<PAGE>
KEYSTONE TAX FREE INCOME FUND
PROSPECTUS MARCH 31, 1996
AS SUPPLEMENTED JANUARY 1, 1997
Keystone Tax Free Income Fund (formerly named Keystone America Tax Free Income
Fund) (the "Fund") is a diversified, open-end management investment company,
commonly known as a mutual fund.
The Fund's investment objective is to seek the highest possible current
income, exempt from federal income taxes, while preserving capital. The Fund
pursues this objective by investing primarily in municipal bonds.
The Fund offers three classes of shares. Information on share classes and
their fee and sales charge structures may be found in the "Expense Information,"
"Alternative Sales Options," "Contingent Deferred Sales Charge and Waiver of
Sales Charges," "Distribution Plans and Agreements" and "Fund Shares" sections
of this prospectus.
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 more detailed information
about securities ratings, is contained in the Fund's statement of additional
information dated March 31, 1996, as supplemented, 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
Expense Information 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
Distribution Plans and Agreements 14
How to Buy Shares 17
Alternative Sales Options 18
Contingent Deferred Sales Charge and Waiver of Sales Charges 21
How to Redeem Shares 21
Shareholder Services 23
Performance Data 25
Fund Shares 25
Additional Information 26
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 INSURED OR OTHERWISE PROTECTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OF ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OF ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
EXPENSE INFORMATION
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 Agreements"; and
"Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT-END BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases ........... 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load ............................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original declining to 1.00% in year and 0.00%
purchase price or redemption proceeds, as the sixth year and thereafter
applicable) 0.00% thereafter
Exchange Fee ...................................... None None None
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 .................................... 0.33% 0.35% 0.35%
---- ---- ----
Total Fund Operating Expenses ..................... 1.19% 1.96% 1.96%
==== ==== ====
<CAPTION>
EXAMPLES(7) 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 .................................................................. $59 $83 $110 $185
Class B .................................................................. $70 $92 $126 $199
Class C .................................................................. $30 $62 $106 $229
You would pay the following expenses on the same investment, assuming no
redemption at the end of each period:
Class A .................................................................. $59 $83 $110 $185
Class B .................................................................. $20 $62 $106 $199
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.
<FN>
- ----------
(1) Class B shares purchased after January 1, 1997, convert tax free to Class A shares after seven years. See "Class B Shares" for
more information.
(2) Class C shares are available only through broker-dealers who have entered into special distribution agreements with Evergreen
Keystone Distributor, Inc., 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 made after January 1, 1997, in the amount of $1,000,000 or more are not subject to a sales charge
at the time of purchase, but may be subject to a contingent deferred sales charge. See 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) Expense ratios shown above are for the Fund's fiscal year ended November 30, 1995. Total Fund Operating Expenses for the
fiscal year ended November 30, 1995 include indirectly paid expenses.
(6) Long-term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted by rules
adopted by the National Association of Securities Dealers, Inc. ("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%.
</FN>
</TABLE>
<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
1995(d) 1994 1993 1992 1991 1990 1989 1988 NOVEMBER 30, 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
<FN>
- ----------
(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.
</FN>
</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.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 1, 1993
NOVEMBER 30, (DATE OF INITIAL
------------------------------ PUBLIC OFFERING) TO
1995(d) 1994 NOVEMBER 30, 1993
----------- ----------- ---------------------
<S> <C> <C> <C>
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
<FN>
- ----------
(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.
</FN>
</TABLE>
<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.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 1, 1993
NOVEMBER 30, (DATE OF INITIAL
------------------------------ PUBLIC OFFERING) TO
1995(d) 1994 NOVEMBER 30, 1993
----------- ----------- ---------------------
<S> <C> <C> <C>
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
<FN>
- ----------
(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 charge.
(c) Annualized.
(d) Calculation based on average shares outstanding.
</FN>
</TABLE>
<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 more than thirty funds advised and managed
by Keystone Investment Management Company ("Keystone"), the Fund's investment
adviser.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund seeks the highest possible current income exempt from federal income
taxes, while preserving capital.
Since the Fund considers preservation of capital as well as the level of tax
exempt income as its primary objective, the Fund may realize less income than a
fund willing to expose shareholders' capital to greater risk.
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, as amended ("1940 Act")).
There can be no assurance that the Fund will achieve its investment objective
since there is uncertainty in every investment.
PRINCIPAL INVESTMENTS
Under ordinary circumstances, the Fund invests substantially all and at least
80% of its assets in federally tax-exempt obligations, including municipal bonds
and notes and 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, 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.
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. 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 ("Moody's") (Aaa, Aa,
A and Baa) or 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 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 call or put 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 municipal 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 the "Risk
Factors," and "Additional Investment Information" sections of this prospectus
and the statement of additional information.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental restrictions summarized below, which may
not be changed without the vote of a majority of the Fund's outstanding shares
(as defined in the 1940 Act). 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.
RISK FACTORS
GENERAL
Like any investment, your investment in the Fund involves an element of risk.
Before you invest in the Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses.
Certain risks related to the Fund are discussed below. To the extent not
discussed in this section, specific risks attendant to individual securities or
investment practices are discussed in "Additional Investment Information."
Should the Fund need to raise cash to meet a large number of redemptions, it
might have to sell portfolio securities at a time when it would be
disadvantageous to do so.
Investing in the Fund involves the risk common to investing in any security,
that is that the value of the securities held by the Fund will fluctuate in
response to changes in economic conditions or public expectations about those
securities. For example, the market value of fixed income securities in which
the Fund may invest are likely to vary inversely to changes in prevailing
interest rates. In addition, the net asset value of the Fund's shares will
change according to 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 obligations 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 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 the Fund and the value of the Fund's portfolio
could be materially affected. In such an event, the Fund would reevaluate its
investment objective and policies and consider changes in the structure of the
Fund or dissolution.
OTHER CONSIDERATIONS
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 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 Fund computes its net asset value as of the close of trading (currently
4:00 p.m. eastern time) on each day that the New York Stock Exchange (the
"Exchange") is open. However, the Fund does not compute its net asset value 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 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. 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 having maturities of 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 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 has qualified and intends to continue to qualify as a regulated
investment company (a "RIC") 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 RIC 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.
If the Fund qualifies as a RIC and if it distributes substantially all of its
net investment income and net capital gains, if any, to shareholders, it will be
relieved of any federal income tax liability.
Any taxable distribution declared in October, November or December to
shareholders of record in such a month and paid by the following January 31 will
be includable in the taxable income of the shareholder as if paid on December 31
of the year in which the dividend was declared.
The Fund intends to make distributions from net investment income monthly and
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 dividend or distribution is based, or, at the shareholder's option, in
cash. Shareholders who have not opted to receive cash prior to the payable date
from net investment income or 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 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
Fund 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 as capital charges.
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 and Class C shares will generally be higher, and income
distributions paid by the Fund with respect to Class A shares will generally be
greater than those paid with respect to Class B and Class C shares.
The 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 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 a shareholder receives 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.
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 (relating to "adjusted current earnings").
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.
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.
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 at the
end of each quarter. 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 provides
investment advice, management and administrative services to the Fund.
INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone is a wholly-owned
subsidiary of Keystone Investments, Inc. ("Keystone Investments"). Keystone
Investments provides accounting, bookkeeping, legal, personnel and general
corporate services to Keystone, its affiliates, and the Keystone Investments
Families of Funds. Both Keystone and Keystone Investments are located at 200
Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, Keystone Investments succeeded to the business of a
corporation with the same name, but under different ownership. Keystone
Investments is a wholly-owned subsidiary of First Union National Bank of North
Carolina ("FUNB"). FUNB is a subsidiary of First Union Corporation ("First
Union"), the sixth largest bank holding company in the U.S. based on total
assets as of September 30, 1996.
First Union is headquartered in Charlotte, North Carolina, and had $133.9
billion in consolidated assets as of September 30, 1996. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the U.S. The Capital Management Group of FUNB ("CMG"),
together with Lieber & Company and Evergreen Asset Management Corp. ("Evergreen
Asset"), wholly-owned subsidiaries of FUNB, manage or otherwise oversee the
investment of over $50 billion in assets belonging to a wide range of clients,
including the Evergreen Family of Funds.
Pursuant to its Investment Advisory and Management Agreement with the Fund
(the "Advisory Agreement"), Keystone manages the investment and reinvestment of
the Fund's assets, supervises the operation of the Fund and provides all
necessary office space, facilities and equipment.
The Fund pays Keystone 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.
Keystone's fee is computed as of the close of business each business day and
payable daily.
The Advisory Agreement continues in effect for two years from its effective
date and, thereafter, from year to year only so long as such continuance is
specifically approved at least annually by the Fund's Board of Trustees or by
vote of shareholders of the Fund. In either case, the terms of the Advisory
Agreement and continuance thereof must be approved by the vote of a majority of
the Fund's Independent Trustees (Trustees who are not "interested persons" of
the Fund, as defined in the 1940 Act, and who have no direct or indirect
financial interest in the Fund's Distribution Plans or any agreement related
thereto), 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 or Keystone or may be terminated by a vote of
shareholders of the Fund. The Advisory Agreement will terminate automatically
upon its assignment.
PRINCIPAL UNDERWRITER
Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of Furman Selz LLC ("Furman Selz"),
which is not affiliated with First Union, is now the Fund's principal
underwriter (the "Principal Underwriter"). EKD replaces Evergreen Keystone
Investment Services, Inc. (formerly Keystone Investment Distributors Company)
("EKIS") as the Fund's principal underwriter. EKIS may no longer act as
principal underwriter of the Fund due to regulatory restrictions imposed by the
Glass-Steagall Act upon national banks such as FUNB and their affiliates, that
prohibit such entities from acting as the underwriters or distributors of mutual
fund shares. While EKIS may no longer act as principal underwriter of the Fund
as discussed above, EKIS may continue to receive compensation from the Fund or
the Principal Underwriter in respect of underwriting and distribution services
performed prior to the termination of EKIS as principal underwriter. In
addition, EKIS may also be compensated by the Principal Underwriter for the
provision of certain marketing support services to the Principal Underwriter at
an annual rate of up to .75% of the average daily net assets of the Fund,
subject to certain restrictions. Both EKD and Furman Selz are located at 230
Park Avenue, New York, New York 10169.
SUB-ADMINISTRATOR
Furman Selz provides officers and certain administrative services to the Fund
pursuant to a sub-administration agreement. For its services under that
agreement, Furman Selz receives a fee from Keystone at the maximum annual rate
of .01% of the average daily net assets of the Fund.
It is expected that on or about January 2, 1997, Furman Selz will transfer
EKD, and its related mutual fund distribution and administration business, to
BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
PORTFOLIO MANAGER
Daniel A. Rabasco, a Keystone Vice President and Portfolio Manager, has been
responsible for the day-to-day management of the Fund since January 1996. Mr.
Rabasco has more than 10 years investment experience.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment advisory
and distribution plan fees discussed in this prospectus, the principal expenses
that the Fund is expected to pay include, but are not limited to, expenses of
its Independent Trustees; transfer, dividend disbursing, and shareholder
servicing agent expenses; custodian expenses; fees of its independent auditors;
fees of legal counsel to the Fund and its Independent Trustees; fees payable to
government agencies, including registration and qualification fees attributable
to 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, 1995, the Fund paid or accrued to
Keystone Management, Inc., the Fund's former investment manager, investment
management and administrative services fees of $919,802 (0.61% of the Fund's
average daily net asset value on an annualized basis). Of such amount, $781,832
was paid to Keystone for its services to the Fund.
For the fiscal year ended November 30, 1995, the Fund paid or accrued $211,525
to Evergreen Keystone Service Company (formerly Keystone Investor Resource
Center, Inc.) ("EKSC") for services rendered as the Fund's transfer agent and
dividend disbursing agent, and $19,338 to Keystone Investments for certain
accounting services. EKSC, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, is a wholly-owned subsidiary of Keystone.
For the fiscal year ended November 30, 1995, the Fund's Class A, Class B and
Class C shares paid 1.19%, 1.96% and 1.96%, respectively, of average net assets
in expenses.
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 consider the number of shares of the Fund sold by the
broker-dealer. In addition, broker-dealers executing portfolio transactions 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,
1995 and 1994 were 30% and 98%, 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.
CODE OF ETHICS
The Fund has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
DISTRIBUTION PLANS AND AGREEMENTS
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 by the Fund
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under the Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as broker-dealers),
as service fees at an annual rate of up to 0.25% of the average daily net asset
value of Class A shares maintained by the recipient and outstanding on the books
of the Fund for specified periods.
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 broker-dealers) and to EKIS,
the predecessor to the Fund's Principal Underwriter, (1) as commissions for
Class B shares sold, (2) as shareholder service fees and (3) as interest.
Amounts paid or accrued to the Principal Underwriter or EKIS in the aggregate
may not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold. The
broker-dealer or other party will also receive service fees at an annual rate of
0.25% of the value of Class B shares maintained by the recipient and outstanding
on the books of the Fund for specified periods. See "Distribution Plans
Generally" below.
CLASS C DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan with respect to Class C shares (the
"Class C Distribution Plan") that provides for expenditures by the Fund 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 broker-dealers) and to EKIS, the
predecessor to the Fund's Principal Underwriter, (1) as commissions for Class C
shares sold, (2) as shareholder service fees, and (3) as interest. Amounts paid
or accrued to the Principal Underwriter or EKIS in the aggregate may not exceed
the annual limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold,
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold, and, beginning approximately fifteen months
after purchase, a commission at an annual rate of 0.75% (subject to NASD rules
- -- see "Distribution Plans Generally") plus service fees which are paid at the
annual rate of 0.25%, respectively, of the value of Class C shares maintained by
the recipient and outstanding on the books of the Fund for specified periods.
See "Distribution Plans Generally" below.
DISTRIBUTION PLANS GENERALLY
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 the 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 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 Distribution Plan, plus interest at the prime
rate plus 1% on such amounts (less any contingent deferred sales charges
("CDSCs") paid by shareholders to the Principal Underwriter) remaining unpaid
from time to time.
In connection with financing its distribution costs, including commission
advances to broker-dealers and others, EKIS, the predecessor to the Principal
Underwriter, sold to a financial institution substantially all of its 12b-1 fee
collection rights and CDSC collection rights in respect of Class B shares sold
during the period beginning approximately June 1, 1995 through November 30,
1996. 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 adverse distribution consequences.
The financing of payments made by the Principal Underwriter to compensate
broker-dealers or other persons for distributing shares of the Fund will be
provided by FUNB or its affiliates.
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. If a Distribution Plan is terminated, the Principal
Underwriter and EKIS will ask the Independent Trustees to take whatever action
they deem appropriate under the circumstances with respect to payment of
Advances (as defined below).
Unpaid distribution costs at November 30, 1995 were: $1,945,004 for Class B
shares purchased prior to June 1, 1995 (6.35% of net class assets for such Class
B shares); $162,557 for Class B shares purchased on or after June 1, 1995 (5.78%
of net class assets for such Class B shares); and $2,197,650 for Class C shares
(10.78% of net class assets).
Broker-dealers or others may receive different levels of compensation
depending on which class of shares they sell. Payments pursuant to a
Distribution Plan are included in the operating expenses of the class.
DISTRIBUTION AGREEMENTS
The Fund has entered into principal underwriting agreements with the Principal
Underwriter (each a "Distribution Agreement") with respect to each class.
Pursuant to its Distribution Agreements, the Fund will compensate the Principal
Underwriter for its services as distributor at an annual rate that may not
exceed .25 of 1% of the Fund's average daily net assets attributable to Class A
shares, .75 of 1% of the Fund's average daily net assets attributable to the
Class B shares, subject to certain restrictions, and .75 of 1% of the Fund's
average daily net assets attributable to the Class C shares.
The Fund may also make payments under its Distribution Plans, in amounts of up
to .25 of 1% of its average daily net assets on an annual basis, attributable to
Class A, B and C shares, respectively, to compensate organizations, which may
include, among others, the Principal Underwriter and Keystone or their
respective affiliates, for services rendered to shareholders and/or the
maintenance of shareholder accounts.
The Fund may not pay any distribution or servicing fees during any fiscal
period in excess of NASD limits. Since the Principal Underwriter's compensation
under the Distribution Agreements is not directly tied to the expenses incurred
by the Principal Underwriter, the amount of compensation received by it under
the Distribution Agreements during any year may, subject to certain conditions,
be more than its actual expenses and may result in a profit to the Principal
Underwriter. Distribution expenses incurred by the Principal Underwriter in one
fiscal year that exceed the level of compensation paid to the Principal
Underwriter for that year may be paid from distribution fees received from a
Fund in subsequent fiscal years.
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 ("Advances"). The Principal Underwriter
intends to seek full reimbursement for such Advances from the Fund (together
with annual interest thereon at the prime rate plus 1%) 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 Distribution Plan.
In states where the Principal Underwriter is not registered as a
broker-dealer, shares of the Fund will only be sold through other broker-dealers
or other financial institutions that are registered.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of Fund shares. In addition, broker-dealers may, from time
to time, receive additional cash payments. The Principal Underwriter may also
provide written information to those broker-dealers with whom it has dealer
agreements that relates to sales incentive campaigns conducted by such
broker-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. Broker-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 1933 Act.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to broker-dealers including, from time to time, to
First Union Brokerage Services, Inc., an affiliate of Keystone, 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
broker-dealer's satisfaction of the required conditions, be periodic and may be
up to 1.00% of the value of shares sold by such broker-dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to broker-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.
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 broker-dealers pursuant to state laws.
EFFECTS OF BANKING LAWS
The Glass-Steagall Act currently limits the ability of depository institutions
(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.
The Glass-Steagall Act and other banking laws and regulations also presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Fund. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer. Keystone
and its affiliates, since they are direct or indirect subsidiaries of FUNB, are
subject to and in compliance with the aforementioned laws and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could prevent Keystone Investments or its affiliates
from performing the services required under the investment advisory contract or
from acting as agent in connection with the purchase of shares of a fund by its
customers. In such event, it is expected that the Trustees would identify, and
call upon each Fund's shareholders to approve, a new investment adviser. If this
were to occur, it is not anticipated that the shareholders of any Fund would
suffer any adverse financial consequences.
HOW TO BUY SHARES
You may purchase shares of the Fund from any broker-dealer that has a selling
agreement with the Principal Underwriter. In addition, you may purchase shares
of the Fund by mailing to the Fund, c/o Evergreen Keystone Service Company, P.O.
Box 2121, Boston, Massachusetts 02106-2121, a completed account application and
a check payable to the Fund. You may also telephone 1-800-343-2898 to obtain the
number of an account to which you can wire or electronically transfer funds and
then send in a completed account application. Subsequent investments in any
amount may be made by check, by wiring Federal funds, by direct deposit or by an
electronic funds transfer ("EFT").
Orders for the purchase of shares of the Fund will be confirmed at the public
offering price, which is 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 broker-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.
Broker-dealers and other financial services firms are obligated to transmit
orders promptly.
Orders for shares received other than as stated above will receive the public
offering price, which is 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 Fund reserves the right to determine the net asset value more frequently
than once a day if deemed desirable.
The initial purchase must be at least $1,000. 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 EKSC by calling toll free
1-800-343-2898 or writing to EKSC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
This prospectus provides information regarding the Class A, B, and C shares
offered by the Fund:
CLASS A SHARES -- FRONT-END LOAD OPTION
With certain exceptions, Class A shares are sold with a sales charge at the
time of purchase. Class A shares are not subject to a CDSC when they are
redeemed except as follows: Class A shares purchased after January 1, 1997, in
an amount equal to or exceeding $1 million, without a front-end sales charge,
will be subject to a CDSC during the month of purchase and the 12-month period
following the month of purchase.
CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are, with certain exceptions, subject to a
CDSC if redeemed during the month of purchase and the 72-month period following
the month of purchase. Class B shares purchased after January 1, 1997, that have
been outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without the imposition of a front-end sales charge or
exchange fee.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are subject to a CDSC if they are redeemed
during the month of purchase and the 12-month period following the month of
purchase. Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Principal Underwriter.
Each class of shares, pursuant to its 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. As a
result, income distributions paid by the Fund with respect to Class B and Class
C shares will generally be less than those paid with respect to Class A shares.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spreading such 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 intended 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 $500,000 or more.
----------------------------------------------
CLASS A SHARES
Class A shares are currently offered at the public offering price, which is
equal to net asset value plus an initial sales charge as follows:
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ------------------------------------------------------------------------------
Less than $50,000 ................ 4.75% 4.99% 4.25%
$50,000 but less than $100,000 ... 4.50% 4.71% 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% 2.00%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
- ----------
*Rounded to the nearest one-hundredth percent.
----------------------------------------------
Purchases of the Fund's Class A shares made after January 1, 1997, (i) in the
amount of $1 million or more; (ii) by a corporate or certain other qualified
retirement plan or a non-qualified deferred compensation plan or a Title I tax
sheltered annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan"), or a TSA plan sponsored by a public
educational entity having 5,000 or more eligible employees (an "Educational TSA
Plan"); or (iii) by (a) institutional investors, which may include bank trust
departments and registered investment advisers; (b) investment advisers,
consultants or financial planners who place trades for their own accounts or the
accounts of their clients and who charge such clients a management, consulting,
advisory or other fee; (c) clients of investment advisers or financial planners
who place trades for their own accounts if the accounts are linked to the master
account of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased; (d) institutional clients of
broker-dealers, including retirement and deferred compensation plans and the
trusts used to fund these plans, which place trades throught an omnibus account
maintained with the Fund by the broker-dealer; and (e) employees of FUNB and its
affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will each be at net asset value without the imposition of a
front-end sales charge. Certain broker-dealers or other financial institutions
may impose a fee on transactions in shares of the Fund.
With respect to purchases of the Fund's Class A shares made after January 1,
1997, in the amount of $1 million or more, the Principal Underwriter will pay
broker-dealers or others concessions 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.
With respect to purchases of the Fund's Class A shares made after January 1,
1997, by Qualifying Plans and Educational TSA Plans, the Principal Underwriter
will pay broker-dealers and others concessions at the rate of 0.50% of the net
asset value of the shares purchased. These payments are subject to reclaim in
the event the shares are redeemed within twelve months after purchase.
Purchases of the Fund's Class A shares made after January 1, 1997, in the
amount of $1 million or more, are subject to a CDSC of 1.00% upon redemption
during the month of purchase and the 12-month period following the month of
purchase.
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 value of Class A shares maintained by such recipient and outstanding on the
books of the Fund for specified periods.
Upon written notice to broker-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
that are offered in connection with certain fee based programs, such as wrap
accounts sponsored or managed by broker-dealers, investment advisers, or others
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.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within 30
days after a change in the registered representative's employment when 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 CDSC with respect to
the redemption proceeds.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within 30
days after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates when 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 CDSC
with respect to the redemption proceeds. This special net asset value purchase
is currently being offered on a calendar month-by-month basis and may be
modified or terminated in the future.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With respect to shares purchased after January 1, 1997, the Fund, with
certain exceptions, imposes a CDSC on Class B shares redeemed as follows:
CDSC
REDEMPTION TIMING IMPOSED
- ----------------- -------
Month of purchase and the first twelve-month
period following the month of purchase ..... 5.00%
Second twelve-month period following the month
of purchase ................................ 4.00%
Third twelve-month period following the month
of purchase ................................ 3.00%
Fourth twelve-month period following the month
of purchase ................................ 3.00%
Fifth twelve-month period following the month
of purchase ................................ 2.00%
Sixth twelve-month period following the month
of purchase ................................ 1.00%
No CDSC is imposed on amounts redeemed thereafter.
When imposed, the CDSC is deducted from the redemption proceeds otherwise
payable to you. The CDSC is retained by the Principal Underwriter or its
predecessor. Amounts received by the Principal Underwriter or its predecessor
under the Class B Distribution Plans are reduced by CDSCs retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.
Class B shares purchased after January 1, 1997, that have been outstanding for
seven years after 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. (Conversion of Class B
shares represented by stock certificates will require the return of the stock
certificates to EKSC.) The Class B shares so converted will no longer be subject
to the higher distribution expenses and other expenses, if any, borne by Class B
shares. Because the net asset value per share of 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
interest of such Class B shareholders.
CLASS C SHARES
Class C shares are offered only through broker-dealers who have special
distribution agreements with the Principal Underwriter. Class C shares are
offered at net asset value, without an initial sales charge. With certain
exceptions, the Fund imposes a CDSC of 1.00% on shares redeemed during the month
of purchase and the 12-month period following the month of purchase. No CDSC is
imposed on amounts redeemed thereafter. If imposed, the CDSC is deducted from
the redemption proceeds otherwise payable to you. The CDSC is retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any CDSC imposed upon the redemption of
Class A, Class B, or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net asset value at the time of
purchase of such shares.
With respect to shares purchased after January 1, 1997, no CDSC is imposed
when you redeem amounts derived from (1) increases in the value of shares
redeemed above the net cost of such shares; (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 12 months after the month of purchase;
(4) Class B shares held for more than 72 months after the month of purchase; or
(5) Class C shares held for more than one year after the month of purchase. Upon
request for redemption, shares not subject to the CDSC will be redeemed first.
Thereafter, shares held the longest will be the first to be redeemed.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC will be
imposed on any redemptions made specifically by an individual participant in the
Qualifying Plan. This waiver is not available in the event a Qualifying Plan (as
a whole) redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of the Fund in the
event of (1) death or disability of the shareholder; (2) a lump-sum distribution
from a 401(k) plan or other benefit plan qualified under the Employee Retirement
Income Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA
plans if the shareholder is at least 59 1/2 years old; (4) involuntary
redemptions of accounts having an aggregate net asset value of less than $1,000;
(5) automatic withdrawals under the Systematic Income Plan of up to 1.0% per
month of the shareholder's initial account balance; (6) withdrawals consisting
of loan proceeds to a retirement plan participant; (7) financial hardship
withdrawals made by a retirement plan participant; or (8) withdrawals consisting
of returns of excess contributions or excess deferral amounts made to a
retirement plan participant.
The Fund may also sell Class A, Class B or
Class C shares at net asset value without any initial sales charge or a CDSC to
certain Directors, Trustees, officers and employees of the Fund, Keystone, the
Principal Underwriter and certain of their affiliates, and to members of the
immediate families of such persons; 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. See the statement of additional
information.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net redemption value by writing
to the Fund, c/o EKSC, and presenting a properly endorsed share certificate (if
certificates have been issued) to the Fund. 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 must complete
the authorization in your account application. Proceeds for shares redeemed on
telephone order will be deposited by wire or EFT only to the bank account
designated in your account application.
You may also redeem your shares through your broker-dealer. The Principal
Underwriter, acting as agent for the Fund, stands ready to repurchase Fund
shares upon orders from broker-dealers and will calculate the net asset value on
the same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable CDSC, to the broker-dealer placing the order
within seven days thereafter. The Principal Underwriter charges no fee for this
service. Your broker-dealer, however, may charge a service fee.
The redemption value equals 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. A CDSC may be imposed by the Fund at the time of redemption of
certain shares as explained in "How to Buy Shares." If imposed, the CDSC is
deducted from the redemption proceeds otherwise payable to you.
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 15 days or more.
Any delay may be avoided by purchasing shares either with a certified check, by
Federal Reserve or bank wire of funds, by direct deposit or by EFT. Although the
mailing of a redemption check or the 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 has been delayed, the check will be mailed or the proceeds wired or
sent EFT 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 CDSC (as described above),
will be made within seven days thereafter except as discussed herein.
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 EKSC'S POLICIES. The Fund or EKSC may waive this
requirement or may require additional documents in certain cases. Currently, the
requirement for a signature guarantee has been waived on redemptions of $50,000
or less when the account address of record has been the same for a minimum
period of 30 days. The Fund and EKSC 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 REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. As mentioned above, 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 EKSC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If you cannot reach the Fund by telephone, you should follow the procedures
for redeeming by mail or through a broker-dealer as set forth herein.
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. No CDSCs are
applied to such redemptions.
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, EKSC, 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. EKSC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Fund, EKSC, nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that EKSC
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 EKSC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL 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
CDSC. However, if the shares being tendered for exchange are
(1) Class A shares acquired without a front-end sales charge,
(2) Class B shares that have been held for less than 72 months, or
(3) Class C shares that have been held for less than one year,
and are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction.
You may exchange shares for another Keystone fund by calling or writing to
EKSC or by using KARL. As noted above, if the shares being tendered for exchange
are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction. The Fund reserves the right to terminate
this exchange offer or to change its terms, including the right to charge for
exchanges.
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
such 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. 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.
AUTOMATIC INVESTMENT PLAN
With a Keystone Automatic Investment Plan, you can automatically transfer as
little as $25 per month or $75 per quarter from your bank account or KLT to the
Keystone fund of your choice. Your bank account will be debited for each
transfer. You will receive confirmation with your next account statement.
To establish or terminate an Automatic Investment Plan or to change the amount
or schedule of your automatic investments, you may write to or call EKSC. Please
include your account numbers. Termination may take up to 30 days.
RETIREMENT PLANS
The Fund has various retirement plans available to you, including Individual
Retirement Accounts (IRAs); Rollover IRAs; Simplified Employee Pension Plans
(SEPs); Salary Reduction Plans (SARSEPs); Tax Sheltered Annuity Plans; 403(b)
(7) Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money
Purchase Plans. For details, including fees and application forms, call toll
free 1-800-247-4075 or write to EKSC.
SYSTEMATIC INCOME PLAN
Under a Systematic Income 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 $75 and may be as much as 1.0% per month
or 3.0% per quarter of the total net asset value of the Fund shares in your
account when the Systematic Income Plan was opened. Fixed withdrawal payments
are not subject to a CDSC. Excessive withdrawals may decrease or deplete the
value of your account. Moreover, because of the effect of the applicable sales
charge, a Class A investor should not make continuous purchases of the Fund's
shares while participating in a Systematic Income 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 and
may result in a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must establish an account
in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application (1) the dollar amount of each
monthly or quarterly investment you wish to make and (2) the fund in which the
investment is to be made. Thereafter, on the first day of the designated month,
an amount equal to the specified monthly or quarterly investment will
automatically be redeemed from your initial account and invested in shares of
the designated fund.
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. See Exhibit A -- "Reduced Sales Charges" at
the back of the prospectus.
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 your 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. See Exhibit A --
"Reduced Sales Charges" at the back of the prospectus.
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 DATA IS BASED ON HISTORICAL RESULTS. PAST
PERFORMANCE SHOULD NOT BE CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE
PERIOD OF TIME. Total return and current 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. 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 the Fund's yield or total return for any future period.
The Fund may also 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
The Fund issues Class A, B and C 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. When issued and paid for, the shares will be fully paid and
nonassessable by the Fund. Shares may be exchanged as explained under
"Shareholder Services," but will have no other preference, conversion, exchange
or preemptive rights. Shares are transferable, redeemable and freely assignable
as collateral. There are no sinking fund provisions. The Fund is authorized to
issue additional series or classes of shares.
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 holders of 10% of the outstanding shares
request a meeting. 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
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
The Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S. and 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 a fully secured or collateralized reverse
repurchase agreement is not subject to the percentage limitation imposed on
borrowings under Section 18 of the 1940 Act.
"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. Only Class A shares subject to an
initial or deferred sales charge are eligible for inclusion in reduced sales
charge programs.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may combine
concurrent direct purchases of Class A shares of two or more of the "Eligible
Funds," as defined below. For example, if a Purchaser concurrently invested
$75,000 in one of the other "Eligible Funds" and $75,000 in the Fund, the sales
charge would be that applicable to a $150,000 purchase, i.e., 3.75% of the
offering price, as indicated in the Sales Charge Schedule in the prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of the Fund's
Class A shares, a Purchaser is entitled to accumulate current purchases with the
current value of previously purchased Class A shares of the Fund and Class A
shares of certain other eligible funds that are still held in (or exchanged for
shares of and are still held in) the same or another eligible fund ("Eligible
Fund(s)"). The Eligible Funds are the 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. EKSC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor the Fund to sell, the amount
indicated.
After the Letter of Intent is received by EKSC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary) 5% of the dollar amount specified on the application will be held
in escrow by EKSC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to 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, EKSC will redeem an appropriate number of the escrowed shares
in order to realize such difference. Shares remaining after any such redemption
will be released by EKSC. Any redemptions made by the Purchaser during the
thirteen-month period will be subtracted from the amount of the purchases for
purposes of determining whether the Letter of Intent has been completed. In the
event of a total redemption of the account prior to completion of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption and the balance will be forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and appoints
EKSC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or EKSC that
a Letter of Intent is in effect each time a purchase is made.
<PAGE>
---------------------------------------
KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
---------------------------------------
- ---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
- ---------------------------------
Evergreen Keystone Distributor, Inc.
230 Park Avenue
New York, New York 10169
TFIF-P Sup. 1/97
9.5M
540095 [recycle symbol]
---------------------------------------
KEYSTONE
[graphic omitted]
TAX FREE
INCOME FUND
---------------------------------------
---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
---------------------------------
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE TAX FREE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 31, 1996
AS SUPPLEMENTED JANUARY 1, 1997
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, 1996, as supplemented. You may obtain a copy of the
prospectus from the Fund's principal underwriter, Evergreen Keystone
Distributor, Inc., or your broker-dealer. Evergreen Keystone Distributor, Inc.
is located at 230 Park Avenue, New York, New York 10169.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
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Page
The Fund ............................................................... 2
Investment Objective and Policies ...................................... 2
Investment Restrictions ................................................ 4
Valuation of Securities ................................................ 6
Brokerage .............................................................. 7
Sales Charges .......................................................... 9
Distribution Plans ..................................................... 12
Investment Adviser ..................................................... 14
Trustees and Officers .................................................. 16
Principal Underwriter .................................................. 20
Sub-administrator ...................................................... 21
Declaration of Trust ................................................... 21
Standardized Total Return and Yield Quotations ......................... 22
Additional Information ................................................. 23
Appendix ............................................................... A-1
Financial Statements ................................................... F-1
<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.
Keystone Investment Management Company ("Keystone") is the Fund's
investment adviser. Evergreen Keystone Distributor, Inc. (formerly Evergreen
Funds Distributor, Inc.) ("EKD" or the "Principal Underwriter") is the Fund's
principal underwriter. Evergreen Keystone Investment Services, Inc. (formerly
Keystone Investment Distributors Company) ("EKIS") is the predecessor to the
Principal Underwriter. See "Investment Adviser" and "Principal Underwriter"
below.
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 OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
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 of the Fund's outstanding
shares as defined in the Investment Company Act of 1940, as amended ("1940 Act")
(which means the lesser of (1) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (2) more than
50% of the outstanding shares)(a "1940 Act majority").
INVESTMENT POLICIES
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
Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's") 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. The enactment of such a proposal could materially affect the
availability of municipal bonds for investment by the Fund and the value of the
Fund's portfolio. 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 whose
distributions are subject to the alternative minimum tax.
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. 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.
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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
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.
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.
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
- --------------------------------------------------------------------------------
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 bonds 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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BROKERAGE
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SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund,
Keystone seeks the best execution of orders at the most favorable prices.
Keystone determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large
block is involved;
4. the broker's readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors and
trends and other statistical and factual information.
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should the Fund or Keystone receive research and other statistical and
factual information from a broker, the Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone is required to perform
under the Advisory Agreement (as defined below). Keystone believes that the
cost, value and specific application of such information are indeterminable and
cannot be practically allocated between the Fund and its other clients 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 Keystone's other clients. Under the Advisory
Agreement, Keystone is permitted to pay higher brokerage commissions for
brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event Keystone follows such a practice,
it will do so on a basis that is fair and equitable to the Fund.
Neither the Fund nor Keystone intends on placing securities
transactions with any particular broker. The Fund's Board of Trustees has
determined, however, that the Fund may consider sales of Fund shares as a factor
in the selection of brokers to execute portfolio transactions, subject to the
requirements of best execution described above.
BROKERAGE COMMISSIONS
The Fund expects that purchases and sales of municipal bonds and
temporary instruments usually will be principal transactions. Municipal bonds
and temporary instruments are normally purchased directly from the issuer or
from an underwriter or market maker for the securities. There usually will be no
brokerage commissions paid by the Fund for such purchases. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark up
or reflect a dealer's mark down. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, the Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of the Fund's securities, the Fund believes that in other
cases its ability to participate in volume transactions will produce better
executions.
The Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, the Principal Underwriter, or any of their affiliated
persons, as defined in the 1940 Act.
The Board of Trustees will, from time to time, review the Fund's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the Board
of Trustees may change, modify or eliminate any of the foregoing practices.
During the fiscal years ended November 30, 1993, 1994 and 1995, the
Fund did not pay any brokerage commissions.
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SALES CHARGES
- --------------------------------------------------------------------------------
The Fund offers three classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, the Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. The Fund charges a CDSC
as reimbursement for certain expenses, such as commissions or shareholder
servicing fees, that it has incurred in connection with the sale of its shares
(see "Distribution Plans"). If imposed, the Fund deducts CDSCs from the
redemption proceeds you would otherwise receive. CDSCs attributable to your
shares are, to the extent permitted by the National Association of Securities
Dealers, Inc. ("NASD"), paid to the Principal Underwriter or its predecessor.
See the prospectus for additional information on a particular class.
CLASS DISTINCTIONS
Class A Shares
With certain exceptions, when you purchase Class A shares after January
1, 1997, you will pay a maximum sales charge of 4.75%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
Class B Shares
The Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares purchased after January 1, 1997,
the Fund charges a CDSC on shares redeemed as follows:
Redemption Timing CDSC Rate
----------------- ---------
Month of purchase and the first twelve-month
period following the month of purchase .............. 5.00%
Second twelve-month
period following the month of purchase .............. 4.00%
Third twelve-month
period following the month of purchase .............. 3.00%
Fourth twelve-month
period following the month of purchase .............. 3.00%
Fifth twelve-month
period following the month of purchase .............. 2.00%
Sixth twelve-month
period following the month of purchase .............. 1.00%
Thereafter ............................................... 0.00%
Class B shares purchased after January 1, 1997, that have been
outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificate to Evergreen Keystone Service
Company (formerly Keystone Investor Resource Center, Inc.)
("EKSC") the Fund's transfer and dividend disbursing agent.)
Class C Shares
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. The Fund
offers Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Fund will charge a CDSC of 1.00%, if you redeem
shares purchased after January 1, 1997, during the month of your purchase and
the 12-month period following the month of your purchase. See "Calculation of
Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net cost of such shares. Upon request for redemption, the
Fund will redeem shares not subject to the CDSC first. Thereafter, the Fund will
redeem shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
Exchanges
The Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Keystone America Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, the Fund will compute any
future CDSC based upon the date you originally purchased the shares you tendered
for exchange.
Waiver of Sales Charges
Purchases of the Fund's Class A shares made after January 1, 1997, (i)
in the amount of $1 million or more; (ii) by a corporate or certain other
qualified retirement plan or a non-qualified deferred compensation plan or a
Title 1 tax sheltered annuity or TSA plan sponsored by an organization having
100 or more eligible employees (a "Qualifying Plan") or a TSA plan sponsored by
a public educational entity having 5,000 or more eligible employees (an
"Educational TSA Plan"); or (iii) by (a) institutional investors, which may
include bank trust departments and registered investment advisers; (b)
investment advisers, consultants or financial planners who place trades for
their own accounts or the accounts of their clients and who charge such clients
a management, consulting, advisory or other fee; (c) clients of investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment advisers or
financial planners on the books of the broker-dealer through whom shares are
purchased; (d) institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with the Fund by the broker-dealer;
and (e) employees of First Union National Bank of North Carolina ("FUNB") and
its affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will be at net asset value without the imposition of a front-end
sales charge. Certain broker-dealers or other financial institutions may impose
a fee on transactions in shares of the Funds.
Shares of the Fund may also be sold, to the extent permitted by
applicable law, regulations, interpretations, or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees or sales representatives of the Fund,
Keystone, the Principal Underwriter, and certain of their affiliates who have
been such for not less than ninety days, and to members of the immediate
families of such persons; (2) a pension and profit-sharing plan established by
such companies, their subsidiaries and affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees, and sales representatives;
or (3) a registered representative of a firm with a dealer agreement with 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 or CDSC is imposed on purchases or redemptions
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, purchased
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1.00% of the amount invested.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC
will be imposed on any redemptions made specifically by an individual
participant in the Qualifying Plan. This waiver is not available in the event a
Qualifying Plan, as a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of 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 a Systematic Income Plan of up to 1.0% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.
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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 (a "Distribution Plan").
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, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees").
The NASD limits the amount that the Fund may pay annually in
distribution costs for sale of its shares and shareholder service fees. The NASD
limits annual expenditures to 1.00% of the aggregate average daily net asset
value of its shares, of which 0.75% may be used to pay such distribution costs
and 0.25% may be used to pay shareholder service fees. The NASD also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales since the inception of the Distribution Plan, plus interest at
the prime rate plus 1% on such amounts (less any CDSCs paid by shareholders to
the Principal Underwriter) remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that the Fund may expend daily
amounts at an annual rate, which is 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 the
Principal Underwriter of the 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 any
such intervals as the Principal Underwriter may determine, in respect of Class A
shares maintained by any such recipient and 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 broker-dealers, service fees at an annual
rate of up to 0.25% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of the Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Class B Distribution Plans 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 and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class B shares sold since inception of a Distribution Plan; (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 recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission equal to 4.00% of the price paid for each Class B share
sold. The broker-dealer or other party may also receive service fees at an
annual rate of 0.25% of the average daily net asset value of such Class B share
maintained by the recipient and 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 ("Advances"). The Principal
Underwriter intends to seek full reimbursement of such Advances from the Fund
(together with annual interest thereon at the prime rate plus 1%) 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
reimbursements of Advances, the effect would be to extend the period of time
during which the Fund incurs the maximum amount of costs allowed by the Class B
Distribution Plans.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, EKIS, the predecessor to the
Principal Underwriter sold to a financial institution substantially all of its
12b-1 fee collection rights and CDSC collection rights in respect of Class B
shares sold during the period beginning approximately June 1, 1995 through
November 30, 1996. 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 Plans, the Fund
may be subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to
compensate broker-dealers or other persons for distributing shares of the Fund
will be provided by FUNB or its affiliates.
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 and/or its
predecessor. Payments are made to the Principal Underwriter (1) to enable the
Principal Underwriter to pay to others (broker-dealers) commissions in respect
of Class C shares sold since inception of the Distribution Plan; (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 recipient and outstanding on the books of the Fund
for specified periods; and (3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission in the amount of 0.75% of the price paid for each Class C
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class C share sold. Beginning approximately fifteen
months after purchase, broker-dealers or others receive a commission at an
annual rate of 0.75% (subject to NASD rules) plus service fees at the annual
rate of 0.25%, respectively, of the average daily net asset value of each Class
C share maintained by the recipient and outstanding on the books of the Fund for
specified periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by the Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by the Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, the Principal Underwriter and EKIS will ask the Independent
Trustees to take whatever action they deem appropriate under the circumstances
with respect to payment of such Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by votes of
the majority of both (1) the Fund's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the 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.
For the year ended November 30, 1995, the Fund paid EKIS $766,469,
$320,355 ($310,343 with respect to Class B shares sold prior to June 1, 1995
and $10,012 with respect to Class B shares sold on or after June 1, 1995) and
$ 216,296 under the Fund's class A, B and C Distribution plans, respectively.
During the year ended November 30, 1994, the Fund paid EKIS $269,046, $241,979
and $279,001 under the Fund's Class A, B and C Distribution Plans, respectively.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Fund's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to the Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments, 200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, the predecessor corporation to Keystone
Investments and indirectly each subsidiary of Keystone Investments, including
Keystone, were acquired (the "Acquisition") by FUNB, a wholly-owned subsidiary
of First Union Corporation ("First Union"). The predecessor corporation to
Keystone Investments was acquired by FUNB by merger into a wholly-owned
subsidiary of FUNB, which entity then succeeded to the business of the
predecessor corporation. Contemporaneously with the Acquisition, the Fund
entered into a new investment advisory agreement with Keystone and into a
principal underwriting agreement with EKD, a wholly-owned subsidiary of Furman
Selz LLC ("Furman Selz"). The new investment advisory agreement (the "Advisory
Agreement") was approved by the shareholders of the Fund on December 9, 1996,
and became effective on December 11, 1996. As a result of the above
transactions, Keystone Management, Inc. ("Keystone Management"), which prior to
the Acquisition acted as investment manager to the Fund, no longer acts as such
to the Fund. Keystone currently provides the Fund with all the services that may
previously have been provided by Keystone Management. The fee rate paid by the
Fund for the services provided by Keystone and its affiliates has not changed as
a result of the Acquisition.
Keystone Investments and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $133.9 billion in consolidated assets as of
September 30, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, together with Lieber & Company and
Evergreen Asset Management Corp., wholly-owned subsidiaries of FUNB, manage or
otherwise oversee the investment of over $50 billion in assets belonging to a
wide range of clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Fund's Board of Trustees, Keystone furnishes to the Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of the Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to, (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees of Independent
Trustees; (5) brokerage commissions, brokers' fees and expenses; (6) issue and
transfer taxes; (7) costs and expenses under the Distribution Plan; (8) taxes
and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
the Fund and its shares with the SEC or under state or other securities laws;
(11) expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
the Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges
and expenses of legal counsel for the Fund and for the Independent Trustees of
the Fund on matters relating to the Fund; (14) 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 Fund pays Keystone a fee for its services at the annual rate of:
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.
Keystone's fee is computed as of the close of business each business day and
payable daily.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of the
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Fund's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
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, $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, $854,509 was paid to Keystone for its services to the Fund.
During the fiscal year ended November 30, 1995, the Fund paid or
accrued to Keystone Management investment management and administrative service
fees of $919,802, which represented 0.61% of the Fund's average net assets. Of
such amount, $781,832 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:
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Professor, Finance Department, George Washington
University; President, Amling & Company (investment
advice); and former Member, Board of Advisers,
Credito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of all the Evergreen funds other than
Evergreen Investment Trust; real estate developer and
construction consultant; and President of Centrum
Equities and Centrum Properties, Inc.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Investment Counselor to Appleton Partners, Inc.; and
former Managing Director, Seaward Management
Corporation (investment advice).
FOSTER BAM: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of all the Evergreen funds other than
Evergreen Investment Trust; Partner in the law firm
of Cummings & Lockwood; Director, Symmetrix, Inc.
(sulphur company) and Pet Practice, Inc. (veterinary
services); and former Director, Chartwell Group Ltd.
(Manufacturer of office furnishings and accessories),
Waste Disposal Equipment Acquisition Corporation and
Rehabilitation Corporation of America (rehabilitation
hospitals).
*GEORGE S. BISSELL: Chairman of the Board, Chief Executive Officer and
Trustee of the Fund; Chairman of the Board, Chief
Executive Officer and Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and Chairman
of its Investment Committee); former Director and
Chairman of the Board of Hartwell Keystone; and
former Chairman of the Board, Director and Chief
Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Principal, Padanaram Associates, Inc.; and former
Executive Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
and former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine;
Chairman and President, Oldways Preservation and
Exchange Trust (education); former Chairman of the
Board, Director, and Executive Vice President, The
London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Associates
(environmental consulting); and former Director,
Keystone Investments and Keystone.
JAMES S. HOWELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman and Trustee of the Evergreen funds; former
Chairman of the Distribution Foundation for the
Carolinas; and former Vice President of Lance Inc.
(food manufacturing).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman of the Board and Chief Executive Officer,
Carson Products Company; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix
Series Fund, Phoenix Multi-Portfolio Fund, and The
Phoenix Big Edge Series Fund; and former President,
Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman and Of Counsel, Keyser, Crowley & Meub,
P.C.; Member, Governor's (VT) Council of Economic
Advisers; Chairman of the Board and Director, Central
Vermont Public Service Corporation and Lahey
Hitchcock Clinic; Director, Vermont Yankee Nuclear
Power Corporation, Grand Trunk Corporation, Grand
Trunk Western Railroad, Union Mutual Fire Insurance
Company, New England Guaranty Insurance Company,
Inc., and the Investment Company Institute; former
Director and President, Associated Industries of
Vermont; former Director of Keystone, Central Vermont
Railway, Inc., S.K.I. Ltd., and Arrow Financial
Corp.; and former Director and Chairman of the Board,
Proctor Bank and Green Mountain Bank.
GERALD M. MCDONELL: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; and Sales
Representative with Nucor-Yamoto, Inc. (Steel
producer).
THOMAS L. MCVERRY: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; former Vice President
and Director of Rexham Corporation; and former
Director of Carolina Cooperative Federal Credit
Union.
*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; and Partner in the
law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Vice Chair and former 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.
RUSSELL A. SALTON, III MD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; Medical Director,
U.S. Health Care/Aetna Health Services; and former
Managed Health Care Consultant; former President,
Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Trustee of the Evergreen funds; and Attorney, Law
Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Chairman, Environmental Warranty, Inc. (Insurance
agency); Executive Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of Connecticut
Natural Gas Corporation, Hartford Hospital, Old State
House Association, Middlesex Mutual Assurance
Company, and Enhance Financial Services, Inc.;
Chairman, Board of Trustees, Hartford Graduate
Center; Trustee, Greater Hartford YMCA; former
Director, Vice Chairman and Chief Investment Officer,
The Travelers Corporation; former Trustee,
Kingswood-Oxford School; and former Managing Director
and Consultant, Russell Miller, Inc.
*ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other
funds in the Keystone Investments Families of Funds;
Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky
& Armentano, P.C.; Adjunct Professor of Law and
former Associate Dean, St. John's University School
of Law; Adjunct Professor of Law, Touro College
School of Law; and former President, Nassau County
Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Investments Families of Funds; President and
Treasurer of the Evergreen funds; Senior Managing
Director, Furman Selz LLC since 1992; Managing
Director from 1984 to 1992; 230 Park Avenue, Suite
910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds
in the Keystone Investments Families of Funds; Senior
Vice President and Director of Administration and
Regulatory Services, BISYS Fund Services; 3435
Stelzer Road, Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Fund within the
meaning of the 1940 Act.
Mr. Bissell is deemed an "interested person" of the Fund by virtue of
his ownership of stock of First Union Corporation ("First Union"), of which
Keystone is an indirect wholly-owned subsidiary. See "Investment Adviser." Mr.
Pettit and Mr. Simons may each be deemed an "interested person" as a result of
certain legal services rendered to a subsidiary of First Union by their
respective law firms, Holcomb and Pettit, P.A. and Farrell, Fritz, Caemmerer,
Cleary, Barnosky & Armentano, P.C. As of the date hereof, Mr. Pettit and Mr.
Simons are each applying for an exemption from the SEC which would allow them to
retain their status as an Independent Trustee.
After the transfer of EKD and its related mutual fund distribution and
administration business to BISYS, it is expected that all of the officers of the
Fund will be officers and/or employees of BISYS. See "Sub-administrator."
During the fiscal year ended November 30, 1995, no Trustee affiliated
with Keystone or any officer of Keystone received any direct remuneration from
the Fund. During the same period the nonaffiliated Trustees received $12,634 in
retainers and fees. For the year ended December 31, 1995, aggregate compensation
received by Independent Trustees on a fund complex wide basis (which includes 32
mutual funds) was $450,716. On December 31, 1995, the Trustees and officers of
the Fund beneficially owned less than 1% of the Fund's then outstanding shares.
Except as set forth above, the address of the Fund's Trustees and
officers is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Fund has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaces EKIS as the Fund's principal underwriter.
EKIS may no longer act as principal underwriter of the Fund due to regulatory
restrictions imposed by the Glass-Steagall Act upon national banks such as FUNB
and their affiliates, that prohibit such entities from acting as the
underwriters of mutual fund shares. While EKIS may no longer act as principal
underwriter of the Fund as discussed above, EKIS may continue to receive
compensation from the Fund or the Principal Underwriter in respect of
underwriting and distribution services performed prior to the termination of
EKIS as principal underwriter. In addition, EKIS may also be compensated by the
Principal Underwriter for the provision of certain marketing support services to
the Principal Underwriter at an annual rate of up to .75% of the average daily
net assets of the Fund, subject to certain restrictions.
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 broker-dealers, and others, acting as principals, for sales of
shares to them. The Underwriting Agreements provide that the Principal
Underwriter will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. The Principal
Underwriter or EKIS, its predecessor, 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 public offering price of the shares, which is determined in accordance
with the provisions of the Fund's Declaration of Trust, By-Laws, current
prospectuses 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 Agreements, the Fund is not
liable to anyone for failure to accept any order.
The Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
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. The Principal Underwriter has also agreed that it 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, 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.
Each Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Fund's Independent Trustees, and (ii) by vote of a majority of
the Fund's Trustees, in each case, cast in person at a meeting called for that
purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Principal Underwriter's judgment, it
could benefit the sales of Fund shares, the Principal Underwriter may provide to
selected broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software, and Fund data files.
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SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
Furman Selz provides officers and certain administrative services to
the Fund pursuant to a sub-administration agreement. For its services under that
agreement Furman Selz will receive from Keystone an annual fee at the maximum
annual rate of .01% of the average daily net assets of the Fund. Furman Selz is
located at 230 Park Avenue, New York, New York 10169.
It is expected that on or about January 2, 1997, Furman Selz will
transfer EKD, and its related mutual fund distribution and administration
business, to BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
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DECLARATION OF TRUST
- --------------------------------------------------------------------------------
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.
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
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.
- --------------------------------------------------------------------------------
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 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, 1995 was 6.75%. The compounded average annual rate of return of Class A of
the Fund for the one and five year periods ended November 30, 1995 were 18.71%
and 6.44%.
The compounded average annual rates of return for Class B and Class C
for the period from February 1, 1993 (inception of Class B and C) through
November 30, 1995 were 4.12% and 5.06%, respectively. The compounded average
annual rates of return for Class B and Class C for the one year period ended
November 30, 1995 were 17.84% and 17.84%, 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, 1995 were
4.76%, 4.24% and 4.25%, 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, 1995 were 6.90%, 6.14% and 6.16%,
respectively.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized 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 up to the lesser of $250,000 or 1% of the Fund's net assets
in any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
GENERAL
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian 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, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the independent auditors.
EKSC, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
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, 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 December 29, 1995, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Drive, E 3rd Fl, Jacksonville, Florida 32246-6484 owned
22.48%, 24.61% and 51.62%, respectively, of the Fund's outstanding Class A, B
and C shares. In addition, on December 29, 1995, Alletta Laird Downs TTEE, U/A
03-28-89, Alletta Laird Downs Trust, P.O. Box 3666, Wilmington, DE 19807-0666
owned 6.18% 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 16 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 OMEGA FUND - 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.
KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long term capital growth through
investments primarily in equity securities of companies with small market
capitalizations.
<PAGE>
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APPENDIX
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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 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.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
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 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.
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>
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
