a cent.
Under the Reorganization Agreement, (i) all of the assets and
liabilities of the Texas Fund will be exchanged for Class A, B, and C Shares of
KTFIF; (ii) KTFIF Class A, B, and C Shares will be distributed to the Class A,
B, and C shareholders of the Texas Fund, respectively, as of the close of
business on the Effective Date; and (iii) the Texas Fund will be liquidated. The
distribution of KTFIF Class A, B, and C Shares will be accomplished by the
establishment of open accounts on the records of KTFIF in the name of each Class
A, B, and C shareholder of the Texas Fund representing the respective pro rata
number of the appropriate Class of Shares of KTFIF due such shareholder.
Fractional Shares of KTFIF will be carried to the third decimal place. After the
Effective Date, KTFIF Share certificates will be issued only upon written
request, and such requests must be accompanied by any Share certificates issued
for Texas Fund Shares held by the investor.
The Board of Trustees of KSTFF, including all of the Independent
Trustees, has determined that the interests of the existing shareholders of the
Texas Fund will not be diluted as a result of the Reorganization, and that the
Reorganization is in the best interests of the Texas Fund shareholders. The
Board of Trustees of KTFIF, including all of the Independent Trustees, has made
the same determinations with respect to the interests of the existing
shareholders of KTFIF.
The consummation of the Reorganization is subject to a number of
conditions set forth in the Reorganization Agreement. Notwithstanding approval
by shareholders of the Texas Fund, the Reorganization Agreement may be
terminated at any time prior to the consummation of the Reorganization without
liability on the part of either party or its respective Trustees, officers or
shareholders, by either party on written notice to the other party if
circumstances should develop that, in the opinion of the Funds, make proceeding
with the Reorganization inadvisable. The Reorganization Agreement may be
amended, waived or supplemented in such manner as may be mutually agreed upon by
the authorized officers of the Funds; provided, however, that following the
Meeting, no such amendment, waiver or supplement may have the
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effect of changing the provision for determining the number of KTFIF Shares to
be issued to Texas Fund shareholders to the detriment of such shareholders
without their approval.
KTFIF will pay the expenses (consisting primarily of legal, accounting,
custodian, and transfer agents fees, as well as printing and mailing and other
expenses in connection with the registration of KTFIF Shares under the 1933 Act)
incurred by it in connection with the Reorganization. The Texas Fund will pay
the expenses of printing and mailing this Prospectus/Proxy Statement and other
material to the Texas Fund shareholders as well as the expenses of conducting
additional proxy solicitations.
DESCRIPTION OF THE SECURITIES TO BE ISSUED
KTFIF is an open-end, diversified management investment company
organized as a Massachusetts business trust. KTFIF currently offers and issues
to the public Class A, B, and C Shares. After the Reorganization, KTFIF will
continue to offer and issue all three classes. Each class participates in
dividends and distributions. Each class has equal voting, liquidation, and other
rights, including rights of appraisal, except (i) expenses related to the
distribution of each class of Shares, or other expenses that the Board of
Trustees may designate as class expenses from time to time, are borne solely by
each class; (ii) each class of Shares has exclusive voting rights with respect
to its 12b-1 Plan; (iii) each class has different exchange privileges; and (iv)
each class generally has a different designation. Subject to certain
limitations, KTFIF Shares may be exchanged for the same class of Shares of other
members of the Keystone America Family and Keystone Liquid Trust, but will have
no other preference, conversion, exchange, or preemptive rights.
KTFIF shareholders are entitled to one vote for each full Share owned
and fractional votes for fractional Shares. Shares of the Fund vote together
except when required by law to vote separately by series or class. The Fund is
not required to hold annual meetings. The Fund will hold special meetings from
time to time as required under its Declaration of Trust and the 1940 Act. A
special meeting of shareholders will be held when 10% of the outstanding shares
request a meeting for the purpose of removing a Trustee.
Under Massachusetts law, it is possible that a KTFIF shareholder may be
held personally liable for the Fund's obligations. The Fund's Declaration of
Trust provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from the Fund
assets for any shareholder held personally liable for the Fund's obligations.
Disclaimers of such liability are included in each Fund agreement.
- 23 -
<PAGE>
The foregoing is only a summary of certain of the provisions of KTFIF's
Declaration of Trust and By-laws, Shareholders should refer to the provisions of
the Declaration of Trust Agreement and By-laws for their full terms.
FEDERAL INCOME TAX CONSEQUENCES
The completion of the Reorganization is contingent upon the receipt by
the Texas Fund of an opinion from Sullivan & Worcester that, on the basis of the
existing provisions of the Internal Revenue Code, Treasury regulations, current
administrative rules, and court decisions, for federal income tax purposes: (i)
no gain or loss will be recognized by the Texas Fund or KTFIF as a result of the
Reorganization; (ii) the basis of the assets of the Texas Fund in the hands of
KTFIF will be the same as the basis of those assets in the hands of the Texas
Fund immediately prior to the Reorganization; (iii) the holding period of the
Texas Fund's assets in the hands of KTFIF will include the period during which
the assets were held by the Texas Fund; (iv) no gain or loss will be recognized
by shareholders of the Texas Fund as a result of the Reorganization; (v) the
basis of KTFIF Shares received by the Texas Fund shareholders will be the same
as the basis of the Texas Fund Shares surrendered therefor; and (vi) the holding
period of KTFIF Shares received by the Texas Fund shareholders will include the
holding period during which the Texas Fund Shares surrendered in exchange
therefor were held, provided that such Shares were held as a capital asset in
the hands of the Texas Fund shareholders on the date of the Reorganization.
As of January 23, 1996, the Texas Fund had available, for federal
income tax purposes, unused capital loss carry forwards of $80,704 expiring in
2002. As a result of the Reorganization, the unused capital loss carryforwards
will become tax attributes of KTFIF, and the utilization of the carryforwards
will benefit all the shareholders of KTFIF. If the Reorganization is
consummated, KTFIF will be constrained, however, in the extent to which it can
use the capital loss carryforwards of the Texas Fund because of limitations
imposed by the Internal Revenue Code upon the occurrence of an "ownership
change." KTFIF should be able to use in each year from 1996 through 2002,
capital loss carryforwards in an amount equal to the value of the Texas Fund on
the date of the Reorganization multiplied by a long-term tax-exempt rate
calculated by the Internal Revenue Service (currently about 6%). If the amount
of such losses is not used in one year, it may be added to the amount available
for use in the next year.
The Texas Fund shareholders should consult their tax advisers regarding
the tax effects, if any, of the proposed Reorganization in light of their
individual circumstances. Since the foregoing discussion relates only to the
federal income tax consequences of the Reorganization, shareholders of the Texas
Fund should also
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<PAGE>
consult their tax advisers as to the state and local tax
consequences, if any, of the Reorganization.
CAPITALIZATION
The following table shows the capitalization of KTFIF and the Texas
Fund as of December 31, 1995 and on a pro forma basis as of that date after
giving effect to the proposed acquisition of assets of the Texas Fund at the
then net asset value per Share. The pro forma data reflects an exchange ratio of
1.07, 1.06, and 1.06 for the KTFIF Class A, B, and C Shares, respectively,
issued for each Class A, B, and C Share, respectively, of the Texas Fund:
Pro Forma
KTFIF The Texas Fund Combined
Total Net Assets
Class A $ 94,012,938 $1,492,294 $ 95,505,232
Class B $ 33,419,936 $3,792,523 $ 37,212,459
Class C $ 19,723,630 $ 343,218 $ 20,066,848
Total $147,156,504 $5,628,035 $152,784,539
Net Asset Value
per Share
Class A $ 10.10 $ 10.78 $10.10
Class B $ 10.01 $ 10.64 $10.01
Class C $ 10.02 $ 10.63 $10.02
Total Shares
Outstanding
Class A 9,307,653 138,477 9,455,453
Class B 3,337,184 356,548 3,716,172
Class C 1,969,174 32,302 2,003,442
Total 14,614,011 527,327 15,175,067
The table set forth above should not be relied on to reflect the number
of Shares to be received in the Reorganization; the actual number of Shares to
be received will depend upon the net asset value and number of Shares
outstanding of each Fund at the time of the Reorganization.
INFORMATION ABOUT THE FUNDS
KEYSTONE TAX FREE INCOME FUND
Information about KTFIF is included in its Prospectus dated March 31,
1995, as supplemented June 1, 1995, which is incorporated by reference herein
and a copy of which accompanies this
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<PAGE>
Prospectus/Proxy Statement. Additional information about KTFIF is included in
its SAI dated March 31, 1995, as supplemented June 1, 1995, and in the SAI dated
March 4, 1996, relating to the Reorganization, each of which is incorporated by
reference herein. Information about KTFIF is also included in its most recent
Annual Report, which is incorporated by reference herein. Important information
about the Fund's performance for its most recent fiscal year is contained in
management's discussion of the same attached hereto as Exhibit B. Copies of
KTFIF's SAIs and Annual Report may be obtained without charge by writing to
KTFIF at the address listed at the front of this Prospectus/Proxy Statement or
by calling KTFIF at (800) 343-2898 or (617) 621-6100.
KEYSTONE TEXAS TAX FREE FUND
Information about the Texas Fund is included in its Prospectus and SAI
each dated May 31, 1995, as supplemented June 1, 1995, each of which is
incorporated by reference herein. Copies of the Texas Fund's Prospectus and SAI
may be obtained without charge by writing to KTFIF at the address listed at the
front of this Prospectus/Proxy Statement or by calling KTFIF at (800) 343-2898
or (617) 621-6100.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Both KTFIF and the Texas Fund are subject to the informational
requirements of the 1934 Act and the 1940 Act, and, in accordance therewith,
file reports, proxy material, and other information with the Commission.
Such reports, proxy material, and other information can be inspected
and copied at the Public Reference Facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549 at prescribed rates.
SUPPLEMENTARY SOLICITATION
Supplementary solicitation will generally be made by mail, telephone,
facsimile, telegram, or in person by officers of KTFIF and the Texas Fund and by
officers or employees of KIRC, Keystone, Keystone Investments, the Principal
Underwriter, or any of their subsidiaries.
The Texas Fund may also arrange to have votes recorded by
telephone. The telephone voting procedure is designated to
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<PAGE>
authenticate shareholders' identities, to allow shareholders to authorize the
voting of their shares in accordance with their instructions, and to confirm
that their instructions have been properly recorded. The Fund has been advised
by counsel that these procedures are consistent with the requirements of
applicable law. If these procedures were subject to a successful legal
challenge, such votes would not be counted at the Meeting. The Fund is unaware
of any such challenge at this time. Shareholders voting by telephone will be
called at the phone numbers KIRC has in its records for accounts, will be asked
to verify certain criteria specific to their accounts intended to ensure the
identity of the shareholder, and will be given an opportunity to authorize
proxies to vote their shares at the meeting in accordance with their
instructions. To ensure that shareholders' instructions have been recorded
correctly, shareholders will receive a confirmation of their instructions in the
mail. A toll-free number will be available in case the information contained in
the confirmation is incorrect. Although shareholders' votes may be taken by
telephone, each shareholder will receive a copy of this Prospectus/Proxy
Statement and may vote by mail using the enclosed proxy card.
SUBSTANTIAL SHAREHOLDERS
As of December 31, 1995, to the best knowledge of KTFIF, the following
accounts owned of record 5% or more of the outstanding Shares of KTFIF:
Class A Shares
Record Owner Percentage Interest
Merrill Lynch Pierce 22.482%
Fenner & Smith
Attn: Book Entry
480 Deer Lake Dr E 3rd FL.
Jacksonville, FL 32246-6484
Class B Shares
Record Owner Percentage Interest
Merrill Lynch Pierce 20.609%
Fenner & Smith
Attn: Book Entry
480 Deer Lake Dr E 3rd FL.
Jacksonville, FL 32246-6484
- 27 -
<PAGE>
Aletta Laird Downs TTEE 6.175%
Alletta Laird Downs Trust
U/A DTD 3-29-89
PO Box 3666
Wilmington, DE 19807-0666
Class C Shares
Record Owner Percentage Interest
Merrill Lynch Pierce 51.621%
Fenner & Smith
Attn: Book Entry
480 Deer Lake Dr E 3rd Fl.
Jacksonville, FL 32246-6484
On that date, the Trustees and officers of KTFIF, as a group,
beneficially owned less than 1% of the outstanding Shares of KTFIF.
As of December 31, 1995, to the best knowledge of the Texas Fund, the
following accounts owned of record 5% or more of the outstanding Shares of the
Texas Fund.
Class A Shares
Record Owner Percentage Interest
Odelia B. McCarley 33.284%
20450 Huebner Road #11222
San Antonio, TX 78258-3908
Nancy L. Holmes 6.154%
Separate Property
3108 Winthrop Avenue
Fort Worth, TX 76116-5515
Ben H. Typpi & Effie M. Typpi 5.063%
JT WROS
1001 South ED Carey Dr.
Harlingen, TX 78552-8720
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<PAGE>
Class B Shares
Record Owner Percentage Interest
Raymond James & Associates, Inc. 22.177%
For Elite Acct # 50115367
FAO RH Tyler & Mildred Tyler T-I-C
Loop 132 HWY 79 Olney, TX 76374
Jodie W. McCarley 7.166%
7339 Seidel
San Antonio, TX 78209-3028
Donaldson Lufkin Jenrette 5.787%
Securities Corporation, Inc.
PO Box 2052
Jersey City, NJ 07303-2052
Mary Jo Clark 5.227%
PO Box 25366
Houston, TX 77265-5366
Class C Shares
Record Owner Percentage Interest
David D. Tatsch 19.033%
Loyce E. Tatsch JTWROS
Route 4 Box 50
Fredericksburg, TX 78624-9561
Barbara B. Matheney 14.468%
Bond Account
C/O First Natl Bank of El Dorado
PO Box 751
El Dorado, AR 717310-0751
Frank H. Bethune 13.033%
Sylvia Bethune JT WROS
3020 Country Square Dr
Apt 1147
Carrollton, TX 75006-5322
Patricia E. Pigg 12.455%
4003 Post Oak Road
Tyler, TX 75701-9334
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<PAGE>
Clifford E. Dickey 11.268%
Vivian A. Dickey JT WROS
1600 Texas Street
Apt 1404
Fort Worth, TX 76102-3475
Merrill Lynch Pierce 8.401%
Fenner & Smith
Attn: Book Entry
4800 Deer Lake Dr E, 3rd FL
Jacksonville, FL 32246-6484
On that date, the Trustees and officers of the Texas Fund, as a group,
beneficially owned less than 1% of the outstanding Shares of the Texas Fund.
INTEREST OF CERTAIN PERSONS
The following entities receive payments from KTFIF for services
rendered pursuant to contractual arrangements with KTFIF: Keystone Management,
as investment manager, receives payments for its investment management services,
as described in the section above entitled "Investment Advisory and Management
Fees"; Keystone, as investment adviser, receives payments for its investment
advisory services, also as described in the section above entitled "Investment
Advisory and Management Fees"; the Principal Underwriter receives payments
pursuant to the 12b-1 Plans described in the section above entitled
"Distribution Procedures and Payments" as well as certain payments in respect of
contingent deferred sales charges; and KIRC is compensated for acting as the
Funds' transfer and dividend disbursing agent.
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<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered
into as of _____________, by and between Keystone Tax Free Income Fund
("KTFIF"), a Massachusetts business trust, and Keystone State Tax Free Fund
("KSTFF"), a Massachusetts business trust (each, a "Fund," and together, the
"Funds"), on behalf of the Keystone Texas Tax Free Fund, a separate series of
KSTFF (the "Texas Fund"), each Fund having its principal place of business at
200 Berkeley Street, Boston, Massachusetts 02116.
W I T N E S S E T H:
WHEREAS, each of KTFIF and the KSTFF is a open-end management company
registered under the Investment Company Act of 1940 (the "1940 Act") and issues
shares of beneficial interest;
WHEREAS, KTFIF and KSTFF have agreed, subject to the receipt of the
approvals described in Section 3 below, to transfer all of the assets of the
Texas Fund to KTFIF in exchange for shares of KTFIF, with KTFIF assuming the
liabilities of the Texas Fund to the extent provided herein;
WHEREAS, following the reorganization, shares of KTFIF will be
distributed to the shareholders of the Texas Fund in liquidation of the Texas
Fund, and the Texas Fund will be terminated;
WHEREAS, the reorganization described in this Agreement is intended to
be a reorganization within the meaning of Section 368 (a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the respective Boards of Trustees of KSTFF and KTFIF,
including each Fund's Trustees who are not interested persons of the Fund as
defined in the 1940 act (the "Independent Trustees"), have determined that
participating in the transactions contemplated by this Agreement is in the best
interests of the Funds;
NOW THEREFORE, in consideration of the premises set forth above and the
mutual covenants and agreements set forth below, the parties hereto agree as
follows:
A-1
<PAGE>
SECTION 1. EXCHANGE OF ASSETS FOR SHARES
1.1 Terms of Exchange.
(a) Upon the Effective Date (as defined in Subsection 1.2 below),
KSTFF, on behalf of the Texas Fund will sell, transfer, and deliver to KTFIF
good and marketable title to all of the then existing assets of the Texas Fund
free and clear of all liens, claims, charges, options, and encumbrances.
(b) KTFIF will assume and pay, to the extent that they exist on the
Effective Date, all the liabilities of the Texas Fund, whether absolute,
accrued, contingent, or otherwise.
(c) KTFIF will deliver to the Texas Fund that number of full and
fractional shares of KTFIF having an aggregate net asset value equal to the
aggregate net asset value of the Texas Fund, all determined as provided in
Section 1.1(d) below.
(d) The following provisions shall apply to the determination of the
number of shares of KTFIF to be delivered:
(i) The net asset value per share of KTFIF shall be determined
as of the close of business on the New York Stock Exchange (the ""Exchange") on
the Effective Date.
(ii) The net value of the assets and liabilities of the Texas
Fund shall be determined as of the close of business on the Exchange on the
Effective Date.
(iii) The net asset value per share of the Texas Fund shall be
determined as of the close of business on the Exchange on the Effective Date.
(iv) The net asset value of KTFIF shall be computed in the
manner set forth in KTFIF's current Registration Statement under the Securities
Act of 1933 ("1933 Act") and the 1940 Act, except that such computation shall be
made to the nearest one-hundredth of a cent.
(v) The assets and liabilities of the Texas Fund shall be
valued in the same manner as that used with respect to the valuation of the
assets and liabilities of KTFIF in the computation of the net asset value per
share of KTFIF.
(vi) The net asset value per share of the Texas Fund shall be
computed by dividing the net value of the assets and liabilities of the Texas
Fund, determined as provided in (ii) and (v) above, by the number of shares of
the Texas Fund outstanding as of the close of business on the Exchange on the
Effective Date; and such computation shall be made to the nearest one-hundredth
of a cent.
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<PAGE>
(vii) The net asset value per share of the Texas Fund
determined as provided in (vi) above shall be divided by the net asset value per
share of KTFIF determined as provided in (i) and (iv) above; and the result of
such division shall be calculated to six decimal places (the "Conversion
Ratio").
(viii) The number of shares of the Texas Fund outstanding at
the close of business on the Exchange on the Effective Date shall be multiplied
by the Conversion Ratio to determine the number of shares of KTFIF to be
delivered.
(ix) KPMG Peat Marwick LLP shall provide a written report to
each of KTFIF and KSTFF on procedures they will have performed to determine the
accuracy of the computations required by this Section 1.1(d).
1.2 Closing and Effective Date. The closing shall be held at
the offices of Keystone Investment Management Company, investment adviser to
KTFIF, located at 200 Berkeley Street, Boston, Massachusetts 02116, and shall
occur on the later of (a) receipt of all necessary regulatory approvals; (b) the
final adjournment of the meeting of the shareholders of the Texas Fund at which
this Agreement will be considered so long as this Agreement and the transaction
set forth herein are approved by the shareholders of the Texas Fund at the
meeting; or (c) such later date as the parties may mutually agree (the
"Effective Date").
1.3 The Texas Fund Share Sales and Transfers. The Texas
Fund shall not issue, sell, or transfer any of its shares after the
Effective Date.
1.4 Transfer Books; Redemptions. The stock transfer books of
the Texas Fund will be permanently closed as of the close of business on the
Effective Date and only redemption requests relating to the Texas Fund received
in proper form on or prior to the close of trading on the Exchange on the
Effective Date shall be accepted by the Texas Fund. Redemption requests relating
to the Texas Fund thereafter received shall be deemed to be redemption requests
for shares of KTFIF to be distributed to the shareholders of the Texas Fund
under this Agreement.
1.5 Treasury Shares. Any shares of the Texas Fund held in the
treasury of the Texas Fund immediately prior to the Effective Date shall be
cancelled upon the Effective Date without conversion into shares of KTFIF.
1.6 Transfer Taxes. Any transfer taxes payable upon issuance
of shares of KTFIF in a name other than the registered shareholder of the Texas
Fund entitled to receive the same shall be paid by the person to whom such
shares are to be issued as a condition of such transfer.
A-3
<PAGE>
1.7 Contingent Deferred Sales Charge. The Texas Fund imposes
certain a deferred sales charges on its shares. The shareholders of the Texas
Fund may be subject to such deferred sales charges with respect to those shares
of KTFIF received by them under this Agreement in exchange for their shares of
the Texas Fund if their shares of the Texas Fund were subject to such deferred
sales charge.
SECTION 2. LIQUIDATION OF THE TEXAS FUND
2.1 Plan of Liquidation. As soon as practicable after the
Effective Date, the Texas Fund will distribute pro rata to its shareholders of
record as of the close of business on the Effective Date, KTFIF shares received
by the Texas Fund pursuant to Section 1 above. KTFIF will establish an open
account on its share records in the name of each shareholder of the Texas Fund
representing the respective number of shares of KTFIF due such shareholder.
Fractional KTFIF shares will be carried to the third decimal place. No
certificates representing KTFIF shares will be issued. Simultaneously with such
crediting of KTFIF shares to the shareholders of record of the Texas Fund, the
shares of the Texas Fund held by such shareholders shall be cancelled.
2.2 Further Actions to Complete Dissolution. As soon as
practicable after the Effective Date, the Texas Fund shall take, in accordance
with its Declaration of Trust, Massachusetts law, and the rules and regulations
of the Securities and Exchange Commission (the "Commission"), all such other
steps as shall be necessary and proper to effect a complete liquidation and
dissolution of the Texas Fund.
SECTION 3. APPROVAL OF TRANSACTIONS
3.1 Trustees of KTFIF. A duly constituted meeting of the Board
of Trustees of KTFIF was held on December 13, 1995, at which meeting this
Agreement and the transactions set forth herein were duly approved by the
Trustees of KTFIF.
3.2 Trustees of KSTFF. A duly constituted meeting of the
Trustees of KSTFF was held on December 13, 1995, at which meeting this Agreement
and the transactions set forth herein were duly approved by the Trustees of
KSTFF, subject to the approval of
A-4
<PAGE>
the shareholders of the Texas Fund as set forth in Subsection 3.3
below.
3.3 Approval by Shareholders of the Texas Fund. A meeting of
the shareholders of the Texas Fund shall be called and held for the purpose of
having the Texas Fund shareholders act upon this Agreement and the transactions
set forth herein. KTFIF shall furnish to the Texas Fund such data and
information relating to KTFIF as shall be reasonably requested by the Trustees
and officers of KSTFF for inclusion in the information to be furnished to the
Texas Fund shareholders in connection with such meeting.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF KEYSTONE TAX
FREE INCOME FUND
4.1 Organization, Existence, etc. KTFIF is a business trust,
duly organized, validly existing, and in good standing under the laws of The
Commonwealth of Massachusetts and has the requisite power to carry on its
business as it is now being conducted. KTFIF has all necessary federal, state,
and local authorization to own all of its properties and assets and to carry on
its business as now being conducted.
4.2 Registration as Investment Company. KTFIF is registered
under the 1940 Act as an open-end, diversified investment company of the
management type, and such registration has not been revoked or rescinded and is
in full force and effect.
4.3 Financial Statements. The financial statements of KTFIF
for the fiscal year ended November 30, 1995, previously delivered to KSTFF,
fairly present the financial position of KTFIF as of November 30, 1995, and the
results of its operations and changes in its net assets for the year then ended.
4.4 Shares to be Issued. The shares of KTFIF to be issued in
exchange for the assets of the Texas Fund have been duly authorized and when
delivered pursuant to this Agreement will be validly issued, fully paid, and
nonassessable by KTFIF.
4.5 Authority Relative to this Agreement. KTFIF has the power
to enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated herein have been duly authorized by the Board of
Trustees of KTFIF and no other proceedings by KTFIF are necessary to authorize
KTFIF's officers to effectuate this Agreement and the transactions contemplated
herein. KTFIF is not a party to, or obligated under, any charter, by-law,
indenture, or contract provision or any other commitment or obligation or
subject to any order or decree that would be violated by its executing and
carrying out this Agreement.
A-5
<PAGE>
4.6 Liabilities. There are no liabilities of KTFIF, whether or
not determined or determinable, other than liabilities disclosed or provided for
in its financial statements for the fiscal year ended November 30, 1995
previously delivered as set forth in Subsection 4.3, and liabilities incurred in
the ordinary course of business subsequent to November 30, 1995 or otherwise
previously disclosed to the KSTFF, none of which has been materially adverse to
the business, assets, or results of operations of KTFIF.
4.7 Litigation. There are no claims, actions, suits, or
proceedings pending or, to the knowledge of KTFIF, threatened that would
materially adversely affect KTFIF or its assets or business or prevent or hinder
consummation of the transactions contemplated hereby.
4.8 Contracts. Except for contracts and agreements previously
disclosed to KSTFF, under which no default exists, KTFIF is not a party to or
subject to any material contract, debt, instrument, plan, lease, franchise,
license, or permit of any kind or nature whatsoever.
4.9 Taxes. The federal income tax returns of KTFIF have been
filed for all taxable years prior to and including November 30, 1994, and all
taxes payable pursuant to such returns have been paid. KTFIF has qualified as a
regulated investment company under the Code in respect to each taxable year of
KTFIF since commencement of its operations.
4.10 Registration/Proxy Statement. KTFIF shall file with the
Commission a Registration/Proxy Statement (the "Registra-tion/Proxy Statement")
under the 1933 Act relating to the shares of KTFIF issuable hereunder. At the
time the Registration/Proxy Statement becomes effective, the Registration/Proxy
Statement (a) will comply in all material respects with the provisions of the
1933 Act and the regulations of the Commission thereunder, and (b) will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. In addition, at the time the Registration/Proxy Statement becomes
effective, at the time of the meeting of the shareholders of the Texas Fund
referred to in Subsection 3.3, and on the Effective Date, the proxy statement
(the "Proxy Statement"), the prospectus (the "Prospectus"), and statement of
additional information (the "Statement of Additional Information") included in
the Registration/Proxy Statement, as amended or supplemented by any amendments
or supplements filed by KTFIF, will not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and warranties
in this Subsection shall apply to statements in or omissions from the
Registration/Proxy
A-6
<PAGE>
Statement or Proxy Statement, Prospectus, and Statement of Additional
Information made in reliance upon and in conformity with information furnished
by KSTFF for use in the Registration/Proxy Statement, as provided in Subsection
5.10.
4.11 Capitalization. On December 31, 1995, 14,614,011 shares
of KTFIF were duly and validly issued and outstanding, fully-paid and
non-assessable by KTFIF. KTFIF does not have any outstanding options, warrants,
or other rights to subscribe for or purchase any of its shares nor is there
outstanding any security convertible into any of its shares.
4.12 Prospectus. The prospectus and statement of additional
information of KTFIF each dated March 31, 1995, as supplemented June 1, 1995
("KTFIF Prospectus"), which have previously been furnished to KSTFF, did not
contain as of such date and do not as of this date contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF KSTFF
5.1 Organization, Existence etc. KSTFF is a business trust,
duly organized, validly existing, and in good standing under the laws of The
Commonwealth of Massachusetts and has the requisite power to carry on its
business as it is now being conducted. KSTFF has all necessary federal, state,
and local authorization to own all of its properties and assets and to carry on
its business as now being conducted.
5.2 Registration as Investment Company. KSTFF is registered
under the 1940 Act as an open-end, non-diversified investment company of the
management type and such registration has not been revoked or rescinded and is
in full force and effect.
5.3 Financial Statements. The financial statements of the
KSTFF for the year ended March 31, 1995 and the fiscal period ended September
30, 1995, previously delivered to KTFIF, fairly present the financial position
of the Texas Fund as of March 31, 1995 and September 30, 1995, respectively, and
the results of its operations and changes in its net assets for the year and
period, respectively, then ended.
5.4 Authority Relative to this Agreement. KSTFF has the
requisite power to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the Board of
Trustees of KSTFF, and, except for the requisite approval by the shareholders
of the Texas Fund, no other proceedings on behalf of KSTFF are necessary to
authorize KSTFF's officers to effectuate this Agreement and the
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<PAGE>
transactions contemplated herein. KSTFF is not a party to or obligated under any
charter, by-law, indenture, or contract provisions or any other commitment or
obligation or subject to any order or decree that would be violated by its
executing and carrying out this Agreement.
5.5 Liabilities. There are no liabilities of the Texas Fund,
whether or not determined or determinable, other than liabilities disclosed or
provided for in the financial statements of KSTFF with respect to the year ended
March 31, 1995 and the fiscal period ended September 30, 1995, previously
delivered as set forth in Subsection 5.3, and liabilities incurred in the
ordinary course of business subsequent to September 30, 1995 or otherwise
previously disclosed to KTFIF, none of which has been materially adverse to the
business assets or results of operations of KSTFF.
5.6 Litigation. There are no claims, actions, suits or
proceedings pending or, to the knowledge of KSTFF, threatened that would
materially adversely affect the Texas Fund or its assets or business or prevent
or hinder consummation of the transactions contemplated hereby.
5.7 Contracts. Except for contracts and agreements previously
disclosed to KTFIF, under which no default exists, KSTFF is not a party to or
subject to any material contract, debt, instrument, plan, lease, franchise,
license, or permit of any kind or nature whatsoever.
5.8 Portfolio Securities. All securities and other assets held
as investments by the Texas Fund as of the Effective Date will be owned by the
Texas Fund free and clear of any liens, claims, charges, options, and
encumbrances, except as otherwise indicated in a schedule to be delivered to
KTFIF prior to the Effective Date. The assets of the Texas Fund do not include
any assets not permitted under the KSTFF Prospectus (as hereinafter defined).
Except as disclosed to KTFIF prior to the Effective Date, none of such
securities or other assets is, or, after the completion of the transactions
contemplated by this Agreement, will be subject to any restrictions, legal or
contractual, on the disposition thereof (including restrictions as to the public
offering or sale thereof under the 1933 Act), and all such securities and other
assets are or will be readily marketable.
5.9 Taxes. The federal income tax returns of the Texas Fund
have been filed for all taxable years prior to and including March 31, 1995, and
all taxes payable pursuant to such returns have been paid. The Texas Fund has
qualified as a regulated investment company under the Code in respect to each
taxable year of the Texas Fund since commencement of its operations.
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5.10 Registration/Proxy Statement. In connection with the
Registration/Proxy Statement, KSTFF will cooperate with KTFIF in the preparation
of the proxy statement portion of the Registration/Proxy Statement, and will
furnish to KTFIF the information relating to the Texas Fund required by the 1933
Act and the regulations thereunder to be set forth in the Registra-tion/Proxy
Statement (including the Proxy Statement, Prospectus, and Statement of
Additional Information). At the time the Regis-tration/Proxy Statement becomes
effective, the Registration/ Proxy Statement, insofar as it relates to the Texas
Fund (a) will comply in all material respects with the provisions of the 1933
Act and the regulations thereunder, and (b) will not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. In addition,
at the time the Registra-tion/Proxy Statement becomes effective, at the time of
the meeting of the shareholders of the Texas Fund referred to in Subsection 3.3,
and on the Effective Date, the Proxy Statement, the Prospectus, and Statement of
Additional Information, as amended or supplemented by any amendments or
supplements filed by KTFIF insofar as they relate to the Texas Fund, will not
contain an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
5.11 Capitalization. On December 31, 1995, 527,327 shares of
the Texas Fund were duly and validly issued and outstanding, fully-paid, and
non-assessable by KSTFF. The Texas Fund does not have any outstanding options,
warrants, or other rights to subscribe for or purchase any shares of the Texas
Fund, nor is there outstanding any security convertible into any shares of the
Texas Fund.
5.12 Prospectus. The prospectus and statement of additional
information of KSTFF each dated May 30, 1995, as supplemented June 1, 1995 (the
KSTFF Prospectus"), which have previously been furnished to KTFIF, did not
contain as of such date and do not as of this date contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
SECTION 6. CONDITIONS TO OBLIGATIONS OF KEYSTONE STATE
TAX FREE FUND
The obligations of KSTFF hereunder with respect to the consummation of
the exchange of assets of the Texas Fund for shares of KTFIF are subject to the
satisfaction of the conditions set forth below in this Section.
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6.1 Shareholder Approval. This Agreement and the transactions
set forth herein with respect to the Texas Fund shall have been approved by the
affirmative vote of the holders of a majority (as defined in the 1940 Act) of
the outstanding voting shares of the Texas Fund.
6.2 Representations, Warranties and Agreements.
KTFIF shall have complied with each of its agreements contained herein, each of
the representations and warranties of KTFIF contained herein shall be true in
all material respects as of the Effective Date, and, except as otherwise
indicated in any financial statements of KTFIF audited or certified by the
Treasurer of KTFIF, which may be delivered to KSTFF on or prior to the last
business day preceding the Effective Date, as of the Effective Date, there shall
have been no material adverse change in the financial condition, results of
operations, business, properties or assets of KTFIF since November 30, 1995.
KSTFF shall have received a certificate of the President of KTFIF satisfactory
in form and substance so stating; provided, however, that a decline in net asset
value shall not constitute a material adverse change.
6.3 Regulatory Approval. The Registration/Proxy Statement
shall have been declared effective by the Commission and no stop order under the
1933 Act pertaining thereto shall have been issued, and all approvals,
registrations, and exemptions under federal and state laws considered to be
necessary shall have been obtained.
6.4 Dividends. KTFIF will declare to its shareholders of
record on or prior to the Effective Date a dividend or dividends, which,
together with all previous such dividends, shall have the effect of distributing
to such shareholders as of the Effective Date, all of KTFIF's investment company
taxable income computed for taxable years ending prior to, as well as for the
period ending on, the Effective Date (computed without regard to any deduction
for dividends paid).
6.5 Opinion of Counsel. KSTFF shall have received the opinion
of Rosemary D. Van Antwerp, General Counsel of Keystone Investment Management
Company, dated the Effective Date, addressed to and in form and substance
satisfactory to the KSTFF, to the effect that (a) KTFIF is a business trust duly
organized and existing and in good standing under the laws of The Commonwealth
of Massachusetts; (b) KTFIF is an open-end, diversified investment company of
the management type registered under the 1940 Act; (c) this Agreement, the
transactions provided for herein and the execution of this Agreement have been
duly authorized and approved by all requisite action of KTFIF, and this
Agreement has been duly executed and delivered by KTFIF and is a valid and
binding obligation of KTFIF; (d) the Registration/Proxy Statement has been
declared effective by the Commission and no stop order under the 1933 Act
pertaining thereto has been issued, and all approvals, registrations and
exemptions under federal and state laws
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considered to be necessary shall have been obtained; and (e) the shares of KTFIF
to be issued in exchange for the assets of the Texas Fund shall have been duly
authorized and upon issuance thereof in accordance with this Agreement will be
validly issued, fully paid and nonassessable by KTFIF.
6.6(a) Secretary's Certificate. KSTFF shall have received
copies of the resolutions adopted by the Board of Trustees of KTFIF authorizing
the execution of this Agreement by KTFIF and the transactions contemplated
hereby, certified by the Secretary or an Assistant Secretary of KTFIF.
(b) KSTFF shall have received a certificate of the
Secretary or an Assistant Secretary of KTFIF as to the signatures and incumbency
of its officers who executed this Agreement on behalf of KTFIF and any other
documents delivered in connection with the transactions contemplated hereby on
behalf of KTFIF.
6.7 Treasurer's Certificate. KTFIF shall have furnished to
KSTFF a statement of KTFIF's assets and liabilities with values determined as
provided in Section 1.1(d) of this Agreement, together with a list of the
respective tax cost of the assets certified by KTFIF's Treasurer.
6.8(a) Officer's Certificate. KSTFF shall have received a
certificate of an appropriate officer of KTFIF as to the fulfillment of all
agreements and conditions on its part to be fulfilled hereunder on or prior to
the Effective Date, and to the effect that the representations and warranties of
KTFIF are true and correct in all material respects at and as of the Effective
Date as if made at and as of such date.
(b) KSTFF shall have received a certificate of an
appropriate officer of KTFIF that (i) material relating to KTFIF included in the
Proxy Statement and in the KTFIF Prospectus that accompanied such Proxy
Statement, taken together, is complete and correct and contained, as of the date
of the Proxy Statement and as of the Effective Date, no untrue statement of a
material fact and omitted no statement of a material fact required to be stated
therein or necessary to make the statements contained therein not misleading;
(ii) the Registration/Proxy Statement insofar as it relates to KTFIF complied
otherwise with the regulations of the Commission applicable to the solicitation
of proxies by registered investment companies; and (iii) KTFIF's Prospectus and
Statement of Additional Information dated March 31, 1995 as supplemented June 1,
1995 complied with the requirements of the 1933 Act and the rules and
regulations of the Commission thereunder.
6.9 Opinion of Tax Counsel. KSTFF shall have received an
opinion of Sullivan & Worcester that for federal income tax purposes (a) no gain
or loss will be recognized by the Texas Fund or KTFIF upon receipt by KTFIF of
the assets transferred pursuant to
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this Agreement; (b) the basis to KTFIF of the assets will be the same as the
basis of the assets in the hands of the Texas Fund immediately before the
exchange; and (c) KTFIF's holding periods with respect to the assets will
include the respective periods for which the assets were held by the Texas Fund.
6.10 KPMG Peat Marwick LLP Letter. KSTFF shall have received a
letter from KPMG Peat Marwick LLP reporting on procedures performed by them to
determine the accuracy of the computations required by Section 1.1(d) above.
SECTION 7. CONDITIONS TO OBLIGATIONS OF KEYSTONE TAX FREE
INCOME FUND.
The obligations of KTFIF hereunder with respect to the consummation of
the exchange of its shares for the assets and liabilities of the Texas Fund are
subject to the satisfaction of the conditions set forth below in this Section.
7.1 Shareholder Approval. This Agreement and the transactions
set forth herein with respect to the Texas Fund shall have been approved by the
affirmative vote of the holders of a majority (as defined in the 1940 Act) of
the outstanding voting shares of the Texas Fund.
7.2 Representations, Warranties and Agreements.
KSTFF shall have complied with each of its agreements contained herein, each of
the representations and warranties of KSTFF contained herein shall be true in
all material respects as of the Effective Date, and, except as otherwise
indicated in any financial statements of KSTFF audited or certified by the
Treasurer of KSTFF, which may be delivered to KTFIF on or prior to the last
business day preceding the Effective Date, as of the Effective Date, there shall
have been no material adverse change in the financial condition, results of
operations, business, properties, or assets of the Texas Fund since September
30, 1995. KTFIF shall have received a certificate of the President of KSTFF
satisfactory in form and substance to KTFIF so stating; provided, however, that
a decline in net asset value shall not constitute a material adverse change.
7.3 Regulatory Approval. The Registration/Proxy Statement
shall have been declared effective by the Commission and no stop order under the
1933 Act pertaining thereto shall have been issued, and all approvals,
registrations, and exemptions under federal and state laws considered to be
necessary shall have been obtained.
7.4 Dividends. The Texas Fund will declare to its shareholders
of record on or prior to the Effective Date a dividend or dividends, which,
together with all previous such dividends, shall have the effect of distributing
to such shareholders, as of the
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Effective Date, all of the Texas Fund's investment company taxable income for
taxable years ending at or prior to the Effective Date (computed without regard
to any deduction for dividends paid) and all of the Texas Fund's net capital
gains if any, realized in taxable years ending at or prior to the Effective Date
(after reduction for any capital loss carryforward).
7.5 Opinion of Counsel. KTFIF shall have received the opinion
of Rosemary D. Van Antwerp, General Counsel of Keystone Investment Management
Company, dated the Effective Date, addressed to and in form and substance
satisfactory to KTFIF, to the effect that (a) the KSTFF is a business trust duly
organized and existing and in good standing under the laws of The Commonwealth
of Massachusetts; (b) KSTFF is an open-end non-diversified investment company of
the management type registered under the 1940 Act; (c) all approvals,
registrations and exemptions under federal and state laws considered to be
necessary have been obtained; and (d) this Agreement, the transactions provided
for herein and the execution of this Agreement have been duly authorized and
approved by all requisite action of the KSTFF, and this Agreement has been duly
executed and delivered by the KSTFF and is a valid and binding obligation of
KSTFF.
7.6(a) Secretary's Certificate. KTFIF shall have received
copies of the resolutions adopted by the Board of Trustees of KSTFF and its
shareholders authorizing the execution of this Agreement on behalf of KSTFF and
the transactions contemplated hereby, each certified by the Secretary or an
Assistant Secretary of KSTFF.
(b) KTFIF shall have received a certificate of the
Secretary or an Assistant Secretary of KSTFF as to the signatures and incumbency
of its officers who executed this Agreement on behalf of KSTFF and any other
documents delivered in connection with the transactions contemplated thereby on
behalf of KSTFF.
7.7 Treasurer's Certificate. KSTFF shall have furnished
to KTFIF a statement of the Texas Fund's assets and liabilities
with values determined as provided in Section 1.1(d) of this Agreement, together
with a list of the respective tax cost of the assets certified by KSTFF's
Treasurer.
7.8(a) Officer's Certificate. KTFIF shall have received a
certificate of an appropriate officer of KSTFF as to the fulfillment of all
agreements and conditions on its part to be fulfilled hereunder on or prior to
the Effective Date, and to the effect that the representations and warranties of
KSTFF are true and correct in all material respects at and as of the Effective
Date as if made at and as of such date.
(b) KTFIF shall have received such other documents,
including an opinion of Rosemary D. Van Antwerp, General Counsel to
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<PAGE>
Keystone Investment Management Company, as KTFIF may reasonably request to show
fulfillment of the purposes and conditions of this Agreement.
7.9 Opinion of Tax Counsel. KTFIF shall have received an
opinion of Sullivan & Worcester that for federal income tax purposes (a) no gain
or loss will be recognized by the Texas Fund or KTFIF upon receipt by KTFIF of
the assets transferred pursuant to this Agreement; (b) the basis to KTFIF of the
assets will be the same as the basis of the assets in the hands of the Texas
Fund immediately before the exchange; and (c) KTFIF's holding periods with
respect to the assets will include the respective periods for which the assets
were held by the Texas Fund.
7.10 KPMG Peat Marwick LLP Letter. KTFIF shall have received a
letter from KPMG Peat Marwick LLP reporting on procedures performed by them to
determine the accuracy of the computations required by Section 1.1(d) above.
7.11 Other Acts. KSTFF will, from time to time, as and when
requested by KTFIF, execute and deliver or cause to be executed and delivered,
all such assignments and other instruments, and will take and cause to be taken
such further action, as KTFIF may deem necessary or desirable in order to vest
in and confirm to KTFIF title to and possession of all the assets to be sold,
assigned, transferred, and delivered hereunder and otherwise to carry out the
intent and purpose of this Agreement.
SECTION 8. AMENDMENT.
By agreement in writing authorized by the Trustees of KSTFF and KTFIF,
the parties hereto may amend this Agreement at any time before or after approval
hereof by the shareholders of the Texas Fund; provided, however, that after such
approval by the shareholders, no amendment shall be made that substantially
changes the terms hereof.
SECTION 9. TERMINATION OF AGREEMENT.
This Agreement may be terminated at any time prior to the Effective Date by
either party hereto by written notice given to the other party hereto, without
liability on the part of either party hereto or its respective Trustees,
officers, or shareholders. In addition, unless the term of this Agreement is
extended by mutual consent of the parties hereto, this Agreement shall be
terminated without liability on the part of any of the foregoing as of the close
of business on April 30, 1996, if the Effective Date is not on or prior to such
date.
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SECTION 10. WAIVER OF REPRESENTATIONS AND CONDITIONS.
At any time prior to the Effective Date, either of the parties may by
written instrument signed by it (a) waive any inaccuracies in the
representations and warranties made to it contained herein; and (b) waive
compliance with any of the covenants or conditions made for its benefit
contained herein; but after approval by the shareholders, no waiver shall be
made that substantially impacts the transactions contemplated hereby.
SECTION 11. EXPENSES.
(a) KTFIF will pay or cause to be paid all fees and expenses that it
incurs in connection with the transaction contemplated by this Agreement,
including, but not limited to, legal, accounting, custodian and transfer agents
fees, as well as printing, mailing and other expenses in connection with the
registration of its shares under the 1933 Act, and additional audit fees.
(b) The Texas Fund will pay or cause to be paid (i) all the costs of
printing and mailing the Prospectus/Proxy Statement and other materials to the
Texas Fund shareholders and conducting proxy solicitations; and (ii) all other
fees and expenses that it incurs in connection with the transaction contemplated
by this Agreement, including, but not limited to, legal, accounting, custodian
and transfer agents fees, and additional audit fees.
SECTION 12. INDEMNIFICATION.
(a) KTFIF agrees to indemnify and hold harmless KSTFF, its Trustees and
officers against any and all claims, to the extent such claims are based upon,
arise out of or relate to any untruthful or inaccurate representation, any
omission of a material fact necessary to make a statement not misleading or any
breach of any warranty or any failure to perform or comply with any of its
covenants, conditions, or agreements set forth in this Agreement and any
obligation or liability of the Texas Fund specifically assumed by KTFIF pursuant
to Section 1.1(a);
(b) KSTFF agrees to indemnify and hold harmless KTFIF, its Trustees and
officers against any and all claims, to the extent such claims are based upon,
arise out of or relate to any untruthful or inaccurate representation, any
omission of a material fact necessary to make a statement not misleading or any
breach of any warranty or any failure to perform or comply with any of its
covenants, conditions or agreements set forth in this Agreement and any
obligation or liability of the Texas Fund (other than obligations and
liabilities specifically assumed by KTFIF pursuant to the provisions of Section
1.1(a)) accruing on or prior to, or existing on the Effective Date or thereafter
accrued.
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<PAGE>
(c) Any claim for indemnification under paragraphs (a) and (b) based
upon any untruthful or inaccurate representation or any breach of any warranty
must be asserted within three years from the Effective Date. As used in this
section, the word "claim" means any and all liabilities, obligations, losses,
damages, deficiencies, demands, claims, penalties, assessments, judgments,
actions, proceedings, and suits of whatever kind and nature and all costs and
expenses (including, without limitation, reasonable attorneys' fees).
SECTION 13. SURVIVAL OF REPRESENTATIONS, ETC.
The representations, warranties, covenants, and indemnifications
provided for in this Agreement shall survive the Effective Date.
SECTION 14. GENERAL.
14.1 Notices. All notices required or permitted hereunder
shall be in writing and shall be deemed to have been delivered when deposited in
the United States mail, postage pre-paid, registered or certified mail, return
receipt requested addressed to the parties as set forth below:
To KSTFF: Albert H. Elfner, III
President and
Chief Executive Officer
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
With a copy to: Rosemary D. Van Antwerp
Senior Vice President and Secretary
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
To KTFIF: Albert H. Elfner, III
President and
Chief Executive Officer
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
With a copy to: Rosemary D. Van Antwerp
Senior Vice President and Secretary
c/o Keystone Investments, Inc.
200 Berkeley Street
Boston, MA 02116
The address of any of the foregoing may be changed by notice given to
the other party in accordance with this Subsection.
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14.2 Recourse Limited. Each of KSTFF and KTFIF is a
Massachusetts business trust established under a Declaration of Trust, as
amended from time to time. The obligations of each of the KSTFF and KTFIF are
not personally binding upon, nor shall recourse be had against the private
property of any of its Trustees, shareholders, officers, employees, or agents,
but only property of KSTFF or KTFIF, as the case may be, shall be bound.
14.3 Entire Agreement. This Agreement supersedes all prior
agreements between the parties whether written or oral, is intended as a
complete and exclusive statement of the terms of the Agreement between the
parties, and may not be changed or terminated orally.
14.4 Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more counterparts have been executed on
behalf of KSTFF and KTFIF and delivered to each of the parties hereto.
14.5 Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.6 No Third Party Rights. Nothing in this Agreement
expressed or implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement. In addition, the parties hereto
represent and warrant that they have not employed any broker, finder, or
intermediary in connection with this transaction who might be entitled to a
finder's fee or other similar fee or commission.
14.7 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of The Commonwealth of
Massachusetts.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
KEYSTONE STATE TAX FREE FUND
ATTEST: ________________________________ By: _________________________
Albert H. Elfner, III
Chief Executive Officer and
President
KEYSTONE TAX FREE INCOME FUND
ATTEST: ________________________________ By: _________________________
Albert H. Elfner, III
Chief Executive Officer and
President
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<PAGE>
EXHIBIT B
MANAGEMENT'S DISCUSSION OF KTFIF'S PERFORMANCE
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995
A Discussion With
Your Fund Manager
Betsy A. Blacher is the senior portfolio manager of your Fund and leads
Keystone's municipal bond investment team. Ms. Blacher is a professional with
16 years of investment experience specializing in municipal bonds. She holds
a Bachelor's degree from Wheaton College in economics and sociology.
Together, with portfolio managers Daniel Rabasco and George Kimball and
analyst David Moore, the team evaluates municipal bonds for Keystone tax free
funds.
Q What does the Fund offer investors?
A The Fund is designed for tax-sensitive investors. It seeks consistent,
attractive income that is exempt from federal income tax.(3) The Fund offers
professional management and diversification by investing in investment grade
municipal bonds. We manage the Fund with careful attention to credit quality
and financial stability.
Q How did municipal bonds perform over the past year?
A Municipal bonds rebounded strongly as a slowing economy reduced the threat
of higher interest rates and inflation. Most bond holders more than recovered
from their losses in 1994 and recorded double-digit total returns. This was a
reversal from 1994 when yields rose and bond prices declined. As growth
moderated at the start of 1995, municipal bonds rallied resulting in
unusually positive total returns.
Q How did the Fund perform?
A The Fund generated returns that paralleled the strong performance of the
municipal bond market. At the beginning of 1995 we expected economic growth
to moderate and interest rates to decline. So, we emphasized bonds that we
expected to benefit from declining rates: non-callable, discount and zero
coupon bonds. Since callable bonds are likely to be bought back by the issuer
in this type of environment, we emphasized noncallable bonds to preserve
income as rates declined. At the same time, these bonds became expensive
relative to other municipal bonds and this contributed to the Fund's price
appreciation.
Discount bonds are sold at a discount from par, or value at maturity.
Historically these bonds have tended to provide more price appreciation in a
falling rate environment than bonds priced close to or above par.
Zero coupon bonds represented a small portion of the portfolio. But, these
bonds were important contributors to the Fund's strong price recovery.
Because zeroes pay income at maturity, they have historically tended to be
the most sensitive to changes in interest rates. As rates declined, they were
among the best performing holdings in the portfolio.
We were pleased with the results of this strategy which helped the Fund
participate in the strong recovery of municipal bonds this year.
Q Total returns were impressive, but municipal bond yields declined. Why?
A Yields declined for nearly every municipal bond investor, including
Keystone Tax Free Income Fund. Slower economic growth lessens the potential
for higher inflation which reduces net bond yields. We held a number of high
coupon bonds and attempted to lock-in income by emphasizing selected
non-callable bonds. While the Fund's income still declined, we believe the
portfolio's holdings of these bonds helped the portfolio to maintain income.
Fund Profile
Objective: Seeks growth and income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Commencement of investment operations: April 14, 1987
Average quality: AA-
Average maturity: 20 years
Net assets: $148 million
(3) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
3
<PAGE>
Keystone Tax Free Income Fund
In evaluating bonds for the Fund, Keystone looks for . . .
(bullet) Strong credit ratings; bonds rated in the top 4 categories (AAA, AA,
A, BBB)
(bullet) Responsible fiscal policies
(bullet) Solid financial positions
(bullet) Attractive values
Keystone's municipal bond team also evaluates local economic conditions, the
state legislative climate, the taxing power of the issuer and expected cash
flows from the project.
Q Did talk about a 'flat tax' in Washington affect municipal bonds?
A Discussions about a 'flat tax' limited performance that otherwise would have
been stronger than the impressive returns of 1995. The 'flat tax' would have
been a negative for municipal bonds because it would have taxed municipal
bond income. At this writing, the possibility of such a tax appears remote.
But, the mere discussion of it caused municipal bonds to rise less in price
than comparable U.S. Treasuries. As a result, we believe that municipals are
still attractive values.
Q What is your outlook?
A We continue to be cautiously optimistic about the municipal bond market. We
expect the economy to continue slowing to a sustainable, non-inflationary
level. This should provide the potential for stable to declining interest
rates over the next six months. In particular, we expect short-term interest
rates to decline further, which could result in some price appreciation.
Q Why do you think growth will remain slow?
A Demographics are important to economic growth. With new home sales and new
family formation slowing, we think economic growth should remain moderate
compared to the 1980s and early 1990s. In addition, world economic growth is
a factor. In Europe, growth has been slow, even with cuts in interest rates.
Because U.S. growth is increasingly dependent on world growth, economic
growth should not be a threat to bond investors for some time. Combined with
a proposal to balance the federal budget, these could be strong positives for
municipal bond investors over the long term.
Q What should shareholders expect?
A We think shareholders should not expect a repeat of the unusually positive
performance of 1995; investors should look forward to returns to come
primarily from income rather than price appreciation in the months ahead.
Q Are municipal bond funds still a good value?
A Even after such a great year, we believe municipal bond yields are still
very attractive values compared to taxable bond yields. On November 30 the
yield on a 30-year AA-rated municipal bond equaled 93% of the yield on a
comparable U.S. Treasury bond. As rates declined, taxable bond yields
declined more than tax free yields. This increased the attractiveness of
municipal bonds compared to taxable bonds. As a result, the after-tax yield
of municipal bonds remains relatively high by historical standards.
- ---------------------------------------[pie chart]------------------------------
Portfolio Quality Summary
as of November 30, 1995
S&P rating(4)
AAA 37%
A 19%
BBB 18%
AA 14%
Not rated 12%
Average portfolio quality: AA-
(percentage of portfolio assets)
(4) Where Standard & Poor's (S&P) ratings were not available, we have used
ratings from Moody's Investor Service, Inc., Fitch Investor's Service,
Inc. or ratings assigned by another nationally recognized statistical
rating organization.
- --------------------------------------------------------------------------------
4
<PAGE>
- ----------------------------------[bar chart]-----------------------------------
Relatively Attractive
Municipal Bond Yields(5)
as of November 30, 1995
Municipal Bonds 5.7
U.S. Treasury Bond 6.13
Municipal bond yields recently equalled 93% of
the yield on a comparable U.S. Treasury bond.
(5) Source: Keystone Investments, Inc. Based on a selection of 30-year
AA-rated municipal bonds versus the yield on the 30-year U.S. Treasury
bond on November 30, 1995.
- --------------------------------------------------------------------------------
Tax-Equivalent Yields
Federal Tax Bracket(6)
- ---------------------------------------
31% 36% 39.6%
- ---------------------------------------
Yield Taxable Equivalent Yield
- ---------------------------------------
4.5% 6.5% 7.0% 7.5%
- ---------------------------------------
5.0% 7.2% 7.8% 8.3%
- ---------------------------------------
5.5% 8.0% 8.6% 9.1%
- ---------------------------------------
A tax free yield of 5% is equal to a taxable yield of 7.8% if you are in the
36% federal tax bracket.
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
(6) The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields
are hypothetical and do not represent the returns of any particular
investment.
[diamond]
This column is intended to answer questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investment Distributors, Inc.,
Attn: Shareholder Communications, 22nd Floor,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
5
<PAGE>
TABLE OF CONTENTS
IMPORTANT DEFINITIONS........................................
SYNOPSIS.....................................................
PRINCIPAL RISK FACTORS.......................................
THE REORGANIZATION...........................................
INFORMATION ABOUT THE FUNDS..................................
ADDITIONAL INFORMATION ABOUT THE FUNDS.......................
<PAGE>
PART B
<PAGE>
INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
OF
KEYSTONE TAX FREE INCOME FUND
Statement of Additional Information
March 4, 1996
This Statement of Additional Information ("SAI") contains or
incorporates by reference material that may be of interest to investors, but
which is not included in the Prospectus/Proxy Statement ("Prospectus") of
Keystone Tax Free Income Fund ("KTFIF") dated March 4, 1996. This SAI is not a
Prospectus and is authorized for distribution only when it accompanies or
follows delivery of the above-referenced Prospectus. This SAI should be read in
conjunction with the Prospectus. Copies of the Prospectus can be obtained by
writing to KTFIF, 200 Berkeley Street, Boston, Massachusetts 02116-5034, or
calling toll-free (800) 343-2898.
TABLE OF CONTENTS
This SAI contains or incorporates by reference the following documents:
I. Statement of Additional Information of KTFIF dated March 31,
1995, as supplemented June 1, 1995, which is hereby incorporated
by reference herein.
II. Annual Report of KTFIF for the fiscal year ended November
30, 1995, which is hereby incorporated by reference herein.
III. Annual Report of Keystone State Tax Free Fund ("KSTFF") for the
fiscal year ended March 31, 1995, which is hereby incorporated
by reference herein.
IV. Semi-Annual Report of KSTFF for the fiscal period ended
September 30, 1995, which is hereby incorporated by
reference herein.
<PAGE>
PART C
<PAGE>
OTHER INFORMATION
Item 15. Indemnification
Provisions for indemnification of Registrant's Trustees and
officers are contained in Article VIII of Registrant's
Restatement of Trust Agreement, a copy of which was filed with
Post Effective Amendment No. 17 to Registration Statement No.
33-11051/811-4951 as Exhibit 24(b)(1) and is incorporated by
reference herein.
Provisions for this indemnification of Keystone
Management, Inc. and Keystone Investment Management
Company, investment manager and investment advisor,
respectively, to the Registrant are contained in Section 5 of
the Investment Management Agreement between Registrant
and Keystone Management, Inc. and Section 6 of the
Investment Advisory Agreement between Keystone
Management, Inc. and Keystone Investment Management
Company, copies of which were filed with Post-Effective
Amendment No. 17 to Registration Statement No. 33-
11051/811-4951 as Exhibits 24(b)(5)(A) and 24(b)(5)(B),
respectively, and are incorporated by reference herein.
Provisions for the indemnification of Keystone Investment
Distributors Company, the Registrant's principal underwriter,
are contained in Section 9 of the Principal Underwriting
Agreements between the Registrant and Keystone Investment
Distributors Company, copies of which were filed with
Post-Effective Amendment No. 17 to Registration Statement No.
33-11051/811-4951 as Exhibit 24(b)(6) and are incorporated by
reference herein.
Item 16. Exhibits
1. A copy of Registrant's Declaration of Trust dated
October 24, 1986, as supplemented, was filed with Post-
Effective Amendment No. 17 to Registration Statement
No. 33-11051/811-4951 as Exhibit 24(b)(1) and is
incorporated by reference herein.
2. A copy of the Registrant's By-laws, as amended, was
filed with Post Effective Amendment No. 17 to
Registration Statement No. 33-11051/811-4951 as Exhibit
24(b)(2) and is incorporated by reference herein.
<PAGE>
3. Not applicable.
4. The Agreement and Plan of Reorganization for the
proposed transaction is filed herewith as Exhibit A to
the Prospectus/Proxy Statement.
5. a. Registrant's Declaration of Trust, Articles III, V
and VI, as filed with Post-Effective Amendment No.
17 to Registration Statement 33-11051/11-4951, are
incorporated by reference herein.
b. Registrant's By-Laws, Article 2, Section 2.5, as
filed with Post-Effective Amendment No. 17 to
Registration Statement 33-11051/11-4951, is
incorporated by reference herein.
6. a. A copy of the Investment Management Agreement
between Keystone Management, Inc. and the
Registrant was filed with Post-Effective Amendment
No. 17 to Registration Statement No. 33-11051/
811-4951 as Exhibit 24(b)(5)(A) and is incorporated
by reference herein.
b. A copy of the Investment Advisory Agreement
between Keystone Management, Inc. and Keystone
Investment Management Company (formerly known as
Keystone Custodian Funds, Inc.) was filed with
Post-Effective Amendment No. 17 to Registration
Statement No. 33-11051/811-4951 as
Exhibit 24(b)(5)(B) and is incorporated by
reference herein.
7. Copies of the Principal Underwriting Agreements between
the Registrant and Keystone Investment Distributors
Company (formerly known as Keystone Distributors, Inc.)
were filed with Post-Effective Amendment No. 17
to Registration Statement No. 33-11051/811-4951 as
Exhibit 24(b)(6) and are incorporated by reference
herein. A copy of the form of Dealer Agreement used by
Keystone Investment Distributors Company was filed with
Post-Effective Amendment No. 10 to Registration
Statement No. 33-11051/811-4951 as part of Exhibit
24(b)(6) and is incorporated by reference herein.
8. Not applicable.
<PAGE>
Item 16. Exhibits (continued)
9. A copy of the form of Custodian Fund Accounting and
Recordkeeping Agreement between the Registrant and
State Street Bank and Trust Company, as amended, was
filed with Post-Effective Amendment No. 17 to the
Fund's Registration Statement No. 33-11051/811-4951 as
Exhibit 24(b)(8) and is incorporated by reference
herein.
10. Copies of Registrant's Class A, B and C
Distribution Plans adopted pursuant to Rule 12b-1 were
filed with Post-Effective Amendment No. 17 to
Registration Statement No. 33-11051/811-4951 as Exhibit
24(b)(15) and are incorporated by reference herein. A
copy of Registrant's Multiple Class Plan adopted
pursuant to Rule 18f-3 was filed with Post-Effective
Amendment No. 16 to Registration Statement 33-
11051/811-4951 and is incorporated by reference
herein.
11. An Opinion and Consent of Counsel as to the legality of
the securities registered by Registrant is filed
herewith as Exhibit 11.
12. An Opinion and Consent of Counsel as to tax matters and
consequences to shareholders is filed herewith as
Exhibit 12.
13. Not applicable.
14. Consent of Independent Auditors is filed herewith as
Exhibit 14.
15. Not applicable.
16. Powers of Attorney are filed herewith as Exhibit 16.
17. a. A copy of Registrant's Declaration under Rule
24f-2 was filed with Registration Statement No.
33-11015/811-4951 and is incorporated by reference
herein.
b. Form of Proxy Card is filed herewith as Exhibit
17(b).
c. Copies of Registrant's most recent Prospectus,
Statement of Additional Information, and Annual
Report are filed herewith as Exhibits 17(c) (1-3),
respectively.
<PAGE>
d. Copies of Keystone State Tax Free Fund's most
recent Prospectus, Statement of Additional
Information, and Annual and Semi-Annual Reports
are filed herewith as Exhibits 17(d) (1-4),
respectively.
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any
public reoffering of the securities registered through
the use of a prospectus that is part of this
Registration Statement by any person or party who is
deemed to be an underwriter within the meaning of Rule
145(c) of the Securities Act of 1933, the reoffering
prospectus will contain the information called for by
the applicable registration form for reofferings by
persons who may be deemed underwriters, in addition to
the information called for by the other items of the
applicable form.
(2) The undersigned Registrant agrees that every prospectus
that is filed under paragraph (1) above will be filed
as a part of an amendment to the Registration Statement
and will not be used until the amendment is effective,
and that, in determining any liability under the
Securities Act of 1933, each post-effective amendment
shall be deemed to be a new registration statement for
the securities offered therein, and the offering of the
securities at that time shall be deemed to be the
initial bona fide offering of them.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on behalf of the Registrant, by the
undersigned, thereunto duly authorized, in the City of Boston, in The
Commonwealth of Massachusetts, on the 31st day of January, 1996.
KEYSTONE TAX FREE INCOME FUND
By: /s/ Rosemary D. Van Antwerp
Rosemary D. Van Antwerp
Senior Vice President
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 31st day of January, 1996.
SIGNATURES TITLE
/s/ George S. Bissell Chairman of the Board and Trustee
George S. Bissell*
/s/ Albert H. Elfner, III Chief Executive Officer, President
Albert H. Elfner, III* and Trustee
/s/ J. Kevin Kenely Treasurer (Principal Financial
J. Kevin Kenely* and Accounting Officer)
*By: /s/ James M. Wall
James M. Wall**
Attorney-in-Fact
<PAGE>
SIGNATURES TITLE
/s/ Frederick Amling Trustee
Frederick Amling*
/s/ Charles A. Austin, III Trustee
Charles A. Austin, III*
/s/ Edwin D. Campbell Trustee
Edwin D. Campbell*
/s/ Charles F. Chapin Trustee
Charles F. Chapin*
/s/ K. Dun Gifford Trustee
K. Dun Gifford*
/s/ Leroy Keith, Jr. Trustee
Leroy Keith, Jr.*
/s/ F. Ray Keyser, Jr. Trustee
F. Ray Keyser, Jr.*
/s/ David M. Richardson Trustee
David M. Richardson*
/s/ Richard J. Shima Trustee
Richard J. Shima*
/s/ Andrew J. Simons Trustee
Andrew J. Simons*
*By: /s/ James M. Wall
James M. Wall**
Attorney-in-Fact
** James M. Wall, by signing his name hereto, does hereby sign
this document on behalf of each of the above-named individuals
<PAGE>
pursuant to powers of attorney duly executed by such persons and attached
hereto as Exhibit 24(b)(16).
EXHIBIT 11
Legal Opinion
<PAGE>
January 31, 1996
Keystone Tax Free Income Fund
200 Berkeley Street
Boston, MA 02116-5034
Gentlemen:
I am a Senior Vice President of and General Counsel to Keystone
Investment Management Company (formerly named Keystone Custodian Funds, Inc.),
investment adviser to Keystone Tax Free Income Fund (the "Fund"), a
Massachusetts business trust. I have been asked to render an opinion with
respect to the issuance of certain shares of beneficial interest, without par
value, of the Fund (the "Shares") in connection with the proposed acquisition by
the Fund of substantially all of the assets of the Keystone Texas Tax Free Fund,
a portfolio of Keystone State Tax Free Fund (the "Reorganization"). The offering
of the Shares pursuant to the Reorganization is the subject of a certain
registration statement (the "Registration Statement") on Form N-14, which is
being filed by the Fund with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
I have examined originals, or copies, certified or otherwise identified
to my satisfaction, of such certificates, records and other documents as I have
deemed necessary or appropriate for the purposes of this opinion.
Based upon the foregoing, I am of the opinion that the Shares, when
issued and sold in accordance with the terms of the Registration Statement, will
be legally issued, fully paid and non-assessable by the Fund.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Sincerely yours,
/s/ Rosemary D. Van Antwerp
Rosemary D. Van Antwerp
Senior Vice President and
General Counsel
EXHIBIT 12
Sullivan & Worcester Tax Opinion
<PAGE>
[Letterhead: Sullivan & Worcester]
January 24, 1996
Keystone Texas Tax Free Fund
Keystone Tax Free Income Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of Keystone Texas Tax Free Fund
Ladies and Gentlemen:
You have asked for our opinion as to certain tax consequences of the
proposed acquisition of assets of Keystone Texas Tax Free Fund ("Selling Fund"),
a separate portfolio of Keystone State Tax Free Fund, a Massachusetts business
trust, by Keystone Tax Free Income Fund ("Acquiring Fund"), also a Massachusetts
business trust, in exchange for voting shares of Acquiring Fund (the
"Reorganization").
In rendering our opinion, we have reviewed and relied upon the draft
Prospectus/Proxy Statement circulated January 21, 1996 and associated form of
Agreement and Plan of Reorganization (the "Reorganization Agreement") and
expected to be filed with the Securities and Exchange Commission on or about
February 2, 1996. We have relied, without independent verification, upon the
factual statements made therein, and assume that there will be no change in
material facts disclosed therein between the date of this letter and the date of
closing of the Reorganization. We further assume that the Reorganization will be
carried out in accordance with the Reorganization Agreement. We have also relied
upon the following representations, each of which has been made to us by
officers of Acquiring Fund or of Selling Fund:
A. The Reorganization will be consummated substantially as described in
the Reorganization Agreement.
B. Acquiring Fund will acquire from Selling Fund at least 90% of the
fair market value of the net assets and at least 70% of the fair market value of
the gross assets held by Selling Fund immediately prior to the Reorganization.
For purposes of this
<PAGE>
Keystone Texas Tax Free Fund
Keystone Tax Free Income Fund
January 24, 1996
Page 2
representation, assets of Selling Fund used to pay reorganization expenses, cash
retained to pay liabilities, and redemptions and distributions (except for
regular and normal distributions) made by Selling Fund immediately preceding the
transfer which are part of the plan of reorganization, will be considered as
assets held by Selling Fund immediately prior to the transfer.
C. To the best knowledge of management of Selling Fund, there is
no plan or intention on the part of the shareholders of Selling Fund to sell,
exchange, or otherwise dispose of a number of Acquiring Fund shares received in
the Reorganization that would reduce the former Selling Fund shareholders'
ownership of Acquiring Fund shares to a number of shares having a value, as of
the date of the Reorganization (the "Closing Date"), of less than 50 percent of
the value of all of the formerly outstanding shares of Selling Fund as of the
same date. For purposes of this representation, Selling Fund shares exchanged
for cash or other property will be treated as outstanding Selling Fund shares on
the Closing Date. There are no dissenters' rights in the Reorganization, and no
cash will be exchanged for Selling Fund shares in lieu of fractional shares of
Acquiring Fund. Moreover, shares of Selling Fund and shares of Acquiring Fund
held by Selling Fund shareholders and otherwise sold, redeemed, or disposed of
prior or subsequent to the Reorganization will be considered in making this
representation, except for shares of Selling Fund or Acquiring Fund redeemed in
the ordinary course of business of Selling Fund or Acquiring Fund in accordance
with the requirements of section 22(e) of the Investment Company Act of 1940.
D. Selling Fund has not redeemed and will not redeem the shares of any
of its shareholders in connection with the Reorganization except to the extent
necessary to comply with its legal obligation to redeem its shares.
E. The management of Acquiring Fund has no plan or intention to redeem
or reacquire any of the Acquiring Fund shares to be received by Selling Fund
shareholders in connection with the Reorganization, except to the extent
necessary to comply with its legal obligation to redeem its shares.
F. The management of Acquiring Fund has no plan or intention to sell or
dispose of any of the assets of Selling Fund which will be acquired by Acquiring
Fund in the Reorganization, except for dispositions made in the ordinary course
of business, and to the extent necessary to enable Acquiring Fund to comply with
its legal obligation to redeem its shares.
<PAGE>
Keystone Texas Tax Free Fund
Keystone Tax Free Income Fund
January 24, 1996
Page 3
G. Following the Reorganization, Acquiring Fund will continue the
historic business of Selling Fund in a substantially unchanged manner as part of
the regulated investment company business of Acquiring Fund, or will use a
significant portion of Selling Fund's historic business assets in a business.
H. There is no intercorporate indebtedness between Acquiring Fund and
Selling Fund.
I. Acquiring Fund does not own, directly or indirectly, and has not
owned in the last five years, directly or indirectly, any shares of Selling
Fund. Acquiring Fund will not acquire any shares of Selling Fund prior to the
Closing Date.
J. Acquiring Fund will not make any payment of cash or of property
other than shares to Selling Fund or to any shareholder of Selling Fund in
connection with the Reorganization.
K. Pursuant to the Reorganization Agreement, the shareholders of
Selling Fund will receive solely Acquiring Fund voting shares in exchange for
their voting shares of Selling Fund.
L. The fair market value of the Acquiring Fund shares to be received by
the Selling Fund shareholders will be approximately equal to the fair market
value of the Selling Fund shares surrendered in exchange therefor.
M. Subsequent to the transfer of Selling Fund's assets to Acquiring
Fund pursuant to the Reorganization Agreement, Selling Fund will distribute the
shares of Acquiring Fund, together with other assets it may have, in final
liquidation as expeditiously as possible.
N. Selling Fund is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of ss. 368(a)(3)(A) of the Internal Revenue
Code of 1986, as amended (the "Code").
O. Selling Fund is treated as a corporation for federal income tax
purposes and at all times in its existence has qualified as a regulated
investment company, as defined in ss. 851 of the Code.
P. Acquiring Fund is treated as a corporation for federal income tax
purposes and at all times in its existence has qualified as a regulated
investment company, as defined in ss. 851 of the Code.
<PAGE>
Keystone Texas Tax Free Fund
Keystone Tax Free Income Fund
January 24, 1996
Page 4
Q. The sum of the liabilities of Selling Fund to be assumed by
Acquiring Fund and the expenses of the Reorganization does not exceed twenty
percent of the fair market value of the assets of Selling Fund.
R. The foregoing representations are true on the date of this letter
and will be true on the date of closing of the Reorganization.
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, it is our opinion that for federal
income tax purposes:
1. The acquisition by Acquiring Fund of substantially all of the assets
of Selling Fund solely in exchange for voting shares of Acquiring Fund followed
by the distribution by Selling Fund of said Acquiring Fund shares to the
shareholders of Selling Fund in exchange for their Selling Fund shares will
constitute a reorganization within the meaning of ss. 368(a)(1)(C) of the Code,
and Acquiring Fund and Selling Fund will each be "a party to a reorganization"
within the meaning of ss. 368(b) of the Code.
2. No gain or loss will be recognized to Selling Fund upon the transfer
of substantially all of its assets to Acquiring Fund solely in exchange for
Acquiring Fund voting shares and assumption by Acquiring Fund of certain
identified liabilities of Selling Fund, or upon the distribution of such
Acquiring Fund voting shares to the shareholders of Selling Fund in exchange for
all of their Selling Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Selling Fund (including any cash retained initially by
Selling Fund to pay liabilities but later transferred) solely in exchange for
Acquiring Fund voting shares and assumption by Acquiring Fund of certain
identified liabilities of Selling Fund.
4. The basis of the assets of Selling Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Selling Fund
immediately prior to the transfer, and the holding period of the assets of
Selling Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Selling Fund.
<PAGE>
Keystone Texas Tax Free Fund
Keystone Tax Free Income Fund
January 24, 1996
Page 5
5. The shareholders of Selling Fund will recognize no gain or loss upon
the exchange of all of their Selling Fund shares solely for Acquiring Fund
voting shares. Gain, if any, will be realized by Selling Fund shareholders who
in exchange for their Selling Fund shares receive other property or money in
addition to Acquiring Fund shares, and will be recognized, but not in excess of
the amount of cash and the value of such other property received. If the
exchange has the effect of the distribution of a dividend, then the amount of
gain recognized that is not in excess of the ratable share of undistributed
earnings and profits of Selling Fund will be treated as a dividend.
6. The basis of the Acquiring Fund voting shares to be received by the
Selling Fund shareholders will be the same as the basis of the Selling Fund
shares surrendered in exchange therefor.
7. The holding period of the Acquiring Fund voting shares to be
received by the Selling Fund shareholders will include the period during which
the Selling Fund shares surrendered in exchange therefor were held, provided the
Selling Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Paragraphs 6.9 and 7.9 of the Reorganization Agreement. We
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement on Form N-14 and to use of our name and any reference to our firm in
the Registration Statement or in the Prospectus/Proxy Statement constituting a
part thereof. In giving such consent, we do not thereby admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ SULLIVAN & WORCESTER
SULLIVAN & WORCESTER
A Registered Limited Liability Partnership
TEXASTAX.OPN
EXHIBIT 14
Independent Auditor's Consent
<PAGE>
EXHIBIT 14
CONSENT OF INDEPENDENT AUDITORS
The Trustees
Keystone Texas Tax Free Fund
Keystone Tax Free Income Fund
We consent to the use of our reports on the financial statements of
Keystone Texas Tax Free Fund, as of and for the year ended March 31, 1995,
dated May 5, 1995, and the financial statements of Keystone Tax Free Income
Fund, as of and for the year ended November 30, 1995, dated January 5, 1996,
incorporated by reference herein into the statement of additional information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
January 31, 1996
Boston, Massachusetts
EXHIBIT 16
Powers of Attorney
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief
Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser
or Manager and registering from time to time the shares of such companies, and
generally to do all such things in my name and in my behalf to enable such
investment companies to comply with the provisions of the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
my said attorneys to any and all registration statements and amendments thereto.
/s/ George S. Bissell
George S. Bissell
Director/Trustee,
Chairman of the Board
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chief Executive Officer and for
which Keystone Custodian Funds, Inc. serves as Adviser or Manager and
registering from time to time the shares of such companies, and generally to do
all such things in my name and in my behalf to enable such investment companies
to comply with the provisions of the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and all requirements and regulations
of the Securities and Exchange Commission thereunder, hereby ratifying and
confirming my signature as it may be signed by my said attorneys to any and all
registration statements and amendments thereto.
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Director/Trustee,
President and Chief
Executive Officer
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director, Trustee or officer and for which Keystone
Custodian Funds, Inc. serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and in my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ J. Kevin Kenely
J. Kevin Kenely
Treasurer
Dated: December 15, 1995
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Frederick Amling
Frederick Amling
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles A. Austin III
Charles A. Austin III
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Edwin D. Campbell
Edwin D. Campbell
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles F. Chapin
Charles F. Chapin
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ K. Dun Gifford
K. Dun Gifford
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Leroy Keith, Jr.
Leroy Keith, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ F. Ray Keyser, Jr.
F. Ray Keyser, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ David M. Richardson
David M. Richardson
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Richard J. Shima
Richard J. Shima
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/Andrew J. Simons
Andrew J. Simons
Director/Trustee
Dated: December 14, 1994
EXHIBIT 17(b)
Proxy Card
<PAGE>
KEYSTONE TEXAS TAX FREE FUND
A Portfolio of Keystone State Tax Free Fund
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 30, 1996
The undersigned, revoking all Proxies heretofore given, hereby appoints
Albert H. Elfner, III, Rosemary D. Van Antwerp, and James M. Wall or any of them
as Proxies of the undersigned, with full power of substitution, to vote on
behalf of the undersigned all shares of Keystone Texas Tax Free Fund (the "Texas
Fund") that the undersigned is entitled to vote at the special meeting of
shareholders of the Texas Fund to be held at 3:00 p.m. on Tuesday, April 30,
1996 at the offices of Keystone Investment Management Company, 26th Floor, 200
Berkeley Street, Boston, Massachusetts 02116 and at any adjournments thereof, as
fully as the undersigned would be entitled to vote if personally present, as
follows:
To approve an Agreement and Plan of Reorganization whereby Keystone Tax
Free Income Fund ("KTFIF") will (i) acquire substantially all of the assets of
the Texas Fund in exchange for Shares of KTFIF; and (ii) assume the liabilities
of the Texas Fund, as substantially described in the accompanying
Prospectus/Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE>
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE KEYSTONE STATE TAX
FREE FUND.
THE BOARD OF TRUSTEES OF THE KEYSTONE STATE TAX FREE FUND RECOMMENDS A VOTE FOR
THE PROPOSAL.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR THE PROPOSAL
IF NO CHOICE IS INDICATED.
THE PROXIES ARE AUTHORIZED IN THEIR DISCRETION TO VOTE UPON SUCH OTHER MATTERS
AS MAY COME BEFORE THE MEETING OR ANY ADJOURNMENTS THEREOF.
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEAR ON THIS CARD.
Dated: ____________________, 199__
Signature(s):_______________________________
Signature (of joint
owner, if any):___________________________
NOTE: When signing as attorney, executor, administrator, trustee, guardian, or
as custodian for a minor, please sign your name and give your full title as
such. If signing on behalf of a corporation, please sign full corporate name and
your name and indicate your title. If you are a partner signing for a
partnership, please sign the partnership name and your name. Joint owners should
each sign this proxy. Please sign, date and return.
EXHIBIT 17(c)(1)
Registrant's Most Recent Prospectus
<PAGE>
KEYSTONE TAX FREE INCOME FUND
PROSPECTUS MARCH 31, 1995
AS SUPPLEMENTED JUNE 1, 1995
Keystone Tax Free Income Fund (formerly named Keystone America Tax Free Income
Fund) (the "Fund") is a mutual fund that seeks the highest possible current
income, exempt from federal income taxes, while preserving capital. The Fund
invests primarily in municipal bonds. The Fund's net asset value per share will
fluctuate in response to changes in the market value of its portfolio
securities.
Generally, the Fund offers three classes of shares. Information on share
classes and their fee and sales charge structures may be found in the Fund's fee
table, "Alternative Sales Options," "Contingent Deferred Sales Charge and Waiver
of Sales Charge," "Distribution Plans," and "Fund Shares."
This prospectus concisely states information about the Fund that you should
know before investing. Please read it and retain it for future reference.
Additional information about the Fund, including information about securities
ratings, is contained in the Fund's statement of additional information dated
March 31, 1995, as supplemented June 1, 1995, which has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. For a free copy, or for other information about the Fund, write to
the address or call the telephone number listed below.
KEYSTONE TAX FREE INCOME FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
TABLE OF CONTENTS
Page
Fee Table 2
Financial Highlights 3
The Fund 6
Investment Objective and Policies 6
Investment Restrictions 7
Risk Factors 8
Pricing Shares 9
Dividends and Taxes 9
Fund Management and Expenses 11
How to Buy Shares 13
Alternative Sales Options 14
Contingent Deferred Sales Charge and
Waiver of Sales Charges 18
Distribution Plans 19
How to Redeem Shares 20
Shareholder Services 22
Performance Data 24
Fund Shares 24
Additional Information 25
Additional Investment Information (i)
Exhibit A A-1
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FEE TABLE
KEYSTONE TAX FREE INCOME FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "Fund Management and Expenses";
"How to Buy Shares"; "Alternative Sales Options"; "Contingent Deferred Sales
Charge and Waiver of Sales Charges"; "Distribution Plans"; and "Shareholders
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>
Sales Charge ........................................... 4.75%(3) None None
(as a percentage of offering price)
Contingent Deferred Sales Charge ....................... 0.00%(4) 5.00% in the first year 1.00% in the first year
(as a percentage of the lesser of cost or market value declining to 1.00% in the and 0.00% thereafter
of shares redeemed) sixth year and 0.00%
thereafter
Exchange Fee (per exchange)(5)......................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(as a percentage of average net assets)
Management Fees ........................................ 0.61% 0.61% 0.61%
12b-1 Fees ............................................. 0.24% 0.99%(7) 1.00%(7)
Other Expenses ......................................... 0.28% 0.28% 0.28%
---- ---- ----
Total Fund Operating Expenses .......................... 1.13% 1.88% 1.89%
==== ==== ====
---- ---- ----
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ............................................................................... $58.00 $82.00 $107.00 $178.00
Class B ............................................................................... $69.00 $89.00 $122.00 N/A
Class C ............................................................................... $29.00 $59.00 $102.00 $221.00
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ............................................................................... $58.00 $82.00 $107.00 $178.00
Class B ............................................................................... $19.00 $59.00 $102.00 N/A
Class C ............................................................................... $19.00 $59.00 $102.00 $221.00
</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 purchased on or after June 1, 1995 convert tax free to Class A
shares after eight years. See "Class B Shares" for more information.
2 Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Investment Distributors
Company, the 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."
4 Purchases of Class A shares in the amount of $1,000,000 or more and/or
purchases made by certain qualifying retirement or other plans are not
subject to a sales charge, but may be subject to a contingent deferred sales
charge. See the "Class A Shares" and "Contingent Deferred Sales Charge and
Waiver of Sales Charges" sections of this prospectus for an explanation of
the charge.
5 There is no exchange fee for exchange orders received by the Fund directly
from an individual shareholder over the Keystone Automated Response Line
("KARL"). (For a description of KARL, see "Shareholder Services.")
6 Expense ratios shown above are for the Fund's fiscal year ended November 30,
1994.
7 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. ("NASD").
8 The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Fund may be
greater or less than 5%.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE TAX FREE INCOME FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 13, 1987
YEAR ENDED NOVEMBER 30, (COMMENCEMENT
------------------------------------------------------------------------------------- OF OPERATIONS) TO
1994 1993 1992 1991 1990 1989 1988 NOVEMBER 30, 1987
--------- ---------- ---------- ---------- ---------- --------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF PERIOD..... $10.250 $10.170 $10.130 $ 9.940 $10.240 $ 9.960 $ 9.640 $10.000
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income--net.. 0.513 0.567 0.625 0.605 0.593 0.617 0.630 0.329
Realized gains (losses)
on investments--net.... (1.285) 0.368 0.306 0.314 (0.060) 0.347 0.370 (0.317)
------- ------- ------- ------- ------- ------- ------- -------
Total income (loss) from
investment operations (0.772) 0.935 0.931 0.919 0.533 0.964 1.000 0.012
------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from
investment income--net. (0.517) (0.571) (0.621) (0.605) (0.603) (0.634) (0.680) (0.372)
Distributions in excess
of investment income--
net(2) ................ 0 (0.044) 0 (0.004) (0.030) 0 0 0
Distributions from
realized gain on
investments--net....... 0 (0.240) (0.270) (0.120) (0.200) (0.050) 0 0
Tax basis return of capital (0.031) 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- ------- -------
Total distributions..... (0.548) (0.855) (0.891) (0.729) (0.833) (0.684) (0.680) (0.372)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value end of
period.................. $ 8.930 $10.250 $10.170 $10.130 $ 9.940 $10.240 $ 9.960 $ 9.640
======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN(3) ........ (7.81%) 9.37% 9.35% 9.59% 5.55% 9.97% 10.60% 0.17%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Operating and
management expenses... 1.13% 1.21% 1.25% 1.58% 1.66% 1.62% 1.57% 1.00%(1)
Investment income--net 5.27% 5.40% 6.02% 5.95% 6.03% 6.15% 6.13% 6.85%(1)
Portfolio turnover rate. 98% 47% 32% 37% 42% 49% 109% 67%
Net assets end of period
(thousands)............ $95,691 $124,102 $120,660 $133,524 $146,335 $162,013 $179,191 $16,090
- ---------
(1) Annualized for the period April 14, 1987 (Commencement of Operations) to
November 30, 1987.
(2) Effective December 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis investment income-- net
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis gains on a
temporary basis) are presented as "Distributions in excess of realized
gains." For the fiscal years ended prior to November 30, 1993, distributions
in excess of book basis net income were charged to paid in capital.
(3) Excluding applicable sales charges.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE TAX FREE INCOME FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.
FEBRUARY 1, 1993
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING)
NOVEMBER 30, TO
1994 NOVEMBER 30, 1993
------------ -----------------
NET ASSET VALUE BEGINNING OF PERIOD............ $10.250 $10.270
------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income--net......................... 0.452 0.369
Realized gains (losses) on investments--net.... (1.287) 0.301
------- -------
Total income (loss) from investment operations. (0.835) 0.670
------- -------
LESS DISTRIBUTIONS
Dividends from investment income--net.......... (0.505) (0.369)
Distributions in excess of investment income-- 0 (0.081)
net(b).........................................
Distributions from realized gain on 0 (0.240)
investments--net ..............................
Tax basis return of capital.................... (0.030) 0
------- -------
Total distributions............................ (0.535) (0.690)
------- -------
Net asset value end of period.................. $ 8.880 $10.250
======= =======
TOTAL RETURN(c)................................ (8.43%) 6.59%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses............ 1.88% 1.96%(a)
Investment income--net....................... 4.60% 4.42%(a)
Portfolio turnover rate........................ 98% 47%
Net assets end of period (thousands)........... $28,860 $14,091
- ---------
(a) Annualized.
(b) Effective December 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis investment income--net
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis gains on a
temporary basis) are presented as "Distributions in excess of realized
gains." For the period ended November 30, 1993, distributions in excess of
book basis net income were charged to paid in capital.
(c) Excluding applicable sales charge.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE TAX FREE INCOME FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information relating to the
Fund and has been audited by KPMG Peat Marwick LLP, the Fund's independent
auditors. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which also
appear, together with the independent auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in its Annual
Report, which will be made available upon request and without charge.
FEBRUARY 1, 1993
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING)
NOVEMBER 30, TO
1994 NOVEMBER 30, 1993
------------ -----------------
NET ASSET VALUE BEGINNING OF PERIOD............ $10.260 $10.270
------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income--net......................... 0.431 0.371
Realized gains (losses) on investments--net.... (1.276) 0.309
------- -------
Total income (loss) from investment operations. (0.845) 0.680
------- -------
LESS DISTRIBUTIONS
Dividends from investment income--net.......... (0.505) (0.371)
Distributions in excess of investment income-- 0 (0.079)
net(b).........................................
Distributions from realized gain on 0 (0.240)
investments--net ..............................
Tax basis return of capital.................... (0.030) 0
------- -------
Total distributions............................ (0.535) (0.690)
------- -------
Net asset value end of period.................. $ 8.880 $10.260
======= =======
TOTAL RETURN(c)................................ (8.52%) 6.70%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses............ 1.89% 1.94%(a)
Investment income--net....................... 4.52% 4.41%(a)
Portfolio turnover rate........................ 98% 47%
Net assets end of period (thousands)........... $23,230 $27,261
- ---------
(a) Annualized.
(b) Effective December 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis investment income--net
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis gains on a
temporary basis) are presented as "Distributions in excess of realized
gains." For the period ended November 30, 1993, distributions in excess of
book basis net income were charged to paid in capital.
(c) Excluding applicable sales charge.
<PAGE>
THE FUND
The Fund is an open-end, diversified management investment company commonly
known as a mutual fund. The Fund was formed as a Massachusetts business trust on
October 24, 1986. The Fund is one of twenty funds managed by Keystone
Management, Inc. ("Keystone Management"), its investment manager, and one of
thirty funds advised by Keystone Investment Management Company (formerly named
Keystone Custodian Funds, Inc.) ("Keystone"), the Fund's investment adviser.
Keystone and Keystone Management are, from time to time, collectively referred
to as "Keystone."
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks the highest possible current income, exempt from federal income
taxes, while preserving capital.
PRINCIPAL INVESTMENT
The Fund invests substantially all and, under ordinary circumstances, at least
80% of its assets in federally tax-exempt obligations, including municipal bonds
and notes and tax-exempt commercial paper (municipal bonds), 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, in the
opinion of counsel to the issuers of such bonds, exempt from federal income
taxes. Municipal bonds include debt obligations issued by or on behalf of a
political subdivision of the U.S. or any agency or instrumentality thereof to
obtain funds for various public purposes. In addition, municipal bonds include
certain types of industrial development bonds that have been or may be issued by
or on behalf of public 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
specific revenue source, such as the user of the facility. Since the Fund
considers preservation of capital as well as the level of tax exempt income, the
Fund may realize less income than a fund willing to expose shareholders' capital
to greater risk.
The 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
bonds, the income from which, while exempt from federal income tax under Section
103 of the Internal Revenue Code (the "Code"), is includable in the calculation
of the federal alternative minimum tax; and (3) "private activity" (private
purpose) bonds, the income from which is not exempt from federal income tax. The
Fund will not invest in private activity (private purpose) bonds and, except as
described under "Other Eligible Securities," will not invest in qualified
"private activity" industrial development bonds.
The Fund invests in municipal bonds only if, at the date of investment, they
are rated within the four highest grades by Standard & Poor's Corporation
("S&P") (AAA, AA, A and BBB), by Moody's Investors Service, Inc. ("Moody's")
(AAA, AA, A and BAA) by Fitch Investor Services, Inc. -- Municipal Division
("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 some speculative characteristics.
While the Fund may invest in securities of any maturity, it is currently
expected that the 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 SECURITIES
The 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 given by S&P, PRIME-1, the
highest grade given 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 having 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.; and (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.
The Fund may enter into repurchase and reverse repurchase agreements, purchase
and sell securities and currencies on a when issued and delayed delivery basis,
write covered call and put options and purchase call and put options, including
purchasing put or call options to close out existing positions, and may employ
new investment techniques with respect to such options. The Fund may also engage
in currency and other financial futures contracts and related options
transactions for hedging purposes and not for speculation and may employ new
investment techniques with respect to such futures contracts and related
options. In addition, the Fund may invest in obligations denominated in foreign
currencies that are exempt from federal income tax and may use subsequently
developed investment techniques that are related to any of its investment
policies.
In addition to the options and futures contracts mentioned above, only if it
is consistent with its investment objective, the Fund may also invest in certain
other types of "derivative instruments," including structured securities.
For further information about the types of investments and investment
techniques available to the Fund, including the associated risks, see
"Additional Investment Information" and the statement of additional information.
Of course, there can be no assurance that the Fund will achieve its investment
objective since there is uncertainty in every investment.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVE
The investment objective of the Fund and the requirement that the Fund invest,
under ordinary circumstances, at least 80% of its assets in federally tax-exempt
obligations are fundamental and neither may be changed without the vote of a
majority of the 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 Fund's outstanding shares
are represented or (2) more than 50% of the outstanding shares).
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental restrictions summarized below,
which may not be changed without the vote of a 1940 Act majority of the Fund's
outstanding shares. These restrictions and certain other fundamental and
nonfundamental restrictions are contained in the statement of additional
information. Unless otherwise stated, all references to the Fund's assets are in
terms of current market value.
Generally, the Fund may not do the following:
(1) purchase any security (other than U.S. government securities) of any
issuer if as a result more than 5% of its total assets would be invested in
securities of the issuer, except that up to 25% of its total assets may be
invested without regard to this limit;
(2) borrow money or enter into reverse repurchase agreements, except that
the Fund may enter into reverse repurchase agreements or borrow money from
banks for temporary or emergency purposes in 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;
(3) purchase any security (other than U.S. government securities) of any
issuer if as a result more than 25% of its total assets would be invested in a
single industry including industrial development bonds from the same facility
or similar types of facilities; governmental issuers of municipal bonds are
not regarded as members of an industry, and the Fund may invest more than 25%
of its assets in industrial development bonds; and
(4) 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.
As a matter of practice, the Fund 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 second investment
restriction above.
The foregoing is only a summary of the Fund's investment restrictions and
policies. See the statement of additional information for details and the full
text of the Fund's investment restrictions and related policies.
RISK FACTORS
GENERAL
Investing in the Fund involves the risk inherent to investing in any security,
i.e., the net asset value of a share of the Fund can increase or decrease in
response to changes in economic conditions, interest rates and the market's
perception of the underlying portfolio securities of the Fund.
By itself, the Fund does not constitute a balanced investment program and is
not designed for investors seeking capital appreciation or maximum tax-exempt
income irrespective of fluctuations in principal or marketability. Shares of the
Fund would not be suitable for tax-exempt institutions and may not be suitable
for certain retirement plans that are unable to benefit from the Fund's
federally tax-exempt dividends. In addition, the Fund may not be an appropriate
investment for entities that are "substantial users" of facilities financed by
industrial development bonds or related persons thereof.
MUNICIPAL OBLIGATIONS
The Fund's ability to achieve its objective depends partially on the prompt
payment by issuers of the interest on and principal of the municipal bonds held
by the Fund. A moratorium, default or other nonpayment of interest or principal
when due on any municipal bond, in addition to affecting the market value and
liquidity of that particular security, could affect the market value and
liquidity of other municipal bonds held by the Fund. In addition, the market for
municipal bonds is often thin and can be temporarily affected by large purchases
and sales, including those by the Fund.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal bonds, and similar proposals may well be introduced in the
future. If such a proposal were enacted, the availability of municipal bonds for
investment by the Fund and the value of the Fund's portfolio could be materially
affected. In which event, the Fund would reevaluate its investment objective and
policies and consider changes in the structure of the Fund or dissolution.
OTHER CONSIDERATIONS
The market value of fixed income securities in which the Fund may invest may
vary inversely to changes in prevailing interest rates.
The Fund has undertaken to a state securities authority to disclose that zero
coupon securities pay no interest to holders prior to maturity, and the interest
on these securities is reported as income to the Fund and distributed to its
shareholders. These distributions must be made from the Fund's cash assets or,
if necessary, from the proceeds of sales of portfolio securities. The Fund 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. If and when the Fund invests in zero coupon bonds, the Fund does not
expect to have enough zero coupon bonds to have a material effect on dividends.
PRICING SHARES
The net asset value of a Fund share is computed each day on which the New York
Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. eastern time for the purpose of pricing Fund
shares) except on days when changes in the value of the Fund's portfolio
securities do not affect the current net asset value of its shares. The Exchange
currently is closed on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is arrived at by determining the value
of the Fund's assets, subtracting its liabilities and dividing the result by the
number of its shares outstanding.
The Fund values municipal bonds on the basis of valuations provided by a
pricing service, approved by the Fund's Board of Trustees, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value. The Fund values short-term investments with
maturities of sixty days or less when purchased at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of discount),
which, when combined with accrued interest, approximates market. Short-term
investments maturing in more than sixty days when purchased that are held on the
sixtieth day prior to maturity are valued at amortized cost (market value on the
sixtieth day adjusted for amortization of premium or accretion of discount),
which, when combined with accrued interest, approximates market; and which in
any case reflects fair value as determined by the Fund's Board of Trustees. All
other investments are valued at market value or, where market quotations are not
readily available, at fair value as determined in good faith according to
procedures established by the Board of Trustees.
DIVIDENDS AND TAXES
The Fund intends to declare dividends from net investment income monthly and
to distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains annually. All dividends and
distributions will be payable in additional shares of that class of shares upon
which the dividend or distribution is based, or, at the shareholder's option, in
cash. Shareholders who have not opted to receive cash prior to the record date
for any 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 the day on the
record date after adjustment for the distribution. Net asset value is used in
computing the number of shares in both capital gains and income distribution
reinvestments. Account statements and/or checks as appropriate will be mailed to
shareholders within seven days after the Fund pays the distribution. Unless the
Fund receives instructions to the contrary from a shareholder before the record
date, it will assume that the shareholder wishes to receive that distribution
and future capital gains and income distributions in shares. Instructions
continue in effect until changed in writing.
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 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.
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Code. The Fund qualifies if, among other things, it
distributes to its shareholders at least 90% of its net investment income for
its fiscal year. The Fund also intends to make timely distributions, if
necessary, sufficient in amount to avoid the nondeductible 4% excise tax imposed
on a regulated investment company when it fails to distribute, with respect to
each calendar year, at least 98% of its ordinary income for such calendar year
and 98% of its net capital gains for the one-year period ending on October 31 of
such calendar year. Any such distribution would be (1) declared in October,
November or December to shareholders of record in such a month, (2) paid by the
following January 31, and (3) includable in the taxable income of the
shareholder for the year in which such distributions were declared. If the Fund
qualifies and if it distributes substantially all of its net investment income
and net capital gains, if any, to shareholders, it will be relieved of any
federal income tax liability.
As of April 1, 1995, in compliance with a recent ruling issued by the Internal
Revenue Service ("IRS"), the Fund treats its 12b-1 fees for tax purposes as
operating expenses rather than capital charges.
The Fund expects that substantially all of its dividends will be "exempt
interest dividends," which will be treated by the shareholder as excludable from
federal gross income. In order to pay exempt interest dividends, at the close of
each quarter, at least 50% of the value of the Fund's assets must consist of
federally tax-exempt obligations. An exempt interest dividend is any dividend or
part thereof (other than a capital gain dividend) paid by the Fund with respect
to its net federally excludable municipal bond interest and designated as an
exempt interest dividend in a written notice mailed to each shareholder not
later than 60 days after the close of its taxable year. The percentage of the
total dividends paid by the Fund with respect to any taxable year that qualifies
as exempt interest dividends will be the same for all shareholders receiving
dividends with respect to such year. If you receive an exempt interest dividend
with respect to any share and such share is held for six months or less, any
loss on the sale or exchange of such share will be disallowed to the extent of
the exempt interest dividend amount.
Any shareholder who may be a "substantial user" of a facility financed with an
issue of tax-exempt obligations or a "related person" to such a user should
consult his tax adviser concerning his qualification to receive exempt interest
dividends should the Fund hold obligations financing such facility.
Under the Tax Reform Act of 1986, interest on certain "private activity bonds"
issued after August 7, 1986, although otherwise tax exempt, is treated as a tax
preference item for alternative minimum tax purposes. Under regulations to be
promulgated, the Fund's exempt interest dividends will be treated the same way
to the extent attributable to interest paid on such private activity bonds.
Corporate shareholders should also be aware that the receipt of exempt interest
dividends could subject them to alternative minimum tax under the provisions of
Section 56(g) of the Code.
Some or all of the Fund's exempt interest dividends may be subject to state
income taxes. The Fund will report to shareholders on a state by state basis the
sources of its exempt interest dividends.
Since none of the Fund's income will consist of corporate dividends, no
distributions will qualify for the corporate dividends received deduction.
The Fund intends to distribute its net capital gains as capital gain
dividends; such dividends are treated by shareholders as long-term capital
gains. Such distributions will be designated as capital gain dividends by a
written notice mailed to each shareholder no later than 60 days after the close
of the Fund's taxable year. If a shareholder receives a capital gain dividend
and holds his shares for six months or less, then any allowable loss on
disposition of such shares will be treated as a long-term capital loss to the
extent of such capital gain dividend.
Interest on indebtedness incurred or continued by shareholders to purchase or
carry shares of the Fund will not be deductible for federal income tax purposes
to the extent of the portion of the interest expense relating to exempt interest
dividends; that portion is determined by multiplying the total amount of
interest paid or accrued on the indebtedness by a fraction, the numerator of
which is the exempt interest dividends received by a shareholder in his taxable
year and the denominator of which is the sum of the exempt interest dividends
and the taxable distributions out of the Fund's investment income and long-term
capital gains received by the shareholder.
The Fund may acquire an option to "put" specified securities to municipal bond
dealers or issuers from whom the securities are purchased. It is expected that
the 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 Fund, and the purchase prices must be allocated
between such securities and the put based upon their respective fair market
values. The IRS has not issued a published ruling on this matter and could reach
a different conclusion.
As mentioned above, at the end of each quarter, at least 50% of the value of
the Fund's assets must be invested in municipal bonds in order for distributions
to qualify as exempt interest dividends. Under particularly unusual
circumstances, such as when the Fund is in a prolonged defensive investment
position, it is possible that no portion of the Fund's distributions of income
to its shareholders for a fiscal year would be exempt from federal income tax;
however, the Fund does not presently anticipate that such unusual circumstances
will occur.
The foregoing is only a summary of some of the important tax considerations
generally affecting the Fund and its shareholders. No attempt is made to present
a detailed explanation of the federal income tax treatment of the Fund or its
shareholders, and this discussion is not intended as a substitute for careful
tax planning. Accordingly, potential investors in the Fund are urged to consult
their tax advisers with specific reference to their own tax situation.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the Fund's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Fund.
Subject to the general supervision of the Board of Trustees, Keystone
Management, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
serves as investment manager to the Fund and is responsible for the overall
management of the Fund's business and affairs.
INVESTMENT MANAGER
Keystone Management, the Fund's investment manager, organized in 1989, is a
wholly-owned subsidiary of Keystone. Its directors and principal executive
officers have been affiliated with Keystone, a seasoned investment adviser, for
a number of years. Keystone Management also serves as investment manager to most
of the other Keystone America Funds and to certain other funds in the Keystone
Investments Family of Funds.
Pursuant to its Investment Management Agreement with the Fund (the "Management
Agreement"), Keystone Management has delegated its investment management
functions, except for certain administrative and management services, to
Keystone and has entered into an Investment Advisory Agreement with Keystone
(the "Advisory Agreement") under which Keystone provides investment advisory and
management services to the Fund. Services performed by Keystone Management
include (1) performing research and planning with respect to (a) the Fund's
qualification as a regulated investment company under Subchapter M of the Code,
(b) tax treatment of the Fund's portfolio investments, (c) tax treatment of
special corporate actions (such as reorganizations), (d) state tax matters
affecting the Fund, and (e) the Fund's distributions of income and capital
gains; (2) preparing the Fund's federal and state tax returns; (3) providing
services to the Fund's shareholders in connection with federal and state
taxation and distributions of income and capital gains; and (4) storing
documents relating to the Fund's activities.
The Fund pays Keystone Management a fee for its services at the annual rate
set forth below:
Aggregate Net Asset
Management Value of the Shares
Fee Income of the Fund
- ------------------------------------------------------------------------------
2.0% of
Gross Dividend and
Interest Income Plus
0.50% of the first $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
computed as of the close of business each business day and paid or accrued
daily. During the fiscal year ended November 30, 1994, the Fund paid or accrued
to Keystone Management investment management and administrative services fees of
$1,005,305, which represented 0.61% of the Fund's average net assets. Of such
amount paid to Keystone Management, $854,509 was paid to Keystone for its
services to the Fund.
INVESTMENT ADVISER
Keystone, the Fund's investment adviser, located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034, has provided investment advisory and
management services to investment companies and private accounts since it was
organized in 1932. Keystone is a wholly-owned subsidiary of Keystone
Investments, Inc. (formerly named Keystone Group, Inc.) ("Keystone
Investments"), 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation predominantly owned by current and
former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in a
number of voting trusts, the trustees of which are George S. Bissell, Albert H.
Elfner, III, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Management, Keystone, their affiliates and the Keystone
Investments Family of Funds.
Pursuant to the Advisory Agreement, Keystone receives for its services an
annual fee representing 85% of the management fee received by Keystone
Management under the Management Agreement.
The Management Agreement and the Advisory Agreement continue in effect from
year to year only so long as such continuance is specifically approved at least
annually by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund. In either case, the terms of the Management Agreement and
the Advisory Agreement and continuance thereof must be approved by the vote of a
majority of the Fund's Independent Trustees in person at a meeting called for
the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Board of Trustees
of the Fund, Keystone Management or Keystone, or by a vote of the shareholders
of the Fund. The Management Agreement and the Advisory Agreement will terminate
automatically upon assignment.
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and management fees discussed above, the principal expenses that the Fund is
expected to pay include expenses relating to certain of its Trustees, its
transfer, dividend disbursing and shareholder servicing agent, its custodian,
its independent auditors and legal counsel to its Board of Trustees; fees
payable to government agencies, including registration and qualification fees of
the Fund and its shares under federal and state securities laws; and certain
extraordinary expenses. In addition, each class will pay all of the expenses
attributable to it. Such expenses are currently limited to Distribution Plan
expenses. The Fund also pays its brokerage commissions, interest charges and
taxes.
For the fiscal year ended November 30, 1994, the Fund's Class A shares paid
1.13% of average net assets in expenses. For the fiscal year ended November 30,
1994, the Fund's Class B and Class C shares paid 1.88% and 1.89%, respectively,
of average net assets in expenses.
During the fiscal year ended November 30, 1994, the Fund paid or accrued to
Keystone Investor Resource Center, Inc. ("KIRC"), the Fund's transfer and
dividend disbursing agent, and Keystone Investments $18,676 as reimbursement for
certain accounting and printing services and paid or accrued to KIRC $232,940
for shareholder services. KIRC is a wholly-owned subsidiary of Keystone.
PORTFOLIO MANAGER
Betsy A. Blacher has been the Fund's portfolio manager since 1990. She is a
Keystone Senior Vice President and Group Head and has more than 15 years of
investment experience.
SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for the Fund,
Keystone may follow a policy of considering as a factor the number of shares of
the Fund sold by the broker-dealer. In addition, broker-dealers may, from time
to time, be affiliated with the Fund, Keystone, the Fund's principal underwriter
or their affiliates.
The Fund may pay higher commissions to broker-dealers that provide research
services. Keystone may use these services in advising the Fund as well as in
advising its other clients.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rates for the fiscal years ended November 30,
1994 and 1993 were 98% and 47%, respectively. High portfolio turnover may
involve correspondingly greater brokerage commissions and other transaction
costs, which would be borne directly by the Fund, as well as additional gains
and/or losses to shareholders. For additional information about brokerage and
distributions, see the statement of additional information.
HOW TO BUY SHARES
Shares of the Fund may be purchased from any broker-dealer that has a selling
agreement with Keystone Investment Distributors Company (formerly named Keystone
Distributors, Inc.) (the Principal Underwriter), the Fund's principal
underwriter. The Principal Underwriter, a wholly-owned subsidiary of Keystone,
is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of the Fund by
mailing to the Fund, c/o KIRC, P.O. Box 2121, Boston, Massachusetts 02106-2121,
a completed account application and a check payable to the Fund. Or, you may
telephone 1-800-343-2898 to obtain the number of an account to which you can
wire or electronically transfer funds and then send in a completed account
application. Subsequent investments in Fund shares in any amount may be made by
check, by wiring federal funds or by an electronic funds transfer ("EFT").
Orders for the purchase of Fund shares will be confirmed at the offering price
equal to the net asset value per share next determined after receipt of the
order in proper form by the Principal Underwriter (generally as of the close of
the Exchange on that day) plus, in the case of Class A shares, the applicable
sales charge. Orders received by dealers or other firms prior to the close of
the Exchange and received by the Principal Underwriter prior to the close of its
business day will be confirmed at the offering price effective as of the close
of the Exchange on that day. The Fund reserves the right to determine the net
asset value more frequently than once a day if deemed desirable. Dealers and
other financial services firms are obligated to transmit orders promptly.
Orders for shares received other than as stated above will receive the
offering price equal to the net asset value per share next determined (generally
the next business day's offering price) plus, in the case of Class A shares, the
applicable sales charge.
The initial purchase must be at least $1,000 for Class A, Class B and Class C
shares. There is no minimum amount for subsequent purchases.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free 1-800-
343-2898 or writing to KIRC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
Generally, the Fund offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class A
shares are not subject to a deferred sales charge when they are redeemed except
as follows: Class A shares purchased on or after April 10, 1995 (1) in an amount
equal to or exceeding $1,000,000 or (2) by a corporate qualified retirement plan
or a non-qualified deferred compensation plan sponsored by a corporation having
100 or more eligible employees (a "Qualifying Plan"), in either case without a
front end sales charge, will be subject to a contingent deferred sales charge
for the 24 month period following the date of purchase. Certain Class A shares
purchased prior to April 10, 1995 may be subject to a deferred sales charge upon
redemption during the one year period following the date of purchase.
CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a contingent deferred sales charge if
they are redeemed. Class B shares purchased on or after June 1, 1995 are subject
to a deferred sales charge upon redemption during the 72 month period following
the month of purchase. Class B shares purchased prior to June 1, 1995 are
subject to a deferred sales charge upon redemption during the four calendar
years following purchase. Class B shares purchased on or after June 1, 1995 that
have been outstanding for eight years following the month of purchase will
automatically convert to Class A shares without imposition of a front-end sales
charge or exchange fee. Class B shares purchased prior to June 1, 1995 will
retain their existing conversion rights.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with the Principal
Underwriter.
Each class of shares, pursuant to its respective Distribution Plan, pays an
annual service fee of 0.25% of the Fund's average daily net assets attributable
to that class. In addition to the 0.25% service fee, the Class B and C
Distribution Plans provide for the payment of an annual distribution fee of up
to 0.75% of the average daily net assets attributable to their respective
classes.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spread the cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares, depending on
the amount of the purchase and the intended length of investment; in which case,
100% of the purchase price is invested immediately. The Fund will not normally
accept any purchase of Class B shares in the amount of $250,000 or more and will
not normally accept any purchase of Class C shares in the amount of $1,000,000
or more.
---------------------------------------
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge as
follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED(1) OFFERING PRICE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 ..................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000 ........ 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ........ 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 ...... 1.50% 1.52% 1.50%
</TABLE>
- ---------
(1) Rounded to the nearest one-hundredth percent.
---------------------------------------
Purchases of the Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan will be at net
asset value without the imposition of a front-end sales charge (each such
purchase, an "NAV Purchase").
With respect to NAV Purchases, the Principal Underwriter will pay broker/
dealers or others concessions based on (1) the investor's cumulative purchases
during the one-year period beginning with the date of the initial NAV Purchase
and (2) the investor's cumulative purchases during each subsequent one-year
period beginning with the first NAV Purchase following the end of the prior
period. For such purchases, concessions will be paid at the following rate:
1.00% of the investment amount up to $2,999,999; plus 0.50% of the investment
amount between $3,000,000 and $4,999,999; plus 0.25% of the investment amount
over $4,999,999.
Class A shares acquired on or after April 10, 1995 in an NAV Purchase are
subject to a contingent deferred sales charge of 1.00% upon redemption during
the 24 month period commencing on the date the shares were originally purchased.
Certain Class A shares purchased without a front-end sales charge prior to April
10, 1995 are subject to a contingent deferred sales charge of 0.25% upon
redemption during the one year period commencing on the date such shares were
originally purchased.
The sales charge is paid to the Principal Underwriter, which, in turn,
normally reallows a portion to your broker-dealer. In addition, your
broker-dealer currently will be paid periodic service fees at an annual rate of
up to 0.25% of the average daily net asset value of outstanding shares of Class
A maintained by such recipient outstanding on the books of the Fund for
specified periods.
Upon written notice to dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A shares
to be included in a managed fee based program (a wrap account) through broker
dealers who have entered into special agreements with the Principal Underwriter.
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 Keystone America Funds. See Exhibit A to this prospectus.
Since January 1, 1995 through June 30, 1995 and upon prior notification to the
Principal Underwriter, Class A shares may be purchased at net asset value by
clients of registered representatives within six months after the redemption of
shares of any registered open-end investment company not distributed or managed
by Keystone or its affiliates, where the amount invested represents redemption
proceeds from such unrelated registered open-end investment company, and the
shareholder either (1) paid a front end sales charge, or (2) was at some time
subject to, but did not actually pay, a contingent deferred sales charge with
respect to the redemption proceeds.
In addition, upon prior notification to the Principal Underwriter, Class A
shares may be purchased at net asset value by clients of registered
representatives within six months after a change in the registered
representative's employment, where the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by Keystone or its affiliates; and the shareholder either
(1) paid a front end sales charge, or (2) was at some time subject to, but did
not actually pay, a contingent deferred sales charge with respect to the
redemption proceeds.
CLASS A DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures, currently
limited to 0.25% annually of the average daily net asset value of Class A
shares, to pay expenses associated with the distribution of Class A shares.
Amounts paid by the Fund to the Principal Underwriter under the Class A
Distribution Plan are currently used to pay others, such as dealers, service
fees at an annual rate of up to 0.25% of the average daily net asset value of
Class A shares maintained by such recipients outstanding on the books of the
Fund for specified periods.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge.
With respect to Class B shares purchased on or after June 1, 1995, the Fund,
with certain exceptions, imposes a deferred sales charge in accordance with the
following schedule:
DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------
First twelve month period following month of
purchase ................................... 5.00%
Second twelve month period following month of
purchase ................................... 4.00%
Third twelve month period following month of
purchase ................................... 3.00%
Fourth twelve month period following month of
purchase ................................... 3.00%
Fifth twelve month period following month of
purchase ................................... 2.00%
Sixth twelve month period following month of
purchase ................................... 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares purchased prior to June 1, 1995, the Fund, with
certain exceptions, imposes a deferred sales charge of 3.00% on shares redeemed
during the calendar year of purchase and the first calendar year after the year
of purchase; 2.00% on shares redeemed during the second calendar year after the
year of purchase; and 1.00% on shares redeemed during the third calendar year
after the year of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Contingent Deferred Sales Charges and Waiver of
Sales Charges" below.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years following the month of purchase will automatically convert to
Class A shares (which are subject to a lower Distribution Plan charge) without
imposition of a front-end sales charge or exchange fee. Class B shares purchased
prior to June 1, 1995 will similarly convert to Class A shares at the end of
seven calendar years after the year of purchase. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to KIRC.) The Class B shares so converted will no longer be subject
to the higher expenses borne by Class B shares. Because the net asset value per
share of the Class A shares may be higher or lower than that of the Class B
shares at the time of conversion, although the dollar value will be the same, a
shareholder may receive more or fewer Class A shares than the number of Class B
shares converted. Under current law, it is the Fund's opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Trustees will consider
what action, if any, is appropriate and in the best interests of the Class B
shareholders.
CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans with respect to its Class B shares
(the "Class B Distribution Plans") that provide for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares to pay expenses of the distribution of Class B shares. Payments under the
Class B Distribution Plans are currently made to the Principal Underwriter
(which may reallow all or part to others, such as dealers) (1) as commissions
for Class B shares sold and (2) as shareholder service fees. Amounts paid or
accrued to the Principal Underwriter under (1) and (2) in the aggregate may not
exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a commission
equal to 4.00% of the price paid for each Class B share sold plus the first
year's service fee in advance in the amount of 0.25% of the price paid for each
Class B share sold. Beginning approximately 12 months after the purchase of a
Class B share, the broker or other party will receive service fees at an annual
rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient outstanding on the books of the Fund for specified
periods. See "Distribution Plans" below.
With respect to the Fund's Class B shares only, for the period June 1, 1995 to
August 31, 1995, the Principal Underwriter will reallow an increased commission
equal to 4.75% of the price paid for each Class B share sold to those
broker/dealers or others who allow their individual selling representatives to
participate in the additional 0.75% commission.
CLASS C SHARES
Class C shares are available only through dealers who have special dealer
agreements with the Principal Underwriter. Class C shares are offered at net
asset value, without an initial sales charge. With certain exceptions, the Fund
imposes a deferred sales charge of 1.00% on shares redeemed within one year
after the date of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter. If imposed, the deferred sales charge is deducted from the
redemption proceeds otherwise payable to you. The deferred sales charge is
retained by the Principal Underwriter. See "Contingent Deferred Sales Charges
and Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to its Class C shares
("Class C Distribution Plan") that provides for expenditures at an annual rate
of up to 1.00% of the average daily net asset value of Class C shares to pay
expenses of the distribution of Class C shares. Payments under the Class C
Distribution Plan are currently made to the Principal Underwriter (which may
reallow all or part to others, such as dealers) (1) as commissions for Fund
shares sold and (2) as shareholder service fees. Amounts paid or accrued to the
Principal Underwriter under (1) and (2) in the aggregate may not exceed the
annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a commission
in the amount of 0.75% of the price paid for each Class C share sold, plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class C share sold, and, beginning approximately fifteen months after
purchase, a commission at an annual rate of 0.75% (subject to NASD rules -- see
"Distribution Plans") plus service fees at an annual rate of 0.25%,
respectively, of the average daily net asset value of Class C shares maintained
by such recipients outstanding on the books of the Fund for specified periods.
See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE
AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge 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 contingent deferred sales charge is imposed when you redeem
amounts derived from (1) increases in the value of your account above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) certain shares with respect to which the Fund did not pay a commission
on issuance, including shares acquired through reinvestment of dividend income
and capital gains distributions; (3) certain Class A shares held for more than
one or two years, as the case may be, from the date of purchase; (4) Class B
shares held more than four consecutive calendar years or more than 72 months
after the month of purchase, as the case may be; or (5) Class C shares held for
more than one year from the date of purchase. Upon request for redemption,
shares not subject to the contingent deferred sales charge will be redeemed
first. Thereafter, shares held the longest will be the first to be redeemed.
The Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a contingent deferred sales charge to
certain Directors, Trustees, officers and employees of the Fund and Keystone and
certain of their affiliates; registered representatives of firms with dealer
agreements with the Principal Underwriter; and a bank or trust company acting as
a trustee for a single account.
With respect to Class A shares purchased by a Qualifying Plan at net asset
value or Class C shares purchased by a Qualifying Plan, no contingent deferred
sales charge 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 contingent deferred sales charge is imposed on a redemption of
shares of the Fund in the event of (1) death or disability of the shareholder;
(2) a lump-sum distribution from a 401(k) plan or other benefit plan qualified
under the Employee Retirement Income Security Act of 1974 ("ERISA"); (3)
automatic withdrawals from ERISA plans if the shareholder is at least 59 1/2
years old; (4) involuntary redemptions of accounts having an aggregate net asset
value of less than $1,000; (5) automatic withdrawals under an automatic
withdrawal plan of up to 1.5% 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.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
From time to time, the Principal Underwriter may provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
dealers whose representatives have sold or are expected to sell significant
amounts of the Fund. In addition, dealers may, from time to time, receive
additional cash payments. The Principal Underwriter may provide written
information to dealers with whom it has dealer agreements that relates to sales
incentive campaigns conducted by such dealers for their representatives as well
as financial assistance in connection with pre-approved seminars, conferences
and advertising. No such programs or additional compensation will be offered to
the extent they are prohibited by the laws of any state or any self-regulatory
agency, such as the NASD. Dealers to whom substantially the entire sales charge
on Class A shares is reallowed may be deemed to be underwriters as that term is
defined under the Securities Act of 1933.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to dealers that satisfy certain criteria established
from time to time by the Principal Underwriter. These conditions relate to
increasing sales of shares of the Keystone funds over specified periods and
certain other factors. Such payments may, depending on the dealer's satisfaction
of the required conditions, be periodic and may be up to 0.25% of the value of
shares sold by such dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payment allowed to dealers for the sale of shares, as described above) to banks
and other financial services firms that facilitate transactions in shares of the
Fund for their clients.
The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
what action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
As discussed above, the Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and Class
C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD limits the amount that a fund may pay annually in distribution costs
for sale of its shares and shareholder service fees. NASD rules limit annual
expenditures to 1% of the aggregate average daily net asset value of a fund's
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 rules also limit the aggregate
amount that the Fund may pay for such distribution costs to 6.25% of gross share
sales since the inception of the 12b-1 Distribution Plan, plus interest at the
prime rate plus 1% on such amounts (less any contingent deferred sales charges
paid by shareholders to the Principal Underwriter) remaining unpaid from time to
time.
The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plan that exceed current annual payments permitted to be received by the
Principal Underwriter from the Fund. The Principal Underwriter intends to seek
full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits. If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by the Distribution Plan. If the Distribution Plan is
terminated, the Principal Underwriter will ask the Independent Trustees to take
whatever action they deem appropriate under the circumstances with respect to
payment of such amounts.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has 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 Plan, the Fund may be subject to possible
adverse distribution consequences.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class.
Unreimbursed distribution expenses under the Class B Distribution Plan at
November 30, 1994 were $1,996,948 (6.92% of Class B net assets). Unreimbursed
distribution expenses under the Class C Distribution Plan at November 30, 1994
were $2,087,302 (8.99% of Class C net assets).
For the year ended November 30, 1994, the Fund paid the Principal Underwriter
$269,046, $241,979 and $279,001 pursuant to its Class A, Class B and Class C
Distribution Plans, respectively.
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.
HOW TO REDEEM SHARES
Fund shares may be redeemed for cash at their redemption value upon written
order sent by you to the Fund, c/o Keystone Investor Resource Center, Inc.
("KIRC"), and presentation to the Fund of a properly endorsed share certificate
if certificates have been issued. Your signature(s) on the written order and
certificates must be guaranteed as described below. The redemption value is the
net asset value per share adjusted for fractions of a cent and may be more or
less than your cost depending upon changes in the value of the Fund's portfolio
securities between purchase and redemption. In order to redeem by telephone you
must have completed the authorization in your account application.
REDEMPTION OF SHARES IN GENERAL
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. In such a case, the Fund will mail the redemption
proceeds upon clearance of the purchase check, which may take up to 15 days or
more. Any delay may be avoided by purchasing shares with a certified check or by
bank wire of funds or EFT. Although the mailing of a redemption check or wiring
or EFT of redemption proceeds may be delayed, the redemption value will be
determined and the redemption processed in the ordinary course of business upon
receipt of proper documentation. In such a case, after the redemption and prior
to the release of the proceeds, no appreciation or depreciation will occur in
the value of the redeemed shares, and no interest will be paid on the redemption
proceeds. If the payment of a redemption check has been delayed, the check will
be mailed promptly after good payment has been collected.
The Fund computes the redemption value at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption, less any applicable contingent deferred sales
charge (as described above), will be made within seven days thereafter except as
discussed herein.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from dealers at the redemption value described above computed
on the day the Principal Underwriter receives the order. The Principal
Underwriter will pay the redemption proceeds, less any applicable deferred sales
charge, to the broker-dealer placing the order within seven days thereafter
assuming it has received proper documentation. The Principal Underwriter charges
no fees for this service, but your broker-dealer may do so.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND KIRC'S POLICIES. The Fund and KIRC may waive this
requirement, but may also require additional documents in certain cases.
Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less where the account address of record has been the
same for a minimum period of 30 days. The Fund and KIRC reserve the right to
withdraw this waiver at any time.
If the Fund receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Fund cannot execute the
order. In such cases, the Fund will request the missing information from you and
process the order on the day such information is received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. To engage in telephone
transactions generally, you must complete the appropriate sections of the Fund's
application.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days. If you cannot reach the Fund by telephone, you should follow the
procedures for redeeming by mail or through a broker as set forth above.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No deferred
sales charges are applied to such redemptions.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay for all
redemptions in cash, the Fund may authorize payment to be made in portfolio
securities or other property. The Fund has obligated itself, however, under the
1940 Act to redeem for cash all shares presented for redemption by any one
shareholder in any 90-day period up to the lesser of $250,000 or 1% of the
Fund's net assets. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share. Shareholders receiving such securities would incur brokerage costs when
these securities are sold.
GENERAL
The Fund reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Fund, KIRC nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, KIRC nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.
The Fund may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Fund
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
The Keystone Automated Response 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
KARL by dialing toll-free 1-800-346-3858 on any touch tone telephone, 24 hours a
day, seven days a week.
EXCHANGES
If you have obtained the appropriate prospectus, you may exchange shares of
the Fund for shares of certain other Keystone America Funds and Keystone Liquid
Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone America
Funds and Class A shares of KLT;
Class B shares may be exchanged for the same type of Class B shares of other
Keystone America Funds and the same type of Class B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone America
Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are
(1) Class A shares acquired in an NAV purchase or otherwise without a front
end sales charge,
(2) Class B shares that have been held for less than 72 months or four years,
as the case may be, or
(3) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares by calling KIRC at
1-800-343-2898, by writing KIRC or by calling KARL at 1-800-346-3858. However,
you must complete the Telephone Exchanges section of the application to enjoy
the telephone exchange privileges. Shares purchased by check are eligible for
exchange after 15 days. There is a $10.00 fee for each exchange, except that
there is no fee for exchange orders received by the Fund directly from an
individual shareholder using KARL. If the shares being tendered for exchange are
still subject to a deferred sales charge, such charge will carry over to the
shares being acquired in the exchange transaction. The Fund reserves the right,
after 60 days' notice to shareholders, to terminate this exchange offer,
including the right to change the fee for each exchange.
Orders to exchange a certain class of shares of the Fund for the corresponding
class of shares of KLT will be executed by redeeming the shares of the Fund and
purchasing the corresponding class of shares of KLT at the net asset value of
KLT shares next determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. In all other
cases, orders for exchanges received by the Fund prior to 4:00 p.m. eastern time
on any day the funds are open for business will be executed at the respective
net asset values determined as of the close of business that day. Orders for
exchanges received after 4:00 p.m. eastern time on any business day will be
executed at the respective net asset values determined at the close of the next
business day.
An excessive number of exchanges may be disadvantageous to the Fund.
Therefore, the Fund, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase shares in any amount and to redeem up to $50,000 worth of
shares. You can use Keystone America Money Line like an "electronic check" to
move money between your bank account and your account in the Fund with one
telephone call. You must allow two business days after the call for the transfer
to take place. For money recently invested, you must allow normal check clearing
time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in your
Keystone America account. Once proper authorization is given, your bank account
will be debited to purchase shares in the Fund. You will receive confirmation
from the Principal Underwriter for every transaction.
To change the amount of a Keystone America Money Line or terminate the service
(which could take up to 30 days), you must write to KIRC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, and include your account number.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the Fund shares in
your account when the Automatic Withdrawal Plan is opened. Fixed withdrawal
payments are not subject to a deferred sales charge. Excessive withdrawals may
decrease or deplete the value of your account. Because of the effect of the
applicable sales charge, a Class A investor should not make continuous purchases
of the Fund's shares while participating in an Automatic Withdrawal Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America 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, which
may cause a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must have established an
account in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and 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
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on the application and indicate the Keystone America Fund(s) into which
distributions are to be invested.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at current
net asset value.
PERFORMANCE DATA
From time to time, the Fund may advertise "total return," "current yield" and
a "tax equivalent yield." ALL FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE
NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Total return and yield are computed
separately for each class of shares of the Fund. Total return refers to the
Fund's average annual compounded rates of return over specified periods
determined by comparing the initial amount invested to the ending redeemable
value of that amount. The resulting equation assumes reinvestment of all
dividends and distributions and deduction of the sales charge and all recurring
charges, if any, applicable to all shareholder accounts. The deduction of the
contingent deferred sales charge is reflected in the applicable years. The
exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period.
Tax equivalent yield is, in general, the current yield divided by a factor
equal to one minus a stated income tax rate and reflects the yield a taxable
investment would have to achieve in order to equal on an after-tax basis a tax
exempt yield.
The Fund may include comparative performance information and general mutual
fund industry information for each class of shares when advertising or marketing
the Fund's shares, such as data from Lipper Analytical Services, Inc.,
Morningstar, Inc., CDS-Weisenberger and Value Line or other financial and
industry publications.
FUND SHARES
Generally, the Fund currently issues three classes of shares, which
participate in dividends and distributions and have equal voting, liquidation
and other rights except that (1) expenses related to the distribution of each
class of shares or other expenses that the Board of Trustees may designate as
class expenses, from time to time, are borne solely by each class; (2) each
class of shares has exclusive voting rights with respect to its Distribution
Plan; (3) each class has different exchange privileges; and (4) each class
generally has a different designation.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of the Fund vote together except when
required by law to vote separately by class. The Fund does not have annual
meetings. The Fund will have special meetings, from time to time, as required
under its Declaration of Trust and under the 1940 Act. As provided in the Fund's
Declaration of Trust, shareholders have the right to remove Trustees by an
affirmative vote of two-thirds of the outstanding shares. A special meeting of
the shareholders will be held when 10% of the outstanding shares request a
meeting for the purpose of removing a Trustee. The Fund is prepared to assist
shareholders in communications with one another for the purpose of convening
such meeting as prescribed by Section 16(c) of the 1940 Act.
Under Massachusetts law, it is possible that a Fund shareholder may be held
personally liable for the Fund's obligations. The Fund's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Fund's obligations and provides indemnification from Fund
assets for any shareholder held personally liable for the Fund's obligations.
The Fund is authorized to issue additional classes or series of shares.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1515, is a
wholly-owned subsidiary of Keystone. As previously mentioned, KIRC serves as the
Fund's transfer agent and dividend disbursing agent.
When the Fund determines from its records that more than one account in the
Fund is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Fund intends, when an annual
report or a semi-annual report of the Fund is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
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 is given a
plus (+) designation.
2. SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the terms of
the notes.
3. SP-3 -- Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example, "SP
- -- 1+/A-1+").
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
1. likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. nature of and provisions of the obligation; and
3. protection afforded by and relative position of the obligation in the
event of bankruptcy reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit quality,
ratings from "AA" to "BBB" may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the successful
completion of the project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion.
D. BOND RATINGS ARE AS FOLLOWS:
1. AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
2. AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
3. A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
4. BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
A Moody's rating for municipal short-term obligations will be designated
Moody's Investment Grade or (MIG). These ratings recognize the difference
between short-term credit risk and long-term risk. Factors affecting the
liquidity of the borrower and the short-term cyclical elements are critical in
short-term ratings.
A short-term rating may also be assigned on issues with a demand feature --
variable rate demand obligation (VRDO). Such ratings will be designated as VMIG.
Short-term ratings on issues with demand features are differentiated by the use
of the VMIG symbol to reflect such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on the external
liquidity.
The note ratings are as follows:
1. MIG1/VMIG1 This designation denotes the best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
2. MIG2/VMIG2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
3. MIG3/VMIG3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
4. MIG4/VMIG4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
B. CORPORATE AND MUNICIPAL BOND RATINGS
1. Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
2. Aa -- Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long term risks appear somewhat larger than in Aaa securities.
3. A -- Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
4. Baa -- Bonds rated Baa are considered to be medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
CON. (--) -- Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (1) earnings of projects under
construction, (2) earnings of projects unseasoned in operation experience, (3)
rentals that begin when facilities are completed, or (4) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the Aa, A, and Baa groups that Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, and Baa 1.
FITCH CORPORATE AND MUNICIPAL RATINGS
A. MUNICIPAL NOTES
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally three years or less. These
include commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes. The short-term rating places greater emphasis on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
The note ratings are as follows:
1. F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
2. F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-
1+.
3. F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned the two higher ratings.
4. F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
B. CORPORATE AND MUNICIPAL BOND RATINGS
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
PLUS (+) OR MINUS (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA category.
A CONDITIONAL rating is premised on the successful completion of a project or
the occurrence of a specific event.
Debt rated BB, B, CCC, CC and C by S&P is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Debt rated C1 by S&P is debt (income bonds) on which no interest is being paid.
Debt rated D by S&P is in default and payment of interest and/ or repayment of
principal is in arrears. The Fund intends to invest in D-rated debt only in
cases where in Keystone's judgment there is a distinct prospect of improvement
in the issuer's financial position as a result of the completion of
reorganization or otherwise. Bonds that are rated Caa by Moody's are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds that are rated Ca by Moody's
represent obligations that are speculative in a high degree. Such issues are
often in default or have other market shortcomings. Bonds that are rated C by
Moody's are the lowest rated bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Debt rated BB, B, CCC, CC, and C by Fitch is regarded as speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
represents the highest degree of speculation. Debt rated DDD, DD, and D are in
default on interest and/or principal payments.
DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES AVAILABLE
TO THE FUND
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S. and the Fund may be subject to the risks associated with the
holding of such property overseas. Examples of governmental actions would be the
imposition of currency controls, interest limitations, withholding taxes,
seizure of assets or the declaration of a moratorium. Various provisions of
federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by the Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. The Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement,
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes acquired by the Fund permit the Fund to demand
payment of principal and accrued interest at any time (on not more than seven
days' notice). Notes acquired by the Fund may have maturities of more than one
year, provided that (1) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days notice, and (2) the rate of interest on
such notes is adjusted automatically at periodic intervals which normally will
not exceed 31 days, but may extend up to one year. The notes will be deemed to
have a maturity equal to the longer of the period remaining to the next interest
rate adjustment or the demand notice period. Because these types of notes are
direct lending arrangements between the lender and borrower, such instruments
are not normally traded and there is no secondary market for these notes,
although they are redeemable and thus repayable by the borrower at face value
plus accrued interest at any time. Accordingly, the Fund's right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. In connection with master demand note arrangements, Keystone considers,
under standards established by the Board of Trustees, earning power, cash flow
and other liquidity ratios of the borrower and will monitor the ability of the
borrower to pay principal and interest on demand. These notes are not typically
rated by credit rating agencies. Unless rated, the Fund may invest in them only
if at the time of an investment the issuer meets the criteria established for
commercial paper discussed in the statement of additional information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the Federal
Reserve System having at least $1 billion in assets, primary dealers in U.S.
government securities or other financial institutions believed by Keystone to be
creditworthy. Such persons must be registered as U.S. government securities
dealers with appropriate regulatory organizations. Under such agreements, the
bank, primary dealer or other financial institution agrees upon entering into
the contract to repurchase the security at a mutually agreed upon date and
price, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period. Under a repurchase agreement, the seller must maintain the value of the
securities subject to the agreement at not less than the repurchase price, such
value being determined on a daily basis by marking the underlying securities to
their market value. Although the securities subject to the repurchase agreement
might bear maturities exceeding a year, the Fund only intends to enter into
repurchase agreements that provide for settlement within a year and usually
within seven days. Securities subject to repurchase agreements will be held by
the Fund's custodian or in the Federal Reserve book entry system. The Fund does
not bear the risk of a decline in the value of the underlying security unless
the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and
losses, including (1) possible declines in the value of the underlying
securities during the period while the Fund seeks to enforce its rights thereto;
(2) possible subnormal levels of income and lack of access to income during this
period; and (3) expenses of enforcing its rights. The Board of Trustees has
established procedures to evaluate the creditworthiness of each party with whom
the Fund enters into repurchase agreements by setting guidelines and standards
of review for Keystone and monitoring Keystone's actions with regard to
repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. The Fund intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions. At
the time the Fund enters into a reverse repurchase agreement, it will establish
a segregated account with the Fund's custodian containing liquid assets such as
U.S. government securities or other high grade debt securities having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
that the Fund is obligated to repurchase may decline below the repurchase price.
Borrowing and reverse repurchase agreements magnify the potential for gain or
loss on the portfolio securities of the Fund and, therefore, increase the
possibility of fluctuation in the Fund's net asset value. Such practices may
constitute leveraging. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities and the Fund's use of
the proceeds of the reverse repurchase agreement may effectively be restricted
pending such determination. The staff of the Securities and Exchange Commission
("SEC") has taken the position that the 1940 Act treats reverse repurchase
agreements as being included in the percentage limit on borrowings imposed on a
Fund.
"WHEN ISSUED" SECURITIES
The Fund may also purchase and sell securities and currencies on a when issued
and delayed delivery basis. When issued or delayed delivery transactions arise
when securities or currencies are purchased or sold by the Fund with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield to the Fund at the time of entering into the
transaction. When the Fund engages in when issued and delayed delivery
transactions, the Fund relies on the buyer or seller, as the case may be, to
consummate the sale. Failure to do so may result in the Fund missing the
opportunity to obtain a price or yield considered to be advantageous. When
issued and delayed delivery transactions may be expected to occur a month or
more before delivery is due. However, no payment or delivery is made by the Fund
until it receives payment or delivery from the other party to the transaction. A
separate account of liquid assets equal to the value of such purchase
commitments will be maintained until payment is made. When issued and delayed
delivery agreements are subject to risks from changes in value based upon
changes in the level of interest rates, currency rates and other market factors,
both before and after delivery. The Fund does not accrue any income on such
securities or currencies prior to their delivery. To the extent the Fund engages
in when issued and delayed delivery transactions, it will do so consistent with
its investment objective and policies and not for the purpose of investment
leverage.
LOANS OF SECURITIES TO BROKER-DEALERS
The Fund may lend securities to brokers and dealers pursuant to agreements
requiring that the loans be continuously secured by cash or securities of the
U.S. government, its agencies or instrumentalities, or any combination of cash
and such securities, as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to the Fund if as a result the aggregate of all outstanding
securities loans exceeds 15% of the value of the Fund's total assets taken at
their current value. The Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other
high-grade, short-term obligations or interest bearing cash equivalents.
Although voting rights attendant to securities loaned pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted by the Fund if, in the opinion of the Fund, a material event affecting the
investment is to occur. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. Loans may
only be made to borrowers deemed to be of good standing, under standards
approved by the Board of Trustees, when the income to be earned from the loan
justifies the attendant risks.
DERIVATIVES
The Fund may use derivatives in furtherance of its investment objective.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates,
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices. Derivatives can be used
to earn income or protect against risk, or both. For example, one party with
unwanted risk may agree to pass that risk to another party who is willing to
accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Fund to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. The Fund is permitted to use derivatives for one
or more of these purposes. Each of these uses entails greater risk than if
derivatives were used solely for hedging purposes. The Fund uses futures
contracts and related options for hedging purposes. Derivatives are a valuable
tool which, when used properly, can provide significant benefit to Fund
shareholders. Keystone is not an aggressive user of derivatives with respect to
the Fund. However, the Fund may take positions in those derivatives that are
within its investment policies if, in Keystone's judgement, this represents an
effective response to current or anticipated market conditions. Keystone's use
of derivatives is subject to continuous risk assessment and control from the
standpoint of the Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options, futures,
forwards and swaps -- from which virtually any type of derivative transaction
can be created. Further information regarding options and futures, is provided
later in this section and is provided in the Fund's statement of additional
information.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. See "Structured Securities" below.
The term "derivative" is also sometimes used to describe securities involving
rights to a portion of the cash flows from an underlying pool of mortgages or
other assets from which payments are passed through to the owner of, or that
collateralize, the securities.
While the judicious use of derivatives by experienced investment managers such
as Keystone can be beneficial, derivatives also involve risks different from,
and, in certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives that investors should understand before
investing in the Fund.
* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to the Fund's interest.
* Management Risk -- Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to the Fund's portfolio and the ability to forecast price,
interest rate or currency exchange rate movements correctly.
* Credit Risk -- This is the risk that a loss may be sustained by the Fund as a
result of the failure of another party to a derivative (usually referred to as
a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, the Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
* Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risks -- Other risks in using derivatives include the risk of mispricing
or improper valuation and the inability of derivatives to correlate perfectly
with underlying assets, rates and indices. Many derivatives, in particular
privately negotiated derivatives, are complex and often valued subjectively.
Improper valuations can result in increased cash payment requirements to
counterparties or a loss of value to a Fund. Derivatives do not always
perfectly or even highly correlate or track the value of the assets, rates or
indices they are designed to closely track. Consequently, the Fund's use of
derivatives may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Fund's investment objective.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. To the extent permitted by its investment policies
and restrictions, the Fund may write (i.e., sell) covered call and put options.
By writing a call option, the Fund becomes obligated during the term of the
option to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, the Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. The Fund also may write straddles
(combinations of covered puts and calls on the same underlying security).
The Fund may only write "covered" options. This means that so long as the Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
the Fund has written options against all of its securities which are available
for writing options, the Fund may be unable to write additional options unless
it sells a portion of its portfolio holdings to obtain new securities against
which it can write options. If this were to occur, higher portfolio turnover and
correspondingly greater brokerage commissions and other transaction costs may
result. However, the Fund does not expect that this will occur.
The Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS. To the extent permitted by its investment policies and
restrictions, the Fund may purchase put or call options, including purchasing
put or call options for the purpose of offsetting previously written put or call
options of the same series.
If the Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying
security or dispose of assets held in a segregated account until the options
expire or are exercised.
An option position may be closed out only in a secondary market for an option
of the same series. Although the Fund generally will write only those options
for which there appears to be an active secondary market, there is no assurance
that a liquid secondary market will exist for any particular option at any
particular time, and for some options no secondary market may exist. In such
event, it might not be possible to effect a closing transaction in a particular
option.
Options on some securities are relatively new, and it is impossible to predict
the amount of trading interest that will exist in such options. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair the Fund's ability to
use such options to achieve its investment objective.
OPTIONS TRADING MARKETS. Options in which the Fund will trade generally are
listed on national securities exchanges. Exchanges on which such options
currently are traded include the Chicago Board Options Exchange and the New
York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any Exchange, but traded in the over-the-counter
market. Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions could fail to
meet their obligations to the Fund. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on its use of options
discussed herein, the Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.
The staff of the SEC is of the view that the premiums that the Fund pays for
the purchase of unlisted options, and the value of securities used to cover
unlisted options written by the Fund, are considered to be invested in illiquid
securities or assets for the purpose of calculating whether the Fund is in
compliance with its investment restriction relating to illiquid investments.
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and
write options on such contracts. The Fund intends to enter into such contracts
and related options for hedging purposes. The Fund will enter into futures on
securities or currencies or index-based futures contracts in order to hedge
against changes in interest or exchange rates or securities prices. A futures
contract on securities or currencies is an agreement to buy or sell securities
or currencies at a specified price during a designated month. A futures contract
on a securities index does not involve the actual delivery of securities, but
merely requires the payment of a cash settlement based on changes in the
securities index. The Fund does not make payment or deliver securities upon
entering into a futures contract. Instead, it puts down a margin deposit, which
is adjusted to reflect changes in the value of the contract and which continues
until the contract is terminated.
The Fund may sell or purchase futures contracts. When a futures contract is
sold by the Fund, the value of the contract will tend to rise when the value of
the underlying securities or currencies declines and to fall when the value of
such securities or currencies increases. Thus, the Fund sells futures contracts
in order to offset a possible decline in the value of its securities or
currencies. If a futures contract is purchased by the Fund, the value of the
contract will tend to rise when the value of the underlying securities or
currencies increases and to fall when the value of such securities or currencies
declines. The Fund intends to purchase futures contracts in order to establish
what is believed by Keystone to be a favorable price and rate of return for
securities or favorable exchange rate for currencies the Fund intends to
purchase.
The Fund also intends to purchase put and call options on futures contracts
for hedging purposes. A put option purchased by the Fund would give it the right
to assume a position as the seller of a futures contract. A call option
purchased by the Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires the Fund to pay a premium. In exchange for the premium, the Fund
becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. The Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that the Fund will be able to enter into an offsetting transaction
with respect to a particular contract at a particular time. If the Fund is not
able to enter into an offsetting transaction, the Fund will continue to be
required to maintain the margin deposits on the contract and to complete the
contract according to its terms, in which case it would continue to bear market
risk on the transaction.
Although futures and options transactions are intended to enable the Fund to
manage market, interest rate or exchange rate risk, unanticipated changes in
interest rates, exchange rates or market prices could result in poorer
performance than if it had not entered into these transactions. Even if Keystone
correctly predicts interest or exchange rate movements, a hedge could be
unsuccessful if changes in the value of the Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between the Fund's futures and securities or currencies positions may be caused
by differences between the futures and securities or currencies markets or by
differences between the securities or currencies underlying the Fund's futures
position and the securities or currencies held by or to be purchased for the
Fund. Keystone will attempt to minimize these risks through careful selection
and monitoring of the Fund's futures and options positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The Fund has the ability to write options on futures, but intends to
write such options only to close out options purchased by the Fund. The Fund
will not change these policies without supplementing the information in its
prospectus and statement of additional information.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, the Fund may invest in securities of foreign issuers. When
the Fund invests in foreign securities they usually will be denominated in
foreign currencies, and the Fund temporarily may hold funds in foreign
currencies. Thus, the value of Fund shares will be affected by changes in
exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, the Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency the Fund
will deliver or receive when the contract is completed) is fixed when the Fund
enters into the contract. The Fund usually will enter into these contracts to
stabilize the U.S. dollar value of a security it has agreed to buy or sell. The
Fund intends to use these contracts to hedge the U.S. dollar value of a security
it already owns, particularly if the Fund expects a decrease in the value of the
currency in which the foreign security is denominated. Although the Fund will
attempt to benefit from using forward contracts, the success of its hedging
strategy will depend on Keystone's ability to predict accurately the future
exchange rates between foreign currencies and the U.S. dollar. The value of the
Fund's investments denominated in foreign currencies will depend on the relative
strength of those currencies and the U.S. dollar, and the Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by the Fund. The
Fund may also purchase and sell options related to foreign currencies in
connection with hedging strategies.
VARIABLE AND FLOATING RATE INSTRUMENTS. Fixed-income securities may have fixed,
variable or floating rates of interest. Variable and floating rate securities
pay interest at rates that are adjusted periodically, according to a specified
formula. A "variable" interest rate adjusts at predetermined intervals (e.g.,
daily, weekly or monthly), while a "floating" interest rate adjusts whenever a
specified benchmark rate (such as the bank prime lending rate) changes.
If permitted by its investment policies, the Fund may invest in fixed-income
securities that pay interest at a coupon rate equal to a base rate, plus
additional interest for a certain period of time if short-term interest rates
rise above a predetermined level or "cap." The amount of such an additional
interest payment typically is calculated under a formula based on a short-term
interest rate index multiplied by a designated factor.
INVERSE FLOATING RATE SECURITIES. If permitted by its investment policies, the
Fund may also invest in securities with rates that move inversely to market
rates ("inverse floaters"). An inverse floater bears an interest rate that
resets in the opposite direction of the change in a specified interest rate
index. As market interest rates rise, the interest rate on the inverse floater
goes down, and vice versa. Inverse floaters tend to exhibit greater price
volatility than fixed-rate bonds of similar maturity and credit quality. The
interest rates on inverse floaters may be significantly reduced, even to zero,
if interest rates rise. Moreover, the secondary market for inverse floaters may
be limited in rising interest rate environments.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in market value.
STRUCTURED SECURITIES. Structured securities generally represent interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of structured securities backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
securities to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured securities is dependent
on the extent of the cash flow on the underlying instruments. Because structured
securities typically involve no credit enhancement, their credit risk generally
will be equivalent to that of the underlying instruments. Structured securities
of a given class may be either subordinated or unsubordinated to the right of
payment of another class. Subordinated structured securities typically have
higher yields and present greater risks than unsubordinated structured
securities.
<PAGE>
EXHIBIT A
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 Keystone America Funds.
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 Keystone America Funds and Keystone Liquid
Trust.
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. KIRC 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, that, 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 KIRC, 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 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 KIRC 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 the Principal
Underwriter 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 the Principal Underwriter or his dealer pay such difference
in sales charge, KIRC 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 KIRC. 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
KIRC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or KIRC that
a Letter of Intent is in effect each time a purchase is made.
<PAGE>
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KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
- ------------------------------------
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
TFIP-P 6/95 [Recycle Logo]
8.75M
--------------------------------------------
KEYSTONE
PHOTO:
MOTHER HOLDING BABY ON
PORCH WITH U.S. FLAG IN
BACKGROUND
TAX FREE
INCOME FUND
--------------------------------------------
[Logo]
PROSPECTUS AND
APPLICATION
EXHIBIT 17(c)(2)
Registrant's Most Recent Statement of Additional Information
<PAGE>
KEYSTONE TAX FREE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
March 31, 1995
As Supplemented June 1, 1995
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
Tax Free Income Fund (formerly named Keystone America Tax Free Income Fund) (the
"Fund"), dated March 31, 1995, as supplemented June 1, 1995. A copy of the
prospectus may be obtained from Keystone Investment Distributors Company
(formerly named Keystone Distributors, Inc.) (the "Principal Underwriter"), the
Fund's principal underwriter, 200 Berkeley Street, Boston, Massachusetts
02116-5034.
TABLE OF CONTENTS
Page
The Fund 2
Investment Policies 2
Investment Restrictions 5
Valuation of Securities 9
Sales Charges 10
Distribution Plans 13
Redemptions in Kind 17
Investment Manager 17
Investment Adviser 20
Trustees and Officers 21
Principal Underwriter 25
Brokerage 26
Declaration of Trust 28
Standardized Total Return and Yield Quotations 30
Additional Information 31
Appendix A-1
Financial Statements F-1
Independent Auditors' Report F-18
<PAGE>
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THE FUND
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The Fund is an open-end, diversified management investment company
commonly known as a mutual fund. The Fund seeks the highest possible current
income, exempt from federal income taxes, while preserving capital. The Fund was
formed as a Massachusetts business trust on October 24, 1986. The Fund is
managed by Keystone Management, Inc. ("Keystone Management") and advised by
Keystone Investment Management Company (formerly named Keystone Custodian Funds,
Inc.) ("Keystone").
The essential information about the Fund is contained in its
prospectus. This statement of additional information provides additional
information about the Fund that may be of interest to some investors.
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INVESTMENT POLICIES
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The Fund invests primarily in municipal bonds, but also may invest in
certain other securities as described below.
MUNICIPAL BONDS
Municipal bonds 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 bonds may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to lend to public or private institutions for the construction
of facilities such as educational, hospital and housing facilities. In addition,
certain types of industrial development bonds have been or may be issued by or
on behalf of public authorities to finance certain privately-operated facilities
and certain local facilities for water supply, gas, electricity or sewage or
solid waste disposal. Such obligations are included within the term municipal
bonds if the interest paid thereon qualifies as 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 included
for the purposes of the calculation of the alternative minimum tax. Other types
of industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute municipal bonds, although the current
federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of municipal bonds are "general
obligation" and limited obligation or "revenue" bonds. General obligation bonds
are obligations involving the credit of an issuer possessing taxing power and
are payable from the issuer's general unrestricted revenues and not from any
particular fund or revenue source. Their payment may be dependent upon an
appropriation by the issuer's legislative body and may be subject to
quantitative limitations on the issuer's taxing power. The characteristics and
methods of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer. Limited obligation or revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, such as the user of the facility. Industrial
development bonds that are municipal bonds are, in most cases, revenue bonds and
generally are not payable from the unrestricted revenues of the issuer. The
credit quality of industrial development revenue bonds is usually directly
related to the credit standing of the owner or user of the facilities. There
are, of course, variations in the security of municipal bonds, both within a
particular classification and between classifications, depending on numerous
factors.
The yields on municipal bonds are dependent on a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, size of a particular
offering, the maturity of the obligation and rating of the issue. The ratings of
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") and Fitch Investor Services, Inc. - Municipal Division ("Fitch"), as
described herein and in the prospectus, represent their opinions as to the
quality of the municipal bonds that they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, municipal bonds with the same maturity, interest rate and
rating may have different yields while municipal bonds of the same maturity and
interest rate with different ratings may have the same yield. It should also be
noted that the standards of disclosure applicable to and the amount of
information relating to the financial condition of issuers of municipal bonds
are not generally as extensive as those relating to corporations.
Subsequent to its purchase by the Fund, an issue of municipal bonds or
other investment may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but Keystone will
consider such an event in its determination of whether the Fund should continue
to hold such obligation in its portfolio.
The ability of the Fund to achieve its investment objective is
dependent upon the continuing ability of issuers of municipal bonds to meet
their obligations to pay interest and principal when due. Obligations of issuers
of municipal bonds, including municipal bonds issued by them, are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal Bankruptcy Act, and laws, if any,
that may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations. There is also the possibility that as a result
of litigation or other conditions, the power or ability of any one or more
issuers to pay, when due, principal of and interest on its or their municipal
bonds may be materially affected. In addition, the market for municipal bonds is
often thin and can be temporarily affected by large purchases and sales
including those by the Fund.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal bonds, and similar proposals may well be introduced in the
future. If such a proposal were enacted, the availability of municipal bonds for
investment by the Fund and the value of the Fund's portfolio could be materially
affected. In which event, the Fund would reevaluate its investment objective and
policies and consider changes in the structure of the Fund or dissolution.
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 bonds, the income from which, while exempt from federal income tax
under Section 103 of the Internal Revenue Code, as amended (the "Code"), is
included 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. The Fund will not invest in private activity (private
purpose) bonds, and, except as described under "Other Eligible Securities," will
not invest in qualified "private activity" industrial development bonds.
OTHER ELIGIBLE SECURITIES
The 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
given by S&P), Prime-1 (the highest grade given 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, having 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 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; and (5) qualified "private activity" industrial development
bonds, the income from which, while exempt from federal income tax under Section
103 of the Code, is included in the calculation of the federal alternative
minimum tax.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVE
The investment objective of the Fund is fundamental and may not be
changed without approval of the holders of a majority as defined in the
Investment Company Act of 1940 ("1940 Act") of the Fund's outstanding voting
shares (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).
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INVESTMENT RESTRICTIONS
- ------------------------------------------------------------------------------
The investment restrictions set forth below are fundamental and may not
be changed without the vote of a 1940 Act majority of the Fund's outstanding
voting shares. Unless otherwise stated, all references to the assets of the Fund
are in terms of current market value. The Fund may not do the following:
(1) purchase any security (other than U.S. government securities) of
any issuer if as a result more than 5% of its total assets would be invested in
securities of the issuer, except that up to 25% of its total assets may be
invested without regard to this limit;
(2) 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;
(3) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or of securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short;
(4) borrow money or enter into reverse repurchase agreements, except
that the Fund may enter into reverse repurchase agreements or borrow money from
banks for temporary or emergency purposes in 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) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis, or collateral
arrangement with respect to the writing of options on securities, are not deemed
to be a pledge of assets;
(6) 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;
(7) make loans, except that the Fund may purchase or hold debt
securities consistent with its investment objective, lend portfolio securities
valued at not more than 15% of its total assets to broker-dealers and enter into
repurchase agreements;
(8) purchase any security (other than U.S. government securities) of
any issuer if as a result more than 25% of its total assets would be invested in
a single industry, including industrial development bonds from the same facility
or similar types of facilities; governmental issuers of municipal bonds are not
regarded as members of an industry and the Fund may invest more than 25% of its
assets in industrial development bonds;
(9) invest more than 10% of its total assets in securities with legal
or contractual restrictions on resale or in securities for which market
quotations are not readily available, or in repurchase agreements maturing in
more than seven days;
(10) invest more than 5% of its total assets in securities of any
company having a record, together with its predecessors, of less than three
years of continuous operation;
(11) purchase securities of other investment companies, except as part
of a merger, consolidation, purchase of assets or similar transaction;
(12) purchase or sell commodities or commodity contracts or real
estate, except that it may purchase and sell securities secured by real estate
and securities of companies which invest in real estate, and may engage in
currency or other financial futures contracts and related options transactions;
and
(13) 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.
Additional restrictions adopted by the Fund, which may be changed by
the Board of Trustees, provide that the Fund may not purchase or retain
securities of an issuer if, to the knowledge of the Fund, officers, Trustees or
Directors of the Fund or Keystone each owning beneficially more than 1/2 of 1%
of the securities of such issuer own in the aggregate more than 5% of the
securities of such issuer, or such persons or management personnel of the Fund
or Keystone have a substantial beneficial interest in the securities of such
issuer. Portfolio securities of the Fund may not be purchased from or sold or
loaned to Keystone or any affiliate thereof or any of their Directors, officers
or employees.
Although not fundamental restrictions or policies requiring a
shareholders' vote to change, the Fund has undertaken to a state securities
authority that, so long as the state authority requires and shares of the Fund
are registered for sale in that state, the Fund (1) will not invest in interests
in oil, gas or other mineral exploration or development programs, except
publicly traded securities of companies engaging in such activities; (2) will
not write, purchase or sell puts, calls or combinations thereof, except that it
may purchase "stand-by commitments" and master demand notes; and (3) in
connection with the purchase of debt securities, it may acquire warrants or
other rights to subscribe for securities of issuers or securities of parents or
subsidiaries of such issuers (warrants), provided that no more than 5% of its
total assets may be invested in warrants (for the purpose of this restriction,
warrants attached to securities acquired by the Fund may be deemed to be without
value), in all cases unless authorized by a vote of a majority of the Fund's
outstanding voting shares.
In addition, although not fundamental restrictions or policies
requiring a shareholders' vote to change, the Fund has undertaken to a state
securities authority that, so long as the state authority requires and shares of
the Fund are registered for sale in that state, the Fund will (1) limit its
purchase of warrants to 5% of net assets, of which 2% may be warrants not listed
on the New York or American Stock Exchange; and (2) not invest in real estate
limited partnership interests.
Although not a fundamental restriction or policy requiring a
shareholders' vote to change, the Fund has undertaken to state securities
authorities that, so long as the state authorities require and shares of the
Fund are registered for sale in those states, the Fund will not invest in
securities (other than U.S. government securities) of any issuer if, as a
result, more than 5% of its total assets would be invested in securities of a
single issuer.
The Fund does not presently intend to invest more than 25% of its total
assets in (1) municipal bonds of a single state and its subdivisions, agencies
and instrumentalities; of a single territory or possession of the U.S. and its
subdivisions, agencies or instrumentalities; or of the District of Columbia and
any subdivision, agency or instrumentality thereof; or (2) municipal bonds, the
payment of which depends on revenues derived from a single facility or similar
types of facilities. Since certain municipal bonds may be related in such a way
that an economic, business or political development or change affecting one such
security could likewise affect the other securities, a change in this policy
could result in increased investment risk, but no change is presently
contemplated. The Fund may invest more than 25% of its total assets in
industrial development bonds.
For the purpose of limitations 1, 10 and 13, the Fund will treat each
state, territory and possession of the U.S., the District of Columbia and, if
its assets and revenues are separate from those of the entity or entities
creating it, each political subdivision, agency and instrumentality of any one
(or more, as in the case of a multi-state authority or agency) of the foregoing
as an issuer of all securities that are backed primarily by its assets or
revenues; each company as an issuer of all securities that are backed primarily
by its assets or revenues; and each of the foregoing entities as an issuer of
all securities that it guarantees; provided, however, that for the purpose of
limitation 1 no entity shall be deemed to be an issuer of a security that it
guarantees so long as no more than 10% of the Fund's total assets (taken at
current value) are invested in securities guaranteed by the entity and
securities of which it is otherwise deemed to be an issuer.
Although not fundamental restrictions or policies requiring a
shareholders' vote to change, the Fund has undertaken to a state securities
authority that, so long as the state authority requires and shares of the Fund
are registered for sale in that state, the Fund (1) will limit its purchase of
warrants to 5% of net assets, of which 2% may be warrants not listed on the New
York or American Stock Exchange; and (2) will not invest in real estate limited
partnership interests.
Although not a fundamental restriction or a policy requiring a
shareholders' vote to change, the Fund has undertaken to a state securities
authority that, so long as the state authority requires and shares of the Fund
are registered for sale in that state, the Fund will maintain 300% asset
coverage with respect to any bank borrowings.
In order to permit the sale of Fund shares in certain states, the Fund
may make commitments more restrictive than the investment restrictions described
above. Should the Fund determine that any such commitment is no longer in the
best interests of the Fund, it will revoke the commitment by terminating sales
of its shares in the state involved.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
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VALUATION OF SECURITIES
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Current values for the Fund's portfolio securities are determined in
the following manner:
(1) securities for which market quotations are readily available are
valued at the mean of the bid and asked prices at the time of valuation;
(2) short-term investments that are purchased with maturities of sixty
days or less are valued at amortized cost (original purchase cost as adjusted
for amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market;
(3) short-term investments having maturities of more than sixty days,
for which market quotations are readily available, are valued at current market
value;
(4) short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market; and
(5) the following securities are valued at prices deemed in good faith
to be fair under procedures established by the Fund's Board of Trustees: (a)
securities, including restricted securities, for which market quotations are not
readily available; and (b) other assets.
The Fund believes that reliable market quotations are generally not
readily available for purposes of valuing municipal bonds. As a result,
depending on the particular municipal bonds owned by the Fund, it is likely that
most of the valuations for such bonds will be based upon their fair value
determined under procedures approved by the Fund's Board of Trustees. The Fund's
Board of Trustees has authorized the use of a pricing service to determine the
fair value of its municipal securities and certain other securities. Non-tax
exempt securities for which market quotations are readily available are valued
on a consistent basis at that price quoted that, in the opinion of the Board of
Trustees or the person designated by the Board of Trustees to make the
determination, most nearly represents the market value of the particular
security. Any securities for which market quotations are not readily available
or other assets are valued on a consistent basis at fair value as determined in
good faith using methods prescribed by the Fund's Board of Trustees.
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SALES CHARGES
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GENERAL
Generally, the Fund offers three classes of shares. Class A shares are
offered with a maximum front end sales charge of 4.75% payable at the time of
purchase ("Front End Load Option"). Class B shares purchased on or after June 1,
1995 are subject to a contingent deferred sales charge payable upon redemption
during the 72 month period following the month of purchase. Class B shares
purchased prior to June 1, 1995 are subject to a contingent deferred sales
charge payable upon redemption within four calendar years after purchase ("Back
End Load Option"). Class B shares purchased on or after June 1, 1995 that have
been outstanding eight years following the month of purchase will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. Class B shares purchased prior to June 1, 1995 that have been
outstanding during seven calendar years will similarly convert to Class A
shares. (Conversion of Class B shares represented by stock certificates will
require the return of stock certificates to Keystone Investor Resource Center,
Inc., the Fund's transfer and dividend disbursing agent ("KIRC").) Class C
shares are sold subject to a contingent deferred sales charge payable upon
redemption within one year after purchase ("Level Load Option"). Class C shares
are available only through dealers who have entered into special distribution
agreements with the Principal Underwriter. The prospectus contains a general
description of how investors may buy shares of the Fund, as well as a table of
applicable sales charges for Class A shares, a discussion of reduced sales
charges that may apply to subsequent purchases and a description of applicable
contingent deferred sales charges.
CONTINGENT DEFERRED SALES CHARGES
In order to reimburse the Fund for certain expenses relating to the
sale of its shares (see "Distribution Plans"), a contingent deferred sales
charge is imposed at the time of redemption of certain Fund shares, as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares made on or after
April 10, 1995 (1) in an amount equal to or exceeding $1,000,000 and/or (2) by a
corporate qualified retirement plan or a non-qualified deferred compensation
plan sponsored by a corporation having 100 or more eligible employees (a
"Qualifying Plan"), in either case without a front-end sales charge, will be
subject to a contingent deferred sales charge of 1.00% during the 24 month
period following the date of purchase. Certain Class A shares purchased without
a front-end sales charge prior to April 10, 1995 may be subject to a contingent
deferred sales charge of 0.25% upon redemption during the one-year period
commencing on the date such shares were originally purchased. The contingent
deferred sales charge will be retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.
CLASS B SHARES
With respect to Class B shares purchased on or after June 1, 1995, the
Fund, with certain exceptions, will impose a deferred sales charge as a
percentage of the lesser of net asset value or net cost of such Class B shares
redeemed during succeeding twelve-month periods following the month of purchase
as follows: 5% during the first period; 4% during the second period; 3% during
the third period; 3% during the fourth period; 2% during the fifth period; and
1% during the sixth period. No deferred sales charge is imposed on amounts
redeemed thereafter.
With certain exceptions, the Fund will impose a deferred sales charge
of 3.00% on shares redeemed during the calendar year of purchase and during the
first calendar year after the year of purchase; 2.00% on shares redeemed during
the second calendar year after the year of purchase; and 1.00% on shares
redeemed during the third calendar year after the year of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter.
When imposed, the contingent deferred sales charge is deducted from the
redemption proceeds otherwise payable to you. The contingent deferred sales
charge is retained by the Principal Underwriter. Amounts received by the
Principal Underwriter under the Class B Distribution Plans are reduced by
deferred sales charges retained by the Principal Underwriter. See "Calculation
of Contingent Deferred Sales Charge" below.
CLASS C SHARES
With certain exceptions, the Fund may impose a deferred sales charge of
1% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge 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.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of your account above the net cost of
such shares due to increases in the net asset value per share of the Fund; (2)
certain shares with respect to which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) certain Class A shares held for more than one
or two years, as the case may be, from the date of purchase; (4) Class B shares
held during more than four consecutive calendar years or more than 72 months
after the month of purchase, as the case may be; or (5) Class C shares held for
more than one year from the date of purchase.
Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed. There is no contingent deferred sales
charge when the shares of a class are exchanged for the shares of the same class
of another Keystone America Fund. Moreover, when shares of one such class of a
fund have been exchanged for shares of another such class of a fund, the
calendar year of the purchase of the shares of the fund exchanged into is
assumed to be the year shares tendered for exchange were originally purchased.
WAIVER OF SALES CHARGES
Shares of the Fund also may 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 officers,
Directors, Trustees, full-time employees and sales representatives of the Fund,
Keystone Management, Keystone, Keystone Investments, Inc. (formerly names
Keystone Group, Inc.) ("Keystone Investments"), their subsidiaries and the
Principal Underwriter who have been such for not less than ninety days; (2) the
pension and profit-sharing plans established by such companies, their
subsidiaries and affiliates, for the benefit of their officers, Trustees,
Directors, full-time employees and sales representatives; and (3) registered
representatives of firms with dealer agreements with the Principal Underwriter,
provided all such sales are made upon the written assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption by the Fund.
No initial sales charge is charged on purchases of shares of the 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 the Fund, or any fund
in the Keystone Investments Family of Funds, pursuant to this waiver is at least
$500,000 and any commission paid at the time of such purchase is not more than
1% of the amount invested.
With respect to Class A shares purchased by a Qualifying Plan at net
asset value or Class C shares purchased by a Qualifying Plan, no contingent
deferred sales charge 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 contingent deferred sales charge is imposed on a
redemption of shares of the Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a 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 an account having an aggregate net asset value of
less than $1,000; (5) automatic withdrawals under an automatic withdrawal plan
of up to 1 1/2% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
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DISTRIBUTION PLANS
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Rule 12b-1 under the 1940 Act permits investment companies, such as the
Fund, 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 the Rule. The Fund's Class A, B and C
Distribution Plans have been approved by the Fund's Board of Trustees, including
a majority of the Trustees who are not interested persons of the Fund as defined
in the 1940 Act ("Independent Trustees") and the Trustees who have no direct or
indirect financial interest in the Distribution Plan or any agreement related
thereto (the "Rule 12b-1 Trustees" who are the same as the Independent
Trustees). (The Class A, B and C Distribution Plans each a "Distribution Plan,"
and collectively "Distribution Plans.")
The National Association of Securities Dealers, Inc. ("NASD") currently
limits the amount that a fund may pay annually in distribution costs for the
sale of its shares and shareholder service fees. The NASD limits annual
expenditures to 1% 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
the Fund may pay for such distribution costs to 6.25% of gross share sales since
the inception of the 12b-1 Plan, plus interest at the prime rate plus 1% on such
amounts (less any contingent deferred sales charges paid by shareholders to the
Principal Underwriter).
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, currently limited to 0.25% of the 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 a principal
underwriter of the Fund (currently the Principal Underwriter) to enable the
Principal Underwriter to pay or to have paid to others who sell Class A shares a
service or other fee, at such intervals as the Principal Underwriter may
determine, in respect of Class A shares maintained by such recipients
outstanding on the books of the Fund for specified periods.
Amounts paid by the Fund under the Class A Distribution Plan are
currently used to pay others, such as 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
recipients outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Fund has adopted Distribution Plans for its Class B shares that
provide that the Fund may expend daily amounts at an annual rate of up to 1.00%
of the 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
the principal underwriter of the Fund (currently the Principal Underwriter) (1)
to enable the Principal Underwriter to pay to others (dealers) commissions in
respect of Class B shares sold since inception of the Distribution Plan; and (2)
to enable the Principal Underwriter to pay or to have paid to others a service
fee, at such intervals as the Principal Underwriter may determine, in respect of
Class B shares maintained by any such recipients outstanding on the books of the
Fund for specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.25% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker or other party receives service fees at an annual
rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient outstanding on the books of the Fund for specified
periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with each Class B
Distribution Plan that exceed current annual payments permitted to be received
by the Principal Underwriter from the Fund. The Principal Underwriter intends to
seek full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits.
If the Fund's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Class B Distribution Plan. If a Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
In connection with financing its distribution costs, including
commission advances to dealers and others, the Principal Underwriter has sold to
a financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Fund
has 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 Plan, the Fund may be subject to possible
adverse distribution consequences.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the 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 the principal underwriter of the Fund
(currently the Principal Underwriter) (1) to enable the Principal Underwriter to
pay to others (dealers) commissions in respect of Class C shares sold since
inception of the Distribution Plan; and (2) to enable the Principal Underwriter
to pay or to have paid to others a service fee, at such intervals as the
Principal Underwriter may determine, in respect of Class C shares maintained by
any such recipients outstanding on the books of the Fund for specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately fifteen months after
purchase, brokers 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% of the
average daily net asset value of each Class C share maintained by the recipients
outstanding on the books of the Fund for specified periods.
DISTRIBUTION PLANS IN GENERAL
Each of the Distribution Plans may be terminated at any time by vote of
the Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of the Fund. Any change in a Distribution Plan
that would materially increase the distribution expenses of the Fund provided
for in the Distribution Plan requires shareholder approval. Otherwise, the
Distribution Plan may be amended by the Trustees, including the Rule 12b-1
Trustees.
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above, and the amounts
and purposes of expenditures under a Distribution Plan must be reported to the
Rule 12b-1 Trustees quarterly. The Rule 12b-1 Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by the Distribution Plan
as stated above.
During the year ended November 30, 1994, the Fund paid the Principal
Underwriter $269,046, $241,979 and $279,001 under the Fund's Class A, B and C
Distribution Plans, respectively. Unreimbursed distribution expenses under the
Class B and Class C Distribution Plans at November 30, 1994 were $1,996,948
(6.92% of Class B net assets at November 30, 1994) and $2,087,302 (8.99% of
Class C net assets at November 30, 1994), respectively.
Whether any expenditure under a Distribution Plan is subject to a state
expense limit will depend upon the nature of the expenditure and the terms of
the state law, regulation or order imposing the limit. A portion of the Fund's
Distribution Plan expenses may be included in the Fund's total operating
expenses for purposes of determining compliance with state expense limits.
The Fund is currently subject to certain annual state expense
limitations, the most restrictive of which is:
2.5% of the first $30 million of Fund average net assets,
2.0% of the next $70 million of Fund average net assets, and
1.5% of Fund average net assets over $100 million.
Capital charges and certain expenses, including a portion of the Fund's
Distribution Plan fees, are currently not included in the calculation of the
state expense limitation. This limitation may be modified or eliminated in the
future.
While a Distribution Plan is in effect, the Fund will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The Independent Trustees of the Fund have determined that the sales of
the Fund's shares resulting from payments under the Distribution Plans have
benefited the Fund.
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REDEMPTIONS IN KIND
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If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund's Board of Trustees may authorize payment
to be made in portfolio securities or other Fund property. The Fund has
obligated itself, however, under the 1940 Act to redeem for cash all shares
presented for redemption by any one shareholder in any 90-day period up to the
lesser of $250,000 or 1% of the Fund's net assets at the beginning of such
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
be readily marketable. Shareholders receiving such securities would incur
brokerage costs when these securities are sold.
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INVESTMENT MANAGER
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Subject to the general supervision of the Fund's Board of Trustees,
Keystone Management, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, serves as investment manager to the Fund and is responsible for the
overall management of the Fund's business and affairs. Keystone Management,
organized in 1989, is a wholly-owned subsidiary of Keystone and its directors
and principal executive officers have been affiliated with Keystone, a seasoned
investment adviser, for a number of years. Keystone Management also serves as
investment manager to each of the other funds in the Keystone Fund Family and to
certain other funds in the Keystone Investments Family of Funds.
Except as otherwise noted below, pursuant to an Investment Management
Agreement (the "Management Agreement"), and subject to the supervision of the
Fund's Board of Trustees, Keystone Management has agreed to manage and
administer the operation of the Fund and manage the investment and reinvestment
of the Fund's assets in conformity with the Fund's investment objectives and
restrictions. The Management Agreement stipulates that Keystone Management shall
provide office space, all necessary office facilities, equipment and personnel
in connection with its services as well as pay or reimburse the Fund for the
compensation of Fund officers and Trustees who are affiliated with the
investment manager and pay all expenses of Keystone Management incurred in
connection with its services. All charges and expenses other than those
specifically referred to as being borne by Keystone Management will be paid by
the Fund, including, but not limited to, custodian charges and expenses;
bookkeeping and auditors' charges and expenses; transfer agent charges and
expenses; fees of Independent Trustees; brokerage commissions, brokers' fees and
expenses; issue and transfer taxes; costs and expenses under the Distribution
Plans; taxes and trust fees payable to governmental agencies; the cost of share
certificates; fees and expenses of the registration and qualification of the
Fund and its shares with the Securities and Exchange Commission (sometimes
referred to herein as the "SEC" or the "Commission") or under state or other
securities laws; expenses of preparing, printing and mailing prospectuses,
statements of additional information, notices, reports and proxy materials to
shareholders of the Fund; expenses of shareholders' and Trustees' meetings;
charges and expenses of legal counsel for the Fund and for the Trustees of the
Fund on matters relating to the Fund; charges and expenses of filing annual and
other reports with the SEC and other authorities; and all extraordinary charges
and expenses of the Fund.
The Management Agreement permits Keystone Management to enter into an
agreement with Keystone or another investment adviser, under which Keystone or
another investment adviser, as investment adviser, will provide substantially
all the services to be provided by Keystone Management under the Management
Agreement, and to delegate to Keystone or another investment adviser
substantially all of the investment manager's rights, duties and obligations
under the Management Agreement.
Keystone Management currently provides the Fund with certain
administrative and management services, which services include (1) performing
research and planning with respect to (a) the Fund's qualification as a
regulated investment company under Subchapter M of the Code, (b) tax treatment
of the Fund's portfolio investments, (c) tax treatment of special corporate
actions (such as reorganizations), (d) state tax matters affecting the Fund, and
(e) the Fund's distributions of income and capital gains; (2) preparing the
Fund's federal and state tax returns; (3) providing services to the Fund's
shareholders in connection with federal and state taxation and distributions of
income and capital gains; and (4) storing documents relating to the Fund's
activities.
The Fund pays Keystone Management a fee for its services at the annual
rate set forth below:
Aggregate Net Asset
Management Value of the Shares
Fee Income of the Fund
2.0% of Gross Dividend
and Interest Income
Plus
0.50% of the first $ 100,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000;
computed as of the close of business on each business day and payable daily.
As a continuing condition of registration of shares in a state,
Keystone Management has agreed to reimburse the Fund annually for certain
operating expenses incurred by the Fund in excess of certain percentages of the
Fund's average daily net assets. Keystone Management is not required to make
such reimbursements to the extent such reimbursement would result in the Fund's
inability to qualify as a regulated investment company under provisions of the
Code. This condition may be modified or eliminated in the future.
The Management Agreement continues in effect from year to year only if
approved at least annually by the Fund's Board of Trustees or by a vote of a
majority of the outstanding shares, and such renewal has been approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Management Agreement may
be terminated, without penalty, on 60 days' written notice by the Fund's Board
of Trustees or by a vote of a majority of outstanding shares. The Management
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
For an additional discussion of fees paid to Keystone Management, see
"Investment Adviser" below.
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INVESTMENT ADVISER
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Pursuant to the Management Agreement, Keystone Management has delegated
its investment management functions, except for certain administrative and
management services, to Keystone and has entered into an Investment Advisory
Agreement (the "Advisory Agreement") with Keystone under which Keystone provides
investment advisory and management services to the Fund.
Keystone, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Investments, 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation predominantly owned by former and
current members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in a
number of voting trusts, the trustees of which are George S. Bissell, Albert H.
Elfner, III, Edward F. Godfrey and Ralph J. Spuehler, Jr.
Keystone Investments provides accounting, bookkeeping, legal, personnel
and general corporate services to Keystone Management, Keystone, their
affiliates and the Keystone Investments Family of Funds. Pursuant to the
Advisory Agreement, Keystone receives for its services an annual fee
representing 85% of the management fee received by Keystone Management under the
Management Agreement.
Pursuant to the Advisory Agreement, and subject to the supervision of
the Fund's Board of Trustees, Keystone manages and administers the operation of
the Fund, and manages the investment and reinvestment of the Fund's assets in
conformity with the Fund's investment objective and restrictions. The Advisory
Agreement stipulates that Keystone shall provide office space, all necessary
office facilities, equipment and personnel in connection with its services as
well as pay or reimburse the Fund or Keystone Management, as the case may be,
for the compensation of Fund officers and Trustees who are affiliated with
Keystone and pay all expenses of Keystone incurred in connection with the
provision of its services. All charges and expenses other than those
specifically referred to as being borne by Keystone will be paid by the Fund,
including, but not limited to, custodian charges and expenses; bookkeeping and
auditors' charges and expenses; transfer agent charges and expenses; fees of
Independent Trustees; brokerage commissions, brokers' fees and expenses; issue
and transfer taxes; costs and expenses under the Distribution Plans; taxes and
trust fees payable to governmental agencies; the cost of share certificates;
fees and expenses of the registration and qualification of the Fund and its
shares with the SEC or under state or other securities laws; expenses of
preparing, printing and mailing prospectuses, statements of additional
information, notices, reports and proxy materials to shareholders of the Fund;
expenses of shareholders' and Trustees' meetings; charges and expenses of legal
counsel for the Fund and for the Trustees of the Fund on matters relating to the
Fund; charges and expenses of filing annual and other reports with the SEC and
other authorities; and all extraordinary charges and expenses of the Fund.
During the fiscal year ended November 30, 1992, the Fund paid or
accrued to Keystone Management investment management and administrative service
fees of $827,208, which represented 0.64% of the Fund's average net assets. Of
such amount paid to Keystone Management, $703,127 was paid to Keystone for its
services to the Fund.
During the fiscal year ended November 30, 1993, the Fund paid or
accrued to Keystone Management investment management and administrative service
fees of $876,654, which represented 0.62% of the Fund's average net assets. Of
such amount paid to Keystone Management, $745,160 was paid to Keystone for its
services to the Fund.
During the fiscal year ended November 30, 1994, the Fund paid or
accrued to Keystone Management investment management and administrative services
fees of $1,005,305, which represented 0.61% of the Fund's average net assets. Of
such amount paid to Keystone Management, $854,509 was paid to Keystone for its
services to the Fund.
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TRUSTEES AND OFFICERS
- ------------------------------------------------------------------------------
Trustees and officers of the Fund, their principal occupations and some
of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Investments; President, Chief Executive Officer and
Trustee or Director of all 30 funds in the Keystone Investments Family of
Funds; Director and Chairman of the Board, Chief Executive Officer and Vice
Chairman of Keystone; Chairman of the Board and Director of Keystone
Institutional Company, Inc. ("Keystone Institutional") (formerly named
Keystone Investment Management Corporation), and Keystone Fixed Income
Advisors ("KFIA"); Director, Chairman of the Board, Chief Executive Officer
and President of Keystone Management and Keystone Software Inc. ("Keystone
Software"); Director and President of Hartwell Keystone Advisers, Inc.
("Hartwell Keystone"), Keystone Asset Corporation, Keystone Capital
Corporation, and Keystone Trust Company; Director of the Principal
Underwriter, KIRC, and Fiduciary Investment Company, Inc. ("FICO");
Director and Vice President of Robert Van Partners, Inc.; Director of
Boston Children's Services Association; Trustee of Anatolia College,
Middlesex School, and Middlebury College; Member, Board of Governors, New
England Medical Center; and former Trustee of Neworld Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member, Board
of Advisers, Credito Emilano (banking); and former Economics and Financial
Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Investment Counselor to Appleton Partners,
Inc.; former Managing Director, Seaward Management Corporation (investment
advice) and former Director, Executive Vice President and Treasurer, State
Street Research & Management Company (investment advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of all
other Keystone Investments Funds; Director and Chairman of the Board of
Hartwell Keystone; Chairman of the Board and Trustee of Anatolia College;
Trustee of University Hospital (and Chairman of its Investment Committee);
former Chairman of the Board and Chief Executive Officer of Keystone
Investments; and former Chief Executive Officer of the Fund.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Director, Coalition of Essential
Schools, Brown University; Director and former Executive Vice President,
National Alliance of Business; former Vice President, Educational Testing
Services; and former Dean, School of Business, Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; former Group Vice President, Textron Corp.; and
former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Director of Phoenix Total Return Fund and Equifax, Inc.;
Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund and The
Phoenix Big Edge Series Fund; and former President, Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Chairman of the Board, Director and Executive Vice
President, The London Harness Company; Managing Partner, Roscommon Capital
Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments and Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Of Counsel, Keyser, Crowley & Meub, P.C.;
Member, Governor's (VT) Council of Economic Advisers; Chairman of the Board
and Director, Central Vermont Public Service Corporation and Hitchcock
Clinic; Director, Vermont Yankee Nuclear Power Corporation, Vermont
Electric Power Company, Inc., Grand Trunk Corporation, Central Vermont
Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual Fire
Insurance Company, New England Guaranty Insurance Company, Inc. and the
Investment Company Institute; former Governor of Vermont; former Director
and President, Associated Industries of Vermont; former Chairman and
President, Vermont Marble Company; former Director of Keystone; and former
Director and Chairman of the Board, Green Mountain Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Vice President, DHR International,
Inc. (executive recruitment); former Senior Vice President, Boyden
International Inc. (executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411 International, Inc. and J & M
Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Chairman, Environmental Warranty, Inc., and Consultant,
Drake Beam Morin, Inc. (executive outplacement); Director of Connecticut
Natural Gas Corporation, Trust Company of Connecticut, Hartford Hospital,
Old State House Association and Enhanced Financial Services, Inc.; Member,
Georgetown College Board of Advisors; Chairman, Board of Trustees, Hartford
Graduate Center; Trustee, Kingswood-Oxford School and Greater Hartford
YMCA; former Director, Executive Vice President and Vice Chairman of The
Travelers Corporation; and former Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky &
Armentano, P.C.; President, Nassau County Bar Association; former Associate
Dean and Professor of Law, St. John's University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; Director, Senior Vice President,
Chief Financial Officer and Treasurer of Keystone Investments, the
Principal Underwriter, Keystone Asset Corporation, Keystone Capital
Corporation, Keystone Trust Company; Treasurer of Keystone Institutional,
Robert Van Partners, Inc., and FICO; Treasurer and Director of Keystone
Management, Keystone Software, and Hartwell Keystone; Vice President and
Treasurer of KFIA; and Director of KIRC.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of all
other Keystone Investments Funds; and President of Keystone.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Investments Funds; Vice President of Keystone Investments; Assistant
Treasurer of FICO and Keystone; and former Vice President and Treasurer of
KIRC.
BETSY A. BLACHER: Vice President of the Fund; Vice President of certain other
Keystone Investments Funds; and Senior Vice President of Keystone.
CHRISTOPHER P. CONKEY: Vice President of the Fund; Vice President of certain
other Keystone Investments Funds; and Senior Vice President of Keystone.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Investments Funds;
Senior Vice President, General Counsel and Secretary of Keystone; Senior
Vice President, General Counsel, Secretary and Director of the Principal
Underwriter, Keystone Management and Keystone Software; Senior Vice
President and General Counsel of Keystone Institutional; Senior Vice
President, General Counsel and Director of FICO and KIRC; Senior Vice
President and Secretary of Hartwell Keystone and Robert Van Partners, Inc.;
Vice President and Secretary of KFIA; Senior Vice President, General
Counsel and Secretary of Keystone Investments, Keystone Asset Corporation,
Keystone Capital Corporation and Keystone Trust Company.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Hartwell Keystone, the Principal Underwriter and KIRC.
Mr. Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
During the fiscal year ended November 30, 1994, no Trustee affiliated
with Keystone or any officer of Keystone received any direct remuneration from
the Fund. During the same period the nonaffiliated Trustees were paid $8,485 in
retainers and fees. For the 12 month fiscal period ending of November 30, 1994,
fees paid to Independent Trustees on a fund complex wide basis were
approximately $585,975. On February 28, 1995, the Trustees and officers of the
Fund beneficially owned less than 1% of the Fund's then outstanding shares.
The address of the Fund's Trustees and officers is 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
- ------------------------------------------------------------------------------
Pursuant to a Principal Underwriting Agreement dated August 19, 1993,
between the Fund and the Principal Underwriter (the "Underwriting Agreement"),
the Principal Underwriter acts as the Fund's principal underwriter. The
Principal Underwriter, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, is a Delaware corporation wholly-owned by Keystone. The Principal
Underwriter, as agent, has agreed to use its best efforts to find purchasers for
the shares. The Principal Underwriter may retain and employ representatives to
promote distribution of the shares and may obtain orders from brokers, dealers
and others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that the Principal Underwriter will bear the expense of
preparing, printing and distributing advertising and sales literature and
prospectuses used by it. In its capacity as principal underwriter, the Principal
Underwriter may receive payments from the Fund pursuant to the Fund's
Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the offering price of the shares in accordance with the provisions of the
Declaration of Trust, By-Laws, and the Fund's current prospectus and statement
of additional information. All orders are subject to acceptance by the Fund, and
the Fund reserves the right in its sole discretion to reject any order received.
Under the Underwriting Agreement, the Fund is not liable to anyone for failure
to accept any order.
The Fund has agreed under the Underwriting Agreement to pay all
expenses in connection with registration of its shares with the Commission and
auditing and filing fees in connection with registration of its shares under the
various state "blue-sky" laws, and the Principal Underwriter assumes the cost of
sales literature and preparation of prospectuses used by it and certain other
expenses.
From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of Fund shares, the Principal Underwriter may use its
discretion in providing to selected dealers promotional materials and selling
aids, including, but not limited to, personal computers, related software and
Fund data files.
The Principal Underwriter has agreed that it will in all respects duly
conform with all state and federal laws applicable to the sale of the shares and
will indemnify and hold harmless the Fund, and each person who has been, is or
may be a Trustee or officer of the Fund, against expenses reasonably incurred by
any of them in connection with any claim or in connection with any action, suit
or proceeding to which any of them may be a party, that arises out of or is
alleged to arise out of any misrepresentation or omission to state a material
fact on the part of the Principal Underwriter or any other person for whose acts
the Principal Underwriter is responsible or is alleged to be responsible, unless
such misrepresentation or omission was made in reliance upon written information
furnished by the Fund.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved by a majority of the Fund's
Independent Trustees at least annually at a meeting called for that purpose, and
if its continuance is approved annually by vote of a majority of Trustees, or by
vote of a majority of the outstanding shares.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares. The Underwriting Agreement will terminate automatically upon
its "assignment" as that term is defined in the 1940 Act.
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BROKERAGE
- ------------------------------------------------------------------------------
It is the policy of the Fund, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net economic result to the
Fund, involving both price paid or received and any commissions and other costs
paid, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Management
weighs such considerations in determining the overall reasonableness of
brokerage commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to the Fund, Keystone Management or Keystone is
considered to be in addition to and not in lieu of services required to be
performed by Keystone Management under the Management Agreement or Keystone
under the Advisory Agreement. The cost, value and specific application of such
information are indeterminable and cannot be practically allocated among the
Fund and other clients of Keystone Management or Keystone who may indirectly
benefit from the availability of such information. Similarly, the Fund may
indirectly benefit from information made available as a result of transactions
effected for such other clients. Under the Management Agreement and the Advisory
Agreement, Keystone Management and Keystone are permitted to pay higher
brokerage commissions for brokerage and research services in accordance with
Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone
Management and Keystone do follow such a practice, they will do so on a basis
which is fair and equitable to the Fund.
The Fund expects that purchases and sales of municipal bonds and
temporary instruments usually will be principal transactions. Municipal bonds
and temporary instruments are normally purchased directly from the issuer or
from an underwriter or market maker for the securities. There usually will be no
brokerage commissions paid by the Fund for such purchases. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark up
or reflect a dealer's mark down. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
The Fund may participate, if and when practicable, in group bidding for
the purchase directly from an issuer of certain securities for the Fund's
portfolio in order to take advantage of the lower purchase price available to
members of such a group.
Neither Keystone Management, Keystone nor the Fund intend to place
securities transactions with any particular broker-dealer or group thereof.
However, the Fund's Board of Trustees has determined that the Fund may follow a
policy of considering sales of shares as a factor in the selection of
broker-dealers to execute portfolio transactions, subject to the requirements of
best execution, including best price, described above.
The policy of the Fund with respect to brokerage is and will be
reviewed by the Fund's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Fund are made independently by Keystone
Management or Keystone from those of the other funds and investment accounts
managed by Keystone Management or Keystone. It may frequently develop that the
same investment decision is made for more than one fund. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more funds or
accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula that is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.
During the fiscal years ended November 30, 1992, 1993 and 1994, the
Fund did not pay any brokerage commissions.
In no instance are portfolio securities purchased from or sold to
Keystone Management, Keystone, the Principal Underwriter or any of their
affiliated persons, as defined in the 1940 Act and rules and regulations issued
thereunder.
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DECLARATION OF TRUST
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MASSACHUSETTS BUSINESS TRUST
The Fund is a Massachusetts business trust established under a
Declaration of Trust dated October 24, 1986, (the "Declaration of Trust"). The
Fund is similar in most respects to a business corporation. The principal
distinction between the Fund and a corporation relates to the shareholder
liability described below. A copy of the Declaration of Trust was filed as an
exhibit to the Fund's Registration Statement. This summary is qualified in its
entirety by reference to the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares, each of which represents
an equal proportionate interest in the Fund with each other share of that class.
Shares are entitled upon liquidation of the Fund to a pro-rata share of the Fund
based on the relative net assets of each class. Shareholders have no preemptive
or conversion rights. Shares are transferable, redeemable and fully assignable
as collateral. There are no sinking fund provisions. Generally, the Fund
currently issues three classes of shares, but may issue additional classes or
series of shares.
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 for the obligations of the
trust. Even if, however, the Fund were held to be a partnership, the possibility
of the shareholders incurring financial loss for that reason appears remote
because the Fund's Declaration of Trust (1) contains an express disclaimer of
shareholder liability for obligations of the Fund; (2) requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Fund or the Trustees; and (3) provides for
indemnification out of Fund property for any shareholder held personally liable
for the obligations of the Fund.
VOTING RIGHTS
Under the Declaration of Trust the Fund does not hold annual meetings.
Shares are entitled to one vote per share. Shares generally vote together as one
class on all matters. Classes of shares of the 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 the 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 any
such Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares. Any
Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee 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 Fund and may perform such acts as in their
sole judgment and discretion are necessary and proper for conducting the
business and affairs of the Fund or promoting the interests of the Fund and the
shareholders.
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- ------------------------------------------------------------------------------
Total return quotations for a class of shares of the 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 cumulative total return of Class A of the Fund for the period April
14, 1987 (commencement of investment operations) through November 30, 1994 was
47.99%. The total cumulative return of Class A of the Fund for the one and five
year periods ended November 30, 1994 were (12.19)% and 21.47%, respectively. The
compounded average annual rate of return of Class A of the Fund for the period
April 14, 1987 (commencement of investment operations) to November 30, 1994 was
5.27%. The compounded average annual rate of return of Class A of the Fund for
the one and five year periods ended November 30, 1994 were (12.19)% and 3.97%.
The cumulative total returns for Class B and C of the Fund for the
period from February 1, 1993 (inception of Class B and C) through November 30,
1994 were (4.98)% and (2.39)%, respectively. The cumulative total returns for
Class B and Class C of the Fund for the one year period ended November 30, 1994
were (11.03)% and (8.52)%, respectively. The compounded average annual rates of
return for Class B and Class C for the one year period ended November 30, 1994
were (11.03)% and (8.52)%, respectively.
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. The standardized yield of
Class A, B and C of the Fund for the 30-day period ended November 30, 1994 were
5.77%, 5.29% and 5.27%, respectively.
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 federal tax equivalent yields for Class A, Class B and
Class C shares of the Fund for an investor in the 31% federal tax bracket for
the 30-day period ended November 30, 1994 were 8.36%, 7.67% and 7.64%,
respectively.
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ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian of all securities and cash of the Fund
(the "Custodian"). The Custodian may hold securities of some foreign issuers
outside the U.S. The Custodian performs no investment management functions for
the Fund, but, in addition to its custodial services, is responsible for
accounting and related recordkeeping on behalf of the Fund.
KPMG Peat Marwick LLP, One Boston Place, Boston, Massachusetts 02108,
Certified Public Accountants, are the independent auditors.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519,
is a wholly-owned subsidiary of Keystone. As previously mentioned, KIRC serves
as the Fund's transfer agent and dividend disbursing agent.
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this statement of additional information or in supplemental sales
literature issued by the Fund or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Fund's prospectus and this statement of additional information omit
certain information contained in the registration statement filed with the SEC,
which may be obtained from the SEC's principal office in Washington, D.C. upon
payment of the fee prescribed by the rules and regulations promulgated by the
SEC.
On February 28, 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Drive, E 3rd Fl, Jacksonville, Florida 32246-6484 owned
22.6%, 24.53% and 50.21%, respectively, of the Fund's outstanding Class A, B and
C shares. In addition, on February 28, 1995, Alletta Laird Downs TTEE, U/A
03-28-89, Alletta Laird Downs Trust, P.O. Box 3666, Wilmington, DE 19807-0666
owned 6.13% of the Fund's outstanding Class B shares. Management does not
believe that any other person beneficially owns 5% or more of the Fund's Class
A, B and C shares.
The Fund is one of 15 different investment companies in the Keystone
America Fund Family, which offers a range of choices to serve shareholder needs.
In addition to the Fund, the Keystone America Family consists of the following
funds having the various investment objectives described below:
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 25%).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE HARTWELL GROWTH FUND - Seeks capital appreciation by investment in
securities selected for their long-term growth prospects.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE AMERICA OMEGA FUND, INC. - Seeks maximum capital growth from common
stocks and securities convertible into common stocks.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of five separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund currently offering two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
KEYSTONE FUND OF THE AMERICAS - Seeks long term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and countries in South and Central
America).
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long term capital growth by
investing primarily in equity securities.
<PAGE>
A-1
APPENDIX
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MONEY MARKET INSTRUMENTS
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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.
COMMERCIAL PAPER
Commercial paper will consist of issues rated at the time of purchase A-1,
by S&P, or PRIME-1 by Moody's or F-1 by Fitch Investors Services, Inc.
(Fitch's); or, if not rated, will be issued by companies that 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 Keystone 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.
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, including their branches abroad, and of U.S.
branches of foreign banks that are members of the Federal Reserve System or
the Federal Deposit Insurance Corporation, and have at least $1 billion in
deposits as of the date of their most recently published financial statements;
or of savings and loan associations that are members of the Federal Savings and
Loan Insurance Corporation, and have at least $1 billion in deposits as of the
date of their most recent financial statements.
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, (the "World Bank"), the
Asian Development Bank or the Inter-American Development Bank. Additionally, the
Fund does not currently intend to purchase foreign securities (except to the
extent that certificates of deposit of foreign branches of U.S. banks may be
deemed foreign securities) or purchase certificates of deposit, bankers'
acceptances or other similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
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.
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, the Fund will invest
in the securities issued by such an instrumentality only when Keystone
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 or Federal Savings and Loan Insurance Corporation.
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
credit worthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
a. Likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in the
event of bankruptcy reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the successful
completion of the project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
2. Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present that make the long term risks appear somewhat
larger than in Aaa securities.
3. A - Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present that suggest a susceptibility to impairment sometime in the
future.
4. Baa - Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
CON. (---) - Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals 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 that Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, and Baa 1.
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FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
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The Fund intends to enter into currency and other financial futures
contracts as a hedge against changes in prevailing levels of interest or
currency exchange rates to seek relative stability of principal and to establish
more definitely the effective return on securities held or intended to be
acquired to the Fund or as a hedge against changes in the prices of securities
or currencies held by the Fund or to be acquired by the Fund. The Fund's hedging
may include sales of futures as an offset against the effect of expected
increases in interest or currency exchange rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest or currency exchange rates.
For example, when the Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when the Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, the 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 Fund intends to engage in options transactions that are related to
currency and other 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 Fund's exposure to
interest rate and/or market fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Fund does not intend to
take delivery of the instruments underlying futures contracts it holds, the Fund
does not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather than
in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed that specify currencies, financial instruments or
financially based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges and
are standardized as to maturity date and underlying financial instrument. The
principal financial futures exchanges in the 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 the
Fund, as seller, to deliver the type of financial instrument specified in the
contract at a specified future time for a specified price. The purchase of an
interest rate futures contract creates an obligation by the Fund, as purchaser,
to accept delivery of the type of financial instrument specified at a specified
future time for a specified price. The specific securities delivered or
accepted, respectively, at settlement date, are not determined until at or near
that date. The determination is in accordance with the rules of the exchange on
which the futures contract sale or purchase was made.
Currently interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, 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
STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the common stocks included in the
index. The index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement by
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the closing value of the
stock index on the expiration date of the contract and the price at which the
futures contract is originally made. No physical delivery of the underlying
stocks in the index is made.
Currently stock index futures contracts can be purchased or sold on the S&P
Index of 500 Stocks, the S&P Index of 100 Stocks, the New York Stock Exchange
Composite Index, the Value Line Index and the Major Market Index. It is expected
that futures contracts trading in additional stock indices will be authorized.
The standard contract size is $500 times the value of the index.
The Fund does not believe that differences between existing stock indices
will create any differences in the price movements of the stock index futures
contracts in relation to the movements in such indices. However, such
differences in the indices may result in differences in correlation of the
futures with movements in the value of the securities being hedged.
OTHER INDEX BASED FUTURES CONTRACTS
It is expected that bond index and other financially based index futures
contracts will be developed in the future. It is anticipated that such index
based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed the Fund will sell interest rate index and
other index based futures contracts to hedge against changes which are expected
to affect the Fund's portfolio.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by the Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from the
Broker, are made on a daily basis as the value of the underlying instrument or
index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when the
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where the Fund has purchased a futures contract
and the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, the Fund may elect to close the position. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the Broker, and the Fund realizes a loss or gain.
The Fund intends to enter into arrangements with its custodian and with
Brokers to enable its initial margin and any variation margin to be held in a
segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which the Fund enters into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument or index and
same delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which the Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e. on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase after allowance for
transaction costs, represents the profit or loss to the Fund.
There can be no assurance, however, that the Fund will be ableto enter into
an offsetting transaction with respect to a particular contract at a particular
time. If the Fund is not able to enter into an offsetting transaction, the Fund
will continue to be required to maintain the margin deposits on the contract and
to complete the contract according to its terms.
OPTIONS ON CURRENCY AND OTHER FINANCIAL FUTURES
The Fund intends to purchase call and put options on currency and other
financial futures contracts and sell such options to terminate an existing
position. Options on 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 Fund intends to use options on currency and other financial futures
contracts in connection with hedging strategies. In the future the Fund may use
such options for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on currency and other 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 the Fund. Put options may be
purchased to hedge a portfolio of stocks or debt instruments or a position in
the futures contract upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of a call option on a currency and other financial futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual stock, which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the underlying
financial instrument or index itself, 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
the Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING CURRENCY AND OTHER FINANCIAL FUTURES
CONTRACTS OR RELATED OPTIONS
The Fund may employ new investment techniques involving currency and other
financial futures contracts and related options. The Fund intends to take
advantage of new techniques in these areas which may be developed from time to
time and which are consistent with the Fund's investment objective. The Fund
believes that no additional techniques have been identified for employment by
the Fund in the foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
The Fund will not enter into a futures contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin deposits on such
futures contracts.
The Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that the Fund owns, or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
The Fund does not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by the Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, the Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
RISKS OF FUTURES CONTRACTS
Currency and other financial futures contracts prices are volatile and are
influenced, among other things, by changes in stock prices, market conditions,
prevailing interest rates and anticipation of future stock prices, market
movements or interest rate changes, all of which in turn are affected by
economic conditions, such as government fiscal and monetary policies and
actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures contracts and
of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; 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 credit worthiness of issuers, or identities of
securities comprising the index and those in the 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, the Fund would presumably have sustained comparable losses if, instead
of entering into the futures contract, it had invested in the underlying
financial instrument. Furthermore, in order to be certain that the Fund has
sufficient assets to satisfy its obligations under a futures contract, the Fund
will establish a segregated account in connection with its futures contracts
that will hold cash or cash equivalents equal in value to the current value of
the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for currency and other financial
futures contracts, there are several special risks relating to options on
futures contracts. The ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. The Fund will not purchase
options on any futures contract unless and until it believes that the market for
such options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to the Fund, even though the use of a futures contract would
not, such as when there is no movement in the level of the futures contract.
FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in securities of foreign issuers. When the Fund invests
in foreign securities they usually will be denominated in foreign currencies and
the Fund temporarily may hold funds in foreign currencies. Thus, the value of a
Fund share will be affected by changes in exchange rates.
FORWARD CURRENCY CONTRACTS
As one way of managing exchange rate risk, the Fund may enter into forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). Under the contract, the exchange rate for the
transaction (the amount of currency the Fund will deliver or receive when the
contract is completed) is fixed when the Fund enters into the contract. The Fund
usually will enter into these contracts to stabilize the U.S. dollar value of a
security it has agreed to buy or sell. The Fund also may use these contracts to
hedge the U.S. dollar value of a security it already owns, particularly if the
Fund expects a decrease in the value of the currency in which the foreign
security is denominated. Although the Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on Keystone's
ability to predict accurately the future exchange rate between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strength of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rate or exchange control regulations between foreign
currencies and the dollar. Changes in foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Fund.
CURRENCY FUTURES CONTRACTS
Currency futures contracts are bilateral agreements under which two parties
agree to take or make delivery of a specified amount of a currency at a
specified future time for a specified price. Trading of currency futures
contracts in the United States is regulated under the Commodity Exchange Act by
the CFTC and NFA. Currently the only national futures exchange on which currency
futures are traded is the International Monetary Market of the Chicago
Mercantile Exchange. Foreign currency futures trading is conducted in the same
manner and subject to the same regulations as trading in interest rate and index
based futures. The Fund intends to only engage in currency futures contracts for
hedging purposes, and not for speculation. The Fund may engage in currency
futures contracts for other purposes if authorized to do so by the Board. The
hedging strategies which will be used by the Fund in connection with foreign
currency futures contracts are similar to those described above for forward
foreign currency exchange contracts.
Currently, currency futures contracts for the British Pound Sterling,
Canadian Dollar, Dutch Guilder, Deutsche Mark, Japanese Yen, Mexican Peso, Swiss
Franc, and French Franc can be purchased or sold for U.S. dollars through the
International Monetary Market. It is expected that futures contracts trading in
additional currencies will be authorized. The standard contract sizes are
L125,000 for the Pound, 125,000 for the Guilder, Mark and Swiss Francs,
C$100,000 for the Canadian Dollar, Y12,500,000 for the Yen, and 1,000,000 for
the Peso. In contrast to Forward Currency Exchange Contracts which can be traded
at any time, only four value dates per year are available, the third Wednesday
of March, June, September and December.
FOREIGN CURRENCY OPTIONS TRANSACTIONS
Foreign currency options (as opposed to futures) are traded in a variety of
currencies in both the United States and Europe. On the Philadelphia Stock
Exchange, for example, contracts for half the size of the corresponding futures
contracts on the Chicago Board Options Exchange are traded with up to nine
months maturity in marks, sterling, yen, Swiss Francs, and Canadian dollars.
Options can be exercised at any time during the contract life, and require a
deposit subject to normal margin requirements. Since a futures contract must be
exercised, the Fund must continually make up the margin balance. As a result, a
wrong price move could result in the Fund losing more than the original
investment, as it cannot walk away from the futures contract as it can an option
contract.
The Fund will purchase call and put options and sell such options to
terminate an existing position. Options on foreign currency are similar to
options on stocks except that an option on an interest rate and/or index based
futures contract gives the purchaser the right, in return for the premium paid,
to purchase or sell foreign currency, rather than to purchase or sell stock, at
a specified exercise price at any time during the period of the option.
The Fund intends to use foreign currency option transactions in connection
with hedging strategies.
PURCHASE OF PUT OPTIONS ON FOREIGN CURRENCIES
The purchase of protective put options on a foreign currency is analogous
to the purchase of protective puts on individual stocks, where an absolute level
of protection is sought below which no additional economic loss would be
incurred by the Fund. Put options may be purchased to hedge a portfolio of
foreign stocks or foreign debt instruments or a position in the foreign currency
upon which the put option is based.
PURCHASE OF CALL OPTIONS ON FOREIGN CURRENCIES
The purchase of a call option on foreign currency represents a means of
obtaining temporary exposure to market appreciation at limited risk. It is
analogous to the purchase of a call option on an individual stock, which can be
used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the foreign currency upon which it is
based, or upon the price of the foreign stock or foreign debt instruments,
purchase of a call option may be less risky than the ownership of the foreign
currency or the foreign securities. The Fund would purchase a call option on a
foreign currency to hedge against an increase in the foreign currency or a
foreign market advance when the Fund is not fully invested.
The Fund may employ new investment techniques involving forward foreign
currency exchange contracts, foreign currency futures contracts and options on
foreign currencies in order to take advantage of new techniques in these areas
which may be developed from time to time and which are consistent with the
Fund's investment objective. The Fund believes that no additional techniques
have been identified for employment by the Fund in the foreseeable future other
than those described above.
CURRENCY TRADING RISKS
Currency exchange trading may involve significant risks. The four major
types of risk the Fund faces are exchange rate risk, interest rate risk, credit
risk and country risk.
EXCHANGE RATE RISK
Exchange rate risk results from the movement up and down of foreign
currency values in response to shifting market supply and demand. When the Fund
buys or sells a foreign currency, an exposure called an open position is
created. Until the time that position can be "covered" by selling or buying an
equivalent amount of the same currency, the Fund is exposed to the risk that the
exchange rate might move against it. Since exchange rate changes can readily
move in one direction, a position carried overnight or over a number of days
involves greater risk than one carried a few minutes or hours. Techniques such
as foreign currency forward and futures contracts and options on foreign
currency are intended to be used by the Fund to reduce exchange rate risk.
MATURITY GAPS AND INTEREST RATE RISK
Interest rate risk arises whenever there are mismatches or gaps in the
maturity structure of the Fund's foreign exchange currency holdings, which is
the total of its outstanding spot and forward or futures contracts.
Foreign currency transactions often involve borrowing short term and
lending longer term to benefit from the normal tendency of interest rates to be
higher for longer maturities. However in foreign exchange trading, while the
maturity pattern of interest rates for one currency is important, it is the
differential between interest rates for two currencies that is decisive.
CREDIT RISK
Whenever the Fund enters into a foreign exchange contract, it faces a risk,
however small, that the counter party will not perform under the contract. As a
result there is a credit risk, although no extension of "credit" is intended. To
limit credit risk, the Fund intends to evaluate the credit worthiness of each
other party. The Fund does not intend to trade more than 5% of its net assets
under foreign exchange contracts with one party.
Credit risk exists because the Fund's counter party may be unable or
unwilling to fulfill its contractual obligations as a result of bankruptcy or
insolvency or when foreign exchange controls prohibit payment. In any foreign
exchange transaction, each party agrees to deliver a certain amount of currency
to the other on a particular date. In establishing its hedges, a Fund relies on
each contract being completed. If the contract is not performed, then the Fund's
hedge is eliminated, and the Fund is exposed to any changes in exchange rates
since the contract was originated. To put itself in the same position it would
have been in had the contract been performed, the Fund must arrange a new
transaction. However, the new transaction may have to be arranged at an adverse
exchange rate. The trustee for a bankrupt company may elect to perform those
contracts that are advantageous to the company but disclaim those contracts that
are disadvantageous, resulting in losses to the Fund.
Another form of credit risk stems from the time zone differences between
the U.S. and foreign nations. If the Fund sells sterling it generally must pay
pounds to a counter party earlier in the day than it will be credited with
dollars in New York. In the intervening hours, the buyer can go into bankruptcy
or can be declared insolvent. Thus, the dollars may never be credited to the
Fund.
COUNTRY RISK
At one time or another, virtually every country has interfered with
international transactions in its currency. Interference has taken the form of
regulation of the local exchange market, restrictions on foreign investment by
residents, or limits on inflows of investment funds from abroad. Governments
take such measures, for example, to improve control over the domestic banking
system, or to influence the pattern of receipts and payments between residents
and foreigners. In those cases, restrictions on the exchange market or on
international transactions are intended to affect the level or movement of the
exchange rate. Occasionally a serious foreign exchange shortage may lead to
payments interruptions or debt servicing delays, as well as interference in the
exchange market. It has become increasingly difficult to distinguish foreign
exchange or credit risk from country risk.
Changes in regulations or restrictions usually do have an important
exchange market impact. Most disruptive are changes in rules which interfere
with the normal payments mechanism. If government regulations change and a
counterparty is either forbidden to perform or is required to do something
extra, then the Fund might be left with an unintended open position or an
unintended maturity mismatch. Dealing with such unintended long or short
positions could result in unanticipated costs to the Fund.
Other changes in official regulations influence international investment
transactions. If one of the factors affecting the buying or selling of a
currency changes, the exchange rate is likely to respond. Changes in such
controls often are unpredictable and can create a significant exchange rate
response.
Many major countries have moved toward liberalization of exchange and
payments restrictions in recent years or accepted the principle that
restrictions should be relaxed. A few industrial countries have moved in the
other direction. Important liberalizations were carried out by Switzerland, the
United Kingdom and Japan. They dismantled mechanisms for restricting either
foreign exchange inflows (Switzerland), outflows (Britain), or elements of both
(Japan). By contrast, France and Mexico have recently tightened foreign exchange
controls.
Overall, many exchange markets are still heavily restricted. Several
countries limit access to the forward market to companies financing documented
export or import transactions in an effort to insulate the market from purely
speculative activities. Some of these countries permit local traders to enter
into forward contracts with residents but prohibit certain forward transactions
with nonresidents. By comparison, other countries have strict controls on
exchange transactions by residents, but permit free exchange transactions
between local traders and non-residents. A few countries have established tiered
markets, funneling commercial transactions through one market and financial
transactions through another. Outside the major industrial countries, relatively
free foreign exchange markets are rare and controls on foreign currency
transactions are extensive.
Another aspect of country risk has to do with the possibility that the Fund
may be dealing with a foreign trader whose home country is facing a payments
problem. Even though the foreign trader intends to perform on its foreign
exchange contracts, the contracts are tied to other external liabilities the
country has incurred. As a result, performance may be delayed and can result in
unanticipated cost to the Fund. This aspect of country risk is a major element
in the Fund's credit judgment as to with whom it will deal and in what amounts.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS--November 30, 1994
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.3%)
ALABAMA
Alabama Housing Finance Agency, Single Family Mortgage 10.750% 06/01/2013 $ 485,000 $ 497,600
ALASKA
Alaska Housing Finance Corporation, Collateralized Home
Mortgage 8.750 12/01/2016 1,700,000 1,746,104
North Slope Borough, Alaska, General Obligation
Refunding (ETM) 8.350 06/30/1998 450,000 485,393
ARIZONA
Salt River Project, Arizona, Agricultural Improvement,
Series C 5.000 01/01/2016 3,000,000 2,299,350
CALIFORNIA
California Educational Facilities Authority, Stanford
University Project, Series H 5.000 01/01/2015 1,250,000 976,075
California Housing Finance Agency, Home Mortgage
Revenue, Single Family 8.600 08/01/2019 480,000 495,178
California Statewide Community Development, Salk
Institute 6.100 07/01/2014 920,000 812,571
Fresno, California, Health Facility, Holy Cross Health
Systems (MBIA) 5.625 12/01/2015 1,500,000 1,254,270
Los Angeles, California, Community Redevelopment
Agency, Series H (FSA) 6.500 12/01/2016 750,000 704,085
Los Angeles, California, Public Works Finance
Authority, Multi Capital Facilities Project 1v (MBIA) 5.250 12/01/2016 1,500,000 1,192,965
Pleasant Hill, California, Joint Powers Financing,
Capital Improvement Progam, Series A 5.250 12/01/2016 500,000 398,125
Sacramento County, California, Certificates of
Participation 5.750 06/01/2015 1,040,000 895,305
San Joaquin Hills, California, Transportation Corridor
Agency, Toll Road 6.750 01/01/2032 1,000,000 884,700
San Joaquin Hills, California, Transportation Corridor
Agency, Toll Road (effective yield 7.75%) (a) 0.000 01/01/2020 2,000,000 277,440
San Jose, California, Redevelopment Tax Allocation
(MBIA) 6.000 08/01/2015 500,000 451,185
Southern California Public Power Authority 5.750 07/01/2017 1,000,000 981,950
University of California, Multiple Purpose Project,
Series C (AMBAC) 5.000 09/01/2013 500,000 394,070
COLORADO
City and County of Denver, Colorado, Airport System,
Series A 7.000 11/15/1999 1,250,000 1,216,437
City and County of Denver, Colorado, Airport System,
Series A, S-91 8.750 11/15/2023 750,000 765,262
City and County of Denver, Colorado, Airport System,
Series A 7.250 11/15/2025 1,000,000 907,940
City and County of Denver, Colorado, Airport System,
Series B 7.250 11/15/2012 750,000 692,558
City and County of Denver, Colorado, Airport System,
Series D 7.750 11/15/2013 1,100,000 1,056,429
City and County of Denver, Colorado, Airport System,
Series D 7.000 11/15/2025 1,000,000 869,480
Colorado Housing Finance Authority, Single Family
Residential Revenue 8.750 09/01/2017 650,000 669,429
Jefferson County, Colorado, Single Family Refunding 8.875 10/01/2013 215,000 222,994
CONNECTICUT
Connecticut Special Tax Obligation, Revenue
Transportation
Infrastructure Series 5.375 09/01/2008 1,000,000 860,240
DELAWARE
Delaware Health Facilities Authority, Medical Center of
Delaware (MBIA) 6.250 10/01/2006 1,000,000 997,810
<PAGE>
Keystone America Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1994
Coupon Maturity Principal Market
Rate Date Amount Value
DISTRICT OF COLUMBIA
District of Columbia, General Obligation (AMBAC) 5.400% 06/01/2006 $1,000,000 $ 894,490
District of Columbia, General Obligation, Series E
(FSA) 6.000 06/01/2011 1,000,000 896,970
FLORIDA
Dade County, Florida, School District (MBIA) 5.000 08/01/2013 1,000,000 796,180
Escambia County, Florida, Pollution Control, Champion
International Corp. Project 6.900 08/01/2022 1,500,000 1,367,430
Florida Board of Education Capital Outlay, Public
Education, Series A 6.100 06/01/2024 1,750,000 1,578,255
Florida Board of Education Capital Outlay, Refunding
Public Education, Series D 5.000 06/01/2015 1,000,000 777,950
Florida State Turnpike Authority, Series A 5.000 07/01/2014 2,000,000 1,594,540
Orange County Housing Finance Authority, Florida, GNMA
Collateralized Mortgage Revenue Refunding 8.400 12/01/2018 300,000 309,450
Palm Beach County, Florida, Health Facilities
Authority, Good Samaritan Health Systems 6.200 10/01/2011 1,500,000 1,298,550
Palm Beach County, Florida, Solid Waste Authority,
Adjustable/Fixed Rate Revenue 8.750 07/01/2010 55,000 60,156
Palm Beach County, Florida, Solid Waste Industrial
Development (Osceola Power) 6.950 01/01/2022 1,250,000 1,114,625
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project 6.850 02/15/2021 2,000,000 1,773,340
Tallahassee, Florida, Health Facilities, Tallahassee
Memorial Regional Medical Project 6.625 12/01/2013 2,640,000 2,576,798
Tampa, Florida, Subordinated Guaranteed Entitlement
Revenue, Series 1988B 8.400 10/01/2008 1,105,000 1,208,660
ILLINOIS
Chicago, Illinois, Gas Supply Revenue (People's Gas
Light and Coke Co.) 8.100 05/01/2020 910,000 965,819
Illinois Educational Facilities Authority, Wesleyan
University 5.625 09/01/2018 1,500,000 1,214,640
Illinois Health Facilities Authority, Community
Hospital, Ottawa Project 6.850 08/15/2024 1,500,000 1,277,595
Illinois Health Facilities Authority, United Medical
Center 8.375 07/01/2012 1,000,000 1,137,100
Quincy, Illinois, Blessing Hospital Revenue 6.000 11/15/2018 750,000 606,848
Robbins, Illinois, Resources Recovery Revenue 9.250 08/15/2014 1,000,000 1,014,030
LOUISIANA
Louisiana Public Facilities Authority Revenue
Prerefunded Health and Education Capital D 7.900 12/01/2015 235,000 257,828
Louisiana Public Facilities Authority, West Jefferson
Medical Center 7.900 12/01/2015 1,470,000 1,588,688
MARYLAND
Maryland State Community Development Administration 8.125 04/01/2017 420,000 427,820
MASSACHUSETTS
Boston, Massachusetts, Metropolitan District General
Obligation 5.900 12/01/2009 900,000 844,056
Massachusetts Bay Transportation Authority, Series A 7.000 03/01/2011 1,000,000 1,016,830
Massachusetts Bay Transportation Authority, Series A 6.250 03/01/2012 2,000,000 1,864,860
Massachusetts General Obligation (FGIC) (effective
yield 7.00%) (a) 0.000 06/01/2007 400,000 180,372
<PAGE>
SCHEDULE OF INVESTMENTS--November 30, 1994
Coupon Maturity Principal Market
Rate Date Amount Value
MASSACHUSETTS--continued
Massachusetts Health And Educational Facilities
Authority, Daughters of Charity 6.100% 07/01/2014 $ 600,000 $ 543,168
Massachusetts Health And Educational Facilities
Authority, Holyoke Hospital 6.500 07/01/2015 1,000,000 854,420
Massachusetts Health And Educational Facilities
Authority, Mount Auburn Hospital 6.250 08/15/2014 500,000 457,440
Massachusetts Health And Educational Facilities
Authority, Winchester Hospital 5.750 07/01/2024 350,000 277,728
Massachusetts Housing Finance Agency 6.300 10/01/2013 3,500,000 3,168,865
Massachusetts Housing Finance Agency (MBIA) 5.950 12/01/2014 850,000 736,185
Massachusetts Housing Finance Agency, Housing Revenue 9.000 12/01/2018 305,000 317,423
Massachusetts Housing Finance Agency, Multi-family
Residential Housing 8.800 08/01/2021 250,000 255,003
Massachusetts Housing Finance Agency, Residential
Housing 8.500 08/01/2020 15,000 15,148
Massachusetts Housing Finance Agency, Residential
Housing 8.400 08/01/2021 1,490,000 1,501,935
Massachusetts Industrial Finance Agency, Harvard
Community Health Plan, Inc. 8.125 10/01/2017 300,000 310,473
Massachusetts Industrial Finance Agency, Solid Waste
Disposal 9.000 07/01/2016 1,400,000 1,393,392
Massachusetts State Water Pollution, Series A 6.375 02/01/2015 1,000,000 933,710
Massachusetts Water Resources Authority, Series C 6.000 12/01/2011 1,000,000 916,050
North Adams, Massachusetts, Limited Tax, General
Obligation 5.700 03/01/2013 600,000 526,062
Quincy, Massachusetts, Revenue Refunding, Quincy
Hospital 5.250 01/15/2016 375,000 298,732
MICHIGAN
Monroe County, Michigan, Economic Development Corp.,
Detroit Edison Co. (FGIC) 6.950 09/01/2022 500,000 496,865
Pinckney, Michigan, Community Schools, Livingston and
Washtenaw Counties 5.000 05/01/2014 500,000 394,800
MINNESOTA
Minnesota Housing Finance Agency, Single Family
Mortgage 8.200 08/01/2019 595,000 604,121
MISSOURI
Kansas City, Missouri, School District Building,
Capital Improvement Project 5.000 02/01/2014 1,500,000 1,203,045
Missouri Health and Educational Facility Revenue,
Children's Mercy Hospital Project 6.000 08/15/2023 1,000,000 771,880
Missouri Housing Development Corp. Multi-family Series
A 5.400 02/01/2013 60,000 50,281
Missouri State Health and Educational Facilities
Authority, Barnes Jewish Inc. 5.250 05/15/2012 700,000 566,237
University of Missouri, Refunding Improvement Systems
Facilities 5.200 11/01/2008 500,000 431,155
NEVADA
Henderson County, Nevada, Water, Series A (AMBAC) 6.200 12/01/2009 1,280,000 1,198,451
Henderson County, Nevada, Water, Series A (AMBAC) 6.375 12/01/2010 1,360,000 1,293,129
NEW HAMPSHIRE
New Hampshire Housing Finance Authority, Single Family
Residential Mortgage 8.625 07/01/2013 245,000 249,596
<PAGE>
Keystone America Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1994
Coupon Maturity Principal Market
Rate Date Amount Value
NEW JERSEY
New Jersey Health Care Facilities Financing Authority,
General Hospital Center of Passaic, Inc. 10.375% 07/01/2014 $1,000,000 $ 1,049,040
NEW MEXICO
Albuquerque, New Mexico, Airport Revenue 8.750 07/01/2019 500,000 536,395
New Mexico Mortgage Finance Authority, Single Family
Mortgage 8.500 07/01/2007 415,000 413,315
New Mexico Mortgage Finance Authority, Single Family
Mortgage 8.625 07/01/2017 2,140,000 2,130,627
NEW YORK
Erie County, New York, Water Authority, Fourth
Resolution Revenue Refunding (effective yield 7.30%)
(a) 0.000 12/01/2017 330,000 63,505
Metropolitan Transportation Authority, New York, Series
K Transport Facilities Revenue 6.000 07/01/2016 135,000 120,048
New York City, New York, General Obligation, Fiscal
1992, Series A 7.750 08/15/2015 1,500,000 1,523,400
New York State Dormitory Authority, City University
(AMBAC) 6.250 07/01/2016 365,000 338,096
New York State Dormitory Authority, State University 5.300 05/15/2010 100,000 84,397
New York State Dormitory Authority, State University 5.875 05/15/2011 1,500,000 1,283,805
New York State Dormitory Authority, State University 6.375 05/15/2014 2,000,000 1,804,920
New York State Environmental Facilities Corp., State
Water Pollution Control (New York City Water Finance
Authority) 5.875 06/15/2014 2,000,000 1,744,560
New York State Local Government Assistance Corp.,
Series A 5.375 04/01/2014 1,100,000 888,426
New York State Thruway Authority, Service Contract
Revenue, Local Highways and Bridges 5.750 04/01/2009 1,300,000 1,183,416
New York State Thruway Authority, Service Contract
Revenue, Local Highways and Bridges 5.875 04/01/2014 2,000,000 1,710,080
New York State Urban Development Corp. Correctional
Capital Facilities Series 4 5.250 01/01/2013 1,000,000 778,020
New York State Urban Development Corp., Correctional
Facilities 5.750 01/01/2013 1,000,000 827,050
New York, New York, General Obligation 7.700 02/01/2009 1,000,000 1,023,620
NORTH CAROLINA
North Carolina Eastern Municipal Power Agency 7.250 01/01/2007 1,000,000 1,014,750
North Carolina Eastern Municipal Power Agency, Series
1993C 5.000 01/01/2021 2,000,000 1,409,340
North Carolina Municipal Power Agency No. 1, Catawba
Electric 9.000 01/01/2013 100,000 102,419
OKLAHOMA
Tulsa, Oklahoma Industrial Authority Hospital Revenue,
St. John Medical Center Project, Series A 6.250 02/15/2014 1,250,000 1,114,700
OREGON
Western Generation Agency, Oregon, Wauna Cogeneration
Project,
Series B (7/15/94-$1,000,000) (c) 7.400 01/01/2016 1,000,000 947,200
PENNSYLVANIA
Beaver County, Pennsylvania, Industrial Development
Authority, Pollution Control Power Co.-Mansfield
Project) 5.450 09/15/2028 2,000,000 1,608,560
<PAGE>
SCHEDULE OF INVESTMENTS--November 30, 1994
Coupon Maturity Principal Market
Rate Date Amount Value
PENNSYLVANIA--continued
Butler County, Pennsylvania, Hospital Authority, Butler
Memorial Hospital 8.000% 07/01/2016 $ 935,000 $ 977,402
Cambria County, Pennsylvania, Hospital Development
Authority, Conemaugh Valley Memorial Hospital 8.875 07/01/2018 2,070,000 2,321,712
Chester County, Pennsylvania, Health And Education
Facilities Authority, Mainline Health System 5.500 05/15/2015 1,000,000 778,700
Pennsylvania Convention Center Authority (effective
yield 7.00%) (a) 0.000 09/01/2008 3,500,000 1,411,410
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Culver Project 7.125 12/01/2015 1,000,000 916,470
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project 6.500 01/01/2013 2,000,000 1,715,040
Pennsylvania General Obligation 5.375 05/01/2013 700,000 584,689
Pennsylvania Higher Education Facilities Authority,
Temple University 5.750 04/01/2031 500,000 407,960
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Albert Einstein Medical Center
Authority 7.625 04/01/2011 250,000 254,273
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Children's Hospital Authority,
Hospital Revenue 5.375 02/15/2014 2,000,000 1,607,640
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Community College (MBIA) 6.500 05/01/2007 1,000,000 989,450
Pottsville, Pennsylvania, Hospital Authority, Daughters
of Charity Health Systems, Inc., 8.250 08/01/2012 290,000 315,682
Scranton-Lackawanna, Pennsylvania, Health and Welfare
Authority Revenue, Walters Institute Project 8.125 07/15/2028 2,200,000 2,322,540
PUERTO RICO
Puerto Rico Commonwealth, General Obligation 7.000 07/01/2005 1,000,000 981,270
Puerto Rico Electric Power Authority, Series S 7.000 07/01/2007 1,365,000 1,394,116
Puerto Rico Public Buildings Authority, Guaranteed
Public Education and Health Facilities, Series M 5.700 07/01/2009 1,000,000 892,490
SOUTH DAKOTA
South Dakota Student Loan Finance 6.750 08/01/2010 1,510,000 1,405,357
TENNESSEE
Bristol, Tennessee, Health and Education Authority,
Bristol Memorial Hospital (FGIC) 6.750 09/01/2010 2,000,000 1,985,740
Bristol, Tennessee, Health and Education Authority,
Bristol Memorial Hospital (FGIC) 8.870 09/01/2021 1,300,000 1,175,720
Knox County, Tennessee, Health and Educational
Facilities 7.250 01/01/2010 1,000,000 1,043,570
Knox County, Tennessee, Health and Educational
Facilities, Fort Saunders Hospital Alliance, Series C
(MBIA) 5.250 01/01/2015 1,500,000 1,222,875
TEXAS
Brazos River Authority, Texas, Revenue Refunding,
Houston Light and Power Project (BIGI) 8.100 05/01/2019 3,000,000 3,204,600
Brazos, Texas, Higher Education Authority Inc. 6.500 06/01/2004 450,000 438,930
<PAGE>
Keystone America Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1994
Coupon Maturity Principal Market
Rate Date Amount Value
TEXAS--continued
Harris County, Texas, Toll Road 7.000% 08/15/2010 $1,000,000 $ 1,029,160
Harris County, Texas, Toll Road Sr. Lien Revenue Toll
Road 8.625 08/15/2007 1,000,000 1,106,110
Harris County, Texas, Toll Road, Unlimited Tax and
Subordinate Lien Refunding 8.125 08/01/2015 2,250,000 2,477,227
Lower Colorado River Authority, Texas Revenue 5.375 01/01/2016 3,860,000 3,125,596
Midland County, Texas, Hospital District, Midland
Memorial Hospital 7.500 06/01/2016 400,000 373,856
Midland County, Texas, Hospital District, Midland
Memorial Hospital (effective yield 7.70%) (a) 0.000 06/01/2007 90,000 34,681
Port of Corpus Christi, Texas, Industrial Development
Corp., (Valero Refining and Marketing Co. Project) 10.250 06/01/2017 990,000 1,083,624
Texas Municipal Power Agency (effective yield 7.09%)
(a) 0.000 09/01/2008 2,125,000 834,403
Texas Municipal Power Agency (effective yield 7.15%)
(a) 0.000 09/01/2006 2,500,000 1,150,625
Texas State Water Development, Unlimited Tax, General
Obligation 5.125 08/01/2015 900,000 722,340
UTAH
Intermountain Power Agency, Utah, Power Supply (ETM)
(effective yield 6.80%) (a) 0.000 07/01/2002 500,000 64,715
Intermountain Power Agency, Utah, Power Supply
Refunding (effective yield 6.95%)(a) 0.000 07/01/2007 750,000 321,952
Utah State Housing Finance Authority, Single Family
Mortgage 9.000 01/01/2019 45,000 43,808
VIRGINIA
Pittsylvania County, Virginia, Industrial Development 7.500 01/01/2014 3,500,000 3,310,300
WASHINGTON
Port of Seattle, Washington, General Obligation 5.750 05/01/2014 500,000 424,465
Washington Public Power Supply System, Nuclear Project
# 1 15.000 07/01/1996 250,000 294,182
Washington Public Power Supply System, Nuclear Project
# 1 14.500 07/01/2002 150,000 182,132
Washington Public Power Supply System, Nuclear Project
# 2 7.625 07/01/2010 1,000,000 1,092,850
Washington State General Obligation 6.750 02/01/2015 1,000,000 991,930
WYOMING
Wyoming Community Development Authority, Single Family
Mortgage 7.875 06/01/2018 1,600,000 1,617,344
TOTAL MUNICIPAL BONDS (COST--$150,992,597) 143,742,744
TEMPORARY TAX-EXEMPT INVESTMENTS (0.8%)
Sayre County, Pennsylvania, Health Care Facilities
Authority, Variable Rate Demand Hospital Revenue Bonds
(VHA of Pennsylvania Inc. Capital Asset Financing
Program) Series 1985B (b) (Cost $1,210,000) 3.650 12/01/2020 1,210,000 1,210,000
TOTAL INVESTMENTS (COST--$152,202,597) (d) 144,952,744
OTHER ASSETS AND LIABILITIES--NET (1.9%) 2,828,740
NET ASSETS (100.0%) $147,781,484
</TABLE>
<PAGE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Effective yield is the yield at which the bond accretes on an annual
basis until its maturity date. All zero coupon bonds are non-callable.
(b) Security is a variable or floating rate instrument with periodic demand
features. The Fund is entitled to full payment of principal and accrued
interest upon surrendering the security to the issuing agent according to the
terms of the demand features.
(c) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal
Securities Act of 1933) which are valued at fair value in the opinion of
management--in the case of bonds, at estimated value considering quality,
coupon, term, call feature, yield to maturity of the security and similar
issues which are actively traded, sinking fund, marketability, plus
adjustment, if any, for equity features or other special factors. The Fund
may make investments in an amount up to 10% of the value of the Fund's net
assets in such securities. Dates of acquisition and costs are set forth in
parentheses after the titles of the restricted securities. On the date of
acquisition there was no market quotation or similar securities and the above
securities were valued at acquisition costs. At November 30, 1994, the fair
value of these restricted securities was $947,200 (0.6% of net assets). The
Fund will not pay the costs of disposition of the above restricted securities
other than ordinary brokerage fees, if any.
(d) The cost of investments for federal tax purposes amounted to
$152,232,717. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at November 30, 1994 are as follows:
Gross unrealized appreciation $ 2,216,503
Gross unrealized depreciation (9,496,476)
Net unrealized depreciation ($ 7,279,973)
<PAGE>
Keystone America Tax Free Income Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 13, 1987
(Commencement
Year Ended November 30, of Operations) to
1994 1993 1992 1991 1990 1989 1988 November 30, 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period $10.250 $ 10.170 $ 10.130 $ 9.940 $ 10.240 $ 9.960 $ 9.640 $10.000
Income from investment operations
Investment income--net 0.513 0.567 0.625 0.605 0.593 0.617 0.630 0.329
Realized gains (losses) on
investments--net (1.285) 0.368 0.306 0.314 (0.060) 0.347 0.370 (0.317)
Total income (loss) from investment
operations (0.772) 0.935 0.931 0.919 0.533 0.964 1.000 0.012
Less distributions
Dividends from investment income--
net (0.517) (0.571) (0.621) (0.605) (0.603) (0.634) (0.680) (0.372)
Distributions in excess of investment
income--net(b) 0 (0.044) 0 (0.004) (0.030) 0 0 0
Distributions from realized gain on
investments--net 0 (0.240) (0.270) (0.120) (0.200) (0.050) 0 0
Tax basis return of capital (0.031) 0 0 0 0 0 0 0
Total distributions (0.548) (0.855) (0.891) (0.729) (0.833) (0.684) (0.680) (0.372)
Net asset value end of period $ 8.930 $ 10.250 $ 10.170 $ 10.130 $ 9.940 $ 10.240 $ 9.960 $ 9.640
Total return(c) (7.81%) 9.37% 9.35% 9.59% 5.55% 9.97% 10.60% 0.17%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses 1.13% 1.21% 1.25% 1.58% 1.66% 1.62% 1.57% 1.00%(a)
Investment income--net 5.27% 5.40% 6.02% 5.95% 6.03% 6.15% 6.13% 6.85%(a)
Portfolio turnover rate 98% 47% 32% 37% 42% 49% 109% 67%
Net assets end of period (thousands) $95,691 $124,102 $120,660 $133,524 $146,335 $162,013 $179,191 $16,090
</TABLE>
(a) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to November 30, 1987.
(b) Effective December 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis investment income--net
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis gains on a
temporary basis) are presented as "Distributions in excess of realized
gains." For the fiscal years ended prior to November 30, 1993, distributions
in excess of book basis net income were charged to paid in capital.
(c) Excluding applicable sales charge.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS-CLASS B SHARES
(For a share outstanding throughout the period)
February 1, 1993
Year Ended (Date of Initial
November 30, Public Offering) to
1994 November 30, 1993
Net asset value beginning of period $10.250 $10.270
Income from investment operations
Investment income--net 0.452 0.369
Realized gains (losses) on
investments--net (1.287) 0.301
Total income (loss) from investment
operations (0.835) 0.670
Less distributions
Dividends from investment income--net (0.505) (0.369)
Distributions in excess of investment
income--net(b) 0 (0.081)
Distributions from realized gain on
investments--net 0 (0.240)
Tax basis return of capital (0.030) 0
Total distributions (0.535) (0.690)
Net asset value end of period $ 8.880 $10.250
Total return(c) (8.43%) 6.59%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses 1.88% 1.96%(a)
Investment income--net 4.60% 4.42%(a)
Portfolio turnover rate 98% 47%
Net assets end of period (thousands) $28,860 $14,091
(a) Annualized.
(b) Effective December 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis investment income--net
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis gains on a
temporary basis) are presented as "Distributions in excess of realized
gains." For the period ended November 30, 1993, distributions in excess of
book basis net income were charged to paid in capital.
(c) Excluding applicable sales charge.
See Notes to Financial Statements.
<PAGE>
Keystone America Tax Free Income Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
February 1, 1993
Year Ended (Date of Initial
November 30, Public Offering) to
1994 November 30, 1993
Net asset value beginning of period $10.260 $10.270
Income from investment operations
Investment income--net 0.431 0.371
Realized gains (losses) on
investments--net (1.276) 0.309
Total income (loss) from investment
operations (0.845) 0.680
Less distributions
Dividends from investment income--net (0.505) (0.371)
Distributions in excess of investment
income--net (b) 0 (0.079)
Distributions from realized gain on
investments--net 0 (0.240)
Tax basis return of capital (0.030) 0
Total distributions (0.535) (0.690)
Net asset value end of period $ 8.880 $10.260
Total return (c) (8.52%) 6.70%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses 1.89% 1.94%(a)
Investment income--net 4.52% 4.41%(a)
Portfolio turnover rate 98% 47%
Net assets end of period (thousands) $23,230 $27,261
(a) Annualized.
(b) Effective December 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis investment income--net
(or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis gains on a
temporary basis) are presented as "Distributions in excess of realized
gains." For the period ended November 30, 1993, distributions in excess of
book basis net income were charged to paid in capital.
(c) Excluding applicable sales charge.
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
November 30, 1994
Assets:
Investments at market value (identified
cost--$152,202,597) (Note 1) $144,952,744
Cash 119,680
Receivable for:
Fund shares sold 47,799
Interest 3,406,224
Prepaid expenses 16,798
Total assets 148,543,245
Liabilities:
Payable for:
Fund shares redeemed 367,775
Distributions to shareholders 333,841
Accrued reimbursable expenses (Note 5) 1,681
Other accrued expenses 58,464
Total liabilities 761,761
Net assets $147,781,484
Net assets represented by:
Paid-in capital $161,237,835
Accumulated distributions in excess of investment
income--net (333,473)
Accumulated realized gains (losses) on investments--net (5,873,025)
Net unrealized depreciation of investments (7,249,853)
Total net assets $147,781,484
Net asset value and redemption price per
share (Note 2):
Class A Shares ($8.93 on 10,719,229 shares outstanding) $ 95,691,357
Class B Shares ($8.88 on 3,251,836 shares outstanding) 28,860,412
Class C Shares ($8.88 on 2,616,944 shares outstanding) 23,229,715
$147,781,484
Offering price per share:
Class A Shares (including sales charge of 4.75%) $ 9.38
Class B Shares $ 8.88
Class C Shares $ 8.88
STATEMENT OF OPERATIONS--
Year Ended November 30, 1994
Investment Income (Note 1):
Interest $ 10,594,712
Expenses (Notes 2 and 5):
Management fee $ 1,005,305
Shareholder services 232,940
Accounting, auditing and legal 46,963
Custodian fees 80,825
Printing 20,112
Trustees' fees and expenses 8,485
Distribution Plan expenses 790,026
Registration fees 69,596
Miscellaneous expenses 9,822
Total expenses 2,264,074
Investment income--net 8,330,638
Realized and unrealized gain (loss)
on investments and closed futures
contracts--net (Notes 1 and 3):
Realized gain (loss) on:
Investments (6,084,448)
Closed futures contracts 215,071
Realized loss on investments and
closed futures contracts--net (5,869,377)
Net unrealized appreciation
(depreciation) on investments:
Beginning of year 8,775,608
End of year (7,249,853)
Increase (decrease) in unrealized
appreciation or depreciation--net (16,025,461)
Net loss on investments and closed
futures contracts (21,894,838)
Net decrease in net assets resulting
from operations ($ 13,564,200)
See Notes to Financial Statements.
<PAGE>
Keystone America Tax Free Income Fund
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended November 30,
1994 1993
Operations:
Investment income--net $ 8,330,638 $ 7,501,414
Realized gain (loss) on investments
and closed futures contracts--net (5,869,377) 4,011,821
Increase (decrease) in unrealized
appreciation or depreciation--net (16,025,461) 170,627
Net increase (decrease) in net
assets resulting from operations (13,564,200) 11,683,862
Distributions to shareholders from
(Notes 1 and 4):
Investment income--net--Class A
Shares (5,980,145) (6,825,448)
In excess of investment
income--net--Class A Shares 0 (527,495)
Realized gain on
investments--net--Class A Shares 0 (2,860,476)
Tax basis return of capital--Class A
Shares (338,046) 0
Investment income--net--Class B
Shares (1,297,179) (256,353)
In excess of investment
income--net--Class B Shares 0 (56,138)
Realized gain on
investments--net--Class B Shares 0 (320,614)
Tax basis return of capital--Class B
Shares (101,954) 0
Investment income--net--Class C
Shares (1,452,252) (467,617)
In excess of investment
income--net--Class C Shares 0 (99,222)
Realized gain on
investments--net--Class C Shares 0 (623,513)
Tax basis return of capital--Class C
Shares (82,063) 0
Total distributions to shareholders (9,251,639) (12,036,876)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A
Shares 6,833,913 9,960,198
Proceeds from shares sold--Class B
Shares 21,886,789 14,717,020
Proceeds from shares sold--Class C
Shares 9,086,896 28,545,190
Payment for shares redeemed--Class A
Shares (23,370,474) (15,535,841)
Payment for shares redeemed--Class B
Shares (4,163,609) (628,895)
Payment for shares redeemed--Class C
Shares (10,093,259) (1,272,363)
Net asset value of shares issued in
reinvestment of distributions from:
Investment income--net and in excess
of investment income--net--
Class A Shares 3,231,223 4,138,211
Investment income--net and in excess
of investment income--net--
Class B Shares 718,132 184,997
Investment income--net and in excess
of investment income--net--
Class C Shares 1,013,566 376,599
Realized gain on
investments--net--Class A Shares 0 3,947,202
Realized gain on
investments--net--Class B Shares 0 238,620
Realized gain on
investments--net--Class C Shares 0 476,455
Net increase in net assets resulting
from capital share transactions 5,143,177 45,147,393
Total increase (decrease) in net
assets (17,672,662) 44,794,379
Net assets:
Beginning of year 165,454,146 120,659,767
End of year [including accumulated
distributions in excess of investment
income--net as follows: November
1994--($333,473) and November
1993--($326,527)]
(Note 1) $147,781,484 $165,454,146
See Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone America Tax Free Income Fund (the "Fund") is a Massachusetts
business trust for which Keystone Management, Inc. ("KMI") is the Investment
Manager and Keystone Custodian Funds, Inc. ("Keystone") is the Investment
Adviser. The Fund was organized on October 24, 1986 and had no operations
prior to February 13, 1987. It is registered under the Investment Company Act
of 1940 as a diversified open-end investment company.
The Fund currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption within three calendar years after the year of purchase. Class
C shares are sold subject to a contingent deferred sales charge payable upon
redemption within one year after purchase. Class C shares are available only
through dealers who have entered into special distribution agreements with
Keystone Distributors, Inc. ("KDI"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Group, Inc., ("KGI"), a
Delaware corporation. KGI is privately owned by an investor group consisting
of members of current and former management of Keystone. KMI is a
wholly-owned subsidiary of Keystone. Keystone Investor Resource Center, Inc.
(KIRC), a wholly-owned subsidiary of Keystone, is the Fund's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Tax-exempt bonds are stated on the basis of valuations provided by a
pricing service, approved by the Board of Trustees, that uses information
with respect to transactions in bonds, quotations from bond dealers and
market transactions in various relationships between securities in
determining value. Non-tax-exempt securities for which market quotations are
readily available are valued at the price quoted which, in the opinion of the
Board of Trustees or their representative, most nearly represents their
market value. Short-term investments which are purchased with maturities of
sixty days or less are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount) which when
combined with accrued interest approximates market. Short-term investments
maturing in more than sixty days for which market quotations are readily
available are valued at current market value. Short-term investments maturing
in more than sixty days when purchased which are held on the sixtieth day
prior to maturity are valued at amortized cost (market value on the sixtieth
day adjusted for amortization of premium or accretion of discount) which when
combined with accrued interest approximates market. All other securities and
other assets are valued at fair value as determined in good faith using
methods prescribed by the Board of Trustees.
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security, financial instrument, or, in the case
of a stock index, cash at a set price on a future date. Upon entering into a
futures contract, the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price indicated
in the futures contract. Subsequent payments ("variation margin") are made or
received by the Fund each day, as the value of the underlying instrument or
index fluctuates, and are recorded for book purposes as unrealized gains or
losses by the Fund. For federal income tax purposes, any futures contracts which
remain open at fiscal year-end are marked-to-market and the resultant net gain
or loss is included in federal taxable income.
<PAGE>
Keystone America Tax Free Income Fund
B. Securities transactions are accounted for on the trade date. Realized
gains and losses are recorded on the identified cost basis. Interest income
is recorded on the accrual basis. All premiums and original issue discounts
are amortized/accreted for both financial reporting and federal income tax
purposes. Distributions to shareholders are recorded by the the Fund at the
close of business on the ex-dividend date.
C. The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended
("Internal Revenue Code"). Thus the Fund is relieved of any federal income
tax liability by distributing all of its net taxable investment income and
net taxable capital gains, if any, to its shareholders. The tax-exempt
interest portion of each dividend is declared uniformly based on the ratio of
the Fund's tax-exempt and taxable income for the entire year. Any
distribution which is declared in December and paid before the next February
1 will be taxable to shareholders in the year declared. The Fund intends to
avoid excise tax liability by making the required distributions under the
Internal Revenue Code.
D. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price and which generally will be maintained at 101%
of the repurchase price. The Fund monitors the value of collateral on a daily
basis, and if the collateral falls below required levels, the Fund intends to
seek additional collateral from the seller or terminate the repurchase
agreement. If the seller defaults, the Fund would suffer a loss to the extent
that the proceeds from the sale of the underlying securities were less than
the repurchase price. Any such loss would be increased by any cost incurred
on disposing of such securities. If bankruptcy proceedings are commenced
against the seller under the repurchase agreement, the realization on the
collateral may be delayed or limited. Repurchase agreements entered into by
the Fund will be limited to transactions with dealers or domestic banks
believed to present minimal credit risks and the Fund will take constructive
receipt of all securities underlying repurchase agreements until such
agreements expire.
E. The Fund distributes net investment income monthly and net capital gains,
if any, annually. Distributions from net investment income are based on tax
basis net income. From time to time the Fund may distribute dividends which
exceed book basis net income. Excess distributions were previously charged to
paid-in capital. Effective December 1, 1993, the Fund adopted Statement of
Position 93-2: Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain and Return of Capital Distributions by
Investment Companies. As a result of this statement, the Fund changed the
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions determined
in accordance with income tax regulations. Accordingly, the following
reclassifications have been made as of November 30, 1993: an increase in paid
in capital of $132,111, an increase in accumulated distributions in excess of
investment income--net of $326,527, and an increase in accumulated realized
<PAGE>
gain (loss) on investments--net of $194,416. Differences between book basis
investment income--net available for distribution and tax basis investment
income--net available for distribution are primarily attributable to
differences in the treatment of 12b-1 Distribution Plan charges and tax basis
returns of capital.
(2.) Capital Share Transactions
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of
the Fund were as follows:
Class A Shares
Year Ended November 30,
1994 1993
Shares sold 697,684 948,591
Shares redeemed (2,421,649) (1,483,607)
Shares issued in reinvestment of
distributions from:
Investment income--net and
distributions in excess of investment
income--net 333,532 396,419
Realized gains--net 0 386,150
Net increase (decrease) (1,390,433) 247,553
Class B Shares
February 1, 1993
(Date of Initial
Public Offering)
Year Ended to
November 30, November 30,
1994 1993
Shares sold 2,235,194 1,392,975
Shares redeemed (432,965) (59,469)
Shares issued in reinvestment of
distributions from:
Investment income--net and
distributions in excess of investment
income--net 75,307 17,559
Realized gains--net 0 23,235
Net increase 1,877,536 1,374,300
Class C Shares
February 1, 1993
(Date of Initial
Public Offering)
Year Ended to
November 30, November 30,
1994 1993
Shares sold 922,206 2,696,646
Shares redeemed (1,068,581) (120,566)
Shares issued in reinvestment of
distributions from:
Investment income--net and
distributions in excess of
investment income--net 105,124 35,767
Realized gains--net 0 46,348
Net increase (decrease) (41,251) 2,658,195
<PAGE>
Keystone America Tax Free Income Fund
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares.
The Class A Distribution Plan provides for payments which are currently
limited to 0.25% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
the Fund to KDI under the Class A Distribution Plan are currently used to pay
others, such as dealers, service fees at an annual rate of 0.25% of the
average net asset value of shares sold by such others and remaining
outstanding on the books of the Fund for specified periods.
The Class B Distribution Plan provides for payments at an annual rate of
1.00% of the average daily net asset value of Class B shares to pay expenses
of the distribution of Class B shares. Amounts paid by the Fund under the
Class B Distribution Plan are currently used to pay others (dealers) (i) a
commission at the time of purchase normally equal to 3.00% of the value of
each share sold; and/or (ii) service fees currently at an annual rate of
0.25% of the average net asset value of shares sold by such others and
remaining outstanding on the books of the Fund for specified periods.
The Class C Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class C shares to pay
expenses of the distribution of Class C shares. Amounts paid by the Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) (i) a payment at the time of purchase of 1.00% of the value of each
share sold, such payment to consist of a commission in the amount of 0.75%
and the first year's service fee in advance in the amount of 0.25%, and (ii)
beginning approximately fifteen months after purchase, a commission at an
annual rate of 0.75% (subject to applicable limitations imposed by the rules
of National Association of Securities Dealers, Inc.) and service fees at the
annual rate of 0.25% of the average net asset value of shares sold by such
others and remaining outstanding on the books of the Fund for specified
periods.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by a vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of the Class B
Distribution Plan, payments to KDI will continue at the annual rate of 1.00%
of the average daily net asset value of Class B shares, as compensation for
its services which had been earned while the Class B Distribution Plan was in
effect. Unreimbursed distribution expenses at November 30, 1994 were
$719,756.
For the year ended November 30, 1994 the Fund paid KDI $269,046, $241,979 and
$279,001 for Class A, Class B and Class C Distribution Plans, respectively.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
(3.) Securities Transactions
As of November 30, 1994, the Fund had a capital loss carryover for federal
income tax purposes of approximately $5,838,000 which expires in 2002. For
the year ended November 30, 1994, purchases and sales of investment
securities were as follows:
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $167,552,928 $154,960,782
Short-term commercial and tax-exempt notes 89,125,200 95,813,291
$256,678,128 $250,774,073
<PAGE>
(4.) Distributions to Shareholders
Distributions of net investment income of $0.043, $0.039 and $0.039 per share
were declared payable January 6, 1995 to shareholders of record December 23,
1994 for Class A, Class B and Class C shares, respectively. These
distributions are not reflected in the accompanying financial statements.
The Fund intends to distribute to its shareholders dividends from net
investment income monthly and all taxable net realized long-term capital
gains, if any, annually.
(5.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, dated December 29, 1989, KMI provides investment management and
administrative services to the Fund. In return, KMI is paid a management fee
computed and payable daily at a rate of 2.0% of the Fund's gross investment
income plus an amount determined by applying percentage rates, which start at
0.50% and decline, as net assets increase, to 0.25% per annum, to the net
asset value of the Fund. KMI has entered into an Investment Advisory
Agreement with Keystone, dated December 30, 1989, under which Keystone
provides investment advisory and management services to the Fund and receives
for its services an annual fee representing 85% of the management fee
received by KMI. During the year ended November 30, 1994, the Fund paid or
accrued to KMI investment and administrative services fees of $1,005,305. Of
such amount paid to KMI, $854,509 was paid to Keystone for its services to
the Fund.
During the year ended November 30, 1994, the Fund paid or accrued to KIRC
$232,940 for shareholder services and a total of $18,676 to KIRC and KGI as
reimbursement for certain accounting services.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund.
<PAGE>
Keystone America Tax Free Income Fund
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone America Tax Free Income Fund
We have audited the accompanying statement of assets and liabilities of
Keystone America Tax Free Income Fund, including the schedule of investments,
as of November 30, 1994, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in
the two-year period then ended, and the financial highlights for each of the
years in the seven-year period then ended and for the period from February
13, 1987 (commencement of operations) to November 30, 1987 for Class A shares
and for the year ended November 30, 1994 and for the period from February 1,
1993 (Date of Initial Public Offering) to November 30, 1993 for Class B
shares and Class C shares. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of November 30, 1994, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone America Tax Free Income Fund as of November 30, 1994, the results of
its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the periods stated in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 6, 1995
EXHIBIT 17(c)(3)
Registrant's Most Recent Annual Report
<PAGE>
Keystone Tax Free Income Fund
Seeks current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Dear Shareholder:
We are writing to report to you on activities in Keystone Tax Free Income
Fund for the twelve-month period which ended November 30, 1995.
Performance
Your Fund provided the following returns, including reinvestment of
dividends, for the twelve-month period:
Class A shares returned 18.71%,
Class B shares returned 17.84%, and
Class C shares returned 17.84%.
Your Fund's strong performance during the fiscal year represented a
significant recovery from the weak municipal bond market environment of 1994.
We were pleased with this performance which resulted in significant price
appreciation for shareholders. This return was in line with municipal bond
benchmarks during the period. We attribute that performance to our careful
credit analysis and the positive performance of the municipal bond market in
1995.
Municipal bond market rebound
This was an unusually strong year for municipal bonds. After an unsettled
market in 1994, patience rewarded municipal bond investors in 1995. Interest
rates declined and bond prices rose as the slow growth economy kept inflation
under control. This 'soft landing' for the economy created a very positive
environment for bond investors, resulting in unusually strong one-year total
returns. The Lehman Municipal Bond Index--a widely recognized benchmark of
municipal bond performance--returned 18.91% for the twelve-month period which
ended November 30, 1995.
The efforts of the Federal Reserve Board in 1994 to engineer a soft
landing for the U.S. economy appeared to succeed in 1995. Economic growth
slowed throughout the year, inflation remained under control and interest
rates declined--generally favorable indicators for municipal bonds. While
growth slowed, the fiscal condition of many municipalities generally
improved. Limited supply also had a positive influence on the municipal bond
market. New issue supply continued to decline from $298 billion in 1993 to
approximately half that amount in 1995.
Portfolio strategy
During the twelve-month period, we emphasized bonds that we believed would
benefit from a declining interest rate environment. We concentrated on
non-callable, discount and zero coupon bonds which typically tend to perform
better when rates decline. This strategy resulted in a lengthening of the
Fund's average maturity to 20 years as of November 30, 1995. We continued to
focus on bonds with maturities in the 20-year area for their attractive
income and lower risk characteristics than longer term bonds. We also
maintained an average portfolio quality of AA- as of November 30, 1995.
(continued on next page)
1
<PAGE>
Keystone Tax Free Income Fund
Relatively attractive values
Despite the strong performance of municipal bonds in 1995, they remained
attractive versus comparable U.S. Treasury securities. In fact, municipal
bond yields averaged about 93% of the yields on comparable long-term U.S.
Treasury bonds, a historically high level.(1) This meant that many investors
could obtain significantly better yields from municipal bonds than Treasuries
on an after-tax basis.
Outlook
We anticipate a continuation of the positive environment for municipal bonds
over the next twelve months. Interest rates should trend down as the economy
continues to slow and level off. However, we do not expect a recession in
1996. A slow growth environment could result in some price appreciation for
shareholders, but we believe most of the returns should come from income.
Municipal bond supply should remain tight in 1996. With the possibility of
rising demand, we think these factors should continue to provide positive
support for municipal bond prices and your Fund.
We encourage you to maintain a long-term perspective about your Fund. Over
time, investment returns have tended to even out, rewarding municipal bond
investors who are able to tolerate short-term price fluctuations. This has
been particularly true for investors over the past couple of years. In all
market environments, we will continue to manage Keystone Tax Free Income Fund
to seek valuable tax-free income from a portfolio of quality municipal
obligations.(2)
We appreciate your continued support of Keystone funds. If you have any
questions or comments, please feel free to write to us.
Sincerely,
[signature of Albert H. Elfner, III]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[signature of George S. Bissell]
George S. Bissell
Chairman of the Board
Keystone Funds
January 1996
(1) Source: Keystone Investments, Inc. The average yield of a selection of
30-year AA-rated municipal bonds compared to the yield on a 30-year U.S.
Treasury bond yield on November 30, 1995.
(2) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
2
<PAGE>
A Discussion With
Your Fund Manager
Betsy A. Blacher is the senior portfolio manager of your Fund and leads
Keystone's municipal bond investment team. Ms. Blacher is a professional with
16 years of investment experience specializing in municipal bonds. She holds
a Bachelor's degree from Wheaton College in economics and sociology.
Together, with portfolio managers Daniel Rabasco and George Kimball and
analyst David Moore, the team evaluates municipal bonds for Keystone tax free
funds.
Q What does the Fund offer investors?
A The Fund is designed for tax-sensitive investors. It seeks consistent,
attractive income that is exempt from federal income tax.(3) The Fund offers
professional management and diversification by investing in investment grade
municipal bonds. We manage the Fund with careful attention to credit quality
and financial stability.
Q How did municipal bonds perform over the past year?
A Municipal bonds rebounded strongly as a slowing economy reduced the threat
of higher interest rates and inflation. Most bond holders more than recovered
from their losses in 1994 and recorded double-digit total returns. This was a
reversal from 1994 when yields rose and bond prices declined. As growth
moderated at the start of 1995, municipal bonds rallied resulting in
unusually positive total returns.
Q How did the Fund perform?
A The Fund generated returns that paralleled the strong performance of the
municipal bond market. At the beginning of 1995 we expected economic growth
to moderate and interest rates to decline. So, we emphasized bonds that we
expected to benefit from declining rates: non-callable, discount and zero
coupon bonds. Since callable bonds are likely to be bought back by the issuer
in this type of environment, we emphasized noncallable bonds to preserve
income as rates declined. At the same time, these bonds became expensive
relative to other municipal bonds and this contributed to the Fund's price
appreciation.
Discount bonds are sold at a discount from par, or value at maturity.
Historically these bonds have tended to provide more price appreciation in a
falling rate environment than bonds priced close to or above par.
Zero coupon bonds represented a small portion of the portfolio. But, these
bonds were important contributors to the Fund's strong price recovery.
Because zeroes pay income at maturity, they have historically tended to be
the most sensitive to changes in interest rates. As rates declined, they were
among the best performing holdings in the portfolio.
We were pleased with the results of this strategy which helped the Fund
participate in the strong recovery of municipal bonds this year.
Q Total returns were impressive, but municipal bond yields declined. Why?
A Yields declined for nearly every municipal bond investor, including
Keystone Tax Free Income Fund. Slower economic growth lessens the potential
for higher inflation which reduces net bond yields. We held a number of high
coupon bonds and attempted to lock-in income by emphasizing selected
non-callable bonds. While the Fund's income still declined, we believe the
portfolio's holdings of these bonds helped the portfolio to maintain income.
Fund Profile
Objective: Seeks growth and income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Commencement of investment operations: April 14, 1987
Average quality: AA-
Average maturity: 20 years
Net assets: $148 million
(3) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
3
<PAGE>
Keystone Tax Free Income Fund
In evaluating bonds for the Fund, Keystone looks for . . .
(bullet) Strong credit ratings; bonds rated in the top 4 categories (AAA, AA,
A, BBB)
(bullet) Responsible fiscal policies
(bullet) Solid financial positions
(bullet) Attractive values
Keystone's municipal bond team also evaluates local economic conditions, the
state legislative climate, the taxing power of the issuer and expected cash
flows from the project.
Q Did talk about a 'flat tax' in Washington affect municipal bonds?
A Discussions about a 'flat tax' limited performance that otherwise would have
been stronger than the impressive returns of 1995. The 'flat tax' would have
been a negative for municipal bonds because it would have taxed municipal
bond income. At this writing, the possibility of such a tax appears remote.
But, the mere discussion of it caused municipal bonds to rise less in price
than comparable U.S. Treasuries. As a result, we believe that municipals are
still attractive values.
Q What is your outlook?
A We continue to be cautiously optimistic about the municipal bond market. We
expect the economy to continue slowing to a sustainable, non-inflationary
level. This should provide the potential for stable to declining interest
rates over the next six months. In particular, we expect short-term interest
rates to decline further, which could result in some price appreciation.
Q Why do you think growth will remain slow?
A Demographics are important to economic growth. With new home sales and new
family formation slowing, we think economic growth should remain moderate
compared to the 1980s and early 1990s. In addition, world economic growth is
a factor. In Europe, growth has been slow, even with cuts in interest rates.
Because U.S. growth is increasingly dependent on world growth, economic
growth should not be a threat to bond investors for some time. Combined with
a proposal to balance the federal budget, these could be strong positives for
municipal bond investors over the long term.
Q What should shareholders expect?
A We think shareholders should not expect a repeat of the unusually positive
performance of 1995; investors should look forward to returns to come
primarily from income rather than price appreciation in the months ahead.
Q Are municipal bond funds still a good value?
A Even after such a great year, we believe municipal bond yields are still
very attractive values compared to taxable bond yields. On November 30 the
yield on a 30-year AA-rated municipal bond equaled 93% of the yield on a
comparable U.S. Treasury bond. As rates declined, taxable bond yields
declined more than tax free yields. This increased the attractiveness of
municipal bonds compared to taxable bonds. As a result, the after-tax yield
of municipal bonds remains relatively high by historical standards.
- ---------------------------------------[pie chart]------------------------------
Portfolio Quality Summary
as of November 30, 1995
S&P rating(4)
AAA 37%
A 19%
BBB 18%
AA 14%
Not rated 12%
Average portfolio quality: AA-
(percentage of portfolio assets)
(4) Where Standard & Poor's (S&P) ratings were not available, we have used
ratings from Moody's Investor Service, Inc., Fitch Investor's Service,
Inc. or ratings assigned by another nationally recognized statistical
rating organization.
- --------------------------------------------------------------------------------
4
<PAGE>
- ----------------------------------[bar chart]-----------------------------------
Relatively Attractive
Municipal Bond Yields(5)
as of November 30, 1995
Municipal Bonds 5.7
U.S. Treasury Bond 6.13
Municipal bond yields recently equalled 93% of
the yield on a comparable U.S. Treasury bond.
(5) Source: Keystone Investments, Inc. Based on a selection of 30-year
AA-rated municipal bonds versus the yield on the 30-year U.S. Treasury
bond on November 30, 1995.
- --------------------------------------------------------------------------------
Tax-Equivalent Yields
Federal Tax Bracket(6)
- ---------------------------------------
31% 36% 39.6%
- ---------------------------------------
Yield Taxable Equivalent Yield
- ---------------------------------------
4.5% 6.5% 7.0% 7.5%
- ---------------------------------------
5.0% 7.2% 7.8% 8.3%
- ---------------------------------------
5.5% 8.0% 8.6% 9.1%
- ---------------------------------------
A tax free yield of 5% is equal to a taxable yield of 7.8% if you are in the
36% federal tax bracket.
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
(6) The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields
are hypothetical and do not represent the returns of any particular
investment.
[diamond]
This column is intended to answer questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investment Distributors, Inc.,
Attn: Shareholder Communications, 22nd Floor,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
5
<PAGE>
Keystone Tax Free Income Fund
Your Fund's Performance
- ------------------------------[Mountain Chart]----------------------------------
Growth of an investment in
Keystone Tax Free Income Fund Class A
$ In Thousands
Initial Reinvested
Investment Distributions
11/86 9649 9649
11/87 9249 9541
11/88 9534 10553
11/89 9801 11605
11/90 9534 12249
11/91 9820 13423
11/92 9991 14678
11/93 9763 16053
11/94 8506 14799
11/95 9572 17569
A $10,000 investment in Keystone Tax Free Income Fund Class A made on
April 14, 1987 with all distributions reinvested was worth $17,569 on
November 30, 1995. Past performance is no guarantee of future results.
- --------------------------------------------------------------------------------
Twelve-Month Performance as of November 30, 1995
================================================================================
Class A Class B Class C
Total returns* 18.71% 17.84% 17.84%
Net asset value 11/30/94 $ 8.93 $ 8.88 $ 8.88
11/30/95 $10.05 $ 9.97 $ 9.97
Dividends $ 0.52 $ 0.46 $ 0.46
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of November 30, 1995
================================================================================
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 18.71% 17.84% 17.84%
1-year 13.07% 13.84% 17.84%
5-year 36.62% -- --
Life of Class 75.69% 12.11% 15.02%
Average Annual Returns
1-year w/o sales charge 18.71% 17.84% 17.84%
1-year 13.07% 13.84% 17.84%
5-year 6.44% -- --
Life of Class 6.75% 4.12% 5.06%
Class A share performance is from the commencement of investment operations
on April 14, 1987. Performance is reported at the current maximum front-end
sales charge of 4.75%.
Class B share performance is from the commencement of investment
operations on February 1, 1993. Shares purchased after June 1, 1995 are
subject to a contingent deferred sales charge (CDSC) that declines from 5% to
1% over six years from the month purchased. Performance assumes that shares
were redeemed after the end of a one-year holding period and reflects the
deduction of a 4% CDSC.
Class C share performance is from the commencement of investment
operations on February 1, 1993. Performance reflects the return you would
have received for holding shares for one year and redeeming after the end of
the period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
6
<PAGE>
Growth of an Investment
- -------------------------------[Line Chart]-------------------------------------
Comparison of change in value of a $10,000 investment
in Keystone Tax Free Income Fund, the
Lehman Municipal Bond Index, and the Consumer Price Index.
In Thousands April 14, 1987 through November 30, 1995
Average Annual Total Return
1 Year 5 Year Life of Class
Class A 13.07% 6.44% 6.75%
Class B 13.84% -- 4.12%
Class C 17.84% -- 5.06%
Class A LMBI* CPI**
11/86 9649 10000 10000
11/87 9541 9768 10294
11/88 10553 10805 10731
11/89 11605 11994 11231
11/90 12249 12917 11936
11/91 13423 14243 12293
11/92 14678 15672 12667
11/93 16053 17409 13006
11/94 14799 16499 13354
11/95 17569 19618 13711
*LMBI = Lehman Municipal Bond Index
**CPI = Consumer Price Index
Past performance is no guarantee of future results. The performance
of Class B or Class C shares may be greater or less than the line shown
based on differences in loads and fees paid by the shareholder investing
in the different classes. Class B and Class C shares were introduced
February 1, 1993. The Lehman Municipal Bond Index is from March 31, 1987.
The Consumer Price Index is through October 31, 1995.
- --------------------------------------------------------------------------------
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of three lines that represent the accumulated value of
an initial $10,000 investment for the period indicated. The lines illustrate
a hypothetical investment in:
1. Keystone Tax Free Income Fund
Your Fund seeks current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds. The return
is quoted after deducting sales charges (if applicable), fund expenses, and
transaction costs and assumes reinvestment of all distributions.
2. Lehman Municipal Bond Index (LMBI)
The LMBI is a broad-based, unmanaged market index of securities issued by
state and local governments. It represents the price change and coupon income
of several thousand securities with various maturities and qualities.
Securities are selected and compiled by Lehman Brothers, Inc. according to
criteria that may be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
The CPI is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as the prices of
services, housing, food, transportation and electricity which are compiled by
the U.S. Bureau of Labor Statistics. The CPI is generally considered a
valuable benchmark for investors who seek to outperform increases in the cost
of living.
The indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance
over the same time frame and over a long period. Long-term performance is a
more reliable and useful measure of performance than measurements of
short-term returns or temporary swings in the market. Your financial adviser
can help you evaluate fund performance in conjunction with the other
important financial considerations such as safety, stability and consistency.
7
<PAGE>
Keystone Tax Free Income Fund
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund
may be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
8
<PAGE>
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
MUNICIPAL BONDS (97.1%)
ALABAMA
Alabama Housing Finance
Agency, Single Family
Mortgage 10.750% 06/01/2013 $ 395,000 $ 424,578
ALASKA
Alaska Housing Finance
Corp., Collateralized
Home Mortgage 8.750 12/01/2016 1,105,000 1,155,311
North Slope Borough,
Alaska, General
Obligation Refunding,
Series G (ETM) 8.350 06/30/1998 450,000 492,485
CALIFORNIA
California Educational
Facilities Authority,
Stanford University
Project, Series H 5.000 01/01/2015 1,250,000 1,182,038
California Housing
Finance Agency, Home
Mortgage Revenue,
Single Family, Series B 8.600 08/01/2019 185,000 195,158
Los Angeles, California,
Public Works Finance
Authority, Multi
Capital Facilities
Project (MBIA) 5.250 12/01/2016 1,000,000 970,260
San Diego County,
California, Water
Revenue Certificates 5.681 04/23/2008 750,000 790,065
San Joaquin Hills,
California,
Transportation Corridor
Agency, Toll
Road Revenue 6.750 01/01/2032 1,000,000 1,038,680
San Joaquin Hills,
California,
Transportation Corridor
Agency, Toll
Road Revenue
(effective yield
7.750%) (a) 0.000 01/01/2020 2,000,000 431,360
Southern California
Public Power Authority,
Palo Verde Project,
Series C (AMBAC) 5.750 07/01/2017 1,000,000 1,076,280
COLORADO
City and County of
Denver, Colorado,
Airport System, Series
A 7.000 11/15/1999 1,250,000 1,335,216
City and County of
Denver, Colorado,
Airport System, Series
A 8.000 11/15/2025 1,000,000 1,116,790
City and County of
Denver, Colorado,
Airport System, Series
A 8.750 11/15/2023 750,000 878,303
City and County of
Denver, Colorado,
Airport System, Series
A 7.250 11/15/2025 1,000,000 1,085,680
City and County of
Denver, Colorado,
Airport System, Series
B 7.250 11/15/2012 750,000 812,025
City and County of
Denver, Colorado,
Airport System, Series
D 7.750 11/15/2013 1,100,000 1,337,215
Colorado Housing Finance
Authority, Single
Family Residential
Revenue, Series C 8.750 09/01/2017 545,000 569,078
Jefferson County,
Colorado, Single Family
Refunding, Series A
(MBIA) 8.875 10/01/2013 170,000 184,032
CONNECTICUT
Connecticut Special Tax
Obligation, Revenue
Transportation
Infrastructure Series
(MBIA) 5.375 09/01/2008 1,000,000 1,025,780
DELAWARE
Delaware Health
Facilities Authority,
Medical Center of
Delaware (MBIA) 6.250 10/01/2006 1,000,000 1,121,200
DISTRICT OF COLUMBIA
District of Columbia,
General Obligation
(AMBAC) 5.400 06/01/2006 1,000,000 1,020,810
FLORIDA
Dade County, Florida,
School District (MBIA) 5.000 08/01/2013 1,000,000 951,170
Florida State Turnpike
Authority, Series A
(FGIC) 5.000 07/01/2014 2,000,000 1,899,580
Jacksonville, Florida,
Electric Authority
Revenue, St. John's
River Project 5.250 10/01/2020 1,950,000 1,876,817
See Notes to Schedule of Investments. (continued on next page)
9
<PAGE>
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
FLORIDA--continued
Orange County, Florida,
Health Facilities
Authority, Adventist
Health System 5.750% 11/15/2025 $1,500,000 $1,509,090
Orange County, Florida,
Housing Finance
Authority, Florida,
GNMA Collateralized
Mortgage Revenue
Refunding 8.400 12/01/2018 300,000 315,861
Orange County, Florida,
Housing Finance
Authority, Mortgage
Revenue Refunding 8.100 11/01/2021 735,000 777,637
Orlando, Florida,
Utilities Commission,
Water and Electric
Revenue 6.000 10/01/2010 150,000 162,881
Palm Beach County,
Florida, Health
Facilities Authority,
Good Samaritan Health
Systems 6.200 10/01/2011 1,500,000 1,554,195
Palm Beach County,
Florida, Solid Waste
Authority,
Adjustable/Fixed
Rate Revenue 8.750 07/01/2010 55,000 59,930
Palm Beach County,
Florida, Solid Waste
Industrial Development,
Okeelanta Power Project 6.850 02/15/2021 2,000,000 2,043,320
Palm Beach County,
Florida, Solid Waste
Industrial Development
(Osceola Power) 6.950 01/01/2022 2,750,000 2,835,168
Sarasota County, Florida,
Utility Systems Revenue
(FGIC) 6.500 10/01/2022 1,000,000 1,107,190
Tallahassee, Florida,
Health Facilities,
Tallahassee Memorial
Regional Medical
Project (MBIA) 6.625 12/01/2013 2,640,000 2,978,923
Tampa, Florida,
Subordinated Guaranteed
Entitlement Revenue,
Series 1988B 8.400 10/01/2008 1,065,000 1,186,378
ILLINOIS
Chicago, Illinois, Gas
Supply Revenue
(People's Gas, Light
and Coke Co.), Series A 8.100 05/01/2020 910,000 1,027,581
Illinois Educational
Facilities Authority,
Wesleyan University 5.625 09/01/2018 1,500,000 1,491,330
Illinois Health
Facilities Authority,
Community Hospital,
Ottawa Project 6.850 08/15/2024 1,500,000 1,540,725
Illinois Health
Facilities Authority,
United Medical Center 8.375 07/01/2012 1,000,000 1,233,260
Quincy, Illinois,
Blessing Hospital
Revenue 6.000 11/15/2018 750,000 733,448
Robbins, Illinois,
Robbins Resources
Recovery 9.250 10/15/2014 1,000,000 1,079,590
LOUISIANA
Louisiana Public
Facilities Authority,
Prerefunded Health and
Education 7.900 12/01/2015 235,000 263,686
Louisiana Public
Facilities Authority,
West Jefferson Medical
Center (MBIA) 7.900 12/01/2015 1,455,000 1,607,877
MARYLAND
Maryland State Community
Development
Administration 8.125 04/01/2017 395,000 412,451
MASSACHUSETTS
Boston, Massachusetts,
Metropolitan District,
General Obligation 5.900 12/01/2009 1,595,000 1,701,482
Massachusetts Bay
Transportation
Authority 7.000 03/01/2021 1,750,000 2,085,090
Massachusetts Bay
Transportation
Authority, Series A 6.250 03/01/2012 2,000,000 2,190,780
Massachusetts Bay
Transportation
Authority, Series A 7.000 03/01/2011 1,000,000 1,168,990
Massachusetts General
Obligation (FGIC)
(effective yield
7.000%) (a) 0.000 06/01/2007 400,000 228,088
Massachusetts Health and
Educational Facilities
Authority, Daughters of
Charity, Series D 6.100 07/01/2014 600,000 624,594
See Notes to Schedule of Investments.
10
<PAGE>
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
MASSACHUSETTS--continued
Massachusetts Health and
Educational Facilities
Authority, Mount Auburn
Hospital (MBIA) 6.250% 08/15/2014 $ 500,000 $ 531,630
Massachusetts Housing
Finance Agency (MBIA) 5.950 12/01/2014 850,000 860,880
Massachusetts Housing
Finance Agency, Housing
Revenue 9.000 12/01/2018 305,000 320,345
Massachusetts Housing
Finance Agency,
Multi-family
Residential Housing 8.800 08/01/2021 250,000 260,530
Massachusetts Housing
Finance Agency,
Residential Housing 8.400 08/01/2021 1,490,000 1,545,592
Massachusetts Housing
Finance Agency,
Residential Housing 8.500 08/01/2020 15,000 15,503
Massachusetts Industrial
Finance Agency, Harvard
Community Health Plan,
Inc. 8.125 10/01/2017 300,000 326,838
Massachusetts Industrial
Finance Agency, Solid
Waste Disposal 9.000 08/01/2016 1,200,000 1,205,772
Massachusetts State
Health and Educational
Facilities,
Rehabilitation
Hospital, Cape Islands,
Series A 7.875 08/15/2024 500,000 514,175
Massachusetts State Water
Pollution, Series A 6.375 02/01/2015 1,000,000 1,072,860
Massachusetts State Water
Pollution, Series C 6.000 12/01/2011 1,000,000 1,068,980
North Adams,
Massachusetts, Limited
Tax, General Obligation
(AMBAC) 5.700 03/01/2013 600,000 617,106
Quincy, Massachusetts,
Quincy Hospital (FSA) 5.250 01/15/2016 375,000 359,629
MICHIGAN
Monroe County, Michigan,
Economic Development
Corp., Detroit Edison
Co. (FGIC) 6.950 09/01/2022 500,000 607,495
MINNESOTA
Minnesota Housing Finance
Agency, Single Family
Mortgage, Series A 8.200 08/01/2019 595,000 620,972
MISSOURI
Kansas City, Missouri,
Municipal Assistance
Corp. Revenue (AMBAC) 6.000 04/15/2020 500,000 515,250
Kansas City, Missouri,
School District
Building, Capital
Improvement Project
(FGIC) 5.000 02/01/2014 1,500,000 1,427,460
Missouri Housing
Development Corp.,
Multi-family, Series A 5.400 02/01/2013 60,000 58,663
Missouri State Health and
Educational Facilities
Authority, Barnes
Jewish Inc. 5.250 05/15/2012 500,000 485,845
St. Louis County,
Missouri, Convention
Sports Project, Series
B 5.600 08/15/2008 500,000 499,445
NEW HAMPSHIRE
New Hampshire Housing
Finance Authority,
Single Family
Residential Mortgage 8.625 07/01/2013 240,000 250,980
NEW MEXICO
Albuquerque, New Mexico,
Airport Revenue, Series
B 8.750 07/01/2019 500,000 536,065
New Mexico Mortgage
Finance Authority,
Single Family Mortgage
(FGIC) 8.500 07/01/2007 380,000 397,024
New Mexico Mortgage
Finance Authority,
Single Family Mortgage
(FGIC) 8.625 07/01/2017 1,950,000 2,037,302
NEW YORK
Metropolitan
Transportation
Authority, New York,
Series K,
Transportation
Facilities Revenue
(MBIA) 6.000 07/01/2016 135,000 138,804
New York City, New York,
General Obligation,
Fiscal 1992, Series A 7.750 08/15/2015 1,500,000 1,700,400
New York City Municipal
Water Financing
Authority, Series A 6.000 06/15/2025 2,000,000 2,062,220
See Notes to Schedule of Investments. (continued on next page)
11
<PAGE>
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
NEW YORK--continued
New York State Dormitory
Authority, State
University Educational
Facilities Revenue,
Series A 6.375% 05/15/2014 $1,900,000 $1,992,074
New York State Dormitory
Authority, State
University Educational
Facilities Revenue,
Series C 7.375 05/15/2010 1,300,000 1,540,331
New York State Local
Government Assistance
Corp., Series A 5.500 04/01/2017 1,100,000 1,098,526
New York State Thruway
Authority, Service
Contract Revenue, Local
Highways and Bridges 5.875 04/01/2014 2,000,000 2,001,120
New York State Urban
Development Corp.,
Refunding Correctional
Facilities, Series A 5.250 01/01/2021 2,000,000 1,845,500
New York State Urban
Development Corp.,
Refunding Correctional
Facilities, Series A 6.500 01/01/2010 1,000,000 1,088,360
New York Urban
Development Corp.,
Correctional
Facilities, Series A 7.500 04/01/2011 1,000,000 1,161,440
Triborough Bridge and
Tunnel Authority, New
York 6.250 01/01/2012 1,690,000 1,780,567
OKLAHOMA
Tulsa, Oklahoma,
Industrial Authority
Hospital Revenue, St.
John Medical Center
Project, Series A 6.250 02/15/2014 1,250,000 1,297,388
OREGON
Western Generation
Agency, Oregon, Wauna
Cogeneration Project,
Series B (b) 7.400 01/01/2016 1,000,000 1,083,270
PENNSYLVANIA
Allentown, Pennsylvania,
Area Hospital Authority
Reveneue, Sacred Heart
Hospital of Allentown 6.750 11/15/2014 750,000 754,020
Butler County,
Pennsylvania, Hospital
Authority, Butler
Memorial Hospital 8.000 07/01/2016 935,000 971,456
Cambria County,
Pennsylvania, Hospital
Development Authority,
Conemaugh Valley
Memorial Hospital 6.625 08/15/2012 100,000 109,996
Cambria County,
Pennsylvania, Hospital
Development Authority,
Conemaugh Valley
Memorial Hospital 8.875 07/01/2018 2,400,000 2,718,288
Chester County,
Pennsylvania, Health
And Education
Facilities Authority,
Mainline Health System 5.500 05/15/2015 1,000,000 974,130
Pennsylvania Convention
Center Authority (FGIC)
(effective yield
7.000%) (a) 0.000 09/01/2008 3,500,000 1,849,785
Pennsylvania Economic
Development Financing
Authority, Resources
Recovery, Colver
Project (b) 7.125 12/01/2015 1,000,000 1,062,200
Pennsylvania Economic
Development Financing
Authority, Resources
Recovery, Northampton
Project (b) 6.500 01/01/2013 2,000,000 1,990,780
Pennsylvania Higher
Education Facilities
Authority, Temple
University (MBIA) 5.750 04/01/2031 500,000 501,140
Philadelphia,
Pennsylvania, Hospital
and Higher Education
Facilities 6.000 06/01/2014 2,000,000 1,894,440
Philadelphia,
Pennsylvania, Hospital
and Higher Education
Facilities, Albert
Einstein Medical Center
Authority 7.625 04/01/2011 250,000 270,078
See Notes to Schedule of Investments.
12
<PAGE>
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
PENNSYLVANIA--continued
Philadelphia,
Pennsylvania, Hospital
and Higher Education
Facilities, Community
College, Series B
(MBIA) 6.500% 05/01/2007 $1,000,000 $1,117,710
Pottsville, Pennsylvania,
Hospital Authority,
Daughters of Charity
Health Systems, Inc.,
Good Samaritan Hospital 8.250 08/01/2012 285,000 309,866
Ridley Park,
Pennsylvania, Hospital
Authority 6.125 12/01/2020 500,000 457,885
Scranton-Lackawanna,
Pennsylvania, Health
and Welfare Authority
Revenue, Walters
Institute Project 8.125 07/15/2028 2,200,000 2,391,818
PUERTO RICO
Puerto Rico Commonwealth,
General Obligation 7.000 07/01/2010 1,000,000 1,178,060
Puerto Rico Commonwealth,
Telephone Authority 5.400 01/01/2008 1,400,000 1,426,348
Puerto Rico Electric
Power Authority, Series
S 7.000 07/01/2007 1,365,000 1,593,023
Puerto Rico Public
Buildings Authority,
Guaranteed Public
Education and Health
Facilities, Series M 5.700 07/01/2009 100,000 103,314
SOUTH DAKOTA
South Dakota Student Loan
Finance, Series A 6.750 08/01/2010 1,510,000 1,564,451
TENNESSEE
Bristol, Tennessee,
Health and Education
Authority, Bristol
Memorial Hospital
(FGIC) 6.750 09/01/2010 2,000,000 2,309,200
Knox County, Tennessee,
Health and Educational
Facilities, Fort
Sanders Hospital
Alliance, Series B
(MBIA) 7.250 01/01/2010 1,000,000 1,193,700
Knox County, Tennessee,
Health and Educational
Facilities, Fort
Sanders Hospital
Alliance, Series C
(MBIA) 5.250 01/01/2015 1,500,000 1,464,480
TEXAS
Austin, Texas, Utilities
System Revenue
(effective yield
6.810%) (a) 0.000 11/15/2011 2,700,000 1,131,570
Brazos River Authority,
Texas, Revenue
Refunding, Houston
Light and Power Project
(MBIA) 8.100 05/01/2019 3,000,000 3,278,580
Brazos, Texas, Higher
Education Authority
Inc., Series A 6.500 06/01/2004 475,000 506,013
Harris County, Texas,
Toll Road, Series A 7.000 08/15/2010 625,000 742,963
Harris County, Texas,
Toll Road, Sr. Lien
Revenue Toll Road 8.625 08/15/2007 1,000,000 1,103,350
Harris County, Texas,
Toll Road, Unlimited
Tax and Subordinate
Lien Refunding 8.125 08/01/2015 2,250,000 2,514,060
Midland County, Texas,
Hospital District,
Midland Memorial
Hospital 7.500 06/01/2016 400,000 421,226
Midland County, Texas,
Hospital District,
Midland Memorial
Hospital (effective
yield 7.700%) (a) 0.000 06/01/2007 90,000 44,913
Port of Corpus Christi,
Texas, Industrial
Development Corp.,
Valero Refining and
Marketing Co. Project,
Series A 10.250 06/01/2017 990,000 1,093,693
Texas Municipal Power
Agency (AMBAC)
(effective yield
7.090%) (a) 0.000 09/01/2006 2,500,000 1,466,325
Texas Municipal Power
Agency (AMBAC)
(effective yield
7.150%) (a) 0.000 09/01/2008 1,200,000 617,844
Texas State Water
Development, Unlimited
Tax, General Obligation 5.125 08/01/2015 650,000 628,368
See Notes to Schedule of Investments. (continued on next page)
13
<PAGE>
Keystone Tax Free Income Fund
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------- ------ --------- --------- -------------
UTAH
Intermountain Power
Agency, Utah, Power
Supply (ETM)
(effective yield
6.800%) (a) 0.000% 07/01/2020 $ 500,000 $ 75,975
Intermountain Power
Agency, Utah, Power
Supply Refunding,
Series A (effective
yield 6.950%) (a) 0.000 07/01/2007 750,000 424,005
Utah State Housing
Finance Authority,
Single Family Mortgage 9.000 01/01/2019 35,000 36,816
VIRGINIA
Hanover County, Virginia,
Industrial Development
Authority, Bon Secours
Health System Project 5.500 08/15/2025 2,000,000 1,979,960
Pittsylvania County,
Virginia, Industrial
Development, Series A 7.300 01/01/2004 1,000,000 1,069,740
Pittsylvania County,
Virginia, Industrial
Development, Series A
(b) 7.500 01/01/2014 3,500,000 3,749,935
WASHINGTON
Port of Seattle,
Washington, General
Obligation 5.750 05/01/2014 500,000 503,000
Washington Public Power
Supply System, Nuclear
Project # 1 14.500 07/01/2002 150,000 173,781
Washington Public Power
Supply System, Nuclear
Project # 1, Series D 15.000 07/01/2017 250,000 273,110
Washington Public Power
Supply System, Nuclear
Project # 2, Series C 7.625 07/01/2010 1,000,000 1,161,170
Washington State General
Obligation, Series A 6.750 02/01/2015 1,000,000 1,156,000
WYOMING
Wyoming Community
Development Authority,
Single Family Mortgage 7.875 06/01/2018 1,405,000 1,477,034
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost--$132,449,310) 143,651,396
================================================================================
TEMPORARY TAX-EXEMPT
INVESTMENTS (1.2%)
Dade County, Florida,
Water and Sewer Systems
Revenue
(Cost $1,825,000) (d) 3.700 10/05/2022 1,825,000 1,825,000
================================================================================
TOTAL INVESTMENTS
(Cost--$134,274,310) (c) 145,476,396
- --------------------------------------------------------------------------------
OTHER ASSETS AND
LIABILITIES--NET (1.7%) 2,540,652
- --------------------------------------------------------------------------------
NET ASSETS (100.0%) $148,017,048
================================================================================
See Notes to Schedule of Investments.
14
<PAGE>
Notes to Schedule of Investments:
(a) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until its maturity date. All
zero coupon bonds are noncallable.
(b) Securities that may be resold to "qualified institutional buyers"
under Rule 144a or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been
determined to be liquid under guidelines established by the Board of
Trustees.
(c) The cost of investments for federal tax purposes amounted to
$134,271,034. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at November 30, 1995 are as
follows:
Gross unrealized appreciation $11,310,602
Gross unrealized depreciation (105,240)
------------
Net unrealized appreciation $11,205,362
============
(d) Variable or floating rate instruments with periodic demand features.
The Fund is entitled to full payment of principle and accrued interest
upon surrendering the security to the issuing agent according to the
terms of the demand features.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--American Municipal Bond Assurance Corp.
ETM--Escrowed To Maturity
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assurance
MBIA--Municipal Bond Insurance Association
See Notes to Financial Statements.
15
<PAGE>
Keystone Tax Free Income Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
February 13,
1987
(Commencement
of Operations)
Year Ended November 30, to
November 30,
1995(d) 1994 1993 1992 1991 1990 1989 1988 1987
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 8.93 $ 10.25 $ 10.17 $ 10.13 $ 9.94 $ 10.24 $ 9.96 $ 9.64 $ 10.00
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.51 0.51 0.57 0.63 0.61 0.59 0.62 0.63 0.33
Net realized and
unrealized gain
(loss) on investments
and futures contracts 1.13 (1.28) 0.36 0.30 0.31 (0.06) 0.34 0.37 (0.32)
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.64 (0.77) 0.93 0.93 0.92 0.53 0.96 1.00 0.01
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.51) (0.52) (0.57) (0.62) (0.61) (0.60) (0.63) (0.68) (0.37)
In excess of net
investment income (0.01) 0.00 (0.04) 0.00 (0.00) (0.03) 0.00 0.00 0.00
Net realized gain
on investments 0.00 0.00 (0.24) (0.27) (0.12) (0.20) (0.05) 0.00 0.00
Tax basis return of
capital 0.00 (0.03) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.52) (0.55) (0.85) (0.89) (0.73) (0.83) (0.68) (0.68) (0.37)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of year $ 10.05 $ 8.93 $ 10.25 $ 10.17 $ 10.13 $ 9.94 $ 10.24 $ 9.96 $ 9.64
================================================================================================================================
Total return (b) 18.71% (7.81%) 9.37% 9.35% 9.59% 5.55% 9.97% 10.60% 0.17%
Ratios/supplemental data
Ratios to average
net assets:
Total expenses 1.19%(a) 1.13% 1.21% 1.25% 1.58% 1.66% 1.62% 1.57% 1.00%(c)
Net investment income 5.35% 5.27% 5.40% 6.02% 5.95% 6.03% 6.15% 6.13% 6.85%(c)
Portfolio turnover rate 30% 98% 47% 32% 37% 42% 49% 109% 67%
- --------------------------------------------------------------------------------------------------------------------------------
Net assets,
end of year
(thousands) $94,183 $95,691 $124,102 $120,660 $133,524 $146,335 $162,013 $179,191 $16,090
================================================================================================================================
</TABLE>
(a) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses for the year ended November 30, 1995, the expense ratio
would have been 1.18%.
(b) Excluding applicable sales charges.
(c) Annualized for the period April 14, 1987 (Commencement of Investment
Operations) to November 30, 1987.
(d) Calculation based on average shares outstanding.
See Notes to Financial Statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the year)
February 1, 1993
Year Ended (Date of Initial
November 30, Public Offering) to
1995 (d) 1994 November 30, 1993
================================================================================
Net asset value, beginning
of year $8.88 $10.25 $10.27
- --------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.44 0.45 0.37
Net realized and unrealized
gain (loss) on
investments and futures
contracts 1.11 (1.29) 0.30
- --------------------------------------------------------------------------------
Total from investment
operations 1.55 (0.84) 0.67
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.45) (0.50) (0.37)
In excess of net investment
income (0.01) 0.00 (0.08)
Net realized gain on
investments 0.00 0.00 (0.24)
Tax basis return of capital 0.00 (0.03) 0.00
- --------------------------------------------------------------------------------
Total distributions (0.46) (0.53) (0.69)
- --------------------------------------------------------------------------------
Net asset value, end of
year $ 9.97 $ 8.88 $10.25
================================================================================
Total return (b) 17.84% (8.43%) 6.59%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.96%(a) 1.88% 1.96%(c)
Net investment income 4.59% 4.60% 4.42%(c)
Portfolio turnover rate 30% 98% 47%
- --------------------------------------------------------------------------------
Net assets, end of year
(thousands) $33,449 $28,860 $14,091
================================================================================
(a) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses for the year ended November 30, 1995, the expense ratio
would have been 1.94%.
(b) Excluding applicable sales charges.
(c) Annualized.
(d) Calculation based on average shares outstanding.
See Notes to Financial Statements.
17
<PAGE>
Keystone Tax Free Income Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the year)
February 1, 1993
Year Ended (Date of Initial
November 30, Public Offering) to
1995 (d) 1994 November 30, 1993
================================================================================
Net asset value, beginning
of year $8.88 $10.26 $10.27
- --------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.44 0.43 0.37
Net realized and unrealized
gain (loss) on
investments and futures
contracts 1.11 (1.27) 0.31
- --------------------------------------------------------------------------------
Total from investment
operations 1.55 (0.84) 0.68
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.45) (0.51) (0.37)
In excess of net investment
income (0.01) 0.00 (0.08)
Net realized gain on
investments 0.00 0.00 (0.24)
Tax basis return of capital 0.00 (0.03) 0.00
- --------------------------------------------------------------------------------
Total distributions (0.46) (0.54) (0.69)
- --------------------------------------------------------------------------------
Net asset value, end of
year $ 9.97 $ 8.88 $10.26
================================================================================
Total return (b) 17.84% (8.52%) 6.70%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.96%(a) 1.89% 1.94%(c)
Net investment income 4.59% 4.52% 4.41%(c)
Portfolio turnover rate 30% 98% 47%
- --------------------------------------------------------------------------------
Net assets, end of year
(thousands) $20,386 $23,230 $27,261
================================================================================
(a) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses for the year ended November 30, 1995, the expense ratio
would have been 1.94%.
(b) Excluding applicable sales charges.
(c) Annualized.
(d) Calculation based on average shares oustanding.
See Notes to Financial Statements.
18
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
November 30, 1995
===================================================================
Assets (Note 1):
Investments at market value
(identified cost--$134,274,310) $145,476,396
Cash 4,472
Receivable for:
Fund shares sold 24,803
Interest 2,895,155
Prepaid expenses 16,572
- -------------------------------------------------------------------
Total assets 148,417,398
- -------------------------------------------------------------------
Liabilities (Notes 2 and 4):
Payable for:
Fund shares redeemed 22,764
Distributions to shareholders 288,160
Other accrued expenses 89,426
- -------------------------------------------------------------------
Total liabilities 400,350
- -------------------------------------------------------------------
Net assets $148,017,048
===================================================================
Net assets represented by (Note 1):
Paid-in capital $143,800,682
Accumulated distributions in excess of net
investment income (288,160)
Net accumulated realized gain (loss) on
investments (6,697,560)
Net unrealized appreciation (depreciation) on
investments 11,202,086
- -------------------------------------------------------------------
Total net assets $148,017,048
===================================================================
Net Asset Value per share
Class A Shares
Net asset value of $94,182,774 / 9,370,675
shares outstanding $10.05
Offering price per share ($10.05 / 0.9525)
(based on a sales charge of 4.75% of the
offering price on November 30, 1995) $10.55
Class B Shares
Net asset value of $33,448,526 / 3,356,230
shares outstanding $ 9.97
Class C Shares
Net asset value of $20,385,748 / 2,045,152
shares outstanding $ 9.97
====================================================================
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended November 30, 1995
====================================================================
Investment income (Note 1):
Interest $ 9,776,365
Expenses (Notes 2 and 4):
Management fee $ 919,802
Transfer agent fees 211,525
Accounting, auditing and legal 64,552
Custodian fees 98,704
Printing 46,538
Trustees' fees and expenses 12,634
Distribution Plan expenses 766,469
Registration fees 60,285
Miscellaneous expenses 15,378
- --------------------------------------------------------------------
Total expenses 2,195,887
Less: Expenses paid indirectly (Note 4) (20,278)
- --------------------------------------------------------------------
Net expenses 2,175,609
- --------------------------------------------------------------------
Net investment income 7,600,756
- --------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and closed futures
contracts (Notes 1 and 3):
Net realized gain (loss) on:
Investments (110,715)
Closed futures contracts (650,028)
- --------------------------------------------------------------------
Net realized gain (loss) on investments
and closed futures contracts (760,743)
Net change in unrealized appreciation
(depreciation) on investments 18,451,939
- --------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and closed futures
contracts 17,691,196
- --------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $25,291,952
====================================================================
19
<PAGE>
Keystone Tax Free Income Fund
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS Year Ended November 30,
1995 1994
============================================================================= ==============================
<S> <C> <C>
Operations:
Net investment income $ 7,600,756 $ 8,330,638
Net realized loss on investments and closed futures contracts (760,743) (5,869,377)
Net change in unrealized appreciation (depreciation) on investments 18,451,939 (16,025,461)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 25,291,952 (13,564,200)
- ------------------------------------------------------------------------------------------------------------
Distributions to shareholders from (Note 1):
Net investment income:
Class A Shares (5,042,433) (5,980,145)
Class B Shares (1,531,824) (1,297,179)
Class C Shares (1,026,499) (1,452,252)
In excess of net investment income:
Class A Shares (70,626) 0
Class B Shares (21,455) 0
Class C Shares (14,377) 0
Tax basis return of capital:
Class A Shares 0 (338,046)
Class B Shares 0 (101,954)
Class C Shares 0 (82,063)
- ------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (7,707,214) (9,251,639)
- ------------------------------------------------------------------------------------------------------------
Capital share transactions (Note 2):
Proceeds from shares sold:
Class A Shares 2,127,732 6,833,913
Class B Shares 6,139,897 21,886,789
Class C Shares 3,205,146 9,086,896
Payment for shares redeemed:
Class A Shares (17,659,525) (23,370,474)
Class B Shares (5,968,412) (4,163,609)
Class C Shares (9,212,881) (10,093,259)
Net asset value of shares issued in reinvestment of dividends and
distributions:
Class A Shares 2,608,685 3,231,223
Class B Shares 790,394 718,132
Class C Shares 619,790 1,013,566
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share
transactions (17,349,174) 5,143,177
- ------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 235,564 (17,672,662)
Net assets:
Beginning of year 147,781,484 165,454,146
- ------------------------------------------------------------------------------------------------------------
End of year [including accumulated distributions in excess of net investment
income as follows: November 1995--($288,160) and November 1994--($333,473)] $148,017,048 $147,781,484
============================================================================================================
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
Keystone Tax Free Income Fund
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Tax Free Income Fund (formerly Keystone America Tax Free Income
Fund) ("Fund") is a Massachusetts business trust for which Keystone
Management Inc. ("KMI") is the Investment Manager and Keystone Investment
Management Company (formerly Keystone Custodian Funds, Inc.) ("Keystone") is
the Investment Adviser. The Fund was organized on October 24, 1986 and had no
operations prior to February 13, 1987. It is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified open-end
investment company.
The Fund currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge which
varies depending on when shares were purchased and how long they have been
held. Class C shares are sold subject to a contingent deferred sales charge
payable upon redemption within one year of purchase, and available only
through dealers who have entered into special distribution agreements with
Keystone Investment Distributors Company (formerly Keystone Distributors,
Inc.) ("KIDC"), the Fund's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of members of current and
former members of management of Keystone and its affiliates.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Tax-exempt bonds are stated on the basis of valuations provided by a
pricing service, approved by the Board of Trustees, that uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Non-tax-exempt securities for which market
quotations are readily available are valued at the price quoted which, in the
opinion of the Board of Trustees or their representative, most nearly
represents their market value. Short-term investments which are purchased
with maturities of sixty days or less are valued at amortized cost (original
cost as adjusted for amortization of premium or accretion of discount) which,
when combined with accrued interest approximates market. Short term
investments maturing in more than sixty days for which market quotations are
readily available are valued at current market value. Short-term investments
maturing in more than sixty days when purchased which are held on the
sixtieth day prior to maturity are valued at amortized cost (market value on
the sixtieth day adjusted for amortization of premium or accretion of
discount) which, when combined with accrued interest, approximates market.
All other securities and other assets are valued at fair value as determined
in good faith using methods prescribed by the Board of Trustees.
B. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price), the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
21
<PAGE>
Keystone Tax Free Income Fund
NOTES TO FINANCIAL STATEMENTS
101% of the repurchase price. The Fund monitors the value of the collateral
on a daily basis, and if the value of the collateral falls below required
levels, the Fund intends to seek additional collateral from the seller or
terminate the repurchase agreement. If the seller defaults, the Fund would
suffer a loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. Any such loss would be
increased by any cost incurred on disposing of such securities. If bankruptcy
proceedings are commenced against the seller under the repurchase agreement,
the realization of the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
C. The Fund may enter into currency or financial futures contracts as a hedge
against changes in interest or currency exchange rates. A futures contract is
an agreement between two parties to buy and sell a specific amount of a
commodity, security, financial instrument, or, in the case of a stock index,
cash at a set price on a future date. Upon entering into a futures contract
the Fund is required to deposit with a broker an amount ("initial margin")
equal to a certain percentage of the purchase price indicated in the futures
contract. Subsequent payments ("variation margin") are made or received by
the Fund each day, as the value of the underlying instrument or index
fluctuates, and are recorded for book purposes as unrealized gains or losses
by the Fund. For federal tax purposes, any futures contracts which remain
open at fiscal year end are marked-to-market and the resultant net gain or
loss is included in the Fund's taxable income. In addition to market risk,
the Fund is subject to the credit risk that the other party will not complete
the obligations of the contract.
D. 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. 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 and other market factors,
both before and after delivery.
E. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis. All
premiums and original issue discounts are amortized/accreted for both
financial reporting and federal income tax purposes.
F. The Fund has qualified and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). Thus, the Fund is relieved of any
federal income tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The Fund intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
G. The Fund declares dividends from net investment income monthly and
distributes to its shareholders such dividends monthly. The Fund declares and
distributes all net realized long-term capital gains, if any, at least
annually. Distributions are determined in accordance with income tax
regulations. Distributions from tax basis net investment income and net
capital gains can exceed book basis net investment income and net capital
gains. Differences between book basis investment income distributions and tax
basis investment income distributions are primarily attributable to
differences in the treatment of 12b-1 Distribution Plan charges and tax basis
returns of capital.
(2.) Capital Share Transactions
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of
the Fund were as follows:
Year Ended November 30,
1995 1994
- ------------------------------------------------------
Class A Shares
Shares sold 224,063 697,684
Shares redeemed (1,843,241) (2,421,649)
Shares issued in
reinvestment of
dividends and
distributions 270,624 333,532
- ------------------------------------------------------
Net decrease (1,348,554) (1,390,433)
======================================================
Class B Shares
Shares sold 647,077 2,235,194
Shares redeemed (625,195) (432,965)
Shares issued in
reinvestment of
dividends and
distributions 82,512 75,307
- ------------------------------------------------------
Net increase 104,394 1,877,536
======================================================
Class C Shares
Shares sold 338,010 922,206
Shares redeemed (974,642) (1,068,581)
Shares issued in
reinvestment of
dividends and
distributions 64,840 105,124
- ------------------------------------------------------
Net decrease (571,792) (41,251)
======================================================
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted with respect to its Class A, Class B, and Class C
shares pursuant to Rule 12b-1 under the 1940 Act.
The Class A Distribution Plan provides for payments at an annual rate of
0.25% of the average daily net asset value of Class A shares to pay expenses
for the distribution of Class A shares. Amounts paid by the Fund to KIDC
under the Class A Distribution Plan are currently used to pay others (such as
dealers), service fees at an annual rate of 0.25% of the average net asset
value of Class A shares maintained by such others and remaining outstanding
on the books of the Fund for specified periods.
The Class B Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class B shares to pay
expenses for the distribution of Class B shares. Amounts paid by the Fund
under the Class B Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase normally equal to 4.00% of the
price paid for each Class B share sold plus the first year's service fee in
advance in the amount of 0.25% of the price paid for each Class B share sold.
Beginning approximately 12 months after the purchase of a Class B share, the
dealer or other party will receive
23
<PAGE>
Keystone Tax Free Income Fund
NOTES TO FINANCIAL STATEMENTS
service fees at an annual rate of 0.25% of the average daily net asset value
of each Class B shares maintained by such others and remaining outstanding on
the Fund's books for specified periods. A contingent deferred sales charge
will be imposed, if applicable, on Class B shares purchased after June 1,
1995 at rates ranging from a maximum of 5% of amounts redeemed during the
first twelve months following the date of purchase to 1% of amounts redeemed
during the sixth twelve month period following the date of purchase. Class B
shares purchased on or after June 1, 1995 that have been outstanding for
eight years following the month of purchase will automatically convert to
Class A shares without a front-end sales charge or exchange fee. Class B
shares purchased prior to June 1, 1995 will retain their existing conversion
rights.
The Class C Distribution Plan provides for payments at an annual rate of
up to 1.00% of the average daily net asset value of Class C shares to pay
expenses for the distribution of Class C shares. Amounts paid by each Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) a commission at the time of purchase normally equal to 0.75% of the
price paid for each 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. Beginning
approximately 15 months after purchase date, the dealer or other party will
receive a commission at an annual rate of 0.75% (subject to applicable
limitations imposed by a rule of the National Association of Securities
Dealers, Inc. ("NASD Rule")) plus service fees at an annual rate of 0.25%,
respectively, of the average net asset value of each Class C share sold by
such others and remaining outstanding on the books of the Fund for specified
periods.
Each of the Distribution Plans may be terminated at any time by vote of
the Independent Trustees or by a vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any of the
Distribution Plans, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
For the year ended November 30, 1995, the Fund paid KIDC $229,818,
$320,355 and $216,296, pursuant to the Fund's Class A, Class B and Class C
Distribution Plans, respectively.
Under the NASD Rule, the maximum uncollected amounts for which KIDC may
seek payment from the Fund under its Class B Distribution Plans at November
30, 1995 are $1,945,004 for shares purchased prior to June 1, 1995 and
$162,557 for shares purchased on or after June 1, 1995. The maximum
uncollected amounts for which KIDC may seek payment from the Fund under its
Class C Distribution Plans is $2,197,650 as of November 30, 1995.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
(3.) Securities Transactions
As of November 30, 1995, the Fund had capital loss carryovers for federal
income tax purposes of approximately $6,698,000 which expire as follows:
2002-$5,831,000, 2003-$867,000.
Cost of purchases and proceeds from sales of investment securities,
excluding short-term securities, during the year ended November 30, 1995 were
$44,461,072 and $63,089,275, respectively.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily at a
rate of 2.0% of the Fund's gross investment income plus an amount determined
by applying annual percentage rates, which start at 0.50% and decline to
0.25% as net assets increase, to the net asset value of the Fund.
KMI has entered into an Investment Advisory Agreement with Keystone, under
which Keystone provides investment advisory and management services to the
Fund and receives for its services an annual fee representing 85% of the
management fee received by KMI. During the year ended November 30, 1995, the
Fund paid or accrued to Keystone investment management and administrative
service fees of $919,802 which represented 0.61% of the average net assets of
the Fund. Of such amount paid to KMI, $781,832 was paid to Keystone for its
services to the Fund.
Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned
subsidiary of Keystone, serves as the Fund's transfer agent. During the year
ended November 30, 1995, the Fund paid or accrued to KIRC $211,525 for
transfer agent fees.
During the year ended November 30, 1995, the Fund paid or accrued to KII
$19,338 for certain accounting services.
The Fund is subject to certain state annual expense limits, the most
restrictive of which is as follows: 2.5% of the first $30 million of Fund
assets, 2.0% of the next $70 million of Fund assets, and 1.5% of Fund assets
over $100 million.
The Fund has entered into an expense offset arrangement with its
custodian. For the year ended November 30, 1995, the Fund paid custody fees
in the amount of $78,426 and received a credit of $20,278 pursuant to the
expense offset arrangement, resulting in a total expense of $98,704. The
assets deposited with the custodian under this expense offset arrangement
could have been invested in an income-producing asset.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund.
(5.) Distributions to Shareholders
Distributions of $0.043, $0.037 and $0.037 per share were declared payable
January 5, 1996 to shareholders of record on December 22, 1995 for Class A,
Class B and Class C shares, respectively. These distributions are not
reflected in the accompanying financial statements.
25
<PAGE>
Keystone Tax Free Income Fund
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Tax Free Income Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Tax Free Income Fund (formerly Keystone America Tax Free Income
Fund), including the schedule of investments, as of November 30, 1995, and
the related statement of operations for the year then ended, the statements
of changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the eight-year
period then ended and for the period from February 13, 1987 (commencement of
operations) to November 30, 1987 for Class A shares and for each of the years
in the two year period ended November 30, 1995 and the period from February
1, 1993 (date of initial public offering) to November 30, 1993 for Class B
and Class C shares. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of November 30, 1995 by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Tax Free Income Fund as of November 30, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and the financial highlights for
each of the years or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 5, 1996
26
<PAGE>
TAX STATUS--Fiscal 1995 Distributions (Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Income Dividends
- -----------------------------------------------
Tax-exempt Taxable Total
- -----------------------------------------------
Class A $0.52 $0.00 $0.52
Class B $0.46 $0.00 $0.46
Class C $0.46 $0.00 $0.46
===============================================
In January 1996, we will send you complete information on distributions
paid during the calendar year 1995 to assist you in completing your federal
income tax return.
27
<PAGE>
[BACK COVER]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied
by the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before
you invest or send money. For a free prospectus on other Keystone funds, contact
your financial adviser or call Keystone.
[KEYSTONE INVESTMENTS LOGO]
P.O. Box 2121
Boston, Massachusetts 02106-2121
TFI-AR-1/96 ["Recycle" symbol]
7.8M
[FRONT COVER]
K E Y S T O N E
[Mother and child beneath American flag]
TAX FREE
INCOME FUND
[KEYSTONE LOGO]
ANNUAL REPORT
NOVEMBER 30, 1995
EXHIBIT 17(d)(1)
Most Recent Prospectus
of
Keystone State Tax Free Fund
<PAGE>
KEYSTONE STATE TAX FREE FUND
PROSPECTUS MAY 31, 1995
AS SUPPLEMENTED JUNE 1, 1995
Keystone State Tax Free Fund (formerly named Keystone America State Tax Free
Fund) (the "FUND") is a mutual fund that currently consists of five separate
series of shares evidencing interests in different portfolios of securities
("Fund(s)"): the Keystone Florida Tax Free Fund ("Florida Fund"), the Keystone
Massachusetts Tax Free Fund ("Massachusetts Fund"), the Keystone New York
Insured Tax Free Fund ("New York Insured Fund"), the Keystone Pennsylvania Tax
Free Fund ("Pennsylvania Fund") and the Keystone Texas Tax Free Fund ("Texas
Fund").
Each of the Funds seeks the highest possible current income exempt from
federal income taxes, while preserving capital. In addition, each Fund, other
than the Florida Fund and the Texas 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.
The Florida Fund also seeks to hold securities exempt from Florida intangible
taxes. At the present time, Florida does not impose a personal income tax.
The New York Insured Fund also seeks to hold securities exempt from New York
City personal income tax.
The Pennsylvania Fund also seeks to hold securities exempt from Pennsylvania
property taxes.
Texas does not currently impose a personal income tax. In the event Texas
enacts a personal income tax, the Texas Fund will seek the highest possible
current income exempt from such taxes, while preserving capital.
KEYSTONE STATE TAX FREE FUND
200 BERKELEY STREET, BOSTON, MA 02116-5034
CALL TOLL FREE 1-800-343-2898
Each Fund invests principally in municipal obligations exempt from federal
income tax and municipal obligations issued by the state for which it is named
and its political subdivisions, agencies and instrumentalities. At least 80% of
the municipal securities in the New York Insured Fund's portfolio will be
insured as to timely payment of both principal and interest. All securities not
insured by the issuer will be insured by a qualified municipal bond insurer.
Each Fund's net asset value per share will fluctuate in response to changes in
the market value of its portfolio securities.
Generally, each Fund offers three classes of shares. Information on share
classes and their fee and sales charge structures may be found in each Fund's
fee table, "How to Buy Shares," "Alternative Sales Options," "Contingent
Deferred Sales Charge and Waiver of Sales Charges," "Distribution Plans," and
"FUND Shares."
This prospectus concisely states information about the FUND and its Funds that
you should know before investing. Please read it and retain it for future
reference.
Additional information about the FUND and its Funds is contained in a
statement of additional information dated May 31, 1995, as supplemented June 1,
1995, which has been filed with the Securities and Exchange Commission and is
incorporated by reference into this prospectus. For a free copy, or for other
information about the FUND and its Funds, write to the address or call the
telephone number listed on this page.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
Fee Table ..................................................... 3
Financial Highlights .......................................... 8
The FUND and Its Funds ........................................ 23
Investment Objectives and Policies ............................ 23
Investment Restrictions ....................................... 27
Risk Factors .................................................. 28
Pricing Shares ................................................ 30
Dividends and Taxes ........................................... 31
FUND Management and Expenses .................................. 33
How to Buy Shares ............................................. 35
Alternative Sales Options ..................................... 36
Contingent Deferred Sales Charge and Waiver of Sales Charges .. 40
Distribution Plans ............................................ 41
How to Redeem Shares .......................................... 42
Shareholder Services .......................................... 44
Performance Data ............................................... 46
FUND Shares .................................................... 47
Additional Information ......................................... 47
Additional Investment Information .............................. (i)
Exhibit A ...................................................... A-1
Exhibit B ...................................................... B-1
<PAGE>
FEE TABLE
KEYSTONE FLORIDA TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "FUND Management and Expenses";
"How to Buy Shares", "Alternative Sales Options"; "Contingent Deferred Sales
Charge and Waiver of Sales Charges"; "Distribution Plans"; and "Shareholder
Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION(1) OPTION(2)
SHAREHOLDER TRANSACTION EXPENSES --------- --------- ---------
<S> <C> <C> <C>
Sales Charge ........................................... 4.75%(3) None None
(as a percentage of offering price)
Contingent Deferred Sales Charge ....................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market value declining to 1.00% in year and 0.00%
of shares redeemed) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)(5) ............... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ........................................ 0.52% 0.52% 0.52%
12b-1 Fees ............................................. 0.15% 0.90%(7) 0.90%(7)
Other Expenses ......................................... 0.08% 0.08% 0.08%
---- ---- ----
Total Fund Operating Expenses .......................... 0.75% 1.50% 1.50%
==== ==== ====
<CAPTION>
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
<S> <C> <C> <C> <C>
Class A ................................................................... $55 $70 $ 87 $136
Class B ................................................................... $65 $77 $102 N/A
Class C ................................................................... $25 $47 $ 82 $179
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ................................................................... $55 $70 $ 87 $136
Class B ................................................................... $15 $47 $ 82 N/A
Class C ................................................................... $15 $47 $ 82 $179
</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 purchased on or after June 1, 1995 convert tax free to Class
A shares after eight calendar years. See "Class B Shares" for more
information.
(2) Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Investment Distributors
Company, the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Alternative Sales Options."
(4) Purchases of Class A shares in the amount of $1,000,000 or more and/or
purchases made by certain qualifying retirement or other plans are not
subject to a sales charge, but may be subject to a contingent deferred sales
charge. See "Class A Shares" and "Contingent Deferred Sales Charge and
Waiver of Sales Charges" for an explanation of the charge.
(5) There is no fee for individual investors making exchanges over the Keystone
Automated Response Line ("KARL"). (For a description of KARL, see
"Shareholder Services.")
(6) Expense ratios are for the fiscal year ended March 31, 1995 after giving
effect to the reimbursement by Keystone Investment Management Company
("Keystone") of expenses in accordance with certain voluntary expense
limitations. Currently, Keystone has voluntarily limited expenses of Class A
Shares to 0.75% of average daily net assets until December 31, 1995.
Similarly, Keystone has voluntarily limited expenses of Class B and C shares
to 1.50% of average daily net assets of each such class until December 31,
1995. Keystone is under no obligation to maintain these limits. Absent
voluntary expense limitations, expense ratios for the fiscal year ended
March 31, 1995 for the Florida Fund's Class A, B and C shares, respectively,
would have been 0.95%, 1.68%, and 1.70%.
(7) 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. ("NASD").
(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%.
<PAGE>
FEE TABLE
KEYSTONE MASSACHUSETTS TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "FUND Management and Expenses";
"How to Buy Shares"; "Alternative Sales Options"; "Contingent Deferred Sales
Charge and Waiver of Sales Charges"; "Distribution Plans"; and "Shareholder
Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION(1) OPTION(2)
SHAREHOLDER TRANSACTION EXPENSES --------- --------- ---------
<S> <C> <C> <C>
Sales Charge ........................................... 4.75%(3) None None
(as a percentage of offering price)
Contingent Deferred Sales Charge ....................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market value declining to 1.00% in year and 0.00%
of shares redeemed) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)(5) ........................ $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ........................................ 0.55% 0.55% 0.55%
12b-1 Fees ............................................. 0.15% 0.90%(7) 0.90%(7)
Other Expenses ......................................... 0.04% 0.04% 0.04%
---- ---- ----
Total Fund Operating Expenses .......................... 0.74% 1.49% 1.49%
==== ==== ====
<CAPTION>
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ..................................................................... $55 $70 $ 87 $105
Class B ..................................................................... $65 $77 $101 N/A
Class C ..................................................................... $25 $47 $ 81 $178
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ..................................................................... $55 $70 $ 87 $105
Class B ..................................................................... $15 $47 $ 81 N/A
Class C ..................................................................... $15 $47 $ 81 $178
</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 purchased on or after June 1, 1995 convert tax free to Class
A shares after eight calendar years. See "Class B Shares" for more
information.
(2) Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Investment Distributors
Company, the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Alternative Sales Options."
(4) Purchases of Class A shares in the amount of $1,000,000 or more and/or
purchases made by certain qualifying retirement or other plans are not
subject to a sales charge, but may be subject to a contingent deferred sales
charge. See "Class A Shares" and "Contingent Deferred Sales Charge and
Waiver of Sales Charges" for an explanation of the charge.
(5) There is no exchange fee for individual investors making exchanges over the
Keystone Automated Response Line ("KARL"). (For a description of KARL, see
"Shareholder Services.")
(6) Expense ratios are estimated for the fiscal year ending March 31, 1996 after
giving effect to the reimbursement by Keystone of expenses in accordance
with certain voluntary expense limitations. Currently, Keystone has
voluntarily limited expenses of Class A Shares to 0.75% of average daily net
assets until December 31, 1995. Similarly, Keystone has voluntarily limited
expenses of Class B and C shares to 1.50% of average daily net assets of
each such class until December 31, 1995. The estimated ratios above assume
Keystone's extension of these expense limits until March 31, 1996, which
Keystone is under no obligation to do. Absent voluntary expense limitations,
expense ratios for the fiscal year ending March 31, 1996 for the
Massachusetts Fund's Class A, B and C shares, respectively, are projected to
be 1.93%, 2.68%, and 2.68%.
(7) 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.
(8) The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Funds may be
greater or less than 5%.
<PAGE>
FEE TABLE
KEYSTONE NEW YORK INSURED TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "FUND Management and Expenses";
"How to Buy Shares", "Alternative Sales Options"; "Contingent Deferred Sales
Charge and Waiver of Sales Charges", "Distribution Plans"; and "Shareholder
Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION(1) OPTION(2)
SHAREHOLDER TRANSACTION EXPENSES --------- --------- ---------
<S> <C> <C> <C>
Sales Charge ........................................... 4.75%(3) None None
(as a percentage of offering price)
Contingent Deferred Sales Charge ....................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market value declining to 1.00% in year and 0.00%
of shares redeemed) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)(5) ........................ $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ........................................ 0.55% 0.55% 0.55%
12b-1 Fees ............................................. 0.15% 0.90%(7) 0.90%(7)
Other Expenses ......................................... 0.04% 0.04% 0.04%
---- ---- ----
Total Fund Operating Expenses .......................... 0.74% 1.49% 1.49%
==== ==== ====
<CAPTION>
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ..................................................................... $55 $70 $ 87 $135
Class B ..................................................................... $65 $77 $101 N/A
Class C ..................................................................... $25 $47 $ 81 $178
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ..................................................................... $55 $70 $ 87 $135
Class B ..................................................................... $15 $47 $ 81 N/A
Class C ..................................................................... $15 $47 $ 81 $178
</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 purchased on or after June 1, 1995 convert tax free to Class
A shares after eight calendar years. See "Class B Shares" for more
information.
(2) Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Investment Distributors
Company, the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Alternative Sales Options."
(4) Purchases of Class A shares in the amount of $1,000,000 or more and/or
purchases made by certain qualifying retirement or other plans are not
subject to a sales charge, but may be subject to a contingent deferred sales
charge. See "Class A Shares" and "Contingent Deferred Sales Charge and
Waiver of Sales Charges" for an explanation of the charge.
(5) There is no exchange fee for individual investors making exchanges over the
Keystone Automated Response Line ("KARL"). (For a description of KARL, see
"Shareholder Services.")
(6) Expense ratios are estimated for the fiscal year ending March 31, 1996 after
giving effect to the reimbursement by Keystone of expenses in accordance
with certain voluntary expense limitations. Currently, Keystone has
voluntarily limited expenses of Class A Shares to 0.75% of average daily net
assets until December 31, 1995. Similarly, Keystone has voluntarily limited
expenses of Class B and C shares to 1.50% of average daily net assets of
each such class until December 31, 1995. The estimated ratios above assume
Keystone's extension of these expense limits until March 31, 1996, which
Keystone is under no obligation to do. Absent voluntary expense limitations,
expense ratios for the fiscal year ending March 31, 1996 for the New York
Insured Fund's Class A, B and C shares, respectively, are projected to be
1.59%, 2.35%, and 2.32%.
(7) 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.
(8) The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Funds may be
greater or less than 5%.
<PAGE>
FEE TABLE
KEYSTONE PENNSYLVANIA TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "FUND Management and Expenses";
"How to Buy Shares"; "Alternative Sales Options"; "Contingent Deferred Sales
Charge and Waiver of Sales Charges"; "Distribution Plans"; and "Shareholder
Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION(1) OPTION(2)
SHAREHOLDER TRANSACTION EXPENSES --------- --------- ---------
<S> <C> <C> <C>
Sales Charge ........................................... 4.75%(3) None None
(as a percentage of offering price)
Contingent Deferred Sales Charge ....................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market value declining to 1.00% in year and 0.00%
of shares redeemed) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)(5) ....................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ........................................ 0.54% 0.54% 0.54%
12b-1 Fees ............................................. 0.15% 0.90%(7) 0.90%(7)
Other Expenses ......................................... 0.06% 0.06% 0.06%
---- ---- ----
Total Fund Operating Expenses .......................... 0.75% 1.50% 1.50%
---- ---- ----
---- ---- ----
<CAPTION>
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ................................................................... $55 $70 $ 87 $136
Class B ................................................................... $65 $77 $102 N/A
Class C ................................................................... $25 $47 $ 82 $179
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ................................................................... $55 $70 $ 87 $136
Class B ................................................................... $15 $47 $ 82 N/A
Class C ................................................................... $15 $47 $ 82 $179
</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 purchased on or after June 1, 1995 convert tax free to Class
A shares after eight calendar years. See "Class B Shares" for more
information.
(2) Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Investment Distributors
Company, the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Alternative Sales Options."
(4) Purchases of Class A shares in the amount of $1,000,000 or more and/or
purchases made by certain qualifying retirement or other plans are not
subject to a sales charge, but may be subject to a contingent deferred sales
charge. See "Class A Shares" and "Contingent Deferred Sales Charge and
Waiver of Sales Charges" for an explanation of the charge.
(5) There is no fee for individual investors making exchanges over the Keystone
Automated Response Line ("KARL"). (For a description of KARL, see
"Shareholder Services.")
(6) Expense ratios are for the fiscal year ended March 31, 1995 after giving
effect to the reimbursement by Keystone of expenses in accordance with
certain voluntary expense limitations. Currently, Keystone has voluntarily
limited expenses of Class A Shares to 0.75% of average daily net assets
until December 31, 1995. Similarly, Keystone has voluntarily limited
expenses of Class B and C shares to 1.50% of average daily net assets of
each such class until December 31, 1995. Keystone is under no obligation to
maintain these limits. Absent voluntary expense limitations, expense ratios
for the fiscal year ended March 31, 1995 for the Pennsylvania Fund's Class
A, B and C shares, respectively, would have been 1.05%, 1.80%, and 1.80%.
(7) 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. ("NASD").
(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%.
<PAGE>
FEE TABLE
KEYSTONE TEXAS TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly. For more complete descriptions of the various costs and expenses,
see the following sections of this prospectus: "FUND Management and Expenses";
"How to Buy Shares"; "Alternative Sales Options"; "Contingent Deferred Sales
Charge and Waiver of Sales Charges"; "Distribution Plans"; and "Shareholder
Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION(1) OPTION(2)
SHAREHOLDER TRANSACTION EXPENSES --------- --------- ---------
<S> <C> <C> <C>
Sales Charge ........................................... 4.75%(3) None None
(as a percentage of offering price)
Contingent Deferred Sales Charge ....................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market value declining to 1.00% in year and 0.00%
of shares redeemed) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)(5) ........................ $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ........................................ 0.55% 0.55% 0.55%
12b-1 Fees ............................................. 0.15% 0.90%(7) 0.90%(7)
Other Expenses ......................................... 0.05% 0.05% 0.05%
---- ---- ----
Total Fund Operating Expenses .......................... 0.75% 1.50% 1.50%
==== ==== ====
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each period:
Class A ............................................................ $55 $70 $ 87 $136
Class B ............................................................ $65 $77 $102 N/A
Class C ............................................................ $25 $47 $ 82 $179
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ............................................................ $55 $70 $ 87 $136
Class B ............................................................ $15 $47 $ 82 N/A
Class C ............................................................ $15 $47 $ 82 $179
</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 purchased on or after June 1, 1995 convert tax free to Class
A shares after eight calendar years. See "Class B Shares" for more
information.
(2) Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Investment Distributors
Company, the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Alternative Sales Options."
(4) Purchases of Class A shares in the amount of $1,000,000 or more and/or
purchases made by certain qualifying retirement or other plans are not
subject to a sales charge, but may be subject to a contingent deferred sales
charge. See "Class A Shares" and "Contingent Deferred Sales Charge and
Waiver of Sales Charges" for an explanation of the charge.
(5) There is no exchange fee for individual investors making exchanges over the
Keystone Automated Response Line ("KARL"). (For a description of KARL, see
"Shareholder Services.")
(6) Expense ratios are for the fiscal year ended March 31, 1995 after giving
effect to the reimbursement by Keystone of expenses in accordance with
certain voluntary expense limitations. Currently, Keystone has voluntarily
limited expenses of Class A Shares to 0.75% of average daily net assets
until December 31, 1995. Similarly, Keystone has voluntarily limited
expenses of Class B and C shares to 1.50% of average daily net assets of
each such class until December 31, 1995. Keystone is under no obligation to
maintain these limits. Absent the voluntary expense limitations, expense
ratios for the fiscal year ended March 31, 1995 for the Texas Fund's Class
A, B and C shares, respectively, would have been 2.57%, 3.36%, and 3.28%.
(7) 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. ("NASD").
(8) The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Funds may be
greater or less than 5%.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE FLORIDA TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
DECEMBER 28,
1990
YEAR ENDED MARCH 31, (COMMENCEMENT OF
------------------------------------------- OPERATIONS) TO
1995 1994 1993 1992 MARCH 31, 1991
------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ....... $10.2900 $10.9400 $10.4300 $10.1700 $10.0000
-------- -------- -------- -------- --------
Income from investment operations
Investment income -- net ................. 0.5576 0.5828 0.6067 0.7230 0.1806
Net gain (loss) on investments and futures
contracts ............................... 0.0734 (0.4400) 0.6414 0.3000 0.1700
-------- -------- -------- -------- --------
Total income from investment operations ... 0.6310 0.1428 1.2481 1.0230 0.3506
-------- -------- -------- -------- --------
Less distributions from:
Investment income -- net (0.5637) (0.5817) (0.6067) (0.7230) (0.1806)
In excess of investment income -- net(3) .. (0.0273) (0.0511) (0.0314) 0 0
Realized gain on investments -- net ....... 0 (0.1600) (0.1000) (0.0400) 0
-------- -------- -------- -------- --------
Total distributions ....................... (0.5910) (0.7928) (0.7381) (0.7630) (0.1806)
-------- -------- -------- -------- --------
Net asset value end of period ............. $10.3300 $10.2900 $10.9400 $10.4300 $10.1700
======== ======== ======== ======== ========
TOTAL RETURN(4) .......................... 6.42% 1.01% 12.32% 10.34% 3.52%
RATIOS/SUPPLEMENTAL DATA Ratios to average
net assets:
Operating and management expenses(2) ... 0.75% 0.75% 0.68% 0.65% 0.65%(1)
Investment income -- net ................ 5.60% 5.16% 5.60% 6.82% 6.33%(1)
Portfolio turnover rate 129% 113% 95% 63% 5%
Net assets end of period (thousands) ...... $42,239 $45,150 $42,997 $29,258 $6,922
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
0.95%, 1.00%, 1.13%, 1.21% and 2.06% (annualized) for the fiscal years ended
March 31, 1995, 1994, 1993, 1992 and for the period December 28, 1990
(Commencement of Operations) to March 31, 1991, respectively.
(3) Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized gains
on investments -- net." For the fiscal years ended prior to April 1, 1993,
distributions in excess of book basis net income were presented as
"Distributions from paid-in capital."
(4) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE FLORIDA TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED MARCH 31, (DATE OF INITIAL
---------------------------- PUBLIC OFFERING) TO
1995 1994 MARCH 31, 1993
------- ------- -----------------------
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ..... $10.2700 $10.9400 $10.8100
-------- -------- --------
Income from investment operations
Investment income -- net ................ 0.5264 0.5258 0.0852
Net gain (loss) on investments and
futures contracts ..................... 0.0234 (0.4730) 0.1379
-------- -------- --------
Total income from investment operations . 0.5498 0.0528 0.2231
-------- -------- --------
Less distributions from:
Investment income -- net ................ (0.4929) (0.4812) (0.0852)
In excess of investment income -- net(3) (0.0869) (0.0816) (0.0079)
Realized gain on investments -- net ..... 0 (0.1600) 0
-------- -------- --------
Total distributions ..................... (0.5798) (0.7228) (0.0931)
-------- -------- --------
Net asset value end of period ........... $10.2400 $10.2700 $10.9400
======== ======== ========
TOTAL RETURN(4) ......................... 5.61% 0.19% 2.06%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) . 1.50% 1.50% 1.50%(1)
Investment income -- net............... 4.81% 4.21% 4.00%(1)
Portfolio turnover rate ................. 129% 113% 95%
Net assets end of period (thousands) .... $51,083 $19,984 $1,704
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
1.68%, 1.74%, and 1.73% (annualized) for the fiscal years ended March 31,
1995, 1994 and for the period February 1, 1993 (Date of Initial Public
Offering) to March 31, 1993, respectively.
(3) Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized gains
on investments -- net." For the fiscal years ended prior to April 1, 1993,
distributions in excess of book basis net income were presented as
"Distributions from paid-in capital."
(4) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE FLORIDA TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED MARCH 31, (DATE OF INITIAL
---------------------------- PUBLIC OFFERING) TO
1995 1994 MARCH 31, 1993
------- ------- -----------------------
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ..... $10.2800 $10.9300 $10.8100
-------- -------- --------
Income from investment operations
Investment income -- net................. 0.4680 0.5116 0.0746
Net gain (loss) on investments and
futures contracts ....................... 0.0820 (0.4507) 0.1375
-------- -------- --------
Total income from investment operations . 0.5500 0.0609 0.2121
-------- -------- --------
Less distributions from:
Investment income -- net ................ (0.4882) (0.4875) (0.0746)
In excess of investment income -- net(3) (0.0818) (0.0634) (0.0175)
Realized gain on investments -- net ..... 0 (0.1600) 0
-------- -------- --------
Total distributions ..................... (0.5700) (0.7109) (0.0921)
-------- -------- --------
Net asset value end of period ........... $10.2600 $10.2800 $10.9300
======== ======== ========
TOTAL RETURN (4) ........................ 5.61% 0.27% 1.95%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) . 1.50% 1.50% 1.50%(1)
Investment income -- net............... 4.86% 4.26% 2.95%(1)
Portfolio turnover rate ................. 129% 113% 95%
Net assets end of period (thousands) .... $12,831 $13,096 $1,987
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
1.70%, 1.84%, and 1.63% (annualized) for the fiscal years ended March 31,
1995, 1994 and for the period February 1, 1993 (Date of Initial Public
Offering) to March 31, 1993, respectively.
(3) Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized gains
on investments -- net." For the fiscal years ended Prior to April 1, 1993
distributions in excess of book basis net income were presented as
"Distributions from paid-in capital."
(4) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE MASSACHUSETTS TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
MARCH 31, 1995 MARCH 31, 1994
-------------- -----------------
<S> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ........................................... $9.1700 $10.0000
------- --------
Income from investment operations
Investment income -- net....................................................... 0.5337 0.0872
Net gain (loss) on investments and futures contracts .......................... 0.0120 (0.8241)
------- --------
Total income from investment operations ....................................... 0.5457 (0.7369)
------- --------
Less distributions from:
Investment income -- net....................................................... (0.5257) (0.0854)
In excess of investments income -- net ........................................ 0 (0.0077)
------- --------
Total distributions ........................................................... (0.5257) (0.0931)
------- --------
Net asset value end of period ................................................. $9.1900 $ 9.1700
======= ========
TOTAL RETURN(3) .............................................................. 6.23% (7.40%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) ....................................... 0.46% 0.35%(1)
Investment income -- net..................................................... 5.90% 5.07%(1)
Portfolio turnover rate ....................................................... 77% 7%
Net assets end of period (thousands) .......................................... $1,974 $1,472
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
1.93% and 3.22% (annualized) for the fiscal year ended March 31, 1995, and
for the period from February 4, 1994 (Commencement of Operations) to March
31, 1994, respectively.
(3) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE MASSACHUSETTS TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
MARCH 31, 1995 MARCH 31, 1994
-------------- -----------------
<S> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD .................. $9.1900 $10.0000
------- --------
Income from investment operations
Investment income -- net ............................. 0.4877 0.0839
Net gain (loss) on investments and futures contracts . (0.0142) (0.8008)
------- --------
Total income from investment operations .............. 0.4735 (0.7169)
------- --------
Less distributions from:
Investment income -- net ............................. (0.4723) (0.0670)
In excess of investment income -- net ................ (0.0412) (0.0261)
------- --------
Total distributions .................................. (0.5135) (0.0931)
------- --------
Net asset value, end of period ....................... $9.1500 $ 9.1900
======= ========
TOTAL RETURN(3) ..................................... 5.41% (7.20%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) .............. 1.24% 1.10%(1)
Investment income -- net ........................... 5.15% 3.23%(1)
Portfolio turnover rate .............................. 77% 7%
Net assets end of period (thousands) ................. $6,169 $1,817
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
2.68%, and 4.60% (annualized) for the fiscal year ended March 31, 1995, and
for the period February 4, 1994 (Commencement of Operations) to March 31,
1994, respectively.
(3) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE MASSACHUSETTS TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
MARCH 31, 1995 MARCH 31, 1994
-------------- -----------------
<S> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD .................. $9.1900 $10.0000
------- --------
Income from investment operations
Investment income -- net ............................. 0.4801 0.0807
Net gain (loss) on investments and futures contracts . (0.0244) (0.7989)
------- --------
Total income from investment operations .............. 0.4557 (0.7182)
------- --------
Less distributions from:
Investment income -- net ............................. (0.4680) (0.0738)
In excess of investment income -- net ................ (0.0377) (0.0180)
------- --------
Total distributions .................................. (0.5057) (0.0918)
------- --------
Net asset value end of period ........................ $9.1400 $ 9.1900
======= ========
TOTAL RETURN(3) ..................................... 5.20% (7.21%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) .............. 1.23% 1.10%(1)
Investment income -- net ........................... 5.11% 4.28%(1)
Portfolio turnover rate .............................. 77% 7%
Net assets end of period (thousands) ................. $1,971 $369
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
2.68%, and 4.91% (annualized) for the fiscal year ended March 31, 1995 and
for the period February 4, 1994 (Commencement of Operations) to March 31,
1994, respectively.
(3) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE NEW YORK INSURED TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
MARCH 31, 1995 MARCH 31, 1994
-------------- -----------------
<S> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ........................................... $9.3200 $10.0000
------- --------
Income from investment operations
Investment income -- net....................................................... 0.5192 0.0862
Net gain (loss) on investments and futures contracts .......................... 0.1154 (0.6748)
------- --------
Total income from investment operations ....................................... 0.6346 (0.5886)
------- --------
Less distributions from:
Investment income -- net....................................................... (0.5146) (0.0784)
In excess of investments income -- net ........................................ 0 (0.0130)
------- --------
Total distributions ........................................................... (0.5146) (0.0914)
------- --------
Net asset value end of period ................................................. $9.4400 $ 9.3200
======= ========
TOTAL RETURN(3) .............................................................. 7.08% (5.91%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) ....................................... 0.50% 0.35%(a)
Investment income -- net..................................................... 5.48% 3.85%(a)
Portfolio turnover rate ....................................................... 77% 14%
Net assets end of period (thousands) .......................................... $3,323 $680
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
1.59% and 4.44% (annualized) for the fiscal year ended March 31, 1995, and
for the period from February 4, 1994 (Commencement of Operations) to March
31, 1994, respectively.
(3) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE NEW YORK INSURED TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
MARCH 31, 1995 MARCH 31, 1994
-------------- -----------------
<S> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD .................. $9.3200 $10.0000
------- --------
Income from investment operations
Investment income -- net ............................. 0.4763 0.0812
Net gain (loss) on investments and futures contracts . 0.0862 (0.6698)
------- --------
Total income from investment operations .............. 0.5625 (0.5886)
------- --------
Less distributions from:
Investment income -- net ............................. (0.4548) (0.0620)
In excess of investment income -- net ................ (0.0477) (0.0294)
------- --------
Total distributions .................................. (0.5025) (0.0914)
------- --------
Net asset value end of period ........................ $9.3800 $ 9.3200
======= ========
TOTAL RETURN(3) ..................................... 6.28% (5.91%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) .............. 1.25% 1.10%(1)
Investment income -- net ........................... 4.78% 3.01%(1)
Portfolio turnover rate .............................. 77% 14%
Net assets end of period (thousands) ................. $11,907 $2,276
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
2.35%, and 5.60% (annualized) for the fiscal year ended March 31, 1995, and
for the period February 4, 1994 (Commencement of Operations) to March 31,
1994, respectively.
(3) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE NEW YORK INSURED TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
MARCH 31, 1995 MARCH 31, 1994
-------------- -----------------
<S> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ........................................... $9.3100 $10.0000
------- --------
Income from investment operations
Investment income -- net....................................................... 0.4828 0.0736
Net gain (loss) on investments and futures contracts .......................... 0.0710 (0.6735)
------- --------
Total income from investment operations ....................................... 0.5538 (0.5999)
------- --------
Less distributions from:
Investment income -- net ...................................................... (0.4579) (0.0664)
In excess of investment income -- net ......................................... (0.0359) (0.0237)
------- --------
Total distributions ........................................................... (0.4938) (0.0901)
------ -------
Net asset value end of period ................................................. $9.3700 $ 9.3100
======= ========
TOTAL RETURN(3) ............................................................... 6.18% (6.02%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) ....................................... 1.26% 1.10%(1)
Investment income -- net .................................................... 4.88% 3.71%(1)
Portfolio turnover rate ....................................................... 77% 14%
Net assets end of period (thousands) .......................................... $2,890 $255
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, "Ratio of
operating and management expenses to average net assets" would have been
2.32%, and 5.13% (annualized) for the fiscal year ended March 31, 1995 and
for the period February 4, 1994 (Commencement of Operations) to March 31,
1994, respectively.
(3) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE PENNSYLVANIA TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
DECEMBER 27,
1990
YEAR ENDED MARCH 31, (COMMENCEMENT OF
------------------------------------------- OPERATIONS) TO
1995 1994 1993 1992 MARCH 31, 1991
------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD .................. $11.0100 $11.4200 $10.7100 $10.2500 $10.0000
-------- -------- -------- -------- --------
Income from investment operations
Investment income -- net ............................. 0.6070 0.6161 0.6349 0.7426 0.1806
Net gain (loss) on investments and futures contracts (0.0918) (0.2990) 0.7499 0.4600 0.2500
-------- -------- -------- -------- --------
Total income from investment operations .............. 0.5152 0.3171 1.3848 1.2026 0.4306
-------- -------- -------- -------- --------
Less distributions from:
Investment income -- net ............................. (0.6070) (0.6195) (0.6349) (0.7426) (0.1806)
In excess of investment income -- net(3) ............ (0.0082) (0.0376) (0.0199) 0 0
Realized gain on investments -- net .................. 0 (0.0633) (0.0200) 0 0
In excess of realized gain on investments -- net ..... 0 (0.0067) 0 0 0
-------- -------- -------- -------- --------
Total distributions .................................. (0.6152) (0.7271) (0.6748) (0.7426) (0.1806)
-------- -------- -------- -------- --------
Net asset value end of period ........................ $10.9100 $11.0100 $11.4200 $10.7100 $10.2500
======== ======== ======== ======== ========
TOTAL RETURN(4) ..................................... 4.91% 2.58% 13.30% 12.07% 4.37%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses (2) ............. 0.75% 0.75% 0.68% 0.65% 0.65%(1)
Investment income -- net ........................... 5.65% 5.27% 5.66% 6.92% 6.84%(1)
Portfolio turnover rate 97% 37% 20% 13% 8%
Net assets end of period (thousands) ................. $30,450 $30,560 $35,502 $12,914 $2,979
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
1.05%, 1.06%, 1.16%, 1.68% and 3.19% annualized for the fiscal years ended
March 31, 1995, 1994, 1993, 1992 and the period December 27, 1990
(Commencement of Operations) to March 31, 1991, respectively.
(3) Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized gains
on investments -- net." For the fiscal years ended prior to April 1, 1993,
distributions in excess of book basis net income were presented as
"Distributions from paid-in capital."
(4) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE PENNSYLVANIA TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED MARCH 31, (DATE OF INITIAL
---------------------------- PUBLIC OFFERING) TO
1995 1994 MARCH 31, 1993
------- ------- -----------------------
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD .................... $10.9800 $11.4200 $11.2000
-------- -------- --------
Income from investment operations
Investment income -- net................................ 0.5369 0.5556 0.0809
Net gain (loss) on investments and
futures contracts .................................... (0.1039) (0.3390) 0.2359
-------- -------- --------
Total income from investment operations ................ 0.4330 0.2166 0.3168
-------- -------- --------
Less distributions from:
Investment income -- net ............................... (0.5255) (0.5201) (0.0809)
In excess of investment income -- net(3) .............. (0.0775) (0.0665) (0.0159)
Realized gain on investments -- net .................... 0 (0.0343) 0
In excess of realized gain on investments -- net ....... 0 (0.0357) 0
-------- -------- --------
Total distributions .................................... (0.6030) (0.6566) (0.0968)
-------- -------- --------
Net asset value end of period .......................... $10.8100 $10.9800 $11.4200
======== ======== ========
TOTAL RETURN(4) ....................................... 4.15% 1.70% 2.82%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) ................ 1.50% 1.50% 1.50%(1)
Investment income -- net.............................. 4.89% 4.32% 3.44%(1)
Portfolio turnover rate ................................ 97% 37% 20%
Net assets end of period (thousands) ................... $30,657 $21,958 $2,543
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
1.80%, 1.81%, and 1.69% (annualized) for the fiscal years ended March 31,
1995, 1994 and for the period February 1, 1993 (Date of Initial Public
Offering) to March 31, 1993, respectively.
(3) Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized gains
on investments -- net." For the fiscal years ended prior to April 1, 1993
distributions in excess of book basis net income were presented as
"Distributions from paid-in capital."
(4) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE PENNSYLVANIA TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED MARCH 31, (DATE OF INITIAL
---------------------------- PUBLIC OFFERING) TO
1995 1994 MARCH 31, 1993
------- ------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ..... $11.0000 $11.4200 $11.2000
-------- -------- --------
Income from investment operations
Investment income -- net ................ 0.5273 0.5462 0.0710
Net gain (loss) on investments and
futures contracts ..................... (0.1035) (0.3217) 0.2448
-------- -------- --------
Total income from investment operations . 0.4238 0.2245 0.3158
-------- -------- --------
Less distributions from:
Investment income -- net ................ (0.5244) (0.5219) (0.0710)
In excess of investment income -- net(3) (0.0694) (0.0526) (0.0248)
Realized gain on investments -- net ..... 0 (0.0337) 0
In excess of realized gain on investments
-- net ................................ 0 (0.0363) 0
-------- -------- --------
Total distributions ..................... (0.5938) (0.6445) (0.0958)
-------- -------- --------
Net asset value end of period ........... $10.8300 $11.0000 $11.4200
======== ======== ========
TOTAL RETURN(4) ......................... 4.05% 1.78% 2.81%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) . 1.50% 1.50% 1.50%(1)
Investment income -- net............... 4.90% 4.33% 2.50%(1)
Portfolio turnover rate ................. 97% 37% 20%
Net assets end of period (thousands) .... $9,559 $9,385 $952
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
1.80%, 1.90%, and 1.60% for the fiscal years ended March 31, 1995, 1994 and
for the period February 1, 1993 (Date of Initial Public Offering) to March
31, 1993, respectively.
(3) Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized gains
on investments -- net." For the fiscal years ended prior to April 1, 1993
distributions in excess of book basis net income were presented as
"Distributions from paid-in capital."
(4) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE TEXAS TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
MARCH 2, 1992
YEAR ENDED MARCH 31, (COMMENCEMENT OF
---------------------------------------------- OPERATIONS) TO
1995 1994 1993 MARCH 31, 1992
------- ------- ------- --------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ........................ $10.1300 $10.6400 $10.0300 $10.0000
-------- -------- -------- --------
Income from investment operations Investment income -- net . 0.5611 0.5991 0.6176 0.0518
Net gain (loss) on investments and futures contracts ....... (0.0101) (0.4039) 0.6066 0.0300
-------- -------- -------- --------
Total income from investment operations .................... 0.5510 0.1952 1.2242 0.0818
-------- -------- -------- --------
Less distributions from:
Investment income -- net ................................... (0.5310) (0.5952) (0.6142) (0.0518)
In excess of realized gain on investments -- net(3) ....... 0 (0.1100) 0 0
-------- -------- -------- --------
Total distributions ........................................ (0.5310) (0.7052) (0.6142) (0.0518)
-------- -------- -------- --------
Net asset value end of period .............................. $10.1500 $10.1300 $10.6400 $10.0300
======== ======== ======== ========
TOTAL RETURN(4) ........................................... 5.66% 1.60% 12.51% 0.82%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) .................... 0.75% 0.29% 0.68% 0.65%(1)
Investment income -- net ................................. 5.56% 5.51% 5.79% 5.95%(1)
Portfolio turnover rate .................................... 58% 56% 62% 19%
Net assets end of period (thousands) ....................... $1,635 $1,916 $2,194 $1,063
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
2.57%, 3.48%, 3.84% and 1.93% (annualized) for the fiscal years ended March
31, 1995, 1994, 1993 and the period March 2, 1992 (Commencement of
Operations) to March 31, 1992, respectively.
(3) Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized gains
on investments -- net." For the period March 2, 1992 (Date of Initial Public
Offering) to March 31, 1992, distributions in excess of book basis net
income were presented as "Distributions from paid-in capital."
(4) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE TEXAS TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED MARCH 31, (DATE OF INITIAL
---------------------------- PUBLIC OFFERING) TO
1995 1994 MARCH 31, 1993
------- ------- -----------------------
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ..... $10.0800 $10.6600 $10.5300
-------- -------- --------
Income from investment operations
Investment income -- net ................ 0.4809 0.5091 0.0822
Net gain (loss) on investments and
futures contracts ..................... 0.0038 (0.4515) 0.1352
-------- -------- --------
Total income from investment operations . 0.4847 0.0576 0.2174
-------- -------- --------
Less distributions from:
Investment income -- net ................ (0.4758) (0.4751) (0.0822)
In excess of investment income -- net (3) (0.0389) (0.0525) (0.0052)
In excess of realized gain on investments
-- net ................................. 0 (0.1100) 0
-------- -------- --------
Total distributions ...................... (0.5147) (0.6376) (0.0874)
-------- -------- --------
Net asset value end of period ............ $10.0500 $10.0800 $10.6600
======== ======== ========
TOTAL RETURN (4) ......................... 5.01% 0.29% 2.06%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses (2) . 1.50% 1.47% 1.50%(1)
Investment income -- net................ 4.80% 4.37% 4.26%(1)
Portfolio turnover rate .................. 58% 56% 62%
Net assets end of period (thousands) ..... $2,163 $1,890 $235
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
3.36%, 4.19%, and 3.76% (annualized) for the fiscal years ended March 31,
1995, 1994 and the period February 1, 1993 (Date of Initial Public Offering)
to March 31, 1993, respectively.
(3) Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized gains
on investments -- net." For the period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, distributions in excess of book basis
net income were presented as "Distributions from paid-in capital."
(4) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE TEXAS TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains important financial information with respect to
the Fund and has been audited by KPMG Peat Marwick LLP, the FUND's independent
auditors. The table appears in the FUND's Annual Report and should be read in
conjunction with the FUND's financial statements and related notes, which also
appear, together with the independent auditors' report, in the FUND's Annual
Report. The FUND's financial statements, related notes, and independent
auditors' report are included in the statement of additional information.
Additional information about the Fund's performance is contained in the FUND's
Annual Report, which will be made available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED MARCH 31, (DATE OF INITIAL
---------------------------- PUBLIC OFFERING) TO
1995(5) 1994 MARCH 31, 1993
------- ------- -----------------------
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ..... $10.0400 $10.6400 $10.5300
-------- -------- --------
Income from investment operations
Investment income -- net................. 0.4701 0.4643 0.0864
Net gain (loss) on investments and
futures contracts ...................... 0.0261 (0.4386) 0.1100
-------- -------- --------
Total income from investment operations . 0.4962 0.0257 0.1964
-------- -------- --------
Less distributions from:
Investment income -- net ................ (0.4722) (0.4349) (0.0864)
In excess of investment income -- net(3) (0.0340) (0.0808) 0
In excess of realized gain on investments
-- net ................................ 0 (0.1100) 0
-------- -------- --------
Total distributions ..................... (0.5062) (0.6257) (0.0864)
-------- -------- --------
Net asset value end of period ........... $10.0300 $10.0400 $10.6400
======== ======== ========
TOTAL RETURN(4) ......................... 5.14% (0.03%) 1.86%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(2) . 1.50% 1.84% 1.50%(a)
Investment income -- net............... 4.88% 3.78% 5.03%(a)
Portfolio turnover rate ................. 58% 56% 62%
Net assets end of period (thousands) .... $224 $813 $25
</TABLE>
(1) Annualized.
(2) Figures are net of the expense reimbursement by Keystone in connection with
the voluntary expense limitation. Before expense reimbursement, the "Ratio
of operating and management expenses to average net assets" would have been
3.28%, 4.39%, and 4.15% (annualized) for the fiscal years ended March 31,
1995, 1994 and for the period February 1, 1993 (Date of Initial Public
Offering) to March 31, 1993, respectively.
(3) Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies."
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized gains
on investments -- net." For the period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, distributions in excess of book basis
net income were presented as "Distributions from paid-in capital."
(4) Excluding applicable sales charge.
(5) Calculation based on average shares outstanding.
<PAGE>
THE FUND AND ITS FUNDS
The FUND is a non-diversified open-end management investment company commonly
known as a mutual fund. The FUND was formed as a Massachusetts business trust on
September 13, 1990. The FUND is one of thirty funds managed or advised by
Keystone Investment Management Company (formerly named Keystone Custodian Funds,
Inc.) ("Keystone"), the FUND's investment adviser. The FUND currently consists
of five separate series evidencing interests in different portfolios of
securities. The Florida Fund and the Pennsylvania Fund were established on
September 19, 1990. The Massachusetts Fund, the New York Insured Fund and the
Texas Fund were established on February 21, 1992. Shares of the Massachusetts
Fund and the New York Insured Fund were not offered prior to February 4, 1994.
The FUND may offer additional Funds in the future.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
Each of the Funds seeks the highest possible current income exempt from
federal income taxes, while preserving capital.
FUNDS' PRINCIPAL INVESTMENTS
Generally, under ordinary circumstances, each Fund invests substantially all
and at least 80% of its assets in federally tax-exempt obligations, including
municipal bonds and notes and municipal tax-exempt 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.
The FLORIDA FUND seeks, in addition, to hold securities exempt from Florida
intangible taxes.
The PENNSYLVANIA FUND seeks, in addition, the highest possible current income
exempt from Pennsylvania state and local taxes while preserving capital. The
Pennsylvania Fund also seeks to hold securities exempt from Pennsylvania
personal property taxes.
The TEXAS FUND provides, in addition, an opportunity for investors to invest
in municipal securities of the State of Texas, its political subdivisions,
agencies and instrumentalities. Texas currently imposes no personal income tax.
In the event Texas enacts a personal income tax, the Texas Fund will seek, in
addition, the highest possible current income exempt from Texas personal income
taxes while preserving capital.
FLORIDA FUND
Under ordinary circumstances, the Florida Fund invests substantially all and
at least 80% of its assets in municipal obligations 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 Exhibit A.
MASSACHUSETTS FUND
Under ordinary circumstances, the Massachusetts Fund invests 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 Standard & Poor's Corporation ("S&P") (AAA, AA, A and BBB), by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A and Baa), by Fitch
Investors Service, Inc. - Municipal Division ("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 with respect to a portion (not to exceed 20%)
of its assets. Such maximum return is ordinarily associated with high yield,
high risk municipal bonds in the lower rating categories of the recognized
rating agencies or that are unrated (high yield bonds). 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 Exhibit A.
NEW YORK INSURED FUND
Under ordinary circumstances, the New York Insured Fund invests 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 Insured 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
Insured 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 Exhibit A.
PENNSYLVANIA FUND
Under ordinary circumstances, the Pennsylvania Fund invests substantially all
and at least 80% of its assets in municipal obligations 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.
Many of the municipal obligations in which the Pennsylvania Fund intends to
invest generate income that is exempt from Pennsylvania state income taxes.
For a further discussion of Pennsylvania tax treatment and the factors
affecting investment in Pennsylvania municipal obligations, see Exhibit A.
TEXAS FUND
Under ordinary circumstances, the Texas Fund invests substantially all and at
least 80% of its assets in municipal obligations of the State of Texas that are
exempt from federal income taxes. The securities include debt obligations of the
State of Texas and its political subdivisions, agencies, authorities and
instrumentalities. Texas does not currently impose an income tax on individuals.
For a further discussion of Texas tax treatment and the factors affecting
investment in Texas municipal obligations, see Exhibit 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 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. 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 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
bonds, the income from which, while exempt from federal income tax under Section
103 of the Internal Revenue Code (the "Code"), is includable in the calculation
of the federal alternative minimum tax; and (3) "private activity" (private
purpose) bonds, the income from which is not exempt from federal income 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.
Each Fund, except the Massachusetts Fund, invests entirely in municipal
obligations only if at the date of investment they are rated 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.
While a 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
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 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.; (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 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. For
example, each Fund may assume a temporary defensive position upon Keystone's
determination that market conditions so warrant. If a Fund is investing
defensively, it is not pursuing its investment objectives.
Each Fund may enter into repurchase and 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, and may employ
new investment techniques with respect to such options. Each Fund may also
engage in financial futures contracts and related options transactions for
hedging purposes and not for speculation and may employ new investment
techniques with respect to such futures contracts and related options. In
addition, each Fund may invest in municipal obligations denominated in foreign
currencies and may use subsequently developed investment techniques that are
related to any of its investment policies. None of the Funds are expected to
enter into repurchase agreements in the ordinary course of business.
In addition to the options and futures mentioned above, if consistent with its
investment objectives, the Fund may 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
"Additional Investment Information" located at the back of this prospectus and
the statement of additional information.
There can be no assurance that a Fund will achieve its investment objectives
since there is uncertainty in every investment.
INSURANCE
At least 80% of the municipal securities in the portfolio of the New York
Insured Fund 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," "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 the New York Insured Fund's portfolio. Similarly, because the net
asset value of the New York Insured Fund's shares is based upon the market value
of the securities in the portfolio, such insurance does not cover or guarantee
the value of the New York Insured Fund's shares.
NEW ISSUE INSURANCE POLICIES
New Issue Insurance Policies are obtained by the respective issuers of the
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 Insured 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 New York Insured Fund from a
qualified municipal bond insurer and are effective only so long as the 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 the New York Insured
Fund. Premium rates for each issue of securities covered by the policy are fixed
for the life of the New York Insured Fund and are periodically adjusted to
reflect purchases and sales of covered securities. The premium on the Portfolio
Insurance Policy is an item of expense and will be reflected in the New York
Insured Fund's average annual expenses. Premiums are paid from the New York
Insured 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 the New York Insured Fund and covered by the
policy, except for nonpayment of premiums.
SECONDARY INSURANCE POLICIES
The New York Insured Fund may, at any time, purchase Secondary Insurance on
any municipal security held by the Fund. Such insurance coverage will be
noncancellable and will continue in force so long as the securities so insured
are outstanding. Secondary Insurance will likely be purchased by the New York
Insured Fund if, in the opinion of Keystone, the market value or net proceeds of
the sale of a security by the Fund would exceed the current value of such
security (without insurance) plus the cost of such insurance. When the New York
Insured 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 the New York Insured Fund in determining
the net capital gain or loss realized by the Fund upon the sale of such Insured
Security.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVES
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 above, are fundamental and may not be
changed without the vote of a majority of the affected Fund's outstanding shares
(as defined in the Investment Company Act of 1940 (the "1940 Act")).
INVESTMENT RESTRICTIONS
Each Fund has adopted the following 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 contained in the statement of additional
information. Unless otherwise stated, all references to a Fund's assets are in
terms of current market value.
Generally, 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, including industrial
development bonds from the same facility or similar types of facilities;
governmental issuers of municipal bonds are not regarded as members of an
industry, and the Fund may invest more than 25% of its assets in industrial
development bonds;
(2) 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) borrow money or enter into reverse repurchase agreements, except that each
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; and
(4) make loans, except that each 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.
The Funds are non-diversified under the federal securities laws. As
non-diversified funds, 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 "regulated investment
companies" 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).
As a matter of practice, a Fund 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 third investment
restriction above.
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.
RISK FACTORS
GENERAL
Investing in a Fund involves the risk common to investing in any security,
i.e., the net asset value of a share of the Fund can increase or decrease in
response to changes in economic conditions, interest rates and the market's
perception of the underlying portfolio securities of the Fund.
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 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.
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, in addition to affecting the
market value and liquidity of that particular security, could affect the market
value and liquidity 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.
From time to time, proposals have been introduced before the U.S. Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations, and similar proposals may well be introduced
in the future. If such a proposal were enacted, the availability of municipal
obligations for investment by each Fund and the value of the Fund's securities
could be materially affected. In such an event, the FUND 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. The
FUND'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 Fund's investment policy allows the Fund to invest a portion
(not to exceed 20%) of its assets in high yield, high risk municipal bonds. The
degree to which the 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. The
Massachusetts Fund seeks to invest up to 20% of its assets aggressively and to
maximize return over time from a combination of many factors, including high
current income and capital appreciation from high yield, high risk bonds.
Although the total amount invested in high yield, high risk securities will not
exceed 20% of the assets of the Massachusetts Fund, the Fund may (as a
non-diversified fund) invest as much as the entire 20% in the securities of a
single issuer. To that extent, the Massachusetts Fund may be more susceptible to
adverse economic, political or regulatory developments affecting a single issuer
than would be the case if the Fund were more broadly diversified.
Such aggressive investing 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 pay-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 characteristics of high yield, high risk securities make them generally
more appropriate for long term investment.
If and when a Fund invests in zero coupon bonds, the Fund does not expect to
have enough zero coupon bonds to have a material effect on dividends. The FUND
has undertaken to a state securities authority to disclose that zero coupon
securities pay no interest to holders prior to maturity, and that the interest
on these securities is reported as income to a Fund and distributed to its
shareholders. These distributions must be made from the Fund's cash assets or,
if necessary, from the proceeds of sales of portfolio securities. The Fund 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.
These risks provide the opportunity for maximizing return over time on a
portion of the Massachusetts Fund's 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.
The maximum return sought by the Massachusetts Fund with respect to up to 20%
of its assets is ordinarily associated with securities in the lower rating
categories of the recognized rating agencies or with securities that are
unrated. Such high yield, high risk securities are generally rated BB or lower
by S&P or Ba or lower by Moody's. The 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 Fund intends to invest in D rated debt only in cases where, in
Keystone's judgment, there is a distinct prospect of improvement in the issuer's
financial position as a result of the completion of reorganization or otherwise.
The Fund 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 Fund takes 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 values based 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 ratings assigned by Moody's and S&P
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 Exhibit A to this prospectus and Appendix A to the statement
of additional information.
PRICING SHARES
The net asset value of a Fund share is computed each day on which the New York
Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. eastern time for the purpose of pricing Fund
shares) except on days when changes in the value of a Fund's portfolio
securities do not affect the current net asset value of its shares. The Exchange
currently is closed on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of each Fund is arrived at by determining the
value of the Fund's assets, subtracting its liabilities and dividing the result
by the number of its shares outstanding. Net asset value per share is calculated
to two decimal places for purposes of purchases and redemptions of a Fund's
shares.
The Funds value municipal obligations on the basis of valuations provided by a
pricing service, approved by the FUND's Board of Trustees, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value. Each Fund values its short-term instruments as
follows: short-term instruments with maturities of sixty days or less are valued
at amortized cost (original purchase cost as adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market; short-term instruments having maturities of more than sixty
days for which market quotations are readily available are valued at current
market value; and short-term instruments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market; and which, in either case, reflects fair value as
determined by the Board of Trustees. All other investments are valued at market
value or, where market quotations are not readily available, at fair value as
determined in good faith according to procedures established by the Board of
Trustees.
DIVIDENDS AND TAXES
Each Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains 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.
As of April 1, 1995, in compliance with a recent ruling issued by the Internal
Revenue Service ("IRS"), the FUND treats its 12b-1 fees for tax purposes as
operating expenses rather than capital charges.
Account statements and/or checks as appropriate will be mailed within seven
days after the Fund pays the distribution. Unless the 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 intends to qualify in the future as a regulated investment
company under the Code. Each Fund is a separate taxable entity for purposes of
Code provisions applicable to regulated investment companies. 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 regulated investment company to the
extent that it fails to distribute, with respect to each calendar year, at least
98% of its ordinary income for such calendar year and 98% of its net capital
gains for the one-year period ending on October 31 of such calendar year. Any
taxable distribution (1) would be declared in October, November or December to
shareholders of record in such a month, (2) would be paid by the following
January 31, and (3) would be includable in the taxable income of shareholders
for the year in which such distribution was declared. If a Fund qualifies and if
it distributes substantially all of its net investment income and net capital
gains, if any, to shareholders, it will be relieved of any federal income tax
liability.
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 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.
Interest on certain "private activity bonds" issued after August 7, 1986,
although otherwise tax exempt, is treated as a tax preference item for
alternative minimum tax purposes. Under regulations to be promulgated, a Fund's
exempt interest dividends will be treated the same way to the extent
attributable to interest paid on such private activity bonds. Corporate
shareholders should also be aware that the receipt of exempt interest dividends
could subject them to alternative minimum tax under the provisions of Section
56(g) of the Code (relating to "adjusted current earnings").
Since none of a Fund's income will consist of corporate dividends, no
distributions will qualify for the corporate dividends received deduction.
Each Fund intends to distribute its net capital gains as capital gain
dividends; shareholders should treat such dividends as long-term capital gains.
Such distributions will be designated as capital gain dividends by a written
notice mailed to each shareholder no later than 60 days after the close of the
Fund's taxable year. If a shareholder receives a capital gain dividend and holds
his shares for six months or less, then any allowable loss on disposition of
such shares will be treated as a long-term capital loss to the extent of such
capital gain dividend.
Interest on indebtedness incurred or continued by shareholders to purchase or
carry shares of 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; that portion is determined by multiplying the total amount of
interest paid or accrued on the indebtedness by a fraction, the numerator of
which is the exempt interest dividends received by a shareholder in his taxable
year and the denominator of which is the sum of the exempt interest dividends
and the taxable distributions out of the Fund's investment income and long-term
capital gains received by the shareholder.
The Funds 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 prices paid by the Funds must
be allocated between such securities and the puts based upon their respective
fair market values. The IRS 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. Texas does not
currently impose any income tax on individuals or corporate shareholders
(although Texas does impose a corporate franchise tax based, in part, on
reportable federal taxable income on those corporations doing business in
Texas). 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 Exhibit A
to this prospectus.
As mentioned above, at the end of each quarter, at least 50% of the value of a
Fund's assets must be invested in municipal obligations in order for
distributions to qualify as exempt interest dividends. 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 FUND does not presently anticipate, however, that such unusual
circumstances will occur.
The foregoing is only a summary of some of the important tax considerations
generally affecting the FUND, 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 FUND, its 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.
FUND MANAGEMENT AND EXPENSES
BOARD OF TRUSTEES
Under Massachusetts law, the FUND's Board of Trustees has absolute and exclusive
control over the management and disposition of all assets of the FUND and its
Funds. Subject to the authority of the Board of Trustees, Keystone serves as
investment adviser to the FUND and its Funds and is responsible for the overall
management of the FUND's business and affairs.
INVESTMENT ADVISER
Keystone, the FUND's investment adviser, located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034, has provided investment advisory and
management services to investment companies and private accounts since it was
organized in 1932. Keystone is a wholly-owned subsidiary of Keystone
Investments, Inc. (formerly Keystone Group, Inc.) ("Keystone Investments"),
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation predominantly owned by current and
former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in a
number of voting trusts, the trustees of which are George S. Bissell, Albert H.
Elfner, III, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone, its affiliates and the Keystone Investments Family of
Funds.
Pursuant to its Investment Advisory and Management Agreement with the FUND
(the "Advisory Agreement"), Keystone provides investment advisory and management
services to the FUND and each Fund.
Each Fund pays Keystone a fee for its services at the annual rate set forth
below:
Aggregate
Net Asset Value
Management of the Shares
Fee of the Fund
- ------------------------------------------------------------------------------
0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
computed as of the close of business each business day and paid daily. During
the year ended March 31, 1995, the Florida, Pennsylvania and Texas Funds paid or
accrued to Keystone investment management and administrative services fees of
$515,205 (0.52% of the Fund's average annual net assets), $357,852 (0.54% of the
Fund's average annual net assets), and $25,402 (0.55% of the Fund's average
annual net assets), respectively. During the year ended March 31, 1995, the New
York Insured and Massachusetts Funds paid or accrued to Keystone investment
management and administrative services fees of $63,808 (0.55% of the Fund's
average annual net assets) and $43,636 (0.55% of the Fund's average annual net
assets), respectively.
The Advisory Agreement continues in effect from year to year only so long as
such continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of the outstanding shares of each Fund. In
either case, the terms of the Advisory Agreement and continuance thereof must be
approved by the vote of a majority of Independent Trustees in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated as to any Fund, without penalty, on 60 days' written
notice by the FUND or Keystone, or may be terminated as to a Fund by a vote of a
majority of the shares of such Fund. The Advisory Agreement will terminate
automatically upon its assignment.
The FUND has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
FUND EXPENSES
Each Fund will pay all of its expenses. In addition to the investment advisory
and management fees discussed above, the principal expenses that each Fund is
expected to pay include, but are not limited to, transfer, dividend disbursing
and shareholder servicing agent costs and expenses; custodian costs and
expenses; its pro rata portion of certain Trustees' fees, fees of its
independent auditors, fees of the FUND's legal counsel and legal counsel to the
FUND's Board of Trustees, fees payable to government agencies, including
registration and qualification fees of the FUND, the Funds and their shares
under federal and state securities laws; and certain extraordinary expenses. In
addition, each class of shares of a Fund will pay all of the expenses
attributable to it. Such expenses are currently limited to Distribution Plan
expenses. Each Fund also pays its brokerage commissions, interest charges and
taxes and certain extraordinary expenses.
Until December 31, 1995, Keystone has voluntarily agreed to limit the expenses
of the FUND's Class A, B, and C shares to 0.75%, 1.50%, and 1.50%, of each such
class's respective average daily net assets. Thereafter, a redetermination of
whether to continue these expense limitations and, if so, at what rates, will be
made.
Keystone will not be required to make such reimbursements to the extent it
would result in a Fund's inability to qualify as a regulated investment company
under the Code. In accordance with certain voluntary expense limitations in
place during the fiscal year ended March 31, 1995, Keystone reimbursed the
Florida, Pennsylvania, Texas, Massachusetts and New York Insured Funds (1)
$89,179, $91,489, $35,517, $26,169 and $22,366, respectively, with respect to
each Fund's Class A shares; (2) $68,953, $81,415, $38,490, $64,511, and $85,602,
respectively, with respect to each Fund's Class B shares; and (3) $31,739,
$27,453, $10,643, $24,181, and $18,786, respectively, with respect to each
Fund's Class C shares. Keystone does not intend to seek repayment for these
amounts.
Each Fund may be subject to certain annual state expense limitations.
During the fiscal year ended March 31, 1995, the Florida, Pennsylvania and
Texas Funds paid or accrued to Keystone Investor Resource Center, Inc. ("KIRC"),
the FUND's transfer and dividend disbursing agent, $116,367, $108,073, and
$6,215, respectively, for shareholder services. During the fiscal year ended
March 31, 1995, the Massachusetts and New York Insured Funds paid or accrued
$25,831 and $15,568 to KIRC for shareholder services. During the year ended
March 31, 1995, the Florida, Pennsylvania, Texas, Massachusetts and New York
Insured Funds paid or accrued to KIRC and Keystone Investments $13,052, $20,909,
$13,870, $17,498 and $17,698, respectively, as reimbursement for certain
accounting services. KIRC is a wholly-owned subsidiary of Keystone.
For the fiscal year ended March 31, 1995, the Class A, B and C shares of the
Florida, Pennsylvania and Texas Funds each paid 0.75%, 1.50% and 1.50%,
respectively, of each Fund's average net assets in expenses.
For the fiscal year ended March 31, 1995, the Class A, B and C shares of the
Massachusetts Fund paid 0.46%, 1.24% and 1.23%, respectively, of average net
assets in expenses. For the fiscal year ended March 31, 1995, the Class A, B and
C shares of the New York Insured Fund paid 0.50%, 1.25% and 1.26%, respectively,
of average net assets in expenses.
The foregoing expenses are net of expense reimbursements made by Keystone in
connection with voluntary expense limitations. See also the "Financial
Highlights" tables beginning on page 8 of this prospectus.
PORTFOLIO MANAGER
Betsy A. Blacher, a Keystone Senior Vice President and Group Head, has been
primarily responsible for the management of each of the Funds since their
inception and is responsible for the day-to-day management of the Florida Fund.
Ms Blacher has more than 16 years of investment experience.
Daniel A. Rabasco, a Keystone Vice President and Portfolio Manager, has been
responsible for the day-to-day management of the Pennsylvania, Texas, New York
Insured and Massachusetts Funds since May 1, 1994. Mr. Rabasco has more than 7
years of investment experience.
SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for a Fund,
Keystone may follow a policy of considering as a factor the number of shares of
the Fund sold by such broker-dealer. In addition, broker-dealers executing
portfolio transactions from time to time may be affiliated with the FUND,
Keystone, the FUND's principal underwriter or their affiliates.
A Fund may pay higher commissions to broker-dealers that provide research
services. Keystone may use these services in advising a Fund as well as in
advising its other clients.
PORTFOLIO TURNOVER
For the fiscal year ended March 31, 1994, the turnover rates for the Florida,
Pennsylvania and Texas Funds were 113%, 37% and 56%, respectively.
For the fiscal year ended March 31, 1995, the portfolio turnover rates for the
Florida, Pennsylvania and Texas Funds were 129%, 97% and 58%, respectively.
For the fiscal year ended March 31, 1995, the portfolio turnover rates for the
Massachusetts and New York Insured Funds were 77% and 77%, respectively.
HOW TO BUY SHARES
Shares of each Fund may be purchased from any broker-dealer that has a selling
agreement with the Keystone Investment Distributors Company (formerly named
Keystone Distributors, Inc.) (the "Principal Underwriter"), the Fund's principal
underwriter. The Principal Underwriter is a wholly-owned subsidiary of Keystone
and is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of a Fund by
mailing to the FUND, c/o KIRC, P.O. Box 2121, Boston, Massachusetts 02106-2121,
a completed account application and a check payable to the FUND. You may also
open an account by telephoning 1-800-343-2898 to obtain the number of an account
to which you can wire or electronically transfer funds. You must then send in a
completed account application. Subsequent investments in Fund shares, in any
amount, may be made by check, by wiring federal funds or by an electronic funds
transfer ("EFT").
Orders for the purchase of shares of a Fund will be confirmed at an offering
price equal to the net asset value per share next determined after receipt of
the order in proper form by the Principal Underwriter (generally as of the close
of the Exchange on that day) plus, in the case of Class A shares, the applicable
sales charge. Orders received by dealers or other firms prior to the close of
the Exchange and received by the Principal Underwriter prior to the close of its
business day will be confirmed at the offering price effective as of the close
of the Exchange on that day. The FUND reserves the right to determine the net
asset value more frequently than once a day if deemed desirable. Dealers and
other financial services firms are obligated to transmit orders promptly.
Orders for shares of a Fund received other than as stated above will receive
the offering price equal to the net asset value per share next determined
(generally the next business day's offering price) plus, in the case of Class A
shares, the applicable sales charge.
Your initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases.
Shares become entitled to income distributions declared on the first business
day following receipt by KIRC of payment for the shares. It is the investor's
responsibility to see that his dealer promptly forwards payment to the Principal
Underwriter for shares being purchased through the dealer.
The FUND reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free 1-800-
343-2898 or writing to KIRC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
Generally, each Fund offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class A
shares are not subject to a deferred sales charge when they are redeemed except
as follows: Class A shares purchased on or after April 10, 1995 (1) in an amount
equal to or exceeding $1,000,000 or (2) by a corporate qualified retirement plan
or a non-qualified deferred compensation plan sponsored by a corporation having
100 or more eligible employees (a "Qualifying Plan"), in either case without a
front end sales charge, will be subject to a contingent deferred sales charge
for the 24 month period following the date of purchase. Certain Class A shares
purchased prior to April 10, 1995 may be subject to a deferred sales charge upon
redemption during the one year period following the date of purchase.
CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a contingent deferred sales charge if
they are redeemed. Class B shares purchased on or after June 1, 1995 are subject
to a deferred sales charge upon redemption during the 72 month period following
the month of purchase. Class B shares purchased prior to June 1, 1995 are
subject to a deferred sales charge upon redemption during the four calendar
years following purchase. Class B shares purchased on or after June 1, 1995 that
have been outstanding for eight years following the month of purchase will
automatically convert to Class A shares without the imposition of a front-end
sales charge or exchange fee. Class B shares purchased prior to June 1, 1995
will retain their existing conversion rights.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with the Principal
Underwriter.
Class A and B shares, pursuant to their Distribution Plans, currently pay an
annual service fee of 0.15% of the Fund's average daily net assets attributable
to that class, and Class C shares pay an annual service fee of 0.25% of the
Fund's average daily net assets attributable to Class C. In addition to the
service fee, the Class B and Class C Distribution Plans provide for the payment
of an annual distribution fee of up to 0.75% of the average daily net assets
attributable to their respective classes.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spreading the cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares, in which case
100% of the purchase price is invested immediately, depending on the amount of
the purchase and the length of investment.
The Fund will not normally accept any purchase of Class B shares in the amount
of $250,000 or more and will not normally accept any purchase of Class C shares
in the amount of $1,000,000 or more.
---------------------------------------
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge as
follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 ..................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000 ........ 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ........ 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 ...... 1.50% 1.52% 1.50%
- ---------
</TABLE>
*Rounded to the nearest one-hundredth percent.
---------------------------------------
Purchases of a Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan will be at net
asset value without the imposition of a front-end sales charge (each such
purchase, an "NAV Purchase").
With respect to NAV Purchases, the Principal Underwriter will pay broker/
dealers or others concessions based on (1) the investor's cumulative purchases
during the one-year period beginning with the date of the initial NAV Purchase
and (2) the investor's cumulative purchases during each subsequent one-year
period beginning with the first NAV Purchase following the end of the prior
period. For such purchases, concessions will be paid at the following rate:
0.50% of the investment amount up to $4,999,999, plus 0.25% of the investment
amount over $4,999,999.
Class A shares acquired on or after April 10, 1995 in an NAV Purchase are
subject to a contingent deferred sales charge of 0.50% upon redemption during
the 24 month period commencing on the date the shares were originally purchased.
Certain Class A shares purchased without a front-end sales charge prior to April
10, 1995 are subject to a contingent deferred sales charge of 0.25% upon
redemption during the one-year period commencing on the date such shares were
originally purchased.
The sales charge is paid to the Principal Underwriter, which in turn normally
reallows a portion to your broker-dealer. In addition, your broker-dealer
currently will be paid periodic service fees at an annual rate of up to 0.15% of
the average daily net asset value of Class A shares maintained by such recipient
outstanding on the books of the FUND for specified periods.
Upon written notice to dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of a Fund alone or in combination with
Class A shares of other Keystone America Funds. See Exhibit B to this
prospectus. Initial sales charges may also be eliminated for persons purchasing
Class A shares that are included in a managed fee based program (wrap account)
through broker dealers who have entered into special agreements with the
Principal Underwriter.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after a change in the registered representative's employment, where the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front end sales charge, or (2)
was at some time subject to, but did not actually pay, a contingent deferred
sales charge with respect to the redemption proceeds.
In addition, since January 1, 1995 and through June 30, 1995 and upon prior
notification to the Principal Underwriter, Class A shares may be purchased at
net asset value by clients of registered representatives within six months after
the redemption of shares of any registered open-end investment company not
distributed or managed by Keystone or its affiliates, where the amount invested
represents redemption proceeds from such unrelated registered open-end
investment company, and the shareholder either (1) paid a front end sales
charge, or (2) was at some time subject to, but did not actually pay, a
contingent deferred sales charge with respect to the redemption proceeds.
CLASS A DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures by the Fund,
currently limited to 0.15% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under each Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as dealers) as
service fees at an annual rate of up to 0.15% of the average daily net asset
value of Class A shares maintained by the recipients outstanding on the books of
the Fund for specified periods.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge.
With respect to Class B shares purchased on or after June 1, 1995, each Fund,
with certain exceptions, imposes a deferred sales charge in accordance with the
following schedule:
DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------
First twelve month period following month of purchase ....... 5.00%
Second twelve month period following month of purchase ...... 4.00%
Third twelve month period following month of purchase ....... 3.00%
Fourth twelve month period following month of purchase ...... 3.00%
Fifth twelve month period following month of purchase ....... 2.00%
Sixth twelve month period following month of purchase ....... 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares sold prior to June 1, 1995, each Fund, with
certain exceptions, imposes a deferred sales charge of 3.00% on shares redeemed
during the calendar year of purchase and the first calendar year after the year
of purchase; 2.00% on shares redeemed during the second calendar year after the
year of purchase; and 1.00% on shares redeemed during the third calendar year
after the year of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. Amounts received by the Principal Underwriter under the
Class B Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Contingent Deferred Sales Charge and Waiver of Sales
Charges" below.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years following the month of purchase will automatically convert to
Class A shares (which are subject to a lower Distribution Plan charge) without
imposition of a front-end sales charge or exchange fee. Class B shares purchased
prior to June 1, 1995 will similarly convert to Class A shares at the end of
seven calendar years after the year of purchase. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to KIRC.) The Class B shares so converted will no longer be subject
to the higher expenses borne by Class B shares. Because the net asset value per
share of the Class A shares may vary from that of the Class B shares at the time
of conversion, although the dollar value will be the same, a shareholder may
receive more or fewer Class A shares than the number of Class B shares
converted. Under current law, it is the FUND's opinion that such a conversion
will not constitute a taxable event under federal income tax law. In the event
that this ceases to be the case, the Board of Trustees will consider what
action, if any, is appropriate and in the best interests of the Class B
shareholders.
CLASS B DISTRIBUTION PLANS
Each Fund has adopted Distribution Plans with respect to its Class B shares
(the "Class B Distribution Plans") that provide for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares (currently limited to 0.90%) to pay expenses of the distribution of Class
B shares. Payments under the Class B Distribution Plans are currently made to
the Principal Underwriter (which may reallow all or part to others, such as
dealers) (1) as commissions for Class B shares sold and (2) as shareholder
service fees. Amounts paid or accrued to the Principal Underwriter under (1) and
(2) in the aggregate may not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to brokers or others a commission
equal to 4.00% of the price paid for each Class B share sold plus the first
year's service fee in advance in the amount of 0.15% of the price paid for each
Class B share sold. Beginning approximately 12 months after the purchase of a
Class B share, the broker or other party will 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 outstanding on the books of the Fund for specified
periods. See "Distribution Plans" below.
With respect to the FUND's Class B shares only, for the period June 1, 1995 to
August 31, 1995, the Principal Underwriter will reallow an increased commission
equal to 4.85% of the price paid for each Class B share sold to those
broker/dealers or others who allow their individual selling representatives to
participate in the additional 0.85% commission.
CLASS C SHARES
Class C shares are offered only through 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
may impose a deferred sales charge of 1.00% on shares redeemed within one year
after the date of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter. If imposed, the deferred sales charge is deducted from the
redemption proceeds otherwise payable to you. The deferred sales charge is
retained by the Principal Underwriter. See "Contingent Deferred Sales Charge and
Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan with respect to its Class C shares
(the "Class C Distribution Plan") that provides for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class C shares
(currently limited to 0.90%) to pay expenses of the distribution of Class C
shares. Payments under the Class C Distribution Plan are currently made to the
Principal Underwriter (which may reallow all or part to others, such as dealers)
(1) as commissions for Class C shares sold and (2) as shareholder service fees.
Amounts paid or accrued to the Principal Underwriter under (1) and (2) in the
aggregate may not exceed the annual limitation referred to above. The Principal
Underwriter generally reallows to brokers or others a commission in the amount
of 0.75% of the price paid for each Class C share sold, plus the first year's
service fee in advance in the amount of 0.25% of the price paid for each Class C
share sold, and, beginning approximately fifteen months after purchase, a
commission at an annual rate of 0.75% (subject to NASD rules -- see
"Distribution Plans") 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 recipients outstanding on the books of the Fund for specified
periods. See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge 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 time of purchase of
such shares. No contingent deferred sales charge is imposed when amounts
redeemed are derived from (1) increases in the value of an account above the net
cost of such shares due to increases in the net asset value per share of such
shares; (2) certain shares with respect to which a Fund did not pay a commission
on issuance, including shares acquired through reinvestment of dividend income
and capital gains distributions; (3) certain Class A shares held for more than
one year or two years, as the case may be, from the date of purchase; (4) Class
B shares held during more than four consecutive calendar years or more than 72
months after the month of purchase, as the case may be; or (5) Class C shares
held for more than one year from date of purchase. Upon request for redemption,
shares not subject to the contingent deferred sales charge will be redeemed
first. Thereafter, shares held the longest will be the first to be redeemed.
Each Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a contingent deferred sales charge to
certain Directors, Trustees, officers and employees of the Fund and Keystone and
certain of their affiliates, to registered representatives of firms with dealer
agreements with the Principal Underwriter and to a bank or trust company acting
as a trustee for a single account.
With respect to Class A shares purchased by a Qualifying Plan at net asset
value or Class C shares purchased by a Qualifying Plan, no contingent deferred
sales charge 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 contingent deferred sales charge 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 401(k) plan or other benefit plan qualified under
the Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of accounts having an aggregate net asset value of
less than $1,000; (5) automatic withdrawals under an automatic withdrawal plan
of up to 1 1/2% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
From time to time, the Principal Underwriter may provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
dealers whose representatives have sold or are expected to sell significant
amounts of a Fund. In addition, from time to time, dealers may receive
additional cash payments. The Principal Underwriter may provide written
information to dealers with whom it has dealer agreements that relates to sales
incentive campaigns conducted by such dealers for their representatives as well
as financial assistance in connection with pre-approved seminars, conferences
and advertising. No such programs or additional compensation will be offered to
the extent they are prohibited by the laws of any state or any self-regulatory
agency such as the National Association of Securities Dealers, Inc. ("NASD").
Dealers to whom substantially the entire sales charge on Class A shares is
reallowed may be deemed to be underwriters as that term is defined under the
Securities Act of 1933.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to dealers that satisfy certain criteria established
from time to time by the Principal Underwriter. These conditions relate to
increasing sales of shares of the Keystone funds over specified periods and
certain other factors. Such payments may, depending on the dealer's satisfaction
of the required conditions, be periodic and may be up to 0.25% of the value of
shares sold by such dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to dealers for the sale of shares, as described above) to banks
and other financial services firms that facilitate transactions in shares of a
Fund for their clients. The Glass-Steagall Act currently limits the ability of a
depository institution (such as a commercial bank or a savings and loan
association) to become an underwriter or distributor of securities. In the event
the Glass-Steagall Act is deemed to prohibit depository institutions from
accepting payments under the arrangement described above, or should Congress
relax current restrictions on depository institutions, the Board of Trustees
will consider what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein, and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
As discussed above, each Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and Class
C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD currently limits the amount that a Fund may pay annually in
distribution costs for the sale of its shares and shareholder service fees. The
rule limits annual expenditures to 1% 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 a 12b-1 Distribution Plan, plus
interest at the prime rate plus 1% on such amounts (less any contingent deferred
sales charges paid by shareholders to the Principal Underwriter) remaining
unpaid from time to time.
The Principal Underwriter 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 the
Principal Underwriter from a Fund. The Principal Underwriter intends to seek
full payment of such charges from a Fund (together with annual interest thereon
at the prime rate plus one percent) at such time in the future as, and to the
extent that, payment thereof by a Fund would be within the permitted limits.
If the FUND's Independent Trustees authorize such payments, the effect would
be to extend the period of time during which the FUND incurs the maximum amount
of costs allowed by a Distribution Plan. If a Distribution Plan is terminated,
the Principal Underwriter will ask the Independent Trustees to take whatever
action they deem appropriate under the circumstances with respect to payment of
such amounts.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The FUND
has 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 Plan, the FUND may be subject to possible
adverse distribution consequences.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class.
For the Florida, Pennsylvania, Texas, Massachusetts and New York Insured
Funds, unreimbursed Class B Distribution Plan expenses at March 31, 1995 were
$3,196,058 (6.26% of Class B net assets), $1,923,455 (6.27% of Class B net
assets), $145,495 (6.73% of Class B net assets), $384,672 (6.24% of Class B net
assets), and $728,940 (6.12% of Class B net assets), respectively.
For the year ended March 31, 1995, the Florida, Pennsylvania, Texas,
Massachusetts and New York Insured Funds paid the Principal Underwriter (1)
$66,246, $44,697, $2,847, $1,829, and $3,025, respectively, pursuant to each
Fund's Class A Distribution Plan; (2) $345,221, $244,404, $18,613, $40,387, and
$70,227, respectively, pursuant to each Fund's Class B Distribution Plan; and
(3) $140,405, $81,781, $5,377, $15,014, and $15,895, respectively, pursuant to
each Fund's Class C Distribution Plan.
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.
HOW TO REDEEM SHARES
Your shares of a Fund may be redeemed for cash at their net asset value upon
written order by you to the FUND, c/o KIRC, and presentation to the FUND of a
properly endorsed share certificate if certificates have been issued. Your
signature(s) on the written order and certificates must be guaranteed as
described below. In order to redeem by telephone or to engage in telephone
transactions generally, you complete the authorization in your account
application. Proceeds for shares redeemed by telephonic order will be deposited
by wire or EFT only to the bank account designated in your account application.
The redemption value equals the net asset value per share then determined and
may be more or less than your cost depending upon changes in the value of the
Fund's portfolio securities between purchase and redemption.
If imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to you.
At various times, the FUND may be requested to redeem shares for which it has
not yet received good payment. In such a case, the FUND will mail the redemption
proceeds upon clearance of the purchase check, which may take up to 15 days or
more. Any delay may be avoided by purchasing shares with a certified check drawn
on a U.S. bank or by bank wire of funds. Although the mailing of a redemption
check or the wiring of redemption proceeds may be delayed, the redemption value
will be determined and the redemption processed in the ordinary course of
business upon-receipt of proper documentation. In such a case, after redemption
and prior to the release of the proceeds, no appreciation or depreciation will
occur in the value of the redeemed shares, and no interest will be paid on the
redemption proceeds. If the mailing of redemption proceeds has been delayed, the
check will be mailed or the proceeds wired promptly after good payment has been
collected.
The FUND computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption less any applicable contingent deferred sales
charge (as described above) will be made within seven days thereafter except as
discussed herein.
You may also redeem your shares through broker-dealers. The Principal
Underwriter, acting as agent for the FUND, stands ready to repurchase a Fund's
shares upon orders from dealers at the redemption value described above computed
on the day the Principal Underwriter receives the order. If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds to the broker-dealer placing the order within seven days thereafter.
The Principal Underwriter charges no fees for this service.
However, your broker-dealer may do so.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
U.S. COMMERCIAL BANK OR TRUST COMPANY OR OTHER PERSONS ELIGIBLE TO GUARANTEE
SIGNATURES UNDER THE SECURITIES ACT OF 1934 AND KIRC'S POLICIES. The FUND and
KIRC may waive this requirement, but may also require additional documents in
certain cases. Currently, the requirement for a signature guarantee has been
waived on redemptions of $50,000 or less where the account address of record has
been the same for a minimum period of 30 days. The FUND and KIRC reserve the
right to withdraw this waiver at any time.
If the FUND receives a redemption order, but you have not clearly indicated
the amount of money or number of shares of the Fund involved, the FUND cannot
execute the order. In such cases, the FUND will request the missing information
from you and process the order on the day such information is received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by check.
If they are $2,500 or more, they will be mailed, wired or sent by EFT to your
previously designated bank account as you direct. If you do not specify how you
wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the FUND by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth herein.
SMALL ACCOUNTS
Due to the high cost of maintaining small accounts, the FUND reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the FUND to pay for all
redemptions in cash, the FUND may authorize payment to be made in portfolio
securities or other property. The FUND has obligated itself, however, under the
1940 Act to redeem for cash all shares of a Fund presented for redemption by any
one shareholder in any 90-day period up to the lesser of $250,000 or 1% of the
Fund's net assets. 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, to the extent permitted by law, would be readily marketable.
Shareholders receiving such securities would incur brokerage costs when these
securities are sold.
GENERAL
The FUND reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose or change fees including fees for services in connection
with exchanges.
Except as otherwise noted, neither the FUND, KIRC nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the FUND, KIRC nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.
The FUND may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the FUND
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price, total return and
yield quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a week.
EXCHANGES
If you have obtained the appropriate prospectus, you may exchange shares of a
Fund for shares of certain other Keystone America Funds and Keystone Liquid
Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone America
Funds and Class A shares of KLT;
Class B shares may be exchanged for the same type of Class B shares of other
Keystone America Funds and the same type of Class B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone America
Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are
(1) Class A shares acquired in an NAV Purchase or otherwise without a
front end sales charge,
(2) Class B shares that have been held for less than 72 months or four
years, as the case may be, or
(3) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares by calling toll free
1-800-343-2898, by writing KIRC or by calling KARL. Shares purchased by check
are eligible for exchange after 15 days. There is a $10.00 fee for each
exchange. If an exchange order is made by an individual investor using KARL,
there is no fee. The FUND reserves the right, after providing shareholders with
any required notice to shareholders, to terminate this exchange offer or to
change its terms, including the right to change the fee for any exchange.
Orders to exchange a certain class of shares of a Fund for the corresponding
class of shares of KLT will be executed by redeeming the shares of the Fund and
purchasing the corresponding class of shares of KLT at the net asset value of
KLT shares next determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. In all other
cases, orders for exchanges received by the FUND prior to 4:00 p.m. eastern time
on any day the FUND is open for business will be executed at the respective net
asset values determined as of the close of business that day. Orders for
exchanges received after 4:00 p.m. eastern time on any business day will be
executed at the respective net asset values determined at the close of the next
business day.
An excessive number of exchanges may be disadvantageous to the FUND.
Therefore, the FUND, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the Funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the Fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the Fund
being acquired may legally be sold.
KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase a Fund's shares in any amount and to redeem up to $50,000
worth of a Fund's shares. You can use Keystone America Money Line like an
"electronic check" to move money between your bank account and your account in
the FUND with one telephone call. You must allow two business days after the
call for the transfer to take place. For money recently invested, you must allow
normal check clearing time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in your
Keystone America account. Once proper authorization is given, your bank account
will be debited to purchase shares in the Fund specified in your account
application. You will receive confirmation from the Principal Underwriter for
every transaction.
To change the amount of or terminate a Keystone America Money Line service
(which could take up to 30 days), you must write to KIRC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, and include your account number.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account for a Fund's shares has a
value of at least $10,000, you may arrange for regular monthly or quarterly
fixed withdrawal payments. Each payment must be at least $100 and may be as much
as 1.5% per month or 4.5% per quarter of the total net asset value of the Fund
shares in your account when the Automatic Withdrawal Plan is opened. Excessive
withdrawals may decrease or deplete the value of your account. 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 an Automatic
Withdrawal Program.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America 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, which
may cause a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must have established an
account in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and 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
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on the application and indicate the Keystone America 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. Two dimensional
investing is available only in states where shares of the Fund being acquired
may legally be sold.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at current
net asset value.
PERFORMANCE DATA
From time to time a Fund may advertise "total return," "current yield" and a
"tax equivalent yield." ALL FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. Total return and current yield are
computed separately for each class of shares of a Fund. Total return refers to a
Fund's average annual compounded rates of return over specified periods
determined by comparing the initial amount invested in a particular class to the
ending redeemable value of that amount. The resulting equation assumes
reinvestment of all dividends and distributions and deduction of the maximum
sales charge and all recurring charges, if any, applicable to all shareholder
accounts. The exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period. Such yield will include income from sources other than municipal
obligations, if any.
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.
Any given yield or total return quotation should not be considered
representative of a Fund's yield or total return for any future period.
The FUND may also include comparative performance information for each class
of shares when advertising or marketing the FUND's shares, such as data from
Lipper Analytical Services, Inc., Morningstar, Inc., S&P, Ibbotson Associates
or other industry publications.
FUND SHARES
The FUND currently issues shares of five separate series evidencing interests
in different portfolio securities, and each Fund generally issues three classes
of shares. The FUND is authorized to issue additional series or classes of
shares. Shares of a Fund participate in dividends and distributions and have
equal voting, liquidation and other rights with other shares of the Fund except
that (1) expenses related to the distribution of each class of shares, or other
expenses that the Board of Trustees may designate as class expenses, from time
to time, are borne solely by each class; (2) each class of shares has exclusive
voting rights with respect to its Distribution Plan; (3) each class has
different exchange privileges; and (4) each class generally has a different
designation. When issued and paid for, the shares of each Fund will be fully
paid and nonassessable by the FUND. Shares of each Fund may be exchanged as
explained under "Shareholder Services," but will have no other preference,
conversion, exchange or preemptive rights. Shares are redeemable, transferable
and freely assignable as collateral. There are no sinking fund provisions.
Shareholders of a Fund are entitled to one vote for each full share owned and
fractional votes for fractional shares on all matters subject to Fund vote.
Shares of a Fund vote together except when required by law to vote separately by
class. The FUND does not have annual meetings. The FUND will have special
meetings, from time to time, as required under its Declaration of Trust and
under the 1940 Act. As provided in the FUND's Declaration of Trust, shareholders
have the right to remove Trustees by an affirmative vote of two-thirds of the
outstanding shares. A special meeting of the shareholders will be held when 10%
of the outstanding shares request a meeting for the purpose of removing a
Trustee. As prescribed by Section 16(c) of the 1940 Act, shareholders may be
eligible for shareholder communication assistance in connection with the special
meeting.
Under Massachusetts law, it is possible that a FUND shareholder may be held
personally liable for the FUND's obligations. The FUND's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the FUND's obligations and provides indemnification from FUND
assets for any shareholder held personally liable for the FUND's obligations.
Disclaimers of such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone. As previously mentioned, KIRC serves as the
FUND's transfer agent and dividend disbursing agent.
When the FUND determines from its records that more than one account in the
FUND is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the FUND intends, when an annual
report or a semi-annual report of the FUND is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the FUND
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating. The following criteria are used in making that assessment:
1. amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note); and
2. source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 -- Strong capacity to pay principal and interest. Those issues
determined to possess a very strong capacity to pay debt service are
given a plus (+ ) designation.
2. SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the terms of
the notes.
3. SP-3 -- Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+ "). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example, "SP
- -- 1+ / A-1+ ").
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
1. likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. nature of and provisions of the obligation; and
3. protection afforded by and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+ ) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the successful
completion of the project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion.
D. BOND RATINGS
Bond ratings are as follows:
1. AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
2. AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
3. A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
4. BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
A Moody's rating for municipal short-term obligations will be designated
Moody's Investment Grade or ("MIG"). These ratings recognize the difference
between short-term credit risk and long-term risk. Factors affecting the
liquidity of the borrower and the short-term cyclical elements are critical in
short-term ratings.
A short-term rating may also be assigned on issues with a demand feature --
variable rate demand obligation ("VRDO"). Such ratings will be designated as
VMIG. Short-term ratings on issues with demand features are differentiated by
the use of the VMIG symbol to reflect such characteristics as payment upon
periodic demand rather than fixed maturity dates and payment relying on the
external liquidity.
The note ratings are as follows:
1. MIG1/VMIG1 This designation denotes the best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
2. MIG2/VMIG2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
3. MIG3/VMIG3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
4. MIG4/VMIG4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
B. CORPORATE AND MUNICIPAL BOND RATINGS
1. Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
2. Aa -- Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long term risks appear somewhat larger than in Aaa securities.
3. A -- Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
4. Baa -- Bonds rated Baa are considered to be medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
CON. (--) -- Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (1) earnings of projects under
construction, (2) earnings of projects unseasoned in operation experience, (3)
rentals that begin when facilities are completed, or (4) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the Aa, A, and Baa groups that Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, and Baa 1.
FITCH CORPORATE AND MUNICIPAL RATINGS
A. MUNICIPAL NOTES
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally three years or less. These
include commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes. The short-term rating places greater emphasis on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
The note ratings are as follows:
1. F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
2. F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+ .
3. F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned the two higher ratings.
4. F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
B. CORPORATE AND MUNICIPAL BOND RATINGS
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
PLUS (+ ) OR MINUS (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA category.
A CONDITIONAL rating is premised on the successful completion of a project or
the occurrence of a specific event.
Debt rated BB, B, CCC, CC and C by S&P is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Debt rated C1 by S&P is debt (income bonds) on which no interest is being paid.
Debt rated D by S&P is in default and payment of interest and/ or repayment of
principal is in arrears. Bonds that are rated Caa by Moody's are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds that are rated Ca by Moody's
represent obligations that are speculative in a high degree. Such issues are
often in default or have other market shortcomings. Bonds that are rated C by
Moody's are the lowest rated bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Debt rated BB, B, CCC, CC, and C by Fitch is regarded as speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
represents the highest degree of speculation. Debt rated DDD, DD, and D are in
default on interest and/or principal payments.
DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
AVAILABLE TO THE FUNDS
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 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 FUND'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 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 FUND's custodian containing liquid assets such as
U.S. government securities or other high grade debt securities having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
that a Fund is obligated to repurchase may decline below the repurchase price.
Borrowing and reverse repurchase agreements magnify the potential for gain or
loss on the portfolio securities of a Fund and, therefore, increase the
possibility of fluctuation in the Fund's net asset value. Such practices may
constitute leveraging. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce 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. The staff of the Securities and Exchange Commission
("SEC") has taken the position that the 1940 Act treats reverse repurchase
agreements as being included in the percentage limit on borrowings imposed on a
fund.
"WHEN ISSUED" SECURITIES
Each 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 the Board of Trustees, when the income to be earned from the loan
justifies the attendant risks.
DERIVATIVES
Each 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.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options, futures,
forwards and swaps -- from which virtually any type of derivative transaction
can be created. Further information regarding options and futures, is provided
later in this section and is provided in the FUND's statement of additional
information.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. See "Structured Securities" below.
The term "derivative" is also sometimes used to describe securities involving
rights to a portion of the cash flows from an underlying pool of mortgages or
other assets from which payments are passed through to the owner of, or that
collateralize, the securities.
While the judicious use of derivatives by experienced investment managers such
as Keystone can be beneficial, derivatives also involve risks different from,
and, in certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives that investors should understand before
investing in 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 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. The Fund may write (i.e., sell) covered call and put
options. By writing a call option, the Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, 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. The 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 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. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on its use of options
discussed herein, each Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.
The staff of the SEC is of the view that the premiums that 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 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 may enter into currency and other financial futures contracts and
write options on such contracts. Each 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 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 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 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 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.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, if permitted by its investment policies, each Fund may
invest in securities of foreign issuers. When a Fund invests in foreign
securities they usually will be denominated in foreign currencies, and the Fund
temporarily may hold funds in foreign currencies. Thus, the value of Fund shares
will be affected by changes in exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, 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.
VARIABLE AND FLOATING RATE INSTRUMENTS. Fixed-income securities may have fixed,
variable or floating rates of interest. Variable and floating rate securities
pay interest at rates that are adjusted periodically, according to a specified
formula. A "variable" interest rate adjusts at predetermined intervals (e.g.,
daily, weekly or monthly), while a "floating" interest rate adjusts whenever a
specified benchmark rate (such as the bank prime lending rate) changes.
If permitted by its investment policies, a Fund may invest in fixed-income
securities that pay interest at a coupon rate equal to a base rate, plus
additional interest for a certain period of time if short-term interest rates
rise above a predetermined level or "cap." The amount of such an additional
interest payment typically is calculated under a formula based on a short-term
interest rate index multiplied by a designated factor.
INVERSE FLOATING RATE SECURITIES. If permitted by its investment policies, a
Fund may also invest in securities with rates that move inversely to market
rates ("inverse floaters"). An inverse floater bears an interest rate that
resets in the opposite direction of the change in a specified interest rate
index. As market interest rates rise, the interest rate on the inverse floater
goes down, and vice versa. Inverse floaters tend to exhibit greater price
volatility than fixed-rate bonds of similar maturity and credit quality. The
interest rates on inverse floaters may be significantly reduced, even to zero,
if interest rates rise. Moreover, the secondary market for inverse floaters may
be limited in rising interest rate environments.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in market value.
STRUCTURED SECURITIES. Structured securities generally represent interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of structured securities backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
securities to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured securities is dependent
on the extent of the cash flow on the underlying instruments. Because structured
securities typically involve no credit enhancement, their credit risk generally
will be equivalent to that of the underlying instruments. Structured securities
of a given class may be either subordinated or unsubordinated to the right of
payment of another class. Subordinated structured securities typically have
higher yields and present greater risks than unsubordinated structured
securities.
<PAGE>
EXHIBIT A
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.
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
During the past decade, the Massachusetts economy shifted from labor intensive
manufacturing to services, especially in the medical and biotechnology areas.
Although The Commonwealth experienced an economic slowdown during the recession,
especially in high technology, real estate, banking, and defense, there are
signs of improvement. While roughly 9.5% of the employment base was lost between
1989 and 1991, employment rose 0.4% between November, 1992 and November, 1993.
Although job losses continued in high tech manufacturing and finance during 1992
and 1993, strong gains were registered in services, construction and high tech
non-manufacturing. The December, 1993 unemployment rate was 6.3% compared to
6.4% for the nation. In addition, per capita personal income averaged 118% of
the national average in 1992.
Although The Commonwealth experienced quite a slowdown during the recession
with spending exceeding revenues, beginning in 1991 the Commonwealth has
experienced a turn-around in its finances with revenues exceeding spending.
Budgeted expenditures for fiscal 1989, 1990 and 1991 were approximately $12.643
billion, $13.260 billion and $13.659 billion, respectively while budgeted
revenues and other sources for those years were approximately $11.970 billion,
$12.008 billion and $13.634 billion, respectively. By comparison, budgeted
revenues and other sources increased by approximately 0.7% from fiscal 1991 to
fiscal 1992, while tax revenues increased by 5.4% for the same period. Budgeted
expenditures in fiscal 1992 were 1.7% lower than fiscal 1991 budgeted
expenditures. 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 ended with positive fund balances of $562.5 million, including a
combined balance of $452.1 million in the stabilization and undesignated general
funds. By comparison, The Commonwealth ended the 1989 fiscal year with fund
balances in deficit by $319.3 million.
The fiscal 1994 budget, as signed into law by the Governor on July 19, 1993,
provides for expenditures of approximately $15.500 billion, an increase of 5.5%
over fiscal 1993 levels. Budgeted revenues for fiscal 1994 are estimated to be
approximately $15.483 billion, which is 5.3% higher than fiscal 1993
expenditures. This amount includes estimated tax revenues of approximately
$10.560 billion, which is 6.3% higher than fiscal 1993 tax revenues. For fiscal
1994, a combined balance of $541.4 million is expected in the stabilization and
undesignated general funds. The fiscal 1994 budget is based upon numerous
spending and revenue estimates, the achievement of which cannot be assured.
In June 1993, new comprehensive education reform legislation was enacted. It
is expected that this legislation will require annual increases in expenditures
for education purposes above fiscal 1993 base spending of $1.289 billion, of
approximately $175 million in fiscal 1994, $141 million in fiscal 1995 and $662
million in fiscal 1996. The fiscal 1994 budget includes $175 million in
appropriations to satisfy this legislation.
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 when 100 of 182 communities
had successful votes, adding $58.5 million to their levy limits. During fiscal
years 1992 and 1993, 123 communities had successful votes totalling $47.4
million. Although Proposition 2 1/2 will continue to constrain local property
tax revenues, significant capacity exists for overrides in nearly all cities and
towns.
An expanded discussion is contained in the statement of additional
information.
KEYSTONE NEW YORK INSURED TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Individual shareholders of the New York Insured 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 Insured 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 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
Insured 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 FUND
The New York economy was severely impacted by the recession, but it has begun
to show signs of recovery. The recession has been more severe in New York than
in other parts of the nation, owing to a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an overbuilt real
estate market. More than 564,000 jobs were lost during the recession,
representing 7% of the pre-recession base. During 1993, employment continued to
decline but at diminishing rates (a 0.3% decline during 1993), indicating a
stabilizing economy. A modest job growth of approximately 0.8% is anticipated
for 1994. It is anticipated that New York's service and trade sectors will be
the major contributors to this growth, while the manufacturing sector is
expected to continue to contract. The State's economy is significantly affected
by New York City's economy by virtue of New York City's dominance in population
and economic activity. New York City accounts for approximately 41% of the
State's population and personal income.
The revised 1993-1994 State Financial Plan is based on an economic projection
that New York will perform more poorly than the nation as a whole. Many
uncertainties exist in forecasts of the State's economy, which could have an
adverse effect on the State, and there can be no assurance that the State
economy will not experience worse-than-predicted results in the 1994 fiscal
year, with corresponding material and adverse effects on the State's projections
of receipts and disbursements.
For fiscal 1993, State financial operations produced a $671 million surplus on
a general fund budget of nearly $31 billion. This surplus followed four years of
operating deficits. On a GAAP basis, the accumulated general fund deficit peaked
in 1991 at $6.2 billion and then decreased to $2.6 billion for fiscal 1993. Debt
reform is the principal cause for this improvement. Short-term borrowing is
only $850 million for the current fiscal year, the lowest level since 1969. To
reduce borrowing costs and improve market access, the Governor is proposing a
constitutional amendment to limit issuance of appropriation bonds and to create
tax-backed debt.
The State's updated financial plan estimates that fiscal 1994 will achieve an
ending cash balance of approximately $299 million. This larger than anticipated
surplus is a result of a stabilizing economy, improving tax collections and
slowing expenditure growth. The 1993 and 1994 budgets were enacted in a timely
manner and were based on realistic economic forecasts, conservative revenue
assumptions and some spending restraint. The Governor's proposed budget for
fiscal 1995 provides for general fund spending growth of 4.3%, use of the
current year surplus, modest tax cuts and a small level of non-recurring
measures. The fiscal 1995 financial plan is based on a forecast of slow economic
growth and projects increases in the personal income tax and user taxes and fees
of 5.3% and 4.1%, respectively.
Significant litigation exists at the State level of government. A suit filed
by a taxpayer activist challenges the constitutionality of the transportation
financing plan. Also, in November 1993, the Court of Appeals affirmed a lower
court's decision, declaring that a change in the actuarial funding method for
determining contributions by the State and its local governments to their
respective retirement systems was unconstitutional. The State may also be liable
for significant payments related to a U.S. Supreme Court decision involving
abandoned property.
An expanded discussion is contained in the statement of additional
information.
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 United States, 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, 1992 and June 30, 1993.
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.
KEYSTONE TEXAS TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Texas does not presently impose an income tax on individuals or corporations.
Consequently, neither individual nor corporate shareholders will be subject to
any Texas state income tax on distributions received from the Texas Fund. Texas
does, however, impose a corporate franchise tax on corporations that do business
in Texas or are chartered or authorized to do business in Texas. The corporate
franchise tax imposed on those corporations is an amount equal to the greater of
(1) 1/4 of 1% of the corporation's "taxable capital" apportioned to Texas, less
certain deductions, or (2) 4.5% of the corporation's "taxable earned surplus"
apportioned to Texas, less certain deductions and loss carryforwards. The amount
of "taxable earned surplus" is based generally on the corporation's "reportable
federal taxable income" as computed under the Code. Exempt interest dividends
distributed by the Texas Fund are expected to be excluded from reportable
federal taxable income by federal law and likewise excluded from the taxable
earned surplus component upon which the Texas corporate franchise tax may be
imposed. Corporations that do business in Texas or are chartered or authorized
to do business in Texas should consult their own tax advisors regarding the full
impact of the Texas franchise tax.
Under present law, the Texas Fund will not be subject to Texas corporate
franchise tax.
SPECIAL FACTORS AFFECTING THE TEXAS FUND
Texas' economy continues to recover from the recession that began in the
mid-1980s after a collapse in oil prices, and the State comptroller expects
continued growth in the early 1990s. Also, since the mid-1980's, the economy has
diversified, with the oil and gas industry diminishing in relative importance
while service-producing sectors provide the major sources of job growth.
Based on information from the Texas Employment Commission, non-farm employment
has reached an all-time high of 7.8 million. The unemployment rate for 1994 is
estimated at 6.4 percent compared to a national average of 6.1 percent. The
Texas State Government ended fiscal year 1994 with a positive cash balance in
the General Fund. This was the seventh consecutive year that the Texas State
Government had ended a fiscal year with a positive balance.
On January 30, 1995, the Texas Supreme Court upheld the constitutionality of a
comprehensive legislative revision to the system for financing the operation of
public schools. The legislative revisions resulted from a series of court
decisions commonly referred to as Edgewood v. Kirby, in which Texas courts have
declared the Texas school finance system unconstitutional under Texas law. The
Supreme Court's ruling suggested that further changes might be needed in Texas'
school finance system in the near future to equalize access to funding for
capital projects, as well as operations. The Texas Legislature is currently
considering legislation which attempts to provide such equalization. The
legislative revision and further efforts to equalize school funding may affect
the financial condition of the Texas State Government and certain Texas school
districts.
Although it is anticipated that most of the bonds held by the Texas Fund will
be revenue obligations or general obligations of local governments or
authorities, rather than general obligations of the State of Texas itself, any
circumstances that adversely affect the State's credit standing may also affect
the market value of these other bonds held by the Texas Fund, either directly or
indirectly, as a result of a dependency of local governments and other
authorities upon State aid and reimbursement programs.
An expanded discussion is contained in the statement of additional
information.
<PAGE>
EXHIBIT B
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of a Fund alone or in combination with
Class A shares of other Keystone America Funds.
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 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 a 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 a Fund's
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 presently consist of the Keystone America Funds and Keystone
Liquid Trust.
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. KIRC 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 doing so, 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 a Fund to sell, the amount
indicated.
After the Letter of Intent is received by KIRC, 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 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 KIRC 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 the Principal
Underwriter 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 the Principal Underwriter or his dealer pay such difference
in sales charge, KIRC 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 KIRC. 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
KIRC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or KIRC that
a Letter of Intent is in effect each time a purchase is made.
<PAGE>
KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Harwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
[Logo]KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
PLATF-P 695
5.35M
[Recycle logo]
KEYSTONE
[Photo: Palm trees & beach]
FLORIDA
TAX FREE FUND
[logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Harwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
PATF-P 695
5.35M
[Recycle logo]
KEYSTONE
[Photo: Covered Bridge]
PENNSYLVANIA
TAX FREE FUND
[logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Harwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
TXTF-P 695
5.35M
[Recycle logo]
KEYSTONE
[Photo: Lone Star State Flag]
TEXAS
TAX FREE FUND
[logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Harwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
MATF-P 695
5.35M
[Recycle logo]
KEYSTONE
[Photo: View of Boston]
MASSACHUSETTS
TAX FREE FUND
[logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Harwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
NYTF-P 695
5.35M
[Recycle logo]
KEYSTONE
[Photo: Statue of Liberty]
NEW YORK INSURED
TAX FREE FUND
[logo]
PROSPECTUS AND
APPLICATION
EXHIBIT 17(c)(2)
Most Recent Statement of Additional Information
of
Keystone State Tax Free Fund
<PAGE>
KEYSTONE STATE TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 31, 1995
AS SUPPLEMENTED JUNE 1, 1995
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
State Tax Free Fund (formerly Keystone America State Tax Free Fund) (the "FUND")
dated May 31, 1995, as supplemented June 1, 1995. A copy of the prospectus may
be obtained from Keystone Investment Distributors Company (formerly Keystone
Distributors, Inc.) (the "Principal Underwriter"), the FUND's principal
underwriter, 200 Berkeley Street, Boston, Massachusetts 02116-5034.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
The FUND 2
Investment Policies 2
Investment Restrictions 6
Valuation and Redemption of Securities 9
Sales Charges 10
Distribution Plans 14
Investment Adviser 17
Trustees and Officers 20
Principal Underwriter 24
Brokerage 25
Declaration of Trust 27
Standardized Total Return and Yield Quotations 29
Additional Information 32
Appendix A A-1
Appendix B B-1
Financial Statements F-1
Independent Auditors' Report F-____
(Keystone Florida Tax Free Fund and
Keystone Texas Tax Free Fund)
Financial Statements F-____
Independent Auditors' Report F-____
(Keystone Pennsylvania Tax Free Fund,
Keystone Massachusetts Tax Free Fund and
Keystone New York Insured Tax Free Fund)
<PAGE>
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THE FUND
- -------------------------------------------------------------------------------
The FUND is a non-diversified, open-end management investment company
commonly known as a mutual fund. The FUND was formed as a Massachusetts business
trust on September 13, 1990. The FUND is one of the thirty funds managed or
advised by Keystone Investment Management Company (formerly named Keystone
Custodian Funds, Inc.) ("Keystone"), the FUND's investment adviser. The FUND
currently consists of the following five separate series evidencing interests in
different portfolios of securities: Keystone Florida Tax Free Fund, Keystone
Massachusetts Tax Free Fund, Keystone New York Insured Tax Free Fund, Keystone
Pennsylvania Tax Free Fund and Keystone Texas Tax Free Fund (each, a "Fund," and
collectively, the "Funds"). The Keystone Pennsylvania Tax Free Fund
("Pennsylvania Fund") and the Keystone Florida Tax Free Fund ("Florida Fund")
were established on September 19, 1990. The Keystone Massachusetts Tax Free Fund
("Massachusetts Fund"), the Keystone New York Insured Tax Free Fund ("New York
Insured Fund") and the Keystone Texas Tax Free Fund ("Texas Fund") were
established on February 21, 1992. The Massachusetts Fund and the New York
Insured Fund were not offered to the public prior to February 4, 1994.
The essential information about the FUND and its Funds is contained in
its prospectus. This statement of additional information provides additional
information about the FUND and its Funds that may be of interest to some
investors.
For special factors affecting each Fund, see Appendix A to this
statement of additional information.
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INVESTMENT POLICIES
- -------------------------------------------------------------------------------
Each Fund invests primarily in municipal obligations that are exempt
from federal income tax and 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 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 Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P") and Fitch Investor Services, Inc, ("Fitch"), as described
below, 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 as extensive
as those generally relating to corporations.
Subsequent to its purchase by a Fund, an issue of municipal obligations
or other investment may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but Keystone will
consider such an event in its determination of whether the Fund should continue
to hold such obligation in its portfolio.
The ability of each Fund to achieve its investment objectives is
dependent upon the continuing ability of issuers of municipal obligations to
meet their obligations to pay interest and principal when due. Obligations of
issuers of 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 as a result of litigation or other
conditions, the power or ability of any one or more issuers to pay, when due,
principal of and interest on its or their municipal obligations may be
materially affected. 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. If such a proposal were enacted, the availability of municipal
obligations for investment by the Funds and the value of the Funds' portfolios
could be materially affected, in which event the FUND would reevaluate the
investment objective and policies of its Funds and consider changes in the
structure of the Funds 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
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, but not exempt from income tax in Pennsylvania, or which are not exempt
from personal property or intangibles tax in Florida or Pennsylvania, as the
case may be. Each Fund will assume a temporary defensive position when, for
example, Keystone determines that market conditions so warrant. If a Fund is
investing defensively, it is not pursuing its objectives.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVES
The investment objectives of each Fund are fundamental and may not be
changed without approval of the holders of a majority of such Fund's outstanding
voting shares (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).
- -------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The investment restrictions as summarized below are fundamental for
each Fund and may not be changed without the vote of a majority of such Fund's
outstanding voting 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, including in 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;
(2) 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) 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, except as part
of a merger, consolidation, purchase of assets or similar transaction;
(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 estate, and may engage in currency
or other financial futures contracts and related options transactions; or
(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.
The Funds are non-diversified under the federal securities laws. As
non-diversified Funds, there is no restriction under the Investment Company Act
of 1940 ("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 "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 has adopted the additional investment restriction set
forth below, which may not be changed without the approval of shareholders.
Specifically, a Fund may not (1) 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 (2)
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 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.
Additional restrictions adopted for each Fund, which may be changed by
the Board of Trustees, provide that a Fund may not purchase or retain securities
of an issuer if, to the knowledge of the FUND, officers, Trustees or Directors
of the FUND or Keystone each owning beneficially more than 1/2 of 1% of the
securities of such issuer own in the aggregate more than 5% of the securities of
such issuer, or such persons or management personnel of the FUND or Keystone
have a substantial beneficial interest in the securities of such issuer.
Portfolio securities of a Fund may not be purchased from or sold or loaned to
Keystone or any affiliate thereof or any of their Directors, officers or
employees.
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.
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
multistate 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.
The Texas Fund has undertaken to a state securities authority that, so
long as the state authority requires and shares of the Fund are registered for
sale in that state, (1) the Fund will not purchase puts, calls, straddles,
spreads or combinations thereof, if by reason thereof the value of its aggregate
investment in such securities will exceed 5% of its total assets except that it
may purchase "stand-by commitments" and master demand notes; and (2) the Fund
will maintain 300% asset coverage on any leverage or bank borrowings.
The FUND has undertaken to a state securities authority that, so long
as the state authority requires and shares of a Fund are registered for sale in
that state, the Fund will (1) not invest in real estate limited partnerships;
and (2) not invest in oil, gas or other mineral leases.
Further, the FUND has undertaken to a state securities authority that,
so long as the state authority requires and shares of a Fund are registered for
sale in that state, all loans of portfolio securities will be made in accordance
with fair, just and equitable practice and the collateral values of portfolio
securities loaned will be maintained at no less than 100% by "marking to market"
daily.
In order to permit the sale of a Fund's shares in certain states, the
FUND may make commitments more restrictive than the investment restrictions
described above. Should the FUND determine that any such commitment is no longer
in the best interests of the affected Fund, it will revoke the commitment by
terminating sales of its shares in the state involved.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
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VALUATION AND REDEMPTION OF SECURITIES
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Current values for each Fund's portfolio securities may be determined
in the following manner:
1. securities for which market quotations are readily available are
valued at the mean of the bid and asked prices at the time of valuation;
2. (a) instruments having 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;
(b) investments maturing in more than sixty days when purchased that
are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest, approximates
market; and which, in either case, reflects fair value as determined by the
FUND's Board of Trustees;
3. short-term instruments having maturities of more than sixty days for
which market quotations are readily available are valued at current market
value; and
4. the following securities are valued at prices deemed in good faith
to be fair under procedures established by the Board of Trustees: (a)
securities, including restricted securities, for which market quotations are not
readily available; and (b) other assets.
The FUND believes 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 the Board of Trustees. The Board
of Trustees has authorized the use of a pricing service to determine the fair
value of each Fund's municipal obligations and certain other securities. Non
tax-exempt securities for which market quotations are readily available are
valued on a consistent basis at that price quoted which, in the opinion of the
Board of Trustees or the person designated by the Board of Trustees to make the
determination, most nearly represents the market value of the particular
security. Any securities for which market quotations are not readily available
or other assets are valued on a consistent basis at fair value as determined in
good faith using methods prescribed by the FUND's Board of Trustees.
The FUND has obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption by any one shareholder in any 90 day period up
to the lesser of $250,000 or 1% of a Fund's assets.
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SALES CHARGES
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GENERAL
Generally, each Fund offers three classes of shares. Class A shares are
offered with a maximum front end sales charge of 4.75% payable at the time of
purchase of Fund shares ("Front End Load Option"). Class B shares purchased on
or after June 1, 1995 are subject to a contingent deferred sales charge payable
upon redemption during the 72 month period following the month of purchase.
Class B shares purchased prior to June 1, 1995 are sold subject to a contingent
deferred sales charge payable upon redemption within three calendar years after
the first year of purchase ("Back End Load Option"). Class B shares purchased on
or after June 1, 1995 that have been outstanding eight years following the month
of purchase will automatically convert to Class A shares without imposition of a
front-end sales charge or exchange fee. Class B shares purchased prior to June
1, 1995 that have been outstanding during seven calendar years will similarly
convert to Class A shares. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to Keystone
Investment Resource Center, Inc. ("KIRC").) Class C shares are sold subject to a
contingent deferred sales charge payable upon redemption within one year after
purchase ("Level Load Option"). Class C shares are available only through
dealers who have entered into special distribution agreements with the FUND's
Principal Underwriter. The FUND's prospectus contains a general description of
how investors may buy shares of the FUND as well as a table of applicable sales
charges for Class A shares, a discussion of reduced sales charges applicable to
subsequent purchases, and a description of applicable contingent deferred sales
charges.
CONTINGENT DEFERRED SALES CHARGES
In order to reimburse a Fund for certain expenses relating to the sale
of its shares (See "Distribution Plans"), a contingent deferred sales charge is
imposed at the time of redemption of certain Fund shares, as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares made on or after
April 10, 1995 (1) in an amount equal to or exceeding $1,000,000 and/or (2) by a
corporate qualified retirement plan or a non-qualified deferred compensation
plan sponsored by a corporation having 100 or more eligible employees (a
"Qualifying Plan"), in either case without a front-end sales charge, will be
subject to a contingent deferred sales charge of 0.50% during the 24 month
period following the date of purchase. Certain Class A shares purchased without
a front-end sales charge prior to April 10, 1995 may be subject to a contingent
deferred sales charge of 0.25% upon redemption during the one-year period
commencing on the date such shares were originally purchased. The contingent
deferred sales charge will be retained by the Principal Underwriter. See
"Calculation of Contingent Deferred Sales Charge" below.
CLASS B SHARES
With respect to Class B shares purchased on or after June 1, 1995, each
Fund, with certain exceptions, will impose a deferred sales charge as a
percentage of the lesser of net asset value or net cost of such Class B shares
redeemed during succeeding twelve-month periods following the month of purchase
as follows: 5% during the first period; 4% during the second period; 3% during
the third period; 3% during the fourth period; 2% during the fifth period, and
1% during the sixth period. No deferred sales charge is imposed on amounts
redeemed thereafter.
With respect to Class B shares purchased prior to June 1, 1995, each
Fund, with certain exceptions, will impose a deferred sales charge of 3.00% on
shares redeemed during the calendar year of purchase and during the first
calendar year after purchase; 2.00% on shares redeemed during the second
calendar year after purchase; and 1.00% on shares redeemed during the third
calendar year after purchase. No deferred sales charge is imposed on amounts
redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. Amounts received by the Principal Underwriter
under the Class B Distribution Plans are reduced by deferred sales charges
retained by the Principal Underwriter. See "Calculation of Contingent Deferred
Sales Charge" below.
CLASS C SHARES
With certain exceptions, a Fund may impose a deferred sales charge of
1% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to you. The deferred sales charge is retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge 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 time of
purchase of such shares.
No contingent deferred sales charge is imposed when amounts redeemed
are derived from (1) increases in the value of an account above the net cost of
such shares due to increases in the net asset value per share of a Fund; (2)
certain shares with respect to which a Fund did not pay a commission on
issuance, including shares acquired through reinvestment of dividend income and
capital gains distributions; (3) Certain Class A shares held for more than one
year or two years, as the case may be, from the date of purchase; (4) Class B
shares held during more than four consecutive calendar years or more than 72
months after the month of purchase, as the case may be; or (5) Class C shares
held for more than one year from date of purchase.
Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed. There is no contingent deferred sales
charge when the shares of a class are exchanged for the shares of the same class
of another Keystone America Fund. Moreover, when shares of one such class of a
fund have been exchanged for shares of another such class of a fund, the
calendar year of the exchange is assumed to be the year shares tendered for
exchange were originally purchased.
WAIVER OF SALES CHARGES
Class A, Class B or Class C shares of each 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 officers, Directors, Trustees, full-time employees and sales
representatives of the FUND, Keystone Management, Keystone, Keystone
Investments, Inc. (formerly Keystone Group, Inc.), ("Keystone Investments"), one
of their subsidiaries or the Principal Underwriter, who have been such for not
less than ninety days; (2) a pension and profit-sharing plan established by such
companies, their subsidiaries and affiliates, for the benefit of their officers,
Directors, Trustees, full-time employees and sales representatives; or (3) a
registered representative of a firm with a dealer agreement with the Principal
Underwriter, 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 the FUND.
No initial sales charge is charged on a purchase 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 one of the Funds or
any fund in the Keystone Investments Family of Funds is at least $500,000.
In addition, no contingent deferred sales charge 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 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 an automatic withdrawal plan
of up to 1 1/2% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
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DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
FUND, 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. Each Fund's Class A, B
and C Distribution Plans have been approved by the FUND's Board of Trustees,
including a majority of the Trustees who are not interested persons of the FUND,
as defined in the 1940 Act ("Independent Trustees"), and the Trustees who have
no direct or indirect financial interest in the Distribution Plan or any
agreement related thereto (the "Rule 12b-1 Trustees," who are the same as the
Independent Trustees). Each Class A, B, and C Distribution Plan, a "Distribution
Plan," and collectively, "Distribution Plans".
DISTRIBUTION PLANS IN GENERAL
The National Association of Securities Dealers, Inc. ("NASD") currently
limits the amount that a Fund may pay annually in distribution costs for sale of
its shares and shareholder service fees. The rule limits annual expenditures to
1% 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 rule 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 12b-1 Plan, plus interest at the prime rate plus 1% on such
amounts (less any contingent deferred sales charges paid by shareholders to the
Principal Underwriter).
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that a Fund may expend daily
amounts at an annual rate currently limited to up to 0.15% of the 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 a principal
underwriter (currently the Principal Underwriter) of a Fund to enable the
Principal Underwriter to pay or to have paid to others who sell Class A shares a
service or other fee, at such intervals as the Principal Underwriter may
determine, in respect of Class A shares previously sold by any such others and
remaining outstanding during the period in respect of which such fee is or has
been paid.
Amounts paid by a Fund under its Class A Distribution Plan are
currently used to pay others, such as dealers, service fees at an annual rate of
up to 0.15% of the average net asset value of Class A shares sold by such others
and remaining outstanding on the books of the Fund for specific periods.
CLASS B DISTRIBUTION PLANS
Each Fund has adopted Distribution Plans for its Class B shares that
provide that a Fund may expend daily amounts at an annual rate of up to 1.00%
(currently limited to 0.90%) of the 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 the principal underwriter of the Fund
(currently the Principal Underwriter) (1) to enable the Principal Underwriter to
pay to others (dealers) commissions in respect of Class B shares sold since
inception of the Distribution Plans; and (2) to enable the Principal Underwriter
to pay or to have paid to others a service fee, at such intervals as the
Principal Underwriter may determine, in respect of Class B shares maintained by
any such recipients outstanding on the books of the Fund for specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.15% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker or other party receives 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 outstanding on the books of the Fund for specified
periods.
The Principal Underwriter 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 the Principal Underwriter from the Fund. The Principal Underwriter intends to
seek full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by the Fund would be within the permitted
limits.
If the FUND's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which the Fund incurs the maximum
amount of costs allowed by a Class B Distribution Plan. If a Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
In connection with financing its distribution costs, including
commission advances to dealers and others, the Principal Underwriter has sold to
a financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The FUND
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminated such shares' Distribution Plan completely.
If it terminated such Distribution Plan, the FUND may be subject to possible
adverse distribution consequences.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that the Fund may expend daily
amounts at an annual rate of up to 1.00% of the 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 the principal underwriter of the Fund
(currently the Principal Underwriter) to enable the Principal Underwriter to pay
to others (dealers) commissions in respect of Class C shares sold since
inception of the Distribution Plan; and (2) to enable the Principal Underwriter
to pay or to have paid to others a service fee, at such intervals as the
Principal Underwriter may determine, in respect of Class C shares maintained by
any such recipients outstanding on the books of the Fund for specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately fifteen months after
purchase, brokers 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% of the
average daily net asset value of each Class C share maintained by the recipients
outstanding on the books of the Fund for specified periods.
DISTRIBUTION PLANS - GENERAL
Each of the Distribution Plans may be terminated at any time by vote of
the Rule 12b-1 Trustees or by a vote of a majority of the outstanding voting
shares of the respective Class. For the Florida Fund, the Pennsylvania Fund, the
Texas Fund, the Massachusetts Fund and the New York Insured Fund unreimbursed
Class B Distribution Plan expenses at March 31, 1995 were $3,196,058 (6.12% of
net assets), $1,923,455 (6.27% of net assets), $145,495 (6.73% of net assets),
$384,672 (6.24% of net assets) and $728,940 (6.26% of net assets), respectively.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the affected Fund provided for in a Distribution Plan
requires the Fund's shareholders' approval. Otherwise, the Distribution Plans
may be amended by the Trustees, including the Rule 12b-1 Trustees.
While the Distribution Plans are in effect, the FUND will be required
to commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The total amounts paid by a Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above, and the amounts
and purposes of expenditures under a Distribution Plan must be reported to the
Rule 12b-1 Trustees quarterly. The Rule 12b-1 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 a Distribution Plan as
stated above.
During the fiscal year ended March 31, 1995, the Florida Fund,
Pennsylvania Fund, Texas Fund, Massachusetts Fund and the New York Insured Fund
paid the Principal Underwriter (1) $66,246, $44,697, $2,847, $1,829 and $3,025,
respectively, pursuant to each Fund's Class A Distribution Plan; (2) $345,221,
$244,404, $18,613, $40,387 and $70,227, respectively, pursuant to each Fund's
Class B Distribution Plan; and (3) $140,405, $81,781, $5,377, $15,014, and
$15,895, respectively, pursuant to each Fund's Class C Distribution Plan.
The Independent Trustees of the FUND have determined that the sales of
each Fund's shares resulting from payments under its Distribution Plan are
expected to benefit such Fund.
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INVESTMENT ADVISER
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Subject to the general supervision of the FUND's Board of Trustees,
Keystone serves as investment adviser to the FUND and is responsible for the
overall management of the FUND's business and affairs.
Keystone, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Investments, 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a corporation predominantly owned by current
and former members of Keystone's management and its affiliates. The shares of
Keystone Investments common stock beneficially owned by current and former
members of management are held in a number of voting trusts, the trustees of
which are George S. Bissell, Albert H. Elfner, III, Edward F. Godfrey, and Ralph
J. Spuehler, Jr. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone Management, Keystone, their
affiliates and the Keystone Investments Family of Funds.
Pursuant to the Investment Advisory and Management Agreement with the
FUND dated August 19, 1993 (the "Advisory Agreement") and subject to the
supervision of the FUND's Board of Trustees, Keystone manages and administers
the operation of the FUND and its Funds, and manages the investment and
reinvestment of each Fund's assets in conformity with such Fund's investment
objectives and restrictions. The Advisory Agreement stipulates that Keystone
shall provide office space, all necessary office facilities, equipment and
personnel in connection with its services as well as pay or reimburse the FUND
for the compensation of FUND officers and Trustees who are affiliated with the
investment adviser. The Advisory Agreement requires Keystone to pay all of its
expenses incurred in connection with its services. All charges and expenses
other than those specifically referred to as being borne by Keystone will be
paid by the FUND, including, but not limited to, custodian charges and expenses;
bookkeeping and auditors' charges and expenses; transfer agent charges and
expenses; fees of Independent Trustees; brokerage commissions, brokers' fees and
expenses; issue and transfer taxes; costs and expenses under the Distribution
Plans; taxes and trust fees payable to governmental agencies; the cost of share
certificates; fees and expenses of the registration and qualification of the
FUND and its shares with the Securities and Exchange Commission (sometimes
referred to herein as the "SEC" or the "Commission") or under state or other
securities laws; expenses of preparing, printing and mailing prospectuses,
statements of additional information, notices, reports and proxy materials to
shareholders of the FUND; expenses of shareholders' and Trustees' meetings;
charges and expenses of legal counsel for the FUND and for the Trustees of the
FUND on matters relating to the FUND; charges and expenses of filing annual and
other reports with the SEC and other authorities, and all extraordinary charges
and expenses of the FUND.
Each Fund pays Keystone a fee for its services to the Fund at the
annual rate set forth below:
Aggregate Net Asset
Management Value of the
Fee Shares of the Fund
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0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000
Computed as of the close of business each business day and paid daily.
The Advisory Agreement continues in effect from year to year only if
approved at least annually by the FUND's Board of Trustees or by a vote of a
majority of the outstanding shares of each Fund, and such renewal has been
approved by the vote of a majority of the Independent Trustees cast in person at
a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated, without penalty, on 60 days' written notice by the
FUND's Board of Trustees or by a vote of a majority of outstanding shares of
each Fund. The Advisory Agreement will terminate automatically upon its
"assignment" as that term is defined in the 1940 Act.
During the year ended March 31, 1993, the Florida Fund and the
Pennsylvania Fund paid or accrued to Keystone investment management and
administrative services fees of $199,288 and $138,570, respectively. During the
period ended March 31, 1993, the Texas Fund paid or accrued to Keystone
investment management and administrative services fees of $8,092.
During the year ended March 31, 1994, the Florida Fund, the
Pennsylvania Fund, and the Texas Fund paid or accrued to Keystone investment
management and administrative services fees of $363,939, $291,982, and $22,246,
respectively. During the period ended March 31, 1994, the Massachusetts and the
New York Insured Fund paid or accrued to Keystone investment management and
service fees of $2,167 and $1,473, respectively.
During the year ended March 31, 1995, the Florida Fund, the
Pennsylvania Fund and the Texas Fund paid or accrued to Keystone investment
management and administrative services fees of $515,205, $357,852 and $25,402,
respectively. During the year ended March 31, 1995, the Massachusetts Fund and
the New York Insured Fund paid or accrued to Keystone investment management and
administrative services fees of $43,636 and $63,808, respectively.
Until December 31, 1995, Keystone has voluntarily agreed to limit the
expenses of the FUND's Class A, B and C shares to 0.75%, 1.50%, and 1.50% of
average daily net assets, respectively. Thereafter, a redetermination of whether
to continue these expense limitations will be made. 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. In accordance with voluntary expense limitations in effect during the
fiscal year ended March 31, 1994, Keystone reimbursed the Florida Fund, the
Pennsylvania Fund, the Texas Fund, the Massachusetts Fund and the New York
Insured Fund (1) $89,179, $91,489, $35,517, $26,169 and $22,366 respectively,
with respect to each Fund's Class A shares; (2) $68,953, $81,415, $38,490,
$64,511 and $85,602 respectively, with respect to each Fund's Class B shares;
and (3) $31,739, $27,453, $10,643, $24,181, and $18,786, respectively, with
respect to each Fund's Class C shares.
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TRUSTEES AND OFFICERS
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Trustees and officers of the FUND, their principal occupations and some
of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Investments; President, Chief Executive Officer and
Trustee or Director of all 30 funds in the Keystone Investments Family
of Funds; Director and Chairman of the Board, Chief Executive Officer
and Vice Chairman of Keystone; Chairman of the Board and Director of
Keystone Institutional Company, Inc. ("Keystone Institutional")
(formerly named Keystone Investment Management Corporation) and
Keystone Fixed Income Advisors ("KFIA"); Director, Chairman of the
Board, Chief Executive Officer and President of Keystone Management,
Keystone Software Inc. ("Keystone Software"); Director and President of
Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"), Keystone Asset
Corporation, Keystone Capital Corporation, and Keystone Trust Company;
Director of the Principal Underwriter, KIRC, and Fiduciary Investment
Company, Inc. ("FICO"); Director and Vice President of Robert Van
Partners, Inc.; Director of Boston Children's Services Association;
Trustee of Anatolia College, Middlesex School, and Middlebury College;
Member, Board of Governors, New England Medical Center; and former
Trustee of Neworld Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member,
Board of Advisers, Credito Emilano (banking); and former Economics and
Financial Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Investment Counselor to Appleton Partners,
Inc.; former Managing Director, Seaward Management Corporation
(investment advice) and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment
advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of
all other Keystone Investments Funds; Director and Chairman of the
Board of Hartwell Keystone; Chairman of the Board and Trustee of
Anatolia College; Trustee of University Hospital (and Chairman of its
Investment Committee); former Chairman of the Board and Chief Executive
Officer of Keystone Investments; and former Chief Executive Officer of
the FUND.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Director, Coalition of Essential
Schools, Brown University; Director and former Executive Vice
President, National Alliance of Business; former Vice President,
Educational Testing Services; and former Dean, School of Business,
Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; former Group Vice President, Textron Corp.;
and former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio
Fund and The Phoenix Big Edge Series Fund; and former President,
Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Chairman of the Board, Director and
Executive Vice President, The London Harness Company; Managing Partner,
Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chief Executive
Officer, Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher &
Associates (environmental consulting); President, Oldways Preservation
and Exchange Trust (education); and former Director, Keystone
Investments and Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Of Counsel, Keyser, Crowley & Meub, P.C.;
Member, Governor's (VT) Council of Economic Advisers; Chairman of the
Board and Director, Central Vermont Public Service Corporation and
Hitchcock Clinic; Director, Vermont Yankee Nuclear Power Corporation,
Vermont Electric Power Company, Inc., Grand Trunk Corporation, Central
Vermont Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual
Fire Insurance Company, New England Guaranty Insurance Company, Inc.
and the Investment Company Institute; former Governor of Vermont;
former Director and President, Associated Industries of Vermont; former
Chairman and President, Vermont Marble Company; former Director of
Keystone; and former Director and Chairman of the Board, Green Mountain
Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Vice President, DHR
International, Inc. (executive recruitment); former Senior Vice
President, Boyden International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New Jersey, 411
International, Inc. and J & M Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director
of Connecticut Natural Gas Corporation, Trust Company of Connecticut,
Hartford Hospital, Old State House Association and Enhanced Financial
Services, Inc.; Member, Georgetown College Board of Advisors;
Chairman, Board of Trustees, Hartford Graduate Center; Trustee,
Kingswood-Oxford School and Greater Hartford YMCA; former Director,
Executive Vice President and Vice Chairman of The Travelers
Corporation; and former Managing Director of Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; President, Nassau County Bar Association;
former Associate Dean and Professor of Law, St. John's University
School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; Director, Senior Vice President,
Chief Financial Officer and Treasurer of Keystone Investments, the
Principal Underwriter, Keystone Asset Corporation, Keystone Capital
Corporation, Keystone Trust Company; Treasurer of Keystone
Institutional, Robert Van Partners, Inc., and FICO; Treasurer and
Director of Keystone Management, Keystone Software, and Hartwell
Keystone; Vice President and Treasurer of KFIA; and Director of KIRC.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; and President of Keystone.
KEVIN J. MORRISSEY: Treasurer of the Fund; Treasurer of all other Keystone
Investments Funds; Vice President of Keystone Investments; Assistant
Treasurer of FICO and Keystone; and former Vice President and Treasurer
of KIRC.
BETSY BLACHER: Vice President of the FUND; Vice President of certain other
Keystone Investments Funds; and Senior Vice President of Keystone.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Investments Funds;
Senior Vice President, General Counsel and Secretary of Keystone;
Senior Vice President, General Counsel, Secretary and Director of the
Principal Underwriter, Keystone Management and Keystone Software;
Senior Vice President and General Counsel of Keystone Institutional;
Senior Vice President, General Counsel and Director of FICO and KIRC;
Senior Vice President and Secretary of Hartwell Keystone and Robert Van
Partners, Inc.; Vice President and Secretary of KFIA; Senior Vice
President, General Counsel and Secretary of Keystone Investments,
Keystone Asset Corporation, Keystone Capital Corporation and Keystone
Trust Company.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Keystone, the Principal Underwriter and KIRC. Mr.
Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
During the fiscal year ended March 31, 1995, no Trustee affiliated with
Keystone or any officer received any direct remuneration from the FUND. During
this same period, the unaffiliated Trustees received no retainers and fees.
Annual retainers and meeting fees paid by all funds in the Keystone Investments
Family of Funds (which includes 30 mutual funds) for the fiscal year ended March
31, 1995, totalled approximately $541,155. As of April 28, 1995, the FUND's
Trustees and officers beneficially owned less than 1% of the Class A shares then
outstanding shares of the Florida Fund, the Pennsylvania Fund, the Texas Fund
and the New York Insured Fund. As of April 28, 1995, the FUND's Trustees and
officers beneficially owned in the aggregate 24.52% of the Class A shares then
outstanding shares of the Massachusetts Fund. As of April 28, 1995, the FUND's
Trustees and officers beneficially owned less than 1% of the Funds' Class B and
C shares then outstanding.
The address of all the FUND's Trustees and officers and the address of
the FUND is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
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The FUND has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement") dated August 19, 1993 with the Principal Underwriter,
a wholly-owned subsidiary of Keystone. The Principal Underwriter, as agent, has
agreed to use its best efforts to find purchasers for the shares. The Principal
Underwriter may retain and employ representatives to promote distribution of the
shares and may obtain orders from brokers, dealers and others, acting as
principals, for sales of shares to them. The Underwriting Agreement provides
that the Principal Underwriter will bear the expense of preparing, printing and
distributing advertising and sales literature and prospectuses used by it. In
its capacity as principal underwriter, the Principal Underwriter may receive
payments from each Fund pursuant to such Fund's Distribution Plan.
All subscriptions and sales of shares by the Principal Underwriter are
at the offering price of the shares in accordance with the provisions of the
FUND's Declaration of Trust, By-Laws, the current prospectus and statement of
additional information. All orders are subject to acceptance by the FUND and the
FUND reserves the right in its sole discretion to reject any order received.
Under the Underwriting Agreement, the FUND is not liable to anyone for failure
to accept any order.
The FUND has agreed under the Underwriting Agreement to pay all
expenses in connection with registration of the shares of its Funds with the
Commission as well as auditing and filing fees in connection with registration
of such shares under the various state "blue-sky" laws, and the Principal
Underwriter assumes the cost of sales literature and preparation of prospectuses
used by it and certain other expenses.
From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of a Fund's shares, the Principal Underwriter may use its
discretion in providing to selected dealers promotional materials and selling
aids, including, but not limited to, personal computers, related software and
Fund data files.
The Principal Underwriter has agreed that it will in all respects duly
conform with all state and federal laws applicable to the sale of the shares and
will indemnify and hold harmless the FUND, and each person who has been, is or
may be a Trustee or officer of the FUND, against expenses reasonably incurred by
any of them in connection with any claim, or in connection with any action, suit
or proceeding to which any of them may be a party, which arises out of or is
alleged to arise out of any misrepresentation or omission to state a material
fact on the part of the Principal Underwriter or any other person for whose acts
the Principal Underwriter is responsible or is alleged to be responsible, unless
such misrepresentation or omission was made in reliance upon written information
furnished by the FUND.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved by a majority of the FUND's Rule
12b-1 Trustees at least annually at a meeting called for that purpose and if its
continuance is approved annually by vote of a majority of the Rule 12b-1
Trustees or by vote of a majority of the outstanding shares of the affected
Funds.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the FUND's Rule 12b-1 Trustees or the Principal
Underwriter or terminated as to any Fund by a vote of a majority of outstanding
shares of such Fund. The Underwriting Agreement will terminate automatically
upon its "assignment" as that term is defined in the 1940 Act.
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BROKERAGE
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It is the policy of the FUND, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net economic result to a Fund,
involving both price paid or received and any commissions and other costs paid,
the efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, the availability of the
broker to stand ready to execute potentially difficult transactions in the
future and the financial strength and stability of the broker. Management weighs
such considerations in determining the overall reasonableness of brokerage
commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to a Fund is considered to be in addition to and
not in lieu of services required to be performed by Keystone under its Advisory
Agreement with the FUND. The cost, value and specific application of such
information are indeterminable and cannot be practically allocated among the
Funds and other clients of Keystone 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 such other
clients. Under the Advisory Agreement, Keystone is permitted to pay higher
brokerage commissions for brokerage and research services in accordance with
Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone does
follow such a practice, it will do so on a basis that is fair and equitable to
the Funds.
The FUND expects that purchases and sales of municipal obligations and
temporary instruments usually will be principal transactions. Municipal
obligations and temporary instruments are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. There usually
will be no brokerage commissions paid by a Fund for such purchases. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark up
or reflect a dealer's mark down. Where transactions are made in the
over-the-counter market, each Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
Each Fund may participate, if and when practicable, in group bidding
for the purchase directly from an issuer of certain securities for the Fund's
portfolio in order to take advantage of the lower purchase price available to
members of such a group.
Neither Keystone nor the Funds intend to place securities transactions
with any particular broker-dealer or group thereof. The FUND's Board of Trustees
has determined, however, that the Funds may follow a policy of considering sales
of shares as a factor in the selection of broker-dealers to execute portfolio
transactions, subject to the requirements of best execution, including best
price, described above.
The policy of the FUND with respect to brokerage is and will be
reviewed by the FUND's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Funds are made independently by Keystone
from those of the other funds and investment accounts managed by Keystone. It
may frequently develop that the same investment decision is made for more than
one fund. Simultaneous transactions are inevitable when the same security is
suitable for the investment objective of more than one account. When two or more
funds or accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula which is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Funds are concerned. In other cases, however, it is believed that the
ability of a Fund to participate in volume transactions will produce better
executions for the Fund.
For the fiscal years and/or periods, as the case may be, ended March
31, 1993, March 31, 1994 and March 31, 1995, the
Funds did not pay any brokerage commissions.
In no instance are portfolio securities purchased from or sold to
Keystone, the Principal Underwriter or any of their affiliated persons, as
defined in the 1940 Act and rules and regulations issued thereunder.
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DECLARATION OF TRUST
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MASSACHUSETTS BUSINESS TRUST
The FUND is a Massachusetts business trust established under a
Declaration of Trust dated September 13, 1990 ("Declaration of Trust"). The FUND
is similar in most respects to a business corporation. The principal distinction
between the FUND and a corporation relates to the shareholder liability
described below. A copy of the Declaration of Trust is filed as an exhibit to
the FUND's Registration Statement. This summary is qualified in its entirety by
reference to the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares. Each share of a Fund
represents an equal proportionate interest in such Fund with each other share of
the Fund. Generally, each Fund currently issues three classes of shares, but may
issue additional classes or series of shares. Upon liquidation, Fund shares are
entitled to a pro rata share of the Fund based on the relative net assets of
each class. Shareholders have no preemptive or conversion rights. Shares are
transferable, redeemable and fully assignable as collateral. There are no
sinking fund provisions.
SHAREHOLDER LIABILITY
Pursuant to 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 for the obligations of the
trust. If the FUND were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because the
FUND's Declaration of Trust (1) contains an express disclaimer of shareholder
liability for obligations of the FUND; (2) requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the FUND or the Trustees; and (3) provides for indemnification out
of FUND property for any shareholder held personally liable for the obligations
of the FUND.
VOTING RIGHTS
Under the Declaration of Trust, the FUND does not hold annual meetings.
Shares 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 the 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, 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
The 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 the FUND or promoting the interests of the FUND and its
Funds and the shareholders.
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
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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, three, 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.
TOTAL RETURN
CLASS A SHARES
For the period December 27, 1990 (commencement of operations) to March
31, 1995, the cumulative total return (including front-end sales charge) for
Class A of the Florida Fund and the Pennsylvania Fund was 31.36% and 35.84%,
respectively.
The cumulative total return (including front-end sales charge) for
Class A of the Florida Fund and the Pennsylvania Fund for the three year period
ended March 31, 1995 was 15.00% and 16.13%, respectively. For the period March
2, 1992 (commencement of operations) to March 31, 1995, the cumulative total
return (including front-end sales charge) for Class A of the Texas Fund was
15.99%.
For the fiscal year ended March 31, 1995, the total return (including
front-end sales charge) for Class A of the Florida Fund, the Pennsylvania Fund,
the Texas Fund, the Massachusetts Fund and the New York Insured Fund was 1.37%,
- -0.08%, 0.64%, 1.19%, and 1.99% respectively.
For the period February 4, 1994 (commencement of operations) to March
31, 1995, the cumulative total return (including front-end sales charge) for
Class A of the Massachusetts and New York Insured Fund was -6.30% and -4.03%,
respectively.
CLASS B SHARES
For the period February 1, 1993 (commencement of operations) to March
31, 1995, the cumulative total return (including contingent deferred sales
charge) for Class B of the Florida Fund, the Pennsylvania Fund and the Texas
Fund was 6.09%, 6.98% and 5.56%, respectively.
For the fiscal year ended March 31, 1995, the total return (including
contingent deferred sales charge) for Class B of the Florida Fund, the
Pennsylvania Fund, the Texas Fund, the Massachusetts Fund and the New York
Insured Fund was 2.61%,
1.20%, 2.01%, 2.42%, and 3.28% respectively.
For the period February 4, 1994 (commencement of operations) to March
31, 1995, the cumulative total return (including contingent deferred sales
charge) for Class B of the Massachusetts and New York Insured Fund was 4.92% and
2.81%, respectively.
CLASS C SHARES
For the period February 1, 1993 (commencement of operations) to March
31, 1995, the cumulative total return (including contingent deferred sales
charge) for Class C of the Florida Fund, the Pennsylvania Fund and the Texas
Fund was 7.96%, 8.88% and 7.06%, respectively.
For the fiscal year ended March 31, 1995, the total return (including
contingent deferred sales charge) for Class C of the Florida Fund, the
Pennsylvania Fund, the Texas Fund, the Massachusetts Fund, and the New York
Insured Fund was 5.61%, 4.05%, 5.14%, 5.20% and 6.18% respectively. For the
period February 4, 1994 (commencement of operations) to March 31, 1995, the
cumulative total return (including contingent deferred sales charge) for Class C
of the Massachusetts and New York Insured Fund was -2.39% and -0.21%,
respectively.
CURRENT YIELD AND TAX EQUIVALENT YIELD
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, 1995, the current yield of Class
A of the Florida Fund, the Pennsylvania Fund, the Texas Fund, the Massachusetts
Fund and the New York Insured Fund was 5.37%, 5.33%, 5.32%, 5.61% and 5.15%,
respectively.
For the 30-day period ended March 31, 1995, the current yield of Class
B of the Florida Fund, the Pennsylvania Fund, the Texas Fund, the Massachusetts
Fund and the New York Insured Fund was 4.89%, 4.85%, 4.84%, 5.13% and 4.65%,
respectively.
For the 30-day period ended March 31, 1995, the current yield of Class
C of the Florida Fund, the Pennsylvania Fund, the Texas Fund, the Massachusetts
Fund and the New York Insured Fund was 4.89%, 4.85%, 4.83%, 5.14% and 4.64%,
respectively.
Tax equivalent yield is, in general, the current yield divided by a
factor equal to one minus a stated income tax rate and reflects the yield a
taxable investment would have to achieve in order to equal on an after-tax basis
a tax-exempt yield.
The tax equivalent yield for the 30-day period ended March 31, 1995 for
Class A of the Florida Fund, the Pennsylvania Fund, the Texas Fund, the
Massachusetts Fund and the New York Insured Fund was 7.78%, 7.72%, 7.71%, 8.13%
and 7.46%, respectively.
The tax equivalent yield for the 30-day period ended March 31, 1995 for
Class B of the Florida Fund, the Pennsylvania Fund, the Texas Fund, the
Massachusetts Fund and the New York Insured Fund was 7.09%, 7.03%, 7.01%, 7.43%
and 6.74%, respectively.
The tax equivalent yield for the 30-day period ended March 31, 1995 for
Class C of the Florida Fund, the Pennsylvania Fund, the Texas Fund, the
Massachusetts Fund and the New York Insured Fund was 7.09%, 7.03%, 7.00%, 7.45%
and 6.72%, respectively.
Any given yield or total return quotation should not be considered
representative of the Fund's yield or total return for any future period.
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ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian of all securities and cash of the FUND
(the "Custodian"). The Custodian performs no investment management functions for
the FUND, but, in addition to its custodial services, is responsible for
accounting and related record keeping on behalf of the FUND.
KPMG Peat Marwick LLP, One Boston Place, Boston, Massachusetts 02108,
Certified Public Accountants, are the independent auditors for the FUND.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519,
is a wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the FUND.
Except as otherwise stated in its prospectus or required by law, the
FUND reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the FUND's
prospectus, statement of additional information or in supplemental sales
literature issued by the FUND or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The FUND's 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.
As of April 28, 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr E 3rd FL, Jacksonville, FL 32246-6484, owned 11.89% of
the outstanding Class A shares of the Florida Fund.
As of April 28, 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr E 3rd Floor, Jacksonville, FL 32246-6484, owned 17.93%
of the outstanding Class B shares of the Florida Fund.
As of April 28, 1995, Merrill Lynch Pierce, Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr E 3rd Flr, Jacksonville, FL, 32246-6484, owned 30.90%
of the outstanding Class C shares of the Florida Fund.
As of April 28, 1995, PaineWebber FBO, Betty J. Puskar, Trustee and
Betty J. Puskar, Revocable Trust, 708 Ocean Drive, Juno Beach, FL 33408, owned
5.07% of the outstanding Class C shares of the Florida Fund.
As of April 28, 1995, Merrill Lynch Pierce, Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr E 3rd Flr, Jacksonville, FL 32246-6484, owned 6.87% of
the outstanding Class A shares, and 9.9% of the outstanding Class B shares of
the Pennsylvania Fund.
As of April 28, 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr. E. 3rd Floor Jacksonville, FL 32246-6484, owned 32.40%
of the outstanding Class C shares of the Pennsylvania Fund.
As of April 28, 1995, PaineWebber FBO, Robert Cougle, Debra K. Cougle
JT WROS, 10506 Old 22, Kutztown, PA 19530, owned 8.04% of the outstanding Class
C shares of the Pennsylvania Fund.
As of April 28, 1995, Gruntal & Co., FBO 544-88017-11, 14 Wall Street,
New York, NY 10005 owned 5.27% of the outstanding Class C shares of the
Pennsylvania Fund.
As of April 28, 1995, Odelia B. McCarley, 20450 Huebner Road #11222,
San Antonio, TX 78258-3908, owned 27.42% of the outstanding Class A shares of
the Texas Fund.
As of April 28, 1995, James C. McClung, 3883 Turtle Creek Blvd. T-14,
Dallas, TX 75219-4403, owned 12.28% of the outstanding Class A shares of the
Texas Fund.
As of April 28, 1995, Prudential Securities FBO, Don Crow, Peggy P.
Crow JT WROS, 5235 20th, Lubbock, TX 79407-2121 owned 6.63% of the outstanding
Class A shares of the Texas Fund.
As of April 28, 1995, Nancy J. Holmes, Seperate Property, 3108 Winthrop
Avenue, Fort Worth, TX 76116-5515, owned 5.22% of the outstanding Class B shares
of the Texas Fund.
As of April 28, 1995, Teresa Holdren, 4910 Dollar Reef, Baycliff, Texas
77518, owned 6.93% of the outstanding Class B shares of the Texas Fund. As of
April 28, 1995, Mary Jo Clark, Post Office Box 25366, Houston, Texas 77265-5366,
owned 8.57% of the outstanding Class B shares of the Texas Fund.
As of April 28, 1995, Donaldson Lufkin Jenrette Securities Corporation,
Inc., P.O. Box 2052, Jersey City, NJ 07303-2052, owned 9.49% and 5.03%,
respectively of the outstanding Class B shares of the Texas Fund.
As of April 28, 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr. E 3rd FL, Jackson, FL 32246-6484 owned 12.97% of the
outstanding Class C shares of the Texas Fund.
As of April 28, 1995, David D. Tatsch and Loyce E. Tatsch JT WROS,
Route 4, Box 50, Fredericksburg, TX 78624, owned 21.01% of the outstanding Class
C shares of the Texas Fund.
As of April 28, 1995, Barbara B. Matheney, Bond Account, C/O First
National Bank of El Dorado, P.O. Box 1751, El Dorado AR 71731-0751, owned 16.50%
of the outstanding Class C shares of the Texas Fund.
As of April 28, 1995, Donaldson Lufkin Jenrette Securities corporation,
Inc., P.O. Box 2052, Jersey City, NJ 07303-2052, owed 14.60% of the outstanding
Class C shares of the Texas Fund.
As of April 28, 1995, Clifford E. Dickey and Vivian A. Dickey JT WROS,
1600 Texas St., Apt. 1404 Ft. Worth, TX 76102-3475, owned 12.44% of the
outstanding Class C shares of the Texas Fund.
As of April 28, 1995, PaineWebber FBO, the Estate of Lois W. Holmes,
Matthew J. & Robert H. Gold, Executors, 12770 Coit Road, Suite 850, Dallas, TX
75251, owned 5.47% of the outstanding Class C shares of the Texas Fund.
As of April 28, 1995, Percy C. Jenkins and Della E. Jenkins, JT WROS,
2025 Pebble Beach, League City, TX 77573-6402, owned 5.42% of the outstanding
Class C shares of the Texas Fund.
As of April 28, 1995, PaineWebber FBO, Dean Ussery and Helen A. Ussery
JT WROS, 1500 Upton, Irving, TX 75060-6885, owned 5.00% of the outstanding Class
C shares of the Texas Fund.
As of April 28, 1995, Albert H. Elfner III, 53 Chestnut St, Boston, MA
02108-3506 owned 23.82% of the outstanding Class A shares of the Massachusetts
Fund.
As of April 28, 1995, Richard Nakashian, P.O. Box 3150, Pocasset,
Massachusetts 02559-3150, owned 9.76% of the outstanding Class A shares of the
Massachusetts Fund. As of April 28, 1995, Ida R. Rodriguez Trust #21528,
Keystone Trust Company TTEE, 58 Helen Rd, Needham, MA 02192-3934 owned 6.49% of
the outstanding Class A shares of the Massachusetts Fund.
As of April 28 1995, Salvatore M. Moscariello & Irene A. Moscariello JT
TEN, 24 Van Norden Road, Reading, MA 01867-1244, owned 6.86% of the outstanding
Class C shares of the Massachusetts Fund.
As of April 28, 1995, PaineWebber for the Benefit of Mrs. Gladys
Wilder, c/o Paul King, 63 Glendale Road, Sharon, MA 02067, owned 5.06% of the
Class C shares of the Massachusetts Fund.
As of April 28, 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr E 3rd Fl, Jacksonville, FL 32246-6484, owned 6.23% of
the outstanding Class A shares of the New York Insured Fund.
As of April 28, 1995, Sandra N. Franck, 345 West 70th Street, Apt. 6F,
New York, NY 10023, owned 5.88% of the outstanding Class A shares of the
Massachusetts Fund.
As of April 28, 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry 4800 Deer Lake Dr E 3rd Fl, Jacksonville, FL 32246-6484, owned 10.71% of
the outstanding Class B shares of the New York Insured Fund.
As of April 28, 1995, John Hancock Clearing Corp., One Financial
Center, 200 Liberty Street, New York, NY 10281, owned 6.28% of the outstanding
Class B shares of the New York Insured Fund.
As of April 28, 1995, Bear Stearns Securities Corp FBO 626-60277-10, 1
Metrotech Center North, Brooklyn, NY 11201-3859, owned 10.43% of the outstanding
Class C shares of the New York Insured Fund.
As of April 28, 1995, Arlene Meltzer, 1195 East Broadway, Apt. L21,
Hewlett NY 11557, owned 5.66% of the outstanding Class C shares of the New York
Insured Fund.
As of April 28, 1995, Carol T. Whitman, PO Box 43 Whippleville, NY
12995, owned 5.86% of the outstanding Class C shares of the New York Insured
Fund.
As of April 28, 1995, Fred Zucker, 20 Old Brook Rd., Dix Hills, NY
11746-6430 owned 13.44% of the outstanding Class C shares of the New York
Insured Fund.
As of April 28, 1995, John J. Deprima and Rose Deprima JT WROS, 9110
Ave. M, Brooklyn, NY 11236-5012 owned 10.74% of the outstanding Class C shares
of the New York Insured Fund.
As of April 28, 1995, NFSC FEBO #CM5-020052, Otto and Gertrand
Steckelkuber, 605 Harrison, Harrison, NY 10528-1406, owed 8.14% of the
outstanding Class C shares of the New York Insured Fund.
As of April 28, 1995, Rose Deprima, 9110 Ave. M, Brooklyn, NY
11236-5012, owned 5.67% of the outstanding Class C shares of the New York
Insured Fund.
The FUND is one of 15 different investment companies in the Keystone
America Family, which offers a range of choices to serve shareholder needs. In
addition to the FUND, the Keystone America Family includes the following funds
with the various investment objectives described below:
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE HARTWELL GROWTH FUND - Seeks capital appreciation by investment in
securities selected for their long-term growth prospects.
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 25%).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE AMERICA OMEGA FUND, INC. - Seeks maximum capital growth from common
stocks and securities convertible into common stocks.
KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the U.S. and Canada)
and Latin America (Mexico and countries in South and Central America).
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long-term capital growth by
investing primarily in equity securities.
<PAGE>
APPENDIX A
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 tax, which are
projected for fiscal year 1995-96 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 10.3 billion dollars for fiscal year
1995-96. 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, and medical
care for indigents, 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.
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
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 the funds are
expended consistent with statutory and public purposes. The General Fund is
generally regarded as the principal indicator of whether the Commonwealth's
operating revenues and expenses are in balance. The other principal operating
funds (the Local Aid Fund and the Highway Fund) are customarily funded to at
least a zero balance.
Although the Commonwealth experienced quite a slowdown during the recession
with spending exceeding revenues, beginning in 1991 the Commonwealth has
experienced a turn-around in its finances with revenues exceeding spending.
Budgeted expenditures for fiscal 1989, 1990 and 1991 were approximately $12.643
billion, $13.260 billion and $13.659 billion, respectively while budgeted
revenues and other sources for those years were approximately $11.970, $12.008
billion and $13.634 billion, respectively. By comparison, budgeted revenues and
other sources increased by approximately 0.7% from fiscal 1991 to fiscal 1992,
while tax revenues increased by 5.4% for the same period. Budgeted expenditures
in fiscal 1992 were 1.7% lower than fiscal 1991 budgeted expenditures.
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. As of
1993 fiscal year end, the Commonwealth showed a year-end cash position of
approximately $622.2 million, as compared to a projected position of $485.1
million. By comparison, the Commonwealth ended the 1989 fiscal year with fund
balances in deficit by $319.3 million.
The fiscal 1994 budget, as signed into law by the Governor on July 19,
1993, provides for expenditures of approximately $15.500 billion, an increase of
5.5% over fiscal 1993 levels. Budgeted revenues for fiscal 1994 are estimated to
be approximately $15.483 billion, which is 5.3% higher than fiscal 1993
expenditures. This amount includes estimated tax revenues of approximately
$10.560 billion, which is 6.3% higher than fiscal 1993 tax revenues. For fiscal
1994, a combined balance of $541.4 million is expected in the stabilization and
undesignated general funds. The fiscal 1994 budget is based upon numerous
spending and revenue estimates, the achievement of which cannot be assured.
In June 1993, new comprehensive education reform legislation was enacted.
It is expected that this legislation will require annual increases in
expenditures for education purposes above fiscal 1993 base spending of $1.289
billion of approximately $175 million in fiscal 1994, $141 million in fiscal
1995 and $662 million in fiscal 1996. The fiscal 1994 budget includes $175
million in appropriations to satisfy 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.
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 Commonwealth in proportion to the personal
income tax liability of all taxpayers in the Commonwealth for the immediately
preceding tax year. 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 o the positive percentage gain in Massachusetts wages and salaries
during the three calendar years immediately preceding the end of a given fiscal
year.
Tax revenues in fiscal 1989 through fiscal 1993 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
1994 will not reach the limit imposed by either of these statutes.
In January 1992, the Governor announced his intention to seek an amendment
to the state constitution that would require any Commonwealth tax increase to
receive at least a two-thirds majority vote in each house of the Legislature. No
action has yet been taken on this proposal.
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.
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, when 182 communities attempted votes on one of the three
types of referenda questions (override of levy limit, exclusion of debt service,
or exclusion of capital expenditures) and 100 passed at least one question,
adding $58.5 million to their levy limits. In fiscal 1992, 67 of 143 communities
had successful votes totalling $31.0 million. In fiscal 1993, 83 communities
attempted a vote; two-thirds of them (56) passed questions aggregating $16.4
million. Although Proposition 2 1/2 will continue to constrain local property
tax revenues, significant capacity exists for overrides in every community.
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 1994, approximately
28.7% of the Commonwealth's budget is estimated to be allocated to Local Aid.
Local Aid payments to cities, towns, and regional school districts take the form
of both direct and indirect assistance.
Direct local aid decreased from $2.961 billion in fiscal 1989 to $2.328
billion in fiscal 1992 and increased to $2.547 billion in fiscal 1993. It is
estimated that fiscal 1994 expenditures for direct Local Aid will be $2.737
billion, which is an increase of approximately 7.5% above the fiscal 1993 level.
The additional amount of indirect Local Aid provided over and above direct Local
Aid was approximately $1.717 billion in fiscal 1993. It is estimated that in
fiscal 1994 approximately $1.717 billion of indirect Local Aid will also be
paid.
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 subsequent years. However, Local
Aid payments expressly remain subject to annual appropriation, and fiscal 1992
and fiscal 1993 appropriations for Local Aid did not meet, and fiscal 1994
appropriations for Local Aid do not meet, the levels set forth in the initiative
law.
COMMONWEALTH EXPENDITURES
From fiscal 1989 to fiscal 1991, total program expenditures of the
Commonwealth (which excludes interfund transfers) in its budgeted operating
funds increased at an average annual rate of approximately 4.0%. Fiscal 1992
program expenditures were $13.420 billion, or 1.7% lower than 1992 fiscal
program expenditures.
For fiscal 1993, program expenditures were $14.696 billion, representing a
9.6% increase from fiscal 1992. It is estimated that fiscal 1994 program
expenditures will total $15.500 billion, an increase of 5.5% over fiscal 1993
levels.
Commonwealth expenditures since fiscal 1989 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.
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 7.1% from $659.7
million in fiscal 1989 to $868.2 million in fiscal 1993. The estimated pension
expenditures for fiscal 1994 are $951.0 million representing an increase of 9.5%
over fiscal 1993 expenditures.
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 have
been declining.
KEYSTONE NEW YORK TAX FREE FUND
GENERAL
During the 1980's, New York's economy underperformed the nation's. The
State's economic performance was reflected in a contracting economic base and
dwindling economic growth that resulted in an erosion of the State's relative
economic influence. A review of the decade's employment trends indicates that
the State consistently lagged the nation in employment growth. In contrast to
the State's relative underperformance, New York City's economy grew steadily.
Economic growth was attributed to a 14.4% overall employment increase. The
service sector increased 3.5% per year and the finance and real estate sector
experienced an annual 2.9% increase. The bull markets of the 1980s gave powerful
economic impetus to the financial sector. The boom in the finance sector
aggravated local inflationary pressure. Between 1980 and 1989 the City's
consumer price index increased 4.6% per year versus a 3.6% increase for the
nation and overall wage rates climbed 7.1% per year, approximately 3.5
percentage points above the U.S. rate. The 1987 stock market crash was a turning
point in the City's economic direction. The ripple effect of the post-crash
layoffs in the finance, insurance and real estate sectors resulted in a stagnant
city economy.
The New York economy was severely impacted by the recession, but it has
begun to show signs of recovery. The recession has been more severe in New York
than in other parts of the nation, owning to a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an overbuilt real
estate market. More than 564,000 jobs were lost during the recession,
representing 7% of the pre-recession base. During 1993 employment continued to
decline but at diminishing rates (a 0.3% decline during 1993), indicating a
stabilizing economy. A modest job growth of approximately 0.8% is anticipated
for 1994. Through the year 1988 New York's employment growth is expected to
average approximately 1.4% per year, compared to the 2.3% annual expansion
experienced during 1983-1988. It is anticipated that New York's service and
trade sectors will be the major contributors to this growth, while the
manufacturing sector is expected to continue to contract. The State's economy is
significantly affected by New York City's economy by virtue of New York City's
dominance in population and economic activity. New York City accounts for
approximately 41% of the State's population and personal income.
The revised 1993-1994 State Financial Plan is based on an economic
projection that New York will perform more poorly than the nation as a whole.
Real gross domestic product grew modestly during calendar year 1992 and is
expected to show increased growth in calendar 1993. Many uncertainties exist in
forecasts of the State's economy, which could have an adverse effect on the
State, and there can be no assurance that the State economy will not experience
worse-than-predicted results in the 1994 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
For fiscal 1993, State financial operations produced a $671 million surplus
on a general fund budget of nearly $31 billion. This surplus followed four years
of operating deficits. The accumulated general fund deficit peaked in 1991 at
$6.2 billion and has since decreased to $2.6 billion for fiscal 1993. Debt
reform is the principal cause for this improvement. Short-term borrowing is only
$850 million for the current fiscal year, the lowest level since 1969. To reduce
borrowing costs and improve market access, the Governor is proposing a
constitutional amendment to limit issuance of appropriation bonds and to create
tax-backed debt.
The State's updated financial plan estimates that fiscal 1994 will achieve
an ending cash balance of approximately $299 million. This larger than
anticipated surplus is a result of a stabilizing economy, improving tax
collections and slowing expenditure growth. The 1993 and 1994 budgets were
enacted in a timely manner and were based on realistic economic forecasts,
conservative revenue assumptions and some spending restraint. The Governor's
proposed budget for fiscal 1995 provides for general fund spending growth of
4.3%, use of the current year surplus, modest tax cuts and a small level of
non-recurring measures. The fiscal 1995 budget relies on modest growth of the
economy and includes growth in personal income withholding and sales and use tax
receipts of 5.3% and 4.1%, respectively.
Significant litigation exists at the State level of government. A suit
filed by a taxpayer activist challenges the constitutionality of the
transportation financing plan. Also, in November 1993, the Court of Appeals
affirmed a lower court's decision, declaring that certain accounting changes
made in funding methods of the State retirement system were unconstitutional.
The State may also be liable for significant payments related to a U.S. Supreme
Court decision involving abandoned property.
STATE FINANCING ACTIVITIES
For the four fiscal years prior to fiscal year 1992, the State incurred
operating deficits in the general fund. In fiscal 1993, the State began the
process of financial reform. Based upon realistic economic and revenue
estimates, the fiscal year 1993 financial plan exceeded expectations and closed
the year with a general fund operating surplus of $671 million in the General
Fund. The surplus revenues were deposited into a tax refund reserve account,
which typically had been funded in the $300-$350 million range. Overfunding of
this reserve allows some additional fiscal flexibility which was not present in
recent prior State budgets.
New York, for the second consecutive year, passed its fiscal 1994 budget
essentially on time. The State faced a $3.7 billion budget gap for fiscal year
1994, as determined by baseline projections. The Governor's 1994 budget
addressed this gap by reducing expenditures by $1.6 billion and increasing
revenues by $2.1 billion. The budget is based upon conservative economic
assumptions, which fall below those forecasted by the leading independent
forecasters.
During the past several years, the State has been forced to borrow on a
seasonal basis due to cash flow timing problems. In June 1990, the Local
Government Assistance Corporation ("LGAC") was formed as a public benefit
corporation for the purpose of issuing long term obligations designed to
eliminate this need. The legislation which created the LGAC specified that the
obligations will be amortized over no more than 30 years and put a $4.7 billion
cap, net of LGAC proceeds, on the seasonal borrowing program. This cap may be
exceeded in cases where the Governor and the legislature have certified the need
for additional borrowing and have devised a method for reducing it back to the
cap no later than the fourth fiscal year after the limit is exceeded. If this
cap were to be exceeded, it could result in action by the rating agencies which
could adversely affect prices of bonds held by the Fund. To date, LGAC has
issued its bonds to provide net proceeds of $3.281 billion and has been
authorized to issue its bonds to provide net proceeds of up to an additional
$703 million during the State's 1994 fiscal year.
In April 1993, legislation was also enacted providing for significant
changes in the long term financing practices of the State and the Authorities.
The Legislature passed a proposed constitutional amendment that would permit the
State, without a voter referendum, but 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 amendment would require that State debt be incurred
only for capital projects included in a multi-year capital financing plan and
would prohibit lease-purchase and contractual obligation financing mechanisms
for State facilities. The Governor and the Legislative leaders have indicated
that public hearings will be held on the proposed constitutional amendment.
Before becoming effective, the proposed constitutional amendment must first be
passed again by the next separately-elected Legislature and then approved by
voters at a general election, so that it could not become effective until after
the general election in November 1995.
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. 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
has been 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 a number
of steps 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 State also established 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.
The City operates under a four year Financial Plan which is prepared
annually and is periodically updated. On June 30, 1986, the Control Board's
powers of approval over the City's Financial Plan were suspended pursuant to the
Financial Emergency Act. However, the Control Board, MAC and OSDC continue to
exercise various monitoring functions relating to the City's financial position.
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 projects a balanced
budget in fiscal 1994, based on revenues of approximately 31.250 billion. The
Financial Plan also predicts 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.
AUTHORITIES
`New York State's authorities are generally responsible for financing,
constructing and operating revenue-producing public benefit facilities. As of
September 30, 1992, there were 18 Authorities that had outstanding debt of $100
million or more. The aggregate outstanding debt, including refunding bonds, of
these 18 Authorities was $62.2 billion as of September 30, 1992, of which
approximately $8.2 billion was moral obligation debt and approximately $17.1
billion was financed under lease-purchase or contractual-obligation financing
arrangements. While Authorities are generally supported by revenues generated,
financed or operated by projects of the Authorities, in recent years, the State
has provided financial assistance through appropriations to enable certain
Authorities (in particular, the New York State Urban Development Corporation and
the New York State Housing Finance Agency) to meet their financial obligations.
Further assistance to these Authorities is expected to be required to continue
in the future.
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. The MTA and
the commuter railroads ended their 1991 fiscal year with their budgets balanced
on a cash basis. For 1993, a $69.8 million cash surplus has been projected. The
1994 operating budget proposal projects a $66 million cash surplus.
In 1981 the Legislature authorized procedures for the adoption, approval
and amendment of a five year plan for a capital program designed to upgrade the
performance of the MTA's transportation systems and to supplement, replace and
rehabilitate facilities and equipment, and also granted certain additional
bonding authorization for the capital program. The MTA has submitted to the
State several 1992-96 Capital Program proposals which have been rejected. A one
year program of approximately $1.6 billion has been deemed approved in the
interim.
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
1993-1994 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 1993-1994 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 Governor
or the State Legislature 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 1991, the total indebtedness of all localities in
the State was approximately $32.2 billion, of which $16.8 billion was debt of
New York City (excluding $6.7 billion in Municipal Assistance Corporation debt);
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 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 years ending 1991. In 1992, an unusually
large number of local government units requested authorization for deficit
financing. According to the Comptroller, ten local governmental units were
authorized to issue deficit financing in the aggregate amount of $131.1 million,
including Nassau County for $65 million in six-year deficit bonds and Suffolk
County for $36 million in six-year deficit bonds. Certain proposed federal
expenditure reductions would 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 also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions, and long range
economic trends. The longer range potential problems of declining city
population, 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 have a substantial long term adverse effect on State finances. 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) contamination in the Love Canal area of
Niagara Falls; (5) alleged responsibility of State officials to assist in
remedying racial segregation in the City of Yonkers; and (6) challenges to
certain public authority financial programs.
Adverse developments in those proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced
1993-1994 State Financial Plan. An adverse decision in any of the above cited
proceedings could exceed the amount of the Revised 1993-1994 State Financial
Plan reserve for the payment of judgments and, therefore, could affect the
ability of the State to maintain a balanced 1993-1994 State Financial Plan.
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
home for more than 268,600 businesses and the headquarters for 64 major
corporations. Pennsylvania's average annual unemployment rate for the years
1988, 1989 and 1990 remained slightly below the nation's annual average
unemployment rate, and Pennsylvania's average annual unemployment rate for the
years 1991, 1992 and 1993 remained slightly above the nation's annual average
unemployment rate. The unadjusted unemployment rate for both Pennsylvania and
the United States for April, 1995 was 5.8%. The population of Pennsylvania,
12,026 million people in 1994 according to the U.S. Bureau of the Census,
represents an increase from the 1985 estimate of 11,772 million. Per capita
income in Pennsylvania for 1993 of $20,352 was higher than the per capita income
of the United States of $20,817. 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, 1991, June 30, 1992 and June 30, 1993 with fund balances of negative
$980,936, positive $87,455 and positive $698,945, 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 $5,075 million at June 30, 1994. 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 November 29, 1994, all outstanding general obligation
bonds of the Commonwealth were rated AA- by Standard & Poor's Corporation and
A-1 by Moody's Investors Service, Inc. (see Appendix B). There can be no
assurance that these ratings will remain in effect in the future. Over the
five-year period ending June 30, 1999, the Commonwealth has projected that it
will issue notes and bonds totaling $2,293 million and retire bonded debt in the
principal amount of $2,448 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 June 30, 1994, total combined debt outstanding for these
agencies was $5,995 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 state-created
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.
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 obligors, 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 obligors 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 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.
KEYSTONE TEXAS TAX FREE FUND
GENERAL
The collapse of oil prices in the mid-1980s adversely affected the Texas
economy due to the State's heavy dependence on oil production. The economy has
become more stable due to the decreased role of the oil and gas industry and
increased diversification into other employment sectors such as the service
producing sectors, including transportation and public utilities, finance,
insurance, real estate, services, trade and government, which are currently the
major sources of job growth in Texas. Unlike the rest of the U.S., in Texas the
manufacturing and construction industries are growing nearly as fast as the
service-producing sector. Construction was the State's fastest growing major
industry through 1994. Based on information from the Texas Employment
Commission, non-farm employment in Texas has reached an all-time high of 7.82
million. Texas' jobless rate was 6.4% in 1994, compared to a national average of
6.1%.
The Comptroller of Public Accounts of the State of Texas predicts that the
overall Texas economy will out-pace national economic growth in the long term by
an annual average of more than one-half percentage point. Of course, there can
be no assurances that this forecast will be realized. Moreover, even if it is
realized, the State's economic performance as a whole would not necessarily be
indicative of the financial performance of the State or local governments,
especially in regions of the State which do not perform as well as the State as
a whole.
STATE GOVERNMENT REVENUES
The state government ended each of the past six fiscal years with cash
surpluses. At the end of fiscal 1994, the State had a $2,225 million cash
balance in the general revenue fund, as compared with a $1,693 million cash
balance at the end of fiscal 1993.
Historically, the primary sources of the state government's revenues have
been sales taxes, mineral severance taxes and federal grants. Federal grants
were the State's main revenue source, accounting for 28.7% of state revenues
during fiscal 1994, while sales tax accounted for 26.7% of state revenue during
fiscal 1994. The remainder of the State government's revenues are derived
primarily from the motor fuels tax and other excise taxes, licenses, fees, fines
and penalties, and interest and investment income. Much of the State
government's revenues are special revenues which are dedicated by the State
constitution or statute to specific purposes which may be inconsistent with the
payment of debt service on State obligations. In addition, the State government
manages two important trust funds--the Permanent University Fund and Permanent
School Fund--endowed with proceeds of the sale or lease of dedicated State
lands, including mineral interests, the income from which is constitutionally
dedicated to the support of State universities and public primary and secondary
schools, respectively.
The State constitution prohibits the State government from levying ad
valorem taxes on property for general revenue purposes. The State constitution
also limits the rate of growth of appropriations from tax revenues not dedicated
by the constitution during any biennium to the estimated rate of growth for the
State's economy. The Legislature may avoid the constitutional limitation if it
finds, by a majority vote of both houses, that an emergency exists. The State
constitution authorizes the Legislature to provide by law for the implementation
of this restriction, and the Legislature, pursuant to such authorization, has
defined the estimated rate of growth in the State's economy to mean the
estimated increase in State personal income.
STATE GOVERNMENT DEBT
With certain exceptions, the Constitution generally prohibits the creation
of debt by or for the State. The limitations of the Constitution do not prohibit
the issuance of revenue bonds, since the Texas courts have held that certain
obligations which are not payable from tax sources do not create a "debt" within
the meaning of the Constitution. The State and various state agencies have
issued revenue bonds payable from the revenues produced by various facilities.
Furthermore, obligations which are payable from funds expected to be available
during the current budget period do not constitute "debt" within the meaning of
the Constitution. Short term obligations, such as tax and revenue anticipation
notes which the Treasurer is authorized to issue solely to coordinate the
State's cash flow within a fiscal year, and which must mature and be paid in
full during the biennium in which they were issued, are not deemed to be debt
within the meaning of the constitutional prohibition. In addition, State
agencies may issue revenue bonds payable from payments to be made by the State
government for a lease or purchase of financed facilities, subject to biennial
appropriations. These bonds are considered "moral obligations" of the State
government, since failure to appropriate funds could injure the State's credit
in the marketplace, although the State government is not legally obligated to do
so.
At times, the voters of Texas, by constitutional amendment, have authorized
the issuance of debt by the State, including general obligation bonds backed by
the full faith and credit of the State. In some cases the authorized debt
requires the approval of the Legislature, but in other cases, the constitutional
amendments permit the debt to be issued without specific legislative action. Of
the general obligation bonds authorized by the State's voters through November
30, 1994, $4.5 billion then remained outstanding and an additional $3.86 billion
were yet to be issued. These bonds include bonds that may be issued by the
Veterans' Land Board for veterans to purchase land and housing, the Water
Development Board for conservation and development of water resources, the Parks
and Wildlife Department for acquisition and development of state parks, the
Texas Higher Education Coordinating Board to finance student loans, the
Department of Agriculture for the purchase of farm and ranch real estate,and the
Texas Public Finance Authority to finance, repair and construct facilities such
as corrections and mental health institutions. In addition, the voters have
authorized the respective Boards of Regents of the University of Texas System
and the Texas A&M University System to issue bonds payable from income from the
Permanent University Fund up to 30% of the book value of the Permanent
University Fund, exclusive of real estate at the time of issuance. The voters
have also authorized the appropriation of the first $100 million coming into the
State Treasury, and not otherwise appropriated by the Constitution, to pay debt
service on bonds issued by other state colleges and universities in the State.
LOCAL GOVERNMENT REVENUES
Various state laws place limits upon the amounts of tax that can be levied
upon the property subject to ad valorem taxes within various taxing units, such
as cities, counties and districts which have ad valorem taxing powers (including
without limitation, school and hospital districts). Because ad valorem taxes are
computed upon the appraised property valuations and property appraisals are
required to be conducted only every three years, it may be several years before
any decline in property values will be reflected in decreases in tax
collections. Conversely, there may be a similar lag time before a rise in
property values results in increased ad valorem tax collections.
FUNDING OF PUBLIC EDUCATION
On May 31, 1993, the Texas governor signed a comprehensive legislative
revision to the school finance provisions of the Texas Education Code. The
legislative revision resulted from a series of court decisions commonly referred
to as Edgewood v. Kirby, in which Texas courts declared the Texas school finance
system unconstitutional under Texas law. Generally, the courts declared the
school finance system unconstitutional because there must be a "direct and close
correlation between a district's tax effort and the educational resources
available to it," and because districts must have "substantially equal access to
similar revenues per pupil at similar levels of tax effort."
The Texas school finance system is funded from a combination of local
school district ad valorem taxes, State funds from the Permanent School Fund
endowment and certain designated tax revenues, and state appropriation. "Tier
one" funding guarantees a school district a basic allotment per pupil; "tier
two" funding guarantees a school district a certain amount of "enrichment"
revenue per student to the extent the local school district sets a tax rate
above $0.86 per $100 assessed valuation.
As under prior law, the legislative revision retains a two tier system of
finance. Under the legislative revision, if a district's adjusted taxable
property wealth per student exceeds $280,000, the district must exercise one of
five operations to reduce its wealth per student to that level: consolidate the
district with a property-poor district for all purposes; consolidate the
district with a property-poor district solely for purposes of levying and
distributing either maintenance, taxes or both maintenance and debt service
taxes; detach property from the district for annexation by a property-poor
district; purchase an attendance credit by paying tax revenues to the State for
redistribution to property-poor districts; or contract to educate students in a
property-poor district at the wealthy district's expense. If a district fails to
exercise a permitted option, the Commissioner of Education must detach mineral,
utility, industrial, or commercial property from the district and annex the
property to a property-poor district or, if necessary, consolidate the district
with a property-poor district.
On January 30, 1995, the Texas Supreme Court ruled that the legislative
revision is constitutional in all respects. It suggested, however, that further
changes may be needed in the near future to provide equal access to funding for
capital projects as well as for operations. The Texas Legislature is currently
considering legislation which attempts to provide such equalization. The
legislative revision and future efforts to equalize school funding may affect
the financial condition of the Texas State Government and certain Texas school
districts.
Public higher education in the State is funded through a combination of
tuition, student fees and other local funds (including gifts from benefactors),
income from the Permanent University Fund and appropriations made by the
Legislature. Tuition rates are set by the Legislature, except that institutions
may double the tuition rate for graduate students. Many student fees are set by
the boards of regents of the various colleges and universities.
OTHER FACTORS
The Texas Fund expects to invest its assets in general obligation bonds,
moral obligation bonds, and revenue bonds issued by the State and local
governments to finance their own works or to finance private enterprises.
Payment of the revenue bonds will depend on the financial performance of the
enterprises financed, which may include public water, sewer, and electric
utility systems, municipal airports, nonprofit hospitals, multi-family
residential housing developments, portfolios of single-family mortgages or
student loans, and other enterprises. The performance of these enterprises may
be affected by industry trends, competition, labor relations, prevailing
interest rates, and similar factors which cannot be predicted with certainty.
Payment of general and moral obligation bonds will depend upon the future
financial condition of the issuing governments and their other obligations,
including obligations concerning public education, criminal detention
facilities, and other matters which have been or hereafter may be imposed by the
courts. The financial performance of financed enterprises and local governments
could be adversely affected not only by any downturn in the State's economy as a
whole, but also by regional or local factors such as closings of military bases,
any layoffs by large employers.
<PAGE>
APPENDIX B
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.
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 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 interst 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.
COMMERCIAL PAPER
Commercial paper will consist of issues rated at the time of purchase
A-1, by Standard & Poor's Corporation (S&P), or Prime-1 by Moody's Investors
Service, Inc., (Moody's) or F-1 by Fitch Investors Services, Inc. (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 Keystone 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.
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.
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 such an instrumentality only when Keystone 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 ("CPO's") 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 Keystone 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 Keystone 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 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
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.
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.
The FUND 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 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.
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. The FUND 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 the FUND's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, 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 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.
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.
<PAGE>
Keystone Florida Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (99.8%)
Bay County, Florida, Hospital Systems
Revenue Refunding, Bay Medical Center
Project 8.000% 10/01/2019 $2,500,000 $2,630,175
Brevard County, Florida, Health Facilities
Authority Revenue Refunding, Wuesthoff
Memorial Hospital, (MBIA) 7.200 04/01/2013 3,000,000 3,221,010
Broward County, Florida, Collateralized
Home Mortgage 7.125 03/01/2017 195,000 202,664
Broward County, Florida, Resource
Recovery, South Project 7.950 12/01/2008 2,210,000 2,391,419
Broward County, Florida, Unlimited
Refunding Bonds 5.000 01/01/2010 3,000,000 2,738,160
Broward County, Florida, Water & Sewer
Utility Revenue (AMBAC) 5.000 10/01/2018 1,600,000 1,392,400
Charlotte County, Florida, Utility Revenue
(FGIC) 6.750 10/01/2013 1,000,000 1,075,830
City of Miami, Florida, Health Facilities
Authority, Mercy Hospital (AMBAC) 6.750 08/01/2020 350,000 386,911
City of Tarpon Springs Health Facilities
Authority, Florida, Hospital Refunding,
Helen Ellis Hospital 7.625 05/01/2021 1,000,000 1,028,010
City of Tarpon Springs Health Facilities
Authority, Florida, Hospital Refunding,
Tarpon Springs Hospital Foundation, Inc. 8.750 05/01/2012 500,000 529,985
Commonwealth of Puerto Rico, Highway
Authority, Series Q 7.750 07/01/2010 125,000 142,884
Dade County, Florida, Educational
Facilities Authority Revenue (St. Thomas
University) 6.000 01/01/2010 2,000,000 1,962,780
Dade County, Florida, Housing Finance
Agency, Single Family Mortgage 7.000 03/01/2024 185,000 190,626
Dade County, Florida, School District,
General Obligation 7.375 07/01/2008 40,000 44,391
Dade County, Florida, Water & Sewer
Systems Revenue Refunding, Series 1993
(FGIC) 5.000 10/01/2013 6,530,000 5,818,426
Duval County, Florida, Single Family
Mortgage Refunding (FGIC) 7.300 07/01/2011 90,000 95,426
Escambia County, Florida, Pollution
Control, Champion International Corp.
Project 6.900 08/01/2022 5,000,000 5,085,150
Escambia County, Florida, Single Family
Mortgage Revenue 6.950 10/01/2027 1,500,000 1,538,610
Florida Division Bond Finance Department,
General Service, Department of
Environmental Preservation (AMBAC) 5.750 07/01/2011 3,000,000 2,980,290
Florida Housing Finance Agency, Home
Ownership Mortgage 7.500 09/01/2014 190,000 201,985
Florida Housing Finance Agency, Home
Ownership Mortgage 8.000 12/01/2020 820,000 875,998
Florida State Board of Education, Capital
Outlay Refunding, Public Education,
Series A 5.000 06/01/2009 3,000,000 2,821,710
Florida State Board of Education Capital
Outlay Refunding, Public Education,
Series D 5.000 06/01/2015 1,000,000 887,990
Florida State Department of
Transportation, Turnpike Revenue Bonds
(FGIC) 5.000 07/01/2013 1,000,000 891,760
Florida State Department of
Transportation, Turnpike Revenue Bonds
(FGIC) 5.000 07/01/2019 2,890,000 2,512,768
Florida State Department of
Transportation, Turnpike Revenue Bonds,
Series 1991A (AMBAC) 7.125 07/01/2018 125,000 140,541
See Notes to Schedule of Investments.
<PAGE>
MUNICIPAL BONDS (continued)
Gainesville, Florida, Utilities System
Revenue, Series B 7.500% 10/01/2008 $3,435,000 $4,049,831
Gainesville, Florida, Utilities System
Revenue, Series B 7.500 10/01/2009 3,695,000 4,372,478
Hillsborough County, Florida, Hospital
Authority, Tampa General Hospital
Project (FSA) 6.375 10/01/2013 3,550,000 3,622,704
Hollywood, Florida, Water and Sewer System
Revenue (FGIC) 6.875 10/01/2021 535,000 596,150
Indian River County, Florida, Water and
Sewer Systems Revenue (FGIC) 6.500 05/01/2016 400,000 435,876
Jacksonville, Florida, Health Facilities
Authority, St. Luke's Hospital
Association 7.125 11/15/2020 3,000,000 3,179,250
Jacksonville, Florida, Hospital Authority,
Baptist Medical Center Project, Series A
(MBIA) 7.300 06/01/2019 350,000 374,297
Lee County, Florida, School Board,
Certificates of Participation, Series A
(FSA) 7.750 08/01/2005 1,500,000 1,692,990
Lee County, Florida, Transportation
Facilities Revenue (AMBAC) 8.250 10/01/2017 45,000 46,969
Miami, Florida, Health Facilities
Authority, Health Facilities Revenue,
Mercy Hospital, Series A (AMBAC) 5.125 08/15/2020 1,700,000 1,483,250
Miramar, Florida, Wastewater Improvement
Assessment Revenue (FGIC) 6.750 10/01/2016 1,000,000 1,070,950
North Springs Improvement District,
Florida, Water and Sewer Revenue, Series
B (MBIA) 6.500 12/01/2016 1,335,000 1,401,710
Okaloosa County, Florida, Gas District,
Refunding and Improvement (MBIA) 6.850 10/01/2014 1,000,000 1,088,430
Orange County, Florida, Housing Finance
Authority, GNMA Collateralized Mortgage,
Series B (AMT) 8.100 11/01/2021 3,695,000 3,881,745
Orange County, Florida, Tourist
Development Tax Revenue, Series B (MBIA) 6.000 10/01/2024 2,500,000 2,469,550
Orlando, Florida, Utilities Commission,
Water and Electric 6.000 10/01/2010 4,000,000 4,084,160
Orlando-Orange County, Florida, Expressway
Authority (FGIC) 8.250 07/01/2015 40,000 50,963
Palm Beach County, Florida, General
Obligation 6.500 07/01/2010 1,880,000 2,011,318
Palm Beach County, Florida, Health
Facilities Authority, Good Samaritan
Health Systems 6.300 10/01/2022 1,000,000 983,350
Palm Beach County, Florida, Solid Waste
Authority Revenue, Series 1984 8.750 07/01/2010 45,000 49,778
Palm Beach County, Florida, Solid Waste
Industrial Development, Okeelanta Power
Project (AMT) 6.700 02/15/2015 5,000,000 4,735,000
Palm Beach County, Florida, Solid Waste
Industrial Development, Okeelanta Power
Project (AMT) 6.850 02/15/2021 6,000,000 5,719,140
Puerto Rico Electric Power Authority 6.000 07/01/2010 500,000 495,870
Puerto Rico Electric Power Authority 7.000 07/01/2011 200,000 213,628
Puerto Rico Industrial, Tourist,
Educational, Medical, Environmental
Control Facilities Finance Authority,
Polytechnic University of Puerto Rico
Project 5.500 08/01/2024 1,000,000 841,010
Puerto Rico Telephone Authority 5.400 01/01/2008 1,150,000 1,117,512
See Notes to Schedule of Investments. (Continued on next page)
<PAGE>
MUNICIPAL BONDS (continued)
Reedy Creek, Florida, Improvement
District, Florida Utilities Revenue
Refunding Series 1 (MBIA) 5.000% 10/01/2019 $5,500,000 $ 4,772,955
State of Florida, General Obligation,
Jacksonville Transportation Authority 9.000 01/01/2000 1,000,000 1,125,750
Tallahassee, Florida, Health Facilities,
Tallahassee Memorial Regional Medical
Project (MBIA) 6.625 12/01/2013 2,000,000 2,137,380
Tampa, Florida, Capital Improvement
Program Revenue, Series B 8.375 10/01/2018 1,250,000 1,320,400
Tampa, Florida, Subordinate Guaranteed
Entitlement Revenue Series B (ETM) 8.500 10/01/2018 45,000 50,084
Tampa, Florida, Water and Sewer Authority
Revenue (FGIC) 5.000 10/01/2014 4,000,000 3,568,520
West Melbourne, Florida, Water and Sewer
Revenue (FGIC) 6.750 10/01/2014 1,000,000 1,077,470
TOTAL MUNICIPAL BONDS (Cost--$102,923,963) 105,908,367
TEMPORARY TAX-EXEMPT INVESTMENTS (7.4%)
Dade County, Florida, Water and Sewer
System Revenue Bond Series 1994 (a) 4.150 10/05/2022 6,385,000 6,385,000
Indian Trace Community Development
District (Broward County, Florida) Basin
I Water Management, Special Benefit
Bonds, Series 1991 (a) 4.100 10/01/1999 1,500,000 1,500,000
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS
(Cost--$7,885,000) 7,885,000
TOTAL INVESTMENTS (Cost--$110,808,963) (b) 113,793,367
OTHER ASSETS AND LIABILITIES--NET (-7.2%) (7,641,161)
NET ASSETS (100.0%) $106,152,206
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) The cost of investments for federal income tax purposes is $111,084,646.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at March 31, 1995 are as follows:
Gross unrealized appreciation $2,862,937
Gross unrealized depreciation (154,216)
Net unrealized appreciation $2,708,721
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
AMT--Subject to Alternative Minimum Tax
ETM -- Escrowed to Maturity
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assistance
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
December 28, 1990
(Commencement of
Year Ended March 31, Operations) to
1995 1994 1993 1992 March 31, 1991
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $10.2900 $10.9400 $10.4300 $10.1700 $10.0000
Income from investment operations
Investment income--net 0.5576 0.5828 0.6067 0.7230 0.1806
Net gain (loss) on investments and
futures contracts 0.0734 (0.4400) 0.6414 0.3000 0.1700
Total income from investment
operations 0.6310 0.1428 1.2481 1.0230 0.3506
Less distributions from:
Investment income--net (0.5637) (0.5817) (0.6067) (0.7230) (0.1806)
In excess of investment income--net
(c) (0.0273) (0.0511) (0.0314) 0 0
Realized gain on investments--net 0 (0.1600) (0.1000) (0.0400) 0
Total distributions (0.5910) (0.7928) (0.7381) (0.7630) (0.1806)
Net asset value end of period $10.3300 $10.2900 $10.9400 $10.4300 $10.1700
Total return (d) 6.42% 1.01% 12.32% 10.34% 3.52%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses
(b) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Investment income--net 5.60% 5.16% 5.60% 6.82% 6.33%(a)
Portfolio turnover rate 129% 113% 95% 63% 5%
Net assets end of period
(thousands) $ 42,239 $ 45,150 $ 42,997 $ 29,258 $ 6,922
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 0.95%, 1.00%, 1.13%, 1.21% and 2.06% (annualized) for the
fiscal years ended March 31, 1995, 1994, 1993, 1992 and for the period
December 28, 1990 (Commencement of Operations) to March 31, 1991,
respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $10.2700 $10.9400 $10.8100
Income from investment operations
Investment income--net 0.5264 0.5258 0.0852
Net gain (loss) on investments and futures contracts 0.0234 (0.4730) 0.1379
Total income from investment operations 0.5498 0.0528 0.2231
Less distributions from:
Investment income--net (0.4929) (0.4812) (0.0852)
In excess of investment income--net (c) (0.0869) (0.0816) (0.0079)
Realized gain on investments--net 0 (0.1600) 0
Total distributions (0.5798) (0.7228) (0.0931)
Net asset value end of period $10.2400 $10.2700 $10.9400
Total return (d) 5.61% 0.19% 2.06%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.50% 1.50%(a)
Investment income--net 4.81% 4.21% 4.00%(a)
Portfolio turnover rate 129% 113% 95%
Net assets end of period (thousands) $ 51,083 $ 19,984 $ 1,704
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.68%, 1.74% and 1.73% (annualized) for the fiscal years ended
March 31, 1995, 1994 and the for period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $10.2800 $10.9300 $10.8100
Income from investment operations
Investment income--net 0.4680 0.5116 0.0746
Net gain (loss) on investments and futures contracts 0.0820 (0.4507) 0.1375
Total income from investment operations 0.5500 0.0609 0.2121
Less distributions from:
Investment income--net (0.4882) (0.4875) (0.0746)
In excess of investment income--net (c) (0.0818) (0.0634) (0.0175)
Realized gain on investments--net 0 (0.1600) 0
Total distributions (0.5700) (0.7109) (0.0921)
Net asset value end of period $10.2600 $10.2800 $10.9300
Total return (d) 5.61% 0.27% 1.95%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.50% 1.50%(a)
Investment income--net 4.86% 4.26% 2.95%(a)
Portfolio turnover rate 129% 113% 95%
Net assets end of period (thousands) $ 12,831 $ 13,096 $ 1,987
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.70%, 1.84% and 1.63% (annualized) for the fiscal years ended
March 31, 1995, 1994 and for the period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1995
ASSETS:
Investments at market value (identified cost--
$110,808,963) (Note 1) $113,793,367
Cash 18,332
Receivable for:
Investments sold 1,588,777
Fund shares sold 80,993
Interest 2,497,300
Due from Investment Adviser (Note 4) 14,549
Unamortized organization expenses (Note 1) 3,695
Prepaid expenses 6,240
Total assets 118,003,253
Liabilities (Notes 2, 4 and 5):
Payable for:
Investments purchased 7,209,862
Fund shares redeemed 4,101,230
Income distributions 510,247
Accrued reimbursable expenses 206
Other accrued expenses 29,502
Total liabilities 11,851,047
Net assets $106,152,206
Net assets represented by (Note 1):
Paid-in capital $109,006,567
Accumulated distributions in excess of
investment income--net (445,095)
Accumulated realized gains (losses) on
investments and closed futures
contracts--net (5,393,670)
Net unrealized appreciation on investments 2,984,404
Total net assets $106,152,206
Net asset value per share (Note 2):
Class A Shares ($10.33 on 4,090,563 shares
outstanding) $ 42,238,663
Class B Shares ($10.24 on 4,988,012 shares
outstanding) 51,082,798
Class C Shares ($10.26 on 1,250,634 shares
outstanding) 12,830,745
$106,152,206
Offering price per share:
Class A Shares (including sales charge of
4.75%) (Note 1) $ 10.85
Class B Shares $ 10.24
Class C Shares $ 10.26
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended March 31, 1995
Investment Income:
Interest $ 6,259,263
Expenses (Notes 1, 2 and 4):
Management fee $ 515,205
Transfer agent fees 116,367
Custodian fees 68,236
Accounting 13,052
Auditing 17,947
Legal 9,701
Printing 15,637
Registration fees 22,592
Amortization of organization expenses 6,125
Distribution Plan expenses 551,872
Miscellaneous expenses 4,257
Total expenses 1,340,991
Less: Reimbursement from Investment
Adviser (Note 4) (189,871)
Net expenses 1,151,120
Investment income--net (Note 1) 5,108,143
Realized and unrealized gain (loss) on
investments and closed futures
contracts--net:
Realized loss on:
Investments (4,280,513)
Closed futures contracts (471,235)
Realized loss on investments and closed
futures contracts--net (Note 3) (4,751,748)
Net unrealized appreciation
(depreciation) on investments:
Beginning of year (2,571,978)
End of year 2,984,404
Net change in unrealized appreciation
(depreciation) on investments 5,556,382
Net gain on investments and closed
futures contracts 804,634
Net increase in net assets resulting
from operations $ 5,912,777
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994
<S> <C> <C>
Operations:
Investment income--net $ 5,108,143 $ 3,315,430
Realized loss on investments and closed futures contracts--net (4,751,748) (176,818)
Net change in unrealized appreciation (depreciation) on investments 5,556,382 (4,019,726)
Net increase (decrease) in net assets resulting from operations 5,912,777 (881,114)
Distributions to shareholders from (Notes 1 and 5):
Investment income--net:
Class A Shares (2,468,849) (2,499,499)
Class B Shares (1,881,744) (424,503)
Class C Shares (757,551) (391,428)
In excess of investment income--net:
Class A Shares (119,609) (219,642)
Class B Shares (331,735) (71,955)
Class C Shares (127,027) (50,867)
Realized gain on investments--net:
Class A Shares 0 (705,182)
Class B Shares 0 (175,428)
Class C Shares 0 (154,938)
Total distributions to shareholders (5,686,515) (4,693,442)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 6,022,911 12,571,766
Proceeds from shares sold--Class B Shares 35,365,150 20,180,024
Proceeds from shares sold--Class C Shares 6,570,695 13,049,614
Payment for shares redeemed--Class A Shares (9,676,164) (8,428,210)
Payment for shares redeemed--Class B Shares (5,409,666) (659,493)
Payment for shares redeemed--Class C Shares (7,105,015) (1,183,738)
Net asset value of shares issued in reinvestment of distributions
from:
Investment income--net and in excess of investment income--net--
Class A Shares 712,811 716,146
Investment income--net and in excess of investment income--net--
Class B Shares 829,201 189,337
Investment income--net and in excess of investment income--net--
Class C Shares 385,988 192,140
Realized gain on investments--net--Class A Shares 0 298,598
Realized gain on investments--net--Class B Shares 0 104,951
Realized gain on investments--net--Class C Shares 0 85,350
Net increase in net assets resulting from capital share
transactions 27,695,911 37,116,485
Total increase in net assets 27,922,173 31,541,929
Net assets:
Beginning of year 78,230,033 46,688,104
End of year [Including accumulated distributions in excess of
investment income--net as follows: March 1995--($445,095) and
March 1994--($327,959)] (Note 1) $106,152,206 $78,230,033
</TABLE>
See Notes to Financial Statements.
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.5910
Class B Shares
Income Dividends
Tax-exempt
$0.5798
Class C Shares
Income Dividends
Tax-exempt
$0.5700
In January, 1996 complete information on calendar year 1995 distributions
will be forwarded to you to assist in completing your 1995 federal income tax
return.
See Notes to Financial Statements.
<PAGE>
Keystone Massachusetts Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (95.5%)
Boston, Massachusetts, Metropolitan
District, General Obligation 5.900% 12/01/2009 $ 695,000 $ 709,942
Massachusetts Bay Transportation
Authority, General Transportation,
Series A 7.000 03/01/2011 160,000 177,958
Massachusetts Bay Transportation
Authority, General Transportation,
Series A 6.250 03/01/2012 400,000 412,580
Massachusetts Bay Transportation
Authority, Series B 6.200 03/01/2016 425,000 432,446
Massachusetts Educational Financing Loan
Authority (AMBAC) 6.000 01/01/2012 300,000 287,889
Massachusetts Municipal Wholesale
Electric, Power Supply Systems,
Series B 6.750 07/01/2008 460,000 490,949
Massachusetts State Health and
Educational Facilities Authority,
Daughters of Charity, Series D 6.100 07/01/2014 400,000 392,292
Massachusetts State Health and
Educational Facilities Authority,
Holyoke Hospital, Series B 6.500 07/01/2015 450,000 426,987
Massachusetts State Health and
Educational Facilities Authority,
Massachusetts Institute of Technology,
Series H 5.000 07/01/2023 200,000 171,468
Massachusetts State Health and
Educational Facilities Authority,
McLean Hospital, Series C (FGIC) 6.500 07/01/2010 300,000 314,658
Massachusetts State Health and
Educational Facilities Authority, New
England Deaconess Hospital 6.875 04/01/2022 450,000 453,816
Massachusetts State Health and
Educational Facilities Authority, Smith
College, Series D 5.750 07/01/2016 350,000 336,658
Massachusetts State Health and
Educational Facilities Authority,
Wellesley College 5.375 07/01/2019 530,000 484,727
Massachusetts State Health and
Educational Facilities Authority,
Winchester Hospital, Series D
(Connie Lee) 5.750 07/01/2014 350,000 330,841
Massachusetts State Health and
Educational Facilities Authority,
Youville Hospital, Series B 6.000 02/15/2025 300,000 291,105
Massachusetts State Housing Finance
Agency, Series A (AMBAC) 6.300 10/01/2013 200,000 199,936
Massachusetts State Housing Finance
Agency, Series A (AMBAC) 6.600 07/01/2014 300,000 303,486
Massachusetts State Housing Finance
Agency, Series A (MBIA) 5.950 12/01/2014 150,000 147,222
Massachusetts State Housing Finance
Agency, Series A 6.300 10/01/2013 450,000 447,408
Massachusetts State Industrial Finance
Agency, Harvard Community Health Plan,
Inc., Series B 8.125 10/01/2017 165,000 177,855
Massachusetts State Industrial Finance
Agency, Solid Waste Disposal, Molten
Metal Technology Project 8.250 08/01/2014 250,000 255,608
Massachusetts State Industrial Finance
Agency, Solid Waste Disposal, Senior
Lien, Massachusetts Recycling Assoc. 9.000 07/01/2016 1,000,000 1,041,980
Massachusetts State General Obligation
Consolidated Loan, Series B 6.000 08/01/2013 100,000 99,534
Massachusetts State Special Obligation,
Series A (AMBAC) 6.000 06/01/2013 250,000 250,383
See Notes to Schedule of Investments. (Continued on next page)
<PAGE>
MUNICIPAL BONDS (continued)
Massachusetts State Special Obligation,
Series A (FGIC) 5.700% 06/01/2010 $250,000 $ 246,178
Massachusetts State Water Resources
Authority, Series C 6.000 12/01/2011 770,000 774,620
TOTAL MUNICIPAL BONDS (Cost--$9,477,448) 9,658,526
TEMPORARY TAX-EXEMPT INVESTMENTS (0.9%)
Massachusetts State Health and
Educational Facilities Authority,
(Capital Assets Program), Series D
(MBIA) (Cost--$95,000) (a) 3.800 01/01/2035 95,000 95,000
TOTAL INVESTMENTS (Cost--$9,572,448) (b) 9,753,526
OTHER ASSETS AND LIABILITIES--NET (3.6%) 360,334
NET ASSETS (100.0%) $10,113,860
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) The cost of investments for federal income tax purposes amounted to
$9,572,448. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at March 31, 1995 are as
follows:
Gross unrealized appreciation $210,459
Gross unrealized depreciation (29,381)
Net unrealized appreciation $181,078
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
FGIC--Federal Guaranty Insurance Co.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.1700 $10.0000
Income from investment operations
Investment income--net 0.5337 0.0872
Net gain (loss) on investments and futures contracts 0.0120 (0.8241)
Total income from investment operations 0.5457 (0.7369)
Less distributions from:
Investment income--net (0.5257) (0.0854)
In excess of investment income--net 0 (0.0077)
Total distributions (0.5257) (0.0931)
Net asset value end of period $ 9.1900 $ 9.1700
Total return (c) 6.23% (7.40%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 0.46% 0.35%(a)
Investment income--net 5.90% 5.07%(a)
Portfolio turnover rate 77% 7%
Net assets end of period (thousands) $ 1,974 $ 1,472
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.93% and 3.22% (annualized) for the fiscal year ended March
31,1995, and for the period from February 4, 1994 (Commencement of
Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.1900 $10.0000
Income from investment operations
Investment income--net 0.4877 0.0839
Net gain (loss) on investments and futures contracts (0.0142) (0.8008)
Total income from investment operations 0.4735 (0.7169)
Less distributions from:
Investment income--net (0.4723) (0.0670)
In excess of investment income--net (0.0412) (0.0261)
Total distributions (0.5135) (0.0931)
Net asset value end of period $ 9.1500 $ 9.1900
Total return (c) 5.41% (7.20%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.24% 1.10%(a)
Investment income--net 5.15% 3.23%(a)
Portfolio turnover rate 77% 7%
Net assets end of period (thousands) $ 6,169 $ 1,817
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 2.68%, and 4.60% (annualized) for the fiscal year ended March
31,1995, and for the period February 4, 1994 (Commencement of Operations)
to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.1900 $10.0000
Income from investment operations
Investment income--net 0.4801 0.0807
Net gain (loss) on investments and futures contracts (0.0244) (0.7989)
Total income from investment operations 0.4557 (0.7182)
Less distributions from:
Investment income--net (0.4680) (0.0738)
In excess of investment income--net (0.0377) (0.0180)
Total distributions (0.5057) (0.0918)
Net asset value end of period $ 9.1400 $ 9.1900
Total return (c) 5.20% (7.21%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.23% 1.10%(a)
Investment income--net 5.11% 4.28%(a)
Portfolio turnover rate 77% 7%
Net assets end of period (thousands) $ 1,971 $ 369
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 2.68%, and 4.91% (annualized) for the fiscal year ended March
31,1995 and for the period February 4, 1994 (Commencement of Operations)
to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1995
Assets:
Investments at market value (identified
cost-- $9,572,448) (Note 1) $ 9,753,526
Cash 116
Receivable for:
Investments sold 354,116
Fund shares sold 50,585
Interest 180,535
Due from Investment Adviser (Note 4) 12,726
Unamortized organization expenses (Note 1) 9,045
Prepaid expenses 373
Total assets 10,361,022
Liabilities (Notes 2, 4, and 5):
Payable for:
Investments purchased 171,983
Fund shares redeemed 3,032
Income distributions 44,292
Accrued reimbursable expenses 2,399
Other accrued expenses 25,456
Total liabilities 247,162
Net assets $10,113,860
Net assets represented by (Note 1):
Paid-in capital $10,280,917
Undistributed investment income--net 20,294
Accumulated realized gains (losses) on
investments--net (368,429)
Net unrealized appreciation on investments 181,078
Total net assets $10,113,860
Net asset value per share (Note 2):
Class A Shares ($9.19 on 214,903 shares
outstanding) $ 1,973,993
Class B Shares ($9.15 on 674,296 shares
outstanding) 6,168,640
Class C Shares ($9.14 on 215,636 shares
outstanding) 1,971,227
$10,113,860
Offering price per share:
Class A Shares (including sales charge of
4.75%) (Note 1) $ 9.65
Class B Shares $ 9.15
Class C Shares $ 9.14
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended March 31, 1995
Investment Income:
Interest $ 505,436
Expenses (Notes 1, 2 and 4):
Management fee $ 43,636
Transfer agent fees 15,568
Custodian fees 22,909
Accounting 17,498
Auditing 11,060
Legal 5,557
Printing 17,044
Registration fees 6,653
Amortization of organization expenses 1,432
Distribution Plan expenses 57,230
Miscellaneous expenses 606
Total expenses 199,193
Less: Reimbursement from Investment
Adviser (Note 4) (114,861)
Net expenses 84,332
Investment income--net (Note 1) 421,104
Realized and unrealized gain (loss) on
investments and closed futures
contracts--net:
Realized loss on:
Investments (283,015)
Closed futures contracts (67,330)
Realized gain (loss) on investments and
closed futures contracts--net
(Note 3) (350,345)
Net unrealized appreciation
(depreciation) on investments:
Beginning of year (233,997)
End of year 181,078
Net change in unrealized appreciation
(depreciation) on investments 415,075
Net gain on investments and closed
futures contracts 64,730
Net increase in net assets resulting
from operations $ 485,834
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Operations:
Investment income--net $ 421,104 $ 16,938
Realized gain (loss) on investments and closed futures
contracts--net (350,345) (16,765)
Net change in unrealized appreciation (depreciation) on
investments 415,075 (233,997)
Net increase (decrease) in net assets resulting from
operations 485,834 (233,824)
Distributions to shareholders from (Notes 1 and 5):
Investment income--net:
Class A Shares (103,346) (10,428)
Class B Shares (230,929) (4,687)
Class C Shares (85,245) (1,823)
In excess of investment income--net:
Class A Shares 0 (942)
Class B Shares (20,118) (1,824)
Class C Shares (6,857) (445)
Total distributions to shareholders (446,495) (20,149)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 1,279,775 1,681,688
Proceeds from shares sold--Class B Shares 4,802,858 1,926,809
Proceeds from shares sold--Class C Shares 1,731,526 401,620
Payment for shares redeemed--Class A Shares (846,310) (91,900)
Payment for shares redeemed--Class B Shares (609,227) (4,920)
Payment for shares redeemed--Class C Shares (182,930) (4,920)
Net asset value of shares issued in reinvestment of
distributions from:
Investment income--net and in excess of investment
income--net--Class A Shares 60,782 2,378
Investment income--net and in excess of investment
income--net--Class B Shares 125,304 160
Investment income--net and in excess of investment
income--net--Class C Shares 55,445 356
Net increase in net assets resulting from capital share
transactions 6,417,223 3,911,271
Total increase in net assets 6,456,562 3,657,298
Net assets:
Beginning of period 3,657,298 0
End of period [Including undistributed investment income--net
(accumulated distributions in excess of investment
income--net) as follows: March 1995--$20,294 and March
1994--($1,803)] (Note 1) $10,113,860 $3,657,298
</TABLE>
See Notes to Financial Statements.
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.5257
Class B Shares
Income Dividends
Tax-exempt
$0.5135
Class C Shares
Income Dividends
Tax-exempt
$0.5057
In January, 1996 complete information on calendar year 1995 distributions
will be forwarded to you to assist in completing your 1995 federal income tax
return.
See Notes to Financial Statements.
<PAGE>
Keystone New York Insured Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (98.1%)
Broome County, New York, Public Safety
Facility (MBIA) 5.250% 04/01/2015 $1,000,000 $ 903,460
Buffalo, New York, Series E 6.500 12/01/2022 465,000 486,841
Erie County, New York, Water Authority,
Fourth Resolution (AMBAC) (effective
yield 6.824%) (b) 0.000 12/01/2017 440,000 86,715
Metropolitan Transportation Authority, New
York, Commuter Facilities, Series A
(MBIA) 6.125 07/01/2014 1,400,000 1,414,518
Nassau County, New York, Combined Sewer
District, Series B 6.000 05/01/2014 695,000 698,816
New Rochelle, New York, General
Obligation, Series B 6.150 08/15/2017 600,000 616,482
New York City, New York, General
Obligation, Series A (FGIC) 5.750 08/01/2010 1,090,000 1,066,816
New York City, New York, Municipal Water
Finance Authority, Water and Sewer
System Series A (FGIC) 7.000 06/15/2015 1,400,000 1,483,748
New York, New York City, Educational
Construction Fund, Senior Subordinate,
Series B 5.500 10/01/2011 200,000 187,380
New York Resources Recovery Agency,
Series B 7.250 07/01/2011 100,000 112,827
New York State Dormitory Authority, City
University Systems (FGIC) 7.000 07/01/2009 200,000 223,800
New York State Dormitory Authority, City
University, 3rd General Resources,
Series 2 (MBIA) 6.250 07/01/2019 575,000 583,475
New York State Dormitory Authority,
Fordham University (FGIC) 5.750 07/01/2015 500,000 486,500
New York State Dormitory Authority, Mount
Sinai Medical School, Series A (MBIA) 5.000 07/01/2015 200,000 176,476
New York State Dormitory Authority, Mount
Sinai Medical School, Series A (MBIA) 5.000 07/01/2021 125,000 107,241
New York State Dormitory Authority, State
University Education Facilities (FGIC) 5.300 05/15/2010 100,000 93,449
New York State Dormitory Authority, State
University Educational Facilities,
Series A (FSA) 5.250 05/15/2015 600,000 545,754
New York State Dormitory Authority, State
University Educational Facilities
(AMBAC) 5.875 05/15/2011 250,000 251,092
New York State Dormitory Authority,
University of Rochester Strong Memorial
(MBIA) 5.500 07/01/2021 400,000 370,212
New York State Energy, New York State
Electric & Gas 5.700 12/01/2028 160,000 147,690
New York State Housing Finance Agency,
Multi-family Mortgage, Series B (AMBAC) 6.250 08/15/2014 875,000 874,834
New York State Medical Care Facilities
Finance Agency, Mental Health Services
Facilities 6.375 08/15/2014 1,000,000 1,023,410
New York State Medical Care Facilities
Finance Agency, Mental Health Services
Facilities, Series A (FGIC) 5.500 08/15/2021 165,000 151,477
New York State Medical Care Facilities
Finance Agency,
St Mary's Hospital, Series A (AMBAC) 6.200 11/01/2014 200,000 203,306
New York State Power Authority, Series CC
(MBIA) 5.250 01/01/2018 500,000 452,550
See Notes to Schedule of Investments. (Continued on next page)
<PAGE>
Municipal Bonds (continued)
New York State Urban Development Corp.,
Correctional Capital Facilities,
Series A 6.500% 01/01/2009 $ 600,000 $ 609,540
New York State Urban Development,
Correctional Facilities, Series A
(AMBAC) 5.000 01/01/2017 500,000 430,895
Niagara Falls, New York, Public
Improvement (MBIA) 7.500 03/01/2016 750,000 899,190
Niagara Falls, New York, Public
Improvement (MBIA) 7.500 03/01/2017 750,000 897,547
Niagara, New York, Frontier Transportation
Authority, Greater Buffalo International
Airport (AMBAC) 6.125 04/01/2014 100,000 100,230
Rochester, New York, General Obligation,
Series A (AMBAC) 5.000 08/15/2018 140,000 125,254
Suffolk County, New York, Industrial
Development Agency, Southwest Sewer
Systems (FGIC) 6.000 02/01/2008 1,000,000 1,031,190
Tioga County, New York, Public Improvement
(FGIC) 5.400 03/15/2010 240,000 232,044
Triborough Bridge and Tunnel Authority,
New York, General Purpose, Series X 6.625 01/01/2012 555,000 600,987
Westchester County, New York, Industrial
Development Resource Recovery, Series A
(AMBAC) 5.750 07/01/2009 100,000 97,774
TOTAL MUNICIPAL BONDS (Cost--$17,216,118) 17,773,520
TEMPORARY TAX-EXEMPT INVESTMENTS (0.2%)
New York City Municipal Water and Finance
Authority, Water and Sewer Systems,
Series C (FGIC) (Cost--$45,000) (a) 4.600 06/15/2023 45,000 45,000
TOTAL INVESTMENTS (Cost--$17,261,118) (c) 17,818,520
OTHER ASSETS AND LIABILITIES--NET (1.7%) 301,682
NET ASSETS (100.0%) $18,120,202
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an accrual basis until maturity.
(c) The cost of investments for federal income tax purposes amounted to
$17,303,918. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at March 31, 1995 are as
follows:
Gross unrealized appreciation $530,070
Gross unrealized depreciation (15,468)
Net unrealized appreciation $514,602
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assistance
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.3200 $10.0000
Income from investment operations
Investment income--net 0.5192 0.0862
Net gain (loss) on investments and futures contracts 0.1154 (0.6748)
Total income from investment operations 0.6346 (0.5886)
Less distributions from:
Investment income--net (0.5146) (0.0784)
In excess of investment income--net 0 (0.0130)
Total distributions (0.5146) (0.0914)
Net asset value end of period $ 9.4400 $ 9.3200
Total return (c) 7.08% (5.91%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 0.50% 0.35%(a)
Investment income--net 5.48% 3.85%(a)
Portfolio turnover rate 77% 14%
Net assets end of period (thousands) $ 3,323 $ 680
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.59% and 4.44% (annualized) for the fiscal year ended March
31, 1995, and for the period from February 4, 1994 (Commencement of
Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.3200 $10.0000
Income from investment operations
Investment income--net 0.4763 0.0812
Net gain (loss) on investments and futures contracts 0.0862 (0.6698)
Total income from investment operations 0.5625 (0.5886)
Less distributions from:
Investment income--net (0.4548) (0.0620)
In excess of investment income--net (0.0477) (0.0294)
Total distributions (0.5025) (0.0914)
Net asset value end of period $ 9.3800 $ 9.3200
Total return (c) 6.28% (5.91%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.25% 1.10%(a)
Investment income--net 4.78% 3.01%(a)
Portfolio turnover rate 77% 14%
Net assets end of period (thousands) $ 11,907 $ 2,276
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 2.35% and 5.60% (annualized) for the fiscal year ended March
31, 1995, and for the period February 4, 1994 (Commencement of
Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.3100 $10.0000
Income from investment operations
Investment income--net 0.4828 0.0736
Net gain (loss) on investments and futures contracts 0.0710 (0.6735)
Total income from investment operations 0.5538 (0.5999)
Less distributions from:
Investment income--net (0.4579) (0.0664)
In excess of investment income--net (0.0359) (0.0237)
Total distributions (0.4938) (0.0901)
Net asset value end of period $ 9.3700 $ 9.3100
Total return (c) 6.18% (6.02%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.26% 1.10%(a)
Investment income--net 4.88% 3.71%(a)
Portfolio turnover rate 77% 14%
Net assets end of period (thousands) $ 2,890 $ 255
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 2.32%, and 5.13% (annualized) for the fiscal year ended March
31, 1995, and for the period February 4, 1994 (Commencement of
Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1995
Assets:
Investments at market value (identified
cost-- $17,261,118) (Note 1) $17,818,520
Cash 4,516
Receivable for:
Fund shares sold 125,249
Interest 314,035
Due from Investment Adviser (Note 4) 9,698
Unamortized organization expenses (Note 1) 2,390
Prepaid expenses 606
Total assets 18,275,014
Liabilities (Notes 2, 4, and 5):
Payable for:
Fund shares redeemed 53,211
Income distributions 76,467
Accrued reimbursable expenses 2,600
Other accrued expenses 22,534
Total liabilities 154,812
Net assets $18,120,202
Net assets represented by (Note 1):
Paid-in capital $17,941,234
Undistributed investment income--net 25,850
Accumulated realized gains (losses) on
investments--net (404,284)
Net unrealized appreciation on investments 557,402
Total net assets $18,120,202
Net asset value per share (Note 2):
Class A Shares ($9.44 on 352,186 shares
outstanding) $ 3,323,045
Class B Shares ($9.38 on 1,269,971 shares
outstanding) 11,906,675
Class C Shares ($9.37 on 308,360 shares
outstanding) 2,890,482
$18,120,202
Offering price per share:
Class A Shares (including sales charge of
4.75%) (Note 1) $ 9.91
Class B Shares $ 9.38
Class C Shares $ 9.37
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended March 31, 1995
Investment Income:
Interest $ 700,194
Expenses (Notes 1, 2 and 4):
Management fee $ 63,808
Transfer agent fees 25,831
Custodian fees 23,968
Accounting 17,698
Auditing 11,066
Legal 5,454
Printing 15,797
Registration fees 2,682
Amortization of organization expenses 268
Distribution Plan expenses 89,147
Miscellaneous expenses 601
Total expenses 256,320
Less: Reimbursement from Investment
Adviser (Note 4) (126,754)
Net expenses 129,566
Investment income--net (Note 1) 570,628
Realized and unrealized gain (loss) on
investments and closed futures
contracts--net
Realized loss on:
Investments (272,389)
Closed futures contracts (120,843)
Realized gain (loss) on investments
and closed futures contracts--net
(Note 3) (393,232)
Net unrealized appreciation
(depreciation) on investments:
Beginning of year (141,597)
End of year 557,402
Net change in unrealized appreciation
(depreciation) on investments 698,999
Net gain on investments and closed
futures contracts 305,767
Net increase in net assets resulting
from operations $ 876,395
See Notes to Financial Statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Operations:
Investment income--net $ 570,628 $ 8,803
Realized gain (loss) on investments and closed futures contracts--net (393,232) (10,721)
Net change in unrealized appreciation (depreciation) on investments 698,999 (141,597)
Net increase (decrease) in net assets resulting from operations 876,395 (143,515)
Distributions to shareholders from (Notes 1 and 5):
Investment income--net:
Class A Shares (110,893) (2,291)
Class B Shares (372,207) (5,248)
Class C Shares (86,125) (1,264)
In excess of investment income--net:
Class A Shares 0 (380)
Class B Shares (39,019) (2,489)
Class C Shares (6,749) (452)
Total distributions to shareholders (614,993) (12,124)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 2,912,705 872,036
Proceeds from shares sold--Class B Shares 10,641,995 2,543,473
Proceeds from shares sold--Class C Shares 2,663,844 429,008
Payment for shares redeemed--Class A Shares (389,013) (159,452)
Payment for shares redeemed--Class B Shares (1,379,298) (160,779)
Payment for shares redeemed--Class C Shares (128,154) (157,276)
Net asset value of shares issued in reinvestment of distributions from:
Investment income--net and in excess of investment income--net--
Class A Shares 46,401 43
Investment income--net and in excess of investment income--net--
Class B Shares 220,338 0
Investment income--net and in excess of investment income--net--
Class C Shares 58,568 0
Net increase in net assets resulting from capital share transactions 14,647,386 3,367,053
Total increase in net assets 14,908,788 3,211,414
Net assets:
Beginning of period 3,211,414 0
End of period [Including undistributed investment income--net
(accumulated distributions in excess of investment income--net) as
follows: March 1995-- $25,850 and March 1994--($1,759)] (Note 1) $18,120,202 $3,211,414
</TABLE>
See Notes to Financial Statements.
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.5146
Class B Shares
Income Dividends
Tax-exempt
$0.5025
Class C Shares
Income Dividends
Tax-exempt
$0.4938
In January, 1996 complete information on calendar year 1995 distributions
will be forwarded to you to assist in completing your 1995 federal income tax
return.
See Notes to Financial Statements.
<PAGE>
Keystone Pennsylvania Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (95.5%)
Allegheny County, Pennsylvania, Airport
Revenue, Greater Pittsburgh International
Airport 6.625% 01/01/2022 $ 750,000 $ 766,155
Allegheny County, Pennsylvania, Finance
Authority, Single Family Mortgage, Series Y 6.600 11/01/2014 1,000,000 1,017,700
Allegheny County, Pennsylvania, Industrial
Development Authority, Environmental
Improvement, USX Corp. 6.700 12/01/2020 2,000,000 1,985,060
Allentown, Pennsylvania, Area Hospital
Authority, Sacred Heart Hospital of
Allentown, Series A 6.750 11/15/2014 1,000,000 933,620
Beaver County, Pennsylvania, Industrial
Development Authority, Pollution Control,
Ohio Edison Co. Project, Series A 7.750 09/01/2024 1,170,000 1,213,430
Bethlehem, Pennsylvania, Authority Water
Revenue Refunding (MBIA) 5.200 11/15/2021 2,600,000 2,293,616
Bucks County, Pennsylvania, Industrial
Development Authority, Personal Care 10.000 05/15/2019 5,100,000 7,764,546
Cambria County, Pennsylvania, Series A (FGIC) 6.625 08/15/2012 4,485,000 4,745,265
Central Bucks, Pennsylvania, School District,
Series A 6.900 11/15/2013 1,000,000 1,070,440
Delaware County, Pennsylvania, Industrial
Development Authority, Pollution Control,
Philadelphia Electric Co., Series A 7.375 04/01/2021 850,000 893,614
Erie County, Pennsylvania, Industrial
Development Authority, Environmental
Improvement, International Paper Co.
Project, Series A 7.625 11/01/2018 500,000 539,555
Guam Airport Authority, Series B 6.400 10/01/2005 500,000 506,990
Hazleton, Pennsylvania, Area School District,
Comp. Interest, Series B (eff. yield
6.30%)(b) 0.000 03/01/2018 5,265,000 1,308,563
Lehigh County, Pennsylvania, General Purpose
Authority, Good Shepherd Rehabilitation
Hospital 7.500 11/15/2021 1,000,000 1,010,630
Lehigh County, Pennsylvania, General Purpose
Authority,
Lehigh Valley Hospital, Series A (MBIA) 7.000 07/01/2016 1,250,000 1,384,387
Mon Valley, Pennsylvania, Sewage Revenue
(MBIA) 6.550 11/01/2019 1,305,000 1,372,429
Montgomery County, Pennsylvania, Higher
Education and Health Authority,
Northwestern Corp. 7.000 06/01/2012 700,000 666,631
Montgomery County, Pennsylvania, Industrial
Development, Pollution Control,
Philadelphia Electric Co. 7.600 04/01/2021 950,000 999,210
Norristown, Pennsylvania, Municipal Waste
Authority, Sewer Revenue (FGIC) 5.125 11/15/2023 1,250,000 1,104,312
Northumberland County, Pennsylvania,
Commonwealth Lease (eff. yield 6.82%)
(MBIA)(b) 0.000 10/15/2012 4,200,000 1,467,732
Pennsylvania Economic Development Financing
Authority Resources Recovery, Colver
Project, Series D 7.150 12/01/2018 3,000,000 3,034,710
Pennsylvania Economic Development Financing
Authority, Resources Recovery, Colver
Project, Series D 7.125 12/01/2015 1,200,000 1,216,296
Pennsylvania Economic Development Financing
Authority, Resources Recovery, Northhampton
University Project 6.500 01/01/2013 4,500,000 4,166,910
See Notes to Schedule of Investments. (Continued on next page)
<PAGE>
MUNICIPAL BONDS (continued)
Pennsylvania General Obligation 5.375% 04/15/2011 $2,500,000 $ 2,362,000
Pennsylvania General Obligation 5.375 05/01/2013 1,300,000 1,209,429
Pennsylvania General Obligation (MBIA) 5.600 06/15/2013 1,000,000 961,150
Pennsylvania Housing Finance Agency, Single
Family Mortgage, Series 40 6.800 10/01/2015 750,000 760,868
Pennsylvania Housing Finance Agency, Single
Family Mortgage, Series 33 6.900 04/01/2017 1,000,000 1,029,170
Pennsylvania Housing Finance Agency, Single
Family Mortgage,
Series 34 A (FHA/FNMA) 6.850 04/01/2016 1,500,000 1,538,700
Pennsylvania Intergovernmental Cooperation
Authority,
Special Tax, City of Philadelphia Funding
Program 6.800 06/15/2022 2,500,000 2,752,850
Pennsylvania Intergovernmental Cooperative
Authority, Special Tax
Philadelphia Funding Program (FGIC) 6.750 06/15/2021 1,000,000 1,063,030
Pennsylvania State Higher Educational
Facilities Authority,
Thomas Jefferson University, Series A 6.625 08/15/2009 1,450,000 1,522,790
Pennsylvania State Industrial Development
Authority, Economic Development (AMBAC) 7.000 01/01/2006 1,500,000 1,683,705
Pennsylvania State Industrial Development
Authority, Economic Development (AMBAC) 7.000 07/01/2006 1,000,000 1,126,680
Philadelphia, Pennsylvania, Hospital and
Higher Education Facilities, Albert
Einstein Medical Center 7.625 04/01/2011 900,000 954,171
Philadelphia, Pennsylvania, Hospital and
Higher Education Facilities, Albert
Einstein Medical Center 7.000 10/01/2021 945,000 971,819
Philadelphia, Pennsylvania, Hospital and
Higher Education Facilities, Graduate
Health Systems Education Facilities 7.250 07/01/2018 1,225,000 1,223,371
Philadelphia, Pennsylvania, Hospital and
Higher Education Facilities, Temple
University Hospital, Series A 6.625 11/15/2023 2,300,000 2,254,943
Puerto Rico Commonwealth Highway and
Transportation Authority, Series W 5.500 07/01/2017 1,500,000 1,362,105
Puerto Rico Commonwealth Highway and
Transportation Authority, Series W 5.250 07/01/2020 1,000,000 867,950
Puerto Rico Commonwealth Highway Authority,
Series Q 7.750 07/01/2010 325,000 371,498
Scranton--Lackawanna, Pennsylvania, Health
And Welfare Authority, Allied Services
Rehabilitation Facility 7.600 07/15/2020 1,000,000 991,870
University of Pittsburgh, Pennsylvania,
University Capital Project, Series A (MBIA) 6.250 06/01/2012 1,000,000 1,021,710
TOTAL MUNICIPAL BONDS (Cost--$65,481,556) 67,491,610
TEMPORARY TAX-EXEMPT INVESTMENTS (2.5%)
Sayre County, Pennsylvania Health Care
Facilities Authority,
Variable Rate (VHA Pennsylvania Capital
Financing Project) Series B (AMBAC) (a) 4.000 12/01/2020 225,000 225,000
See Notes to Financial Statements.
<PAGE>
TEMPORARY TAX-EXEMPT INVESTMENTS (continued)
Sayre County, Pennsylvania Health Care
Facilities Authority,
Variable Rate (VHA Pennsylvania Capital
Financing Project) Series F (AMBAC) (a) 4.000% 12/01/2020 $500,000 $ 500,000
Sayre County, Pennsylvania Health Care
Facilities Authority,
Variable Rate (VHA Pennsylvania Capital
Financing Project) Series H (AMBAC) (a) 4.000 12/01/2020 225,000 225,000
Sayre County, Pennsylvania Health Care
Facilities Authority,
Variable Rate (VHA Pennsylvania Capital
Financing Project) Series K (AMBAC) (a) 4.000 12/01/2020 400,000 400,000
Sayre County, Pennsylvania Health Care
Facilities Authority,
Variable Rate (VHA Pennsylvania Capital
Financing Project) Series M (AMBAC) (a) 4.000 12/01/2020 430,000 430,000
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS
(Cost--$1,780,000) 1,780,000
TOTAL INVESTMENTS (Cost--$67,261,556) (c) 69,271,610
OTHER ASSETS AND LIABILITIES--NET (2.0%) 1,394,617
NET ASSETS (100.0%) $70,666,227
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
(c) The cost of investments for federal income tax purposes amount to
$67,351,319. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at March 31, 1995 are as
follows:
Gross unrealized appreciation $2,153,788
Gross unrealized depreciation (233,497)
Net unrealized appreciation $1,920,291
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Idemnity Corp.
FGIC--Federal Guaranty Insurance Co.
FHA--Federal Housing Authority
FNMA--Federal National Mortgage Association
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
December 27,
1990
(Commencement of
Year Ended March 31,
Operations) to
1995 1994 1993 1992 March 31, 1991
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $11.0100 $11.4200 $10.7100 $10.2500 $10.0000
Income from investment operations
Investment income--net 0.6070 0.6161 0.6349 0.7426 0.1806
Net gain (loss) on investments and
futures contracts (0.0918) (0.2990) 0.7499 0.4600 0.2500
Total income from investment
operations 0.5152 0.3171 1.3848 1.2026 0.4306
Less distributions from:
Investment income--net (0.6070) (0.6195) (0.6349) (0.7426) (0.1806)
In excess of investment income--net
(c) (0.0082) (0.0376) (0.0199) 0 0
Realized gain on investments--net 0 (0.0633) (0.0200) 0 0
In excess of realized gain on
investments--net 0 (0.0067) 0 0 0
Total distributions (0.6152) (0.7271) (0.6748) (0.7426) (0.1806)
Net asset value end of period $10.9100 $11.0100 $11.4200 $10.7100 $10.2500
Total return (d) 4.91% 2.58% 13.30% 12.07% 4.37%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses
(b) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Investment income--net 5.65% 5.27% 5.66% 6.92% 6.84%(a)
Portfolio turnover rate 97% 37% 20% 13% 8%
Net assets end of period (thousands) $ 30,450 $ 30,560 $ 35,502 $ 12,914 $ 2,979
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.05%, 1.06%, 1.16%, 1.68%, and 3.19% annualized for the fiscal
years ended March 31, 1995, 1994, 1993, 1992, and for the period from
December 27, 1990 (Commencement of Operations) to March 31, 1991,
respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $10.9800 $11.4200 $11.2000
Income from investment operations
Investment income--net 0.5369 0.5556 0.0809
Net gain (loss) on investments and futures contracts (0.1039) (0.3390) 0.2359
Total income from investment operations 0.4330 0.2166 0.3168
Less distributions from:
Investment income--net (0.5255) (0.5201) (0.0809)
In excess of investment income--net (c) (0.0775) (0.0665) (0.0159)
Realized gain on investments--net 0 (0.0343) 0
In excess of realized gain on investments--net 0 (0.0357) 0
Total distributions (0.6030) (0.6566) (0.0968)
Net asset value end of period $10.8100 $10.9800 $11.4200
Total return (d) 4.15% 1.70% 2.82%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.50% 1.50%(a)
Investment income--net 4.89% 4.32% 3.44%(a)
Portfolio turnover rate 97% 37% 20%
Net assets end of period (thousands) $ 30,657 $ 21,958 $ 2,543
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.80%, 1.81% and 1.69% (annualized) for the fiscal years ended
March 31, 1995, 1994 and for the period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $11.0000 $11.4200 $11.2000
Income from investment operations
Investment income--net 0.5273 0.5462 0.0710
Net gain (loss) on investments and futures contracts (0.1035) (0.3217) 0.2448
Total income from investment operations 0.4238 0.2245 0.3158
Less distributions from:
Investment income--net (0.5244) (0.5219) (0.0710)
In excess of investment income--net (c) (0.0694) (0.0526) (0.0248)
Realized gain on investments--net 0 (0.0337) 0
In excess of realized gain on investments--net 0 (0.0363) 0
Total distributions (0.5938) (0.6445) (0.0958)
Net asset value end of period $10.8300 $11.0000 $11.4200
Total return (d) 4.05% 1.78% 2.81%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.50% 1.50%(a)
Investment income--net 4.90% 4.33% 2.50%(a)
Portfolio turnover rate 97% 37% 20%
Net assets end of period (thousands) $ 9,559 $ 9,385 $ 952
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.80%, 1.90% and 1.60% the fiscal years ended March 31, 1995,
1994 and for the period February 1, 1993 (Date of Initial Public
Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1995
ASSETS:
Investments at market value (identified cost--
$67,261,556) (Note 1) $69,271,610
Cash 4,190
Receivable for:
Fund shares sold 307,524
Interest 1,440,618
Due from Investment Adviser (Note 4) 19,417
Unamortized organization expenses (Note 1) 4,713
Prepaid expenses 4,230
Total assets 71,052,302
Liabilities (Notes 2, 4, and 5):
Payable for:
Fund shares redeemed 20,490
Income Distributions 329,303
Accrued reimbursable expenses 2,662
Other accrued expenses 33,620
Total liabilities 386,075
Net assets $70,666,227
Net assets represented by (Note 1):
Paid-in capital $72,310,612
Accumulated distributions in excess of
investment income--net (106,519)
Accumulated realized gains (losses) on
investments--net (3,547,920)
Net unrealized appreciation on investments 2,010,054
Total net assets $70,666,227
Net asset value per share (Note 2):
Class A Shares ($10.91 on 2,791,272 shares
outstanding) $30,450,398
Class B Shares ($10.81 on 2,836,903 shares
outstanding) 30,657,215
Class C Shares ($10.83 on 882,307 shares
outstanding) 9,558,614
$70,666,227
Offering price per share:
Class A Shares (including sales charge of
4.75%) (Note 1) $ 11.45
Class B Shares $ 10.81
Class C Shares $ 10.83
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended March 31, 1995
Investment Income:
Interest $ 4,260,404
Expenses (Notes 1, 2 and 4):
Management fee $ 357,852
Transfer agent fees 108,073
Custodian fees 54,701
Accounting 20,909
Auditing 13,919
Legal 8,725
Printing 13,444
Registration fees 9,924
Amortization of organization expenses 6,368
Distribution Plan expenses 370,882
Miscellaneous expenses 6,940
Total expenses 971,737
Less: Reimbursement from Investment
Adviser (Note 4) (200,357)
Net expenses 771,380
Investment income--net (Note 1) 3,489,024
Realized and unrealized gain (loss) on
investments and closed futures
contracts--net
Realized loss on:
Investments (2,887,427)
Closed futures contracts (655,075)
Realized gain (loss) on investments
and closed futures contracts--net
(Note 3) (3,542,502)
Net unrealized appreciation
(depreciation) on investments
Beginning of year (908,692)
End of year 2,010,054
Net change in unrealized appreciation
(depreciation) on investments 2,918,746
Net loss on investments and closed
futures contracts (623,756)
Net increase in net assets resulting
from operations $ 2,865,268
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994
<S> <C> <C>
Operations:
Investment income--net $ 3,489,024 $ 2,629,409
Realized gain (loss) on investments and closed futures contracts--net (3,542,502) 260,203
Net change in unrealized appreciation (depreciation) on investments 2,918,746 (2,810,110)
Net increase (decrease) in net assets resulting from operations 2,865,268 79,502
Distributions to shareholders from (Notes 1 and 5):
Investment income--net:
Class A Shares (1,714,136) (1,799,163)
Class B Shares (1,329,520) (559,910)
Class C Shares (445,368) (270,336)
In excess of investment income--net:
Class A Shares (23,117) (109,066)
Class B Shares (196,143) (71,503)
Class C Shares (58,900) (27,275)
Realized gain on investments--net:
Class A Shares 0 (190,387)
Class B Shares 0 (46,226)
Class C shares 0 (23,591)
In excess of realized gain on investments--net:
Class A Shares 0 (20,150)
Class B Shares 0 (48,235)
Class C Shares 0 (25,409)
Total distributions to shareholders (3,767,184) (3,191,251)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 4,586,195 9,860,800
Proceeds from shares sold--Class B Shares 11,181,757 20,840,298
Proceeds from shares sold--Class C Shares 3,274,301 9,480,902
Payment for shares redeemed--Class A Shares (5,294,580) (14,642,422)
Payment for shares redeemed--Class B Shares (2,964,040) (460,192)
Payment for shares redeemed--Class C Shares (3,313,655) (686,320)
Net asset value of shares issued in reinvestment of distributions
from:
Investment income--net and in excess of investment income--net--
Class A Shares 942,252 856,370
Investment income--net and in excess of investment income--net--
Class B Shares 877,275 331,750
Investment income--net and in excess of investment income--net--
Class C Shares 375,859 200,252
Realized gain from investments--net and in excess of realized gain
from investments--net--Class A Shares 0 126,877
Realized gain from investments--net and in excess of realized gain
from investments--net--Class B Shares 0 68,449
Realized gain from investments--net and in excess of realized gain
from investments--net--Class C Shares 0 40,740
Net increase in net assets resulting from capital share transactions 9,665,364 26,017,504
Total increase in net assets 8,763,448 22,905,755
Net assets:
Beginning of year 61,902,779 38,997,024
End of year [Including accumulated distributions in excess of
investment income--net as follows: March 1995--($106,519) and
March 1994--($108,524)] (Note 1) $70,666,227 $ 61,902,779
</TABLE>
See Notes to Financial Statements.
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.6152
Class B Shares
Income Dividends
Tax-exempt
$0.6030
Class C Shares
Income Dividends
Tax-exempt
$0.5938
In January, 1996 complete information on calendar year 1995 distributions
will be forwarded to you to assist in completing your 1995 federal income tax
return.
See Notes to Financial Statements.
<PAGE>
Keystone Texas Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (99.2%)
Bear County, Texas, Health Facilities
Development Corp., Southwest Methodist
Hospital (AMBAC) 6.750% 11/01/2021 $ 50,000 $ 53,527
Brazos County, Texas, Health Facilities
Development Corp.,
St. Joseph's Hospital 6.000 01/01/2013 200,000 182,940
Brazos County, Texas, Higher Education
Authority Incorporated-Student Loan
Revenue, Series A (AMT) 6.500 06/01/2004 250,000 258,942
Brownsville, Texas, Utilities System
Revenue (MBIA) 6.250 09/01/2014 160,000 165,830
Circle C Municipal Utility District #3,
Texas (FGIC) 6.500 11/15/2009 50,000 51,500
Coppell, Texas, Independent School District
(FGIC) 7.700 08/15/2004 40,000 47,168
Harris County, Texas, Toll Road (FGIC) 6.500 08/15/2011 50,000 54,282
Harris County, Texas, Health Facilities,
Memorial Hospital System 7.125 06/01/2015 475,000 491,340
Houston, Texas, Airport Senior Lien (AMT) 8.200 07/01/2017 160,000 176,626
Lower Colorado River Authority 5.375 01/01/2016 345,000 309,344
Matagorda County, Texas, Navigation
District 1, Central Power and Light
Project 6.000 07/01/2028 175,000 165,410
Midland County, Texas, Hospital District
(effective yield 7.95%) (b) 0.000 06/01/2007 160,000 70,386
Puerto Rico Electric Power Authority, Power
Revenue 6.000 07/01/2016 50,000 48,359
Puerto Rico Industrial, Tourist,
Educational, Medical, Environmental
Control Facilities Finance Authority,
Polytechnic University of Puerto Rico
Project 5.700 08/01/2013 150,000 134,103
Puerto Rico Telephone Authority 5.400 01/01/2008 150,000 145,762
Puerto Rico, General Obligation 7.700 07/01/2020 40,000 45,832
San Antonio, Texas, Electric and Gas
Revenue 6.000 02/01/2014 100,000 99,085
San Antonio, Texas, Electric and Gas
Revenue, Series B 6.000 02/01/2014 50,000 49,543
Texas Housing Agency, Single Family
Mortgage Revenue 8.200 03/01/2016 170,000 175,372
Texas Municipal Power Agency (MBIA) 6.100 09/01/2009 130,000 134,889
Texas State Public Finance Authority,
Technical College (MBIA) 6.250 08/01/2009 310,000 325,181
Texas State Public Finance Authority
Building Revenue,
Series A (AMBAC) 5.750 02/01/2015 500,000 486,075
Titus County, Texas, Water District #1,
Fresh Water Supply, Southwestern Electric
Power 8.200 08/01/2011 45,000 51,282
University of Texas, Permanent University
Fund 6.500 07/01/2011 25,000 26,016
University of Texas, University Revenue,
Series B 6.750 08/15/2013 180,000 189,250
Westside Calhoun County, Texas, Navigation
District, Union Carbide Co. 6.500 12/01/2008 50,000 50,000
TOTAL MUNICIPAL BONDS (Cost--$3,941,643) 3,988,044
See Notes to Schedule of Investments. (Continued on next page)
<PAGE>
TEMPORARY TAX-EXEMPT INVESTMENT (0.1%)
Texas Department of Housing and Community
Affairs, Multi-Family Housing Revenue
Refunding Bonds (High Point III
Development) Series 1993A
(Cost--$5,000)(a) 4.050% 02/01/2023 $5,000 $ 5,000
TOTAL INVESTMENTS (Cost--$3,946,643) (c) 3,993,044
OTHER ASSETS AND LIABILITIES--NET (0.7%) 28,558
NET ASSETS (100.0%) $4,021,602
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instrument with periodic demand feature. The
Fund is entitled to full payment of principal and interest upon
surrendering the security to the issuing agent according to the terms of
the demand feature.
(b) Effective yield is the yield at which the bond accretes on an annual
basis until its maturity. All zero coupon bonds are non-callable.
(c) The cost of investments for federal income tax purposes is $3,969,406.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at March 31, 1995 are as follows:
Gross unrealized appreciation $ 85,247
Gross unrealized depreciation (61,609)
Net unrealized appreciation $ 23,638
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
AMT--Subject to Alternative Minimum Tax
FGIC--Federal Guaranty Insurance Co.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
March 2, 1992
(Commencement of
Year Ended March 31, Operations) to
1995 1994 1993 March 31, 1992
<S> <C> <C> <C> <C>
Net asset value beginning of period $10.1300 $10.6400 $10.0300 $10.0000
Income from investment operations
Investment income--net 0.5611 0.5991 0.6176 0.0518
Net gain (loss) on investments and futures
contracts (0.0101) (0.4039) 0.6066 0.0300
Total income from investment operations 0.5510 0.1952 1.2242 0.0818
Less distributions from:
Investment income--net (0.5310) (0.5952) (0.6142) (0.0518)
In excess of realized gain on
investments--net (c) 0 (0.1100) 0 0
Total distributions (0.5310) (0.7052) (0.6142) (0.0518)
Net asset value end of period $10.1500 $10.1300 $10.6400 $10.0300
Total return (d) 5.66% 1.60% 12.51% 0.82%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 0.75% 0.29% 0.68% 0.65%(a)
Investment income--net 5.56% 5.51% 5.79% 5.95%(a)
Portfolio turnover rate 58% 56% 62% 19%
Net assets end of period (thousands) $ 1,635 $ 1,916 $ 2,194 $ 1,063
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 2.57%, 3.48%, 3.84%, and 1.93% (annualized) for the fiscal
years ended March 31, 1995, 1994, 1993, and the period from March 2, 1992
(Commencement of Operations) to March 31, 1992, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net". Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net". For the period March 2,
1992 (Date of Initial Public Offering) to March 31, 1992, distributions
in excess of book basis net income were presented as "Distributions from
paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $10.0800 $10.6600 $10.5300
Income from investment operations
Investment income--net 0.4809 0.5091 0.0822
Net gain (loss) on investments and futures contracts 0.0038 (0.4515) 0.1352
Total income from investment operations 0.4847 0.0576 0.2174
Less distributions from:
Investment income--net (0.4758) (0.4751) (0.0822)
In excess of investment income--net (c) (0.0389) (0.0525) (0.0052)
In excess of realized gain on investments--net 0 (0.1100) 0
Total distributions (0.5147) (0.6376) (0.0874)
Net asset value end of period $10.0500 $10.0800 $10.6600
Total return (d) 5.01% 0.29% 2.06%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.47% 1.50%(a)
Investment income--net 4.80% 4.37% 4.26%(a)
Portfolio turnover rate 58% 56% 62%
Net assets end of period (thousands) $ 2,163 $ 1,890 $ 235
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 3.36%, 4.19%, and 3.76% (annualized) for fiscal years ended
March 31, 1995, 1994 and the period from February 1, 1993 (Date of
Initial Public Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net". Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net". For the period February 1,
1993 (Date of Initial Public Offering) to March 31, 1993, distributions
in excess of book basis net income were presented as "Distributions from
paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995(e) 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $10.0400 $10.6400 $10.5300
Income from investment operations
Investment income--net 0.4701 0.4643 0.0864
Net gain (loss) on investments and futures contracts 0.0261 (0.4386) 0.1100
Total income from investment operations 0.4962 0.0257 0.1964
Less distributions from:
Investment income--net (0.4722) (0.4349) (0.0864)
In excess of investment income--net (c) (0.0340) (0.0808) 0
In excess of realized gain on investments--net 0 (0.1100) 0
Total distributions (0.5062) (0.6257) (0.0864)
Net asset value end of period $10.0300 $10.0400 $10.6400
Total return (d) 5.14% (0.03%) 1.86%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.84% 1.50%(a)
Investment income--net 4.88% 3.78% 5.03%(a)
Portfolio turnover rate 58% 56% 62%
Net assets end of period (thousands) $ 224 $ 813 $ 25
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 3.28%, 4.39%, and 4.15% (annualized) for the fiscal years ended
March 31, 1995, 1994 and for the period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net". Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net". For the period February 1,
1993 (Date of Initial Public Offering) to March 31, 1993, distributions
in excess of book basis net income were presented as "Distributions from
paid-in capital."
(d) Excluding applicable sales charges.
(e) Calculation based on average shares outstanding.
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1995
Assets:
Investments at market value (identified cost--$3,946,643)
(Note 1) $3,993,044
Cash 1,760
Interest receivable 55,915
Due from Investment Adviser (Note 4) 6,978
Unamortized organization expenses (Note 1) 4,099
Prepaid expenses and other assets 115
Total assets 4,061,911
Liabilities (Notes 2, 4 and 5):
Income distributions 17,983
Accrued reimbursable expenses 393
Other accrued expenses 21,933
Total liabilities 40,309
Net assets $4,021,602
Net assets represented by (Note 1):
Paid-in capital $4,285,982
Undistributed investment income--net 21,818
Accumulated realized gains (losses) on investments and
closed futures contracts--net (332,599)
Net unrealized appreciation on investments 46,401
Total net assets $4,021,602
Net asset value per share (Note 2):
Class A Shares ($10.15 on 161,045 shares outstanding) $1,634,823
Class B Shares ($10.05 on 215,314 shares outstanding) 2,162,852
Class C Shares ($10.03 on 22,316 shares outstanding) 223,927
$4,021,602
Offering price per share:
Class A Shares (including sales charge of 4.75%) (Note 2) $ 10.66
Class B Shares $ 10.05
Class C Shares $ 10.03
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended March 31, 1995
<TABLE>
<S> <C> <C>
Investment Income:
Interest $ 291,747
Expenses (Notes 1, 2 and 4):
Management fee $ 25,402
Shareholder services 6,215
Custodian fees 20,266
Accounting 13,870
Auditing 7,886
Legal 9,200
Printing 14,975
Registration fees 11,310
Distribution Plan expenses 26,837
Amortization of organization expenses 2,159
Miscellaneous expenses 1,174
Total expenses 139,294
Less: Reimbursement from Investment Adviser (Note 4) (84,650)
Net expenses 54,644
Investment income--net (Note 1) 237,103
Realized and unrealized gain (loss) on investments and closed futures
contracts--net: (Notes 1 and 3)
Realized loss on:
Investments (289,473)
Closed futures contracts (19,570)
Realized loss on investments and closed futures contracts--net (309,043)
Net unrealized appreciation (depreciation) on investments:
Beginning of year (164,645)
End of year 46,401
Net change in unrealized appreciation (depreciation) on investments 211,046
Net loss on investments and closed futures contracts (97,997)
Net increase in net assets resulting from operations $ 139,106
</TABLE>
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994
<S> <C> <C>
Operations:
Investment income--net $ 237,103 $ 197,103
Realized loss on investments and closed futures contracts--net (309,043) (4,956)
Net change in unrealized appreciation (depreciation) on investments 211,046 (218,646)
Net increase (decrease) in net assets resulting from operations 139,106 (26,499)
Distributions to shareholders from (Notes 1 and 5):
Investment income--net:
Class A Shares (103,988) (123,793)
Class B Shares (99,393) (49,517)
Class C Shares (29,138) (22,411)
In excess of investment income--net:
Class B Shares (8,132) (5,472)
Class C Shares (2,097) (4,165)
In excess of realized gain on investments--net
Class A Shares 0 (22,232)
Class B Shares 0 (15,613)
Class C Shares 0 (8,549)
Total distributions to shareholders (242,748) (251,752)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 258,882 300,604
Proceeds from shares sold--Class B Shares 971,881 1,766,963
Proceeds from shares sold--Class C Shares 137,217 901,208
Payment for shares redeemed--Class A Shares (577,484) (567,582)
Payment for shares redeemed--Class B Shares (744,621) (28,895)
Payment for shares redeemed--Class C Shares (687,214) (79,571)
Net asset value of shares issued in reinvestment of distributions
from:
Investment income--net and in excess of investment income--net--Class
A Shares 64,701 63,221
Investment income--net and in excess of investment income--net--Class
B Shares 67,669 31,641
Investment income--net and in excess of investment income--net--Class
C Shares 15,761 19,608
In excess of realized gain on investments--net--Class A Shares 0 16,293
In excess of realized gain on investments--net--Class B Shares 0 10,991
In excess of realized gain on investments--net--Class C Shares 0 8,325
Net increase (decrease) in net assets resulting from capital share
transactions (493,208) 2,442,806
Total increase (decrease) in net assets (596,850) 2,164,555
Net assets:
Beginning of year 4,618,452 2,453,897
End of year [Including undistributed investment income--net
(accumulated distributions in excess of investment income--net) as
follows: March 1995 $21,818 and March 1994 ($8,181)] (Note 1) $4,021,602 $4,618,452
</TABLE>
See Notes to Financial Statements.
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.5310
Class B Shares
Income Dividends
Tax-exempt
$0.5147
Class C Shares
Income Dividends
Tax-exempt
$0.5062
In January, 1996 complete information on calendar year 1995 distributions
will be forwarded to you to assist in completing your 1995 federal income tax
return.
See Notes to Financial Statements.
<PAGE>
Keystone State Tax Free Fund
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Keystone State Tax Free Fund (formerly Keystone America State Tax Free Fund)
("FUND") was formed as a Massachusetts business trust on September 13, 1990.
Keystone Investment Management Company (formerly Keystone Custodian Funds,
Inc.) ("Keystone") is the Investment Adviser and Manager. The FUND currently
offers shares of five separate series evidencing interests in different
portfolios of securities: the Keystone Florida Tax Free Fund (formerly
Keystone America Florida Tax Free Fund) ("Florida Fund"), which was
established on September 19, 1990 and had no operations prior to December 28,
1990; the Keystone Massachusetts Tax Free Fund (formerly Keystone America
Massachusetts Tax Free Fund) ("Massachusetts Fund"), and the Keystone New
York Insured Tax Free Fund (formerly Keystone America New York Insured Tax
Free Fund) ("New York Fund"), which were established February 21, 1992 and
had no operations prior to February 4, 1994; the Keystone Pennsylvania Tax
Free Fund (formerly Keystone America Pennsylvania Tax Free Fund)
("Pennsylvania Fund"), which was established September 19, 1989 and had no
operations prior to December 27, 1990; and the Keystone Texas Tax Free Fund
(formerly Keystone America Texas Tax Free Fund) ("Texas Fund"), which was
established on February 21, 1992 and had no operations prior to March 2, 1992
(together the "Funds" and each individually a "Fund"). The FUND is registered
under the Investment Company Act of 1940 as an open-end investment company
and each of the Funds is registered as a nondiversified fund.
Each Fund issues Class A, Class B and Class C shares. Class A shares are
sold subject to a maximum sales charge of 4.75% payable at the time of
purchase. Class B shares are sold subject to a contingent deferred sales
charge payable upon redemption within three calendar years after the year of
purchase. Class C shares are sold subject to a contingent deferred sales
charge payable upon redemption within one year of purchase. Class C shares
are available only through dealers who have entered into special distribution
agreements with Keystone Investment Distributors Company (formerly Keystone
Distributors, Inc.) ("KIDC"), the FUND's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of members of current
management. Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned
subsidiary of Keystone, is the FUND's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the FUND, in conformity with generally accepted accounting
principles.
A. Tax-exempt bonds are stated on the basis of valuations provided by a
pricing service, approved by the Board of Trustees, that uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Non-tax-exempt securities for which market
quotations are readily available are valued at the price quoted which, in the
opinion of the Board of Trustees or their representative, most nearly
represents their market value. Short-term investments which are purchased
with maturities of sixty days or less are valued at amortized cost (original
cost as adjusted for amortization of premium or accretion of discount) which
when combined with accrued interest approximates market. Short term
investments maturing in more than sixty days for which market quotations are
readily available are valued at current market value. Short-term investments
maturing in more than sixty days when purchased which are held on the
sixtieth day prior to maturity are valued at amortized cost (market value on
the sixtieth day adjusted for amorti-
<PAGE>
zation of premium or accretion of discount) which when combined with accrued
interest approximates market. All other securities and other assets are
valued at fair value as determined in good faith using methods prescribed by
the Board of Trustees.
Each Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security, financial instrument, or, in the case of a
stock index, cash at a set price on a future date. Upon entering into a
futures contract the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at fiscal year end are marked-to-market and the
resultant net gain or loss is included in the Fund's taxable income. In
addition to market risk, the Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
B. 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. 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 agreements are subject to risks from changes in value based upon
changes in the level of interest rates and other market factors, both before
and after delivery.
C. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis.
D. Each Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, each Fund expects to be relieved of
any federal income tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The tax-exempt interest portion of each dividend is declared uniformly based
on the ratio of each Fund's tax-exempt and taxable income for the entire
year. Each Fund intends to avoid excise tax liability by making the required
distributions under the Internal Revenue Code.
E. Organization expenses are being amortized to operations over a five-year
period on a straight-line basis. In the event any of the initial shares are
redeemed by any holder thereof during the five-year amortization period,
redemption proceeds will be reduced by any unamortized organization expenses
in the same proportion as the number of initial shares being redeemed bears
to the number of initial shares outstanding at the time of redemption.
2. Capital Share Transactions
The Trust agreement authorizes the issuance of an unlimited number of shares
of beneficial interest without par value. Transactions in shares of the FUND
were as follows:
<PAGE>
Keystone State Tax Free Fund
Florida Fund
Class A Shares
Year Ended March 31,
1995 1994
Shares sold 594,097 1,132,680
Shares redeemed (961,330) (766,821)
Shares issued in
reinvestment of
dividends and
distributions 70,513 90,781
Net increase (decrease) (296,720) 456,640
Class B Shares
Year Ended March 31,
1995 1994
Shares sold 3,504,376 1,822,413
Shares redeemed (544,344) (59,616)
Shares issued in
reinvestment of
dividends and
distributions 82,908 26,492
Net increase (decrease) 3,042,940 1,789,289
Class C Shares
Year Ended March 31,
1995 1994
Shares sold 643,062 1,172,529
Shares redeemed (704,324) (105,663)
Shares issued in
reinvestment of
dividends and
distributions 38,331 24,930
Net increase (decrease) (22,931) 1,091,796
Massachusetts Fund
Class A Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 141,360 169,889
Shares redeemed (93,803) (9,554)
Shares issued in
reinvestment of
dividends and
distributions 6,770 241
Net increase (decrease) 54,327 160,576
Class B Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 532,363 198,306
Shares redeemed (69,932) (500)
Shares issued in
reinvestment of
dividends and
distributions 14,043 16
Net increase (decrease) 476,474 197,822
Class C Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 189,623 40,587
Shares redeemed (20,305) (500)
Shares issued in
reinvestment of
dividends and
distributions 6,195 36
Net increase (decrease) 175,513 40,123
<PAGE>
New York Fund
Class A Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 315,837 89,267
Shares redeemed (41,667) (16,300)
Shares issued in
reinvestment of
dividends and
distributions 5,049 0
Net increase (decrease) 279,219 72,967
Class B Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 1,155,373 260,571
Shares redeemed (153,738) (16,358)
Shares issued in
reinvestment of
dividends and
distributions 24,119 4
Net increase (decrease) 1,025,754 244,217
Class C Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 288,523 43,808
Shares redeemed (14,006) (16,400)
Shares issued in
reinvestment of
dividends and
distributions 6,435 0
Net increase (decrease) 280,952 27,408
Pennsylvania Fund
Class A Shares
Year Ended March 31,
1995 1994
Shares sold 422,375 842,721
Shares redeemed (494,154) (1,258,721)
Shares issued in
reinvestment of
dividends and
distributions 87,463 83,694
Net increase (decrease) 15,684 (332,306)
Class B Shares
Year Ended March 31,
1995 1994
Shares sold 1,037,572 1,782,476
Shares redeemed (282,691) (39,183)
Shares issued in
reinvestment of
dividends and
distributions 82,087 33,981
Net increase (decrease) 836,968 1,777,274
Class C Shares
Year Ended March 31,
1995 1994
Shares sold 306,060 808,331
Shares redeemed (312,198) (58,600)
Shares issued in
reinvestment of
dividends and
distributions 34,993 20,350
Net increase (decrease) 28,855 770,081
<PAGE>
Texas Fund
Class A Shares
Year Ended March 31,
1995 1994
Shares sold 25,763 27,776
Shares redeemed (60,316) (52,129)
Shares issued in
reinvestment of
dividends and
distributions 6,476 7,317
Net increase (decrease) (28,077) (17,036)
Class B Shares
Year Ended March 31,
1995 1994
Shares sold 96,577 164,066
Shares redeemed (75,526) (2,615)
Shares issued in
reinvestment of
dividends and
distributions 6,859 3,915
Net increase (decrease) 27,910 165,366
Class C Shares
Year Ended March 31,
1995 1994
Shares sold 14,015 83,240
Shares redeemed (74,258) (7,206)
Shares issued in
reinvestment of
dividends and
distributions 1,584 2,567
Net increase (decrease) (58,659) 78,601
Each Fund bears some of the costs of selling its shares under a
Distribution Plan adopted with respect to its Class A, Class B, and Class C
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
the Distribution Plan, the Fund pays KIDC, the principal underwriter and a
wholly-owned subsidiary of Keystone, amounts which in total may not exceed
the Distribution Plan maximum.
Each Class A Distribution Plan provides for payments which are currently
limited to 0.15% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
each Fund to KIDC under the Class A Distribution Plan are currently used to
pay others such as brokers or dealers, service fees at an annual rate of
0.15% of the average net asset value of the shares sold by such others and
remaining outstanding on the books of the Funds for specified periods.
Each Class B Distribution Plan provides for payments at an annual rate of
0.90% of the average daily net asset value of Class B shares to pay expenses
of the distribution of Class B shares. Amounts paid by each Fund under the
Class B Distribution Plan are currently used to pay others (dealers) (i) a
commission at the time of purchase normally equal to 3.00% of the value of
each share sold; and/or (ii) service fees currently at an annual rate of
0.15% of the average net asset value of shares sold by such others and
remaining outstanding on the books of the Funds for specified periods.
Each Class C Distribution Plan provides for payments at an annual rate of
up to 0.90% of the average daily net asset value of Class C shares to pay
expenses of the distribution of Class C shares. Amounts paid by each Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) (i) a commission at the time of purchase normally equal to 1.00% of
the value of each share sold; and (ii) beginning approximately fifteen months
after purchase a commission at an annual rate of 0.75% (subject to applicable
limitations imposed by the rules of the National Association of Securities
Dealers, Inc. ("NASD")) plus service fees at an annual rate of 0.15% of the
average net asset value of each share sold by such others and
<PAGE>
remaining outstanding on the books of the Funds for specified periods.
Each of the Distribution Plans may be terminated at any time by vote of
the Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any of the
Distribution Plans, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the distribution Plan was in effect.
For the year ended March 31, 1995, the Florida Fund paid KIDC $66,246,
$345,221 and $140,405, the Massachusetts Fund paid KIDC $1,829, $40,387 and
$15,014, the New York Fund paid KIDC $3,025, $70,227, and $15,895, the
Pennsylvania Fund paid KIDC $44,697, $244,404 and $81,781, and the Texas Fund
paid KIDC $2,847, $18,613 and $5,377, respectively, pursuant to each Fund's
Class A, Class B, and Class C Distribution Plans.
Under a Rule of the NASD, the maximum uncollected amounts for which KIDC
may seek payment from the FUND under its Class B Distribution Plans are
$3,196,058, $384,672, $728,940, $1,923,455, and $145,495, respectively, for
the Florida Fund, the Massachusetts Fund, the New York Fund, the Pennsylvania
Fund and the Texas Fund as of March 31, 1995. The maximum uncollected amounts
for which KIDC may seek payment from the FUND under its Class C Distribution
Plans are $1,218,232, $118,845, $176,106, $743,501, and $58,326,
respectively, for the Florida Fund, the Massachusetts Fund, the New York
Fund, the Pennsylvania Fund and the Texas Fund as of March 31, 1995.
3. Securities Transactions
As of March 31, 1995, the Florida Fund, the Massachusetts Fund, the New York
Fund, the Pennsylvania Fund and the Texas Fund had capital loss carryovers
for federal income tax purposes of approximately $2,981,000, $195,000,
$1,000, $1,503,000, and $110,000, respectively, which expire in 2003.
Purchases and sales of investment securities (including proceeds received at
maturity), during the year ended March 31, 1995 were as follows:
Florida Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $153,556,374 $122,377,974
Short-term commercial and
tax-exempt notes 69,395,000 63,760,000
$222,951,374 $186,137,974
Massachusetts Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $11,543,684 $ 5,815,892
Short-term commercial and
tax-exempt notes 7,502,000 7,857,000
$19,045,684 $13,672,892
New York Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $23,006,381 $ 8,408,545
Short-term commercial and
tax-exempt notes 12,760,000 13,260,000
$35,766,381 $21,668,545
Pennsylvania Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $ 71,879,367 $62,540,085
Short-term commercial and
tax-exempt notes 35,440,000 36,455,000
$107,319,367 $98,995,085
<PAGE>
Texas Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $2,584,895 $2,907,532
Short-term commercial and
tax-exempt notes 1,900,000 2,065,000
$4,484,895 $4,972,532
4. Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between Keystone and
the FUND, dated November 29, 1990, Keystone provides investment management
and administrative services to the FUND and its Funds. In return, Keystone is
paid a management fee computed and paid daily. The management fee is
calculated by applying percentage rates, which start at 0.55% and decline, as
net assets increase, to 0.25% per annum, to the net asset value of each Fund.
During the year ended March 31, 1995, the Florida Fund, the Massachusetts
Fund, the New York Fund, the Pennsylvania Fund and the Texas Fund paid or
accrued to Keystone investment management and administrative services fees of
$515,205, $43,636, $63,808, $357,852 and $25,402, respectively, which
represented 0.52%, 0.55%, 0.55%, 0.54%, and 0.55%, respectively, of the
average net assets of the Funds on an annualized basis.
During the year ended March 31, 1995, the Florida Fund, the Massachusetts
Fund, the New York Fund, the Pennsylvania Fund and the Texas Fund paid or
accrued to KII $13,052, $17,498, $17,698, $20,909 and $13,870, respectively,
for certain accounting and printing services and to KIRC $116,367, $15,568,
$25,831, $108,073, and $6,215, respectively, for transfer agent fees.
Keystone has voluntarily agreed to limit all expenses incurred including
management fee of the Class A Shares of the Florida Fund, the Pennsylvania
Fund and the Texas Fund to 0.75% of average daily net assets and has limited
annual expenses of the Class B Shares and Class C Shares to 1.50% of average
daily net asset value.
Keystone voluntarily limited the expenses, including the management fee,
of the Class A Shares of the Massachusetts Fund and the New York Fund to
0.35% until August 15, 1994, after which the expense limitation is being
increased by 0.10% every three months until May 15, 1995 when expenses will
be limited to 0.75% until December 31, 1995. Expenses of Class B Shares and
Class C Shares of those Funds were limited to 1.10% until August 15, 1994,
after which the expense limitations are being similarly increased until May
15, 1995 when expenses will be limited to 1.50% until December 31, 1995.
Keystone will not be required to make such reimbursement to an extent which
would result in a Fund's inability to qualify as a regulated investment
company under the provisions of the Internal Revenue Code. In accordance with
this voluntary expense limitation, Keystone reimbursed the Florida Fund, the
Massachusetts Fund, the New York Fund, the Pennsylvania Fund and the Texas
Fund (i) $89,179, $26,169, $22,366, $91,489 and $35,517, respectively, with
respect to each Fund's Class A Shares, (ii) $68,953, $64,511, $85,602,
$81,415 and $38,490, respectively, with respect to each Fund's Class B
Shares; and (iii) $31,739, $24,181, $18,786, $27,453 and $10,643,
respectively, with respect to each Fund's Class C Shares. Keystone does not
intend to seek repayment of these amounts.
<PAGE>
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the FUND. Officers of Keystone and affiliated Trustees receive no
compensation directly from the FUND. Currently, the Independent Trustees of
the FUND receive no compensation for their services.
5. Distributions to Shareholders
Each Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains, if any, at least
annually. Distributions are determined in accordance with income tax
regulations. Distributions from tax basis net investment income and net
capital gains can exceed book basis net investment income and net capital
gains.
<PAGE>
Keystone State Tax Free Fund
Index to Financial Statements
Page
Keystone Florida Tax Free Fund
Schedule of Investments as of March 31, 1995 18
Financial Highlights--for a share outstanding throughout the period:
Class A shares for each of the years in the four-year period ended
March 31, 1995 and the period from December 28, 1990 to March 31,
1991 21
Class B shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 22
Class C shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 23
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1995 24
Statement of Operations for the year ended March 31, 1995 24
Statements of Changes in Net Assets for each of the years in the two
year period ended March 31, 1995 25
Federal Tax Status (unaudited) 26
Keystone Massachusetts Tax Free Fund
Schedule of Investments as of March 31, 1995 27
Financial Highlights--for a share outstanding throughout the period:
Class A shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 29
Class B shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 30
Class C shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 31
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1995 32
Statement of Operations for the year ended March 31, 1995 32
Statements of Changes in Net Assets for the year ended March 31, 1995
and the period from February 4, 1994 to March 31, 1994 33
Federal Tax Status (Unaudited) 34
Keystone New York Insured Tax Free Fund
Schedule of Investments as of March 31, 1995 35
Financial Highlights--for a share outstanding throughout the period:
Class A shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 37
Class B shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 38
Class C shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 39
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1995 40
Statement of Operations for the year ended March 31, 1995 40
Statements of Changes in Net Assets for the year ended March 31, 1995
and the period from February 4, 1994 to March 31, 1994 41
Federal Tax Status (Unaudited) 42
<PAGE>
Keystone Pennsylvania Tax Free Fund
Schedule of Investments as of March 31, 1995
Financial Highlights--for a share outstanding throughout the period: 43
Class A shares for each of the years in the four-year period ended
March 31, 1995 and the period from December 27, 1990 to March 31,
1991 46
Class B shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 47
Class C shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 48
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1995 49
Statement of Operations for the year ended March 31, 1995 49
Statements of Changes in Net Assets for each of the years in the two
year period ended March 31, 1995 50
Federal Tax Status (Unaudited) 51
Keystone Texas Tax Free Fund
Schedule of Investments as of March 31, 1995 52
Financial Highlights--for a share outstanding throughout the period:
Class A shares for each of the years in the three-year period ended
March 31, 1995 and the period from March 2, 1992 to March 31, 1992 54
Class B shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 55
Class C shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 56
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1995 57
Statement of Operations for the year ended March 31, 1995 57
Statements of Changes in Net Assets for each of the years in the two
year period ended March 31, 1995 58
Federal Tax Status (Unaudited) 59
Notes to Financial Statements 60
Independent Auditors' Report 70
<PAGE>
Keystone State Tax Free Fund
Independent Auditors' Report
The Trustees and Shareholders of
Keystone State Tax Free Fund (formerly Keystone America State Tax Free Fund)
We have audited the financial statements, including the schedules of
investments and the financial highlights for the portfolios of Keystone State
Tax Free Fund ("the Funds") as listed in the accompanying index to financial
statements. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of March 31, 1995 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
portfolios of Keystone State Tax Free Fund as of March 31, 1995, the results
of their operations, the changes in their net assets and the financial
highlights for each of the periods specified in the index to financial
statements in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
May 5, 1995
EXHIBIT 17(d)(3)
Most Recent Annual Report
of
Keystone State Tax Free Fund
Keystone State Tax Free Fund
Seeks generous tax-free income from high quality municipal bonds
Keystone State Tax Free Fund
Dear Shareholder:
We are pleased to report on the positive performance of Keystone State Tax
Free Fund for the twelve-month period which ended March 31, 1995.
Following this letter we have included a performance summary for each
state fund and an interview with Keystone's municipal bond managers,
discussing the market's performance.
The year in review
In 1994, short-term interest rates rose more sharply than they had at any
time in the last five years. This had a significant impact on municipal bond
prices which declined as rates increased. Rates continued to rise throughout
most of the year, but by December the market had begun to stabilize. Since
January 1, 1995 bond prices have continued to advance, paving the way for a
return to performance that we believe should be closer to long-term
historical averages. Municipal bond returns, as represented by the Lehman
Municipal Bond Index, returned 7.46% for your Fund's twelve-month fiscal
period which ended March 31, 1995. The majority of this return was achieved
in the last four months of the period.(1)
The interest rate environment
The first few months of the fiscal year, which began April 1, 1994, were
difficult for all municipal bond investors. The Federal Reserve Bank (the
Fed) increased short-term rates in an effort to slow the growth of the
economy and to control inflation. The markets reacted strongly to the initial
change in the direction of interest rates. This reaction is not uncommon
during expansionary periods. During the twelve-month period, investors began
to adjust to the higher rate environment and price changes became more
moderate. Since the start of the new year, prices have rebounded slightly, an
indication that investors believe the Fed has brought inflation under
control.
Portfolio strategy
During the year, our strategy focused on maintaining tax-free income and
price stability. We selected higher coupon issues in an effort to take
advantage of greater potential income and the price stability they have
historically provided. We also emphasized bonds with maturities in the 15- to
20-year range, which have tended to be more stable than longer-term bonds.
Outlook
We believe the most dramatic interest rate increases are behind us. We
believe this may lead to improved price stability for municipal bonds in
1995. This is supported by our belief that the economy is slowing to a
sustainable, low inflation level. We also expect the decrease in the supply
of municipal bonds, coupled with level or rising demand for these bonds, to
be a positive factor for municipal bonds.
(Continued on next page)
- ------------
(1) The price performance of the Lehman Municipal Bond Index for the four- and
twelve-month periods which ended March 31, 1995.
1
<PAGE>
We believe municipal investors who weathered last year's storm can expect
to see a return to more normal market conditions over the coming year, with
less price fluctuation and attractive levels of income. We will continue to
manage Keystone State Tax Free Funds to seek valuable state and federal
tax-free income from a portfolio of quality municipal obligations.(2) We
appreciate your continued support of Keystone funds. If you have any
questions or comments, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III /s/ George S. Bissell
Albert H. Elfner, III George S. Bissell
Chairman and President Chairman of the Board
Keystone Investments, Inc. Keystone Funds
May 1995
(2) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minium tax (AMT).
Table of Contents Page
Letter from the Chairmen 1
Your Fund's Performance
- --a discussion of Fund performance and strategy
Keystone Florida Tax Free Fund 3
Keystone Massachusetts Tax Free Fund 5
Keystone New York Insured Tax Free Fund 7
Keystone Pennsylvania Tax Free Fund 9
Keystone Texas Tax Free Fund 11
A Discussion With Fund Management
- -- an interview with Keystone's tax-free investment division 13
Schedule of Investments and Financial Statements
Keystone Florida Tax Free Fund 18
Keystone Massachusetts Tax Free Fund 27
Keystone New York Insured Tax Free Fund 35
Keystone Pennsylvania Tax Free Fund 43
Keystone Texas Tax Free Fund 52
Notes to Financial Statements 60
Independent Auditor's Report 70
2
<PAGE>
Keystone Florida Tax Free Fund Your Fund's objective is to earn generous
income, exempt from federal income tax, while preserving capital.(3) In
addition, your Fund seeks to ensure that its shares are exempt from the
Florida intangibles tax. The Fund is managed by Betsy Blacher, vice president
and head of Keystone's municipal bond department.
Performance
Class A shares returned 6.42% for the twelve-month period.
Class B shares returned 5.61% for the twelve-month period.
Class C shares returned 5.61% for the twelve-month period.
Portfolio Strategy
In response to the rising interest rate environment throughout the year, Fund
strategy focused on selecting high quality, higher coupon bonds in an attempt
to take advantage of their income potential. To increase the stability of the
portfolio, we favored bonds with call protection. We shortened the average
maturity from 22.5 years on March 31, 1994 to 19.5 years by March 31, 1995 to
lower our interest rate risk. As of March 31, 1995 the average quality of the
Fund's holdings was AA+, with 40.9% of the bonds rated AAA, the highest
possible rating.
**********************************[PIE CHART]**********************************
Portfolio Quality Summary
as of March 31, 1995
S&P rating(4)
AAA 40.9%
AA 25.8%
BBB 15.2%
Not rated 12.2%
A 5.9%
Average portfolio quality: AA+
(as a percent of net assets)
*******************************************************************************
Economic Environment
Florida's economy continues to diversify beyond tourism to include
international business development, particularly in Miami and Orlando. The
state has been able to attract manufacturing firms due to its low business
costs. The employment situation compares favorably to the national average;
Florida ranks second in the number of jobs generated in 1994. The state's
fiscal position remains strong as well; overall debt levels are moderate and
the general fund balance has posted a healthy surplus for three years in a
row.
Outlook
We believe Florida's long-term outlook is stable. Due to its historical
popularity as a retirement area, Florida continues to have a high
concentration of retirees living on fixed incomes. This has somewhat
cushioned Floridians from the ups and downs of the business cycle.
Tax-Equivalent Yields(5)
Federal Tax Bracket
- ------------- ---------------------------------
28% 31% 36% 39.6%
- ------------- --- --- --- ------
Fund Yield Taxable Equivalent Yield
- ------------- ---------------------------------
4.5% 6.2% 6.5% 7.0% 7.5%
5.0% 6.9% 7.2% 7.8% 8.3%
5.5% 7.6% 8.0% 8.6% 9.1%
- ------------- --- --- --- ------
(3) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
(4) Where Standard & Poor's ratings were not available, we have used ratings
from Moody's Investor Service, Inc., Fitch Investors' Service, Inc., or
ratings assigned by another nationally recognized statistical rating
organization.
(5) The table is based on federal tax brackets. The 28% tax bracket includes
single filers earning $23,350-56,550 and joint filers earning
$39,001-94,250; the 31% bracket includes single filers earning
$56,551-117,950 and joint filers earning $94,251-143,600; the 36% bracket
includes single filers earning $117,951-256,500 and joint filers earning
$143,601-256,500; the 39.6% bracket includes single and joint filers
earning over $256,500. Yields are hypothetical and do not represent the
returns of any particular investment.
3
<PAGE>
***************************[MOUNTAIN CHART]************************************
Growth of an investment in
Keystone Florida Tax Free Fund Class A
In Thousands
Initial Reinvested
12/90 9629 9637
3/91 9687 9860
3/92 9934 10879
3/93 10420 12220
3/94 9801 12343
3/95 9839 13136
A $10,000 investment in Keystone Florida Tax Free Fund
Class A made on December 28, 1990 with all distributions
reinvested was worth $13,136 on March 31, 1995. Past
performance is no guarantee of future results.
*******************************************************************************
Class A shares were introduced on December 28, 1990. Performance is reported
at the current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Performance reflects the
deduction of the contingent deferred sales charge, a maximum of 3%. If you
have not redeemed, the returns under "w/o (without) sales charge" are more
appropriate for the period.
Class C shares were introduced on February 1, 1993. Performance reflects the
return you would have received after holding shares for one year or more and
redeeming after the end of that period.
Twelve-Month Performance as of March 31, 1995
Class A Class B Class C
Total returns* 6.42% 5.61% 5.61%
Net asset value 3/31/94 $10.29 $10.27 $10.28
3/31/95 $10.33 $10.24 $10.26
Dividends $ .591 $ .580 $ .570
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge
(CDSC) if applicable.
Historical Record as of March 31, 1995
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 6.42% 5.61% 5.61%
1-year 1.37% 2.61% 5.61%
3-year 15.00% -- --
Life of Class 31.36% 6.09% 7.96%
Average Annual Returns
1-year w/o sales charge 6.42% 5.61% 5.61%
1-year 1.37% 2.61% 5.61%
3-year 4.77% -- --
Life of Class 6.61% 2.77% 3.60%
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost. Performance
for each class will differ.
You may exchange your shares for another Keystone fund by phone or in writing
for a $10 fee. The exchange fee is waived for individual investors who make
an exchange using Keystone's Automated Response Line (KARL). The Fund
reserves the right to change or terminate the exchange offer.
4
<PAGE>
Keystone Massachusetts Tax Free Fund Your Fund's objective is to earn generous
income, exempt from federal and state income tax, while preserving
capital.(6) The Fund is managed by Daniel R. Rabasco, vice president in
Keystone's municipal bond department.
Performance
Class A shares returned 6.23% for the twelve-month period.
Class B shares returned 5.41% for the twelve-month period.
Class C shares returned 5.20% for the twelve-month period.
Portfolio Strategy
The life of your Fund has coincided with a period of unusual price
fluctuations in the municipal bond market. In response to the rising interest
rate environment throughout the year, Fund strategy focused on selecting high
quality, higher coupon bonds in an attempt to take advantage of their income
potential. To increase the stability of the portfolio, we favored bonds with
call protection. The average maturity of the Fund's holdings was 19.4 years
on March 31, 1995 and the average quality was A, with 20.7% of the bonds
rated AAA, the highest possible rating.
Economic Environment
The Commonwealth's credit trend has been stable. Improved economic conditions
and more conservative fiscal management have produced positive fund bal ances
for the state treasury in each of the past five years. The governor's
proposed 1996 budget contains moderate increases in spending and a
significant surplus is expected for that year. Bond issuance for capital
improvements, including MBTA bonds, is expected to total $6.3 billion over
the next five years.
*************************************[PIE CHART]*******************************
Portfolio Quality Summary
as of March 31, 1995
S&P Rating(7)
A 43.3%
AAA 20.7%
AA 18.1%
Not rated 13.5%
BBB 4.4%
Average portfolio quality: A
(as a percent of net assets)
*******************************************************************************
The Massachusetts unemployment rate has been close to the national average.
Much of the job growth has been in business services such as accounting,
engineering, non-hospital health care and software development. Employment in
defense and computer manufacturing have continued to decrease.
Outlook
Long-term, we believe the highly educated Massachusetts work force should
help in developing new high technology industries. The economy should also
receive a boost from increases in international trade--Massachusetts
currently ranks eleventh in the nation in exports. Public infrastructure
projects, specifically the Central Artery and Boston Harbor cleanup projects,
should also continue to provide job opportunities.
Tax-Equivalent Yields(8)
Federal Tax Bracket
- -------------------------- ------------------------------------------------
28% 31% 36% 39.6%
(combined state & federal) (36.64%) (39.28%) (43.68%) (46.85%)
- -------------------------- ------- ------- ------- ---------
Fund Yield Taxable Equivalent Yield
- -------------------------- ------------------------------------------------
4.5% 7.1 % 7.4 % 8.0 % 8.5 %
5.0% 7.9 % 8.2 % 8.9 % 9.4 %
5.5% 8.7 % 9.1 % 9.8 % 10.3 %
- -------------------------- ------- ------- ------- ---------
(6) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
(7) Where Standard & Poor's ratings were not available, we have used ratings
from Moody's Investor Service, Inc., Fitch Investors' Service, Inc., or
ratings assigned by another nationally recognized statistical rating
organization.
(8) The table is based on federal tax brackets. The 28% bracket includes
single filers earning $23,350-56,550 and joint filers earning
$39,001-94,250; the 31% bracket includes single filers earning
$56,551-117,950 and joint filers earning $94,251-143,600; the 36% bracket
includes single filers earning $117,951-256,500 and joint filers earning
$143,601-256,500; the 39.6% bracket includes single and joint filers
earning over $256,500. Yields are hypothetical and do not represent the
returns of any particular investment.
5
<PAGE>
***************************[MOUNTAIN CHART]************************************
Growth of an investment in
Keystone Massachusetts Tax Free Fund Class A
In Thousands
Initial Reinvested
2/94 9372 9414
3/94 8734 8820
4/94 8696 8825
5/94 8772 8945
6/94 8639 8852
7/94 8772 9033
8/94 8734 9037
9/94 8563 8903
10/94 8315 8689
11/94 8096 8504
12/94 8296 8756
1/95 8525 9040
2/95 8725 9294
3/95 8753 9370
A $10,000 investment in Keystone Massachusetts
Tax Free Fund Class A made on February 4, 1994
with all distributions reinvested was worth $9,370
on March 31, 1995. Past performance is no guarantee
of future results.
*******************************************************************************
Class A, Class B, and Class C shares were introduced on February 4, 1994.
Class A share performance is reported at the current maximum front-end sales
charge of 4.75%.
Class B share performance reflects the deduction of the contingent deferred
sales charge, a maximum of 3%. If you have not redeemed, the returns under
"w/o (without) sales charge" are more appropriate for the period.
Class C share performance reflects the return you would have received after
holding shares for one year or more and redeeming after the end of that
period.
Twelve-Month Performance as of March 31, 1995
Class A Class B Class C
Total returns* 6.23% 5.41% 5.20%
Net asset value 3/31/94 $9.17 $9.19 $9.19
3/31/95 $9.19 $9.15 $9.14
Dividends $.526 $.514 $.506
Capital gains None None None
*Before deduction of front-end or contingent deferred sales charge (CDSC) if
applicable.
Historical Record as of March 31, 1995
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 6.23% 5.41% 5.20%
1-year 1.19% 2.42% 5.20%
Life of Class -6.30% -4.92% -2.39%
Average Annual Returns
1-year w/o sales charge 6.23% 5.41% 5.20%
1-year 1.19% 2.42% 5.20%
Life of Class -5.45% -4.25% -2.06%
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost. Performance
for each class will differ.
You may exchange your shares for another Keystone fund by phone or in writing
for a $10 fee. The exchange fee is waived for individual investors who make
an exchange using Keystone's Automated Response Line (KARL). The Fund
reserves the right to change or terminate the exchange offer.
6
<PAGE>
Keystone New York Insured Tax Free Fund
Your Fund's objective is to earn generous income, exempt from federal, state,
and New York City income tax, while preserving capital.(9) At least 80% of
your Fund's investments will be insured as to timely payment of both
principal and interest. The Fund is managed by Daniel R. Rabasco, vice
president in Keystone's municipal bond department.
Performance
Class A shares returned 7.08% for the twelve-month period.
Class B shares returned 6.28% for the twelve-month period.
Class C shares returned 6.18% for the twelve-month period.
Portfolio Strategy
The life of your Fund has coincided with a period of unusual price
fluctuations in the municipal bond market. In response to the rising interest
rate environment throughout the year, Fund strategy focused on selecting high
quality, higher coupon bonds in an effort to take advantage of their income
potential. To increase the stability of the portfolio, we favored bonds with
call protection. The average maturity of the Fund's holdings was 19.6 years
on March 31, 1995 and the average quality was AA+, with 93.2% of the bonds
rated AAA, the highest possible rating.
**********************************[PIE CHART]**********************************
Portfolio Quality Summary
as of March 31, 1995
S&P rating(10)
AAA 93.2%
AA 3.4%
BBB 3.4%
Average portfolio quality: AA+
(as a percent of net assets)
*******************************************************************************
Economic Environment
New York's economic recovery slowed in 1994, due primarily to a downturn in
the securities industry. After improving moderately throughout 1993,
employment growth virtually ceased after mid-1994. The state's unemployment
rate continued to exceed the national average.
While New York posted general fund operating surpluses in fiscal 1993 and
1994, current projections call for a $259 million shortfall in fiscal 1995
and a deficit of $5.0 billion for 1996. The primary components of the 1996
deficit are revenue and expenditure imbalances. The governor's budget
proposes to eliminate the projected gap through social welfare cost
containment, state agency restructuring, freezes in local aid and various
revenue increases.
Outlook
Given the weakness of the state's budget, we believe it is unlikely that the
governor's full tax cut plan will be approved, although a significant portion
of it may pass. Any tax cut package would add further stress to the budget.
Under these circumstances, we believe that your Fund's emphasis on insured
bonds should provide additional protection and stability.
Tax-Equivalent Yields
Federal Tax Bracket(11)
- ------------------- ------------------------------------------------
28% 31% 36% 39.6%
(combined city,
state & federal) (36.12%) (38.78%) (43.22%) (46.41%)
- ------------------- ------- ------- ------- ---------
Fund Yield Taxable Equivalent Yield
- ------------------- ------------------------------------------------
4.5% 7.0% 7.3% 7.9% 8.4%
5.0% 7.8% 8.2% 8.8% 9.3%
5.5% 8.6% 9.0% 9.7% 10.3%
- ------------------- ------- ------- ------- ---------
(9) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
(10) Where Standard & Poor's ratings were not available, we have used ratings
from Moody's Investor Service, Inc., Fitch Investors' Service, Inc., or
ratings assigned by another naionally recognized statistical rating
organization.
(11) The table is based on federal tax brackets. The 28% bracket includes
single filers earning $23,350-56,550 and joint filers earning
$39,001-94,250; the 31% bracket includes single filers earning
$56,551-117,950 and joint filers earning $94,251-143,600; the 36%
bracket includes single filers earning $117,951-256,500 and joint filers
earning $143,601-256,500; the 39.6% bracket includes single and joint
filers earning over $256,500. Yields are hypothetical and do not
represent the returns of any particular investment.
7
<PAGE>
***************************[MOUNTAIN CHART]************************************
Growth of an investment in
Keystone New York Insured Tax Free Fund Class A
In Thousands
Initial Reinvested
2/94 9363 9404
3/94 8877 8962
4/94 8934 9062
5/94 9010 9182
6/94 8887 9098
7/94 9058 9316
8/94 8991 9290
9/94 8763 9097
10/94 8544 8912
11/94 8267 8666
12/94 8506 8957
1/95 8734 9239
2/95 8944 9502
3/95 8991 9597
A $10,000 investment in Keystone New York Insured
Tax Free Fund Class A made on February 4, 1994 with
all distributions reinvested was worth $9,597 on
March 31, 1995. Past performance is no guarantee
of future results.
*******************************************************************************
Twelve-Month Performance as of March 31, 1995
Class A Class B Class C
Total returns* 7.08% 6.28% 6.18%
Net asset value 3/31/94 $9.32 $9.32 $9.31
3/31/95 $9.44 $9.38 $9.37
Dividends $.515 $.502 $.494
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge
(CDSC) if applicable.
Historical Record as of March 31, 1995
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 7.08% 6.28% 6.18%
1-year 1.99% 3.28% 6.18%
Life of Class -4.03% -2.81% -0.21%
Average Annual Returns
1-year w/o sales charge 7.08% 6.28% 6.18%
1-year 1.99% 3.28% 6.18%
Life of Class -3.48% -2.43% -0.18%
Class A, Class B, and Class C shares were introduced on February 4, 1994.
Class A share performance is reported at the current maximum front-end
sales charge of 4.75%.
Class B share performance reflects the deduction of the contingent
deferred sales charge, a maximum of 3%. If you have not redeemed, the returns
under "w/o (without) sales charge" are more appropriate for the period.
Class C share performance reflects the return you would have received
after holding shares for one year or more and redeeming after the end of that
period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
8
<PAGE>
Keystone Pennsylvania Tax Free Fund
Your Fund's objective is to earn generous income, exempt from federal, state,
and city income tax, while preserving capital.(12) In addition, your Fund
seeks to ensure that its shares are exempt from Pennsylvania's personal
property taxes. The Fund is managed by Daniel R. Rabasco, vice president in
Keystone's municipal bond department.
Performance
Class A shares returned 4.91% for the twelve-month period.
Class B shares returned 4.15% for the twelve-month period.
Class C shares returned 4.05% for the twelve-month period.
Portfolio Strategy
In response to the rising interest rate environment throughout the year, Fund
strategy focused on selecting high quality, higher coupon bonds in an attempt
to take advantage of their income potential. To increase the stability of the
portfolio, we favored bonds with call protection. We shortened the average
maturity from 22.5 years on March 31, 1994 to 20.8 years by March 31, 1995 to
lower our interest rate risk. As of March 31, 1995, the average quality of
the Fund's holdings was A+, with 43.5% of the bonds rated AAA, the highest
possible rating.
**********************************[PIE CHART]**********************************
Portfolio Quality Summary
as of March 31, 1995
S&P Rating
AAA 43.5%
BBB 29.6%
AA 14.1%
A 7.0%
Not rated 5.8%
Average portfolio quality: A+
(as a percent of net assets)
*******************************************************************************
Economic Environment
Over the past ten years, Pennsylvania has succeeded in diversifying its
economy to offset losses in manufacturing and mining. Pittsburgh and
Philadelphia, which account for about half of the Commonwealth's population,
have increased their roles as trade, financial and medical centers. The
Pittsburgh area has also benefited from growth in the high technology sector.
Pennsylvania's large agricultural base adds further breadth to the economy.
Pennsylvania has posted positive general fund balances for the past three
years through conservative fiscal management. Although the new governor
called for significant tax cuts during his campaign, the 1996 budget proposes
only modest cuts, to be funded primarily through reductions in Medicaid
spending.
Outlook
In the long term, Pennsylvania could become an attractive lower-cost
environment for industry. The Commonwealth's highly educated work force,
strong distribution network and ample natural resources all are assets. We
expect Pennsylvania's conservative and consistent fiscal policies to continue
to be favorable to municipal bond investors.
Tax-Equivalent Yields
Federal Tax Bracket(13)
- ------------- ----------------------------------------
28% 31% 36% 39.6%
(combined
state
& federal) (30.02%) (32.93%) (37.79%) (41.29%)
- ------------- ----- ----- ----- -------
Fund Yield Taxable Equivalent Yield
- ------------- ----------------------------------------
4.5% 6.4% 6.7% 7.2% 7.7%
5.0% 7.1% 7.5% 8.0% 8.5%
5.5% 7.8% 8.2% 8.8% 9.4%
- ------------- ----- ----- ----- -------
(12) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
(13) The table is based on federal tax brackets. The 28% bracket includes
single filers earning $23,350-56,550 and joint filers earning
$39,001-94,250; the 31% bracket includes single filers earning
$56,551-117,950 and joint filers earning $94,251-143,600; the 36%
bracket includes single filers earning $117,951-256,500 and joint filers
earning $143,601-256,500; the 39.6% bracket includes single and joint
filers earning over $256,500. Yields are hypothetical and do not
represent the returns of any particular investment.
9
<PAGE>
***************************[MOUNTAIN CHART]************************************
Growth of an investment in
Keystone Pennsylvania Tax Free Fund Class A
In Thousands
Initial Reinvested
12/90 9715 9723
3/91 9763 9941
3/92 10201 11141
3/93 10877 12622
3/94 10487 12948
3/95 10391 13584
A $10,000 investment in Keystone
Pennsylvania Tax Free Fund Class A
made on December 27, 1990 with all
distributions reinvested was worth
$13,584 on March 31, 1995. Past
performance is no guarantee of future
results.
*******************************************************************************
Twelve-Month Performance as of March 31, 1995
Class A Class B Class C
Total returns* 4.91% 4.15% 4.05%
Net asset value 3/31/94 $11.01 $10.98 $11.00
3/31/95 $10.91 $10.81 $10.83
Dividends $ .615 $ .603 $ .594
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge
(CDSC) if applicable.
Historical Record as of March 31, 1995
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 4.91% 4.15% 4.05%
1-year -0.08% 1.20% 4.05%
3-year 16.13% -- --
Life of Class 35.84% 6.98% 8.88%
Average Annual Returns
1-year w/o sales charge 4.91% 4.15% 4.05%
1-year -0.08% 1.20% 4.05%
3-year 5.11% -- --
Life of Class 7.45% 3.16% 4.00%
Class A shares were introduced on December 27, 1990. Performance is reported
at the current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Performance reflects the
deduction of the contingent deferred sales charge, a maximum of 3%. If you
have not redeemed, the returns under "w/o (without) sales charge" are more
appropriate for the period.
Class C shares were introduced on February 1, 1993. Performance reflects the
return you would have received after holding shares for one year or more and
redeeming after the end of that period.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost. Performance
for each class will differ.
You may exchange your shares for another Keystone fund by phone or in writing
for a $10 fee. The exchange fee is waived for individual investors who make
an exchange using Keystone's Automated Response Line (KARL). The Fund
reserves the right to change or terminate the exchange offer.
10
<PAGE>
Keystone Texas Tax Free Fund
Your Fund's objective is to earn generous income, exempt from federal income
tax, while preserving capital.(14) Your Fund seeks to achieve its objective
by investing primarily in Texas municipal securities. The Fund is managed by
Daniel R. Rabasco, vice president in Keystone's municipal bond department.
Performance
Class A shares returned 5.66% for the twelve-month period.
Class B shares returned 5.01% for the twelve-month period.
Class C shares returned 5.14% for the twelve-month period.
Portfolio Strategy
In response to the rising interest rate environment throughout the year, Fund
strategy focused on selecting high quality, higher coupon bonds in an attempt
to take advantage of their income potential. To increase the stability of the
portfolio, we favored bonds with call protection. We shortened the average
maturity from 22.5 years on March 31, 1994 to 18.1 years by March 31, 1995 to
lower our interest rate risk. As of March 31, 1995 the average quality of the
Fund's holdings was AA-, with 34.1% of the bonds rated AAA, the highest
possible rating.
**********************************[PIE CHART]**********************************
Portfolio Quality Summary
as of March 31, 1995
S&P Rating(15)
A 44.8%
AAA 34.1%
AA 14.7%
BBB 6.4%
Average portfolio quality: AA-
(as a percent of net assets)
*******************************************************************************
Economic Environment
The Texas economy has performed better than the national economy since 1989.
The state has had a record of strong economic growth and financial
performance. The Lone Star state has also continued to diversify from its
reliance on the energy industry and job growth has been steady since
September 1990.
Continued improvement in the economy has produced strong revenue growth in
the face of rising expenditures. Texas finished fiscal year 1994 with a
general fund surplus of approximately $2.2 billion, and has ended each
of the past six years with significant surpluses.
Outlook
We believe Texas should continue to enjoy strong economic performance because
of its growing high tech sector and its role as a low cost alternative for
business. The state also benefits from its role as a transportation and
distribution center due to its central US location. While rising costs for
Medicaid, education and prison facilities present future fiscal challenges,
we believe the state's strong economic growth combined with its prudent
fiscal management should enable it to maintain its record of strong fiscal
performance.
Tax-Equivalent Yields
Federal Tax Bracket(16)
- ------------- ---------------------------------
28% 31% 36% 39.6%
Tax Free
Yield Taxable Equivalent Yield
- ------------- ---------------------------------
4.5% 6.2% 6.5% 7.0% 7.5%
5.0% 6.9% 7.2% 7.8% 8.3%
5.5% 7.6% 8.0% 8.6% 9.1%
- ------------- --- --- --- ------
(14) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
(15) Where Standard & Poor's ratings were not available, we have used ratings
from Moody's Investor Service, Inc., Fitch Investors' Service, Inc., or
ratings assigned by another nationally recognized statistical rating
organization.
(16) The table is based on federal tax brackets. The 28% bracket includes
single filers earning $23,350-$56,550 and joint filers earning
$39,001-$94,250; the 31% bracket includes single filers earning
$56,551-117,950 and joint filers earning $94,251-143,600; the 36%
bracket includes single filers earning $117,951-256,500 and joint filers
earning $143,601-256,500; the 39.6% bracket includes single and joint
filers earning over $256,500. Yields are hypothetical and do not
represent the returns of any particular investment.
11
<PAGE>
***************************[MOUNTAIN CHART]************************************
Growth of an investment in
Keystone Texas Tax Free Fund Class A
In Thousands
Initial Reinvested
3/92 9553 9603
3/93 10134 10804
3/94 9649 10977
3/95 9668 11599
A $10,000 investment in Keystone Texas
Tax Free Fund Class A made on March 1, 1992
with all distributions reinvested was worth
$11,599 on March 31, 1995. Past performance
is no guarantee of future results.
*******************************************************************************
Twelve-Month Performance as of March 31, 1995
Class A Class B Class C
Total returns* 5.66% 5.01% 5.14%
Net asset value 3/31/94 $10.13 $10.08 $10.04
3/31/95 $10.15 $10.05 $10.03
Dividends $ .531 $ .515 $ .506
Capital gains None None None
* Before deduction of front-end or contingent deferred sales charge
(CDSC) if applicable.
Historical Record as of March 31, 1995
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 5.66% 5.01% 5.14%
1-year 0.64% 2.02% 5.14%
3-year 15.05% -- --
Life of Class 15.99% 5.56% 7.06%
Average Annual Returns
1-year w/o sales charge 5.66% 5.01% 5.14%
1-year 0.64% 2.02% 5.14%
3-year 4.78% -- --
Life of Class 4.93% 2.53% 3.20%
Class A shares were introduced on March 2, 1992. Performance is reported at
the current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Performance reflects the
deduction of the contingent deferred sales charge, a maximum of 3%. If you
have not redeemed, the returns under "w/o (without) sales charge" are more
appropriate for the period.
Class C shares were introduced on February 1, 1993. Performance reflects the
return you would have received after holding shares for one year or more and
redeeming after the end of that period.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost. Performance
for each class will differ.
You may exchange your shares for another Keystone fund by phone or in writing
for a $10 fee. The exchange fee is waived for individual investors who make
an exchange using Keystone's Automated Response Line (KARL). The Fund
reserves the right to change or terminate the exchange offer.
12
<PAGE>
A Discussion With
Your Fund's Management
The Keystone State Tax Free Funds are managed by Keystone's
municipal bond team, which includes portfolio managers Betsy Blacher
and Daniel R. Rabasco. The team is comprised of six investment professionals
who are dedicated to researching, analyzing and evaluating
municipal bonds for each fund. We asked them several questions
about the market's recent performance. Their responses follow.
Q What do Keystone State Tax Free Funds offer investors?
A The Funds are designed for tax-sensitive investors. Each portfolio seeks
consistent, attractive income that is exempt from federal income and state
taxes as applicable.(17) In states that tax personal property or intangible
assets (Florida and Pennsylvania), we also seek tax-exempt status. The
Funds offer professional management and diversification from a portfolio of
quality municipal bonds. We manage each state fund with careful attention
to credit quality and financial stability.
Q How did municipal bonds perform over the past year?
A Municipal bonds had their worst performance in over five years. The Federal
Reserve Bank's program of raising short-term interest rates to control
inflation caused municipal bond yields to rise and prices to fall for most
of 1994. But while it was a difficult year for investors, it was also a
textbook example of the value of investing for the long term. One year
after the rate increases began, rates have finally leveled off and
municipal bond prices have recovered significantly. Price appreciation
since the first day of 1995 has made up for more than half of the declines
experienced in 1994.
Q What was your investment strategy during the year?
A When interest rates were rising, we generally shortened the maturity of the
Funds' holdings to minimize price volatility. We focused on high quality
bonds with higher coupons to increase tax-free income, and kept more cash
on hand. While this strategy did not prevent price declines, it helped
reduce share price fluctuations.
Throughout the year we emphasized "non-callable" bonds--bonds which cannot
be called back by their issuers and repaid early. This tends to increase
portfolio stability because we can count on a steady stream of income.
Toward the end of the fiscal year, we lengthened maturities slightly, in an
effort to increase return potential. We also reduced our cash position
during the second half of the period and became more fully invested again.
Q What is your outlook for the municipal bond market?
A While we believe the worst effects of rising rates are behind us, we are
still cautious in the short-term. We believe there may be brief periods of
declining bond prices as the economy settles to a level of sustainable, low
inflation growth. We will most likely use these periods as buying
opportunities, because we also believe the long-term outlook for municipal
bonds is positive. We expect the combination of higher yields and
relatively low inflation should continue to provide investors with very
attractive after-tax returns.
Q How are supply and demand?
A The supply of new municipal bonds has been shrinking. We expect this to
continue because a large number of bonds will likely be called and redeemed
this year. Demand has remained strong for municipal
- -------------
(17) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
13
<PAGE>
*******************************[BAR CHART]*************************************
Decline in Supply Since 1993
Long-term municipal bonds
In billions
1990 128
1991 174
1992 235
1993 292
1994 164
1995 125
Source: Bond Buyer, January 30, 1995, except 1995 - Keystone estimate
The supply of municipal bond new issues peaked in 1993, and
is expected to decline for 1995.
*******************************************************************************
bonds as investors are finding them one of the few remaining tax shelters.
We think these factors should provide support for municipal bond prices in
1995.
Q What types of bonds do you favor in today's environment?
A We are extremely selective about fund holdings. We prefer bonds rated A or
better. We maintain core positions of relatively high coupon bonds to
generate strong income streams. Our current sector emphasis is on quality
essential services and general obligation bonds--sectors that we believe
should do well in a slowing economy. We always evaluate how a potential
holding will fit with the existing composition of each portfolio, and
strive to build portfolios that are diversified across industry sectors and
maturities.
Q Is this a good time for investors to buy tax free funds?
A Yes, we believe it is. For tax-sensitive investors, municipal bond funds
are one of the few remaining investments for tax-free income. While it is
impossible to know how the market will perform, share prices remain at
attractive levels, and this may be a smart time to consider adding to
tax-exempt holdings. Of course, there is always risk associated with
investing, but we think the portfolios of Keystone State Tax Free Fund will
continue to offer investors a diversified, professionally managed
opportunity for income that is exempt from federal and state (and city)
taxes as applicable.(18)
[diamond]
This column is intended to answer common
shareholder questions about your Fund. If you have a
question you would like answered, please write to:
Manager, Shareholder Communications, Keystone Distributors Inc.,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
- ------------
(18) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
14
<PAGE>
Your Fund's Performance
**********************************[LINE CHART]*********************************
Comparison of change in value of a $10,000 investment
in Keystone Florida Tax Free Fund Class A, the
Lehman Municipal Bond Index and the Consumer Price Index.
In Thousands December 28, 1990 through March 31, 1995
Average Annual Total Return
1 Year Life of Class
Class A 1.37% 6.61%
Class B 2.61% 2.77%
Class C 5.61% 3.60%
Class A LMBI CPI
3/91 9860 10226 10090
6/91 10085 10444 10164
9/91 10503 10850 10254
12/91 10890 11215 10306
3/92 10879 11248 10411
6/92 11327 11675 10478
9/92 11614 11985 10560
12/92 11842 12203 10605
3/93 12220 12656 10732
6/93 12682 13070 10792
9/93 13139 13512 10844
12/93 13291 13701 10897
3/94 12343 12949 11001
6/94 12414 13096 11061
9/94 12461 13186 11166
12/94 12250 12997 11188
3/95 13136 13916 11315
Past performance is no guarantee of future results.
The Lehman Municipal Bond Index and the Consumer
Price Index are from December 31, 1990.
*******************************************************************************
*******************************[LINE CHART]************************************
Comparison of change in value of a $10,000
investment in Keystone Massachusetts
Tax Free Fund and the Lehman Municipal Bond Index.
In Thousands February 4, 1994 through March 31, 1995
Average Annual Total Return
1 Year Life of Class
Class A 1.19% -5.45%
Class B 2.42% -4.25%
Class C 5.20% -2.06%
Class A Class B Class C LMBI
2/94 9414 9884 9883 9741
3/94 8820 9280 9279 9345
4/94 8825 9275 9272 9424
5/94 8945 9401 9398 9506
6/94 8852 9294 9290 9451
7/94 9033 9483 9478 9624
8/94 9037 9478 9472 9657
9/94 8903 9326 9309 9515
10/94 8689 9102 9084 9346
11/94 8504 8908 8889 9177
12/94 8756 9169 9150 9379
1/95 9040 9453 9432 9647
2/95 9294 9717 9696 9928
3/95 9370 9508 9761 10042
Past performance is no guarantee of future results.
The Lehman Municipal Bond Index is from January 31, 1994.
*******************************************************************************
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Your Keystone State Tax Free Fund
Your Fund seeks high current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds. In addition,
each Fund also seeks to provide a maximum level of income that is exempt from
state and local income or personal property taxes, as applicable. Returns are
quoted after deducting front-end or contingent deferred sales charges (if
applicable), fund expenses, and transaction costs. The return also includes
reinvestment of all distributions.
2. Lehman Municipal Bond Index (LMBI)
The LMBI is a broad-based, unmanaged market index of securities issued by
state and local governments. It represents the price change and coupon income
of several thousand securities with various maturities and qualities.
Securities are selected and compiled by Lehman Brothers, Inc. according to
criteria that may be unrelated to your Fund's investment objective. The index
does not include transaction costs associated with buying and selling
securities, and does not hold cash to meet redemptions. It would be difficult
for most individual investors to duplicate this index.
15
<PAGE>
**********************************[LINE CHART]*********************************
Comparison of change in value of a $10,000
investment in Keystone New York Insured
Tax Free Fund and the Lehman Municipal
Bond Index.
In Thousands February 3, 1994 through March 31, 1995
Average Annual Total Return
1 Year Life of Class
Class A 1.99% -3.48%
Class B 3.28% -2.43%
Class C 6.18% -0.18%
Class A Class B Class C LMBI
2/94 9404 9873 9873 9741
3/94 8962 9409 9398 9345
4/94 9062 9504 9491 9424
5/94 9182 9630 9616 9506
6/94 9098 9532 9517 9451
7/94 9316 9761 9745 9624
8/94 9290 9723 9707 9657
9/94 9097 9510 9503 9515
10/94 8912 9315 9298 9346
11/94 8666 9058 9040 9177
12/94 8957 9349 9330 9379
1/95 9239 9642 9632 9647
2/95 9502 9904 9894 9928
3/95 9597 9719 9979 10042
Past performance is no guarantee of future
results. The Lehman Municipal Bond Index
is from January 31, 1994.
*******************************************************************************
**********************************[LINE CHART]*********************************
Comparison of change in value of a $10,000
investment in Keystone Pennsylvania Tax Free
Fund Class A, the Lehman Municipal Bond Index
and the Consumer Price Index.
In Thousands December 27, 1990 through March 31, 1995
Average Annual Total Return
1 Year Life of Class
Class A -0.08% 7.45%
Class B 1.20% 3.16%
Class C 4.05% 4.00%
Class A LMBI CPI
12/90 9723 10000 10000
3/91 9941 10226 10090
6/91 10178 10444 10164
9/91 10652 10850 10254
12/91 11073 11215 10306
3/92 11141 11248 10411
6/92 11634 11675 10478
9/92 11849 11985 10560
12/92 12099 12203 10605
3/93 12622 12656 10732
6/93 13109 13070 10792
9/93 13646 13512 10844
12/93 13824 13701 10897
3/94 12948 12949 11001
6/94 13025 13096 11061
9/94 13078 13186 11166
12/94 12684 12997 11188
3/95 13584 13916 11315
Past performance is no guarantee of future results.
The Lehman Municipal Bond Index and the
Consumer Price Index are from December 31, 1990.
*******************************************************************************
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the US
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help
you evaluate fund performance in conjunction with the other important
financial considerations such as safety, stability and consistency.
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
16
<PAGE>
**********************************[LINE CHART]*********************************
Comparison of change in value of a $10,000
investment in Keystone Texas Tax Free Fund
Class A, the Lehman Municipal Bond Index
and the Consumer Price Index.
In Thousands March 1, 1992 through March 31, 1995
Average Annual Total Return
1 Year Life of Class
Class A 0.64% 4.93%
Class B 2.02% 2.53%
Class C 5.14% 3.20%
Class A LMBI CPI
3/92 9603 10004 10050
6/92 9985 10384 10115
9/92 10263 10659 10195
12/92 10474 10853 10238
3/93 10804 11256 10361
6/93 11181 11624 10418
9/93 11631 12017 10469
12/93 11745 12186 10519
3/94 10977 11517 10620
6/94 11063 11648 10678
9/94 11160 11727 10779
12/94 10863 11559 10801
3/95 11599 12376 10924
Past performance is no guarantee of future
results. The Lehman Municipal Bond Index
and the Consumer Price Index are from
February 28, 1992.
*******************************************************************************
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
17
<PAGE>
Keystone Florida Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (99.8%)
Bay County, Florida, Hospital Systems
Revenue Refunding, Bay Medical Center
Project 8.000% 10/01/2019 $2,500,000 $2,630,175
Brevard County, Florida, Health Facilities
Authority Revenue Refunding, Wuesthoff
Memorial Hospital, (MBIA) 7.200 04/01/2013 3,000,000 3,221,010
Broward County, Florida, Collateralized
Home Mortgage 7.125 03/01/2017 195,000 202,664
Broward County, Florida, Resource
Recovery, South Project 7.950 12/01/2008 2,210,000 2,391,419
Broward County, Florida, Unlimited
Refunding Bonds 5.000 01/01/2010 3,000,000 2,738,160
Broward County, Florida, Water & Sewer
Utility Revenue (AMBAC) 5.000 10/01/2018 1,600,000 1,392,400
Charlotte County, Florida, Utility Revenue
(FGIC) 6.750 10/01/2013 1,000,000 1,075,830
City of Miami, Florida, Health Facilities
Authority, Mercy Hospital (AMBAC) 6.750 08/01/2020 350,000 386,911
City of Tarpon Springs Health Facilities
Authority, Florida, Hospital Refunding,
Helen Ellis Hospital 7.625 05/01/2021 1,000,000 1,028,010
City of Tarpon Springs Health Facilities
Authority, Florida, Hospital Refunding,
Tarpon Springs Hospital Foundation, Inc. 8.750 05/01/2012 500,000 529,985
Commonwealth of Puerto Rico, Highway
Authority, Series Q 7.750 07/01/2010 125,000 142,884
Dade County, Florida, Educational
Facilities Authority Revenue (St. Thomas
University) 6.000 01/01/2010 2,000,000 1,962,780
Dade County, Florida, Housing Finance
Agency, Single Family Mortgage 7.000 03/01/2024 185,000 190,626
Dade County, Florida, School District,
General Obligation 7.375 07/01/2008 40,000 44,391
Dade County, Florida, Water & Sewer
Systems Revenue Refunding, Series 1993
(FGIC) 5.000 10/01/2013 6,530,000 5,818,426
Duval County, Florida, Single Family
Mortgage Refunding (FGIC) 7.300 07/01/2011 90,000 95,426
Escambia County, Florida, Pollution
Control, Champion International Corp.
Project 6.900 08/01/2022 5,000,000 5,085,150
Escambia County, Florida, Single Family
Mortgage Revenue 6.950 10/01/2027 1,500,000 1,538,610
Florida Division Bond Finance Department,
General Service, Department of
Environmental Preservation (AMBAC) 5.750 07/01/2011 3,000,000 2,980,290
Florida Housing Finance Agency, Home
Ownership Mortgage 7.500 09/01/2014 190,000 201,985
Florida Housing Finance Agency, Home
Ownership Mortgage 8.000 12/01/2020 820,000 875,998
Florida State Board of Education, Capital
Outlay Refunding, Public Education,
Series A 5.000 06/01/2009 3,000,000 2,821,710
Florida State Board of Education Capital
Outlay Refunding, Public Education,
Series D 5.000 06/01/2015 1,000,000 887,990
Florida State Department of
Transportation, Turnpike Revenue Bonds
(FGIC) 5.000 07/01/2013 1,000,000 891,760
Florida State Department of
Transportation, Turnpike Revenue Bonds
(FGIC) 5.000 07/01/2019 2,890,000 2,512,768
Florida State Department of
Transportation, Turnpike Revenue Bonds,
Series 1991A (AMBAC) 7.125 07/01/2018 125,000 140,541
See Notes to Schedule of Investments.
18
<PAGE>
MUNICIPAL BONDS (continued)
Gainesville, Florida, Utilities System
Revenue, Series B 7.500% 10/01/2008 $3,435,000 $4,049,831
Gainesville, Florida, Utilities System
Revenue, Series B 7.500 10/01/2009 3,695,000 4,372,478
Hillsborough County, Florida, Hospital
Authority, Tampa General Hospital
Project (FSA) 6.375 10/01/2013 3,550,000 3,622,704
Hollywood, Florida, Water and Sewer System
Revenue (FGIC) 6.875 10/01/2021 535,000 596,150
Indian River County, Florida, Water and
Sewer Systems Revenue (FGIC) 6.500 05/01/2016 400,000 435,876
Jacksonville, Florida, Health Facilities
Authority, St. Luke's Hospital
Association 7.125 11/15/2020 3,000,000 3,179,250
Jacksonville, Florida, Hospital Authority,
Baptist Medical Center Project, Series A
(MBIA) 7.300 06/01/2019 350,000 374,297
Lee County, Florida, School Board,
Certificates of Participation, Series A
(FSA) 7.750 08/01/2005 1,500,000 1,692,990
Lee County, Florida, Transportation
Facilities Revenue (AMBAC) 8.250 10/01/2017 45,000 46,969
Miami, Florida, Health Facilities
Authority, Health Facilities Revenue,
Mercy Hospital, Series A (AMBAC) 5.125 08/15/2020 1,700,000 1,483,250
Miramar, Florida, Wastewater Improvement
Assessment Revenue (FGIC) 6.750 10/01/2016 1,000,000 1,070,950
North Springs Improvement District,
Florida, Water and Sewer Revenue, Series
B (MBIA) 6.500 12/01/2016 1,335,000 1,401,710
Okaloosa County, Florida, Gas District,
Refunding and Improvement (MBIA) 6.850 10/01/2014 1,000,000 1,088,430
Orange County, Florida, Housing Finance
Authority, GNMA Collateralized Mortgage,
Series B (AMT) 8.100 11/01/2021 3,695,000 3,881,745
Orange County, Florida, Tourist
Development Tax Revenue, Series B (MBIA) 6.000 10/01/2024 2,500,000 2,469,550
Orlando, Florida, Utilities Commission,
Water and Electric 6.000 10/01/2010 4,000,000 4,084,160
Orlando-Orange County, Florida, Expressway
Authority (FGIC) 8.250 07/01/2015 40,000 50,963
Palm Beach County, Florida, General
Obligation 6.500 07/01/2010 1,880,000 2,011,318
Palm Beach County, Florida, Health
Facilities Authority, Good Samaritan
Health Systems 6.300 10/01/2022 1,000,000 983,350
Palm Beach County, Florida, Solid Waste
Authority Revenue, Series 1984 8.750 07/01/2010 45,000 49,778
Palm Beach County, Florida, Solid Waste
Industrial Development, Okeelanta Power
Project (AMT) 6.700 02/15/2015 5,000,000 4,735,000
Palm Beach County, Florida, Solid Waste
Industrial Development, Okeelanta Power
Project (AMT) 6.850 02/15/2021 6,000,000 5,719,140
Puerto Rico Electric Power Authority 6.000 07/01/2010 500,000 495,870
Puerto Rico Electric Power Authority 7.000 07/01/2011 200,000 213,628
Puerto Rico Industrial, Tourist,
Educational, Medical, Environmental
Control Facilities Finance Authority,
Polytechnic University of Puerto Rico
Project 5.500 08/01/2024 1,000,000 841,010
Puerto Rico Telephone Authority 5.400 01/01/2008 1,150,000 1,117,512
See Notes to Schedule of Investments. (Continued on next page)
19
<PAGE>
MUNICIPAL BONDS (continued)
Reedy Creek, Florida, Improvement
District, Florida Utilities Revenue
Refunding Series 1 (MBIA) 5.000% 10/01/2019 $5,500,000 $ 4,772,955
State of Florida, General Obligation,
Jacksonville Transportation Authority 9.000 01/01/2000 1,000,000 1,125,750
Tallahassee, Florida, Health Facilities,
Tallahassee Memorial Regional Medical
Project (MBIA) 6.625 12/01/2013 2,000,000 2,137,380
Tampa, Florida, Capital Improvement
Program Revenue, Series B 8.375 10/01/2018 1,250,000 1,320,400
Tampa, Florida, Subordinate Guaranteed
Entitlement Revenue Series B (ETM) 8.500 10/01/2018 45,000 50,084
Tampa, Florida, Water and Sewer Authority
Revenue (FGIC) 5.000 10/01/2014 4,000,000 3,568,520
West Melbourne, Florida, Water and Sewer
Revenue (FGIC) 6.750 10/01/2014 1,000,000 1,077,470
TOTAL MUNICIPAL BONDS (Cost--$102,923,963) 105,908,367
TEMPORARY TAX-EXEMPT INVESTMENTS (7.4%)
Dade County, Florida, Water and Sewer
System Revenue Bond Series 1994 (a) 4.150 10/05/2022 6,385,000 6,385,000
Indian Trace Community Development
District (Broward County, Florida) Basin
I Water Management, Special Benefit
Bonds, Series 1991 (a) 4.100 10/01/1999 1,500,000 1,500,000
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS
(Cost--$7,885,000) 7,885,000
TOTAL INVESTMENTS (Cost--$110,808,963) (b) 113,793,367
OTHER ASSETS AND LIABILITIES--NET (-7.2%) (7,641,161)
NET ASSETS (100.0%) $106,152,206
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) The cost of investments for federal income tax purposes is $111,084,646.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at March 31, 1995 are as follows:
Gross unrealized appreciation $2,862,937
Gross unrealized depreciation (154,216)
Net unrealized appreciation $2,708,721
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
AMT--Subject to Alternative Minimum Tax
ETM -- Escrowed to Maturity
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assistance
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
20
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
December 28, 1990
(Commencement of
Year Ended March 31, Operations) to
1995 1994 1993 1992 March 31, 1991
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $10.2900 $10.9400 $10.4300 $10.1700 $10.0000
Income from investment operations
Investment income--net 0.5576 0.5828 0.6067 0.7230 0.1806
Net gain (loss) on investments and
futures contracts 0.0734 (0.4400) 0.6414 0.3000 0.1700
Total income from investment
operations 0.6310 0.1428 1.2481 1.0230 0.3506
Less distributions from:
Investment income--net (0.5637) (0.5817) (0.6067) (0.7230) (0.1806)
In excess of investment income--net
(c) (0.0273) (0.0511) (0.0314) 0 0
Realized gain on investments--net 0 (0.1600) (0.1000) (0.0400) 0
Total distributions (0.5910) (0.7928) (0.7381) (0.7630) (0.1806)
Net asset value end of period $10.3300 $10.2900 $10.9400 $10.4300 $10.1700
Total return (d) 6.42% 1.01% 12.32% 10.34% 3.52%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses
(b) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Investment income--net 5.60% 5.16% 5.60% 6.82% 6.33%(a)
Portfolio turnover rate 129% 113% 95% 63% 5%
Net assets end of period
(thousands) $ 42,239 $ 45,150 $ 42,997 $ 29,258 $ 6,922
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 0.95%, 1.00%, 1.13%, 1.21% and 2.06% (annualized) for the
fiscal years ended March 31, 1995, 1994, 1993, 1992 and for the period
December 28, 1990 (Commencement of Operations) to March 31, 1991,
respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
21
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $10.2700 $10.9400 $10.8100
Income from investment operations
Investment income--net 0.5264 0.5258 0.0852
Net gain (loss) on investments and futures contracts 0.0234 (0.4730) 0.1379
Total income from investment operations 0.5498 0.0528 0.2231
Less distributions from:
Investment income--net (0.4929) (0.4812) (0.0852)
In excess of investment income--net (c) (0.0869) (0.0816) (0.0079)
Realized gain on investments--net 0 (0.1600) 0
Total distributions (0.5798) (0.7228) (0.0931)
Net asset value end of period $10.2400 $10.2700 $10.9400
Total return (d) 5.61% 0.19% 2.06%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.50% 1.50%(a)
Investment income--net 4.81% 4.21% 4.00%(a)
Portfolio turnover rate 129% 113% 95%
Net assets end of period (thousands) $ 51,083 $ 19,984 $ 1,704
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.68%, 1.74% and 1.73% (annualized) for the fiscal years ended
March 31, 1995, 1994 and the for period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
22
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $10.2800 $10.9300 $10.8100
Income from investment operations
Investment income--net 0.4680 0.5116 0.0746
Net gain (loss) on investments and futures contracts 0.0820 (0.4507) 0.1375
Total income from investment operations 0.5500 0.0609 0.2121
Less distributions from:
Investment income--net (0.4882) (0.4875) (0.0746)
In excess of investment income--net (c) (0.0818) (0.0634) (0.0175)
Realized gain on investments--net 0 (0.1600) 0
Total distributions (0.5700) (0.7109) (0.0921)
Net asset value end of period $10.2600 $10.2800 $10.9300
Total return (d) 5.61% 0.27% 1.95%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.50% 1.50%(a)
Investment income--net 4.86% 4.26% 2.95%(a)
Portfolio turnover rate 129% 113% 95%
Net assets end of period (thousands) $ 12,831 $ 13,096 $ 1,987
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.70%, 1.84% and 1.63% (annualized) for the fiscal years ended
March 31, 1995, 1994 and for the period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
23
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1995
ASSETS:
Investments at market value (identified cost--
$110,808,963) (Note 1) $113,793,367
Cash 18,332
Receivable for:
Investments sold 1,588,777
Fund shares sold 80,993
Interest 2,497,300
Due from Investment Adviser (Note 4) 14,549
Unamortized organization expenses (Note 1) 3,695
Prepaid expenses 6,240
Total assets 118,003,253
Liabilities (Notes 2, 4 and 5):
Payable for:
Investments purchased 7,209,862
Fund shares redeemed 4,101,230
Income distributions 510,247
Accrued reimbursable expenses 206
Other accrued expenses 29,502
Total liabilities 11,851,047
Net assets $106,152,206
Net assets represented by (Note 1):
Paid-in capital $109,006,567
Accumulated distributions in excess of
investment income--net (445,095)
Accumulated realized gains (losses) on
investments and closed futures
contracts--net (5,393,670)
Net unrealized appreciation on investments 2,984,404
Total net assets $106,152,206
Net asset value per share (Note 2):
Class A Shares ($10.33 on 4,090,563 shares
outstanding) $ 42,238,663
Class B Shares ($10.24 on 4,988,012 shares
outstanding) 51,082,798
Class C Shares ($10.26 on 1,250,634 shares
outstanding) 12,830,745
$106,152,206
Offering price per share:
Class A Shares (including sales charge of
4.75%) (Note 1) $ 10.85
Class B Shares $ 10.24
Class C Shares $ 10.26
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended March 31, 1995
Investment Income:
Interest $ 6,259,263
Expenses (Notes 1, 2 and 4):
Management fee $ 515,205
Transfer agent fees 116,367
Custodian fees 68,236
Accounting 13,052
Auditing 17,947
Legal 9,701
Printing 15,637
Registration fees 22,592
Amortization of organization expenses 6,125
Distribution Plan expenses 551,872
Miscellaneous expenses 4,257
Total expenses 1,340,991
Less: Reimbursement from Investment
Adviser (Note 4) (189,871)
Net expenses 1,151,120
Investment income--net (Note 1) 5,108,143
Realized and unrealized gain (loss) on
investments and closed futures
contracts--net:
Realized loss on:
Investments (4,280,513)
Closed futures contracts (471,235)
Realized loss on investments and closed
futures contracts--net (Note 3) (4,751,748)
Net unrealized appreciation
(depreciation) on investments:
Beginning of year (2,571,978)
End of year 2,984,404
Net change in unrealized appreciation
(depreciation) on investments 5,556,382
Net gain on investments and closed
futures contracts 804,634
Net increase in net assets resulting
from operations $ 5,912,777
24
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994
<S> <C> <C>
Operations:
Investment income--net $ 5,108,143 $ 3,315,430
Realized loss on investments and closed futures contracts--net (4,751,748) (176,818)
Net change in unrealized appreciation (depreciation) on investments 5,556,382 (4,019,726)
Net increase (decrease) in net assets resulting from operations 5,912,777 (881,114)
Distributions to shareholders from (Notes 1 and 5):
Investment income--net:
Class A Shares (2,468,849) (2,499,499)
Class B Shares (1,881,744) (424,503)
Class C Shares (757,551) (391,428)
In excess of investment income--net:
Class A Shares (119,609) (219,642)
Class B Shares (331,735) (71,955)
Class C Shares (127,027) (50,867)
Realized gain on investments--net:
Class A Shares 0 (705,182)
Class B Shares 0 (175,428)
Class C Shares 0 (154,938)
Total distributions to shareholders (5,686,515) (4,693,442)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 6,022,911 12,571,766
Proceeds from shares sold--Class B Shares 35,365,150 20,180,024
Proceeds from shares sold--Class C Shares 6,570,695 13,049,614
Payment for shares redeemed--Class A Shares (9,676,164) (8,428,210)
Payment for shares redeemed--Class B Shares (5,409,666) (659,493)
Payment for shares redeemed--Class C Shares (7,105,015) (1,183,738)
Net asset value of shares issued in reinvestment of distributions
from:
Investment income--net and in excess of investment income--net--
Class A Shares 712,811 716,146
Investment income--net and in excess of investment income--net--
Class B Shares 829,201 189,337
Investment income--net and in excess of investment income--net--
Class C Shares 385,988 192,140
Realized gain on investments--net--Class A Shares 0 298,598
Realized gain on investments--net--Class B Shares 0 104,951
Realized gain on investments--net--Class C Shares 0 85,350
Net increase in net assets resulting from capital share
transactions 27,695,911 37,116,485
Total increase in net assets 27,922,173 31,541,929
Net assets:
Beginning of year 78,230,033 46,688,104
End of year [Including accumulated distributions in excess of
investment income--net as follows: March 1995--($445,095) and
March 1994--($327,959)] (Note 1) $106,152,206 $78,230,033
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.5910
Class B Shares
Income Dividends
Tax-exempt
$0.5798
Class C Shares
Income Dividends
Tax-exempt
$0.5700
In January, 1996 complete information on calendar year 1995 distributions
will be forwarded to you to assist in completing your 1995 federal income tax
return.
See Notes to Financial Statements.
26
<PAGE>
Keystone Massachusetts Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (95.5%)
Boston, Massachusetts, Metropolitan
District, General Obligation 5.900% 12/01/2009 $ 695,000 $ 709,942
Massachusetts Bay Transportation
Authority, General Transportation,
Series A 7.000 03/01/2011 160,000 177,958
Massachusetts Bay Transportation
Authority, General Transportation,
Series A 6.250 03/01/2012 400,000 412,580
Massachusetts Bay Transportation
Authority, Series B 6.200 03/01/2016 425,000 432,446
Massachusetts Educational Financing Loan
Authority (AMBAC) 6.000 01/01/2012 300,000 287,889
Massachusetts Municipal Wholesale
Electric, Power Supply Systems,
Series B 6.750 07/01/2008 460,000 490,949
Massachusetts State Health and
Educational Facilities Authority,
Daughters of Charity, Series D 6.100 07/01/2014 400,000 392,292
Massachusetts State Health and
Educational Facilities Authority,
Holyoke Hospital, Series B 6.500 07/01/2015 450,000 426,987
Massachusetts State Health and
Educational Facilities Authority,
Massachusetts Institute of Technology,
Series H 5.000 07/01/2023 200,000 171,468
Massachusetts State Health and
Educational Facilities Authority,
McLean Hospital, Series C (FGIC) 6.500 07/01/2010 300,000 314,658
Massachusetts State Health and
Educational Facilities Authority, New
England Deaconess Hospital 6.875 04/01/2022 450,000 453,816
Massachusetts State Health and
Educational Facilities Authority, Smith
College, Series D 5.750 07/01/2016 350,000 336,658
Massachusetts State Health and
Educational Facilities Authority,
Wellesley College 5.375 07/01/2019 530,000 484,727
Massachusetts State Health and
Educational Facilities Authority,
Winchester Hospital, Series D
(Connie Lee) 5.750 07/01/2014 350,000 330,841
Massachusetts State Health and
Educational Facilities Authority,
Youville Hospital, Series B 6.000 02/15/2025 300,000 291,105
Massachusetts State Housing Finance
Agency, Series A (AMBAC) 6.300 10/01/2013 200,000 199,936
Massachusetts State Housing Finance
Agency, Series A (AMBAC) 6.600 07/01/2014 300,000 303,486
Massachusetts State Housing Finance
Agency, Series A (MBIA) 5.950 12/01/2014 150,000 147,222
Massachusetts State Housing Finance
Agency, Series A 6.300 10/01/2013 450,000 447,408
Massachusetts State Industrial Finance
Agency, Harvard Community Health Plan,
Inc., Series B 8.125 10/01/2017 165,000 177,855
Massachusetts State Industrial Finance
Agency, Solid Waste Disposal, Molten
Metal Technology Project 8.250 08/01/2014 250,000 255,608
Massachusetts State Industrial Finance
Agency, Solid Waste Disposal, Senior
Lien, Massachusetts Recycling Assoc. 9.000 07/01/2016 1,000,000 1,041,980
Massachusetts State General Obligation
Consolidated Loan, Series B 6.000 08/01/2013 100,000 99,534
Massachusetts State Special Obligation,
Series A (AMBAC) 6.000 06/01/2013 250,000 250,383
See Notes to Schedule of Investments. (Continued on next page)
27
<PAGE>
MUNICIPAL BONDS (continued)
Massachusetts State Special Obligation,
Series A (FGIC) 5.700% 06/01/2010 $250,000 $ 246,178
Massachusetts State Water Resources
Authority, Series C 6.000 12/01/2011 770,000 774,620
TOTAL MUNICIPAL BONDS (Cost--$9,477,448) 9,658,526
TEMPORARY TAX-EXEMPT INVESTMENTS (0.9%)
Massachusetts State Health and
Educational Facilities Authority,
(Capital Assets Program), Series D
(MBIA) (Cost--$95,000) (a) 3.800 01/01/2035 95,000 95,000
TOTAL INVESTMENTS (Cost--$9,572,448) (b) 9,753,526
OTHER ASSETS AND LIABILITIES--NET (3.6%) 360,334
NET ASSETS (100.0%) $10,113,860
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) The cost of investments for federal income tax purposes amounted to
$9,572,448. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at March 31, 1995 are as
follows:
Gross unrealized appreciation $210,459
Gross unrealized depreciation (29,381)
Net unrealized appreciation $181,078
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
FGIC--Federal Guaranty Insurance Co.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
28
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.1700 $10.0000
Income from investment operations
Investment income--net 0.5337 0.0872
Net gain (loss) on investments and futures contracts 0.0120 (0.8241)
Total income from investment operations 0.5457 (0.7369)
Less distributions from:
Investment income--net (0.5257) (0.0854)
In excess of investment income--net 0 (0.0077)
Total distributions (0.5257) (0.0931)
Net asset value end of period $ 9.1900 $ 9.1700
Total return (c) 6.23% (7.40%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 0.46% 0.35%(a)
Investment income--net 5.90% 5.07%(a)
Portfolio turnover rate 77% 7%
Net assets end of period (thousands) $ 1,974 $ 1,472
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.93% and 3.22% (annualized) for the fiscal year ended March
31,1995, and for the period from February 4, 1994 (Commencement of
Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
29
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.1900 $10.0000
Income from investment operations
Investment income--net 0.4877 0.0839
Net gain (loss) on investments and futures contracts (0.0142) (0.8008)
Total income from investment operations 0.4735 (0.7169)
Less distributions from:
Investment income--net (0.4723) (0.0670)
In excess of investment income--net (0.0412) (0.0261)
Total distributions (0.5135) (0.0931)
Net asset value end of period $ 9.1500 $ 9.1900
Total return (c) 5.41% (7.20%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.24% 1.10%(a)
Investment income--net 5.15% 3.23%(a)
Portfolio turnover rate 77% 7%
Net assets end of period (thousands) $ 6,169 $ 1,817
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 2.68%, and 4.60% (annualized) for the fiscal year ended March
31,1995, and for the period February 4, 1994 (Commencement of Operations)
to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
30
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.1900 $10.0000
Income from investment operations
Investment income--net 0.4801 0.0807
Net gain (loss) on investments and futures contracts (0.0244) (0.7989)
Total income from investment operations 0.4557 (0.7182)
Less distributions from:
Investment income--net (0.4680) (0.0738)
In excess of investment income--net (0.0377) (0.0180)
Total distributions (0.5057) (0.0918)
Net asset value end of period $ 9.1400 $ 9.1900
Total return (c) 5.20% (7.21%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.23% 1.10%(a)
Investment income--net 5.11% 4.28%(a)
Portfolio turnover rate 77% 7%
Net assets end of period (thousands) $ 1,971 $ 369
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 2.68%, and 4.91% (annualized) for the fiscal year ended March
31,1995 and for the period February 4, 1994 (Commencement of Operations)
to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
31
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1995
Assets:
Investments at market value (identified
cost-- $9,572,448) (Note 1) $ 9,753,526
Cash 116
Receivable for:
Investments sold 354,116
Fund shares sold 50,585
Interest 180,535
Due from Investment Adviser (Note 4) 12,726
Unamortized organization expenses (Note 1) 9,045
Prepaid expenses 373
Total assets 10,361,022
Liabilities (Notes 2, 4, and 5):
Payable for:
Investments purchased 171,983
Fund shares redeemed 3,032
Income distributions 44,292
Accrued reimbursable expenses 2,399
Other accrued expenses 25,456
Total liabilities 247,162
Net assets $10,113,860
Net assets represented by (Note 1):
Paid-in capital $10,280,917
Undistributed investment income--net 20,294
Accumulated realized gains (losses) on
investments--net (368,429)
Net unrealized appreciation on investments 181,078
Total net assets $10,113,860
Net asset value per share (Note 2):
Class A Shares ($9.19 on 214,903 shares
outstanding) $ 1,973,993
Class B Shares ($9.15 on 674,296 shares
outstanding) 6,168,640
Class C Shares ($9.14 on 215,636 shares
outstanding) 1,971,227
$10,113,860
Offering price per share:
Class A Shares (including sales charge of
4.75%) (Note 1) $ 9.65
Class B Shares $ 9.15
Class C Shares $ 9.14
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended March 31, 1995
Investment Income:
Interest $ 505,436
Expenses (Notes 1, 2 and 4):
Management fee $ 43,636
Transfer agent fees 15,568
Custodian fees 22,909
Accounting 17,498
Auditing 11,060
Legal 5,557
Printing 17,044
Registration fees 6,653
Amortization of organization expenses 1,432
Distribution Plan expenses 57,230
Miscellaneous expenses 606
Total expenses 199,193
Less: Reimbursement from Investment
Adviser (Note 4) (114,861)
Net expenses 84,332
Investment income--net (Note 1) 421,104
Realized and unrealized gain (loss) on
investments and closed futures
contracts--net:
Realized loss on:
Investments (283,015)
Closed futures contracts (67,330)
Realized gain (loss) on investments and
closed futures contracts--net
(Note 3) (350,345)
Net unrealized appreciation
(depreciation) on investments:
Beginning of year (233,997)
End of year 181,078
Net change in unrealized appreciation
(depreciation) on investments 415,075
Net gain on investments and closed
futures contracts 64,730
Net increase in net assets resulting
from operations $ 485,834
32
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Operations:
Investment income--net $ 421,104 $ 16,938
Realized gain (loss) on investments and closed futures
contracts--net (350,345) (16,765)
Net change in unrealized appreciation (depreciation) on
investments 415,075 (233,997)
Net increase (decrease) in net assets resulting from
operations 485,834 (233,824)
Distributions to shareholders from (Notes 1 and 5):
Investment income--net:
Class A Shares (103,346) (10,428)
Class B Shares (230,929) (4,687)
Class C Shares (85,245) (1,823)
In excess of investment income--net:
Class A Shares 0 (942)
Class B Shares (20,118) (1,824)
Class C Shares (6,857) (445)
Total distributions to shareholders (446,495) (20,149)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 1,279,775 1,681,688
Proceeds from shares sold--Class B Shares 4,802,858 1,926,809
Proceeds from shares sold--Class C Shares 1,731,526 401,620
Payment for shares redeemed--Class A Shares (846,310) (91,900)
Payment for shares redeemed--Class B Shares (609,227) (4,920)
Payment for shares redeemed--Class C Shares (182,930) (4,920)
Net asset value of shares issued in reinvestment of
distributions from:
Investment income--net and in excess of investment
income--net--Class A Shares 60,782 2,378
Investment income--net and in excess of investment
income--net--Class B Shares 125,304 160
Investment income--net and in excess of investment
income--net--Class C Shares 55,445 356
Net increase in net assets resulting from capital share
transactions 6,417,223 3,911,271
Total increase in net assets 6,456,562 3,657,298
Net assets:
Beginning of period 3,657,298 0
End of period [Including undistributed investment income--net
(accumulated distributions in excess of investment
income--net) as follows: March 1995--$20,294 and March
1994--($1,803)] (Note 1) $10,113,860 $3,657,298
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.5257
Class B Shares
Income Dividends
Tax-exempt
$0.5135
Class C Shares
Income Dividends
Tax-exempt
$0.5057
In January, 1996 complete information on calendar year 1995 distributions
will be forwarded to you to assist in completing your 1995 federal income tax
return.
See Notes to Financial Statements.
34
<PAGE>
Keystone New York Insured Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (98.1%)
Broome County, New York, Public Safety
Facility (MBIA) 5.250% 04/01/2015 $1,000,000 $ 903,460
Buffalo, New York, Series E 6.500 12/01/2022 465,000 486,841
Erie County, New York, Water Authority,
Fourth Resolution (AMBAC) (effective
yield 6.824%) (b) 0.000 12/01/2017 440,000 86,715
Metropolitan Transportation Authority, New
York, Commuter Facilities, Series A
(MBIA) 6.125 07/01/2014 1,400,000 1,414,518
Nassau County, New York, Combined Sewer
District, Series B 6.000 05/01/2014 695,000 698,816
New Rochelle, New York, General
Obligation, Series B 6.150 08/15/2017 600,000 616,482
New York City, New York, General
Obligation, Series A (FGIC) 5.750 08/01/2010 1,090,000 1,066,816
New York City, New York, Municipal Water
Finance Authority, Water and Sewer
System Series A (FGIC) 7.000 06/15/2015 1,400,000 1,483,748
New York, New York City, Educational
Construction Fund, Senior Subordinate,
Series B 5.500 10/01/2011 200,000 187,380
New York Resources Recovery Agency,
Series B 7.250 07/01/2011 100,000 112,827
New York State Dormitory Authority, City
University Systems (FGIC) 7.000 07/01/2009 200,000 223,800
New York State Dormitory Authority, City
University, 3rd General Resources,
Series 2 (MBIA) 6.250 07/01/2019 575,000 583,475
New York State Dormitory Authority,
Fordham University (FGIC) 5.750 07/01/2015 500,000 486,500
New York State Dormitory Authority, Mount
Sinai Medical School, Series A (MBIA) 5.000 07/01/2015 200,000 176,476
New York State Dormitory Authority, Mount
Sinai Medical School, Series A (MBIA) 5.000 07/01/2021 125,000 107,241
New York State Dormitory Authority, State
University Education Facilities (FGIC) 5.300 05/15/2010 100,000 93,449
New York State Dormitory Authority, State
University Educational Facilities,
Series A (FSA) 5.250 05/15/2015 600,000 545,754
New York State Dormitory Authority, State
University Educational Facilities
(AMBAC) 5.875 05/15/2011 250,000 251,092
New York State Dormitory Authority,
University of Rochester Strong Memorial
(MBIA) 5.500 07/01/2021 400,000 370,212
New York State Energy, New York State
Electric & Gas 5.700 12/01/2028 160,000 147,690
New York State Housing Finance Agency,
Multi-family Mortgage, Series B (AMBAC) 6.250 08/15/2014 875,000 874,834
New York State Medical Care Facilities
Finance Agency, Mental Health Services
Facilities 6.375 08/15/2014 1,000,000 1,023,410
New York State Medical Care Facilities
Finance Agency, Mental Health Services
Facilities, Series A (FGIC) 5.500 08/15/2021 165,000 151,477
New York State Medical Care Facilities
Finance Agency,
St Mary's Hospital, Series A (AMBAC) 6.200 11/01/2014 200,000 203,306
New York State Power Authority, Series CC
(MBIA) 5.250 01/01/2018 500,000 452,550
See Notes to Schedule of Investments. (Continued on next page)
35
<PAGE>
Municipal Bonds (continued)
New York State Urban Development Corp.,
Correctional Capital Facilities,
Series A 6.500% 01/01/2009 $ 600,000 $ 609,540
New York State Urban Development,
Correctional Facilities, Series A
(AMBAC) 5.000 01/01/2017 500,000 430,895
Niagara Falls, New York, Public
Improvement (MBIA) 7.500 03/01/2016 750,000 899,190
Niagara Falls, New York, Public
Improvement (MBIA) 7.500 03/01/2017 750,000 897,547
Niagara, New York, Frontier Transportation
Authority, Greater Buffalo International
Airport (AMBAC) 6.125 04/01/2014 100,000 100,230
Rochester, New York, General Obligation,
Series A (AMBAC) 5.000 08/15/2018 140,000 125,254
Suffolk County, New York, Industrial
Development Agency, Southwest Sewer
Systems (FGIC) 6.000 02/01/2008 1,000,000 1,031,190
Tioga County, New York, Public Improvement
(FGIC) 5.400 03/15/2010 240,000 232,044
Triborough Bridge and Tunnel Authority,
New York, General Purpose, Series X 6.625 01/01/2012 555,000 600,987
Westchester County, New York, Industrial
Development Resource Recovery, Series A
(AMBAC) 5.750 07/01/2009 100,000 97,774
TOTAL MUNICIPAL BONDS (Cost--$17,216,118) 17,773,520
TEMPORARY TAX-EXEMPT INVESTMENTS (0.2%)
New York City Municipal Water and Finance
Authority, Water and Sewer Systems,
Series C (FGIC) (Cost--$45,000) (a) 4.600 06/15/2023 45,000 45,000
TOTAL INVESTMENTS (Cost--$17,261,118) (c) 17,818,520
OTHER ASSETS AND LIABILITIES--NET (1.7%) 301,682
NET ASSETS (100.0%) $18,120,202
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an accrual basis until maturity.
(c) The cost of investments for federal income tax purposes amounted to
$17,303,918. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at March 31, 1995 are as
follows:
Gross unrealized appreciation $530,070
Gross unrealized depreciation (15,468)
Net unrealized appreciation $514,602
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assistance
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
36
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.3200 $10.0000
Income from investment operations
Investment income--net 0.5192 0.0862
Net gain (loss) on investments and futures contracts 0.1154 (0.6748)
Total income from investment operations 0.6346 (0.5886)
Less distributions from:
Investment income--net (0.5146) (0.0784)
In excess of investment income--net 0 (0.0130)
Total distributions (0.5146) (0.0914)
Net asset value end of period $ 9.4400 $ 9.3200
Total return (c) 7.08% (5.91%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 0.50% 0.35%(a)
Investment income--net 5.48% 3.85%(a)
Portfolio turnover rate 77% 14%
Net assets end of period (thousands) $ 3,323 $ 680
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.59% and 4.44% (annualized) for the fiscal year ended March
31, 1995, and for the period from February 4, 1994 (Commencement of
Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
37
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.3200 $10.0000
Income from investment operations
Investment income--net 0.4763 0.0812
Net gain (loss) on investments and futures contracts 0.0862 (0.6698)
Total income from investment operations 0.5625 (0.5886)
Less distributions from:
Investment income--net (0.4548) (0.0620)
In excess of investment income--net (0.0477) (0.0294)
Total distributions (0.5025) (0.0914)
Net asset value end of period $ 9.3800 $ 9.3200
Total return (c) 6.28% (5.91%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.25% 1.10%(a)
Investment income--net 4.78% 3.01%(a)
Portfolio turnover rate 77% 14%
Net assets end of period (thousands) $ 11,907 $ 2,276
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 2.35% and 5.60% (annualized) for the fiscal year ended March
31, 1995, and for the period February 4, 1994 (Commencement of
Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
38
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Net asset value beginning of period $ 9.3100 $10.0000
Income from investment operations
Investment income--net 0.4828 0.0736
Net gain (loss) on investments and futures contracts 0.0710 (0.6735)
Total income from investment operations 0.5538 (0.5999)
Less distributions from:
Investment income--net (0.4579) (0.0664)
In excess of investment income--net (0.0359) (0.0237)
Total distributions (0.4938) (0.0901)
Net asset value end of period $ 9.3700 $ 9.3100
Total return (c) 6.18% (6.02%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.26% 1.10%(a)
Investment income--net 4.88% 3.71%(a)
Portfolio turnover rate 77% 14%
Net assets end of period (thousands) $ 2,890 $ 255
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 2.32%, and 5.13% (annualized) for the fiscal year ended March
31, 1995, and for the period February 4, 1994 (Commencement of
Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
39
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1995
Assets:
Investments at market value (identified
cost-- $17,261,118) (Note 1) $17,818,520
Cash 4,516
Receivable for:
Fund shares sold 125,249
Interest 314,035
Due from Investment Adviser (Note 4) 9,698
Unamortized organization expenses (Note 1) 2,390
Prepaid expenses 606
Total assets 18,275,014
Liabilities (Notes 2, 4, and 5):
Payable for:
Fund shares redeemed 53,211
Income distributions 76,467
Accrued reimbursable expenses 2,600
Other accrued expenses 22,534
Total liabilities 154,812
Net assets $18,120,202
Net assets represented by (Note 1):
Paid-in capital $17,941,234
Undistributed investment income--net 25,850
Accumulated realized gains (losses) on
investments--net (404,284)
Net unrealized appreciation on investments 557,402
Total net assets $18,120,202
Net asset value per share (Note 2):
Class A Shares ($9.44 on 352,186 shares
outstanding) $ 3,323,045
Class B Shares ($9.38 on 1,269,971 shares
outstanding) 11,906,675
Class C Shares ($9.37 on 308,360 shares
outstanding) 2,890,482
$18,120,202
Offering price per share:
Class A Shares (including sales charge of
4.75%) (Note 1) $ 9.91
Class B Shares $ 9.38
Class C Shares $ 9.37
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended March 31, 1995
Investment Income:
Interest $ 700,194
Expenses (Notes 1, 2 and 4):
Management fee $ 63,808
Transfer agent fees 25,831
Custodian fees 23,968
Accounting 17,698
Auditing 11,066
Legal 5,454
Printing 15,797
Registration fees 2,682
Amortization of organization expenses 268
Distribution Plan expenses 89,147
Miscellaneous expenses 601
Total expenses 256,320
Less: Reimbursement from Investment
Adviser (Note 4) (126,754)
Net expenses 129,566
Investment income--net (Note 1) 570,628
Realized and unrealized gain (loss) on
investments and closed futures
contracts--net
Realized loss on:
Investments (272,389)
Closed futures contracts (120,843)
Realized gain (loss) on investments
and closed futures contracts--net
(Note 3) (393,232)
Net unrealized appreciation
(depreciation) on investments:
Beginning of year (141,597)
End of year 557,402
Net change in unrealized appreciation
(depreciation) on investments 698,999
Net gain on investments and closed
futures contracts 305,767
Net increase in net assets resulting
from operations $ 876,395
See Notes to Financial Statements.
40
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
February 4, 1994
(Commencement
Year Ended of Operations) to
March 31, 1995 March 31, 1994
<S> <C> <C>
Operations:
Investment income--net $ 570,628 $ 8,803
Realized gain (loss) on investments and closed futures contracts--net (393,232) (10,721)
Net change in unrealized appreciation (depreciation) on investments 698,999 (141,597)
Net increase (decrease) in net assets resulting from operations 876,395 (143,515)
Distributions to shareholders from (Notes 1 and 5):
Investment income--net:
Class A Shares (110,893) (2,291)
Class B Shares (372,207) (5,248)
Class C Shares (86,125) (1,264)
In excess of investment income--net:
Class A Shares 0 (380)
Class B Shares (39,019) (2,489)
Class C Shares (6,749) (452)
Total distributions to shareholders (614,993) (12,124)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 2,912,705 872,036
Proceeds from shares sold--Class B Shares 10,641,995 2,543,473
Proceeds from shares sold--Class C Shares 2,663,844 429,008
Payment for shares redeemed--Class A Shares (389,013) (159,452)
Payment for shares redeemed--Class B Shares (1,379,298) (160,779)
Payment for shares redeemed--Class C Shares (128,154) (157,276)
Net asset value of shares issued in reinvestment of distributions from:
Investment income--net and in excess of investment income--net--
Class A Shares 46,401 43
Investment income--net and in excess of investment income--net--
Class B Shares 220,338 0
Investment income--net and in excess of investment income--net--
Class C Shares 58,568 0
Net increase in net assets resulting from capital share transactions 14,647,386 3,367,053
Total increase in net assets 14,908,788 3,211,414
Net assets:
Beginning of period 3,211,414 0
End of period [Including undistributed investment income--net
(accumulated distributions in excess of investment income--net) as
follows: March 1995-- $25,850 and March 1994--($1,759)] (Note 1) $18,120,202 $3,211,414
</TABLE>
See Notes to Financial Statements.
41
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.5146
Class B Shares
Income Dividends
Tax-exempt
$0.5025
Class C Shares
Income Dividends
Tax-exempt
$0.4938
In January, 1996 complete information on calendar year 1995 distributions
will be forwarded to you to assist in completing your 1995 federal income tax
return.
See Notes to Financial Statements.
42
<PAGE>
Keystone Pennsylvania Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (95.5%)
Allegheny County, Pennsylvania, Airport
Revenue, Greater Pittsburgh International
Airport 6.625% 01/01/2022 $ 750,000 $ 766,155
Allegheny County, Pennsylvania, Finance
Authority, Single Family Mortgage, Series Y 6.600 11/01/2014 1,000,000 1,017,700
Allegheny County, Pennsylvania, Industrial
Development Authority, Environmental
Improvement, USX Corp. 6.700 12/01/2020 2,000,000 1,985,060
Allentown, Pennsylvania, Area Hospital
Authority, Sacred Heart Hospital of
Allentown, Series A 6.750 11/15/2014 1,000,000 933,620
Beaver County, Pennsylvania, Industrial
Development Authority, Pollution Control,
Ohio Edison Co. Project, Series A 7.750 09/01/2024 1,170,000 1,213,430
Bethlehem, Pennsylvania, Authority Water
Revenue Refunding (MBIA) 5.200 11/15/2021 2,600,000 2,293,616
Bucks County, Pennsylvania, Industrial
Development Authority, Personal Care 10.000 05/15/2019 5,100,000 7,764,546
Cambria County, Pennsylvania, Series A (FGIC) 6.625 08/15/2012 4,485,000 4,745,265
Central Bucks, Pennsylvania, School District,
Series A 6.900 11/15/2013 1,000,000 1,070,440
Delaware County, Pennsylvania, Industrial
Development Authority, Pollution Control,
Philadelphia Electric Co., Series A 7.375 04/01/2021 850,000 893,614
Erie County, Pennsylvania, Industrial
Development Authority, Environmental
Improvement, International Paper Co.
Project, Series A 7.625 11/01/2018 500,000 539,555
Guam Airport Authority, Series B 6.400 10/01/2005 500,000 506,990
Hazleton, Pennsylvania, Area School District,
Comp. Interest, Series B (eff. yield
6.30%)(b) 0.000 03/01/2018 5,265,000 1,308,563
Lehigh County, Pennsylvania, General Purpose
Authority, Good Shepherd Rehabilitation
Hospital 7.500 11/15/2021 1,000,000 1,010,630
Lehigh County, Pennsylvania, General Purpose
Authority,
Lehigh Valley Hospital, Series A (MBIA) 7.000 07/01/2016 1,250,000 1,384,387
Mon Valley, Pennsylvania, Sewage Revenue
(MBIA) 6.550 11/01/2019 1,305,000 1,372,429
Montgomery County, Pennsylvania, Higher
Education and Health Authority,
Northwestern Corp. 7.000 06/01/2012 700,000 666,631
Montgomery County, Pennsylvania, Industrial
Development, Pollution Control,
Philadelphia Electric Co. 7.600 04/01/2021 950,000 999,210
Norristown, Pennsylvania, Municipal Waste
Authority, Sewer Revenue (FGIC) 5.125 11/15/2023 1,250,000 1,104,312
Northumberland County, Pennsylvania,
Commonwealth Lease (eff. yield 6.82%)
(MBIA)(b) 0.000 10/15/2012 4,200,000 1,467,732
Pennsylvania Economic Development Financing
Authority Resources Recovery, Colver
Project, Series D 7.150 12/01/2018 3,000,000 3,034,710
Pennsylvania Economic Development Financing
Authority, Resources Recovery, Colver
Project, Series D 7.125 12/01/2015 1,200,000 1,216,296
Pennsylvania Economic Development Financing
Authority, Resources Recovery, Northhampton
University Project 6.500 01/01/2013 4,500,000 4,166,910
See Notes to Schedule of Investments. (Continued on next page)
43
<PAGE>
MUNICIPAL BONDS (continued)
Pennsylvania General Obligation 5.375% 04/15/2011 $2,500,000 $ 2,362,000
Pennsylvania General Obligation 5.375 05/01/2013 1,300,000 1,209,429
Pennsylvania General Obligation (MBIA) 5.600 06/15/2013 1,000,000 961,150
Pennsylvania Housing Finance Agency, Single
Family Mortgage, Series 40 6.800 10/01/2015 750,000 760,868
Pennsylvania Housing Finance Agency, Single
Family Mortgage, Series 33 6.900 04/01/2017 1,000,000 1,029,170
Pennsylvania Housing Finance Agency, Single
Family Mortgage,
Series 34 A (FHA/FNMA) 6.850 04/01/2016 1,500,000 1,538,700
Pennsylvania Intergovernmental Cooperation
Authority,
Special Tax, City of Philadelphia Funding
Program 6.800 06/15/2022 2,500,000 2,752,850
Pennsylvania Intergovernmental Cooperative
Authority, Special Tax
Philadelphia Funding Program (FGIC) 6.750 06/15/2021 1,000,000 1,063,030
Pennsylvania State Higher Educational
Facilities Authority,
Thomas Jefferson University, Series A 6.625 08/15/2009 1,450,000 1,522,790
Pennsylvania State Industrial Development
Authority, Economic Development (AMBAC) 7.000 01/01/2006 1,500,000 1,683,705
Pennsylvania State Industrial Development
Authority, Economic Development (AMBAC) 7.000 07/01/2006 1,000,000 1,126,680
Philadelphia, Pennsylvania, Hospital and
Higher Education Facilities, Albert
Einstein Medical Center 7.625 04/01/2011 900,000 954,171
Philadelphia, Pennsylvania, Hospital and
Higher Education Facilities, Albert
Einstein Medical Center 7.000 10/01/2021 945,000 971,819
Philadelphia, Pennsylvania, Hospital and
Higher Education Facilities, Graduate
Health Systems Education Facilities 7.250 07/01/2018 1,225,000 1,223,371
Philadelphia, Pennsylvania, Hospital and
Higher Education Facilities, Temple
University Hospital, Series A 6.625 11/15/2023 2,300,000 2,254,943
Puerto Rico Commonwealth Highway and
Transportation Authority, Series W 5.500 07/01/2017 1,500,000 1,362,105
Puerto Rico Commonwealth Highway and
Transportation Authority, Series W 5.250 07/01/2020 1,000,000 867,950
Puerto Rico Commonwealth Highway Authority,
Series Q 7.750 07/01/2010 325,000 371,498
Scranton--Lackawanna, Pennsylvania, Health
And Welfare Authority, Allied Services
Rehabilitation Facility 7.600 07/15/2020 1,000,000 991,870
University of Pittsburgh, Pennsylvania,
University Capital Project, Series A (MBIA) 6.250 06/01/2012 1,000,000 1,021,710
TOTAL MUNICIPAL BONDS (Cost--$65,481,556) 67,491,610
TEMPORARY TAX-EXEMPT INVESTMENTS (2.5%)
Sayre County, Pennsylvania Health Care
Facilities Authority,
Variable Rate (VHA Pennsylvania Capital
Financing Project) Series B (AMBAC) (a) 4.000 12/01/2020 225,000 225,000
See Notes to Financial Statements.
44
<PAGE>
TEMPORARY TAX-EXEMPT INVESTMENTS (continued)
Sayre County, Pennsylvania Health Care
Facilities Authority,
Variable Rate (VHA Pennsylvania Capital
Financing Project) Series F (AMBAC) (a) 4.000% 12/01/2020 $500,000 $ 500,000
Sayre County, Pennsylvania Health Care
Facilities Authority,
Variable Rate (VHA Pennsylvania Capital
Financing Project) Series H (AMBAC) (a) 4.000 12/01/2020 225,000 225,000
Sayre County, Pennsylvania Health Care
Facilities Authority,
Variable Rate (VHA Pennsylvania Capital
Financing Project) Series K (AMBAC) (a) 4.000 12/01/2020 400,000 400,000
Sayre County, Pennsylvania Health Care
Facilities Authority,
Variable Rate (VHA Pennsylvania Capital
Financing Project) Series M (AMBAC) (a) 4.000 12/01/2020 430,000 430,000
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS
(Cost--$1,780,000) 1,780,000
TOTAL INVESTMENTS (Cost--$67,261,556) (c) 69,271,610
OTHER ASSETS AND LIABILITIES--NET (2.0%) 1,394,617
NET ASSETS (100.0%) $70,666,227
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
(c) The cost of investments for federal income tax purposes amount to
$67,351,319. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at March 31, 1995 are as
follows:
Gross unrealized appreciation $2,153,788
Gross unrealized depreciation (233,497)
Net unrealized appreciation $1,920,291
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Idemnity Corp.
FGIC--Federal Guaranty Insurance Co.
FHA--Federal Housing Authority
FNMA--Federal National Mortgage Association
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
45
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
December 27,
1990
Year Ended March 31, (Commencement of
Operations) to
1995 1994 1993 1992 March 31, 1991
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $11.0100 $11.4200 $10.7100 $10.2500 $10.0000
Income from investment operations
Investment income--net 0.6070 0.6161 0.6349 0.7426 0.1806
Net gain (loss) on investments and
futures contracts (0.0918) (0.2990) 0.7499 0.4600 0.2500
Total income from investment
operations 0.5152 0.3171 1.3848 1.2026 0.4306
Less distributions from:
Investment income--net (0.6070) (0.6195) (0.6349) (0.7426) (0.1806)
In excess of investment income--net
(c) (0.0082) (0.0376) (0.0199) 0 0
Realized gain on investments--net 0 (0.0633) (0.0200) 0 0
In excess of realized gain on
investments--net 0 (0.0067) 0 0 0
Total distributions (0.6152) (0.7271) (0.6748) (0.7426) (0.1806)
Net asset value end of period $10.9100 $11.0100 $11.4200 $10.7100 $10.2500
Total return (d) 4.91% 2.58% 13.30% 12.07% 4.37%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses
(b) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Investment income--net 5.65% 5.27% 5.66% 6.92% 6.84%(a)
Portfolio turnover rate 97% 37% 20% 13% 8%
Net assets end of period (thousands) $ 30,450 $ 30,560 $ 35,502 $ 12,914 $ 2,979
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.05%, 1.06%, 1.16%, 1.68%, and 3.19% annualized for the fiscal
years ended March 31, 1995, 1994, 1993, 1992, and for the period from
December 27, 1990 (Commencement of Operations) to March 31, 1991,
respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
46
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $10.9800 $11.4200 $11.2000
Income from investment operations
Investment income--net 0.5369 0.5556 0.0809
Net gain (loss) on investments and futures contracts (0.1039) (0.3390) 0.2359
Total income from investment operations 0.4330 0.2166 0.3168
Less distributions from:
Investment income--net (0.5255) (0.5201) (0.0809)
In excess of investment income--net (c) (0.0775) (0.0665) (0.0159)
Realized gain on investments--net 0 (0.0343) 0
In excess of realized gain on investments--net 0 (0.0357) 0
Total distributions (0.6030) (0.6566) (0.0968)
Net asset value end of period $10.8100 $10.9800 $11.4200
Total return (d) 4.15% 1.70% 2.82%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.50% 1.50%(a)
Investment income--net 4.89% 4.32% 3.44%(a)
Portfolio turnover rate 97% 37% 20%
Net assets end of period (thousands) $ 30,657 $ 21,958 $ 2,543
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.80%, 1.81% and 1.69% (annualized) for the fiscal years ended
March 31, 1995, 1994 and for the period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
47
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $11.0000 $11.4200 $11.2000
Income from investment operations
Investment income--net 0.5273 0.5462 0.0710
Net gain (loss) on investments and futures contracts (0.1035) (0.3217) 0.2448
Total income from investment operations 0.4238 0.2245 0.3158
Less distributions from:
Investment income--net (0.5244) (0.5219) (0.0710)
In excess of investment income--net (c) (0.0694) (0.0526) (0.0248)
Realized gain on investments--net 0 (0.0337) 0
In excess of realized gain on investments--net 0 (0.0363) 0
Total distributions (0.5938) (0.6445) (0.0958)
Net asset value end of period $10.8300 $11.0000 $11.4200
Total return (d) 4.05% 1.78% 2.81%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.50% 1.50%(a)
Investment income--net 4.90% 4.33% 2.50%(a)
Portfolio turnover rate 97% 37% 20%
Net assets end of period (thousands) $ 9,559 $ 9,385 $ 952
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 1.80%, 1.90% and 1.60% the fiscal years ended March 31, 1995,
1994 and for the period February 1, 1993 (Date of Initial Public
Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net." Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net." For the fiscal years ended
prior to April 1, 1993 distributions in excess of book basis net income
were presented as "Distributions from paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
48
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1995
ASSETS:
Investments at market value (identified cost--
$67,261,556) (Note 1) $69,271,610
Cash 4,190
Receivable for:
Fund shares sold 307,524
Interest 1,440,618
Due from Investment Adviser (Note 4) 19,417
Unamortized organization expenses (Note 1) 4,713
Prepaid expenses 4,230
Total assets 71,052,302
Liabilities (Notes 2, 4, and 5):
Payable for:
Fund shares redeemed 20,490
Income Distributions 329,303
Accrued reimbursable expenses 2,662
Other accrued expenses 33,620
Total liabilities 386,075
Net assets $70,666,227
Net assets represented by (Note 1):
Paid-in capital $72,310,612
Accumulated distributions in excess of
investment income--net (106,519)
Accumulated realized gains (losses) on
investments--net (3,547,920)
Net unrealized appreciation on investments 2,010,054
Total net assets $70,666,227
Net asset value per share (Note 2):
Class A Shares ($10.91 on 2,791,272 shares
outstanding) $30,450,398
Class B Shares ($10.81 on 2,836,903 shares
outstanding) 30,657,215
Class C Shares ($10.83 on 882,307 shares
outstanding) 9,558,614
$70,666,227
Offering price per share:
Class A Shares (including sales charge of
4.75%) (Note 1) $ 11.45
Class B Shares $ 10.81
Class C Shares $ 10.83
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended March 31, 1995
Investment Income:
Interest $ 4,260,404
Expenses (Notes 1, 2 and 4):
Management fee $ 357,852
Transfer agent fees 108,073
Custodian fees 54,701
Accounting 20,909
Auditing 13,919
Legal 8,725
Printing 13,444
Registration fees 9,924
Amortization of organization expenses 6,368
Distribution Plan expenses 370,882
Miscellaneous expenses 6,940
Total expenses 971,737
Less: Reimbursement from Investment
Adviser (Note 4) (200,357)
Net expenses 771,380
Investment income--net (Note 1) 3,489,024
Realized and unrealized gain (loss) on
investments and closed futures
contracts--net
Realized loss on:
Investments (2,887,427)
Closed futures contracts (655,075)
Realized gain (loss) on investments
and closed futures contracts--net
(Note 3) (3,542,502)
Net unrealized appreciation
(depreciation) on investments
Beginning of year (908,692)
End of year 2,010,054
Net change in unrealized appreciation
(depreciation) on investments 2,918,746
Net loss on investments and closed
futures contracts (623,756)
Net increase in net assets resulting
from operations $ 2,865,268
49
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994
<S> <C> <C>
Operations:
Investment income--net $ 3,489,024 $ 2,629,409
Realized gain (loss) on investments and closed futures contracts--net (3,542,502) 260,203
Net change in unrealized appreciation (depreciation) on investments 2,918,746 (2,810,110)
Net increase (decrease) in net assets resulting from operations 2,865,268 79,502
Distributions to shareholders from (Notes 1 and 5):
Investment income--net:
Class A Shares (1,714,136) (1,799,163)
Class B Shares (1,329,520) (559,910)
Class C Shares (445,368) (270,336)
In excess of investment income--net:
Class A Shares (23,117) (109,066)
Class B Shares (196,143) (71,503)
Class C Shares (58,900) (27,275)
Realized gain on investments--net:
Class A Shares 0 (190,387)
Class B Shares 0 (46,226)
Class C shares 0 (23,591)
In excess of realized gain on investments--net:
Class A Shares 0 (20,150)
Class B Shares 0 (48,235)
Class C Shares 0 (25,409)
Total distributions to shareholders (3,767,184) (3,191,251)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 4,586,195 9,860,800
Proceeds from shares sold--Class B Shares 11,181,757 20,840,298
Proceeds from shares sold--Class C Shares 3,274,301 9,480,902
Payment for shares redeemed--Class A Shares (5,294,580) (14,642,422)
Payment for shares redeemed--Class B Shares (2,964,040) (460,192)
Payment for shares redeemed--Class C Shares (3,313,655) (686,320)
Net asset value of shares issued in reinvestment of distributions
from:
Investment income--net and in excess of investment income--net--
Class A Shares 942,252 856,370
Investment income--net and in excess of investment income--net--
Class B Shares 877,275 331,750
Investment income--net and in excess of investment income--net--
Class C Shares 375,859 200,252
Realized gain from investments--net and in excess of realized gain
from investments--net--Class A Shares 0 126,877
Realized gain from investments--net and in excess of realized gain
from investments--net--Class B Shares 0 68,449
Realized gain from investments--net and in excess of realized gain
from investments--net--Class C Shares 0 40,740
Net increase in net assets resulting from capital share transactions 9,665,364 26,017,504
Total increase in net assets 8,763,448 22,905,755
Net assets:
Beginning of year 61,902,779 38,997,024
End of year [Including accumulated distributions in excess of
investment income--net as follows: March 1995--($106,519) and
March 1994--($108,524)] (Note 1) $70,666,227 $ 61,902,779
</TABLE>
See Notes to Financial Statements.
50
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.6152
Class B Shares
Income Dividends
Tax-exempt
$0.6030
Class C Shares
Income Dividends
Tax-exempt
$0.5938
In January, 1996 complete information on calendar year 1995 distributions
will be forwarded to you to assist in completing your 1995 federal income tax
return.
See Notes to Financial Statements.
51
<PAGE>
Keystone Texas Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (99.2%)
Bear County, Texas, Health Facilities
Development Corp., Southwest Methodist
Hospital (AMBAC) 6.750% 11/01/2021 $ 50,000 $ 53,527
Brazos County, Texas, Health Facilities
Development Corp.,
St. Joseph's Hospital 6.000 01/01/2013 200,000 182,940
Brazos County, Texas, Higher Education
Authority Incorporated- Student Loan
Revenue, Series A (AMT) 6.500 06/01/2004 250,000 258,942
Brownsville, Texas, Utilities System
Revenue (MBIA) 6.250 09/01/2014 160,000 165,830
Circle C Municipal Utility District #3,
Texas (FGIC) 6.500 11/15/2009 50,000 51,500
Coppell, Texas, Independent School District
(FGIC) 7.700 08/15/2004 40,000 47,168
Harris County, Texas, Toll Road (FGIC) 6.500 08/15/2011 50,000 54,282
Harris County, Texas, Health Facilities,
Memorial Hospital System 7.125 06/01/2015 475,000 491,340
Houston, Texas, Airport Senior Lien (AMT) 8.200 07/01/2017 160,000 176,626
Lower Colorado River Authority 5.375 01/01/2016 345,000 309,344
Matagorda County, Texas, Navigation
District 1, Central Power and Light
Project 6.000 07/01/2028 175,000 165,410
Midland County, Texas, Hospital District
(effective yield 7.95%) (b) 0.000 06/01/2007 160,000 70,386
Puerto Rico Electric Power Authority, Power
Revenue 6.000 07/01/2016 50,000 48,359
Puerto Rico Industrial, Tourist,
Educational, Medical, Environmental
Control Facilities Finance Authority,
Polytechnic University of Puerto Rico
Project 5.700 08/01/2013 150,000 134,103
Puerto Rico Telephone Authority 5.400 01/01/2008 150,000 145,762
Puerto Rico, General Obligation 7.700 07/01/2020 40,000 45,832
San Antonio, Texas, Electric and Gas
Revenue 6.000 02/01/2014 100,000 99,085
San Antonio, Texas, Electric and Gas
Revenue, Series B 6.000 02/01/2014 50,000 49,543
Texas Housing Agency, Single Family
Mortgage Revenue 8.200 03/01/2016 170,000 175,372
Texas Municipal Power Agency (MBIA) 6.100 09/01/2009 130,000 134,889
Texas State Public Finance Authority,
Technical College (MBIA) 6.250 08/01/2009 310,000 325,181
Texas State Public Finance Authority
Building Revenue,
Series A (AMBAC) 5.750 02/01/2015 500,000 486,075
Titus County, Texas, Water District #1,
Fresh Water Supply, Southwestern Electric
Power 8.200 08/01/2011 45,000 51,282
University of Texas, Permanent University
Fund 6.500 07/01/2011 25,000 26,016
University of Texas, University Revenue,
Series B 6.750 08/15/2013 180,000 189,250
Westside Calhoun County, Texas, Navigation
District, Union Carbide Co. 6.500 12/01/2008 50,000 50,000
TOTAL MUNICIPAL BONDS (Cost--$3,941,643) 3,988,044
See Notes to Schedule of Investments. (Continued on next page)
52
<PAGE>
TEMPORARY TAX-EXEMPT INVESTMENT (0.1%)
Texas Department of Housing and Community
Affairs, Multi- Family Housing Revenue
Refunding Bonds (High Point III
Development) Series 1993A
(Cost--$5,000)(a) 4.050% 02/01/2023 $5,000 $ 5,000
TOTAL INVESTMENTS (Cost--$3,946,643) (c) 3,993,044
OTHER ASSETS AND LIABILITIES--NET (0.7%) 28,558
NET ASSETS (100.0%) $4,021,602
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instrument with periodic demand feature. The
Fund is entitled to full payment of principal and interest upon
surrendering the security to the issuing agent according to the terms of
the demand feature.
(b) Effective yield is the yield at which the bond accretes on an annual
basis until its maturity. All zero coupon bonds are non-callable.
(c) The cost of investments for federal income tax purposes is $3,969,406.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at March 31, 1995 are as follows:
Gross unrealized appreciation $ 85,247
Gross unrealized depreciation (61,609)
Net unrealized appreciation $ 23,638
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
AMT--Subject to Alternative Minimum Tax
FGIC--Federal Guaranty Insurance Co.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
53
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
March 2, 1992
(Commencement of
Year Ended March 31, Operations) to
1995 1994 1993 March 31, 1992
<S> <C> <C> <C> <C>
Net asset value beginning of period $10.1300 $10.6400 $10.0300 $10.0000
Income from investment operations
Investment income--net 0.5611 0.5991 0.6176 0.0518
Net gain (loss) on investments and futures
contracts (0.0101) (0.4039) 0.6066 0.0300
Total income from investment operations 0.5510 0.1952 1.2242 0.0818
Less distributions from:
Investment income--net (0.5310) (0.5952) (0.6142) (0.0518)
In excess of realized gain on
investments--net (c) 0 (0.1100) 0 0
Total distributions (0.5310) (0.7052) (0.6142) (0.0518)
Net asset value end of period $10.1500 $10.1300 $10.6400 $10.0300
Total return (d) 5.66% 1.60% 12.51% 0.82%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 0.75% 0.29% 0.68% 0.65%(a)
Investment income--net 5.56% 5.51% 5.79% 5.95%(a)
Portfolio turnover rate 58% 56% 62% 19%
Net assets end of period (thousands) $ 1,635 $ 1,916 $ 2,194 $ 1,063
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 2.57%, 3.48%, 3.84%, and 1.93% (annualized) for the fiscal
years ended March 31, 1995, 1994, 1993, and the period from March 2, 1992
(Commencement of Operations) to March 31, 1992, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net". Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net". For the period March 2,
1992 (Date of Initial Public Offering) to March 31, 1992, distributions
in excess of book basis net income were presented as "Distributions from
paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
54
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $10.0800 $10.6600 $10.5300
Income from investment operations
Investment income--net 0.4809 0.5091 0.0822
Net gain (loss) on investments and futures contracts 0.0038 (0.4515) 0.1352
Total income from investment operations 0.4847 0.0576 0.2174
Less distributions from:
Investment income--net (0.4758) (0.4751) (0.0822)
In excess of investment income--net (c) (0.0389) (0.0525) (0.0052)
In excess of realized gain on investments--net 0 (0.1100) 0
Total distributions (0.5147) (0.6376) (0.0874)
Net asset value end of period $10.0500 $10.0800 $10.6600
Total return (d) 5.01% 0.29% 2.06%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.47% 1.50%(a)
Investment income--net 4.80% 4.37% 4.26%(a)
Portfolio turnover rate 58% 56% 62%
Net assets end of period (thousands) $ 2,163 $ 1,890 $ 235
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 3.36%, 4.19%, and 3.76% (annualized) for fiscal years ended
March 31, 1995, 1994 and the period from February 1, 1993 (Date of
Initial Public Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net". Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net". For the period February 1,
1993 (Date of Initial Public Offering) to March 31, 1993, distributions
in excess of book basis net income were presented as "Distributions from
paid-in capital."
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
55
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering) to
1995(e) 1994 March 31, 1993
<S> <C> <C> <C>
Net asset value beginning of period $10.0400 $10.6400 $10.5300
Income from investment operations
Investment income--net 0.4701 0.4643 0.0864
Net gain (loss) on investments and futures contracts 0.0261 (0.4386) 0.1100
Total income from investment operations 0.4962 0.0257 0.1964
Less distributions from:
Investment income--net (0.4722) (0.4349) (0.0864)
In excess of investment income--net (c) (0.0340) (0.0808) 0
In excess of realized gain on investments--net 0 (0.1100) 0
Total distributions (0.5062) (0.6257) (0.0864)
Net asset value end of period $10.0300 $10.0400 $10.6400
Total return (d) 5.14% (0.03%) 1.86%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.50% 1.84% 1.50%(a)
Investment income--net 4.88% 3.78% 5.03%(a)
Portfolio turnover rate 58% 56% 62%
Net assets end of period (thousands) $ 224 $ 813 $ 25
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would
have been 3.28%, 4.39%, and 4.15% (annualized) for the fiscal years ended
March 31, 1995, 1994 and for the period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies." As a result, distribution amounts exceeding book basis net
income (or tax basis net income on a temporary basis) are presented as
"Distributions in excess of investment income--net". Similarly, capital
gain distributions in excess of book basis capital gains (or tax basis
capital gains on a temporary basis) are presented as "Distributions in
excess of realized gains on investments--net". For the period February 1,
1993 (Date of Initial Public Offering) to March 31, 1993, distributions
in excess of book basis net income were presented as "Distributions from
paid-in capital."
(d) Excluding applicable sales charges.
(e) Calculation based on average shares outstanding.
See Notes to Financial Statements.
56
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1995
Assets:
Investments at market value (identified cost--$3,946,643)
(Note 1) $3,993,044
Cash 1,760
Interest receivable 55,915
Due from Investment Adviser (Note 4) 6,978
Unamortized organization expenses (Note 1) 4,099
Prepaid expenses and other assets 115
Total assets 4,061,911
Liabilities (Notes 2, 4 and 5):
Income distributions 17,983
Accrued reimbursable expenses 393
Other accrued expenses 21,933
Total liabilities 40,309
Net assets $4,021,602
Net assets represented by (Note 1):
Paid-in capital $4,285,982
Undistributed investment income--net 21,818
Accumulated realized gains (losses) on investments and
closed futures contracts--net (332,599)
Net unrealized appreciation on investments 46,401
Total net assets $4,021,602
Net asset value per share (Note 2):
Class A Shares ($10.15 on 161,045 shares outstanding) $1,634,823
Class B Shares ($10.05 on 215,314 shares outstanding) 2,162,852
Class C Shares ($10.03 on 22,316 shares outstanding) 223,927
$4,021,602
Offering price per share:
Class A Shares (including sales charge of 4.75%) (Note 2) $ 10.66
Class B Shares $ 10.05
Class C Shares $ 10.03
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Year Ended March 31, 1995
<TABLE>
<S> <C> <C>
Investment Income:
Interest $ 291,747
Expenses (Notes 1, 2 and 4):
Management fee $ 25,402
Shareholder services 6,215
Custodian fees 20,266
Accounting 13,870
Auditing 7,886
Legal 9,200
Printing 14,975
Registration fees 11,310
Distribution Plan expenses 26,837
Amortization of organization expenses 2,159
Miscellaneous expenses 1,174
Total expenses 139,294
Less: Reimbursement from Investment Adviser (Note 4) (84,650)
Net expenses 54,644
Investment income--net (Note 1) 237,103
Realized and unrealized gain (loss) on investments and closed futures
contracts--net: (Notes 1 and 3)
Realized loss on:
Investments (289,473)
Closed futures contracts (19,570)
Realized loss on investments and closed futures contracts--net (309,043)
Net unrealized appreciation (depreciation) on investments:
Beginning of year (164,645)
End of year 46,401
Net change in unrealized appreciation (depreciation) on investments 211,046
Net loss on investments and closed futures contracts (97,997)
Net increase in net assets resulting from operations $ 139,106
</TABLE>
57
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended March 31,
1995 1994
<S> <C> <C>
Operations:
Investment income--net $ 237,103 $ 197,103
Realized loss on investments and closed futures contracts--net (309,043) (4,956)
Net change in unrealized appreciation (depreciation) on investments 211,046 (218,646)
Net increase (decrease) in net assets resulting from operations 139,106 (26,499)
Distributions to shareholders from (Notes 1 and 5):
Investment income--net:
Class A Shares (103,988) (123,793)
Class B Shares (99,393) (49,517)
Class C Shares (29,138) (22,411)
In excess of investment income--net:
Class B Shares (8,132) (5,472)
Class C Shares (2,097) (4,165)
In excess of realized gain on investments--net
Class A Shares 0 (22,232)
Class B Shares 0 (15,613)
Class C Shares 0 (8,549)
Total distributions to shareholders (242,748) (251,752)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 258,882 300,604
Proceeds from shares sold--Class B Shares 971,881 1,766,963
Proceeds from shares sold--Class C Shares 137,217 901,208
Payment for shares redeemed--Class A Shares (577,484) (567,582)
Payment for shares redeemed--Class B Shares (744,621) (28,895)
Payment for shares redeemed--Class C Shares (687,214) (79,571)
Net asset value of shares issued in reinvestment of distributions
from:
Investment income--net and in excess of investment income--net--Class
A Shares 64,701 63,221
Investment income--net and in excess of investment income--net--Class
B Shares 67,669 31,641
Investment income--net and in excess of investment income--net--Class
C Shares 15,761 19,608
In excess of realized gain on investments--net--Class A Shares 0 16,293
In excess of realized gain on investments--net--Class B Shares 0 10,991
In excess of realized gain on investments--net--Class C Shares 0 8,325
Net increase (decrease) in net assets resulting from capital share
transactions (493,208) 2,442,806
Total increase (decrease) in net assets (596,850) 2,164,555
Net assets:
Beginning of year 4,618,452 2,453,897
End of year [Including undistributed investment income--net
(accumulated distributions in excess of investment income--net) as
follows: March 1995 $21,818 and March 1994 ($8,181)] (Note 1) $4,021,602 $4,618,452
</TABLE>
See Notes to Financial Statements.
58
<PAGE>
FEDERAL TAX STATUS--Fiscal 1995 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.5310
Class B Shares
Income Dividends
Tax-exempt
$0.5147
Class C Shares
Income Dividends
Tax-exempt
$0.5062
In January, 1996 complete information on calendar year 1995 distributions
will be forwarded to you to assist in completing your 1995 federal income tax
return.
See Notes to Financial Statements.
59
<PAGE>
Keystone State Tax Free Fund
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Keystone State Tax Free Fund (formerly Keystone America State Tax Free Fund)
("FUND") was formed as a Massachusetts business trust on September 13, 1990.
Keystone Investment Management Company (formerly Keystone Custodian Funds,
Inc.) ("Keystone") is the Investment Adviser and Manager. The FUND currently
offers shares of five separate series evidencing interests in different
portfolios of securities: the Keystone Florida Tax Free Fund (formerly
Keystone America Florida Tax Free Fund) ("Florida Fund"), which was
established on September 19, 1990 and had no operations prior to December 28,
1990; the Keystone Massachusetts Tax Free Fund (formerly Keystone America
Massachusetts Tax Free Fund) ("Massachusetts Fund"), and the Keystone New
York Insured Tax Free Fund (formerly Keystone America New York Insured Tax
Free Fund) ("New York Fund"), which were established February 21, 1992 and
had no operations prior to February 4, 1994; the Keystone Pennsylvania Tax
Free Fund (formerly Keystone America Pennsylvania Tax Free Fund)
("Pennsylvania Fund"), which was established September 19, 1989 and had no
operations prior to December 27, 1990; and the Keystone Texas Tax Free Fund
(formerly Keystone America Texas Tax Free Fund) ("Texas Fund"), which was
established on February 21, 1992 and had no operations prior to March 2, 1992
(together the "Funds" and each individually a "Fund"). The FUND is registered
under the Investment Company Act of 1940 as an open-end investment company
and each of the Funds is registered as a nondiversified fund.
Each Fund issues Class A, Class B and Class C shares. Class A shares are
sold subject to a maximum sales charge of 4.75% payable at the time of
purchase. Class B shares are sold subject to a contingent deferred sales
charge payable upon redemption within three calendar years after the year of
purchase. Class C shares are sold subject to a contingent deferred sales
charge payable upon redemption within one year of purchase. Class C shares
are available only through dealers who have entered into special distribution
agreements with Keystone Investment Distributors Company (formerly Keystone
Distributors, Inc.) ("KIDC"), the FUND's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
(formerly Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is
privately owned by an investor group consisting of members of current
management. Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned
subsidiary of Keystone, is the FUND's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the FUND, in conformity with generally accepted accounting
principles.
A. Tax-exempt bonds are stated on the basis of valuations provided by a
pricing service, approved by the Board of Trustees, that uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Non-tax-exempt securities for which market
quotations are readily available are valued at the price quoted which, in the
opinion of the Board of Trustees or their representative, most nearly
represents their market value. Short-term investments which are purchased
with maturities of sixty days or less are valued at amortized cost (original
cost as adjusted for amortization of premium or accretion of discount) which
when combined with accrued interest approximates market. Short term
investments maturing in more than sixty days for which market quotations are
readily available are valued at current market value. Short-term investments
maturing in more than sixty days when purchased which are held on the
sixtieth day prior to maturity are valued at amortized cost (market value on
the sixtieth day adjusted for amorti-
60
<PAGE>
zation of premium or accretion of discount) which when combined with accrued
interest approximates market. All other securities and other assets are
valued at fair value as determined in good faith using methods prescribed by
the Board of Trustees.
Each Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security, financial instrument, or, in the case of a
stock index, cash at a set price on a future date. Upon entering into a
futures contract the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at fiscal year end are marked-to-market and the
resultant net gain or loss is included in the Fund's taxable income. In
addition to market risk, the Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
B. 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. 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 agreements are subject to risks from changes in value based upon
changes in the level of interest rates and other market factors, both before
and after delivery.
C. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis.
D. Each Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, each Fund expects to be relieved of
any federal income tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The tax-exempt interest portion of each dividend is declared uniformly based
on the ratio of each Fund's tax-exempt and taxable income for the entire
year. Each Fund intends to avoid excise tax liability by making the required
distributions under the Internal Revenue Code.
E. Organization expenses are being amortized to operations over a five-year
period on a straight-line basis. In the event any of the initial shares are
redeemed by any holder thereof during the five-year amortization period,
redemption proceeds will be reduced by any unamortized organization expenses
in the same proportion as the number of initial shares being redeemed bears
to the number of initial shares outstanding at the time of redemption.
2. Capital Share Transactions
The Trust agreement authorizes the issuance of an unlimited number of shares
of beneficial interest without par value. Transactions in shares of the FUND
were as follows:
61
<PAGE>
Keystone State Tax Free Fund
Florida Fund
Class A Shares
Year Ended March 31,
1995 1994
Shares sold 594,097 1,132,680
Shares redeemed (961,330) (766,821)
Shares issued in
reinvestment of
dividends and
distributions 70,513 90,781
Net increase (decrease) (296,720) 456,640
Class B Shares
Year Ended March 31,
1995 1994
Shares sold 3,504,376 1,822,413
Shares redeemed (544,344) (59,616)
Shares issued in
reinvestment of
dividends and
distributions 82,908 26,492
Net increase (decrease) 3,042,940 1,789,289
Class C Shares
Year Ended March 31,
1995 1994
Shares sold 643,062 1,172,529
Shares redeemed (704,324) (105,663)
Shares issued in
reinvestment of
dividends and
distributions 38,331 24,930
Net increase (decrease) (22,931) 1,091,796
Massachusetts Fund
Class A Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 141,360 169,889
Shares redeemed (93,803) (9,554)
Shares issued in
reinvestment of
dividends and
distributions 6,770 241
Net increase (decrease) 54,327 160,576
Class B Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 532,363 198,306
Shares redeemed (69,932) (500)
Shares issued in
reinvestment of
dividends and
distributions 14,043 16
Net increase (decrease) 476,474 197,822
Class C Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 189,623 40,587
Shares redeemed (20,305) (500)
Shares issued in
reinvestment of
dividends and
distributions 6,195 36
Net increase (decrease) 175,513 40,123
62
<PAGE>
New York Fund
Class A Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 315,837 89,267
Shares redeemed (41,667) (16,300)
Shares issued in
reinvestment of
dividends and
distributions 5,049 0
Net increase (decrease) 279,219 72,967
Class B Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 1,155,373 260,571
Shares redeemed (153,738) (16,358)
Shares issued in
reinvestment of
dividends and
distributions 24,119 4
Net increase (decrease) 1,025,754 244,217
Class C Shares
Year Ended February 4, 1994
March 31, 1995 to March 31, 1994
Shares sold 288,523 43,808
Shares redeemed (14,006) (16,400)
Shares issued in
reinvestment of
dividends and
distributions 6,435 0
Net increase (decrease) 280,952 27,408
Pennsylvania Fund
Class A Shares
Year Ended March 31,
1995 1994
Shares sold 422,375 842,721
Shares redeemed (494,154) (1,258,721)
Shares issued in
reinvestment of
dividends and
distributions 87,463 83,694
Net increase (decrease) 15,684 (332,306)
Class B Shares
Year Ended March 31,
1995 1994
Shares sold 1,037,572 1,782,476
Shares redeemed (282,691) (39,183)
Shares issued in
reinvestment of
dividends and
distributions 82,087 33,981
Net increase (decrease) 836,968 1,777,274
Class C Shares
Year Ended March 31,
1995 1994
Shares sold 306,060 808,331
Shares redeemed (312,198) (58,600)
Shares issued in
reinvestment of
dividends and
distributions 34,993 20,350
Net increase (decrease) 28,855 770,081
63
<PAGE>
Texas Fund
Class A Shares
Year Ended March 31,
1995 1994
Shares sold 25,763 27,776
Shares redeemed (60,316) (52,129)
Shares issued in
reinvestment of
dividends and
distributions 6,476 7,317
Net increase (decrease) (28,077) (17,036)
Class B Shares
Year Ended March 31,
1995 1994
Shares sold 96,577 164,066
Shares redeemed (75,526) (2,615)
Shares issued in
reinvestment of
dividends and
distributions 6,859 3,915
Net increase (decrease) 27,910 165,366
Class C Shares
Year Ended March 31,
1995 1994
Shares sold 14,015 83,240
Shares redeemed (74,258) (7,206)
Shares issued in
reinvestment of
dividends and
distributions 1,584 2,567
Net increase (decrease) (58,659) 78,601
Each Fund bears some of the costs of selling its shares under a
Distribution Plan adopted with respect to its Class A, Class B, and Class C
shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
the Distribution Plan, the Fund pays KIDC, the principal underwriter and a
wholly-owned subsidiary of Keystone, amounts which in total may not exceed
the Distribution Plan maximum.
Each Class A Distribution Plan provides for payments which are currently
limited to 0.15% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
each Fund to KIDC under the Class A Distribution Plan are currently used to
pay others such as brokers or dealers, service fees at an annual rate of
0.15% of the average net asset value of the shares sold by such others and
remaining outstanding on the books of the Funds for specified periods.
Each Class B Distribution Plan provides for payments at an annual rate of
0.90% of the average daily net asset value of Class B shares to pay expenses
of the distribution of Class B shares. Amounts paid by each Fund under the
Class B Distribution Plan are currently used to pay others (dealers) (i) a
commission at the time of purchase normally equal to 3.00% of the value of
each share sold; and/or (ii) service fees currently at an annual rate of
0.15% of the average net asset value of shares sold by such others and
remaining outstanding on the books of the Funds for specified periods.
Each Class C Distribution Plan provides for payments at an annual rate of
up to 0.90% of the average daily net asset value of Class C shares to pay
expenses of the distribution of Class C shares. Amounts paid by each Fund
under the Class C Distribution Plan are currently used to pay others
(dealers) (i) a commission at the time of purchase normally equal to 1.00% of
the value of each share sold; and (ii) beginning approximately fifteen months
after purchase a commission at an annual rate of 0.75% (subject to applicable
limitations imposed by the rules of the National Association of Securities
Dealers, Inc. ("NASD")) plus service fees at an annual rate of 0.15% of the
average net asset value of each share sold by such others and
64
<PAGE>
remaining outstanding on the books of the Funds for specified periods.
Each of the Distribution Plans may be terminated at any time by vote of
the Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any of the
Distribution Plans, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the distribution Plan was in effect.
For the year ended March 31, 1995, the Florida Fund paid KIDC $66,246,
$345,221 and $140,405, the Massachusetts Fund paid KIDC $1,829, $40,387 and
$15,014, the New York Fund paid KIDC $3,025, $70,227, and $15,895, the
Pennsylvania Fund paid KIDC $44,697, $244,404 and $81,781, and the Texas Fund
paid KIDC $2,847, $18,613 and $5,377, respectively, pursuant to each Fund's
Class A, Class B, and Class C Distribution Plans.
Under a Rule of the NASD, the maximum uncollected amounts for which KIDC
may seek payment from the FUND under its Class B Distribution Plans are
$3,196,058, $384,672, $728,940, $1,923,455, and $145,495, respectively, for
the Florida Fund, the Massachusetts Fund, the New York Fund, the Pennsylvania
Fund and the Texas Fund as of March 31, 1995. The maximum uncollected amounts
for which KIDC may seek payment from the FUND under its Class C Distribution
Plans are $1,218,232, $118,845, $176,106, $743,501, and $58,326,
respectively, for the Florida Fund, the Massachusetts Fund, the New York
Fund, the Pennsylvania Fund and the Texas Fund as of March 31, 1995.
3. Securities Transactions
As of March 31, 1995, the Florida Fund, the Massachusetts Fund, the New York
Fund, the Pennsylvania Fund and the Texas Fund had capital loss carryovers
for federal income tax purposes of approximately $2,981,000, $195,000,
$1,000, $1,503,000, and $110,000, respectively, which expire in 2003.
Purchases and sales of investment securities (including proceeds received at
maturity), during the year ended March 31, 1995 were as follows:
Florida Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $153,556,374 $122,377,974
Short-term commercial and
tax-exempt notes 69,395,000 63,760,000
$222,951,374 $186,137,974
Massachusetts Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $11,543,684 $ 5,815,892
Short-term commercial and
tax-exempt notes 7,502,000 7,857,000
$19,045,684 $13,672,892
New York Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $23,006,381 $ 8,408,545
Short-term commercial and
tax-exempt notes 12,760,000 13,260,000
$35,766,381 $21,668,545
Pennsylvania Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $ 71,879,367 $62,540,085
Short-term commercial and
tax-exempt notes 35,440,000 36,455,000
$107,319,367 $98,995,085
65
<PAGE>
Texas Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $2,584,895 $2,907,532
Short-term commercial and
tax-exempt notes 1,900,000 2,065,000
$4,484,895 $4,972,532
4. Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between Keystone and
the FUND, dated November 29, 1990, Keystone provides investment management
and administrative services to the FUND and its Funds. In return, Keystone is
paid a management fee computed and paid daily. The management fee is
calculated by applying percentage rates, which start at 0.55% and decline, as
net assets increase, to 0.25% per annum, to the net asset value of each Fund.
During the year ended March 31, 1995, the Florida Fund, the Massachusetts
Fund, the New York Fund, the Pennsylvania Fund and the Texas Fund paid or
accrued to Keystone investment management and administrative services fees of
$515,205, $43,636, $63,808, $357,852 and $25,402, respectively, which
represented 0.52%, 0.55%, 0.55%, 0.54%, and 0.55%, respectively, of the
average net assets of the Funds on an annualized basis.
During the year ended March 31, 1995, the Florida Fund, the Massachusetts
Fund, the New York Fund, the Pennsylvania Fund and the Texas Fund paid or
accrued to KII $13,052, $17,498, $17,698, $20,909 and $13,870, respectively,
for certain accounting and printing services and to KIRC $116,367, $15,568,
$25,831, $108,073, and $6,215, respectively, for transfer agent fees.
Keystone has voluntarily agreed to limit all expenses incurred including
management fee of the Class A Shares of the Florida Fund, the Pennsylvania
Fund and the Texas Fund to 0.75% of average daily net assets and has limited
annual expenses of the Class B Shares and Class C Shares to 1.50% of average
daily net asset value.
Keystone voluntarily limited the expenses, including the management fee,
of the Class A Shares of the Massachusetts Fund and the New York Fund to
0.35% until August 15, 1994, after which the expense limitation is being
increased by 0.10% every three months until May 15, 1995 when expenses will
be limited to 0.75% until December 31, 1995. Expenses of Class B Shares and
Class C Shares of those Funds were limited to 1.10% until August 15, 1994,
after which the expense limitations are being similarly increased until May
15, 1995 when expenses will be limited to 1.50% until December 31, 1995.
Keystone will not be required to make such reimbursement to an extent which
would result in a Fund's inability to qualify as a regulated investment
company under the provisions of the Internal Revenue Code. In accordance with
this voluntary expense limitation, Keystone reimbursed the Florida Fund, the
Massachusetts Fund, the New York Fund, the Pennsylvania Fund and the Texas
Fund (i) $89,179, $26,169, $22,366, $91,489 and $35,517, respectively, with
respect to each Fund's Class A Shares, (ii) $68,953, $64,511, $85,602,
$81,415 and $38,490, respectively, with respect to each Fund's Class B
Shares; and (iii) $31,739, $24,181, $18,786, $27,453 and $10,643,
respectively, with respect to each Fund's Class C Shares. Keystone does not
intend to seek repayment of these amounts.
66
<PAGE>
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the FUND. Officers of Keystone and affiliated Trustees receive no
compensation directly from the FUND. Currently, the Independent Trustees of
the FUND receive no compensation for their services.
5. Distributions to Shareholders
Each Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains, if any, at least
annually. Distributions are determined in accordance with income tax
regulations. Distributions from tax basis net investment income and net
capital gains can exceed book basis net investment income and net capital
gains.
67
<PAGE>
Keystone State Tax Free Fund
Index to Financial Statements
Page
Keystone Florida Tax Free Fund
Schedule of Investments as of March 31, 1995 18
Financial Highlights--for a share outstanding throughout the period:
Class A shares for each of the years in the four-year period ended
March 31, 1995 and the period from December 28, 1990 to March 31,
1991 21
Class B shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 22
Class C shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 23
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1995 24
Statement of Operations for the year ended March 31, 1995 24
Statements of Changes in Net Assets for each of the years in the two
year period ended March 31, 1995 25
Federal Tax Status (unaudited) 26
Keystone Massachusetts Tax Free Fund
Schedule of Investments as of March 31, 1995 27
Financial Highlights--for a share outstanding throughout the period:
Class A shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 29
Class B shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 30
Class C shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 31
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1995 32
Statement of Operations for the year ended March 31, 1995 32
Statements of Changes in Net Assets for the year ended March 31, 1995
and the period from February 4, 1994 to March 31, 1994 33
Federal Tax Status (Unaudited) 34
Keystone New York Insured Tax Free Fund
Schedule of Investments as of March 31, 1995 35
Financial Highlights--for a share outstanding throughout the period:
Class A shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 37
Class B shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 38
Class C shares for the year ended March 31, 1995 and the period from
February 4, 1994 to March 31, 1994 39
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1995 40
Statement of Operations for the year ended March 31, 1995 40
Statements of Changes in Net Assets for the year ended March 31, 1995
and the period from February 4, 1994 to March 31, 1994 41
Federal Tax Status (Unaudited) 42
68
<PAGE>
Keystone Pennsylvania Tax Free Fund
Schedule of Investments as of March 31, 1995
Financial Highlights--for a share outstanding throughout the period: 43
Class A shares for each of the years in the four-year period ended
March 31, 1995 and the period from December 27, 1990 to March 31,
1991 46
Class B shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 47
Class C shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 48
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1995 49
Statement of Operations for the year ended March 31, 1995 49
Statements of Changes in Net Assets for each of the years in the two
year period ended March 31, 1995 50
Federal Tax Status (Unaudited) 51
Keystone Texas Tax Free Fund
Schedule of Investments as of March 31, 1995 52
Financial Highlights--for a share outstanding throughout the period:
Class A shares for each of the years in the three-year period ended
March 31, 1995 and the period from March 2, 1992 to March 31, 1992 54
Class B shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 55
Class C shares for each of the years in the two-year period ended
March 31, 1995 and the period from February 1, 1993 to March 31,
1993 56
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1995 57
Statement of Operations for the year ended March 31, 1995 57
Statements of Changes in Net Assets for each of the years in the two
year period ended March 31, 1995 58
Federal Tax Status (Unaudited) 59
Notes to Financial Statements 60
Independent Auditors' Report 70
69
<PAGE>
Keystone State Tax Free Fund
Independent Auditors' Report
The Trustees and Shareholders of
Keystone State Tax Free Fund (formerly Keystone America State Tax Free Fund)
We have audited the financial statements, including the schedules of
investments and the financial highlights for the portfolios of Keystone State
Tax Free Fund ("the Funds") as listed in the accompanying index to financial
statements. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of March 31, 1995 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
portfolios of Keystone State Tax Free Fund as of March 31, 1995, the results
of their operations, the changes in their net assets and the financial
highlights for each of the periods specified in the index to financial
statements in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
May 5, 1995
70
<PAGE>
[Back Cover]
Keystone America
Family Of Funds
[diamond]
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund, Inc.
Omega Fund, Inc.
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information of
the Fund's shareholders. Its use for other purposes is
authorized only when it is preceded or accompanied by the
prospectus, describing all fees, charges and other important
facts about the Fund.
[Keystone logo]
P.O. Box 2121
Boston, Massachusetts 02106-2121
STFF-AR-5/95
10M ["Recycle" symbol]
<PAGE>
[Front Cover]
KEYSTONE
[Photo: Flag flying, government-type building in background]
STATE
TAX FREE FUND
FLORIDA TAX FREE FUND
MASSACHUSETTS TAX FREE FUND
NEW YORK INSURED TAX FREE FUND
PENNSYLVANIA TAX FREE FUND
TEXAS TAX FREE FUND
[Keystone logo]
ANNUAL REPORT
MARCH 31, 1995
EXHIBIT 17(d)(4)
Most Recent Semi-Annual Report
of
Keystone State Tax Free Fund
<PAGE>
PAGE 1
- ------------------------------------------------------------------
Keystone State Tax Free Fund
Seeks generous tax-free income from high quality municipal bonds
Dear Shareholder:
We are pleased to report on the performance of Keystone State Tax Free Fund
for the six-month period which ended September 30, 1995. Following this
letter we have included a performance summary for each state fund and an
interview with Keystone's municipal bond department, discussing the market's
performance.
Municipal bond market rebounded
After an unsettled market in 1994, municipal bond investors were rewarded for
their patience over the past six months. Interest rates trended down during
the period and bond prices rose. Low inflation combined with slow but steady
economic growth to create a more positive investment environment. The Lehman
Municipal Bond Index(1) returned 5.36% for the six-month period and 11.19%
for the twelve-month period which ended September 30, 1995.
The Federal Reserve Board succeeded in engineering a soft landing for the
U.S. economy which created a favorable environment for municipal bonds.
Compared to taxable Treasury bonds, municipals were relatively cheap. In
fact, municipal bond yields averaged about 92% of the yield on comparable
long-term U.S. Treasury bonds, making them especially attractive on an
after-tax basis.
During the six months, we continued to emphasize bonds with maturities in
the 20-year range to pursue higher income with lower risk than longer term
bonds. We selected higher coupon issues to take advantage of greater
potential income and stability, and favored non-callable bonds for their
price appreciation potential and predictable income flow.
We expect the interest rate environment to remain stable over the coming
months as the economy adjusts to a slower pace of economic growth.
Shareholders should not be surprised to see modest declines in yields
consistent with lower interest rates, but tight municipal bond supply and
steady to rising demand should continue to be a positive factor for municipal
bond prices. Keystone State Tax Free Funds maintain their objective of
seeking valuable state and federal tax-free income from a portfolio of
quality municipal obligations.(1)
We appreciate your continued support of Keystone funds. If you have any
questions or comments, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III
- --------------------------
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
- --------------------------
George S. Bissell
Chairman of the Board
Keystone Funds
November 1995
- -------------
(1) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
<PAGE>
PAGE 2
- ------------------------------------------------------------------
Keystone Florida Tax Free Fund
Your Fund's Performance
Your Fund's objective is to earn generous income, exempt from federal income
tax, while preserving capital.(2) In addition, your Fund seeks to ensure that
its shares are exempt from the Florida intangibles tax. Your Fund is managed
by Betsy Blacher, senior vice president and head of Keystone's municipal bond
department.
Performance
Class A shares returned 5.21% for the six-month period and 10.89% for the
twelve-month period.
Class B shares returned 4.93% for the six-month period and 10.19% for the
twelve-month period.
Class C shares returned 4.82% for the six-month period and 10.13% for the
twelve-month period.
Portfolio Strategy
Your Fund's portfolio was well positioned to take advantage of the declining
interest rate environment during the six-month period. We continued to use a
"barbell" strategy, with a heavy weighting in AAA- rated bonds for stability
and in BBB-rated issues (the lowest investment grade category) for yield and
price appreciation potential. We also invested in some industrial revenue
bonds for attractive income. Your Fund's average maturity was 20.8 years on
September 30, 1995, up from 19.5 years on March 31, 1995. As of September 30,
1995, your Fund's average quality was AA, the second highest bond rating.
Economic Environment
Florida is now the fourth largest state in the nation due to rapid population
growth. Tourism has improved considerably after a slight decline last year,
and the
- --------------------------------------------------------------------------
[typeset description of Pie Chart]
Portfolio Quality Summary
as of September 30, 1995
S&P Rating(3)
AAA (32%) Cash (2%) Not Rated (13%) BBB (19%) A (9%) AA (25%)
Average portfolio quality: AA
(as a percentage of portfolio assets)
- -----------------------------------------------------------------------------
employment situation compares favorably with the national average.
Offsetting this are slower income and household growth. Estimates project
this trend to continue which may affect other areas of growth, such as
construction activity. Tax revenues have been higher than expected, however,
and the state continues to experience a surplus in the general fund.
Outlook
We believe Florida's long-term outlook is stable, but it faces challenges in
funding for school construction, prison facilities and other infrastructure
needs. Floridians are reluctant to approve sales tax increases for these
purposes, so revenues will need to be generated in other ways. We will be
monitoring political and budgetary news as well as household and income
growth in the coming months.
- -------------
(2) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
(3) Where Standard & Poor's ratings were not available, we have used ratings
from Moody's Investor Service, Inc., Fitch Investors' Service, Inc., or
ratings assigned by another nationally recognized statistical rating
organization.
<PAGE>
PAGE 3
- ------------------------------------------------------------------
Keystone Florida Tax Free Fund
- -----------------------------------------------------------------------------
[typeset description of Mountain Chart]
Growth of an investment in
Keystone Florida Tax Free Fund Class A
In Thousands
Initial Reinvested
Investment Distributions
12/90 9629 9637
9/91 9963 10503
9/92 10287 11614
9/93 10887 13139
9/94 9610 12461
9/95 10077 13819
Total Value: $13,819
A $10,000 investment in Keystone Florida Tax Free Fund Class A made on
December 28, 1990 with all distributions reinvested was worth $13,819 on
September 30, 1995. Past performance is no guarantee of future results.
- -----------------------------------------------------------------------------
Tax-Equivalent Yields
Federal Tax Bracket(4)
- -------------------------------------
31% 36% 39.6%
- -------------------------------------
Yield Taxable Equivalent Yield
- -------------------------------------
4.5% 6.5% 7.0% 7.5%
5.0% 7.2% 7.8% 8.3%
5.5% 8.0% 8.6% 9.1%
- -------------------------------------
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
- -------------
(4) The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earnings
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields
are hypothetical and do not represent the returns of any particular
investment.
Six-Month Performance as of September 30, 1995
-----------------------------------------------------------------------------
Class A Class B Class C
Total returns* 5.21% 4.93% 4.82%
Net asset value 3/31/95 $10.33 $10.24 $10.26
9/30/95 $10.58 $10.48 $10.49
Dividends $ 0.28 $ 0.26 $ 0.26
Capital gains None None None
*Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of September 30, 1995
- -----------------------------------------------------------------------------
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 10.89% 10.19% 10.13%
1-year 5.62% 6.19% 10.13%
3-year 13.33% -- --
Life of Class 38.19% 10.40% 13.17%
Average Annual Returns
1-year w/o sales charge 10.89% 10.19% 10.13%
1-year 5.62% 5.62% 10.13%
3-year 4.26% -- --
Life of Class 7.03% 3.78% 4.75%
Class A shares were introduced on December 28, 1990. Performance is
reported at the current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Shares purchased after
June 1, 1995 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years from the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period
and reflects the deduction of a 4% CDSC.
Class C shares were introduced on February 1, 1993. Performance reflects
the return you would have received after holding shares for one year or more
and redeeming after the end of that period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 4
- ------------------------------------------------------------------
Keystone Massachusetts Tax Free Fund
Your Fund's Performance
Your Fund's objective is to earn generous income, exempt from federal and
state income tax, while preserving capital.(5) It is managed by Daniel A.
Rabasco, vice president in Keystone's municipal bond department.
Performance
Class A shares returned 4.20% for the six-month period and 9.66% for the
twelve-month period.
Class B shares returned 3.91% for the six-month period and 8.99% for the
twelve-month period.
Class C shares returned 3.91% for the six-month period and 8.96% for the
twelve-month period.
Portfolio Strategy
Your Fund's portfolio was well positioned to take advantage of the declining
interest rate environment during the six-month period. We maintained our
emphasis on high quality, higher coupon bonds and favored bonds with call
protection. We are also invested in several industrial revenue bonds for
attractive income. Your Fund's average maturity was 19.4 years on September
30, 1995, unchanged from March 31, 1995. As of September 30, 1995, your
Fund's average quality was A, the third highest bond rating.
Economic Environment
The Commonwealth's economy is fairly stable. Job losses due to declines in
defense spending and consolidation in the banking industry have been
generally offset by growth in the service sector. Improving eco-
- -----------------------------------------------------------------------------
[Typeset representation of pie chart]
Portfolio Quality Summary
as of September 30, 1995
S&P rating6
AAA (26%) Not Rated (11%) A (48%) AA (15%)
Average portfolio quality: A
(as a percentage of portfolio assets)
- -----------------------------------------------------------------------------
nomic conditions and more conservative fiscal management have resulted in
positive fund balances for the state treasury in each of the past five years,
a trend that is expected to continue. Medicaid expenditures are expected to
increase only marginally for fiscal year 1995.
Outlook
We don't expect to see significant growth in Massachusetts. However, we
continue to see economic opportunities for the Bay State from increases in
international trade and the ongoing public infrastructure projects. The
central artery and Boston Harbor cleanup projects should continue to be a
positive influence on the economy.
- -------------
(6) Where Standard & Poor's ratings were not available, we have used ratings
from Moody's Investor Service, Inc., Fitch Investors' Service, Inc., or
ratings assigned by another nationally recognized statistical rating
organization.
<PAGE>
PAGE 5
- ------------------------------------------------------------------
Keystone Massachusetts Tax Free Fund
- -----------------------------------------------------------------------------
[Typeset representation of mountain chart]
Growth of an investment in
Keystone Massachusetts Tax Free Fund Class A
In Thousands
Initial Reinvested
Investment Distributions
9372 9414
3/94 8734 8820
8696 8825
8772 8945
6/94 8639 8852
8772 9033
8734 9037
9/94 8563 8903
8315 8689
8096 8504
12/94 8296 8756
8525 9040
8725 9294
3/95 8753 9370
8715 9372
9001 9722
6/95 8791 9539
8763 9552
8848 9689
9/95 8877 9764
Total Value: $9,764
A $10,000 investment in Keystone Massachusetts Tax Free Fund Class A made on
February 4, 1994 with all distributions reinvested was worth $9,764 on
September 30, 1995. Past performance is no guarantee of future results.
- -----------------------------------------------------------------------------
Tax-Equivalent Yields
Federal Tax Bracket(7)
- ---------------------------------------------------------
31% 36% 39.6%
(combined state
& federal) (39.28%) (43.68%) (46.85%)
- ---------------------------------------------------------
Yield Taxable Equivalent Yield
- ---------------------------------------------------------
4.5% 7.4% 8.0% 8.5%
5.0% 8.2% 8.9% 9.4%
5.5% 9.1% 9.8% 10.3%
- ---------------------------------------------------------
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
(7) The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields are
hypothetical and do not represent the returns of any particular investment.
Six-Month Performance as of September 30, 1995
-----------------------------------------------------------------------------
Class A Class B Class C
Total returns* 4.20% 3.91% 3.91%
Net asset value 3/31/95 $9.19 $9.15 $9.14
9/30/95 $9.32 $9.27 $9.26
Dividends $0.25 $0.23 $0.23
Capital gains None None None
*Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of September 30, 1995
-----------------------------------------------------------------------------
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 9.66% 8.99% 8.96%
1-year 4.45% 4.99% 8.96%
Life of Class -2.36% -2.06% 1.43%
Average Annual Returns
1-year w/o sales charge 9.66% 8.99% 8.96%
1-year 4.45% 4.99% 8.96%
Life of Class -1.43% -1.25% 0.86%
Class A, Class B, and Class C shares were introduced on February 4, 1994.
Class A share performance is reported at the current maximum front-end
sales charge of 4.75%.
Class B shares purchased after June 1, 1995 are subject to a contingent
deferred sales charge (CDSC) that declines from 5% to 1% over six years from
the month purchased. Performance assumes that shares were redeemed after the
end of a one-year holding period and reflects the deduction of a 4% CDSC.
Class C shares were introduced on February 1, 1993. Performance reflects
the return you would have received after holding shares for one year or more
and redeeming after the end of that period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 6
- ------------------------------------------------------------------
Keystone New York Insured Tax Free Fund
Your Fund's Performance
Your Fund's objective is to earn generous income, exempt from federal, state,
and New York City income tax, while preserving capital.(8) It is managed by
Daniel A. Rabasco, vice president in Keystone's municipal bond department.
Performance
Class A shares returned 4.67% for the six-month period and 10.41% for the
twelve-month period.
Class B shares returned 4.28% for the six-month period and 9.66% for the
twelve-month period.
Class C shares returned 4.39% for the six-month period and 9.62% for the
twelve-month period.
Portfolio Strategy
Your Fund's portfolio was well positioned to take advantage of the declining
interest rate environment during the six-month period. We maintained our
emphasis on high quality, higher coupon insured bonds and favored bonds with
call protection. Your Fund's average maturity was 20.1 years on September 30,
1995, up slightly from 19.6 years on March 31, 1995. As of September 30,
1995, your Fund's average quality was AA+, the second highest bond rating.
Economic Environment
New York's economy continued to lag that of the nation, affected in part by
contraction in the banking and manufacturing sectors. For August 1995, the
state's unemployment rate was 7.1% compared to the
- -----------------------------------------------------------------------------
[Typeset representation of pie chart]
Portfolio Quality Summary
as of September 30, 1995
S&P rating(9)
AAA (90%) BBB (3%) AA (7%)
Average portfolio quality: AA+
(as a percentage of portfolio assets)
- -----------------------------------------------------------------------------
national average of 5.6%. A recent development is that New York ended fiscal
year 1995 with a positive fund balance and expects another positive balance
for 1996.
Outlook
Implementation of tax cuts that were part of the 1995 fiscal year budget may
strain the long term finances of the state. In addition, economic performance
is not expected to rebound appreciably, weighed down by significant social
service costs. With the challenging years that lie ahead for New York, we
believe that your Fund's emphasis on insured bonds should provide valuable
protection and stability.
- -------------
(8) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
(9) Where Standard & Poor's ratings were not available, we have used ratings
from Moody's Investor Service, Inc., Fitch Investors' Service, Inc., or
ratings assigned by another nationally recognized statistical rating
organization.
<PAGE>
PAGE 7
- ------------------------------------------------------------------
Keystone New York Insured Tax Free Fund
-----------------------------------------------------------------------------
[Plot points for mountain chart]
Growth of an investment in
Keystone New York Insured Tax Free Fund Class A
In Thousands
Initial Reinvested
Investment Distributions
9363 9404
3/94 8877 8962
8934 9062
9010 9182
6/94 8887 9098
9058 9316
8991 9290
9/94 8763 9097
8544 8912
8267 8666
12/94 8506 8957
8734 9239
8944 9502
3/95 8991 9596
8953 9597
9239 9946
6/95 9068 9803
9058 9835
9163 9991
9/95 9172 10044
Total Value: $10,044
A $10,000 investment in Keystone New York Insured Tax Free Fund Class A made
on February 4, 1994, with all distributions reinvested was worth $10,044 on
September 30, 1995. Past performance is no guarantee of future results.
- -----------------------------------------------------------------------------
Tax-Equivalent Yields
Federal Tax Bracket(10)
- -----------------------------------------------------------
31% 36% 39.6%
(combined city,
state & federal) (39.32%) (43.21%) (46.88%)
- -----------------------------------------------------------
Yield Taxable Equivalent Yield
- -----------------------------------------------------------
4.5% 7.4% 7.9% 8.5%
5.0% 8.2% 8.8% 9.4%
5.5% 9.1% 9.7% 10.4%
-----------------------------------------------------------
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
- -------------
(10) The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields
are hypothetical and do not represent the returns of any particular
investment.
Six-Month Performance as of September 30, 1995
-----------------------------------------------------------------------------
Class A Class B Class C
Total returns* 4.67% 4.28% 4.39%
Net asset value 3/31/95 $9.44 $9.38 $9.37
9/30/95 $9.63 $9.55 $9.55
Dividends $0.25 $0.23 $0.23
Capital gains None None None
*Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of September 30, 1995
-----------------------------------------------------------------------------
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 10.41% 9.66% 9.62%
1-year 5.17% 5.66% 9.62%
Life of Class 0.44% 0.46% 4.18%
Average Annual Returns
1-year w/o sales charge 10.41% 9.66% 9.62%
1-year 5.17% 5.66% 9.62%
Life of Class 0.26% 0.28% 2.49%
Class A, Class B, and Class C shares were introduced on February 4, 1994.
Class A share performance is reported at the current maximum front-end
sales charge of 4.75%.
Class B shares purchased after June 1, 1995 are subject to a contingent
deferred sales charge (CDSC) that declines from 5% to 1% over six years from
the month purchased. Performance assumes that shares were redeemed after the
end of a one-year holding period and reflects the deduction of a 4% CDSC.
Class C share performance reflects the return you would have received
after holding shares for one year or more and redeeming after the end of that
period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 8
- ------------------------------------------------------------------
Keystone Pennsylvania Tax Free Fund
Your Fund's Performance
Your Fund's objective is to earn generous income, exempt from federal, state,
and city income tax, while preserving capital.(11) In addition, your Fund
seeks to ensure that its shares are exempt from Pennsylvania's personal
property tax. It is managed by Daniel A. Rabasco, vice president in
Keystone's municipal bond department.
Performance
Class A shares returned 4.76% for the six-month period and 8.80% for the
twelve-month period.
Class B shares returned 4.31% for the six-month period and 7.95% for the
twelve-month period.
Class C shares returned 4.40% for the six-month period and 7.99% for the
twelve-month period.
Portfolio Strategy
Your Fund's portfolio was well positioned to take advantage of the declining
interest rate environment during the six-month period. We continued to use a
"barbell" strategy, with a heavy weighting in AAA- rated bonds for price
appreciation potential and in BBB-rated issues (the lowest investment grade
category) for yield. We also invested in some industrial revenue bonds for
attractive income. Your Fund's average maturity was 20.6 years on September
30, 1995, basically unchanged from 20.8 years on March 31, 1995. As of
September 30, 1995, your Fund's average quality was AA+, the second highest
bond rating.
Economic Environment
Pennsylvania's well diversified economy includes strong financial, medical
and technology sectors as well as its historical agricultural base. Stronger
than expected
-----------------------------------------------------------------------------
[Typeset representation of pie chart]
Portfolio Quality Summary
as of September 30, 1995
S&P Rating(12)
AAA (52%) Not Rated (6%) BBB (26%) A (6%) AA (10%)
Average portfolio quality: AA+
(as a percentage of portfolio assets)
- -----------------------------------------------------------------------------
business taxes in fiscal year 1994 resulted in a $540 million general fund
surplus. Between $54 million and $111 million of the surplus will be
transferred to the budget stabilization fund, a positive indicator of
longer-term fiscal strength. Pennsylvania's unemployment rate of 5.5% as of
July, 1995 is roughly the same as the national rate.
Outlook
We expect Pennsylvania's conservative and consistent fiscal policies to
continue to be favorable to municipal bond investors. Even though job growth
has slowed recently, the new diversified Pennsylvania economy should track
the nation. Additionally, Pittsburgh and Philadelphia, which account for
about half of the Commonwealth's population may also experience a boost from
strength in the high technology and financial services sectors.
-----------------------------------------------------------------------------
(11) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
(12) Where Standard & Poor's ratings were not available, we have used ratings
from Moody's Investor Service, Inc., Fitch Investors' Service, Inc., or
ratings assigned by another nationally recognized statistical rating
organization.
<PAGE>
PAGE 9
- ------------------------------------------------------------------
Keystone Pennsylvania Tax Free Fund
- -----------------------------------------------------------------------------
[Typeset representation of mountain chart]
Growth of an investment in
Keystone Pennsylvania Tax Free Fund
Class A
In Thousands
Initial Reinvested
Investment Distributions
12/90 9715 9723
9/91 10096 10652
9/92 10525 11849
9/93 11430 13646
9/94 10296 13078
9/95 10601 14230
Total Value: $14,230
A $10,000 investment in Keystone Pennsylvania tax Free Fund Class A made on
December 27, 1990 with all distributions reinvested was worth $14,230 on
September 30, 1995. Past performance is no guarantee of future results.
- -----------------------------------------------------------------------------
Tax-Equivalent Yields
Federal Tax Bracket(13)
-------------------------------------------------
31% 36% 39.6%
(combined state
& federal) (32.93%) (37.79%) (41.29%)
- --------------- ----- ----- -------
Yield Taxable Equivalent Yield
4.5% 6.7% 7.2% 7.7%
5.0% 7.5% 8.0% 8.5%
5.5% 8.2% 8.8% 9.4%
-------------------------------------------------
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
- -------------
(13) The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields
are hypothetical and do not represent the returns of any particular
investment.
Six-Month Performance as of September 30, 1995
-----------------------------------------------------------------------------
Class A Class B Class C
Total returns* 4.76% 4.31% 4.40%
Net asset value 3/31/95 $10.91 $10.81 $10.83
9/30/95 $11.13 $11.00 $11.03
Dividends $ 0.29 $ 0.27 $ 0.27
Capital gains None None None
*Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of September 30, 1995
-----------------------------------------------------------------------------
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 8.80% 7.95% 7.99%
1-year 3.63% 3.87% 7.99%
3-year 14.38% -- --
Life of Class 42.30% 10.66% 13.67%
Average Annual Returns
1-year w/o sales charge 8.80% 7.95% 7.99%
1-year 3.63% 3.87% 7.99%
3-year 4.58% -- --
Life of Class 7.69% 3.87% 4.92%
Class A shares were introduced on December 27, 1990. Performance is reported
at the current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Shares purchased after
June 1, 1995 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years from the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period
and reflects the deduction of a 4% CDSC.
Class C shares were introduced on February 1, 1993. Performance reflects
the return you would have received after holding shares for one year or more
and redeeming after the end of that period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 10
- ------------------------------------------------------------------
Keystone Texas Tax Free Fund
Your Fund's Performance
Your Fund's objective is to earn generous income, exempt from federal income
tax, while preserving capital.(14) Your Fund seeks to achieve its objective
by investing primarily in Texas municipal securities. It is managed by Daniel
A. Rabasco, vice president in Keystone's municipal bond department.
Performance
Class A shares returned 5.44% for the six-month period and 9.58% for the
twelve-month period.
Class B shares returned 5.05% for the six-month period and 8.82% for the
twelve-month period.
Class C shares returned 5.16% for the six-month period and 9.12% for the
twelve-month period.
Portfolio Strategy
Your Fund's portfolio was well positioned to take advantage of the declining
interest rate environment during the six-month period. We maintained our
emphasis on high quality, higher coupon bonds and favored bonds with call
protection. We also invested in some industrial revenue bonds for attractive
income. Your Fund's average maturity was 17.6 years on September 30, 1995,
down slightly from 18.1 years on March 31, 1995. As of September 30, 1995,
your Fund's average quality was AA, the second highest bond rating.
Economic Environment
Texas continues to experience strong employment growth. Between August 1994
and August 1995 the Lone Star state added almost 250,000 jobs and employment
increased 3.2%. Texas recently passed
-----------------------------------------------------------------------------
[Typeset representation of pie chart]
Portfolio Quality Summary
as of September 30, 1995
S&P rating(15)
AAA (41%) BBB (3%) A (26%) AA (30%)
Average portfolio quality: AA
(as a percentage of portfolio assets)
-----------------------------------------------------------------------------
New York as the second most populous state in the nation. Continued
improvement in the economy has produced strong revenue growth in the face of
rising expenditures. Texas finished fiscal year 1995 with a general fund
surplus of approximately $2.1 billion, and has ended each of the past seven
years with significant surpluses.
Outlook
We believe Texas should continue to enjoy strong employment growth. Its plan
to save on Medicaid costs through use of managed care is currently awaiting
federal waiver, and its program for education reform was finally upheld by
the State Supreme Court. We believe the state's large, growing and
increasingly diversified economy and its prudent and innovative fiscal
management should help it maintain its record of strong fiscal performance.
- -------------
(14) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
(15) Where Standard & Poor's ratings were not available, we have used ratings
from Moody's Investor Service, Inc., Fitch Investors' Service, Inc., or
ratings assigned by another nationally recognized statistical rating
organization.
<PAGE>
PAGE 11
- ------------------------------------------------------------------
Keystone Texas Tax Free Fund
- -----------------------------------------------------------------------------
[Typeset representation of mountain chart]
Growth of an investment in
Keystone Texas Tax Free Fund Class A
In Thousands
Initial Reinvested
Investment Distributions
3/92 9553 9603
9/92 9906 10263
9/93 10601 11631
9/94 9563 11160
9/95 9925 12229
Total Value: $12,229
A $10,000 investment in Keystone Texas Tax Free Fund Class A made on March 1,
1992 with all distributions reinvested was worth $12,229 on September 30,
1995. Past performance is no guarantee of future results.
- -----------------------------------------------------------------------------
Tax-Equivalent Yields
Federal Tax Bracket(16)
- -------------------------------------
31% 36% 39.6%
- -------------------------------------
Yield Taxable Equivalent Yield
- -------------------------------------
4.5% 6.5% 7.0% 7.5%
5.0% 7.2% 7.8% 8.3%
5.5% 8.0% 8.6% 9.1%
- -------------------------------------
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
- -------------
(16) The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields
are hypothetical and do not represent the returns of any particular
investment.
Six-Month Performance as of September 30, 1995
- -----------------------------------------------------------------------------
Class A Class B Class C
Total returns* 5.44% 5.05% 5.16%
Net asset value 3/31/95 $10.15 $10.05 $10.03
9/30/95 $10.42 $10.30 $10.29
Dividends $ 0.28 $ 0.25 $ 0.25
Capital gains None None None
*Before deduction of front-end or contingent deferred sales charge (CDSC).
Historical Record as of September 30, 1995
- -----------------------------------------------------------------------------
Cumulative total returns Class A Class B Class C
1-year w/o sales charge 9.58% 8.82% 9.12%
1-year 4.38% 4.82% 9.12%
3-year 13.50% -- --
Life of Class 22.29% 9.96% 12.58%
Average Annual Returns
1-year w/o sales charge 9.58% 8.82% 9.12%
1-year 4.38% 4.82% 9.12%
3-year 4.31% -- --
Life of Class 5.78% 3.63% 4.54%
Class A shares were introduced on March 2, 1992. Performance is reported at
the current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Shares purchased after
June 1, 1995 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years from the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period
and reflects the deduction of a 4% CDSC.
Class C shares were introduced on February 1, 1993. Performance reflects
the return you would have received after holding shares for one year or more
and redeeming after the end of that period.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
Performance for each class will differ.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 12
- ------------------------------------------------------------------
Keystone State Tax Free Fund
A Discussion With
Your Fund's Management
Keystone State Tax Free Funds are managed by Keystone's
municipal bond team, headed by senior vice president
Betsy Blacher. The team is comprised of five investment
professionals who are dedicated to researching, analyzing and
evaluating municipal bonds for each fund. We asked them
several questions about the market's recent performance.
Their responses follow.
Q What do Keystone State Tax Free Funds offer investors?
A The Funds are designed for tax-sensitive investors. The Funds offer
professional management and diversification from a portfolio of quality
municipal bonds. We manage each state fund with careful attention to credit
quality and financial stability. Each portfolio seeks consistent, attractive
income that is exempt from federal income and state (and city) taxes as
applicable.(17) In states that tax intangible assets or personal property
(Florida and Pennsylvania), we also seek tax-exempt status.
Q How did economic conditions affect the municipal bond market over the past
six months?
A 1995 has been a much improved environment for municipal bonds. Lower
interest rates contributed to a nice rebound for municipal bond prices, in
sharp contrast to 1994. Combined with low inflation, real after-tax yields
for municipal bond investors were quite attractive.
Q How did the Funds perform?
A All five Keystone funds posted positive total returns for the six months
which ended September 30, 1995. Shares prices rose during the period and
paralleled the performance of the municipal bond market. The Funds continued
to provide shareholders with attractive tax-free income. Considering all the
talk about a flat tax in Congress, we were pleased with the Funds'
performance.
Q What effect would a flat tax have on municipal bond investments?
A Enactment of a flat tax would eliminate the tax advantage of municipal
bonds because the income they pay would no longer be tax-exempt. As a result,
states and local governments would lose an important source of inexpensive
financing.
Q Do you believe a flat tax will be enacted?
A No, we believe the enactment of a flat tax is highly unlikely. But,
discussions in Washington held back performance that would otherwise have
been even stronger for municipal bonds. We would not be surprised to see some
minor changes to the tax code, but we see significant hurdles to
implementation of a flat tax. On the national level, any decrease in tax
revenues would make it even more difficult to balance the federal budget. On
the local level, many state governments are already strained to pay for a
greater portion of federally mandated services, such as Medicaid. Eliminating
states' ability to issue tax-free bonds would make this problem even worse.
Because of this, we think passage of a flat tax is highly unlikely.
Q What were the key components of your investment strategy?
A Based on the yield curve (see chart), we concentrated on bonds with
20-year maturities because they provided yields close to those of 30-year
bonds but with less risk. We continued to focus on high quality bonds with
higher coupons to maximize tax-free income.We continued our emphasis on
"non-callable" bonds--bonds which cannot be called back by their issures and
repaid early--to increase the potential for price appreciation. We also
invested selectively in industrial development bonds to take advantage of
their higher yields.
- -------------
(17) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
<PAGE>
PAGE 13
- ------------------------------------------------------------------
Keystone State Tax Free Fund
[typeset representation of line chart]
Municipals Treasuries
1 3.85 5.57
2 4.1 5.78
5 4.3 5.88
10 4.8 6.08
20 5.7 6.16 -- Best Value
30 5.9 6.43 Limited additional yield beyond 20 years,
but more risk.
Because the difference in yield between 20-year and 30-year bonds was small, we
emphasized 20 year bonds.
Source: Goldman Sachs
- --------------------------------------------------------------------
Q What types of bonds do you favor in today's environment?
A We are extremely selective about fund holdings and generally prefer bonds
rated A or better. We continue to emphasize high quality essential services
and general obligation bonds--bonds that we believe should do well in a slow
growth economy. We maintain core positions of relatively high coupon bonds to
generate strong income streams, and invest in a small percentage of lower
quality bonds for their high yields or price appreciation potential. We
always evaluate how a potential holding will fit with the existing
composition of each portfolio, and strive to build portfolios that are
diversified across credit sectors and maturities.
Q What is your outlook for the municipal bond market?
A We are cautiously positive on the market. The trend in rates is down,
inflation is low, the dollar is stronger against foreign currencies and the
economy seems to have adjusted to slower growth. While we will continue to
monitor Washington's discussions on a flat tax, we believe these are all
positive factors for municipal bond performance over the long term. We are
also watching other economic indicators performance over the long-term
direction of the economy which could have an impact on interest rates and
bond prices.
Q Is this a good time for investors to buy tax free funds?
A Yes, we believe it is. Municipal bond funds remain one of the few sources
of tax-free income for investors, and with inflation so low, real after-tax
returns are very attractive. Of course there is always risk associated with
investing, but our emphasis on high quality municipal bonds helps improve the
stability of the Funds' portfolios. We think the portfolios of Keystone State
Tax Free Fund will continue to offer investors a diversified, professionally
managed opportunity for income that is exempt from federal and state (and
city) taxes as applicable.(18)
[diamond]
This column is intended to answer questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investments, Inc.
Attn: Manager, Shareholder Communications
200 Berkeley Street, 22nd Floor,
Boston, Massachusetts 02116-5034.
- --------------------------
(18) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
<PAGE>
PAGE 14
- ------------------------------------------------------------------
Keystone State Tax Free Fund
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a
diversified portfolio of short- term securities, including commercial paper,
bankers' acceptances, certificates of deposit and other short-term
instruments. The fund pays income which can fluctuate daily. Liquidity and
safety of principal are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the
price at which the share is sold to the public.
<PAGE>
PAGE 15
- ------------------------------------------------------------------
Keystone Florida Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ------------------------------------------------------------- ----- --------- --------- -------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.6%)
Bay County, Florida, Hospital Systems Revenue Refunding, Bay
Medical Center Project 8.000% 10/01/2019 $2,500,000 $2,716,950
Brevard County, Florida, Health Facilities Authority Revenue
Refunding, Wuesthoff Memorial Hospital (MBIA) 7.200 04/01/2013 3,000,000 3,350,130
Broward County, Florida, Collateralized Home Mortgage 7.125 03/01/2017 195,000 203,434
Broward County, Florida, Resource Recovery, South Project 7.950 12/01/2008 2,210,000 2,450,691
Broward County, Florida, Unlimited Refunding Bonds 5.000 01/01/2010 3,000,000 2,820,000
Broward County, Florida, Water & Sewer Utility Revenue
(AMBAC) 5.000 10/01/2018 1,600,000 1,432,704
Charlotte County, Florida, Utility Revenue (FGIC) 6.750 10/01/2013 1,000,000 1,101,370
City of Miami, Florida, Health Facilities Authority,
Mercy Hospital (AMBAC) 6.750 08/01/2020 350,000 395,332
City of Tarpon Springs Health Facilities Authority, Florida,
Hospital Refunding, Helen Ellis Hospital 7.625 05/01/2021 1,000,000 1,037,840
City of Tarpon Springs Health Facilities Authority, Florida,
Hospital Refunding, Tarpon Springs Hospital Foundation,
Inc. 8.750 05/01/2012 500,000 531,170
Commonwealth of Puerto Rico, Highway Authority, Series Q 7.750 07/01/2010 125,000 145,059
Dade County, Florida, Aviation Revenue, Series C 5.750 10/01/2025 2,000,000 2,157,430
Dade County, Florida, Educational Facilities Authority
Revenue (St. Thomas University) 6.000 01/01/2010 2,000,000 2,009,980
Dade County, Florida, Housing Finance Agency, Single Family
Mortgage 7.000 03/01/2024 185,000 191,430
Dade County, Florida, School District, General Obligation 7.375 07/01/2008 40,000 44,888
Duval County, Florida, Single Family Mortgage Refunding
(FGIC) 7.300 07/01/2011 90,000 95,296
Escambia County, Florida, Pollution Control, Champion
International Corp. Project 6.900 08/01/2022 2,400,000 2,501,640
Florida Housing Finance Agency, Home Ownership Mortgage 7.500 09/01/2014 185,000 196,821
Florida Housing Finance Agency, Home Ownership Mortgage 8.000 12/01/2020 785,000 834,942
Florida State Board of Education Capital Outlay Refunding,
Public Education, Series D 5.000 06/01/2015 1,000,000 901,050
Florida State Department of Transportation, Turnpike Revenue
Bonds (FGIC) 5.000 07/01/2019 2,890,000 2,562,621
Florida State Department of Transportation, Turnpike Revenue
Bonds, Series 1991A (AMBAC) 7.125 07/01/2018 125,000 143,365
Florida State Transportation, Jacksonville Transportation 1,120,000
Authority 9.000 01/01/2000 1,000,000
Gainesville, Florida, Utilities System Revenue, Series B 7.500 10/01/2008 3,435,000 4,173,147
Gainesville, Florida, Utilities System Revenue, Series B 7.500 10/01/2009 3,695,000 4,506,533
Hollywood, Florida, Water and Sewer System Revenue (FGIC) 6.875 10/01/2021 535,000 609,274
Indian River County, Florida, Water and Sewer Systems Revenue
(FGIC) 6.500 05/01/2016 400,000 445,284
See Notes to Schedule of Investments. (Continued on next page)
<PAGE>
PAGE 16
- ------------------------------------------------------------------
Keystone State Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
- -----------------------------------------------------------------------------------------------------------------
Municipal Bonds (continued)
Industrial Development Board of Mobile, Alabama, Solid Waste
Revenue, S95, Mobile Energy Services Co. Project 6.950% 01/01/2020 $ 500,000 $ 511,615
Jacksonville, Florida, Health Facilities Authority, St.
Luke's Hospital Association 7.125 11/15/2020 3,000,000 3,227,040
Jacksonville, Florida, Hospital Authority, Baptist Medical
Center Project, Series A (MBIA) 7.300 06/01/2019 350,000 379,722
Lee County, Florida, School Board, Certificates of
Participation, Series A (FSA) 7.750 08/01/2005 1,500,000 1,729,770
Lee County, Florida, Transportation Facilities Revenue
(AMBAC) 8.250 10/01/2017 45,000 46,125
Massachusetts State Health and Educational Facilities
Authority, Dana Farber Cancer Project, Series G-1 6.250 12/01/2022 2,500,000 2,474,100
Miami, Florida, Health Facilities Authority, Health
Facilities Revenue, Mercy Hospital, Series A (AMBAC) 5.125 08/15/2020 1,700,000 1,518,814
Miami, Florida, Special Obligation Revenue (FGIC) 6.000 02/01/2001 1,000,000 1,005,820
Miramar, Florida, Wastewater Improvement Assessment Revenue
(FGIC) 6.750 10/01/2016 1,000,000 1,097,350
New York State Housing Finance Agency, Service Contract 3,490,760
Obligation Revenue, Series D 5.375 03/15/2023 4,000,000
New York State Urban Development Corp., Correctional
Facilities, Series A 6.500 10/01/2009 1,900,000 1,998,762
North Springs Improvement District, Florida, Water and Sewer
Revenue, Series B (MBIA) 6.500 12/01/2016 1,335,000 1,442,975
Okaloosa County, Florida, Gas District, Refunding and
Improvement (MBIA) 6.850 10/01/2014 1,000,000 1,118,190
Orange County, Florida, Health Facilities Authority, Hospital
Revenue, Adventist Health (AMBAC) 5.250 11/15/2020 1,000,000 911,620
Orange County, Florida, Housing Finance Authority, GNMA
Collateralized Mortgage, Series B (AMT) 8.100 11/01/2021 2,380,000 2,496,311
Orlando, Florida, Utilities Commission, Water and Electric 6.000 10/01/2010 3,850,000 4,087,930
Orlando-Orange County, Florida, Expressway Authority (FGIC) 8.250 07/01/2015 40,000 51,775
Palm Beach County, Florida, General Obligation 6.500 07/01/2010 1,880,000 2,077,381
Palm Beach County, Florida, Solid Waste Authority Revenue,
Series 1984 8.750 07/01/2010 45,000 49,125
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project (AMT) 6.700 02/15/2015 5,000,000 4,870,550
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project (AMT) 6.850 02/15/2021 3,000,000 2,949,570
Palm Beach County, Florida, Solid Waste Industrial
Development, Osceda Power Project (AMT) 6.850 01/01/2014 3,500,000 3,465,560
Pittsylvania County, Virginia, Industrial Development
Authority Revenue, Series A 7.550 01/01/2019 3,100,000 3,227,813
Puerto Rico Electric Power Authority 6.000 07/01/2010 500,000 503,765
See Notes to Schedule of Investments.
<PAGE>
PAGE 17
- ------------------------------------------------------------------
Keystone State Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
- -----------------------------------------------------------------------------------------------------------------
Municipal Bonds (continued)
Puerto Rico Electric Power Authority 7.000% 07/01/2011 $ 200,000 $ 228,130
Puerto Rico Industrial, Tourist, Educational, Medical,
Environmental Control Facilities Finance Authority,
Polytechnic University of Puerto Rico Project 5.500 08/01/2024 1,000,000 866,820
Reedy Creek, Florida, Improvement District, Florida Utilities
Revenue Refunding Series 1 (MBIA) 5.000 10/01/2019 5,500,000 4,900,390
Robbins, Illinois, Resource Recovery Bonds, Partners A 9.250 10/15/2014 1,000,000 1,072,570
Tallahassee, Florida, Health Facilities, Tallahassee Memorial
Regional Medical Project (MBIA) 6.625 12/01/2013 2,000,000 2,203,740
Tampa, Florida, Capital Improvement Program Revenue, Series B 8.375 10/01/2018 1,250,000 1,339,712
Tampa, Florida, Subordinate Guaranteed Entitlement Revenue
Series B (ETM) 8.500 10/01/2018 45,000 50,212
Tampa, Florida, Water and Sewer Authority Revenue (FGIC) 5.000 10/01/2014 2,000,000 1,810,120
Tomball, Texas, Hospital Authority Revenue, Series 1993 6.125 07/01/2023 6,500,000 5,790,850
University of Puerto Rico, University Revenues, Series M
(MBIA) 5.250 06/01/2025 2,000,000 1,831,920
West Melbourne, Florida, Water and Sewer Revenue (FGIC) 6.750 10/01/2014 1,000,000 1,107,150
- -----------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (Cost--$99,817,396) 104,612,438
- -----------------------------------------------------------------------------------------------------------------
TEMPORARY TAX-EXEMPT INVESTMENTS (0.7%)
Dade County, Florida, Water and Sewer System Revenue Bond
Series 1994 (Cost $740,000)(a) 4.350 10/05/2022 740,000 740,000
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost--$100,557,396) 105,352,438
OTHER ASSETS AND LIABILITIES--NET (1.7%) 1,750,076
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS (100.0%) $107,102,514
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
AMT--Subject to Alternative Minimum Tax
ETM--Escrowed to Maturity
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assistance
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
PAGE 18
- ------------------------------------------------------------------
Keystone Florida Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
December 27, 1990
Six Months (Commencement of
Ended Year Ended March 31, Operations) to
September 30, 1995 1995 1994 1993 1992 March 31, 1991
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning
of period $10.33 $10.29 $10.94 $10.43 $10.17 $10.00
- --------------------------- ----------------- ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income 0.28 0.56 0.58 0.61 0.72 0.18
Net gain (loss) on
investments and
closed futures contracts 0.25 0.07 (0.44) 0.64 0.30 0.17
- --------------------------- ----------------- ---- ---- ---- ---- -------------------
Total from investment
operations 0.53 0.63 0.14 1.25 1.02 0.35
- --------------------------- ----------------- ---- ---- ---- ---- -------------------
Less distributions from:
Net investment income (0.28) (0.56) (0.58) (0.61) (0.72) (0.18)
In excess of net investment
income 0 (0.03) (0.05) (0.03) 0 0
Net realized gain on
investments 0 0 (0.16) (0.10) (0.04) 0
- --------------------------- ----------------- ---- ---- ---- ---- -------------------
Total distributions (0.28) (0.59) (0.79) (0.74) (0.76) (0.18)
- --------------------------- ----------------- ---- ---- ---- ---- -------------------
Net asset value end of
period $10.58 $10.33 $10.29 $10.94 $10.43 $10.17
=========================== ================= ==== ==== ==== ==== ===================
Total return(c) 5.21% 6.42% 1.01% 12.32% 10.34% 3.52%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses(b) 0.75%(a) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Net investment income 5.48%(a) 5.60% 5.16% 5.60% 6.82% 6.33%(a)
Portfolio turnover rate 32% 129% 113% 95% 63% 5%
- --------------------------- ----------------- ---- ---- ---- ---- -------------------
Net assets end of period
(thousands) $40,323 $42,239 $45,150 $42,997 $29,258 $6,922
=================================================================================================================
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 0.91%,
0.95%, 1.00%, 1.13%, 1.21% and 2.06% (annualized) for the six months
ended September 30, 1995, the fiscal years ended March 31, 1995, 1994,
1993, 1992 and the period December 28, 1990 (Commencement of Operations)
to March 31, 1991, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 19
- ------------------------------------------------------------------
Keystone Florida Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
Six Months (Date of Initial
Ended Year Ended March 31, Public Offering) to
September 30, 1995 1995 1994 March 31, 1993
================================================================================================================
<S> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of period $10.24 $10.27 $10.94 $10.81
------------------------------------------ ----------------- ------ ------ ------------------
Income from investment operations:
Net investment income 0.25 0.53 0.52 0.08
Net gain (loss) on investments and closed
futures contracts 0.25 0.02 (0.47) 0.14
------------------------------------------ ----------------- ------ ------ ------------------
Total from investment operations 0.50 0.55 0.05 0.22
------------------------------------------ ----------------- ------ ------ ------------------
Less distributions from:
Net investment income (0.26) (0.49) (0.48) (0.08)
In excess of net investment income 0 (0.09) (0.08) (0.01)
Net realized gain on investments 0 0 (0.16) 0
------------------------------------------ ----------------- ------ ------ ------------------
Total distributions (0.26) (0.58) (0.72) (0.09)
------------------------------------------ ----------------- ------ ------ ------------------
Net asset value end of period $10.48 $10.24 $10.27 $10.94
========================================== ================= ====== ====== ==================
Total return(c) 4.93% 5.61% 0.19% 2.06%
Ratios/supplemental data
Ratios to average net assets:
Total expenses(b) 1.44%(a) 1.50% 1.50% 1.50%(a)
Net investment income 4.78%(a) 4.81% 4.21% 4.00%(a)
Portfolio turnover rate 32% 129% 113% 95%
------------------------------------------ ----------------- ------ ------ ------------------
Net assets end of period (thousands) $54,483 $51,083 $19,984 $1,704
================================================================================================================
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 1.67%,
1.74% and 1.73% (annualized) for the six months ended September 30, 1995,
the fiscal years ended March 31, 1995, 1994 and for the period February
1, 1993 (Date of Initial Public Offering) to March 31, 1993,
respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 20
- ------------------------------------------------------------------
Keystone Florida Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
Six Months (Date of Initial
Ended Year Ended March 31, Public Offering) to
September 30, 1995 1995 1994 March 31, 1993
================================================================================================================
<S> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of period $10.26 $10.28 $10.93 $10.81
- --------------------------------------- ----------------- ------ ------ ----------------------
Income from investment operations:
Net investment income 0.24 0.47 0.51 0.07
Net gain (loss) on investments and
closed contracts 0.25 0.08 (0.45) 0.14
- --------------------------------------- ----------------- ------ ------ ----------------------
Total from investment operations 0.49 0.55 0.06 0.21
- --------------------------------------- ----------------- ------ ------ ----------------------
Less distributions from:
Net investment income (0.26) (0.49) (0.49) (0.07)
In excess of net investment income 0 (0.08) (0.06) (0.02)
Net realized gain on investments 0 0 (0.16) 0
- --------------------------------------- ----------------- ------ ------ ----------------------
Total distributions (0.26) (0.57) (0.71) (0.09)
- --------------------------------------- ----------------- ------ ------ ----------------------
Net asset value end of period $10.49 $10.26 $10.28 $10.93
======================================= ================= ====== ====== ======================
Total return(c) 4.82% 5.61% 0.27% 1.95%
Ratios/supplemental data
Ratios to average net assets:
Total expenses(b) 1.44%(a) 1.50% 1.50% 1.50%(a)
Net investment income 4.79%(a) 4.86% 4.26% 2.95%(a)
Portfolio turnover rate 32% 129% 113% 95%
- --------------------------------------- ----------------- ------ ------ ----------------------
Net assets end of period (thousands) $12,296 $12,831 $13,096 $1,987
================================================================================================================
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 1.67%,
1.74%, 1.84% and 1.63% (annualized) for the six months ended September
30, 1995, the fiscal years ended March 31, 1995, 1994 and for the period
February 1, 1993 (Date of Initial Public Offering) to March 31, 1993,
respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 21
- ------------------------------------------------------------------
Keystone Florida Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
(Unaudited)
<TABLE>
- ----------------------------------------------------------------------------------
<S> <C>
Assets (Notes 1 and 4):
Investments at market value (identified cost-- $100,557,396) $105,352,438
Cash 4,548
Receivable for:
Fund shares sold 57,895
Interest 2,302,290
Due from Investment Adviser 43,452
Unamortized organization expenses 1,211
Prepaid expenses 1,908
- ---------------------------------------------------------------- -----------
Total assets 107,763,742
- ---------------------------------------------------------------- -----------
Liabilities (Notes 2, 4 and 5):
Payable for:
Fund shares redeemed 191,947
Income distributions 451,977
Commissions payable to Principal Underwriter 1,545
Accrued expenses 15,759
- ---------------------------------------------------------------- -----------
Total liabilities 661,228
- ---------------------------------------------------------------- -----------
Net assets $107,102,514
- ---------------------------------------------------------------- -----------
Net assets represented by (Note 1):
Paid-in capital $107,478,884
Accumulated distributions in excess of net investment income (507,603)
Accumulated net realized gains (losses) on investments (4,663,809)
Net unrealized appreciation (depreciation) on investments 4,795,042
- ---------------------------------------------------------------- -----------
Total net assets $107,102,514
- ---------------------------------------------------------------- -----------
Net Asset Value (Note 2):
Class A Shares
Net asset value of $40,323,393/3,811,917 shares outstanding $10.58
Offering price per share ($10.58/0.9525) (based on a sales
charge of 4.75% of the offering price September 30, 1995) $11.11
Class B Shares
Net asset value of $54,482,960/5,201,144 shares outstanding $10.48
Class C Shares
Net asset value of $12,296,161/1,171,722 shares outstanding $10.49
- ---------------------------------------------------------------- -----------
</TABLE>
STATEMENT OF OPERATIONS
Six Months Ended September 30, 1995
(Unaudited)
<TABLE>
- -------------------------------------------------------------------------
<S> <C> <C>
Investment Income (Note 1):
Interest $3,316,857
Expenses (Notes 1, 2 and 4):
Management fee $ 277,231
Transfer agent fees 59,925
Custodian fees 29,186
Accounting 9,273
Auditing 5,378
Legal 2,406
Printing 6,378
Registration fees 10,931
Amortization of organization expenses 2,484
Distribution Plan expenses 324,162
Miscellaneous expenses 5,909
- --------------------------------------- ---------- -------------
Total expenses 733,263
Less: Reimbursement from Investment
Adviser (107,462)
- --------------------------------------- ---------- -------------
Net expenses 625,801
- --------------------------------------- ---------- -------------
Net investment income (Note 1) 2,691,056
- --------------------------------------- ---------- -------------
Net realized and unrealized gain
(loss) on investments and closed
futures contracts (Notes 1 and 3):
Net realized gain (loss) on:
Investments 824,990
Closed futures contracts (95,129)
- --------------------------------------- ---------- -------------
Net realized gain (loss) on investments
and closed futures contracts 729,861
- --------------------------------------- ---------- -------------
Net change in unrealized appreciation
(depreciation) on investments:
Beginning of period 2,984,404
End of period 4,795,042
- --------------------------------------- ---------- -------------
Net change in unrealized appreciation
(depreciation) on investments 1,810,638
- --------------------------------------- ---------- -------------
Net gain (loss) on investments and
futures contracts 2,540,499
- --------------------------------------- ---------- -------------
Net increase (decrease) in net assets
resulting from operations $5,231,555
- --------------------------------------- ---------- -------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 22
- ------------------------------------------------------------------
Keystone Florida Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
September 30, March 31,
1995 1995
- -------------------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Operations (Notes 1 and 3): (Unaudited)
Net investment income $ 2,691,056 $ 5,108,143
Net realized gain (loss) on investments and closed futures contracs 729,861 (4,751,748)
Net change in unrealized appreciation (depreciation) 1,810,638 5,556,382
- -------------------------------------------------------------------------- ------------- -----------
Net increase (decrease) in net assets resulting from operations 5,231,555 5,912,777
- -------------------------------------------------------------------------- ------------- -----------
Distributions to shareholders from (Notes 1 and 5):
Net Investment income:
Class A Shares (1,114,219) (2,468,849)
Class B Shares (1,329,657) (1,881,744)
Class C Shares (309,688) (757,551)
In excess of net investment income:
Class A Shares 0 (119,609)
Class B Shares 0 (331,735)
Class C Shares 0 (127,027)
- -------------------------------------------------------------------------- ------------- -----------
Total distributions to shareholders (2,753,564) (5,686,515)
- -------------------------------------------------------------------------- ------------- -----------
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 1,356,094 6,022,911
Proceeds from shares sold--Class B Shares 4,840,248 35,365,150
Proceeds from shares sold--Class C Shares 552,020 6,570,695
Payment for shares redeemed--Class A Shares (4,574,035) (9,676,164)
Payment for shares redeemed--Class B Shares (3,155,089) (5,409,666)
Payment for shares redeemed--Class C Shares (1,510,632) (7,105,015)
Net asset value of shares issued in reinvestment of distributions from:
Net investment income and in excess of net investment income--Class A
Shares 292,300 712,811
Net investment income and in excess of net investment income--Class B
Shares 523,442 829,201
Net investment income and in excess of net investment income--Class C
Shares 147,969 385,988
- -------------------------------------------------------------------------- ------------- -----------
Net increase (decrease) in net assets resulting from capital share
transactions (1,527,683) 27,695,911
- -------------------------------------------------------------------------- ------------- -----------
Total increase (decrease) in net assets 950,308 27,922,173
Net assets:
Beginning of period 106,152,206 78,230,033
- -------------------------------------------------------------------------- ------------- -----------
End of period [Including accumulated distributions in excess of net
investment income as follows: September 1995--($507,603) and March
1995--($445,095)] (Note 1) $107,102,514 $106,152,206
- -------------------------------------------------------------------------- ------------- -----------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 23
- ------------------------------------------------------------------
Keystone Massachusetts Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- -------------------------------------------------------------- ----- --------- -------- -----------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (96.4%)
Boston, Massachusetts, Metropolitan District, General
Obligation 5.900% 12/01/2009 $ 500,000 $ 523,303
Chelsea, Massachusetts, School Project Loan Act 1948 (AMBAC) 6.000 06/15/2014 400,000 403,360
Massachusetts Bay Transportation Authority, General
Transportation, Series B 5.500 03/01/2011 100,000 95,016
Massachusetts Bay Transportation Authority, General
Transportation, Series A 7.000 03/01/2011 750,000 863,108
Massachusetts Bay Transportation Authority, General
Transportation, Series A 6.250 03/01/2012 400,000 426,196
Massachusetts Bay Transportation Authority, Series B 6.200 03/01/2016 625,000 660,025
Massachusetts Educational Financing Loan Authority (AMBAC) 6.000 01/01/2012 300,000 297,066
Massachusetts Municipal Wholesale Electric, Power Supply
Systems, Series B 6.750 07/01/2008 460,000 500,227
Massachusetts State Health and Educational Facilities
Authority, Dana Farber Cancer Project, Series G-1 5.500 12/01/2027 750,000 655,575
Massachusetts State Health and Educational Facilities
Authority, Boston College, Series K 5.250 06/01/2018 100,000 93,093
Massachusetts State Health and Educational Facilities
Authority, Massachusetts Institute of Technology, Series H 5.000 07/01/2023 340,000 308,785
Massachusetts State Health and Educational Facilities
Authority, McLean Hospital, Series C (FGIC) 6.500 07/01/2010 300,000 320,031
Massachusetts State Health and Educational Facilities
Authority, New England Deaconess Hospital 6.875 04/01/2022 550,000 561,198
Massachusetts State Health and Educational Facilities
Authority, Smith College, Series D 5.750 07/01/2016 350,000 346,157
Massachusetts State Health and Educational Facilities
Authority, Wellesley College 5.375 07/01/2019 600,000 562,116
Massachusetts State Housing Finance Agency, Series A (AMBAC) 6.600 07/01/2014 300,000 308,046
Massachusetts State Industrial Finance Agency, Harvard
Community Health Plan, Inc., Series B 8.125 10/01/2017 165,000 178,131
Massachusetts State Industrial Finance Agency, Milton Academy,
Series B (MBIA) 5.250 09/01/2013 500,000 469,930
Massachusetts State Industrial Finance Agency, Solid Waste
Disposal, Molten Metal Technology Project 8.250 08/01/2014 250,000 261,553
Massachusetts State Port Authority, Series B 5.000 07/01/2013 400,000 355,348
Massachusetts State Industrial Finance Agency, Solid Waste
Disposal, Senior Lien, Massachusetts Recycling Associates 9.000 08/01/2016 1,000,000 1,016,530
Massachusetts State Water Pollution, Series 2 6.125 02/01/2008 610,000 653,536
Massachusetts State Water Pollution, Series A 6.375 02/01/2015 300,000 310,824
Massachusetts State Water Resources Authority, General
Refunding, Series B 5.000 03/01/2022 200,000 172,440
Massachusetts State Water Resources Authority, Series C 6.000 12/01/2011 770,000 800,469
See Notes to Schedule of Investments. (Continued on next page)
<PAGE>
PAGE 24
------------------------------------------------------------------
Keystone Massachusetts Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
- ----------------------------------------------------------------------------------------------------------------
Municipal Bonds (continued)
University of Massachusetts, Building Authority, Series A
(MBIA) 5.500% 05/01/2015 $250,000 $ 241,790
- -------------------------------------------------------------- --- ------- ------ ---------
TOTAL MUNICIPAL BONDS (Cost--$11,031,487) 11,383,853
- -------------------------------------------------------------- --- ------- ------ ---------
TEMPORARY TAX-EXEMPT INVESTMENTS (2.6%)
Massachusetts State Health and Educational Facilities
Authority, (Capital Assets Program), Series D (MBIA)
(Cost--$305,000) (a) 4.200 01/01/2035 305,000 305,000
- -------------------------------------------------------------- --- ------- ------ ---------
TOTAL INVESTMENTS (Cost--$11,336,487) 11,688,853
OTHER ASSETS AND LIABILITIES--NET (1.0%) 117,121
- -------------------------------------------------------------- --- ------- ------ ---------
NET ASSETS (100.0%) $11,805,974
- -------------------------------------------------------------- --- ------- ------ ---------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
FGIC--Federal Guaranty Insurance Co.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
PAGE 25
- -----------------------------------------------------------------------------
Keystone Massachusetts Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
Six Months Year Ended (Commencement
Ended March 31, of Operations) to
September 30, 1995 1995 March 31, 1994
=============================================== ================== =========== ==================
<S> <C> <C> <C>
(Unaudited)
Net asset value beginning of period $ 9.19 $ 9.17 $10.00
- ----------------------------------------------- ----------------- --------- -----------------
Income from investment operations:
Net investment income 0.24 0.53 0.08
Net gain (loss) on investments and closed
futures contracts 0.14 0.02 (0.82)
- ----------------------------------------------- ----------------- --------- -----------------
Total from investment operations 0.38 0.55 (0.74)
- ----------------------------------------------- ----------------- --------- -----------------
Less distributions from:
Net investment income (0.25) (0.53) (0.08)
In excess of net investment income 0 0 (0.01)
- ----------------------------------------------- ----------------- --------- -----------------
Total distributions (0.25) (0.53) (0.09)
- ----------------------------------------------- ----------------- --------- -----------------
Net asset value end of period $ 9.32 $ 9.19 $ 9.17
=============================================== ================= ========= =================
Total return(c) 4.20% 6.23% (7.40%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses(b) 0.73%(a) 0.46% 0.35%(a)
Net investment income 5.49%(a) 5.90% 5.07%(a)
Portfolio turnover rate 41% 77% 7%
- ----------------------------------------------- ----------------- --------- -----------------
Net assets end of period (thousands) $2,412 $1,974 $1,472
=============================================== ================= ========= =================
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 1.70%,
1.93%, and 3.22% (annualized) for the six months ended September 30,
1995, the fiscal year ended March 31, 1995, and the period February 4,
1994 (Commencement of Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 26
- -----------------------------------------------------------------------------
Keystone Massachusetts Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
Six Months Year Ended (Commencement
Ended March 31, of Operations) to
September 30, 1995 1995 March 31, 1994
=============================================== ================== =========== ==================
<S> <C> <C> <C>
(Unaudited)
Net asset value beginning of period $ 9.15 $ 9.19 $10.00
- ----------------------------------------------- ----------------- --------- -----------------
Income from investment operations:
Net investment income--net 0.22 0.48 0.08
Net gain (loss) on investments and closed
futures contracts 0.13 (0.01) (0.80)
- ----------------------------------------------- ----------------- --------- -----------------
Total from investment operations 0.35 0.47 (0.72)
- ----------------------------------------------- ----------------- --------- -----------------
Less distributions from:
Net investment income (0.23) (0.47) (0.07)
In excess of net investment income 0 (0.04) (0.02)
- ----------------------------------------------- ----------------- --------- -----------------
Total distributions (0.23) (0.51) (0.09)
- ----------------------------------------------- ----------------- --------- -----------------
Net asset value end of period $ 9.27 $ 9.15 $ 9.19
=============================================== ================= ========= =================
Total return(c) 3.91% 5.41% (7.20%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses(b) 1.48%(a) 1.24% 1.10%(a)
Net investment income 4.73%(a) 5.15% 3.23%(a)
Portfolio turnover rate 41% 77% 7%
- ----------------------------------------------- ----------------- --------- -----------------
Net assets end of period (thousands) $7,343 $6,169 $1,817
=============================================== ================= ========= =================
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.49%,
2.68%, and 4.60% (annualized) for the six months ended September 30,
1995, the fiscal year ended March 31, 1995, and the period February 4,
1994 (Commencement of Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 27
- -----------------------------------------------------------------------------
Keystone Massachusetts Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
Six Months Year Ended (Commencement
Ended March 31, of Operations) to
September 30, 1995 1995 March 31, 1994
=============================================== ================== =========== ==================
<S> <C> <C> <C>
(Unaudited)
Net asset value beginning of period $ 9.14 $ 9.19 $10.00
- ----------------------------------------------- ----------------- --------- -----------------
Income from investment operations:
Net investment income--net 0.22 0.48 0.08
Net gain (loss) on investments and closed
futures contracts 0.13 (0.02) (0.80)
- ----------------------------------------------- ----------------- --------- -----------------
Total from investment operations 0.35 0.46 (0.72)
- ----------------------------------------------- ----------------- --------- -----------------
Less distributions from:
Net investment income (0.23) (0.47) (0.07)
In excess of net investment income 0 (0.04) (0.02)
- ----------------------------------------------- ----------------- --------- -----------------
Total distributions (0.23) (0.51) (0.09)
- ----------------------------------------------- ----------------- --------- -----------------
Net asset value end of period $ 9.26 $ 9.14 $ 9.19
=============================================== ================= ========= =================
Total return (c) 3.91% 5.20% (7.21%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.48%(a) 1.23% 1.10%(a)
Net investment income 4.73%(a) 5.11% 4.28%(a)
Portfolio turnover rate 41% 77% 7%
- ----------------------------------------------- ----------------- --------- -----------------
Net assets end of period (thousands) $2,051 $1,971 $ 369
=============================================== ================= ========= =================
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.51%,
2.68%, and 4.91% (annualized) for the six months ended September 30,
1995, the fiscal year ended March 31, 1995, and the period February 4,
1994 (Commencement of Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 28
- -----------------------------------------------------------------------------
Keystone Massachusetts Tax Free FundS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
(Unaudited)
Assets (Notes 1 and 4):
Investments at market value (identified cost--
$11,336,487) $11,688,853
Cash 515
Interest receivable 167,531
Due from Investment Adviser 16,456
Unamortized organization expenses 7,898
Prepaid expenses 115
- ------------------------------------------------- ----------
Total assets 11,881,368
- ------------------------------------------------- ----------
Liabilities (Notes 2, 4 and 5):
Income distribution payable 49,484
Commissions payable to Principal Underwriter 101
Accrued reimbursable expenses 1,110
Other accured expenses 24,699
- ------------------------------------------------- ----------
Total liabilities 75,394
- ------------------------------------------------- ----------
Net assets $11,805,974
- ------------------------------------------------- ----------
Net assets represented by (Note 1):
Paid-in capital $11,826,254
Undistributed net investment income 5,892
Accumulated net realized gains (losses) on
investments (378,538)
Net unrealized appreciation (depreciation) on
investments 352,366
- ------------------------------------------------- ----------
Total net assets $11,805,974
- ------------------------------------------------- ----------
Net Asset Value (Note 2):
Class A Shares
Net asset value of $2,412,180/258,762 shares
outstanding $9.32
Offering price per share ($9.32/0.9525) (based
on a sales charge of 4.75% of the offering
price September 30, 1995) $9.78
Class B Shares
Net asset value of $7,342,545/792,330 shares
outstanding $9.27
Class C Shares
Net asset value of $2,051,249/221,525 shares
outstanding $9.26
- ------------------------------------------------- ----------
STATEMENT OF OPERATIONS
Year Ended September 30, 1995
(Unaudited)
Investment Income (Note 1):
Interest $338,395
Expenses (Notes 1, 2 and 4):
Management fee $ 29,992
Transfer agent fees 9,401
Custodian fees 12,502
Accounting 9,874
Auditing 5,092
Legal 2,700
Printing 10,847
Registration fees 4,698
Amortization of organization
expenses 1,147
Distribution Plan expenses 40,048
Miscellaneous expenses 654
- ----------------------------------- ----- -------
Total expenses 126,955
Less: Reimbursement from
Investment Adviser (54,933)
- ----------------------------------- ----- -------
Net expenses 72,022
- ----------------------------------- ----- -------
Net investment income (Note 1) 266,373
- ----------------------------------- ----- -------
Net realized and unrealized gain
(loss) on investments and closed
futures contracts (Notes 1 and 3):
Net realized gain (loss) on:
Investments 27,836
Closed futures contracts (37,945)
- ----------------------------------- ----- -------
Net realized gain (loss) on
investments and closed futures
contracts (10,109)
- ----------------------------------- ----- -------
Net change in unrealized
appreciation (depreciation) on
investments:
Beginning of period 181,078
End of period 352,366
- ----------------------------------- ----- -------
Net change in unrealized
appreciation (depreciation) on
investments 171,288
- ----------------------------------- ----- -------
Net gain (loss) on investments and
futures contracts 161,179
- ----------------------------------- ----- -------
Net increase (decrease) in net
assets resulting from operations $427,552
- ----------------------------------- ----- -------
See Notes to Financial Statements.
<PAGE>
PAGE 29
- -----------------------------------------------------------------------------
Keystone Massachusetts Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
September 30, March 31,
1995 1995
- -------------------------------------------------------------------------- --------------- -------------
<S> <C> <C>
(Unaudited)
Operations (Notes 1 and 3):
Net investment income $ 266,373 $ 421,104
Net realized gain (loss) on investments and closed futures contracts (10,109) (350,345)
Net change in unrealized appreciation (depreciation) 171,288 415,075
- -------------------------------------------------------------------------- ------------- -----------
Net increase (decrease) in net assets resulting from operations 427,552 485,834
- -------------------------------------------------------------------------- ------------- -----------
Distributions to shareholders from (Notes 1 and 5):
Net investment income:
Class A Shares (62,077) (103,346)
Class B Shares (167,692) (230,929)
Class C Shares (51,006) (85,245)
In excess of net investment income:
Class B Shares 0 (20,118)
Class C Shares 0 (6,857)
- -------------------------------------------------------------------------- ------------- -----------
Total distributions to shareholders (280,775) (446,495)
- -------------------------------------------------------------------------- ------------- -----------
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 442,675 1,279,775
Proceeds from shares sold--Class B Shares 1,226,668 4,802,858
Proceeds from shares sold--Class C Shares 83,303 1,731,526
Payment for shares redeemed--Class A Shares (67,244) (846,310)
Payment for shares redeemed--Class B Shares (244,048) (609,227)
Payment for shares redeemed--Class C Shares (57,661) (182,930)
Net asset value of shares issued in reinvestment of distributions from:
Net investment income and in excess of net investment income--Class A
Shares 36,378 60,782
Net investment income and in excess of net investment income--Class B
Shares 96,769 125,304
Net investment income and in excess of net investment income--Class C
Shares 28,497 55,445
- -------------------------------------------------------------------------- ------------- -----------
Net increase (decrease) in net assets resulting from capital share
transactions 1,545,337 6,417,223
- -------------------------------------------------------------------------- ------------- -----------
Total increase (decrease) in net assets 1,692,114 6,456,562
Net assets:
Beginning of period 10,113,860 3,657,298
- -------------------------------------------------------------------------- ------------- -----------
End of period (Including undistributed net investment income as follows:
September 1995--$5,892 and March 1995--$20,294) (Note 1) $11,805,974 $10,113,860
- -------------------------------------------------------------------------- ------------- -----------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 30
- ----------------------------------------------------------------------------
Keystone New York Insured Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Rate Amount Value
- ----------------------------------------------------------- ----- --------- --------- ------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (94.9%)
Broome County, New York, Public Safety Facility (MBIA) 5.250% 04/01/2015 $1,000,000 $ 924,037
Buffalo, New York, Series E 6.500 12/01/2022 465,000 495,383
Buffalo, New York, Municipal Water Finance Authority, 5.000 07/01/2025 500,000 436,585
Erie County, New York, Water Authority, Fourth Resolution
(AMBAC) (effective yield 6.824%) (b) 0.000 12/01/2017 770,000 157,196
Metropolitan Transportation Authority, New York, Commuter
Facilities, Series A (MBIA) 6.125 07/01/2014 1,400,000 1,432,970
Nassau County, New York, 5.875 08/01/2015 250,000 250,925
Nassau County, New York, Combined Sewer District,
Series B 6.000 05/01/2014 695,000 713,696
New Rochelle, New York, General Obligation, Series B 6.150 08/15/2017 600,000 627,528
New York City, New York, General Obligation, Series A
(FGIC) 5.750 08/01/2010 90,000 91,323
New York City, New York, Municipal Water Finance
Authority, Water and Sewer System Series A (FGIC) 7.000 06/15/2015 1,400,000 1,535,058
New York, New York City, Educational Construction Fund,
Senior Subordinate, Series B 5.500 10/01/2011 200,000 197,612
New York Resources Recovery Agency, Series B 7.250 07/01/2011 100,000 115,704
New York State Dormitory Authority, City University
Systems (FGIC) 7.000 07/01/2009 1,200,000 1,385,256
New York State Dormitory Authority, City University, 3rd
General Resources, Series 2 (MBIA) 6.250 07/01/2019 450,000 458,177
New York State Dormitory Authority, Fordham University
(FGIC) 5.750 07/01/2015 500,000 491,215
New York State Dormitory Authority, Mount Sinai Medical
School, Series A (MBIA) 5.000 07/01/2021 125,000 108,989
New York State Dormitory Authority, State University
Educational Facilities, Series A (FSA) 5.250 05/15/2015 600,000 553,578
New York State Dormitory Authority, State University
Educational Facilities (AMBAC) 5.875 05/15/2011 250,000 257,505
New York State Dormitory Authority, University of
Rochester Strong Memorial (MBIA) 5.500 07/01/2021 400,000 375,892
New York State Energy, New York State Electric & Gas 5.700 12/01/2028 250,000 236,523
New York State Housing Finance Agency, Multi-family
Mortgage, Series B (AMBAC) 6.250 08/15/2014 875,000 881,659
New York State Medical Care Facilities Finance Agency,
Mental Health Services Facilities 6.375 08/15/2014 1,000,000 1,032,300
New York State Medical Care Facilities Finance Agency,
Mental Health Services Facilities 6.375 11/15/2019 250,000 253,468
New York State Medical Care Facilities Finance Agency,
Mental Health Services Facilities, Series A (FGIC) 5.500 08/15/2021 165,000 155,247
New York State Medical Care Facilities Finance Agency, St
Mary's Hospital, Series A (AMBAC) 6.200 11/01/2014 200,000 205,932
New York State Power Authority, Series CC (MBIA) 5.250 01/01/2018 500,000 462,265
See Notes to Schedule of Investments.
</TABLE>
<PAGE>
PAGE 31
- -----------------------------------------------------------------------------
Keystone New York Insured Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Rate Amount Value
- ----------------------------------------------------------- ----- --------- --------- ------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (continued)
New York State Urban Development Corp., Correctional
Capital Facilities, Series A 6.500% 01/01/2009 $ 600,000 $ 631,188
New York State Urban Development, Correctional
Facilities, Series A (AMBAC) 5.000 01/01/2017 500,000 439,730
Niagara Falls, New York, Public Improvement (MBIA) 7.500 03/01/2014 400,000 489,260
Niagara Falls, New York, Public Improvement (MBIA) 7.500 03/01/2016 750,000 922,193
Niagara Falls, New York, Public Improvement (MBIA) 7.500 03/01/2017 750,000 921,285
Niagara, New York, Frontier Transportation Authority,
Greater Buffalo International Airport (AMBAC) 6.125 04/01/2014 100,000 101,537
New York and New Jersey, Port Authority 6.125 06/01/2014 500,000 504,400
Puerto Rico, Electric Power Authority 6.500 07/01/2006 400,000 449,424
Rochester, New York, General Obligation, Series A (AMBAC) 5.000 08/15/2018 140,000 129,392
Suffolk County, New York, Industrial Development Agency,
Southwest Sewer Systems (FGIC) 6.000 02/01/2008 1,000,000 1,063,900
Triborough Bridge and Tunnel Authority, New York, General
Purpose, Series X 6.625 01/01/2012 555,000 610,017
Westchester County, New York, Industrial Development
Resource Recovery, Series A (AMBAC) 5.750 07/01/2009 100,000 103,224
- ----------------------------------------------------------- ----- --------- --------- ------------
TOTAL MUNICIPAL BONDS (Cost--$19,280,832) 20,201,573
- ----------------------------------------------------------- ----- --------- --------- ------------
TEMPORARY TAX-EXEMPT INVESTMENTS (5.4%)
New York City, New York, Sub Series A-5 (a) 4.600 08/01/2015 900,000 900,000
New York City, New York, Municipal Water Finance
Authority, Series C (FGIC) (a) 4.600 06/15/2023 150,000 150,000
New York City, New York, Municipal Water Finance
Authority, Series G (FGIC) (a) 4.400 08/15/2001 100,000 100,000
- ----------------------------------------------------------- ----- --------- --------- ------------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (Cost--$1,150,000) 1,150,000
- ----------------------------------------------------------- ----- --------- --------- ------------
TOTAL INVESTMENTS (Cost--$20,430,832) 21,351,573
OTHER ASSETS AND LIABILITIES--NET (-0.3%) (55,282)
- ----------------------------------------------------------- ----- --------- --------- ------------
NET ASSETS (100.0%) $21,296,291
- ----------------------------------------------------------- ----- --------- --------- ------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an accrual basis until maturity.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assistance
MBIA--Municipal Bond Investors Assurance Corp.
<PAGE>
PAGE 32
- -----------------------------------------------------------------------------
Keystone New York Insured Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
Six Months Year Ended (Commencement of
Ended March 31, Operations) to
September 30, 1995 1995 March 31, 1994
=============================================== ================== =========== ==================
(Unaudited)
<S> <C> <C> <C>
Net asset value beginning of period $ 9.44 $ 9.32 $10.00
- ----------------------------------------------- ----------------- --------- -----------------
Income from investment operations:
Net investment income 0.24 0.52 0.09
Net gain (loss) on investments and closed
futures contracts 0.20 0.12 (0.68)
- ----------------------------------------------- ----------------- --------- -----------------
Total from investment operations 0.44 0.64 (0.59)
- ----------------------------------------------- ----------------- --------- -----------------
Less distributions from:
Net investment income (0.25) (0.52) (0.08)
In excess of net investment income 0 0 (0.01)
- ----------------------------------------------- ----------------- --------- -----------------
Total distributions (0.25) (0.52) (0.09)
- ----------------------------------------------- ----------------- --------- -----------------
Net asset value end of period $ 9.63 $ 9.44 $ 9.32
=============================================== ================= ========= =================
Total return(c) 4.67% 7.08% (5.91%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses(b) 0.73%(a) 0.50% 0.35%(a)
Net investment income 5.09%(a) 5.48% 3.85%(a)
Portfolio turnover rate 9% 77% 14%
- ----------------------------------------------- ----------------- --------- -----------------
Net assets end of period (thousands) $3,724 $3,323 $ 680
=============================================== ================= ========= =================
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 1.30%,
1.59% and 4.44% (annualized) for the six months ended September 30, 1995,
the fiscal year ended March 31, 1995 and the period from February 4, 1994
(Commencement of Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 33
- -----------------------------------------------------------------------------
Keystone New York Insured Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
Six Months Year Ended (Commencement of
Ended March 31, Operations) to
September 30, 1995 1995 March 31, 1994
=============================================== ================== =========== ==================
(Unaudited)
<S> <C> <C> <C>
Net asset value beginning of period $ 9.38 $ 9.32 $10.00
- ----------------------------------------------- ----------------- --------- -----------------
Income from investment operations:
Net investment income 0.21 0.47 0.08
Net gain (loss) on investments and closed
futures contracts 0.19 0.09 (0.67)
- ----------------------------------------------- ----------------- --------- -----------------
Total from investment operations 0.40 0.56 (0.59)
- ----------------------------------------------- ----------------- --------- -----------------
Less distributions from:
Net investment income (0.23) (0.45) (0.06)
In excess of net investment income 0 (0.05) (0.03)
- ----------------------------------------------- ----------------- --------- -----------------
Total distributions (0.23) (0.50) (0.09)
- ----------------------------------------------- ----------------- --------- -----------------
Net asset value end of period $ 9.55 $ 9.38 $ 9.32
=============================================== ================= ========= =================
Total return(c) 4.28% 6.28% (5.91%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses(b) 1.48%(a) 1.25% 1.10%(a)
Net investment income 4.33%(a) 4.78% 3.01%(a)
Portfolio turnover rate 9% 77% 14%
- ----------------------------------------------- ----------------- --------- -----------------
Net assets end of period (thousands) $15,613 $11,907 $2,276
=============================================== ================= ========= =================
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.05%,
2.35% and 5.60% (annualized) for the six months ended September 30, 1995,
the fiscal year ended March 31, 1995 and the period February 4, 1994
(Commencement of Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 34
- -----------------------------------------------------------------------------
Keystone New York Insured Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 4, 1994
Six Months Year Ended (Commencement of
Ended March 31, Operations) to
September 30, 1995 1995 March 31, 1994
=============================================== ================== =========== ==================
(Unaudited)
<S> <C> <C> <C>
Net asset value beginning of period $ 9.37 $ 9.31 $10.00
- ----------------------------------------------- ----------------- --------- -----------------
Income from investment operations:
Net investment income 0.21 0.48 0.07
Net gain (loss) on investments and closed
futures contracts 0.20 0.07 (0.67)
- ----------------------------------------------- ----------------- --------- -----------------
Total from investment operations 0.41 0.55 (0.60)
- ----------------------------------------------- ----------------- --------- -----------------
Less distributions from:
Net investment income (0.23) (0.46) (0.07)
In excess of net investment income 0 (0.03) (0.02)
- ----------------------------------------------- ----------------- --------- -----------------
Total distributions (0.23) (0.49) (0.09)
- ----------------------------------------------- ----------------- --------- -----------------
Net asset value end of period $ 9.55 $ 9.37 $ 9.31
=============================================== ================= ========= =================
Total return(c) 4.39% 6.18% (6.02%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses(b) 1.48%(a) 1.26% 1.10%(a)
Net investment income 4.37%(a) 4.88% 3.71%(a)
Portfolio turnover rate 9% 77% 14%
- ----------------------------------------------- ----------------- --------- -----------------
Net assets end of period (thousands) $1,959 $2,890 $ 255
=============================================== ================= ========= =================
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.06%,
2.32% and 5.13% (annualized) for the six months ended September 30, 1995,
the fiscal year ended March 31, 1995 and the period February 4, 1994
(Commencement of Operations) to March 31, 1994, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 35
- -----------------------------------------------------------------------------
Keystone New York Insured Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
(Unaudited)
Assets (Notes 1 and 4):
Investments at market value (identified cost--
$20,430,832) $21,351,573
Cash 2,072
Receivable for:
Fund shares sold 69,118
Interest 401,806
Due from Investment Adviser 17,419
Unamortized organization expenses 2,082
Prepaid expenses 201
- ------------------------------------------------ ------------
Total assets 21,844,271
- ------------------------------------------------ ------------
Liabilities (Notes 2, 4, and 5):
Payable for:
Investments purchased 448,431
Income distributions 83,292
Commissions payable to Principal Underwriter 1,179
Accrued reimbursable expenses 1,000
Other accrued expenses 14,078
- ------------------------------------------------ ------------
Total liabilities 547,980
- ------------------------------------------------ ------------
Net assets $21,296,291
- ------------------------------------------------ ------------
Net assets represented by (Note 1):
Paid-in capital $20,744,587
Accumulated disributions in excess of net
investment income (12,274)
Accumulated net realized gains (losses) on
investments (356,763)
Net unrealized appreciation (depreciation) on
investments 920,741
- ------------------------------------------------ ------------
Total net assets $21,296,291
- ------------------------------------------------ ------------
Net asset value per share (Note 2):
Class A Shares
Net asset value of $3,724,348/386,654 shares
outstanding $ 9.63
Offering price per share ($9.63/0.9525)(based
on a sales charge of 4.75% of the offering
price September 30, 1995) $10.11
Class B Shares
Net asset value of $15,613,272/1,634,736
shares outstanding $ 9.55
Class C Shares
Net asset value of $1,958,671/205,115 shares
outstanding $ 9.55
- ------------------------------------------------ ------------
STATEMENT OF OPERATIONS
Six Months Ended September 30, 1995
(Unaudited)
Investment Income (Note 1):
Interest $584,348
Expenses (Notes 1, 2 and 4):
Management fee $ 55,234
Transfer agent fees 14,666
Custodian fees 14,591
Accounting 9,563
Auditing 5,004
Legal 2,754
Printing 10,035
Registration fees 2,405
Amortization of organization
expenses 308
Distribution Plan expenses 76,781
Miscellaneous expenses 784
- -------------------------------------- ------- ---------
Total expenses 192,125
Less: Reimbursement from Investment
Adviser (57,281)
- -------------------------------------- ------- ---------
Net expenses 134,844
- -------------------------------------- ------- ---------
Investment income--net (Note 1) 449,504
- -------------------------------------- ------- ---------
Net realized and unrealized gain
(loss) on investments and closed
futures contracts (Notes 1 and 3):
Net realized gain (loss) on:
Investments 68,781
Closed futures contracts (21,260)
- -------------------------------------- ------- ---------
Net realized gain (loss) on
investments and closed futures
contracts 47,521
- -------------------------------------- ------- ---------
Net change in unrealized
appreciation (depreciation) on
investments:
Beginning of period 557,402
End of period 920,741
- -------------------------------------- ------- ---------
Net change in unrealized
appreciation (depreciation) on
investments 363,339
- -------------------------------------- ------- ---------
Net gain (loss) on investments and
closed futures contracts 410,860
- -------------------------------------- ------- ---------
Net increase (decrease) in net assets
resulting from operations $860,364
- -------------------------------------- ------- ---------
See Notes to Financial Statements.
<PAGE>
PAGE 36
- -----------------------------------------------------------------------------
Keystone New York Insured Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
September 30, March 31,
1995 1995
- ------------------------------------------------------------------------------ --------------- -------------
<S> <C> <C>
Operations: (Unaudited)
Net investment income $ 449,504 $ 570,628
Net realized gain (loss) on investments and closed futures contracts 47,521 (393,232)
Net change in unrealized appreciation (depreciation) 363,339 698,999
- ------------------------------------------------------------------------------ ------------- -----------
Net increase (decrease) in net assets resulting from operations 860,364 876,395
- ------------------------------------------------------------------------------ ------------- -----------
Distributions to shareholders from (Notes 1 and 5):
Net investment income:
Class A Shares (93,191) (110,893)
Class B Shares (332,661) (372,207)
Class C Shares (61,776) (86,125)
In excess of net investment income:
Class B Shares 0 (39,019)
Class C Shares 0 (6,749)
- ------------------------------------------------------------------------------ ------------- -----------
Total distributions to shareholders (487,628) (614,993)
- ------------------------------------------------------------------------------ ------------- -----------
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 592,630 2,912,705
Proceeds from shares sold--Class B Shares 4,058,708 10,641,995
Proceeds from shares sold--Class C Shares 350,608 2,663,844
Payment for shares redeemed--Class A Shares (316,308) (389,013)
Payment for shares redeemed--Class B Shares (797,299) (1,379,298)
Payment for shares redeemed--Class C Shares (1,381,234) (128,154)
Net asset value of shares issued in reinvestment of distributions from:
Net investment income--Class A Shares 55,384 46,401
Net investment income and in excess of net investment income--Class B Shares 195,674 220,338
Net investment income and in excess of net investment income--Class C Shares 45,190 58,568
- ------------------------------------------------------------------------------ ------------- -----------
Net increase in net assets resulting from capital share transactions 2,803,353 14,647,386
- ------------------------------------------------------------------------------ ------------- -----------
Total increase (decrease) in net assets 3,176,089 14,908,788
Net assets:
Beginning of period 18,120,202 3,211,414
- ------------------------------------------------------------------------------ ------------- -----------
End of period (accumulated distributions in excess of net investment income)
and undistributed net investment income as follows: September
1995--($12,274) and March 1995--$25,850) (Note 1) $21,296,291 $18,120,202
- ------------------------------------------------------------------------------ ------------- -----------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 37
- -----------------------------------------------------------------------------
Keystone Pennsylvania Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- -------------------------------------------------------------- ----- --------- --------- ------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (95.7%)
Allegheny County, Pennsylvania, Airport Revenue, Greater
Pittsburgh International Airport 6.625% 01/01/2022 $ 750,000 $ 775,153
Allegheny County, Pennsylvania, Finance Authority, Single
Family Mortgage 6.600 11/01/2014 1,000,000 1,031,570
Allegheny County, Pennsylvania, Industrial Development
Authority, USX Corp. 6.700 12/01/2020 2,000,000 2,034,420
Allentown, Pennsylvania Area Hospital Authority, Sacred
Heart Hospital of Allentown, Series A 6.750 11/15/2014 1,750,000 1,721,457
Beaver County, Pennsylvania, Industrial Development
Authority, Industrial Development Authority, Pollution
Control, Ohio Edison Co. Project, Series A 7.750 09/01/2024 1,170,000 1,231,671
Berks County, Pennsylvania, Capital Appreciation Second
Series (FGIC) (effective yield 5.55%)(b) 0.000 05/15/2015 3,400,000 1,078,480
Berks County, Pennsylvania, Capital Appreciation Second
Series (FGIC) (effective yield 5.60%)(b) 0.000 05/15/2016 3,460,000 1,035,059
Berks County, Pennsylvania, Capital Appreciation Second
Series (FGIC) (effective yield 5.60%)(b) 0.000 05/15/2018 2,800,000 714,392
Bucks County, Pennsylvania, Industrial Development
Authority, Personal Care 10.000 05/15/2019 5,600,000 8,646,120
Cambria County, Pennsylvania, Series A (FGIC) 6.625 08/15/2012 4,385,000 4,717,208
Central Bucks, Pennsylvania School District, Series A 6.900 11/15/2013 1,000,000 1,141,580
Delaware County, Pennsylvania, Hospital Authority, Delaware
County Memorial Hospital (MBIA) 5.500 08/15/2019 2,000,000 1,898,040
Delaware County, Pennsylvania, Industrial Development
Authority, Pollution Control, Philadelphia Electric Co.,
Series A 7.375 04/01/2021 850,000 908,786
Elizabeth Forward, Pennsylvania, School District, Capital
Appreciation, Series B (MBIA) (effective yield 6.30%) (b) 0.000 09/01/2018 2,170,000 548,771
Erie County, Pennsylvania, Industrial Development Authority,
Environmental Improvement, International Paper Co.
Project, Series A 7.625 11/01/2018 500,000 562,290
Hazleton, Pennsylvania, Area School District, Compound
Interest, Series B (effective yield 6.30%) (b) 0.000 03/01/2018 5,265,000 1,378,061
Lehigh County, Pennsylvania, General Purpose Authority, Good
Shepherd Rehabilitation Hospital 7.500 11/15/2021 1,000,000 1,021,730
Lehigh County, Pennsylvania, General Purpose Authority,
Lehigh Valley Hospital, Series A (MBIA) 7.000 07/01/2016 1,250,000 1,414,800
Mon Valley, Pennsylvania, Sewage Revenue (MBIA) 6.550 11/01/2019 1,305,000 1,388,651
Monroeville, Pennsylvania, Hospital Authority, Forbes Health
System 6.250 10/01/2015 1,000,000 970,820
Montgomery County, Pennsylvania, Higher Education And Health
Authority, Northwestern Corp. 7.000 06/01/2012 700,000 682,703
See Notes to Schedule of Investments. (Continued on next page)
</TABLE>
<PAGE>
PAGE 38
- -----------------------------------------------------------------------------
Keystone Pennsylvania Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- -------------------------------------------------------------- ----- --------- --------- ------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (continued)
Montgomery County, Pennsylvania, Industrial Development,
Pollution Control, Philadelphia Electric Co. 7.600% 04/01/2021 $ 950,000 $ 1,015,883
Norristown, Pennsylvania, Municipal Waste Authority, Sewer
Revenue (FGIC) 5.125 11/15/2023 1,000,000 892,940
Northumberland County, Pennsylvania, Commonwealth Lease
(effective yield 6.82%) (b) 0.000 10/15/2012 4,200,000 1,562,694
Pennsylvania Economic Development Financing Authority
Resources Recovery, Colver Project, Series D 7.150 12/01/2018 3,000,000 3,118,560
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project, Series D 7.125 12/01/2015 1,200,000 1,254,744
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northhampton University Project 6.500 01/01/2013 4,500,000 4,361,130
Pennsylvania General Obligation 5.375 05/01/2013 1,000,000 956,310
Pennsylvania General Obligation (MBIA) 5.600 06/15/2013 1,000,000 992,960
Pennsylvania Housing Finance Agency, Single Family Mortgage,
Series 40 6.800 10/01/2015 750,000 774,263
Pennsylvania Housing Finance Agency, Single Family Mortgage,
Series 33 6.900 04/01/2017 1,000,000 1,034,490
Pennsylvania Housing Finance Agency, Single Family Mortgage,
Series 34 A (FHA/FNMA) 6.850 04/01/2016 1,500,000 1,546,860
Pennsylvania State Industrial Development Authority,
Economic Development (AMBAC) 7.000 01/01/2006 1,500,000 1,721,850
Pennsylvania State Industrial Development Authority,
Economic Revenue Bonds 7.000 06/07/2006 1,000,000 1,153,390
Pennsylvania Intragovernmental Cooperation Authority,
Special Tax, Philadelphia Funding Program (FGIC) 6.750 06/15/2021 1,000,000 1,069,870
Pennsylvania Intragovernmental Cooperation Authority,
Special Tax, City of Philadelphia Funding Program 6.800 06/15/2022 2,500,000 2,806,050
Pennsylvania State Higher Educational Facilities Authority,
Thomas Jefferson University, Series A 6.625 08/15/2009 1,450,000 1,547,933
Philadelphia, Pennsylvania, Hospital & Higher Education
Facilities, Albert Einstein Medical Center 7.625 04/01/2011 900,000 957,753
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Albert Einstein Medical Center 7.000 10/01/2021 945,000 989,708
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Graduate Health Systems Education Facilities,
Series A 7.250 07/01/2018 1,225,000 1,283,959
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Temple University, Series A 6.625 11/15/2023 2,300,000 2,275,183
Philadelphia, Pennsylvania, Water & Waste (MBIA) 6.250 08/01/2012 1,000,000 1,071,150
Puerto Rico Electric Power Authority, Series Z 5.250 07/01/2021 2,000,000 1,780,320
Puerto Rico Highway Authority, Series Q 7.750 07/01/2010 325,000 377,153
See Notes to Schedule of Investments.
</TABLE>
<PAGE>
PAGE 39
- -----------------------------------------------------------------------------
Keystone Pennsylvania Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- -------------------------------------------------------------- ----- --------- --------- ------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (continued)
Scranton-Lackawanna, Pennsylvania, Health And Welfare
Authority, Allied Services Rehabilitation Facility 7.600% 07/15/2026 $1,000,000 $ 1,014,310
Southeastern, Pennsylvania, Transportation Authority, Series
A (FGIC) 5.750 03/01/2020 1,000,000 976,880
Westmoreland County, Pennsylvania, Municipal Authority,
Capital Appreciation, Series A (effective yield
6.10%)(FGIC) (b) 0.000 08/15/2017 2,000,000 533,960
Westmoreland County, Pennsylvania, Municipal Authority,
Capital Appreciation, Series A (effective yield
6.15%)(FGIC) (b) 0.000 08/15/2019 2,000,000 467,640
- -------------------------------------------------------------- ----- --------- --------- ------------
TOTAL MUNICIPAL BONDS (Cost--$69,188,867) 72,439,705
- -------------------------------------------------------------- ----- --------- --------- ------------
TEMPORARY TAX-EXEMPT INVESTMENTS (2.3%)
Sayre County, Pennsylvania Health Care Facilities Authority,
Variable Rate (VHA Pennsylvania Capital Financing Project)
Series A (a) 4.200 12/01/2020 200,000 200,000
Sayre County, Pennsylvania Health Care Facilities Authority,
Variable Rate (VHA Pennsylvania Capital Financing Project)
Series F (a) 4.200 12/01/2020 500,000 500,000
Sayre County, Pennsylvania Health Care Facilities Authority,
Variable Rate (VHA Pennsylvania Capital Financing Project)
Series I (a) 4.200 10/01/2020 495,000 495,000
Sayre County, Pennsylvania Health Care Facilities Authority,
Variable Rate (VHA Pennsylvania Capital Financing Project)
Series K (a) 4.200 12/01/2020 480,000 480,000
Sayre County, Pennsylvania Health Care Facilities Authority,
Variable Rate (VHA Pennsylvania Capital Financing Project)
Series M (a) 4.200 12/01/2020 40,000 40,000
- -------------------------------------------------------------- ----- --------- --------- ------------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (Cost--$1,715,000) 1,715,000
- ----------------------------------------------------------------------- --------- --------- ------------
TOTAL INVESTMENTS (Cost--$70,903,867) 74,154,705
OTHER ASSETS AND LIABILITIES--NET (2.0%) 1,541,807
- -------------------------------------------------------------- ----- --------- --------- ------------
NET ASSETS (100.0%) $75,696,512
- -------------------------------------------------------------- ----- --------- --------- ------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of the
demand features. (b) Effective yield (calculated at date of purchase) is the
yield at which the bond accretes on an annual basis until maturity date.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
FGIC--Federal Guaranty Insurance Co.
FHA--Federal Housing Authority
FNMA--Federal National Mortgage Association
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
PAGE 40
- -----------------------------------------------------------------------------
Keystone Pennsylvania Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Year Ended March 31,
December 27,
1990
Six Months (Commencement
Ended of
September 30, Operations) to
1995 1995 1994 1993 1992 March 31, 1991
================================= ============== ====== ====== ====== ====== ===============
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of
period $ 10.91 $ 11.01 $ 11.42 $ 10.71 $ 10.25 $10.00
- --------------------------------- ------------ ---- ---- ---- ---- -------------
Income from investment
operations:
Net investment income 0.30 0.61 0.62 0.63 0.74 0.18
Net gain (loss) on investments
and closed futures contracts 0.21 (0.09) (0.30) 0.75 0.46 0.25
- --------------------------------- ------------ ---- ---- ---- ---- -------------
Total from investment operations 0.51 0.52 0.32 1.38 1.20 0.43
- --------------------------------- ------------ ---- ---- ---- ---- -------------
Less distributions from:
Net investment income (0.29) (0.61) (0.62) (0.63) (0.74) (0.18)
In excess of net investment
income 0 (0.01) (0.04) (0.02) 0 0
Net realized gain on investments 0 0 (0.06) (0.02) 0 0
In excess of net realized gain on
investments 0 0 (0.01) 0 0 0
- --------------------------------- ------------ ---- ---- ---- ---- -------------
Total distributions (0.29) (0.62) (0.73) (0.67) (0.74) (0.18)
- --------------------------------- ------------ ---- ---- ---- ---- -------------
Net asset value end of period $ 11.13 $ 10.91 $ 11.01 $ 11.42 $ 10.71 $10.25
================================= ============ ==== ==== ==== ==== =============
Total return(c) 4.76% 4.91% 2.58% 13.30% 12.07% 4.37%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 0.75%(a) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Net investment income 5.42%(a) 5.65% 5.27% 5.66% 6.92% 6.84%(a)
Portfolio turnover rate 15% 97% 37% 20% 13% 8%
- --------------------------------- ------------ ---- ---- ---- ---- -------------
Net assets end of period
(thousands) $30,459 $30,450 $30,560 $35,502 $12,914 $2,979
================================= ============ ==== ==== ==== ==== =============
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 1.00%,
1.05%, 1.06%, 1.16%, 1.68%, and 3.19% (annualized) the for the six months
ended September 30, 1995, the fiscal years ended March 31, 1995, 1994,
1993, 1992, and the period December 27, 1990 (Commencement of Operations)
to March 31, 1991, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 41
- -----------------------------------------------------------------------------
Keystone Pennsylvania Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
Six Months (Date of Initial
Ended Public Offering)
September 30, Year Ended March 31 to
1995 1995 1994 March 31, 1993
=============================================== =============== ====== ====== ================
<S> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of period $ 10.81 $ 10.98 $ 11.42 $11.20
- ----------------------------------------------- ------------- ---- ---- --------------
Income from investment operations:
Net investment income 0.26 0.54 0.56 0.08
Net gain (loss) on investments and closed
futures contracts 0.19 (0.10) (0.34) 0.24
- ----------------------------------------------- ------------- ---- ---- --------------
Total from investment operations 0.45 0.44 0.22 0.32
- ----------------------------------------------- ------------- ---- ---- --------------
Less distributions from:
Net investment income (0.26) (0.53) (0.52) (0.08)
In excess of net investment income 0 (0.08) (0.07) (0.02)
Net realized gain on investments 0 0 (0.03) 0
In excess of net realized gain on investments 0 0 (0.04) 0
- ----------------------------------------------- ------------- ---- ---- --------------
Total distributions (0.26) (0.61) (0.66) (0.10)
- ----------------------------------------------- ------------- ---- ---- --------------
Net asset value end of period $ 11.00 $ 10.81 $ 10.98 $11.42
=============================================== ============= ==== ==== ==============
Total return(c) 4.31% 4.15% 1.70% 2.82%
Ratios/supplemental data
Ratios to average net assets:
Total expenses(b) 1.44%(a) 1.50% 1.50% 1.50%(a)
Net investment income 4.72%(a) 4.89% 4.32% 3.44%(a)
Portfolio turnover rate 15% 97% 37% 20%
- ----------------------------------------------- ------------- ---- ---- --------------
Net assets end of period (thousands) $35,694 $30,657 $21,958 $2,543
=============================================== ============= ==== ==== ==============
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 1.75%,
1.80%, 1.81% and 1.69% (annualized) for the six months ended September
30, 1995, the fiscal years ended March 31, 1995, 1994 and the period
February 1, 1993 (Date of Initial Public Offering) to March 31, 1993,
respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 42
- -----------------------------------------------------------------------------
Keystone Pennsylvania Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
Six Months (Date of Initial
Ended Public Offering)
September 30, Year Ended March 31 to
1995 1995 1994 March 31, 1993
=============================================== =============== ===== ===== ================
(Unaudited)
<S> <C> <C> <C> <C>
Net asset value beginning of period $10.83 $11.00 $11.42 $11.20
- ----------------------------------------------- ------------- --- --- --------------
Income from investment operations:
Net investment income 0.26 0.53 0.54 0.07
Net gain (loss) on investments and closed
futures contracts 0.21 (0.10) (0.32) 0.24
- ----------------------------------------------- ------------- --- --- --------------
Total from investment operations 0.47 0.43 0.22 0.31
- ----------------------------------------------- ------------- --- --- --------------
Less distributions from:
Net investment income (0.27) (0.53) (0.52) (0.07)
In excess of net investment income 0 (0.07) (0.05) (0.02)
Net realized gain on investments 0 0 (0.03) 0
In excess of net realized gain on investments 0 0 (0.04) 0
- ----------------------------------------------- ------------- --- --- --------------
Total distributions (0.27) (0.60) (0.64) (0.09)
- ----------------------------------------------- ------------- --- --- --------------
Net asset value end of period $11.03 $10.83 $11.00 $11.42
=============================================== ============= === === ==============
Total return (c) 4.40% 4.05% 1.78% 2.81%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.45%(a) 1.50% 1.50% 1.50%(a)
Net investment income 4.73%(a) 4.90% 4.33% 2.50%(a)
Portfolio turnover rate 15% 97% 37% 20%
- ----------------------------------------------- ------------- --- --- --------------
Net assets end of period (thousands) $9,544 $9,559 $9,385 $ 952
=============================================== ============= === === ==============
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 1.75%,
1.80%, 1.90% and 1.60% (annualized) for the six months ended September
30, 1995, the fiscal years ended March 31, 1995, 1994 and for the period
February 1, 1993 (Date of Initial Public Offering) to March 31, 1993,
respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 43
- -----------------------------------------------------------------------------
Keystone Pennsylvania Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES--
September 30, 1995
(Unaudited)
Assets (Notes 1 and 4):
Investments at market value (identified cost--
$70,903,867) $74,154,705
Cash 1,946
Receivable for:
Investments sold 1,477,629
Fund shares sold 38,146
Interest 1,298,202
Due from Investment Adviser 41,525
Unamortized organization expenses 1,670
Prepaid expenses 1,563
- ------------------------------------------------- ------------
Total assets 77,015,386
- ------------------------------------------------- ------------
Liabilities: (Notes 2, 4, and 5)
Payable for:
Investments purchased 969,426
Income distributions 319,653
Commissions payable to Principal Underwriter 1,900
Accrued reimbursable expenses 1,433
Other accrued expenses 26,462
- ------------------------------------------------- ------------
Total liabilities 1,318,874
- ------------------------------------------------- ------------
Net assets $75,696,512
- ------------------------------------------------- ------------
Net assets represented by (Note 1):
Paid-in capital $75,974,057
Accumulated distributions in excess of net
investment income (145,642 )
Accumulated net realized gain (loss) on
investments (3,382,741 )
Net unrealized appreciation (depreciation) on
investments 3,250,838
- ------------------------------------------------- ------------
Total net assets $75,696,512
- ------------------------------------------------- ------------
Net Asset Value (Note 2):
Class A Shares
Net asset value of $30,458,759/2,737,172
shares outstanding $ 11.13
Offering price per share ($11.13/0.9525)(based
on a sales charge of 4.75% of the offering
price September 30, 1995) $ 11.69
Class B Shares
Net asset value of $35,694,113/3,243,655
shares outstanding $ 11.00
Class C Shares
Net asset value of $9,543,640/865,027 shares
outstanding $ 11.03
- ------------------------------------------------- ------------
STATEMENT OF OPERATIONS--
Six Months Ended September 30, 1995
(Unaudited)
Investment Income:
Interest $2,275,113
Expenses (Notes 1, 2 and 4):
Management fee $ 196,952
Transfer agent fees 55,494
Custodian fees 26,949
Accounting 9,934
Auditing 5,444
Legal 3,288
Printing 6,521
Registration fees 4,421
Amortization of organization
expenses 3,043
Distribution Plan expenses 216,607
Miscellaneous expenses 2,471
- -------------------------------------- -------- -----------
Total expenses 531,124
Less: Reimbursement from Investment
Adviser (104,958)
- -------------------------------------- -------- -----------
Net expenses 426,166
- -------------------------------------- -------- -----------
Net investment income (Note 1) 1,848,947
- -------------------------------------- -------- -----------
Net realized and unrealized gain
(loss) on investments and closed
futures contracts (Notes 1 and 3):
Net realized gain (loss) on:
Investments 370,528
Closed futures contracts (205,349)
- -------------------------------------- -------- -----------
Net realized gain (loss) on
investments and closed futures
contracts 165,179
------------------------------------ -------- -----------
Net change unrealized appreciation
(depreciation) on investments:
Beginning of period 2,010,054
End of period 3,250,838
- -------------------------------------- -------- -----------
Net change in unrealized appreciation
(depreciation) on investments 1,240,784
- -------------------------------------------------- -----------
Net gain (loss) on investments and closed
futures contracts 1,405,963
- -------------------------------------------------- -----------
Net increase (decrease) in net assets resulting
from operations $3,254,910
- -------------------------------------------------- -----------
See Notes to Financial Statements.
<PAGE>
PAGE 44
- -----------------------------------------------------------------------------
Keystone Pennsylvania Tax Free Fund
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
September 30, March 31,
1995 1995
- ----------------------------------------------------------------------------- --------------- -------------
Operations: (Unaudited)
<S> <C> <C>
Net investment income $ 1,848,947 $ 3,489,024
Net realized gain (loss) on investments and closed futures contracts 165,179 (3,542,502)
Net change in unrealized appreciation (depreciation) 1,240,784 2,918,746
- ----------------------------------------------------------------------------- ------------- -----------
Net increase (decrease) in net assets resulting from operations 3,254,910 2,865,268
- ----------------------------------------------------------------------------- ------------- -----------
Distributions to shareholders from (Notes 1 and 5):
Net investment income:
Class A Shares (818,961) (1,714,136)
Class B Shares (827,894) (1,329,520)
Class C Shares (241,215) (445,368)
In excess of net investment income
Class A Shares 0 (23,117)
Class B Shares 0 (196,143)
Class C Shares 0 (58,900)
- ----------------------------------------------------------------------------- ------------- -----------
Total distributions to shareholders (1,888,070) (3,767,184)
- ----------------------------------------------------------------------------- ------------- -----------
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 1,131,776 4,586,195
Proceeds from shares sold--Class B Shares 5,455,715 11,181,757
Proceeds from shares sold--Class C Shares 649,772 3,274,301
Payment for shares redeemed--Class A Shares (2,181,136) (5,294,580)
Payment for shares redeemed--Class B Shares (1,486,684) (2,964,040)
Payment for shares redeemed--Class C Shares (1,021,361) (3,313,655)
Net asset value of shares issued in reinvestment of distributions from:
Net investment income and in excess of net investment income--Class A
Shares 446,771 942,252
Net investment income and in excess of net investment income--Class B
Shares 486,663 877,275
Net investment income and in excess of net investment income--Class C
Shares 181,929 375,859
- ----------------------------------------------------------------------------- ------------- -----------
Net increase (decrease) in net assets resulting from capital share
transactions 3,663,445 9,665,364
- ----------------------------------------------------------------------------- ------------- -----------
Total increase (decrease) in net assets 5,030,285 8,763,448
Net assets:
Beginning of period 70,666,227 61,902,779
- ----------------------------------------------------------------------------- ------------- -----------
End of year [Including accumulated distributions in excess of net investment
income as follows: September 1995--($145,642) and March 1995--($106,519)]
(Note 1) $75,696,512 $70,666,227
- ----------------------------------------------------------------------------- ------------- -----------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 45
- -----------------------------------------------------------------------------
Keystone Texas Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
---------------------------------------------------------- ----- -------- ------- ----------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.7%)
Bexar County, Texas, Health Facilities Development
Corp., Southwest Methodist Hospital (AMBAC) 6.750% 11/01/2021 $ 50,000 $ 56,398
Brazos County, Texas, Health Facilities Development
Corp., St. Joseph's Hospital 6.000 01/01/2013 200,000 189,794
Brazos County, Texas, Higher Education Authority
Incorporated--Student Loan Revenue, Series A (AMT) 6.500 06/01/2004 225,000 235,017
Brownsville, Texas, Utilities System Revenue (MBIA) 6.250 09/01/2014 160,000 169,510
Circle C Municipal Utility District #3, Texas (FGIC) 6.500 11/15/2009 50,000 52,263
Coppell, Texas, Independent School District (FGIC) 7.700 08/15/2004 40,000 47,971
Harris County, Texas, Toll Road (FGIC) 6.500 08/15/2011 50,000 55,291
Harris County, Texas, Toll Road, Sub Lien, Series A 7.000 08/15/2010 375,000 434,392
Harris County, Texas, Health Facilities, Memorial
Hospital System 7.125 06/01/2015 475,000 500,897
Houston, Texas, Airport Senior Lien (AMT) 8.200 07/01/2017 160,000 175,573
Houston, Texas, General Obligation, Series C 7.000 03/01/2008 200,000 231,902
Lake Worth, Texas, Independent School District, Tarrant
County, Series 9 (effective yield 6.67%)(b) 0.000 02/15/2024 340,000 59,245
Matagorda County, Texas, Navigation District 1, Central
Power and Light Project 6.000 07/01/2028 175,000 172,564
Midland County, Texas, Hospital District (effective
yield 7.95%) (b) 0.000 06/01/2007 160,000 76,216
Puerto Rico Electric Power Authority, Power Revenue 6.000 07/01/2016 50,000 49,522
Puerto Rico Electric Power Authority, Power Revenue
Refunding (MBIA) 6.500 07/01/2006 100,000 112,356
Puerto Rico, General Obligation 7.700 07/01/2020 40,000 46,334
San Antonio, Texas, Electric and Gas Revenue 6.000 02/01/2014 100,000 100,125
San Antonio, Texas, Electric and Gas Revenue, Series B 6.000 02/01/2014 50,000 50,045
Texas Housing Agency, Single Family Mortgage Revenue 8.200 03/01/2016 165,000 169,917
Texas Municipal Power Agency (AMBAC)(effective yield
7.35%)(b) 0.000 09/01/2008 625,000 451,141
Texas Municipal Power Agency (MBIA) 6.100 09/01/2009 130,000 138,649
Texas National Research Lab Commission Financing Corp.
Lease Revenue, Superconducting Super Collider 6.950 12/01/2012 100,000 111,676
Texas State Public Finance Authority, Technical College
(MBIA) 6.250 08/01/2009 310,000 335,649
Texas State Public Finance Authority Building Revenue,
Series A (AMBAC) 5.750 02/01/2015 500,000 494,725
Texas State Water Development, Series G and I 5.125 08/01/2015 300,000 278,220
Titus County, Texas, Water District #1, Fresh Water
Supply, Southwestern Electric Power 8.200 08/01/2011 45,000 51,915
University of Texas, Permanent University Fund 6.500 07/01/2011 25,000 26,478
University of Texas, University Revenue, Series B 6.750 08/15/2013 180,000 193,300
Westside Calhoun County, Texas, Navigation District,
Union Carbide Co. 6.500 12/01/2008 50,000 50,035
---------------------------------------------------------- ----- -------- ------- ----------
TOTAL MUNICIPAL BONDS (Cost--$4,948,949) 5,117,120
---------------------------------------------------------- ----- -------- ------- ----------
</TABLE>
See Notes to Schedule of Investments. (Continued on next page)
<PAGE>
PAGE 46
- -----------------------------------------------------------------------------
Keystone Texas Tax Free Fund
SCHEDULE OF INVESTMENTS--September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
---------------------------------------------------------- ----- -------- ------- ----------
<S> <C> <C> <C> <C>
TEMPORARY TAX-EXEMPT INVESTMENT (1.5%)
Texas Hospital Equipment Finance Council, Insured Revenue
Bonds, Series 85A (Cost--$81,000)(a) 4.500% 04/07/2005 $81,000 $ 81,000
---------------------------------------------------------- --- ------- ----- --------
TOTAL INVESTMENTS (Cost--$5,029,949) 5,198,120
OTHER ASSETS AND LIABILITIES--NET (0.8%) 42,367
---------------------------------------------------------- ----- -------- ------- ----------
NET ASSETS (100.0%) $5,240,487
---------------------------------------------------------- ----- -------- ------- ----------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Variable or floating rate instrument with periodic demand feature. The
Fund is entitled to full payment of principal and interest upon
surrendering the security to the issuing agent according to the terms of
the demand feature.
(b) Effective yield is the yield at which the bond accretes on an annual
basis until its maturity. All zero coupon bonds are non-callable.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corp.
AMT--Subject to Alternative Minimum Tax
FGIC--Federal Guaranty Insurance Co.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
PAGE 47
- -----------------------------------------------------------------------------
Keystone Texas Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Six Months March 2, 1992
Ended (Commencement of
September 30, Year Ended march 31 Operations) to
1995 1995 1994 1993 March 31, 1992
========================================= =============== ===== ===== ===== ================
<S> <C> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of period $10.15 $10.13 $10.64 $10.03 $10.00
- ----------------------------------------- ------------- --- --- --- ---------------
Income from investment operations:
Net investment income 0.29 0.56 0.60 0.62 0.05
Net realized gain (loss) on investments
and closed futures contracts 0.26 (0.01) (0.40) 0.60 0.03
- ----------------------------------------- ------------- --- --- --- ---------------
Total from investment operations 0.55 0.55 0.20 1.22 0.08
- ----------------------------------------- ------------- --- --- --- ---------------
Less distributions from:
Net investment income (0.28) (0.53) (0.60) (0.61) (0.05)
In excess of net realized gain on
investments 0 0 (0.11) 0 0
- ----------------------------------------- ------------- --- --- --- ---------------
Total distributions (0.28) (0.53) (0.71) (0.61) (0.05)
- ----------------------------------------- ------------- --- --- --- ---------------
Net asset value end of period $10.42 $10.15 $10.13 $10.64 $10.03
========================================= ============= === === === ===============
Total return (c) 5.44% 5.66% 1.60% 12.51% 0.82%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 0.75%(a) 0.75% 0.29% 0.68% 0.65%(a)
Net investment income 5.22%(a) 5.56% 5.51% 5.79% 5.95%(a)
Portfolio turnover rate 19% 58% 56% 62% 19%
- ----------------------------------------- ------------- --- --- --- ---------------
Net assets end of period (thousands) $1,395 $1,635 $1,916 $2,194 $1,063
========================================= ============= === === === ===============
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.54%,
2.57%, 3.48%, 3.84% and 1.93% (annualized) for the six months ended
September 30, 1995, the fiscal years ended March 31, 1995, 1994, 1993,
and the period March 2, 1992 (Commencement of Operations) to March 31,
1992, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 48
- -----------------------------------------------------------------------------
Keystone Texas Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
Six Months (Date of Initial
Ended Public Offering)
September 30, Year Ended March 31 to
1995 1995 1994 March 31, 1993
================================================ =============== ===== ===== ================
<S> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of period $10.05 $10.08 $10.66 $10.53
- ------------------------------------------------ ------------- --- --- --------------
Income from investment operations:
Net investment income 0.23 0.48 0.51 0.08
Net realized gain (loss) on investments and
closed futures contracts 0.27 0.01 (0.45) 0.14
- ------------------------------------------------ ------------- --- --- --------------
Total from investment operations 0.50 0.49 0.06 0.22
- ------------------------------------------------ ------------- --- --- --------------
Less distributions from:
Net investment income (0.25) (0.48) (0.48) (0.08)
In excess of net investment income 0 (0.04) (0.05) (0.01)
In excess of net realized gain on investments 0 0 (0.11) 0
- ------------------------------------------------ ------------- --- --- --------------
Total distributions (0.25) (0.52) (0.64) (0.09)
- ------------------------------------------------ ------------- --- --- --------------
Net asset value end of period $10.30 $10.05 $10.08 $10.66
================================================ ============= === === ==============
Total return (c) 5.05% 5.01% 0.29% 2.06%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.50%(a) 1.50% 1.47% 1.50%(a)
Net investment income 4.39%(a) 4.80% 4.37% 4.26%(a)
Portfolio turnover rate 19% 58% 56% 62%
- ------------------------------------------------ ------------- --- --- --------------
Net assets end of period (thousands) $3,563 $2,163 $1,890 $ 235
================================================ ============= === === ==============
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 3.21%, 3.28%,
4.39% and 4.15% (annualized) for the six months ended September 30, 1995, the
fiscal years ended March 31, 1995, 1994 and the period February 1, 1993 (Date
of Initial Public Offering) to March 31, 1993, respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 49
- -----------------------------------------------------------------------------
Keystone Texas Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 1, 1993
Six Months (Date of Initial
Ended Public Offering)
September 30, Year Ended March 31 to
1995 1995 1994 March 31, 1993
=============================================== =============== ===== ====== ================
<S> <C> <C> <C> <C>
(Unaudited)
Net asset value beginning of period $10.03 $10.04 $10.64 $10.53
- ----------------------------------------------- ------------- --- ---- --------------
Income from investment operations:
Net investment income 0.24 0.47 0.47 0.09
Net gain (loss) on investments and closed
futures contracts 0.27 0.03 (0.44) 0.11
- ----------------------------------------------- ------------- --- ---- --------------
Total from investment operations 0.51 0.50 0.03 0.20
- ----------------------------------------------- ------------- --- ---- --------------
Less distributions from:
Net investment income (0.25) (0.47) (0.44) (0.09)
In excess of net investment income 0 (0.04) (0.08) 0
In excess of net realized gain on investments 0 0 (0.11) 0
- ----------------------------------------------- ------------- --- ---- --------------
Total distributions (0.25) (0.51) (0.63) (0.09)
- ----------------------------------------------- ------------- --- ---- --------------
Net asset value end of period $10.29 $10.03 $10.04 $10.64
=============================================== ============= === ==== ==============
Total return (c) 5.16% 5.14% (0.03%) 1.86%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.50%(a) 1.50% 1.84% 1.50%(a)
Net investment income 4.48%(a) 4.88% 3.78% 5.03%(a)
Portfolio turnover rate 19% 58% 56% 62%
- ----------------------------------------------- ------------- --- ---- --------------
Net assets end of period (thousands) $ 282 $ 224 $ 813 $ 25
=============================================== ============= === ==== ==============
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 3.29%,
3.28%, 4.39%, and 4.15% (annualized) for the six months ended September
30, 1995, the fiscal years ended March 31, 1995, 1994 and for the period
February 1, 1993 (Date of Initial Public Offering) to March 31, 1993,
respectively.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 50
- -----------------------------------------------------------------------------
Keystone Texas Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES--
September 30, 1995 (Unaudited)
- ---------------------------------------------------------------
Assets (Notes 1 and 4):
Investments at market value (identified cost--
$5,029,949) $5,198,120
Cash 2,422
Interest receivable 57,093
Due from Investment Adviser 13,632
Unamortized organization expenses 3,017
Prepaid expenses and other assets 51
- -------------------------------------------------- -----------
Total assets 5,274,335
- -------------------------------------------------- -----------
Liabilities (Notes 4 and 5):
Income distribution payable 21,364
Accrued expenses 12,484
- -------------------------------------------------- -----------
Total liabilities 33,848
- -------------------------------------------------- -----------
Net assets $5,240,487
- -------------------------------------------------- -----------
Net assets represented by (Note 1):
Paid-in capital $5,398,018
Undistributed net investment income 13,029
Accumulated net realized gain (loss) on
investments and closed futures contracts (338,731 )
Net unrealized appreciation (depreciation) on
investments 168,171
- -------------------------------------------------- -----------
Total net assets $5,240,487
- -------------------------------------------------- -----------
Net Asset Value (Note 2):
Class A Shares
Net assets of $1,395,450/133,868 shares
outstanding $ 10.42
Offering price per share ($10.42/0.9525) (based
on a sales charge of 4.75% of the offering
price September 30, 1995) $ 10.94
Class B Shares
Net assets of $3,562,540/345,938 shares
outstanding $ 10.30
Class C Shares
Net assets of $282,497/27,461 shares
outstanding $ 10.29
- ------------------------------------------------------------------
STATEMENT OF OPERATIONS--
Six Months Ended September 30, 1995 (Unaudited)
Investment Income (Note 1):
Interest $134,542
Expenses (Notes 1, 2 and 4):
Management fee $ 12,483
Transfer agent fees 2,570
Custodian fees 9,580
Accounting 9,816
Auditing 4,655
Legal 2,500
Printing 6,403
Registration fees 2,868
Distribution Plan expenses 14,396
Amortization of organization
expenses 1,082
Miscellaneous expenses 1,295
- -------------------------------------- ------- ---------
Total expenses 67,648
Less: Reimbursement from Investment
Adviser (39,607)
- -------------------------------------- ------- ---------
Net expenses 28,041
- -------------------------------------- ------- ---------
Net investment income (Note 1) 106,501
- -------------------------------------- ------- ---------
Net realized and unrealized gain
(loss) on investments and closed
futures contracts (Notes 1 and 3):
Net realized gain (loss) on:
Investments (3,274)
Closed futures contracts (2,858)
- -------------------------------------- ------- ---------
Net realized gain (loss) on
investments and closed futures
contracts (6,132)
- -------------------------------------- ------- ---------
Net change in unrealized
appreciation (depreciation) on
investments:
Beginning of period 46,401
End of period 168,171
------------------------------------ ------- ---------
Net change in unrealized
appreciation (depreciation) on
investments 121,770
- -------------------------------------- ------- ---------
Net gain (loss) on investments and
futures contracts 115,638
- -------------------------------------- ------- ---------
Net increase (decrease) in net assets
resulting from operations $222,139
- -------------------------------------- ------- ---------
See Notes to Financial Statements.
<PAGE>
PAGE 51
- -----------------------------------------------------------------------------
Keystone Texas Tax Free Fund
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended
September 30, Year Ended
1995 March 31,1995
- ----------------------------------------------------------------------------- --------------- --------------
<S> <C> <C>
Operations (Notes 1 and 3): (Unaudited)
Net investment income $ 106,501 $ 237,103
Net realized gain (loss) on investments and closed futures contracts (6,132) (309,043)
Net change in unrealized apprecaition (depreciation) 121,770 211,046
- ----------------------------------------------------------------------------- ------------- ------------
Net increase (decrease) in net assets resulting from operations 222,139 139,106
- ----------------------------------------------------------------------------- ------------- ------------
Distributions to shareholders from (Notes 1 and 5):
Net investment income:
Class A Shares (43,234) (103,988)
Class B Shares (65,157) (99,393)
Class C Shares (6,899) (29,138)
In excess of net investment income:
Class B Shares 0 (8,132)
Class C Shares 0 (2,097)
- ----------------------------------------------------------------------------- ------------- ------------
Total distributions to shareholders (115,290) (242,748)
- ----------------------------------------------------------------------------- ------------- ------------
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 25,903 258,882
Proceeds from shares sold--Class B Shares 1,528,339 971,881
Proceeds from shares sold--Class C Shares 60,000 137,217
Payment for shares redeemed--Class A Shares (327,420) (577,484)
Payment for shares redeemed--Class B Shares (224,987) (744,621)
Payment for shares redeemed--Class C Shares (12,912) (687,214)
Net asset value of shares issued in reinvestment of distributions from:
Net investment income and in excess of net investment income--Class A Shares 24,724 64,701
Net investment income and in excess of net investment income--Class B Shares 33,836 67,669
Net investment income and in excess of net investment income--Class C Shares 4,553 15,761
- ----------------------------------------------------------------------------- ------------- ------------
Net increase (decrease) in net assets resulting from capital share
transactions 1,112,036 (493,208)
- ----------------------------------------------------------------------------- ------------- ------------
Total increase (decrease) in net assets 1,218,885 (596,850)
Net assets:
Beginning of period 4,021,602 4,618,452
- ----------------------------------------------------------------------------- ------------- ------------
End of period (Including undistributed net income as follows: September
1995--$13,029 and March 1995--$21,818) (Note 1) $ 5,240,487 $4,021,602
- ----------------------------------------------------------------------------- ------------- ------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 52
- -----------------------------------------------------------------------------
Keystone State Tax Free Fund
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Keystone State Tax Free Fund (formerly Keystone America State Tax Free Fund)
("FUND") was formed as a Massachusetts business trust on September 13, 1990.
Keystone Investment Management Company (formerly Keystone Custodian Funds,
Inc.) ("Keystone") is the Investment Adviser and Manager. The FUND currently
offers shares of five separate series evidencing interests in different
portfolios of securities: the Keystone Florida Tax Free Fund (formerly
Keystone America Florida Tax Free Fund) ("Florida Fund"), which was
established on September 19, 1990 and had no operations prior to December 27,
1990; the Keystone Massachusetts Tax Free Fund (formerly Keystone America
Massachusetts Tax Free Fund) ("Massachusetts Fund"), and the Keystone New
York Insured Tax Free Fund (formerly Keystone America New York Insured Tax
Free Fund) ("New York Fund"), which were established February 21, 1992 and
had no operations prior to February 4, 1994; the Keystone Pennsylvania Tax
Free Fund (formerly Keystone America Pennsylvania Tax Free Fund)
("Pennsylvania Fund"), which was established September 19, 1990 and had no
operations prior to December 27, 1990; and the Keystone Texas Tax Free Fund
(formerly Keystone America Texas Tax Free Fund) ("Texas Fund"), which was
established on February 21, 1992 and had no operations prior to March 2, 1992
(together the "Funds" and each individually a "Fund"). The FUND is registered
under the Investment Company Act of 1940 ("1940 Act") as an open-end
investment company and each of the Funds is registered as a nondiversified
fund.
Each Fund currently offers three classes of shares. Class A shares are
sold subject to a maximum sales charge of 4.75% payable at the time of
purchase. Class B shares are sold subject to a contingent deferred sales
charge which varies depending on when shares were purchased and how long they
have been held. Class C shares are sold subject to a contingent deferred
sales charge payable upon redemption within one year of purchase, and
available only through dealers who have entered into special distribution
agreements with Keystone Investment Distributors Company ("KIDC") (formerly
Keystone Distributors, Inc.), the FUND's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
("KII") (formerly Keystone Group, Inc.), a Delaware corporation. KII is
privately owned by an investor group consisting of members of current and
former management of Keystone and its affiliates. Keystone Investor Resource
Center, Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the FUND's
transfer agent.
The following is a summary of significant accounting policies consistently
followed by the FUND, in conformity with generally accepted accounting
principles.
A. Tax-exempt bonds are stated on the basis of valuations provided by a
pricing service, approved by the Board of Trustees, that uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Non-tax-exempt securities for which market
quotations are readily available are valued at the price quoted which, in the
opinion of the Board of Trustees or their representative, most nearly
represents their market value. Short-term investments which are purchased
with maturities of sixty days or less are valued at amortized cost (original
cost as adjusted for amortization of premium or accretion of discount) which
when combined with accrued interest approximates market. Short-term
investments maturing in more than sixty days for which market quotations are
readily available are valued at current market value. Short-term investments
maturing in more than sixty days when purchased which are held on the
sixtieth
<PAGE>
PAGE 53
- -----------------------------------------------------------------------------
day prior to maturity are valued at amortized cost (market value on the
sixtieth day adjusted for amortization of premium or accretion of discount)
which when combined with accrued interest approximates market. All other
securities and other assets are valued at fair value as determined in good
faith using methods prescribed by the Board of Trustees.
Each Fund enters into currency and other financial futures contracts as a
hedge against changes in interest or currency exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security, financial instrument, or, in the case of a
stock index, cash at a set price on a future date. Upon entering into a
futures contract the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at fiscal year end are marked-to-market and the
resultant net gain or loss is included in the Fund's taxable income. In
addition to market risk, the Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
B. 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. 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 agreements are subject to risks from changes in value based upon
changes in the level of interest rates and other market factors, both before
and after delivery.
C. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis.
D. Each Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Thus, each Fund expects to be relieved of
any federal income tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The tax-exempt interest portion of each dividend is declared uniformly based
on the ratio of each Fund's tax-exempt and taxable income for the entire
year. Each Fund intends to avoid excise tax liability by making the required
distributions under the Internal Revenue Code.
E. Organization expenses are being amortized to operations over a five-year
period on a straight-line basis. In the event any of the initial shares are
redeemed by any holder thereof during the five-year amortization period,
redemption proceeds will be reduced by any unamortized organization expenses
in the same proportion as the number of initial shares being redeemed bears
to the number of initial shares outstanding at the time of redemption.
2. Capital Share Transactions
The Trust agreement authorizes the issuance of an unlimited number of shares
of beneficial interest without par value. Transactions in shares of the FUND
were as follows:
<PAGE>
PAGE 54
- -----------------------------------------------------------------------------
Keystone State Tax Free Fund
<TABLE>
<CAPTION>
Florida Fund
-------------------------------------
Class A Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 129,324 594,097
Shares redeemed (435,982) (961,330)
Shares issued in
reinvestment of
dividends and
distributions 28,012 70,513
- ---------------------- ----------------- -------------
Net increase
(decrease) (278,646) (296,720)
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 466,379 3,504,376
Shares redeemed (303,863) (544,344)
Shares issued in
reinvestment of
dividends and
distributions 50,616 82,908
- ---------------------- ----------------- -------------
Net increase
(decrease) 213,132 3,042,940
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 52,456 643,062
Shares redeemed (145,654) (704,324)
Shares issued in
reinvestment of
dividends and
distributions 14,286 38,331
- ---------------------- ----------------- -------------
Net increase
(decrease) (78,912) (22,931)
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund
-------------------------------------
Class A Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 47,156 141,360
Shares redeemed (7,230) (93,803)
Shares issued in
reinvestment of
dividends and
distributions 3,933 6,770
- ---------------------- ----------------- -------------
Net increase
(decrease) 43,859 54,327
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 133,928 532,363
Shares redeemed (26,404) (69,932)
Shares issued in
reinvestment of
dividends and
distributions 10,510 14,043
- ---------------------- ----------------- -------------
Net increase
(decrease) 118,034 476,474
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 9,049 189,623
Shares redeemed (6,258) (20,305)
Shares issued in
reinvestment of
dividends and
distributions 3,098 6,195
- ---------------------- ----------------- -------------
Net increase
(decrease) 5,889 175,513
- ---------------------- ----------------- -------------
</TABLE>
<PAGE>
PAGE 55
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
New York Fund
-------------------------------------
Class A Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 61,743 315,837
Shares redeemed (33,086) (41,667)
Shares issued in
reinvestment of
dividends and
distributions 5,811 5,049
- ---------------------- ----------------- -------------
Net increase
(decrease) 34,468 279,219
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 428,032 1,155,373
Shares redeemed (83,942) (153,738)
Shares issued in
reinvestment of
dividends and
distributions 20,675 24,119
- ---------------------- ----------------- -------------
Net increase
(decrease) 364,765 1,025,754
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 36,964 288,523
Shares redeemed (144,990) (14,006)
Shares issued in
reinvestment of
dividends and
distributions 4,781 6,435
- ---------------------- ----------------- -------------
Net increase
(decrease) (103,245) 280,952
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania Fund
-------------------------------------
Class A Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 102,635 422,375
Shares redeemed (197,277) (494,154)
Shares issued in
reinvestment of
dividends and
distributions 40,542 87,463
- ---------------------- ----------------- -------------
Net increase
(decrease) (54,100) 15,684
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 498,246 1,037,572
Shares redeemed (136,111) (282,691)
Shares issued in
reinvestment of
dividends and
distributions 44,617 82,087
- ---------------------- ----------------- -------------
Net increase
(decrease) 406,752 836,968
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 59,193 306,060
Shares redeemed (93,113) (312,198)
Shares issued in
reinvestment of
dividends and
distributions 16,640 34,993
- ---------------------- ----------------- -------------
Net increase
(decrease) (17,280) 28,885
- ---------------------- ----------------- -------------
</TABLE>
<PAGE>
PAGE 56
- -----------------------------------------------------------------------------
Keystone State Tax Free Fund
<TABLE>
<CAPTION>
Texas Fund
-------------------------------------
Class A Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 2,529 25,763
Shares redeemed (32,115) (60,316)
Shares issued in
reinvestment of
dividends and
distributions 2,409 6,476
- ---------------------- ----------------- -------------
Net increase
(decrease) (27,177) (28,077)
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 149,213 96,577
Shares redeemed (21,921) (75,526)
Shares issued in
reinvestment of
dividends and
distributions 3,332 6,859
- ---------------------- ----------------- -------------
Net increase
(decrease) 130,624 27,910
- ---------------------- ----------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- ---------------------- ------------------ --------------
<S> <C> <C>
Shares sold 5,964 14,015
Shares redeemed (1,268) (74,258)
Shares issued in
reinvestment of
dividends and
distributions 449 1,584
- ---------------------- ----------------- -------------
Net increase
(decrease) 5,145 (58,659)
- ---------------------- ----------------- -------------
</TABLE>
Each Fund bears some of the costs of selling its shares under a
Distribution Plan adopted with respect to its Class A, Class B, and Class C
shares pursuant to Rule 12b-1 under the 1940 Act.
Each Class A Distribution Plan provides for payments which are currently
limited to 0.15% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
each Fund to KIDC under the Class A Distribution Plan are currently used to
pay others such as dealers, service fees at an annual rate of 0.15% of the
average net asset value of Class A shares maintained by such others and
remaining outstanding on the books of the Funds for specified periods.
Each Class B Distribution Plan provides for payments at an annual rate of
0.90% of the average daily net asset value of Class B shares to pay expenses
of the distribution of Class B shares. Amounts paid by each Fund under the
Class B Distribution Plan are currently used to pay others (dealers) (i) a
commission at the time of purchase normally equal to 4.00% of the price paid
for each Class B share sold plus the first year's service fee in advance in
the amount of 0.15% of the price paid for each Class B share sold. Beginning
approximately 12 months after the purchase of a Class B share, the dealer or
other party will receive service fees at an annual rate of 0.15% of the
average daily net asset value of each Class B share maintained by such others
outstanding on the Fund's books for specified periods. A contingent deferred
sales charge will be imposed, if applicable, on Class B shares purchased
after June 1, 1995 at rates ranging from a maximum of 5.00% of amounts
redeemed during the first twelve months following the date of purchase to
1.00% of amounts redeemed during the sixth twelve-month period following the
date of purchase. Class B shares purchased on or after June 1, 1995 that have
been outstanding for eight years following the month of purchase will
automatically convert to Class A shares without a front end sales charge or
exchange fee. Class B shares purchased prior to June 1, 1995 will retain
their existing conversion rights.
Each Class C Distribution Plan provides for payments at an annual rate of
up to 0.90% of the average daily net asset value of Class C shares to pay
expenses
<PAGE>
PAGE 57
- -----------------------------------------------------------------------------
of the distribution of Class C shares. Amounts paid by each Fund under the
Class C Distribution Plan are currently used to pay others (dealers) a
commission at the time of purchase normally equal to 0.75% of the price paid
for each share sold plus the first year's service fee in advance in the
amount of 0.15% of the price paid for each Class C share. Beginning
approximately 15 months after purchase, the dealer or other party will
receive a commission at an annual rate of 0.75% (subject to applicable
limitations imposed by the rules of the National Association of Securities
Dealers, Inc. ("NASD rule") plus service fees at an annual rate of 0.15%,
respectively, of the average net asset value of each Class C share sold by
such others and remaining outstanding on the books of the Funds for specified
periods.
Each of the Distribution Plans may be terminated at any time by vote of
the Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any of the
Distribution Plans, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the distribution Plan was in effect.
For the six months ended September 30, 1995, the Florida Fund paid KIDC
$30,113, $238,600 and $55,449, the Massachusetts Fund paid KIDC $1,244,
$29,762 and $9,042, the New York Fund paid KIDC $2,721, $62,533, and $11,527,
the Pennsylvania Fund paid KIDC $22,965, $149,952 and $43,690, and the Texas
Fund paid KIDC $1,202, $11,946 and $1,248, respectively, pursuant to each
Fund's Class A, Class B, and Class C Distribution Plans.
Under a Rule of the NASD, the maximum uncollected amounts for which KIDC
may seek payment from the FUND under its Class B Distribution Plans are
$3,119,763, $382,667, $788,515, $1,920,879, and $139,964 for shares purchased
prior to June 1, 1995 and $229,596, $47,184, $159,081, $265,961 and $93,126
for shares purchased after June 1, 1995, respectively, for the Florida Fund,
the Massachusetts Fund, the New York Fund, the Pennsylvania Fund and the
Texas Fund as of September 30, 1995. The maximum uncollected amounts for
which KIDC may seek payment from the FUND under its Class C Distribution
Plans are $1,254,939, $121,460, $187,290, $772,302, and $63,746,
respectively, for the Florida Fund, the Massachusetts Fund, the New York
Fund, the Pennsylvania Fund and the Texas Fund as of September 30, 1995.
3. Securities Transactions
As of March 31, 1995, the Florida Fund, the Massachusetts Fund, the New York
Fund, the Pennsylvania Fund and the Texas Fund had loss carryovers for
federal income tax purposes of approximately $2,981,000, $195,000, $1,000,
$1,503,000 and $110,000, respectively, which expire in 2003.
Purchases and sales of investment securities (including proceeds received
at maturity), during the six months ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Florida Fund
--------------------------
Cost of Proceeds
Purchases From Sales
---------- ------------
<S> <C> <C>
Tax-exempt investments $33,973,942 $37,905,500
Short-term commercial
and tax-exempt notes 21,205,000 28,350,000
- ------------------------ -------- ----------
$55,178,942 $66,255,500
- ------------------------ -------- ----------
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund
--------------------------
Cost of Proceeds
Purchases From Sales
--------- -------------
<S> <C> <C>
Tax-exempt investments $5,837,948 $ 4,311,746
Short-term commercial
and tax-exempt notes 3,210,000 3,000,000
- ------------------------ ------- -----------
$9,047,948 $7,311,746
- ------------------------ ------- -----------
</TABLE>
<PAGE>
PAGE 58
-----------------------------------------------------------------------------
Keystone State Tax Free Fund
<TABLE>
<CAPTION>
New York Fund
---------------------------
Cost of Proceeds
Purchases From Sales
---------- -------------
<S> <C> <C>
Tax-exempt investments $ 3,642,107 $ 1,646,175
Short-term commercial
and tax-exempt notes 7,155,000 6,050,000
- ------------------------ -------- -----------
$10,797,107 $7,696,175
- ------------------------ -------- -----------
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania Fund
--------------------------
Cost of Proceeds
Purchases From Sales
---------- ------------
<S> <C> <C>
Tax-exempt investments $14,149,040 $10,812,257
Short-term commercial
and tax-exempt notes 10,820,000 10,885,000
- ------------------------ -------- ----------
$24,969,040 $21,697,257
- ------------------------ -------- ----------
</TABLE>
<TABLE>
<CAPTION>
Texas Fund
------------------------
Cost of Proceeds
Purchases From Sales
--------- -----------
<S> <C> <C>
Tax-exempt investments $1,836,824 $ 826,245
Short-term commercial
and tax-exempt notes 806,000 730,000
- ------------------------ ------- ---------
$2,642,824 $1,556,245
- ------------------------ ------- ---------
</TABLE>
4. Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between Keystone and
the FUND, dated November 29, 1990, Keystone provides investment management
and administrative services to the FUND and its Funds. In return, Keystone is
paid a management fee computed and paid daily. The management fee is
calculated by applying percentage rates, which start at 0.55% and decline, as
net assets increase, to 0.25% per annum, to the net asset value of each Fund.
During the six months ended September 30, 1995, the Florida Fund,
Massachusetts Fund, New York Fund, Pennsylvania Fund and Texas Fund paid or
accrued to Keystone investment management and administrative services fees of
$277,231, $29,992, $55,234, $196,952 and $12,483, respectively, which
represented 0.52%, 0.55%, 0.55%, 0.53%, and 0.55%, respectively, of the
average net assets of the Funds on an annualized basis.
During the six months ended September 30, 1995, the Florida Fund,
Massachusetts Fund, New York Fund, Pennsylvania Fund and Texas Fund paid or
accrued to KII $9,273, $9,874, $9,563, $9,934 and $9,816, respectively, for
certain accounting and to KIRC $59,925, $9,401, $14,666, $55,494, and $2,570,
respectively, for transfer agent fees.
Keystone has voluntarily agreed to limit all expenses incurred including
management fee of the Class A Shares of the Florida Fund, the Pennsylvania
Fund and the Texas Fund to 0.75% of average daily net assets and has limited
annual expenses of the Class B Shares and Class C Shares to 1.50% of average
daily net asset value.
Keystone voluntarily limited the expenses, including the management fee,
of the Class A Shares of the Massachusetts Fund and the New York Fund to
0.35% until August 15, 1994, after which the expense limitation was increased
by 0.10% every three months until May 15, 1995 since which date expenses were
limited to 0.75% until December 31, 1995. Expenses of Class B Shares and
Class C Shares of those Funds were limited to 1.10% until August 15, 1994,
after which the expense limitations were similarly increased until May 15,
1995 since which date expenses were limited to 1.50% until December 31, 1995.
Keystone will not be required to make such reimbursement to an extent which
would result in a Fund's inability to qualify as a regulated investment
company under the provisions of the Internal Revenue Code. In accordance with
this voluntary expense limitation, Keystone reimbursed the Florida Fund, the
Massachusetts Fund, the New York Fund, the Pennsylvania Fund and the Texas
Fund (i) $33,827, $11,143, $10,401, $38,806 and $14,391, respectively, with
respect to each Fund's
<PAGE>
PAGE 59
- -----------------------------------------------------------------------------
Class A Shares, (ii) $59,703, $33,524, $39,404, $51,176 and $22,732,
respectively, with respect to each Fund's Class B Shares; and (iii) $13,932,
$10,266, $7,476, $14,976 and $2,484, respectively, with respect to each
Fund's Class C Shares. Keystone does not intend to seek repayment of these
amounts.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the FUND. Officers of Keystone and affiliated Trustees receive no
compensation directly from the FUND. Currently, the Independent Trustees of
the FUND receive no compensation for their services.
5. Distributions to Shareholders
Each Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains, if any, at least
annually. Distributions are determined in accordance with income tax
regulations. Distributions from tax basis net investment income and net
capital gains can exceed book basis net investment income and net capital
gains.
<PAGE>
[front cover]
KEYSTONE
[photo of American flag flying in front of
building]
STATE
TAX FREE FUND
FLORIDA TAX FREE FUND
MASSACHUSETTS TAX FREE FUND
NEW YORK INSURED TAX FREE FUND
PENNSYLVANIA TAX FREE FUND
TEXAS TAX FREE FUND
[Keystone logo]
SEMIANNUAL REPORT
SEPTEMBER 30, 1995
[back cover]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you
invest or send money. For a free prospectus on other Keystone funds, contact
your financial adviser or call Keystone at 1-800-343-2898.
[Keystone logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
STF-AR-11/95
9M [recycle logo]
