<PAGE>
KEYSTONE AMERICA STATE TAX FREE FUND
PROSPECTUS AUGUST 1, 1994
Keystone America State Tax Free Fund (the "FUND") is a mutual fund that
currently consists of five separate series of shares evidencing interests in
different portfolios of securities ("Fund(s)"): the Keystone America Florida Tax
Free Fund ("Florida Fund"), the Keystone America Massachusetts Tax Free Fund
("Massachusetts Fund"), the Keystone America New York Insured Tax Free Fund
("New York Insured Fund"), the Keystone America Pennsylvania Tax Free Fund
("Pennsylvania Fund") and the Keystone America Texas Tax Free Fund ("Texas
Fund").
Each of the Funds seeks the highest possible current income exempt from
federal income taxes, while preserving capital. In addition, each Fund, other
than the Florida Fund and the Texas Fund, also seeks to provide a maximum level
of income to its shareholders that is exempt from the personal income taxes of
the shareholders' state of residence.
The Florida Fund also seeks to hold securities exempt from Florida intangible
taxes. At the present time, Florida does not impose a personal income tax.
The New York Insured Fund also seeks to hold securities exempt from New York
City personal income tax.
The Pennsylvania Fund also seeks to hold securities exempt from Pennsylvania
property taxes.
Texas does not currently impose a personal income tax. In the event Texas
enacts a personal income tax, the Texas Fund will seek the highest possible
current income exempt from such taxes, while preserving capital.
Each Fund invests principally in municipal obligations exempt from federal
income tax. In addition, each of the Funds invests principally in municipal
obligations issued by the state for which it is named and its political
subdivisions, agencies and instrumentalities. At least 80% of the municipal
securities in the New York Insured Fund's portfolio will be insured as to timely
payment of both principal and interest. All securities not insured by the issuer
will be insured by a qualified municipal bond insurer. Each Fund's net asset
value per share will fluctuate in response to changes in the market value of its
portfolio securities.
Each Fund offers three classes of shares. Class A shares are offered at a
public offering price that includes a sales charge at the time of purchase.
Class B shares are offered without an initial sales charge, although a
contingent deferred sales charge may be imposed at the time of redemption that
decreases depending on how long the shares have been held. Class C shares are
offered without an initial sales charge, although a contingent deferred sales
charge may be imposed on redemptions within one year of purchase. Class C shares
are available only through dealers who have entered into special distribution
agreements with Keystone Distributors, Inc. ("KDI"), the FUND's principal
underwriter ("Principal Underwriter"). Each class makes service fee payments
under a Distribution Plan pursuant to Rule 12b-1 under the Investment Company
Act of 1940 ("1940 Act"). Both Class B and Class C shares make commission
related payments under their Distribution Plans. See "Alternative Sales Option."
This prospectus concisely states information about the FUND and its Funds that
you should know before investing. Please read it and retain it for future
reference.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
KEYSTONE AMERICA STATE TAX FREE FUND
200 BERKELEY STREET, BOSTON, MA 02116-5034
CALL TOLL FREE 1-800-343-2898
<PAGE>
Additional information about the FUND and its Funds is contained in a
statement of additional information and appendices dated August 1, 1994, which
has been filed with the Securities and Exchange Commission and is incorporated
by reference into this prospectus. For a free copy, or for other information
about the FUND and its Funds, write to the address or call the telephone number
listed on the previous page.
TABLE OF CONTENTS
Page
Fee Table ................................................................. 3
Financial Highlights ...................................................... 6
The FUND and Its Funds .................................................... 21
Investment Objectives and Policies ........................................ 21
Investment Restrictions ................................................... 25
Risk Factors .............................................................. 26
Pricing Shares ............................................................ 28
Dividends and Taxes ....................................................... 29
FUND Management and Expenses .............................................. 31
How to Buy Shares ......................................................... 34
Alternative Sales Options ................................................. 34
Calculation of Contingent Deferred Sales Charge and
Waiver of Sales Charges ................................................... 37
Distribution Plans ........................................................ 38
How to Redeem Shares ...................................................... 39
Shareholder Services ...................................................... 41
Performance Data .......................................................... 43
FUND Shares ............................................................... 43
Additional Information .................................................... 44
Exhibit A ................................................................. A-1
Exhibit B ................................................................. B-1
Additional Investment Information ......................................... (i)
<PAGE>
FEE TABLE
KEYSTONE AMERICA FLORIDA AND PENNSYLVANIA TAX FREE FUNDS
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each Fund's class will bear directly or
indirectly.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION<F1> OPTION<F2>
-------------- --------------- --------------
<S> <C> <C> <C>
Sales Charge ...................................... 4.75%<F3> None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%<F4> 3.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market declining to 1.00% in year and 0.00%
value of shares redeemed) the fourth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)<F5> ................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES<F6>
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ................................... 0.21% 0.21% 0.21%
12b-1 Fees ........................................ 0.15% 0.90%<F7> 0.90%<F7>
Other Expenses .................................... 0.39% 0.39% 0.39%
---- ---- ----
Total Fund Operating Expenses ..................... 0.75% 1.50% 1.50%
---- ---- ----
---- ---- ----
<CAPTION>
EXAMPLES<F8> 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ................................................................... $55 $70 $87 $136
Class B ................................................................... $45 $67 $82 N/A
Class C ................................................................... $25 $47 $82 $179
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ................................................................... $55 $70 $87 $136
Class B ................................................................... $15 $47 $82 N/A
Class C ................................................................... $15 $47 $82 $179
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<FN>
<F1> Class B Shares convert tax free to Class A shares after seven calendar
years.
<F2> Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Distributors, Inc., the
Fund's principal underwriter.
<F3> The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Alternative Sales Options."
<F4> Purchases of Class A shares in the amount of $1,000,000 or more are not
subject to a sales charge, but may be subject to a contingent deferred
sales charge of 0.25%. See "Calculation of Contingent Deferred Sales Charge
and Waiver of Sales Charges" for an explanation of the charge.
<F5> There is no exchange fee for individual investors making exchanges over the
Keystone Automated Response Line ("KARL"). (For a description of KARL, see
"Shareholder Services.")
<F6> Expense ratios are for the Fund's fiscal year ended March 31, 1994. For the
one year period commencing January 1, 1994, Keystone Custodian Funds, Inc.
has voluntarily limited expenses of Class A shares to 0.75% of average
daily net assets and expenses of Class B and C shares to 1.50% of average
daily net assets. Absent the voluntary expense limitations, expense ratios
for the fiscal year ended March 31, 1994 for the Florida Fund's and the
Pennsylvania Fund's Class A, Class B, and Class C shares, respectively,
were 1.00%, 1.74% and 1.84% (Florida Fund); and 1.06%, 1.81%, and 1.90%
(Pennsylvania Fund).
<F7> 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").
<F8> The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Funds may be
greater or less than 5%.
</TABLE>
<PAGE>
FEE TABLE
KEYSTONE AMERICA TEXAS TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each Fund's class will bear directly or
indirectly.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION<F1> OPTION<F2>
-------------- --------------- --------------
<S> <C> <C> <C>
Sales Charge ...................................... 4.75%<F3> None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%<F4> 3.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market declining to 1.00% in year and 0.00%
value of shares redeemed) the fourth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)<F5>.................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES<F6>
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ................................... 0.21% 0.21% 0.21%
12b-1 Fees ........................................ 0.15% 0.90%<F7> 0.90%<F7>
Other Expenses .................................... 0.39% 0.39% 0.39%
---- ---- ----
Total Fund Operating Expenses ..................... 0.75% 1.50% 1.50%
---- ---- ----
---- ---- ----
<CAPTION>
EXAMPLES<F8> 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ................................................................... $55 $70 $87 $136
Class B ................................................................... $45 $67 $82 N/A
Class C ................................................................... $25 $47 $82 $179
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ................................................................... $55 $70 $87 $136
Class B ................................................................... $15 $47 $82 N/A
Class C ................................................................... $15 $47 $82 $179
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<FN>
<F1> Class B Shares convert tax free to Class A shares after seven calendar
years.
<F2> Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Distributors, Inc., the
Fund's principal underwriter.
<F3> The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Alternative Sales Options."
<F4> Purchases of Class A shares in the amount of $1,000,000 or more are not
subject to a sales charge, but may be subject to a contingent deferred
sales charge of 0.25%. See "Calculation of Contingent Deferred Sales Charge
and Waiver of Sales Charges" for an explanation of the charge.
<F5> There is no exchange fee for individual investors making exchanges over the
Keystone Automated Response Line ("KARL"). (For a description of KARL, see
"Shareholder Services.")
<F6> Expense ratios represent estimated ratios for the fiscal year ending March
31, 1995. For the one year period commencing January 1, 1994, Keystone
Custodian Funds, Inc. has voluntarily limited expenses of Class A shares to
0.75% of average daily net assets and expenses of Class B and C shares to
1.50% of average daily net assets. The estimated ratios above assume
Keystone's extension of the foregoing expense limitations to March 31,
1995, which Keystone is under no obligation to do. Absent the voluntary
expense limitations, expense ratios for the fiscal year ending March 31,
1995 for the Texas Fund's Class A, Class B, and Class C shares are
projected to be 3.48%, 4.19% and 4.39%.
<F7> 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").
<F8> The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Funds may be
greater or less than 5%.
</TABLE>
<PAGE>
FEE TABLE
KEYSTONE AMERICA MASSACHUSETTS AND NEW YORK INSURED TAX FREE FUNDS
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each Fund's class will bear directly or
indirectly.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION<F1> OPTION<F2>
-------------- --------------- --------------
<S> <C> <C> <C>
Sales Charge ...................................... 4.75%<F3> None None
(as a percentage of offering price)
Contingent Deferred Sales Charge .................. 0.00%<F4> 3.00% in the first year 1.00% in the first
(as a percentage of the lesser of cost or market declining to 1.00% in year and 0.00%
value of shares redeemed) the fourth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)<F5> ................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES<F6>
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ................................... 0.30% 0.30% 0.30%
12b-1 Fees ........................................ 0.15% 0.90%<F7> 0.90%<F7>
Other Expenses .................................... 0.10% 0.10% 0.10%
---- ---- ----
Total Fund Operating Expenses ..................... 0.55% 1.30% 1.30%
---- ---- ----
---- ---- ----
EXAMPLES<F8> 1 YEAR 3 YEARS
------ -------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ............................................................................................. $53 $64
Class B ............................................................................................. $43 $61
Class C ............................................................................................. $23 $41
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ............................................................................................. $53 $64
Class B ............................................................................................. $13 $41
Class C ............................................................................................. $13 $41
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>
<F1> Class B Shares convert tax free to Class A shares after seven calendar
years.
<F2> Class C shares are available only through dealers who have entered into
special distribution agreements with Keystone Distributors, Inc., the
Fund's Principal Underwriter.
<F3> The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Alternative Sales Options."
<F4> Purchases of Class A shares in the amount of $1,000,000 or more are not
subject to a sales charge, but may be subject to a contingent deferred
sales charge of 0.25%. See "Calculation of Contingent Deferred Sales Charge
and Waiver of Sales Charges" for an explanation of the charge.
<F5> There is no exchange fee for individual investors making exchanges over the
Keystone Automated Response Line ("KARL"). (For a description of KARL, see
"Shareholder Services.")
<F6> Expense ratios represent estimated ratios for the year ending March 31,
1995. Keystone Custodian Funds, Inc. has voluntarily limited expenses of
Class A shares to 0.35% of average daily net assets until August 15, 1994,
after which the expense limitation will be increased by 0.10% per quarter
until May 15, 1995 when expenses will be limited to 0.75% until December
31, 1995. Expenses of Class B and C shares will be limited to 1.10% until
August 15, 1994, after which the expense limitation will be similarly
increased until May 15, 1995 when expenses will be limited to 1.50% until
December 31, 1995. The expense ratios shown reflect the average expense
ratio of each Fund through the end of its fiscal year. Absent the voluntary
expense limitations, expense ratios for the fiscal year ended March 31,
1995 for the Massachusetts Fund's and the New York Insured Fund's Class A,
B and C shares, respectively, are projected to be 3.22%, 4.60% and 4.91%
(Massachusetts Fund) and 4.44%, 5.60% and 5.13% (New York Insured Fund).
<F7> 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.
<F8> The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Funds may be
greater or less than 5%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA FLORIDA TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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>
DECEMBER 27, 1990
YEAR ENDED MARCH 31, (COMMENCEMENT OF
------------------------------------------- OPERATIONS) TO
1994 1993 1992 MARCH 31, 1993
------- ------- ------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF
PERIOD .......................... $10.9400 $10.4300 $10.1700 $10.0000
------- ------- ------- -------
Income from investment operations
Investment income -- net ........ 0.5828 0.6067 0.7230 0.1806
Realized gains (losses) on
investments -- net .............. (0.4400) 0.6414 0.3000 0.1700
------- ------- ------- -------
Total income from investment
operations ...................... 0.1428 1.2481 1.0230 0.3506
------- ------- ------- -------
Less distributions
Dividends from investment income
- -- net <F3> ..................... (0.5817) (0.6067) (0.7230) (0.1806)
Distributions in excess of
investment income -- net ........ (0.0511) (0.0314) 0 0
Distributions in excess of
realized gain on investments -- (0.1600) (0.1000) (0.0400) 0
------- ------- ------- -------
Total distributions ............. (0.7928) (0.7381) (0.7630) (0.1806)
------- ------- ------- -------
Net asset value, end of period .. $10.2900 $10.9400 $10.4300 $10.1700
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN <F4> ............... 1.01% 12.32% 10.34% 3.52%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management
expenses <F2> ............... 0.75% 0.68% 0 65% 0.65%<F1>
Investment income -- net ...... 5.16% 5.60% 6.82% 6.33%<F1>
Portfolio turnover rate ......... 113% 95% 63% 5%
Net assets, end of period
(thousands) ..................... $ 45,150 $ 42,997 $ 29,258 $ 6,922
<FN>
<F1> Annualized.
<F2> Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 1.00%, 1.13%, 1.21% and 2.06%
(annualized) for the fiscal years ended March 31, 1994, 1993, 1992 and the
period December 27, 1990 (commencement of operations) to March 31, 1991,
respectively.
<F3> Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distribution by Investment Companies. As
a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income--net." Similarly, capital gain distributions in
excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized
gains on investments -- net." For the fiscal years ending prior to March
31, 1993, distributions in excess of book basis net income were charged to
paid-in capital.
<F4> Excluding applicable sales charges.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA FLORIDA TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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 1, 1993
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING) TO
MARCH 31, 1994 MARCH 31, 1993
-------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .......................................... $10.9400 $10.8100
-------- --------
Income from investment operations
Investment income -- net....................................................... 0.5258 0.0852
Realized gains (losses) on investments -- net.................................. (0.4730) 0.1379
-------- --------
Total income from investment operations ....................................... 0.0528 0.2231
-------- --------
Less distributions
Dividends from investment income -- net ....................................... (0.4812) (0.0852)
Distributions in excess of investment income -- net <F3>....................... (0.0816) (0.0079)
Distributions in excess of realized gain on investments -- net ................ (0.1600) 0
-------- --------
Total distributions ........................................................... (0.7228) (0.0931)
-------- --------
Net asset value, end of period ................................................ $10.2700 $10.9400
-------- --------
-------- --------
TOTAL RETURN <F4>.............................................................. 0.19% 2.06%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses <F2> ....................................... 1.50% 1.50%<F1>
Investment income -- net..................................................... 4.21% 4.00%<F1>
Portfolio turnover rate ....................................................... 113% 95%
Net assets end of period (thousands) .......................................... $ 19,984 $ 1,704
<FN>
<F1> Annualized.
<F2> Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 1.74%, and 1.73% (annualized) for the
fiscal year ended March 31, 1994 and the period February 1, 1993 (Date of
Initial Public Offering) to March 31, 1993, respectively.
<F3> Effective March 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized
gains on investments -- net." For the period ended March 31, 1993,
distributions in excess of book basis net income were charged to paid-in
capital.
<F4> Excluding applicable sales charges.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA FLORIDA TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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 1, 1993
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING) TO
MARCH 31, 1994 MARCH 31, 1993
-------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .......................................... $10.9300 $10.8100
------- -------
Income from investment operations
Investment income -- net...................................................... 0.5116 0.0746
Realized gains (losses) on investments -- net.................................. (0.4507) 0.1375
------- -------
Total income from investment operations ....................................... 0.0609 0.2121
------- -------
Less distributions
Dividends from investment income -- net ....................................... (0.4875) (0.0746)
Distributions in excess of investment income -- net <F3> ...................... (0.0634) (0.0175)
Distributions in excess of realized gain on investments -- net ................ (0.1600) 0
------- -------
Total distributions ........................................................... (0.7109) (0.0921)
------- -------
Net asset value, end of period ................................................ $10.2800 $10.9300
------- -------
------- -------
TOTAL RETURN <F4>.............................................................. 0.27% 1.95%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses <F2> ...................................... 1.50% 1.50%<F1>
Investment income -- net.................................................... 4.26%<F1> 2.95%<F1>
Portfolio turnover rate ....................................................... 113% 95%
Net assets, end of period (thousands) ......................................... $ 13,096 $ 1,987
<FN>
<F1> Annualized.
<F2> Figures are net of the expense reimbursement made by Keystone Custodian
Fund, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 1.84%, and 1.63% (annualized) for the
fiscal year ended March 31, 1994 and the period February 1, 1993 (Date of
Initial Public Offering) to March 31, 1993, respectively.
<F3> Effective March 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized
gains on investments -- net." For the period ended March 31, 1993,
distributions in excess of book basis net income were charged to paid-in
capital.
<F4> Excluding applicable sales charges.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA PENNSYLVANIA TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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>
DECEMBER 27, 1990
YEAR ENDED MARCH 31, (COMMENCEMENT OF
-------------------- OPERATIONS) TO
1994 1993 1992 MARCH 31, 1991
---- ---- ---- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ................... $11.4200 $10.7100 $10.2500 $10.0000
------- ------- ------- -------
Income from investment operations
Investment income -- net................................ 0.6161 0.6349 0.7426 0.1806
Realized gains (losses) on investments -- net........... (0.2990) 0.7499 0.4600 0.2500
------- ------- ------- -------
Total income from investment operations ................ 0.3171 1.3848 1.2026 0.4306
------- ------- ------- -------
Less distributions
Dividends from investment income -- net................. (0.6195) (0.6349) (0.7426) (0.1806)
Distributions in excess of investment income -- net<F3>. (0.0376) (0.0199) 0 0
Distributions from gains on investments -- net.......... (0.0633) (0.0200) 0 0
Distributions in excess of realized gains on
investments -- net .................................... (0.0067) 0 0 0
------- ------- ------- -------
Total distributions .................................... (0.7271) (0.6748) (0.7426) (0.1806)
------- ------- ------- -------
Net asset value, end of period ......................... $11.0100 $11.4200 $10.7100 $10.2500
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN<F4>......................................... 2.58% 13.30% 12.07% 4.37%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses <F2> ............... 0.75%<F1> 0.68% 0.65% 0.65%<F1>
Investment income -- net ............................. 5.27% 5.66% 6.92% 6.84%<F1>
Portfolio turnover rate ................................ 37% 20% 13% 8%
Net assets, end of period (thousands) .................. $ 30,560 $ 35,502 $ 12,914 $ 2,979
<FN>
<F1> Annualized.
<F2> Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, "Ratio of operating and management expenses to
average net assets" would have been 1.06%, 1.16%, 1.68% and 3.19%
(annualized) for the fiscal years ended March 31, 1994, 1993 and 1992 and
the period December 27, 1990 (Commencement of Operations) to March 31,
1991, respectively.
<F3> Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result, distribution amounts exceeding book basis net investment (or
tax basis net income on a temporary basis) are presented as "Distributions
in excess of investment income -- net." Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis gains on
a temporary basis) are presented as "Distributions in excess of realized
gains on investments -- net." For the fiscal year ended March 31, 1993,
distributions in excess of book basis net income were charged to paid-in
capital.
<F4> Excluding applicable sales charges.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA PENNSYLVANIA TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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 1, 1993
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING) TO
MARCH 31, 1994 MARCH 31, 1993
-------------- --------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .......................................... $11.4200 $11.2000
-------- -------
Income from investment operations
Investment income -- net........................................................ 0.5556 0.0809
Realized gains (losses) on investments -- net................................... (0.3390) 0.2359
-------- -------
Total income from investment operations ....................................... 0.2166 0.3168
-------- -------
Less distributions
Dividends from investment income -- net......................................... (0.5201) (0.0809)
Distributions in excess of investment income -- net <F3> ....................... (0.0665) (0.0159)
Distributions from realized gains on investments -- net ........................ (0.0343) 0
Distributions in excess of realized gains on investments -- net ................ (0.0357) 0
-------- -------
Total distributions ........................................................... (0.6566) (0.0968)
-------- -------
Net asset value, end of period ................................................ $10.9800 $11.4200
-------- -------
-------- -------
TOTAL RETURN ................................................................. 1.70% 2.82%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Operating and management expenses <F2> ...................................... 1.50% 1.50%<F1>
Investment income -- net .................................................... 4.32% 3.44%<F1>
Portfolio turnover rate ....................................................... 37% 20%
Net assets, end of period (thousands) ......................................... $ 21,958 $ 2,543
<FN>
<F1> Annualized.
<F2> Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before the
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 1.81% and 1.69% (annualized) for the
year ended March 31, 1994 and the period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, respectively.
<F3> Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result, distribution amounts exceeding book basis net investment (or
tax basis net income on a temporary basis) are presented as "Distributions
in excess of investment income -- net." Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis gains on
a temporary basis) are presented as "Distributions in excess of realized
gains on investment -- net." For the period February 1, 1993 (Date of
Initial Public Offering) to March 31, 1993, distributions in excess of book
basis net income were charged to paid-in capital.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA PENNSYLVANIA TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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 1, 1993
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING) TO
MARCH 31, 1994 MARCH 31, 1993
-------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .......................................... $11.4200 $11.2000
------- -------
Income from investment operations
Investment income -- net....................................................... 0.5462 0.0710
Realized gains (losses) on investments -- net ................................. (0.3217) 0.2448
------- -------
Total income from investment operations ....................................... 0.2245 0.3158
------- -------
Less distributions
Dividends from investment income -- net ....................................... (0.5219) (0.0710)
Distributions in excess of investment income -- net<3> ........................ (0.0526) (0.0248)
Distributions from realized gains on investments -- net ....................... (0.0337) 0
Distributions in excess of realized gains on investments -- net ............... (0.0363) 0
------- -------
Total distributions ........................................................... (0.6445) (0.0958)
------- -------
Net asset value, end of period ................................................ $11.0000 $11.4200
------- -------
------- -------
TOTAL RETURN .................................................................. 1.78% 2.81%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Operating and management expenses<F2> ....................................... 1.50% 1.50%<F1>
Investment income -- net .................................................... 4.33% 2.50%<F1>
Portfolio turnover rate ....................................................... 37% 20%
Net assets, end of period (thousands) ......................................... $ 9,385 $ 952
<FN>
<F1> Annualized.
<F2> Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before the
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 1.90% and 1.60% (annualized) for the
year ended March 31, 1994 and the period February 1, 1993 (Date of Initial
Public Offering) to March 31, 1993, respectively.
<F3> Effective April 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result, distribution amounts exceeding book basis net investment (or
tax basis net income on a temporary basis) are presented as "Distributions
in excess of investment income -- net." Similarly, capital gain
distributions in excess of book basis capital gains (or tax basis gains on
a temporary basis) are presented as "Distributions in excess of investment
income on investment -- net." For the period February 1, 1993 (Date of
Initial Public Offering) to March 31, 1993 distributions in excess of book
basis net income were charged to paid-in-capital.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA TEXAS TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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>
MARCH 2, 1992
YEAR ENDED MARCH 31, (COMMENCEMENT OF
---------------------------------- OPERATIONS) TO
1994 1993 MARCH 31, 1992
---- ---- --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........................... $10.6400 $10.0300 $10.0000
------- ------- -------
Income from investment operations
Investment income -- net........................................ 0.5991 0.6176 0.0518
Realized gains (losses) on investments -- net .................. (0.4039) 0.6066 0.0300
------- ------- -------
Total income from investment operations ........................ 0.1952 1.2242 0.0818
------- ------- -------
Less distributions
Dividends from investment income -- net......................... (0.5952) (0.6142) (0.0518)
Distributions in excess of realized gain on investments -- net . (0.1100) 0 0
------- ------- -------
Total distributions ............................................ (0.7052) (0.6142) (0.0518)
------- ------- -------
Net asset value, end of period ................................. $10.1300 $10.6400 $10.0300
------- ------- -------
TOTAL RETURN <F3> ............................................... 1.60% 12.51% 0.82%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses<F2> ......................... 0.29% 0.68% 0.65%<F1>
Investment income -- net...................................... 5.51% 5.79% 5.95%<F1>
Portfolio turnover rate ........................................ 56% 62% 19%
Net assets, end of period (thousands) .......................... $ 1,916 $ 2,194 $ 1,063
<FN>
<F1> Annualized.
<F2> Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 3.48%, 3.84% and 1.93% (annualized) for
the fiscal years ended March 31, 1994, 1993 and the period March 2, 1992
(commencement of operations) to March 31, 1992, respectively.
<F3> Excluding applicable sales charges.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA TEXAS TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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 1, 1993
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING) TO
MARCH 31, 1994 MARCH 31, 1993
-------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..................... $10.6600 $10.5300
------- -------
Income from investment operations
Investment income -- net ................................. 0.5091 0.0822
Realized gains (losses) on investments -- net ............ (0.4515) 0.1352
------- -------
Total income from investment operations .................. 0.0576 0.2174
------- -------
Less distributions
Dividends from investment income -- net .................. (0.4751) (0.0822)
Distributions in excess of investment income -- net <F3>.. (0.0525) (0.0052)
Distributions in excess of realized gain on investments --
net ...................................................... (0.1100) 0
------- -------
Total distributions ...................................... (0.6376) (0.0874)
------- -------
Net asset value, end of period ........................... $10.0800 $10.6600
------- -------
------- -------
TOTAL RETURN <F4> ........................................ 0.29% 2.06%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses <F2> ................ 1.47% 1.50%<F1>
Investment income -- net .............................. 4.37% 4.26%<F1>
Portfolio turnover rate ................................. 56% 62%
Net assets, end of period (thousands) ................... $ 1,890 $ 235
<FN>
<F1> Annualized.
<F2> Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 4.19% and 3.76% (annualized) for the
fiscal year ended March 31, 1994 and the period February 1, 1993 (Date of
Initial Public Offering) to March 31, 1993, respectively.
<F3> Effective March 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized
gains on investments -- net." For the period February 1, 1993 (Date of
Initial Public Offering) to March 31, 1993, distributions in excess of book
basis net income were charged to paid-in capital.
<F4> Excluding applicable sales charges.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA TEXAS TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and 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 1, 1993
(DATE OF INITIAL
YEAR ENDED PUBLIC OFFERING) TO
MARCH 31, 1994 MARCH 31, 1993
-------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..................... $10.6400 $10.5300
------- -------
Income from investment operations
Investment income -- net ................................. 0.4643 0.0864
Realized gains (losses) on investments -- net ............ (0.4386) 0.1100
------- -------
Total income from investment operations .................. 0.0257 0.1964
------- -------
Less distributions
Dividends from investment income -- net .................. (0.4349) (0.0864)
Distributions in excess of investment income -- net <F3>.. (0.0808) 0
Distributions in excess of realized gain on investments --
net .................................................. (0.1100) 0
------- -------
Total distributions ...................................... (0.6257) (0.0864)
------- -------
Net asset value, end of period ........................... $10.0400 $10.6400
------- -------
------- -------
TOTAL RETURN <F4> ........................................ (0.03%) 1.86%
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses <F2> ................. 1.84% 1.50%<F1>
Investment income -- net ............................... 3.78% 5.03%<F1>
Portfolio turnover rate .................................. 56% 62%
Net assets, end of period (thousands) .................... $ 813 $ 25
<FN>
<F1> Annualized.
<F2> Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 4.39% and 4.15% (annualized) for the
fiscal year ended March 31, 1994 and the period February 1, 1993 (Date of
Initial Public Offering) to March 31, 1993, respectively.
<F3> Effective March 1, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result, distribution amounts exceeding book basis net income (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income -- net." Similarly, capital gain distributions
in excess of book basis capital gains (or tax basis capital gains on a
temporary basis) are presented as "Distributions in excess of realized
gains on investments -- net." For the period February 1, 1993 (Date of
Initial Public Offering) to March 31, 1993, distributions in excess of book
basis net income were charged to paid-in capital.
<F4> Excluding applicable sales charges.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA MASSACHUSETTS TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and auditors' report are
included in the statement of additional information. Additional information
about the Fund's performance is contained in its Annual Report, which will be
made available upon request and without charge.
FEBRUARY 4, 1994
(COMMENCEMENT OF
OPERATIONS) TO
MARCH 31, 1994
----------------
NET ASSET VALUE, BEGINNING OF PERIOD .......................... $ 10.0000
--------
Income from investment operations
Investment income -- net ..................................... 0.0872
Realized gains (losses) on investments -- net ................. (0.8241)
--------
Total income from investment operations ....................... (0.7369)
--------
Less distributions
Dividends from investment income -- net ....................... (0.0854)
Distributions in excess of investment income -- net ........... (0.0077)
--------
Total distributions ........................................... (0.0931)
--------
Net asset value, end of period ................................ $ 9.1700
--------
--------
TOTAL RETURN (c) ............................................. (7.40%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses(b) ....................... 0.35%(a)
Investment income -- net .................................. 5.07%(a)
Portfolio turnover rate ...................................... 7%
Net assets, end of period (thousands) ........................ $ 1,472
(a) Annualized.
(b) Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 3.22% (annualized) for the period
February 4, 1994 (Commencement of Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA MASSACHUSETTS TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and auditors' report are
included in the statement of additional information. Additional information
about the Fund's performance is contained in its Annual Report, which will be
made available upon request and without charge.
FEBRUARY 4, 1994
(COMMENCEMENT OF
OPERATIONS) TO
MARCH 31, 1994
----------------
NET ASSET VALUE, BEGINNING OF PERIOD .......................... $ 10.0000
--------
Income from investment operations
Investment income -- net ..................................... 0.0839
Realized gains (losses) on investments -- net ................. (0.8008)
--------
Total income from investment operations ....................... (0.7169)
--------
Less distributions
Dividends from investment income -- net ....................... (0.0670)
Distributions in excess of investment income -- net ........... (0.0261)
--------
Total distributions ........................................... (0.0931)
--------
Net asset value, end of period ................................ $ 9.1900
--------
--------
TOTAL RETURN (c) .............................................. (7.20%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses (b) ....................... 1.10%(a)
Investment income -- net .................................... 3.23%(a)
Portfolio turnover rate ....................................... 7%
Net assets, end of period (thousands) ......................... $ 1,817
(a) Annualized.
(b) Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 4.60% (annualized) for the period
February 4, 1994 (Commencement of Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA MASSACHUSETTS TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and auditors' report are
included in the statement of additional information. Additional information
about the Fund's performance is contained in its Annual Report, which will be
made available upon request and without charge.
FEBRUARY 4, 1994
(COMMENCEMENT OF
OPERATIONS) TO
MARCH 31, 1994
----------------
NET ASSET VALUE, BEGINNING OF PERIOD .......................... $ 10.0000
---------
Income from investment operations
Investment income -- net ...................................... 0.0807
Realized gains (losses) on investments -- net ................. (0.7989)
--------
Total income from investment operations ....................... (0.7182)
--------
Less distributions
Dividends from investment income -- net ....................... (0.0738)
Distributions in excess of investment income -- net ........... (0.0180)
--------
Total distributions ........................................... (0.0918)
--------
Net asset value end of period ................................. $ 9.1900
--------
--------
TOTAL RETURN (c) .............................................. (7.21%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses (b) ....................... 1.10%(a)
Investment income -- net .................................... 4.28%(a)
Portfolio turnover rate ....................................... 7%
Net assets, end of period (thousands) ......................... $ 369
(a) Annualized.
(b) Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 4.91% (annualized) for the period
February 4, 1994 (Commencement of Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA NEW YORK INSURED TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and auditors' report are
included in the statement of additional information. Additional information
about the Fund's performance is contained in its Annual Report, which will be
made available upon request and without charge.
FEBRUARY 4, 1994
(COMMENCEMENT OF
OPERATIONS) TO
MARCH 31, 1994
----------------
NET ASSET VALUE, BEGINNING OF PERIOD .......................... $ 10.0000
----------
Income from investment operations
Investment income -- net ...................................... 0.0862
Realized gains (losses) on investments -- net ................. (0.6748)
----------
Total income from investment operations ....................... (0.5886)
----------
Less distributions
Dividends from investment income -- net ....................... (0.0784)
Distributions in excess of investment income -- net ........... (0.0130)
----------
Total distributions ........................................... (0.0914)
----------
Net asset value, end of period ................................ $ 9.3200
----------
----------
TOTAL RETURN (c) .............................................. (5.91%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses (b) ....................... 0.35%(a)
Investment income -- net ................................... 3.85%(a)
Portfolio turnover rate ....................................... 14%
Net assets, end of period (thousands) ......................... $ 680
(a) Annualized.
(b) Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 4.44% (annualized) for the period
February 4, 1994 (Commencement of Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA NEW YORK INSURED TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and auditors' report are
included in the statement of additional information. Additional information
about the Fund's performance is contained in its Annual Report, which will be
made available upon request and without charge.
FEBRUARY 4, 1994
(COMMENCEMENT OF
OPERATIONS) TO
MARCH 31, 1994
----------------
NET ASSET VALUE, BEGINNING OF PERIOD .......................... $ 10.0000
----------
Income from investment operations
Investment income -- net ..................................... 0.0812
Realized gains (losses) on investments -- net ................ (0.6698)
----------
Total income from investment operations ....................... (0.5886)
----------
Less distributions
Dividends from investment income -- net ...................... (0.0620)
Distributions in excess of investment income -- net .......... (0.0294)
----------
Total distributions ........................................... (0.0914)
----------
Net asset value, end of period ................................ $ 9.3200
----------
----------
TOTAL RETURN (c) .............................................. (5.91%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses (b) ....................... 1.10%(a)
Investment income -- net ................................... 3.01%(a)
Portfolio turnover rate ....................................... 14%
Net assets, end of period (thousands) ......................... $ 2,276
(a) Annualized.
(b) Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 5.60% (annualized) for the period
February 4, 1994 (Commencement of Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE AMERICA NEW YORK INSURED TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table contains significant financial information with respect
to the fund and has been audited by KPMG Peat Marwick, the Fund's independent
auditors. The table has been taken from 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 auditors' report, in the Fund's Annual
Report. The Fund's financial statements, related notes, and auditors' report are
included in the statement of additional information. Additional information
about the Fund's performance is contained in its Annual Report, which will be
made available upon request and without charge.
FEBRUARY 4, 1994
(COMMENCEMENT OF
OPERATIONS) TO
MARCH 31, 1994
----------------
NET ASSET VALUE, BEGINNING OF PERIOD .......................... $ 10.0000
----------
Income from investment operations
Investment income -- net ...................................... 0.0736
Realized gains (losses) on investments -- net ................. (0.6735)
----------
Total income from investment operations ....................... (0.5999)
----------
Less distributions
Dividends from investment income -- net ....................... (0.0664)
Distributions in excess of investment income -- net ........... (0.0237)
----------
Total distributions ........................................... (0.0901)
----------
Net asset value, end of period ................................ $ 9.3100
----------
--------
TOTAL RETURN (c) .............................................. (6.02%)
RATIOS/SUPPLEMENTAL DATA Ratios to average net assets:
Operating and management expenses (b) ....................... 1.10%(a)
Investment income -- net .................................... 3.71%(a)
Portfolio turnover rate ....................................... 14%
Net assets, end of period (thousands) ......................... $ 255
(a) Annualized.
(b) Figures are net of the expense reimbursement made by Keystone Custodian
Funds, Inc. in connection with a voluntary expense limitation. Before
expense reimbursement, the "Ratio of operating and management expenses to
average net assets" would have been 5.13% (annualized) for the period
February 4, 1994 (Commencement of Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
THE FUND AND ITS FUNDS
The FUND is a non-diversified open-end management investment company commonly
known as a mutual fund. The FUND was formed as a Massachusetts business trust on
September 13, 1990. The FUND is one of thirty funds managed or advised by
Keystone Custodian Funds, Inc. ("Keystone"), the FUND's investment adviser. The
FUND currently consists of five separate series evidencing interests in
different portfolios of securities. The Florida Fund and the Pennsylvania Fund
were established on September 19, 1990. The Massachusetts Fund, the New York
Insured Fund and the Texas Fund were established on February 21, 1992. Shares of
the Massachusetts Fund and the New York Insured Fund were not offered prior to
February 4, 1994. The FUND may offer additional Funds in the future.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
Each of the Funds seeks the highest possible current income exempt from
federal income taxes, while preserving capital.
The FLORIDA FUND seeks, in addition, to hold securities exempt from Florida
intangible taxes.
The PENNSYLVANIA FUND seeks, in addition, the highest possible current income
exempt from Pennsylvania state and local taxes while preserving capital. The
Pennsylvania Fund also seeks to hold securities exempt from Pennsylvania
personal property taxes.
The TEXAS FUND provides, in addition, an opportunity for investors to invest
in municipal securities of the State of Texas, its political subdivisions,
agencies and instrumentalities. Texas currently imposes no personal income tax.
In the event Texas enacts a personal income tax, the Texas Fund will seek, in
addition, the highest possible current income exempt from Texas personal income
taxes while preserving capital.
FUNDS' PRINCIPAL INVESTMENTS
Generally, under ordinary circumstances, each Fund invests substantially all
and at least 80% of its assets in federally tax-exempt obligations, including
municipal bonds and notes and municipal tax-exempt commercial paper obligations
that are obligations issued by or on behalf of states, territories and
possessions of the United States ("U.S."), the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from which
is exempt from federal income taxes, including the alternative minimum tax. Thus
it is possible that up to 20% of a Fund's assets could be in securities subject
to the alternative minimum tax and/or in taxable obligations.
Municipal bonds include fixed, variable or floating rate general obligation
and revenue bonds (including municipal lease obligations, resource recovery
bonds and zero coupon bonds). Municipal rates include tax anticipation notes,
bond anticipation notes, revenue anticipation notes and project notes. Municipal
commercial paper obligations are unsecured promissory notes issued by
municipalities to meet short term credit needs.
FLORIDA TAX FREE FUND
Under ordinary circumstances, the Florida Fund invests substantially all and
at least 80% of its assets in municipal obligations exempt from federal taxes
and the Florida intangibles tax.
For a further discussion of Florida tax treatment and the factors affecting
investment in Florida municipal obligations, see Exhibit A.
MASSACHUSETTS TAX FREE FUND
Under ordinary circumstances, the Massachusetts Fund invests at least 80% of
its assets in securities the interest from which is exempt from federal taxes
and Massachusetts state income taxes. The Massachusetts Fund invests in debt
obligations of The Commonwealth of Massachusetts and its political subdivisions,
agencies, authorities and instrumentalities and debt obligations of other
qualifying issuers, such as U.S. territories.
The Massachusetts Fund invests at least 80% of its assets in investment grade
municipal obligations - bonds rated at the date of investment within the four
highest grades by Standard & Poor's Corporation ("S&P") (AAA, AA, A and BBB), by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A and Baa), by Fitch
Investors Service, Inc. - Municipal Division ("Fitch") (AAA, AA, A and BBB), or,
if not rated or rated under a different system, are of comparable quality to
obligations so rated as determined by Keystone. Securities that are in the
lowest investment grade (BBB or Baa) may have speculative characteristics. The
Fund may seek to maximize return with respect to a portion (not to exceed 20%)
of its assets. Such maximum return is ordinarily associated with high yield,
high risk municipal bonds in the lower rating categories of the recognized
rating agencies or that are unrated (high yield bonds). Such high yield, high
risk bonds generally involve greater volatility of price and risk of principal
and income than bonds in the higher rating categories and are, on balance,
considered predominantly speculative. High yield bonds are also commonly known
as "junk bonds."
For a further discussion of Massachusetts tax treatment and the factors
affecting investment in Massachusetts municipal obligations, see Exhibit A.
NEW YORK INSURED TAX FREE FUND
Under ordinary circumstances, the New York Insured Fund invests at least 80%
of its assets in securities the interest from which is exempt from federal taxes
and New York state income taxes. The New York Insured Fund invests in debt
obligations of the State of New York and its political subdivisions, agencies,
authorities and instrumentalities and debt obligations of other qualifying
issuers, such as U.S. territories.
As more fully discussed below in the section entitled "Insurance," at least
80% of the municipal securities in the investment portfolio of the New York
Insured Fund will be insured as to timely payment of both principal and
interest. The purpose of insuring these investments is to minimize credit risks
associated with defaults in municipal securities owned by the Fund. Such
insurance, however, does not insure against market risk and therefore will not
guarantee the market value of the securities in the Fund's portfolio upon which
the net asset value of the Fund's shares is based.
For a further discussion of New York tax treatment and the factors affecting
investment in New York municipal obligations, see Exhibit A.
PENNSYLVANIA TAX FREE FUND
Under ordinary circumstances, the Pennsylvania Fund invests substantially all
and at least 80% of its assets in municipal obligations exempt from federal
taxes and Pennsylvania state income taxes. The securities include debt
obligations of the Commonwealth of Pennsylvania and its political subdivisions,
agencies, authorities and instrumentalities and debt obligations of other
qualifying issuers, such as Puerto Rico and the Virgin Islands. In addition, the
Pennsylvania Fund attempts to invest in municipal obligations exempt from
Pennsylvania local income taxes and seeks to hold, on the annual assessment
date, municipal obligations exempt from Pennsylvania personal property taxes.
Many of the municipal obligations in which the Pennsylvania Fund intends to
invest generate income that is exempt from Pennsylvania state income taxes.
For a further discussion of Pennsylvania tax treatment and the factors
affecting investment in Pennsylvania municipal obligations, see Exhibit A.
TEXAS TAX FREE FUND
Under ordinary circumstances, the Texas Fund invests substantially all and at
least 80% of its assets in municipal obligations of the State of Texas that are
exempt from federal income taxes. The securities include debt obligations of the
State of Texas and its political subdivisions, agencies, authorities and
instrumentalities. Texas does not currently impose an income tax on individuals.
For a further discussion of Texas tax treatment and the factors affecting
investment in Texas municipal obligations, see Exhibit A.
MUNICIPAL OBLIGATIONS
Municipal obligations include debt obligations issued by or on behalf of a
political subdivision of the U.S. or any agency or instrumentality thereof to
obtain funds for various public purposes. In addition, municipal obligations
include certain types of industrial development bonds that have been or may be
issued by or on behalf of public authorities to finance privately operated
facilities. General obligation bonds involve the credit of an issuer possessing
taxing power and are payable from the issuer's general unrestricted revenues.
Their payment may be dependent upon an appropriation by the issuer's legislative
body and may be subject to quantitative limitations on the issuer's taxing
power. Limited obligation or revenue bonds are payable only from the revenues of
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, such as the user
of the facility. Since each Fund considers preservation of capital as well as
the level of tax-exempt income, each Fund may realize less income than a mutual
fund willing to expose shareholders' capital to greater risk.
The Tax Reform Act of 1986 made significant changes in the federal tax status
of certain obligations that were previously fully federally tax-exempt. As a
result, three categories of such obligations issued after August 7, 1986 now
exist: (1) "public purpose" bonds, the income from which remains fully exempt
from federal income tax; (2) qualified "private activity" industrial development
bonds, the income from which, while exempt from federal income tax under Section
103 of the Internal Revenue Code (the "Code"), is includable in the calculation
of the federal alternative minimum tax; and (3) "private activity" (private
purpose) bonds, the income from which is not exempt from federal income tax. A
Fund will not invest in private purpose bonds and, except as described under
"Other Eligible Investments," will not invest in qualified "private activity"
industrial development bonds whose distributions are subject to the alternative
minimum tax.
Each Fund, except the Massachusetts Fund, invests entirely in municipal
obligations only if at the date of investment they are rated within the four
highest grades by S&P (AAA, AA, A and BBB), by Moody's (Aaa, Aa, A and Baa), by
Fitch (AAA, AA, A and BBB) or, if not rated or rated under a different system,
are of comparable quality to obligations so rated as determined by Keystone.
While a Fund may invest in securities of any maturity, it is currently
expected that a Fund will not invest in securities (other than certain money
market securities) with maturities of more than 30 years or less than 5 years.
OTHER ELIGIBLE INVESTMENTS
A Fund may invest up to 20% of its assets under ordinary circumstances and up
to 100% of its assets for temporary defensive purposes in the following types of
instruments: (1) commercial paper, including master demand notes, that at the
date of investment is rated A-1 (the highest grade by S&P), PRIME- 1 (the
highest grade by Moody's) or, if not rated by such services, is issued by a
company that at the date of investment has an outstanding issue rated A or
better by S&P or Moody's; (2) obligations, including certificates of deposit and
bankers' acceptances, of banks or savings and loan associations that have at
least $1 billion in assets as of the date of their most recently published
financial statements and are members of the Federal Deposit Insurance
Corporation, including U.S. branches of foreign banks and foreign branches of
U.S. banks; (3) corporate obligations (maturing in 13 months or less) that at
the date of investment are rated A or better by S&P or Moody's; (4) obligations
issued or guaranteed by the U.S. government or by any agency or instrumentality
of the U.S.; (5) qualified "private activity" industrial development bonds, the
income from which, while exempt from federal income tax under Section 103 of the
Code, is includable in the calculation of the federal alternative minimum tax;
and (6) municipal obligations, the income from which is exempt from federal
income tax, but not exempt from income tax, personal property tax or intangibles
tax in a state for which a Fund is named and where such taxes apply. For
example, each Fund may assume a temporary defensive position upon Keystone's
determination that market conditions so warrant. If a Fund is investing
defensively, it is not pursuing its investment objectives.
Each Fund may enter into repurchase and reverse repurchase agreements,
purchase and sell securities on a when issued and delayed delivery basis, write
covered call and put options and purchase call and put options, including
purchasing call and put options to close out existing positions, and may employ
new investment techniques with respect to such options. Each Fund may also
engage in financial futures contracts and related options transactions for
hedging purposes and not for speculation and may employ new investment
techniques with respect to such futures contracts and related options. In
addition, each Fund may invest in municipal obligations denominated in foreign
currencies and may use subsequently developed investment techniques that are
related to any of its investment policies. None of the Funds are expected to
enter into repurchase agreements in the ordinary course of business.
For further information about the types of investments and investment
techniques available to the Funds, including the risks associated therewith, see
"Additional Investment Information" located at the back of this prospectus and
the statement of additional information.
There can be no assurance that a Fund will achieve its investment objectives
since there is uncertainty in every investment.
INSURANCE
At least 80% of the municipal securities in the portfolio of the New York
Insured Fund will consist of obligations that at all times are fully insured as
to the payment of all principal and interest when due ("Insured Securities").
Each Insured Security in the portfolio will be covered by either a "New Issue
Insurance Policy," "Portfolio Insurance Policy" issued by a qualified municipal
bond insurer, or a "Secondary Insurance Policy." The insurance does not insure
against market risk and therefore does not guarantee the market value of the
securities in the New York Insured Fund's portfolio. Similarly, because the net
asset value of the New York Insured Fund's shares is based upon the market value
of the securities in the portfolio, such insurance does not cover or guarantee
the value of the New York Insured Fund's shares.
NEW ISSUE INSURANCE POLICIES
New Issue Insurance Policies are obtained by the respective issuers of the
municipal securities, and all premiums respecting such securities have been paid
in advance by such issuers. Such policies are noncancellable and will continue
in force so long as the municipal securities are outstanding, and the respective
insurers remain in business. Since New Issue Insurance Policies remain in effect
as long as the securities are outstanding, the insurance may have an effect on
the resale value of the Insured Securities. Therefore, New Issue Insurance
Policies may be considered to represent an element of market value with regard
to the Insured Securities, but the exact effect, if any, of this insurance on
such market value cannot be estimated. The New York Insured Fund will purchase
municipal securities subject to New Issue Insurance Policies only if the claims
paying ability of the insurer thereof is rated AAA by S&P or Aaa by Moody's.
PORTFOLIO INSURANCE POLICIES
Portfolio Insurance Policies are obtained by the New York Insured Fund from a
qualified municipal bond insurer and are effective only so long as the Fund is
in existence, the insurer is still in business and meeting its obligations, and
the Insured Securities described in the policy are held by the New York Insured
Fund. Premium rates for each issue of securities covered by the policy are fixed
for the life of the New York Insured Fund and are periodically adjusted to
reflect purchases and sales of covered securities. The premium on the Portfolio
Insurance Policy is an item of expense and will be reflected in the New York
Insured Fund's average annual expenses. Premiums are paid from the New York
Insured Fund's assets and reduce the current yield on its portfolio by the
amount thereof. The insurer cannot cancel coverage already in force with respect
to Insured Securities owned by the New York Insured Fund and covered by the
policy, except for nonpayment of premiums.
SECONDARY INSURANCE POLICIES
The New York Insured Fund may, at any time, purchase Secondary Insurance on
any municipal security held by the Fund. Such insurance coverage will be
noncancellable and will continue in force so long as the securities so insured
are outstanding. Secondary Insurance will likely be purchased by the New York
Insured Fund if, in the opinion of Keystone, the market value or net proceeds of
the sale of a security by the Fund would exceed the current value of such
security (without insurance) plus the cost of such insurance. When the New York
Insured Fund purchases Secondary Insurance, the single premium is added to the
cost basis of the security and is not considered an item of expense of the Fund.
One of the purposes of such insurance is to enable the securities covered by
such insurance to be sold as "AAA" or "Aaa" rated Insured Securities at a market
price higher than that which might otherwise be obtainable if the securities
were sold without the insurance coverage. Therefore, such insurance may be
considered to represent an element of market value of such Insured Securities,
although the exact effect, if any, on such market value cannot be estimated. Any
difference between the excess of such a security's market value as an Aaa or AAA
rated security over its market value without such rating, including the single
premium cost thereof, would inure to the New York Insured Fund in determining
the net capital gain or loss realized by the Fund upon the sale of such Insured
Security.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVES
The investment objectives of each Fund and the requirement that each Fund
invest, under ordinary circumstances, at least 80% of its assets in federally
tax-exempt municipal obligations that are also exempt from certain taxes in the
state for which it is named, as set forth above, are fundamental and may not be
changed without the vote of a majority of the affected Fund's outstanding shares
(as defined in the 1940 Act).
INVESTMENT RESTRICTIONS
Each Fund has adopted the following fundamental restrictions, which may not be
changed without the vote of a majority of such Fund's outstanding shares. These
restrictions and certain other fundamental restrictions are set forth in the
statement of additional information. Unless otherwise stated, all references to
a Fund's assets are in terms of current market value.
Each Fund may not do the following:
(1) purchase any security of any issuer (other than issues of the U.S.
government, its agencies or instrumentalities) if as a result more than 25% of
its total assets would be invested in a single industry, including industrial
development bonds from the same facility or similar types of facilities;
governmental issuers of municipal bonds are not regarded as members of an
industry, and the Fund may invest more than 25% of its assets in industrial
development bonds;
(2) invest more than 10% of its assets in securities with legal or contractual
restrictions on resale or in securities for which market quotations are not
readily available, or in repurchase agreements maturing in more than seven days;
(3) 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;
(4) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis, or collateral
arrangements with respect to the writing of options on securities, are not
deemed to be a pledge of assets;
(5) borrow money or enter into reverse repurchase agreements, except that each
Fund may enter into reverse repurchase agreements or borrow money from banks for
temporary or emergency purposes in aggregate amounts up to one-third of the
value of the Fund's net assets; provided that while borrowings from banks (not
including reverse repurchase agreements) exceed 5% of the Fund's net assets, any
such borrowings will be repaid before additional investments are made;
(6) make loans, except that each Fund may purchase or hold debt securities
consistent with its investment objectives, lend portfolio securities valued at
not more than 15% of its total assets to broker-dealers, and enter into
repurchase agreements; and
(7) 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.
The Funds are non-diversified under the federal securities laws. As
non-diversified funds, there is no restriction under the 1940 Act on the
percentage of assets that may be invested at any time in the securities of any
one issuer. The Funds intend to comply, however, with the Code's diversification
requirements and other requirements applicable to "regulated investment
companies" to ensure they will not be subject to U.S. federal income tax on
income and capital gain distributions to shareholders.
For this reason, each Fund has adopted the investment restriction set forth
below, which may not be changed without the approval of a majority of its
outstanding shares. Specifically, a Fund may not purchase a security if more
than 25% of the Fund's total assets would be invested in the securities of a
single issuer (other than the U.S. government, its agencies and
instrumentalities) or, with respect to 50% of the Fund's total assets, if more
than 5% of such assets would be invested in the securities of a single issuer
(other than the U.S. government, its agencies and instrumentalities).
As a matter of practice, a Fund treats reverse repurchase agreements as
borrowings for purposes of compliance with the limitations of the 1940 Act.
Reverse repurchase agreements will be taken into account along with borrowings
from banks for purposes of the 5% limit set forth in the fifth investment
restriction above.
RISK FACTORS
Investing in a Fund involves the risk common to investing in any security,
i.e., net asset value will fluctuate in response to changes in economic
conditions, interest rates and the market's perception of the underlying
portfolio securities of the Fund.
To the extent the Funds are not fully diversified, they may be more
susceptible to adverse economic, political or regulatory developments affecting
a single issuer than would be the case if the Funds were more broadly
diversified.
A Fund's ability to achieve its objectives depends partially on the prompt
payment by issuers of the interest on and principal of the municipal obligations
held by the Fund. A moratorium, default or other nonpayment of interest or
principal when due on any municipal obligation, in addition to affecting the
market value and liquidity of that particular security, could affect the market
value and liquidity of other municipal obligations held by a Fund. In addition,
the market for municipal obligations is often thin and can be temporarily
affected by large purchases and sales, including those by a Fund.
From time to time, proposals have been introduced before the U.S. Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations, and similar proposals may well be introduced
in the future. If such a proposal were enacted, the availability of municipal
obligations for investment by each Fund and the value of the Fund's securities
could be materially affected. In such an event, the FUND would reevaluate its
Funds' investment objectives and policies and consider changes in the structure
of the Funds or dissolution.
By itself, a Fund does not constitute a balanced investment program and is not
designed for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal or marketability. Shares of a Fund
would not be suitable for tax-exempt institutions and may not be suitable for
certain retirement plans that are unable to benefit from the Fund's federally
tax-exempt dividends. In addition, the Funds may not be appropriate investments
for entities that are "substantial users" of facilities financed by industrial
development bonds or related persons thereof.
The market value of fixed income securities may vary inversely to changes in
prevailing interest rates.
If and when a Fund invests in zero coupon bonds, the Fund does not expect to
have enough zero coupon bonds to have a material effect on dividends. The FUND
has undertaken to a state securities authority to disclose that zero coupon
securities pay no interest to holders prior to maturity, and that the interest
on these securities is reported as income to a Fund and distributed to its
shareholders. These distributions must be made from the Fund's cash assets or,
if necessary, from the proceeds of sales of portfolio securities. The Fund will
not be able to purchase additional income producing securities with cash used to
make such distributions, and its current income ultimately may be reduced as a
result.
If and when a Fund invests in municipal lease obligations, the possibility
exists that a municipality may not appropriate the funds for lease payments. The
FUND's Board of Trustees will be responsible for determining, on an ongoing
basis, the credit quality of such leases, including an assessment of the
likelihood of cancellation of any such lease.
The Massachusetts Fund's investment policy allows the Fund to invest a portion
(not to exceed 20%) of its assets in high yield, high risk municipal bonds. The
degree to which the Fund will hold such securities will, among other things,
depend upon Keystone's economic forecast and its judgment as to the comparative
values offered by high yield, high risk bonds and higher quality bonds. The
Massachusetts Fund seeks to invest up to 20% of its assets aggressively and to
maximize return over time from a combination of many factors, including high
current income and capital appreciation from high yield, high risk bonds.
Although the total amount invested in high yield, high risk securities will not
exceed 20% of the assets of the Massachusetts Fund, the Fund may (as a
non-diversified fund) invest as much as the entire 20% in the securities of a
single issuer. To that extent, the Massachusetts Fund may be more susceptible to
adverse economic, political or regulatory developments affecting a single issuer
than would be the case if the Fund were more broadly diversified.
Such aggressive investing involves risks that are greater than the risks of
investing in higher quality debt securities. These risks are discussed in
greater detail below and include risks from (1) interest rate fluctuation; (2)
changes in credit status, including weaker overall credit condition of issuers
and risks of default; (3) industry, market and economic risk; (4) volatility of
price resulting from broad and rapid changes in the value of underlying
securities; and (5) greater price variability and credit risks of such high
yield, high risk securities as zero coupon bonds and PIK securities.
These risks provide the opportunity for maximizing return over time on a
portion of the Massachusetts Fund's assets, but may result in greater upward and
downward movement of the net asset value per share of the Fund. As a result,
they should be carefully considered by investors.
The maximum return sought by the Massachusetts Fund with respect to up to 20%
of its assets is ordinarily associated with securities in the lower rating
categories of the recognized rating agencies or with securities that are
unrated. Such high yield, high risk securities are generally rated BB or lower
by S&P or BA or lower by Moody's. The Fund may invest in securities that are
rated as low as D by S&P and C- by Moody's. These rating categories are
described in the section of this prospectus entitled "Additional Investment
Information." The Fund intends to invest in D rated debt only in cases where, in
Keystone's judgment, there is a distinct prospect of improvement in the issuer's
financial position as a result of the completion of reorganization or otherwise.
The Fund may also invest in unrated securities that, in Keystone's judgment,
offer comparable yields and risks to those of securities that are rated, as well
as non-investment quality zero coupon and PIK securities.
Investors should be aware of the following: (1) securities rated BB or lower
by S&P or BA or lower by Moody's are considered predominantly speculative with
respect to the ability of the issuer to meet principal and interest payments;
(2) the value of high yield, high risk securities may be more susceptible to
real or perceived adverse economic, company or industry conditions than is the
case for higher quality securities; (3) adverse market, credit or economic
conditions could make it difficult at certain times to sell certain high yield,
high risk securities held by the Fund; (4) the secondary market for high yield,
high risk securities may be less liquid than the secondary market for higher
quality securities, which may affect the value of certain high yield, high risk
securities held by the Fund at certain times; and (5) zero coupon and PIK high
yield, high risk securities may be subject to greater changes in value due to
market conditions, the absence of a cash interest payment and the tendency of
issuers of such securities to have weaker overall credit conditions than other
high yield, high risk securities. These characteristics of high yield, high risk
securities make them generally more appropriate for long term investment.
Since the Fund takes an aggressive approach to investing a portion of its
assets, Keystone tries to maximize the return by controlling the risk associated
with those investments through diversification, credit analyses, review of
sector and industry trends, interest rate forecasts and economic analysis.
Keystone's analysis of securities focuses on values based on factors such as
asset values, earnings prospects and the quality of management of the company.
In making investment recommendations, Keystone also considers current income,
potential for capital appreciation, maturity structure, quality guidelines,
coupon structure, average yield, percentage of zeros and PIKs, percentage of
non-accruing items and yield to maturity. Keystone also considers the ratings of
Moody's and S&P assigned to various securities, but does not rely solely on
ratings assigned by Moody's and S&P because (1) Moody's and S&P assigned ratings
are based largely on historical financial data and may not accurately reflect
the current financial outlook of municipalities; and (2) there can be large
differences among the current financial conditions of issuers within the same
rating category.
For a discussion of the tax considerations for each state and special factors,
including the risks associated with investing in the municipal securities of a
single state, see Exhibit A to this prospectus and Appendix A to the statement
of additional information.
PRICING SHARES
The net asset value of a Fund share is computed each day on which the New York
Stock Exchange (the "Exchange") is open as of the close of trading on the
Exchange (currently 4:00 p.m. Eastern time for the purpose of pricing Fund
shares) except on days when changes in the value of a Fund's portfolio
securities do not affect the current net asset value of its shares. The Exchange
currently is closed on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of each Fund is arrived at by determining the
value of the Fund's assets, subtracting its liabilities and dividing the result
by the number of its shares outstanding. Net asset value per share is calculated
to two decimal places for purposes of purchases and redemptions of a Fund's
shares.
The Funds value municipal obligations on the basis of valuations provided by a
pricing service, approved by the FUND's Board of Trustees, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value. Each Fund values its short-term instruments as
follows: short-term instruments with maturities of sixty days or less are valued
at amortized cost (original purchase cost as adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market; short-term instruments having maturities of more than sixty
days for which market quotations are readily available are valued at current
market value; and short-term instruments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market; and which, in either case, reflects fair value as
determined by the Board of Trustees. All other investments are valued at market
value or, where market quotations are not readily available, at fair value as
determined in good faith according to procedures established by the Board of
Trustees.
DIVIDENDS AND TAXES
Each Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains annually. All dividends and
distributions will be payable in shares or, at the option of the shareholder, in
cash. Shareholders of a Fund who have not opted to receive cash prior to the
payable date for any dividend from net investment income or the record date for
any capital gains distribution will have the number of such shares determined on
the basis of the Fund's net asset value per share computed at the end of that
day after adjustment for the distribution. Net asset value is used in computing
the number of shares in both capital gains and income distribution
reinvestments. There is a possibility that shareholders may lose the tax-exempt
status on accrued income on municipal bonds if shares of the Funds are redeemed
before a dividend has been declared.
Commissions paid by a Fund on new sales of shares under the Fund's
Distribution Plans (see "Distribution Plans") and deferred sales charge receipts
are treated as capital charges and capital credits, respectively, in determining
net investment income for tax purposes. For financial statement purposes, these
expenses are treated as operating expenses and expense offsets. As a result, the
amount of dividend distributions required to satisfy the requirements of the
Internal Revenue Code might exceed net investment income for financial statement
purposes, resulting in a portion of such dividends being a distribution in
excess of investment income-net for financial statement purposes. Differences in
the operation of the Distribution Plan adopted by the Class A shares of each
Fund from that of the Class B and Class C Distribution Plans will cause a
variation in the net asset values of the respective classes of shares.
Account statements and/or checks as appropriate will be mailed within seven
days after the Fund pays the distribution. Unless the FUND receives instructions
to the contrary before the record or payable date, as the case may be, it will
assume that a shareholder wishes to receive that distribution and future capital
gains and income distributions in shares. Instructions continue in effect until
changed in writing.
Each of the Funds intends to qualify in the future as a regulated investment
company under the Code. Each Fund is a separate taxable entity for purposes of
Code provisions applicable to regulated investment companies. Each of the Funds
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for its fiscal year. Each Fund also intends to
make timely distributions, if necessary, sufficient in amount to avoid the
nondeductible 4% excise tax imposed on a regulated investment company to the
extent that it fails to distribute, with respect to each calendar year, at least
98% of its ordinary income for such calendar year and 98% of its net capital
gains for the one-year period ending on October 31 of such calendar year. Any
taxable distribution (1) would be declared by December 31 to shareholders of
record in December, (2) would be paid by the following January 31, and (3) would
be includable in the taxable income of shareholders for the year in which such
distributions were declared. If a Fund qualifies and if it distributes all of
its net investment income and net capital gains, if any, to shareholders, it
will be relieved of any federal income tax liability.
Each Fund expects that substantially all of its dividends will be "exempt
interest dividends," which should be treated as excludable from federal gross
income. In order to pay exempt interest dividends, at least 50% of the value of
the Fund's assets must consist of federally tax-exempt obligations at the close
of each quarter. An exempt interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by the Fund with respect to its net
federally excludable municipal obligation interest and designated as an exempt
interest dividend in a written notice mailed to each shareholder not later than
60 days after the close of its taxable year. The percentage of the total
dividends paid by a Fund with respect to any taxable year that qualifies as
exempt interest dividends will be the same for all shareholders of the Fund
receiving dividends with respect to such year. If a shareholder receives an
exempt interest dividend with respect to any share and such share has been held
for six months or less, any loss on the sale or exchange of such share will be
disallowed to the extent of the exempt interest dividend amount.
Any shareholder of a Fund who may be a "substantial user" of a facility
financed with an issue of tax-exempt obligations or a "related person" to such a
user should consult his tax adviser concerning his qualification to receive
exempt interest dividends should the Fund hold obligations financing such
facility.
Interest on certain "private activity bonds" issued after August 7, 1986,
although otherwise tax exempt, is treated as a tax preference item for
alternative minimum tax purposes. Under regulations to be promulgated, a Fund's
exempt interest dividends will be treated the same way to the extent
attributable to interest paid on such private activity bonds. Corporate
shareholders should also be aware that the receipt of exempt interest dividends
could subject them to alternative minimum tax under the provisions of Section
56(g) of the Code (relating to "adjusted current earnings").
Since none of a Fund's income will consist of corporate dividends, no
distributions will qualify for the corporate dividends received deduction.
Each Fund intends to distribute its net capital gains as capital gain
dividends; shareholders should treat such dividends as long-term capital gains.
Such distributions will be designated as capital gain dividends by a written
notice mailed to each shareholder no later than 60 days after the close of the
Fund's fiscal taxable year. If a shareholder receives a capital gain dividend
and holds his shares for six months or less, then any allowable loss on
disposition of such shares will be treated as a long-term capital loss to the
extent of such capital gain dividend.
Interest on indebtedness incurred or continued by shareholders to purchase or
carry shares of a Fund will not be deductible for federal income tax purposes to
the extent of the portion of the interest expense relating to exempt interest
dividends; that portion is determined by multiplying the total amount of
interest paid or accrued on the indebtedness by a fraction, the numerator of
which is the exempt interest dividends received by a shareholder in his taxable
year and the denominator of which is the sum of the exempt interest dividends
and the taxable distributions out of the Fund's investment income and long-term
capital gains received by the shareholder.
The Funds may acquire options to "put" specified securities to municipal bond
dealers or issuers from whom the securities are purchased. It is expected that
each Fund will be treated for federal income tax purposes as the owner of the
municipal bonds acquired subject to the put. The interest on the municipal bonds
will be tax-exempt to the Funds, and the purchase prices must be allocated
between such securities and the put based upon their respective fair market
values. The Internal Revenue Service has not issued a published ruling on this
matter and could reach a different conclusion.
STATE INCOME TAXES
The exemption of interest on municipal bonds for federal income tax purposes
does not necessarily result in exemption under the income, corporate or personal
property tax laws of any state or city. Generally, individual shareholders of
the Funds receive tax-exempt treatment at the state level for distributions
derived from municipal securities of their state of residency. Texas does not
currently impose any income tax on individuals or corporate shareholders
(although Texas does impose a corporate franchise tax based, in part, on
reportable federal taxable income on those corporations doing business in
Texas). Florida does not currently impose any individual income tax, although it
does impose a tax on corporate income. Each Fund will report to shareholders on
a state by state basis the sources of its exempt interest dividends. For a
further discussion of state tax treatment relating to each Fund, see Exhibit A
to this prospectus.
The foregoing is only a summary of some of the important tax considerations
generally affecting the FUND, its Funds and their shareholders. No attempt is
made to present a detailed explanation of the federal or state income or other
tax treatment of the FUND, its Funds or their shareholders, and this discussion
is not intended as a substitute for careful tax planning. Accordingly,
shareholders are urged to consult their tax advisers with specific reference to
their tax situation.
As mentioned above, at the end of each quarter, at least 50% of the value of a
Fund's assets must be invested in municipal obligations in order for
distributions to qualify as exempt interest dividends. Under particularly
unusual circumstances, such as when a Fund is in a prolonged defensive
investment position, it is possible that no portion of a Fund's distributions of
income to its shareholders for a fiscal year would be exempt from federal income
tax. The FUND does not presently anticipate, however, that such unusual
circumstances will occur.
FUND MANAGEMENT AND EXPENSES BOARD OF TRUSTEES
Under Massachusetts law, the FUND's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the FUND
and its Funds. Subject to the authority of the Board of Trustees, Keystone
serves as investment adviser to the FUND and its Funds and is responsible for
the overall management of the FUND's business and affairs.
INVESTMENT ADVISER
Keystone, the FUND's investment adviser, located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034, has provided investment advisory and
management services to investment companies and private accounts since it was
organized in 1932. Keystone is a wholly-owned subsidiary of Keystone Group, Inc.
("Keystone Group"), located at 200 Berkeley Street, Boston, Massachusetts
02116-5034.
Keystone Group is a corporation privately owned by current and former members
of management of Keystone and its affiliates. The shares of Keystone Group
common stock beneficially owned by management are held in a number of voting
trusts, the trustees of which are George S. Bissell, Albert H. Elfner, III,
Roger T. Wickers, Edward F. Godfrey and Ralph J. Spuehler, Jr. Keystone Group
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone, its affiliates and the Keystone Group of Mutual Funds.
Pursuant to its Investment Advisory and Management Agreement with the FUND
(the "Advisory Agreement"), Keystone provides investment advisory and management
services to the FUND and each Fund.
Each Fund pays Keystone a fee for its services at the annual rate set forth
below:
Aggregate
Net Asset Value
Management of the Shares
Fee of the Fund
- ------------------------------------------------------------------------------
0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
computed as of the close of business each business day and paid daily. During
the year ended March 31, 1994, the Florida, Pennsylvania and Texas Funds paid or
accrued to Keystone investment management and administrative services fees of
$363,939 (0.54% of the Fund's average annual net assets), $291,982 (0.55% of the
Fund's average annual net assets), and $22,246 (0.55% of the Fund's average
annual net assets), respectively. During the period ended March 31, 1994, the
New York Insured and Massachusetts Funds paid or accrued to Keystone investment
management and administrative services fees of $1,473 (0.55% of the Fund's
average annual net assets) and $2,167 (0.55% of the Fund's average annual net
assets), respectively.
The Advisory Agreement continues in effect from year to year only so long as
such continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of the outstanding shares of each Fund. In
either case, the terms of the Advisory Agreement and continuance thereof must be
approved by the vote of a majority of Independent Trustees in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated as to any Fund, without penalty, on 60 days' written
notice by the FUND or Keystone, or may be terminated as to a Fund by a vote of a
majority of the shares of such Fund. The Advisory Agreement will terminate
automatically upon its assignment.
FUND EXPENSES
Each Fund will pay all of its expenses. In addition to the investment advisory
and management fees discussed above, the principal expenses that each Fund is
expected to pay include, but are not limited to, transfer, dividend disbursing
and shareholder servicing agent costs and expenses; custodian costs and
expenses; its pro rata portion of certain Trustees' fees, fees of its
independent auditors, fees of the FUND's legal counsel and legal counsel to the
FUND's Board of Trustees, fees payable to government agencies, including
registration and qualification fees of the FUND, the Funds and their shares
under federal and state securities laws; and certain extraordinary expenses. In
addition, each class of a Fund will pay all of the expenses attributable to it.
Such expenses are currently limited to Distribution Plan expenses. Each Fund
also pays its brokerage commissions, interest charges and taxes and certain
extraordinary expenses.
Until December 31, 1994, Keystone has voluntarily agreed to limit all expenses
of the Class A shares of the Florida, Pennsylvania and Texas Funds incurred by
the Funds to 0.75% of average daily net assets and limit annual expenses of
those Funds' Class B and Class C shares to 1.50% of average daily net assets.
Thereafter, a redetermination of whether to continue these expense limitations,
and, if so, at what rates, will be made.
Keystone has voluntarily limited the expenses of the Class A shares of the
Massachusetts and New York Insured Funds to 0.35% until August 15, 1994; 0.45%
until November 15, 1994; 0.55% until February 15, 1995; and 0.65% until May 15,
1995. Thereafter, expenses of Class A shares will be limited to 0.75% until
December 31, 1995. Expenses of Class B and C shares of those Funds will be
limited to 1.10% until August 15, 1994; 1.20% until November 15, 1994; 1.30%
until February 15, 1995; and 1.40% until May 15, 1995. Thereafter, expenses of
Class B and C shares will be limited to 1.50% until December 31, 1995.
Thereafter, a redetermination of whether to continue these expense limitations
and, if so, at what rates, will be made.
Keystone will not be required to make such reimbursements to the extent it
would result in a Fund's inability to qualify as a regulated investment company
under the Code. In accordance with these voluntary expense limitations, Keystone
reimbursed the Florida, Pennsylvania, Texas, Massachusetts and New York Insured
Funds (1) $122,334, $107,397, $72,371, $5,910, and $2,434, respectively, with
respect to each Fund's Class A shares; (2) $23,487, $40,539, $32,035, $5,082,
and $7,843, respectively, with respect to each Fund's Class B shares; and (3)
$30,780, $25,273, $15,135, $1,624, and $1,373, respectively, with respect to
each Fund's Class C shares. Keystone does not intend to seek repayment for these
amounts.
Each Fund may be subject to certain annual state expense limitations. No such
limitation is currently believed to be applicable to a Fund.
During the fiscal year ended March 31, 1994, the Florida, Pennsylvania and
Texas Funds paid or accrued to Keystone Investor Resource Center, Inc. ("KIRC"),
the FUND's transfer agent, $75,613, $78,621, and $5,640, respectively, for
shareholder services. During the fiscal period ended March 31, 1994, the
Massachusetts and New York Insured Funds paid or accrued $246 and $426 to KIRC
for shareholder services. During the year ended March 31, 1994, the Florida,
Pennsylvania and Texas Funds paid or accrued to KIRC and KGI $20,425, $15,023
and $21,668, respectively, as reimbursement for certain accounting services.
KIRC is a wholly-owned subsidiary of Keystone.
For the fiscal year ended March 31, 1994, the Class A shares of the Florida
and Pennsylvania Funds each paid 0.75% of its average net assets in expenses.
For the fiscal year ended March 31, 1994, each of these Fund's respective Class
B and Class C shares paid 1.50% of its average net assets in expenses. For the
fiscal year ended March 31, 1994, the Class A, B and C shares, respectively of
the Texas Fund paid 0.29%, 1.47% and 1.84% of its average net assets in
expenses. For the fiscal period ended March 31, 1994, the Class A shares of the
Massachusetts and New York Insured Funds each paid 0.35% of its average net
assets in expenses. For the fiscal period ended March 31, 1994, these Fund's
respective Class B and Class C shares paid 1.10% of its average net assets in
expenses.
PORTFOLIO MANAGER
Betsy A. Blacher, a Keystone Vice President and Senior Portfolio Manager, has
been primarily responsible for management of each of the Funds since their
inception and is responsible for the day-to-day management of the Florida Fund.
Ms Blacher has more than 15 years of investment experience.
Daniel A. Rabasco, a Keystone Vice President and Portfolio Manager, has been
responsible for the day-to-day management of the Pennsylvania, Texas, New York
Insured and Massachusetts Funds since May 1, 1994. Mr. Rabasco has more than 7
years of investment experience.
SECURITIES TRANSACTIONS
Under policies established by the Board of Trustees, Keystone selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for a Fund,
Keystone may follow a policy of considering as a factor the number of shares of
the Fund sold by such broker-dealer. In addition, broker-dealers executing
portfolio transactions from time to time may be affiliated with the FUND,
Keystone, the FUND's Principal Underwriter or their affiliates.
A Fund may pay higher commissions to broker-dealers that provide research
services. Keystone may use these services in advising a Fund as well as in
advising its other clients.
PORTFOLIO TURNOVER
The portfolio turnover rates for the Florida, Pennsylvania and Texas Funds for
the fiscal year ended March 31, 1994 were 113%, 37%, 56%, respectively.
For the fiscal year ended March 31, 1993, the turnover rates for the Florida,
Pennsylvania and Texas Funds were 95%, 20% and 62%, respectively. For the fiscal
period ended March 31, 1994, the portfolio turnover rates for the Massachusetts
and New York Insured Funds were 7% and 14%, respectively. For the fiscal year
ended March 31, 1995, the portfolio turnover rates for the Massachusetts and New
York Insured Funds are expected to be 100%.
HOW TO BUY SHARES
Shares of each Fund may be purchased from any broker-dealer that has a selling
agreement with KDI. KDI, a wholly-owned subsidiary of Keystone, is located at
200 Berkeley Street, Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of a Fund by
mailing to the FUND, c/o KIRC, P.O. Box 2121, Boston, Massachusetts 02106-2121,
a completed account application specifying the Fund in which you are investing
and a check payable to the FUND. You may also open an account by telephoning
1-800-343-2898 to obtain the number of an account to which you can wire or
electronically transfer funds. You must then send in a completed account
application. Subsequent investments in Fund shares, in any amount, may be made
by check, by wiring federal funds or by an electronic funds transfer ("EFT").
Orders for the purchase of shares of a Fund will be confirmed at an offering
price equal to the net asset value per share next determined after receipt of
the order in proper form by KDI (generally as of the close of the Exchange on
that day) plus, in the case of Class A shares, the applicable sales charge.
Orders received by dealers or other firms prior to the close of the Exchange and
received by KDI prior to the close of its business day will be confirmed at the
offering price effective as of the close of the Exchange on that day. The FUND
reserves the right to determine the net asset value more frequently than once a
day if deemed desirable. Dealers and other financial services firms are
obligated to transmit orders promptly.
Orders for shares of a Fund received by broker-dealers prior to that day's
close of trading on the Exchange and transmitted to the FUND prior to its close
of business that day will receive the offering price equal to the net asset
value per share computed at the close of trading on the Exchange on the same day
plus, in the case of Class A shares, the front end sales charge. Orders received
by broker-dealers after that day's close of trading on the Exchange and
transmitted to the FUND prior to the close of business on the next business day
will receive the next business day's offering price.
Orders for shares of a Fund received directly by the FUND from you will
receive the offering price equal to the net asset value per share next computed
after the FUND receives the purchase order from you plus, in the case of Class A
shares, the front end sales charge.
Your initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases.
Shares become entitled to income distributions declared on the first business
day following receipt by KIRC of payment for the shares. It is the investor's
responsibility to see that his dealer promptly forwards payment to KDI for
shares being purchased through the dealer.
The FUND reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
Shareholder inquiries should be directed to KIRC by calling toll free 1-800-
343-2898 or writing to KIRC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
Each Fund offers three classes of shares:
CLASS A SHARES -- FRONT END LOAD OPTION
Class A shares are sold with a sales charge at the time of purchase. Class A
shares are not subject to a sales charge when they are redeemed (except that
shares sold in a single purchase in excess of $1,000,000 without a front end
sales charge will be subject to a contingent deferred sales charge for one
year).
CLASS B SHARES -- BACK END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed during the calendar
year of purchase or within three calendar years after the calendar year of
purchase. Class B shares will automatically convert to Class A shares at the end
of seven calendar years after purchase.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through dealers
who have entered into special distribution agreements with KDI.
Class A and B shares, pursuant to their Distribution Plans, currently pay an
annual service fee of 0.15% of the Fund's average daily net assets attributable
to that class, and Class C shares pay an annual service fee of 0.25% of the
Fund's average daily net assets attributable to Class C. In addition to the
service fee, the Class B and Class C Distribution Plans provide for the payment
of an annual distribution fee of up to 0.75% of the average daily net assets
attributable to their respective classes.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spreading the cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares, in which case
100% of the purchase price is invested immediately, depending on the amount of
the purchase and the length of investment. The Fund will not normally accept any
purchase of Class B shares in the amount of $250,000 or more and will not
normally accept any purchase of Class C shares in the amount of $1,000,000 or
more.
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge as
follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED<F1> OFFERING PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 ..................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000 ........ 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ........ 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 ...... 1.50% 1.52% 1.50%
$1,000,000 and over<F2> ................ 0% 0% 0.25%
<FN>
<F1> Rounded to the nearest one-hundredth percent.
<F2> Purchases of $1,000,000 or more may be subject to a contingent deferred
sales charge of 0.25%. See "Calculation of Contingent Deferred Sales Charge
and Waiver of Sales Charges".
</TABLE>
The sales charge is paid to KDI, which in turn normally reallows a portion to
your broker-dealer. In addition, your broker-dealer currently will be paid
periodic service fees at an annual rate of up to 0.15% of the average daily net
asset value of outstanding shares of Class A sold by your dealer.
Upon written notice to dealers with whom it has dealer agreements, KDI may
reallow up to the full applicable sales charge.
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of a Fund alone or in combination with
Class A shares of other Keystone America Funds. See Exhibit B to this
prospectus. Initial sales charges may also be eliminated for persons purchasing
Class A shares to be included in a managed fee based program (wrap account)
through broker dealers who have entered into special agreements with KDI.
With certain exceptions, purchases of Class A shares in the amount of
$1,000,000 or more on which no sales charge has been paid will be subject to a
contingent deferred sales charge of 0.25% upon redemption during the one year
period commencing on the date the shares were originally purchased. The
contingent deferred sales charge is retained by KDI. See "Calculation of
Contingent Deferred Sales Charges and Waiver of Sales Charges" below.
CLASS A DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures currently
limited to 0.15% annually of the average daily net asset value of Class A shares
to pay expenses associated with the distribution of Class A shares. Amounts paid
by each Fund to KDI under the Class A Distribution Plan are currently used to
pay others, such as dealers, service fees at an annual rate of up to 0.15% of
the average daily net asset value of Class A shares sold by such others and
remaining outstanding on the books of a Fund for specified periods.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With certain exceptions, a Fund may impose a deferred sales charge of
3.00% on shares redeemed during the calendar year of purchase and the first
calendar year after the year of purchase; 2.00% on shares redeemed during the
second calendar year after the year of purchase; and 1.00% on shares redeemed
during the third calendar year after the year of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by KDI. Amounts received by KDI under the
Class B Distribution Plan are reduced by deferred sales charges retained by KDI.
See "Calculation of Contingent Deferred Sales Charges and Waiver of Sales
Charges" below.
Class B shares that have been outstanding during seven calendar years 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 KIRC.) The Class B shares
so converted will no longer be subject to the higher expenses borne by Class B
shares. Because the net asset value per share of the Class A shares may vary
from that of the Class B shares at the time of conversion, although the dollar
value will be the same, a shareholder may receive more or fewer Class A shares
than the number of Class B shares converted. Under current law, it is the FUND's
opinion that such a conversion will not constitute a taxable event under federal
income tax law. In the event that this ceases to be the case, the Board of
Trustees will consider what action, if any, is appropriate and in the best
interests of the Class B shareholders.
CLASS B DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan with respect to its Class B shares
(the "Class B Distribution Plan") that provides for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class B shares
(currently limited to 0.90%) to pay expenses of the distribution of Class B
shares. Amounts paid by a Fund under the Class B Distribution Plan are used to
pay others (dealers) (1) a commission at the time of purchase normally equal to
3.00% of the value of each share sold; and/or (2) service fees currently at an
annual rate of 0.15% of the average daily net asset value of shares sold by such
others and remaining outstanding on the books of the Fund for specified periods.
See "Distribution Plans" below.
CLASS C SHARES
Class C shares are offered only through dealers who have special distribution
agreements with KDI. Class C shares are offered at net asset value, without an
initial sales charge. With certain exceptions, each Fund may impose a deferred
sales charge of 1.00% on shares redeemed within one year after the date of
purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If
imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to you. The deferred sales charge is retained by KDI. See
"Calculation of Contingent Deferred Sales Charges and Waiver of Sales Charges"
below.
CLASS C DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan with respect to its Class C shares
(the "Class C Distribution Plan") that provides for expenditures at an annual
rate of up to 1.00% (currently limited to 0.90%) of the average daily net asset
value of Class C shares to pay expenses of the distribution of Class C shares.
Amounts paid by a Fund under the Class C Distribution Plan are currently used to
pay others (dealers) (1) a payment at the time of purchase of 1.00% of the value
of each share sold, such payment to consist of a commission in the amount of
0.75% plus the first year's service fee in advance in the amount of 0.25%, and
(2) beginning approximately fifteen months after purchase, a commission at an
annual rate of 0.75% (subject to the NASD rule -- see "Distribution Plans") plus
service fees at an annual rate of 0.25%, respectively, of the average daily net
asset value of each share sold by such others and remaining outstanding on the
books of each Fund for specified periods. See "Distribution Plans" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class A,
Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net cost of such shares. No contingent
deferred sales charge is imposed when amounts redeemed are derived from (1)
increases in the value of an account above the net cost of such shares due to
increases in the net asset value per share of such shares; (2) certain shares
with respect to which a Fund did not pay a commission on issuance, including
shares acquired through reinvestment of dividend income and capital gains
distributions; (3) Class C shares and certain Class A shares held for more than
one year from the date of purchase; or (4) Class B shares held during more than
four consecutive calendar years. Upon request for redemption, shares not subject
to the contingent deferred sales charge will be redeemed first. Thereafter,
shares held the longest will be the first to be redeemed.
Each Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a contingent deferred sales charge to
certain Directors, Trustees, officers and employees of the Fund and Keystone and
certain of their affiliates, to registered representatives of firms with dealer
agreements with KDI and to a bank or trust company acting as a trustee for a
single account.
In addition, no contingent deferred sales charge is imposed on a redemption of
shares of a Fund in the event of (1) death or disability of the shareholder; (2)
a lump-sum distribution from a 401(k) plan or other benefit plan qualified under
the Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of accounts having an aggregate net asset value of
less than $1,000; or (5) automatic withdrawals under an automatic withdrawal
plan of up to 1 1/2% per month of the shareholder's initial account balance.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
From time to time, KDI may provide promotional incentives, including
reallowance of up to the entire sales charge, to certain dealers whose
representatives have sold or are expected to sell significant amounts of a Fund.
In addition, from time to time, dealers may receive additional cash payments.
KDI may provide written information to dealers with whom it has dealer
agreements that relates to sales incentive campaigns conducted by such dealers
for their representatives as well as financial assistance in connection with
preapproved seminars, conferences and advertising. No such programs or
additional compensation will be offered to the extent they are prohibited by the
laws of any state or any self-regulatory agency such as the National Association
of Securities Dealers, Inc. ("NASD"). Dealers to whom substantially the entire
sales charge on Class A shares is reallowed may be deemed to be underwriters as
that term is defined under the Securities Act of 1933.
KDI may also pay a transaction fee (up to the level of payments allowed to
dealers for the sale of shares, as described above) to banks and other financial
services firms that facilitate transactions in shares of a Fund for their
clients. The Glass-Steagall Act currently limits the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the
Glass-Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
what action, if any, is appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein, and banks and financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTION PLANS
Each Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares pursuant
to Rule 12b-1 under the 1940 Act. Payments under the Class A Distribution Plans
are currently limited to 0.15% annually of the average daily net asset value of
Class A shares. The Class B Distribution Plans and the Class C Distribution
Plans provide for the payment at an annual rate of up to 1.00% of the average
daily net asset value of Class B shares and Class C shares, respectively,
although payments under the Class B and Class C Distribution Plans are each
currently limited to 0.90%.
A new rule adopted by the NASD limits the amount that a Fund may pay annually
in distribution costs for the sale of its shares and shareholder service fees.
The rule limits annual expenditures to 1% of the aggregate average daily net
asset value of its shares, of which 0.75% may be used to pay such distribution
costs and 0.25% may be used to pay shareholder service fees. The new NASD rule
also limits the aggregate amount that a Fund may pay for such distribution costs
to 6.25% of gross share sales since the inception of a 12b-1 Distribution Plan,
plus interest at the prime rate plus 1% on such amounts (less any contingent
deferred sales charges paid by shareholders to KDI).
KDI 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 KDI from a Fund. KDI intends
to seek full payment of such charges from a Fund (together with annual interest
thereon at the prime rate plus one percent) at such time in the future as, and
to the extent that, payment thereof by a Fund would be within the permitted
limits.
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. After the termination of a Class B Distribution Plan,
however, KDI would be entitled to receive payment, at the annual rate of 1.00%
of the average daily net asset value of Class B shares, as compensation for its
services which had been earned at any time during which such Class B
Distribution Plan was in effect. For the Florida, Pennsylvania, Texas,
Massachusetts and New York Insured Funds, unreimbursed Class B Distribution Plan
expenses at March 31, 1994 were $1,296,714 (1.7% of total net assets),
$1,408,304 (2.3% of total net assets), $119,969 (2.6% of total net assets),
$120,510 (3.3% of total net assets), and $149,797 (4.7% of total net assets),
respectively.
For the year ended March 31, 1994, the Florida, Pennsylvania and Texas Funds
and for the period from February 4, 1994 (commencement of operations) to March
31, 1994, the Massachusetts and New York Insured Funds paid KDI (1) $69,333,
$47,974, $3,293, $155, and $128, respectively, pursuant to each Fund's Class A
Distribution Plan; (2) $91,806, $117,658, $10,756, $1,306, and $1,567,
respectively, pursuant to each Fund's Class B Distribution Plan; and (3)
$91,943, $62,419, $5,929, $426, and $340, respectively, pursuant to each Fund's
Class C Distribution Plan. The Funds make no payments in connection with the
sale of their shares other than the fee paid to its Principal Underwriter.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell. Payments pursuant to a Distribution Plan are
included in the operating expenses of the class.
HOW TO REDEEM SHARES
Your shares of a Fund may be redeemed for cash at their net asset value upon
written order by you to the FUND, c/o KIRC, and presentation to the FUND of a
properly endorsed share certificate if certificates have been issued. Your
signature(s) on the written order and certificates must be guaranteed as
described below. In order to redeem by telephone or to engage in telephone
transactions generally, you complete the authorization in your account
application. Proceeds for shares redeemed by telephonic order will be deposited
by wire or EFT only to the bank account designated in your account application.
At various times, the FUND may be requested to redeem a Fund's shares for
which it has not yet received good payment. In such a case, the FUND may delay
the mailing of a redemption check or wiring or EFT of redemption proceeds until
good payment has been collected for the purchase of such shares. This may take
up to 15 days. Any delay may be avoided by purchasing shares either with a
certified check or bank wire of funds or EFT. Although the mailing of a
redemption check or wiring or EFT of redemption proceeds may be delayed, the
redemption value will be determined and the redemption processed in the ordinary
course of business upon receipt of proper documentation. In such a case, after
the redemption and prior to the release of the proceeds, no appreciation or
depreciation will occur in the value of the redeemed shares and no interest will
be paid on the redemption proceeds. If the payment of a redemption 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 will be made within seven days thereafter except
as discussed herein.
You may also redeem your shares through broker-dealers. KDI, acting as agent
for the FUND, stands ready to repurchase a Fund's shares upon orders from
dealers at the redemption value described above computed on the day KDI receives
the order. If KDI has received proper documentation, it will pay the redemption
proceeds to the broker-dealer placing the order within seven days thereafter.
KDI charges no fees for this service. However, your broker-dealer may do so.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
U.S. COMMERCIAL BANK OR TRUST COMPANY OR OTHER PERSONS ELIGIBLE TO GUARANTEE
SIGNATURES UNDER THE SECURITIES ACT OF 1934 AND KIRC'S POLICIES. The FUND and
KIRC may waive this requirement, but may also require additional documents in
certain cases. Currently, the requirement for a signature guarantee has been
waived on redemptions of $50,000 or less where the account address of record has
been the same for a minimum period of 30 days. The FUND and KIRC reserve the
right to withdraw this waiver at any time.
If the FUND receives a redemption order, but you have not clearly indicated
the amount of money or number of shares of the Fund involved, the FUND cannot
execute the order. In such cases, the FUND will request the missing information
from you and process the order on the day such information is received.
TELEPHONE
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898.
In order to insure that instructions received by KIRC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If the redemption proceeds are less than $2,500, they will be mailed by check.
If they are $2,500 or more, they will be mailed, wired or sent by EFT to your
previously designated bank account as you direct. If you do not specify how you
wish your redemption proceeds to be sent, they will be mailed by check.
If you cannot reach the FUND by telephone, you should follow the procedures
for redeeming by mail or through a broker as set forth herein.
SMALL ACCOUNTS
Due to the high cost of maintaining small accounts, the FUND reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the FUND to pay for all
redemptions in cash, the FUND may authorize payment to be made in portfolio
securities or other property. The FUND has obligated itself, however, under the
1940 Act to redeem for cash all shares of a Fund presented for redemption by any
one shareholder in any 90-day period up to the lesser of $250,000 or 1% of the
Fund's net assets. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and, to the extent permitted by law, would be readily marketable.
Shareholders receiving such securities would incur brokerage costs when these
securities are sold.
REDEMPTION OF CERTAIN CLASS A SHARES
Certain purchases of Class A Shares in the amount of $1,000,000 or more, on
which no initial sales charge has been paid, are subject to a contingent
deferred sales charge of 0.25%. See "Class A Shares."
GENERAL
The FUND reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose or change fees including fees for services in connection
with exchanges.
Except as otherwise noted, neither the FUND, KIRC nor KDI assumes
responsibility for the authenticity of any instructions received by any of them
from a shareholder in writing, over the Keystone Automated Response Line
("KARL") or by telephone. KIRC will employ reasonable procedures to confirm that
instructions received over KARL or by telephone are genuine. Neither the FUND,
KIRC nor KDI will be liable when following instructions received over KARL or by
telephone that KIRC reasonably believes to be genuine. If, for any reason,
reasonable procedures are not followed, the FUND, KIRC or KDI may be liable for
any losses due to unauthorized or fraudulent instructions.
The FUND may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the FUND
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from KIRC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price, total return and
yield quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a week.
EXCHANGES
If you have obtained the appropriate prospectus, you may exchange shares of a
Fund for shares of certain other Keystone America Funds and Keystone Liquid
Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone America
Funds and Class A shares of KLT;
Class B shares may be exchanged for Class B shares of other Keystone America
Funds and Class B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone America
Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are
(1) Class A shares where the original purchase was for $1,000,000 or more
and no sales charge was paid,
(2) Class B shares that have been held for less than four years, or
(3) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares by calling toll free 1-800-343-2898, by writing KIRC
or by calling KARL. Shares purchased by check are eligible for exchange after 15
days. There is a $10.00 fee for each exchange. If an exchange order is made by
an individual investor using KARL, there is no fee. If an exchange order is made
by anyone other than an individual investor using KARL, there is a $5 fee. The
FUND reserves the right, after providing shareholders with any required notice
to shareholders, to terminate this exchange offer or to change its terms,
including the right to change the fee for any exchange.
Orders to exchange shares of a Fund for shares of KLT will be executed by
redeeming the shares of the Fund and purchasing shares of KLT at the net asset
value of KLT shares next determined after the proceeds from such redemption
become available, which may be up to seven days after such redemption. In all
other cases, orders for exchanges received by the FUND prior to 4:00 p.m. 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. on any business day will be executed at the respective
net asset values determined at the close of the next business day.
An excessive number of exchanges may be disadvantageous to the FUND.
Therefore, the FUND, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the Funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. Exchanges are subject to the minimum initial purchase requirements of
the Fund being acquired. An exchange constitutes a sale for federal income tax
purposes.
The exchange privilege is available only in states where shares of the Fund
being acquired may legally be sold.
KEYSTONE AMERICA MONEY LINE
Keystone America Money Line eliminates the delay of mailing a check or the
expense of wiring funds. You must request the service on your application.
Keystone America Money Line allows you to authorize electronic transfers of
money to purchase a Fund's shares in any amount and to redeem up to $50,000
worth of a Fund's shares. You can use Keystone America Money Line like an
"electronic check" to move money between your bank account and your account in
the FUND with one telephone call. You must allow two business days after the
call for the transfer to take place. For money recently invested, you must allow
normal check clearing time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in your
Keystone America account. Once proper authorization is given, your bank account
will be debited to purchase shares in the Fund specified in your account
application. You will receive confirmation from KDI for every transaction.
To change the amount of or terminate a Keystone America Money Line service
(which could take up to 30 days), you must write to KIRC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, and include your account number.
AUTOMATIC WITHDRAWAL PLAN
Under an Automatic Withdrawal Plan, if your account for a Fund's shares has a
value of at least $10,000, you may arrange for regular monthly or quarterly
fixed withdrawal payments. Each payment must be at least $100 and may be as much
as 1.5% per month or 4.5% per quarter of the total net asset value of the Fund
shares in your account when the Automatic Withdrawal Plan is opened. Excessive
withdrawals may decrease or deplete the value of your account. Because of the
effect of the applicable sales charge, a Class A investor should not make
continuous purchases of a Fund's shares while participating in an Automatic
Withdrawal Program.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America Fund. This results in more shares being
purchased when the selected fund's net asset value is relatively low and fewer
shares being purchased when the fund's net asset value is relatively high, which
may cause a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must have established an
account in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and the fund in
which the investment is to be made. Thereafter, on the first day of the
designated month an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and invested
in shares of the designated fund. If you are a Class A investor and paid a sales
charge on your initial purchase, the shares purchased will be eligible for
Rights of Accumulation and the sales charge applicable to the purchase will be
determined accordingly. In addition, the value of shares purchased will be
included in the total amount required to fulfill a Letter of Intent. If a sales
charge was not paid on the initial purchase, a sales charge will be imposed at
the time of subsequent purchases and the value of shares purchased will become
eligible for Rights of Accumulation and Letters of Intent.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any of your
Keystone America Funds automatically invested to purchase Class A shares of any
other Keystone America Fund. You may select this service on the application and
indicate the Keystone America Fund(s) into which distributions are to be
invested. The value of shares purchased will be ineligible for Rights of
Accumulation and Letters of Intent. Two dimensional investing is available only
in states where shares of the Fund being acquired may legally be sold.
OTHER SERVICES
Under certain circumstances you may, within 30 days after a redemption,
reinstate your account at current net asset value.
PERFORMANCE DATA
From time to time a Fund may advertise "total return," "current yield" and a
"tax equivalent yield." ALL FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. Total return and total yield are
computed separately for each class of shares of a Fund. Total return refers to a
Fund's average annual compounded rates of return over specified periods
determined by comparing the initial amount invested in a particular class to the
ending redeemable value of that amount. The resulting equation assumes
reinvestment of all dividends and distributions and deduction of the maximum
sales charge and all recurring charges, if any, applicable to all shareholder
accounts. The exchange fee is not included in the calculation.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period. Such yield will include income from sources other than municipal
obligations, if any.
Tax equivalent yield is, in general, the current yield divided by a factor
equal to one minus a stated income tax rate and reflects the yield a taxable
investment would have to achieve in order to equal on an after-tax basis a
tax-exempt yield.
Any given yield or total return quotation should not be considered
representative of a Fund's yield or total return for any future period.
The FUND may also include comparative performance information for each class
of shares when advertising or marketing the FUND's shares, such as data from
Lipper Analytical Services, Inc. or other industry publications.
FUND SHARES
The FUND currently issues shares of five separate series evidencing interests
in different portfolio securities. Each Fund issues three classes of shares. The
FUND is authorized to issue additional series or classes of shares. Shares of a
Fund participate proportionately in dividends and distributions and have equal
voting, liquidation and other rights with other shares of the Fund except that
(1) expenses related to the distribution of each class of shares, or other
expenses that the Board of Trustees may designate as class expenses, from time
to time, are borne solely by each class; (2) each class of shares has exclusive
voting rights with respect to its Distribution Plan; (3) each class has
different exchange privileges; and (4) each class has a different designation.
When issued and paid for, the shares of each Fund will be fully paid and
nonassessable by the FUND. Shares of each Fund may be exchanged as explained
under "Shareholder Services," but will have no other preference, conversion,
exchange or preemptive rights. Shares are redeemable, transferable and freely
assignable as collateral. There are no sinking fund provisions.
Shareholders of a Fund are entitled to one vote for each full share owned and
fractional votes for fractional shares on all matters subject to Fund vote.
Shares of a Fund vote together except when required by law to vote separately by
class. The FUND does not have annual meetings. The FUND will have special
meetings, from time to time, as required under its Declaration of Trust and
under the 1940 Act. As provided in the FUND's Declaration of Trust, shareholders
have the right to remove Trustees by an affirmative vote of two-thirds of the
outstanding shares. A special meeting of the shareholders will be held when 10%
of the outstanding shares request a meeting for the purpose of removing a
Trustee. As prescribed by Section 16(c) of the 1940 Act, shareholders may be
eligible for shareholder communication assistance in connection with the special
meeting.
Under Massachusetts law, it is possible that a FUND shareholder may be held
personally liable for the FUND's obligations. The FUND's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the FUND's obligations and provides indemnification from FUND
assets for any shareholder held personally liable for the FUND's obligations.
Disclaimers of such liability are included in each Fund agreement.
ADDITIONAL INFORMATION
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519, is a
wholly-owned subsidiary of Keystone. As previously mentioned, KIRC serves as the
FUND's transfer agent and dividend disbursing agent.
When the FUND determines from its records that more than one account in the
FUND is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the FUND intends, when an annual
report or a semi-annual report of the FUND is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the FUND
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
EXHIBIT A
KEYSTONE AMERICA FLORIDA TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Florida does not presently impose an income tax on individuals and thus
individual shareholders of the Florida Fund will not be subject to any Florida
state income tax on distributions received from the Florida Fund. Shares of the
Florida Fund may, however, be subject to Florida intangible personal property
tax imposed on certain property held on January 1 of each year. Corporate
shareholders, depending on the domicile of the corporation, may be subject to
Florida corporate income taxes depending on the portion of the Florida Fund's
income that is allocable to Florida under applicable Florida law.
According to a technical assistance advisement from the State of Florida,
Department of Revenue, shares of the Florida Fund owned by a Florida resident
will be exempt from the intangible personal property tax so long as its
portfolio assets consist 100% of securities that are exempt from the intangible
personal property tax, including Florida municipal bonds and/or municipal bonds
issued by the U.S. Government or the governments of Puerto Rico or Guam. The
technical assistance advisement will not be binding on the Department of Revenue
for any shareholder of the Fund; however, such advisements are considered
helpful in understanding the Department's position on any particular tax issue.
SPECIAL FACTORS AFFECTING THE FLORIDA FUND
Under current law, the State of Florida is required to maintain a balanced
budget so that current expenses are met from current revenues. Florida does not
currently impose a tax on personal income. It does impose a tax on corporate
income derived from activities within the State. In addition, Florida imposes an
ad valorem tax on certain intangible property (see above) as well as sales and
use taxes. These taxes are the principal source of funds to meet State expenses,
including repayment of, and interest on, obligations backed solely by the full
faith and credit of the State.
Florida's Constitution permits the issuance of state or municipal obligations
pledging the full faith and credit of the State, with a concurring vote by the
respective electors, to finance or refinance capital projects authorized by the
Legislature. The State Constitution also provides that the Legislature shall
appropriate monies sufficient to pay debt service on state bonds pledging the
full faith and credit of the State as they become due. All State tax revenues,
other than trust funds dedicated by the State Constitution for other purposes,
are available for such an appropriation, if required.
On the other hand, municipalities and other political subdivisions of the
State principally rely on a combination of ad valorem taxes on real property,
user fees and occupational license fees to meet their day-to-day expenses
including the repayment of principal of, and interest on, their obligations
backed by their full faith and credit. (Revenue bonds, of course, are dependent
on the revenue generated by a specific facility or enterprise.)
Florida has experienced substantial population increases as a result of
migration to Florida from other areas of the U.S. and from foreign countries.
This population growth is expected to continue, and it is anticipated that
corresponding increases in State revenues will be necessary during the next
decade to meet increased burdens on the various public and social services
provided by the State.
Florida's ability to meet increasing expenses will be dependent in part upon
the State's continued ability to foster business and economic growth. Florida
has experienced significant increases in the technology-based and other light
industries and in the service sector. This growth has diversified the State's
overall economy, which at one time was dominated by the citrus and tourism
industries. The State's economic and business growth could be restricted,
however, by the natural limitations on Florida's water supplies.
<PAGE>
KEYSTONE AMERICA MASSACHUSETTS TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Under Massachusetts law, individual shareholders of the Massachusetts Fund who
are subject to Massachusetts personal income tax will not be subject to
Massachusetts personal income tax on dividends paid by the Massachusetts Fund to
the extent such dividends are exempt from federal income tax and are derived
from interest payments on Massachusetts municipal securities. Long term capital
gains distributions are taxable as long term capital gains, except that such
distributions derived from the sale of certain Massachusetts obligations are
exempt from Massachusetts personal income tax. These obligations, which are few
in number, are those issued pursuant to legislation that specifically exempts
gain on their sale from Massachusetts income taxation. Dividends and other
distributions are not exempt from Massachusetts corporate excise tax.
SPECIAL FACTORS AFFECTING THE MASSACHUSETTS FUND
During the past decade, the Massachusetts economy shifted from labor intensive
manufacturing to services, especially in the medical and biotechnology areas.
Although The Commonwealth experienced an economic slowdown during the recession,
especially in high technology, real estate and banking, and defense, there are
signs of improvement. While roughly 9.5% of the employment base was lost between
1989 and 1991, employment rose 0.4% between November, 1992 and November, 1993.
Although job losses continued in high tech manufacturing and finance during 1992
and 1993, strong gains were registered in services, construction and high tech
non-manufacturing. The December, 1993 unemployment rate was 6.3% compared to
6.4% for the nation. In addition, per capita personal income averaged 118% of
the national average in 1992.
Although The Commonwealth experienced quite a slowdown during the recession
with spending exceeding revenues, beginning in 1991 the Commonwealth has
experienced a turn-around in its finances with revenues exceeding spending.
Budgeted expenditures for fiscal 1989, 1990 and 1991 were approximately $12.643
billion, $13.260 billion and $13.659 billion, respectively while budgeted
revenues and other sources for those years were approximately $11.970, $12.008
billion and $13.634 billion, respectively. By comparison, budgeted revenues and
other sources increased by approximately 0.7% from fiscal 1991 to fiscal 1992,
while tax revenues increased by 5.4% for the same period. Budgeted expenditures
in fiscal 1992 were 1.7% lower than fiscal 1991 budgeted expenditures.
Furthermore, total revenues and other sources for fiscal 1993 increased
approximately 6.9% from fiscal 1992, while tax revenues increased by 4.7% for
the same period. Budgeted expenditures and other uses in fiscal 1993 were
approximately 9.6% higher than fiscal 1992 expenditures and other uses. Fiscal
1993 ended with positive fund balances of $562.5 million, including a combined
balance of $452.1 million in the stabilization and undesignated general funds.
By comparison, The Commonwealth ended the 1989 fiscal year with fund balances in
deficit by $319.3 million.
The fiscal 1994 budget, as signed into law by the Governor on July 19, 1993,
provides for expenditures of approximately $15.500 billion, an increase of 5.5%
over fiscal 1993 levels. Budgeted revenues for fiscal 1994 are estimated to be
approximately $15.483 billion, which is 5.3% higher than fiscal 1993
expenditures. This amount includes estimated tax revenues of approximately
$10.560 billion, which is 6.3% higher than fiscal 1993 tax revenues. For fiscal
1994, a combined balance of $541.4 million is expected in the stabilization and
undesignated general funds. The fiscal 1994 budget is based upon numerous
spending and revenue estimates, the achievement of which cannot be assured.
In June 1993, new comprehensive education reform legislation was enacted. It
is expected that this legislation will require annual increases in expenditures
for education purposes above fiscal 1993 base spending of $1.289 billion of
approximately $175 million in fiscal 1994, $141 million in fiscal 1995 and $662
million in fiscal 1996. The fiscal 1994 budget includes $175 million in
appropriations to satisfy this legislation.
In November 1980, voters in The Commonwealth approved a state-wide limitation
initiative petition, commonly known as Proposition 2 1/2, to constrain the
levels of property taxation and to limit the charges and fees imposed on cities
and towns by certain governmental entities. Many communities have responded to
the limitations of Proposition 2 1/2 through statutorily permitted overrides and
exclusions. Override activity peaked in fiscal 1991 when 100 of 182 communities
had successful votes, adding $58.5 million to their levy limits. During fiscal
years 1992 and 1993, 123 communities had successful votes totalling $47.4
million. Although Proposition 2 1/2 will continue to constrain local property
tax revenues, significant capacity exists for overrides in nearly all cities and
towns.
An expanded discussion is contained in the Statement of Additional
Information.
KEYSTONE AMERICA NEW YORK INSURED TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Individual shareholders of the New York Insured Fund who are subject to New
York State and New York City personal income tax will not be subject to New York
State or City personal income tax on dividends paid by the New York Insured Fund
to the extent that they are derived from interest on obligations of the State of
New York and its political subdivisions that is exempt from federal income tax.
In addition, dividends derived from interest on debt obligations issued by
certain other governmental entities (for example, U.S. territories) will be
similarly exempt.
For New York State and City personal income tax purposes, long term capital
gain distributions are taxable as long term capital gains regardless of the
length of time shareholders have owned their shares. Short term capital gains
and any other taxable income are taxable as ordinary income.
To the extent that investors are obligated to pay state or local taxes outside
of the State of New York, dividends earned by an investment in the New York
Insured Fund may represent taxable income. Distributions from investment income
and capital gains, including exempt-interest dividends, may be subject to New
York State franchise taxes and to the New York City General Corporation Tax, if
received by a corporation subject to those taxes, to state taxes in states other
than New York and to local taxes in cities other than New York City.
SPECIAL FACTORS AFFECTING THE NEW YORK FUND
The New York economy was severely impacted by the recession, but it has begun
to show signs of recovery. The recession has been more severe in New York than
in other parts of the nation, owing to a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an overbuilt real
estate market. More than 564,000 jobs were lost during the recession,
representing 7% of the pre-recession base. During 1993, employment continued to
decline but at diminishing rates (a 0.3% decline during 1993), indicating a
stabilizing economy. A modest job growth of approximately 0.8% is anticipated
for 1994. It is anticipated that New York's service and trade sectors will be
the major contributors to this growth, while the manufacturing sector is
expected to continue to contract. The State's economy is significantly affected
by New York City's economy by virtue of New York City's dominance in population
and economic activity. New York City accounts for approximately 41% of the
State's population and personal income.
The revised 1993-1994 State Financial Plan is based on an economic projection
that New York will perform more poorly than the nation as a whole. Many
uncertainties exist in forecasts of the State's economy, which could have an
adverse effect on the State, and there can be no assurance that the State
economy will not experience worse-than-predicted results in the 1994 fiscal
year, with corresponding material and adverse effects on the State's projections
of receipts and disbursements.
For fiscal 1993, State financial operations produced a $671 million surplus on
a general fund budget of nearly $31 billion. This surplus followed four years of
operating deficits. On a GAAP basis, the accumulated general fund deficit peaked
in 1991 at $6.2 billion and then decreased to $2.6 billion for fiscal 1993. Debt
reform is the principal cause for this improvement. Short-term borrowing is only
$850 million for the current fiscal year, the lowest level since 1969. To reduce
borrowing costs and improve market access, the Governor is proposing a
constitutional amendment to limit issuance of appropriation bonds and to create
tax-backed debt.
The State's updated financial plan estimates that fiscal 1994 will achieve an
ending cash balance of approximately $299 million. This larger than anticipated
surplus is a result of a stabilizing economy, improving tax collections and
slowing expenditure growth. The 1993 and 1994 budgets were enacted in a timely
manner and were based on realistic economic forecasts, conservative revenue
assumptions and some spending restraint. The Governor's proposed budget for
fiscal 1995 provides for general fund spending growth of 4.3%, use of the
current year surplus, modest tax cuts and a small level of non-recurring
measures. The fiscal 1995 financial plan is based on a forecast of slow economic
growth and projects increases in the personal income tax and user taxes and fees
of 5.3% and 4.1%, respectively.
Significant litigation exists at the State level of government. A suit filed
by a taxpayer activist challenges the constitutionality of the transportation
financing plan. Also, in November 1993, the Court of Appeals affirmed a lower
court's decision, declaring that a change in the actuarial funding method for
determining contributions by the State and its local governments to their
respective retirement systems was unconstitutional. The State may also be liable
for significant payments related to a U.S. Supreme Court decision involving
abandoned property.
An expanded discussion is contained in the Statement of Additional
Information.
<PAGE>
KEYSTONE AMERICA PENNSYLVANIA TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Individual shareholders of the Pennsylvania Fund who are subject to the
Pennsylvania personal income tax, as either residents or non-residents of the
Commonwealth of Pennsylvania, will not be subject to Pennsylvania personal
income tax on distributions of interest made by the Pennsylvania Fund that are
attributable to (1) obligations issued by the Commonwealth of Pennsylvania, any
public authority, commission, board or agency created by the Commonwealth of
Pennsylvania, any political subdivision of the Commonwealth of Pennsylvania or
any public authority created by any such political subdivision (collectively,
"Pennsylvania Obligations"); and (2) obligations of the United States and
certain qualifying agencies, instrumentalities, territories and possessions of
the United States, the interest from which are statutorily free from state
taxation in the Commonwealth of Pennsylvania under the laws of the Commonwealth
or the U.S. (collectively, "U.S. Obligations"). Distributions attributable to
most other sources will not be exempt from Pennsylvania personal income tax.
Distributions of gains attributable to Pennsylvania Obligations and U.S.
Obligations (collectively "Exempt Obligations") will be subject to the
Pennsylvania personal income tax.
Shares of the Pennsylvania Fund that are held by individual shareholders who
are Pennsylvania residents subject to the Pennsylvania county personal property
tax will be exempt from such tax to the extent that the Pennsylvania Fund's
portfolio consists of Exempt Obligations on the annual assessment date.
Nonresidents of the Commonwealth of Pennsylvania are not subject to the
Pennsylvania county personal property tax. Shares of the Pennsylvania Fund that
are held by individual shareholders who are residents of the City of Pittsburgh
or the School District of Pittsburgh, or both, will be exempt from the personal
property tax imposed by each such jurisdiction to the extent that the
Pennsylvania Fund's portfolio consists of Exempt Obligations on the annual
assessment date. Corporations are not subject to Pennsylvania personal property
taxes. For shareholders who are residents of the City of Philadelphia,
distributions of interest derived from Exempt Obligations are not taxable for
purposes of the Philadelphia School District investment income tax provided that
the Pennsylvania Fund reports to its investors the percentage of Exempt
Obligations held by it for the year. The Pennsylvania Fund will report such
percentage to its shareholders.
Distributions of interest, but not gains, realized on Exempt Obligations are
not subject to the Pennsylvania corporate income tax. The Pennsylvania
Department of Revenue also takes the position that shares of funds similar to
the Pennsylvania Fund are not considered exempt assets of a corporation for the
purpose of determining its capital stock value subject to the Commonwealth's
capital stock and franchise taxes.
SPECIAL FACTORS AFFECTING THE PENNSYLVANIA FUND
Historically, Pennsylvania is among the leading states in manufacturing and
mining, and its steel and coal industries have been of national importance.
However, due in part to the decline in the steel and coal industries,
Pennsylvania's economy has become more diversified, with major new sources of
growth in the service and trade sectors. The Commonwealth's unemployment rate is
below the national average, and its per capita income is slightly above the
national average. The Commonwealth's General Fund, through which taxes are
received and debt service is made, had unappropriated balance surpluses for the
years ended June 30, 1992 and June 30, 1993.
The Pennsylvania Fund's yield and share price stability are tied in part to
conditions within the Commonwealth. Changes in economic conditions in or
governmental policies of the Commonwealth could have a significant impact on the
performance of Pennsylvania Obligations held by the Pennsylvania Fund. For
example, the Commonwealth's continued dependence on manufacturing, mining and
steel has made the Commonwealth vulnerable to cyclical industry fluctuations,
foreign imports and environmental concerns. Growth in the service and trade
sectors, however, has helped diversify the Commonwealth's economy and reduce its
unemployment rate below the national average. Changes in local economic
conditions or local governmental policies within the Commonwealth, which can
vary substantially by region, could also have a significant impact on the
performance of municipal obligations held by the Pennsylvania Fund. Also, the
Pennsylvania Fund will invest in obligations that are secured by obligors other
than the Commonwealth or its political subdivisions (such as hospitals,
universities, corporate obligors and corporate credit and liquidity providers)
and obligations limited to specific revenue pledges (such as sewer authority
bonds). The creditworthiness of these obligors may be wholly or partly
independent of the creditworthiness of the Commonwealth or its municipal
authorities. The Trustees of the Pennsylvania Fund have the power, however, to
eliminate unsafe investments.
An expanded discussion is contained in the Statement of Additional
Information.
KEYSTONE AMERICA TEXAS TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Texas does not presently impose an income tax on individuals or corporations.
Consequently, neither individual nor corporate shareholders will be subject to
any Texas state income tax on distributions received from the Texas Fund. Texas
does, however, impose a corporate franchise tax on corporations that do business
in Texas or are chartered or authorized to do business in Texas. The corporate
franchise tax imposed on those corporations is an amount equal to the greater of
(1) 1/4 of 1% of the corporation's "taxable capital" apportioned to Texas, less
certain deductions, or (2) 4.5% of the corporation's "taxable earned surplus"
apportioned to Texas, less certain deductions and loss carryforwards. The amount
of "taxable earned surplus" is based generally on the corporation's "reportable
federal taxable income" as computed under the Code. Exempt interest dividends
distributed by the Texas Fund are expected to be excluded from reportable
federal taxable income by federal law and likewise excluded from the taxable
earned surplus component upon which the Texas corporate franchise tax may be
imposed. Corporations that do business in Texas or are chartered or authorized
to do business in Texas should consult their own tax advisors regarding the full
impact of the Texas franchise tax.
Under present law, the Texas Fund will not be subject to Texas corporate
franchise tax.
SPECIAL FACTORS AFFECTING THE TEXAS FUND
Texas' economy continues to recover from the recession that began in the
mid-1980s after a collapse in oil prices, and the State comptroller expects
continued growth in the early 1990s. Also, since the mid-1980's, the economy has
diversified, with the oil and gas industry diminishing in relative importance
while service-producing sectors provide the major sources of job growth.
Based on information from the Texas Employment Commission, non-farm employment
has reached an all-time high of 7.6 million. The unemployment rate for 1994 is
estimated at 6.9 percent compared to a national average of 6.8 percent. The
Texas State Government ended fiscal year 1993 with a positive cash balance in
the General Fund. This was the sixth consecutive year that the Texas State
Government had ended a fiscal year with a positive balance.
On May 31, 1993, the Texas Governor signed a comprehensive legislative
revision to the school finance provisions of the Texas Education Code. The
legislative revisions resulted from a series of court decisions commonly
referred to as Edgewood v. Kirby, in which Texas courts have declared the Texas
school finance system unconstitutional under Texas law. Previous legislative
efforts to correct the school finance system were declared unconstitutional. A
state district court has ruled that the reform legislation is constitutional;
however, the decision has been appealed to the Texas Supreme Court. Either the
legislative revision or successful challenges to such revision could
substantially and adversely affect the obligation and ability of certain Texas
school districts to repay their property tax supported bonds. A successful
challenge to the legislative plan could also adversely affect financial
condition and prospects of the Texas State Government.
Although it is anticipated that most of the bonds held by the Texas Fund will
be revenue obligations or general obligations of local governments or
authorities, rather than general obligations of the State of Texas itself, any
circumstances that adversely affect the State's credit standing may also affect
the market value of these other bonds held by the Texas Fund, either directly or
indirectly, as a result of a dependency of local governments and other
authorities upon State aid and reimbursement programs.
An expanded discussion is contained in the Statement of Additional
Information.
EXHIBIT B
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of a Fund alone or in combination with
Class A shares of other Keystone America Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Code; a pension, profit-sharing or other employee benefit plan whether or
not qualified under Section 401 of the Internal Revenue Code; or other organized
groups of persons, whether incorporated or not, provided the organization has
been in existence for at least six months and has some purpose other than the
purchase of redeemable securities of a registered investment company at a
discount. In order to qualify for a lower sales charge, all orders from an
organized group will have to be placed through a single investment dealer or
other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may combine
concurrent direct purchases of Class A shares of two or more of the "Eligible
Funds," as defined below. For example, if a Purchaser concurrently invested
$75,000 in one of the other "Eligible Funds" and $75,000 in a Fund, the sales
charge would be that applicable to a $150,000 purchase, i.e., 3.75% of the
offering price, as indicated in the Sales Charge schedule in the prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of a Fund's
shares, a Purchaser is entitled to accumulate current purchases with the current
value of previously purchased Class A shares of the Fund and Class A shares of
certain other eligible funds that are still held in (or exchanged for shares of
and are still held in) the same or another eligible fund ("Eligible Fund(s)").
The Eligible Funds presently consist of the Keystone America Funds and Keystone
Liquid Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75% of the offering price as indicated in the Sales
Charge schedule. KIRC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By doing so, the Purchaser agrees to invest within a
thirteen-month period a specified amount, which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor a Fund to sell, the amount
indicated.
After the Letter of Intent is received by KIRC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary), 5% of the dollar amount specified on the application will be held
in escrow by KIRC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to KDI 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 KDI
or his dealer pay such difference in sales charge, KIRC will redeem an
appropriate number of the escrowed shares in order to realize such difference.
Shares remaining after any such redemption will be released by KIRC. Any
redemptions made by the Purchaser during the thirteen-month period will be
subtracted from the amount of the purchases for purposes of determining whether
the Letter of Intent has been completed. In the event of a total redemption of
the account prior to completion of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption and the balance
will be forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and appoints
KIRC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform KDI or KIRC that a Letter of Intent is
in effect each time a purchase is made.
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 -- Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
2. SP-2 -- Satisfactory capacity to pay principal and interest.
3. SP-3 -- Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+ "). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example, "SP
- -- 1+/A-1+").
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
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.
C. 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.
D. MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
Moody's ratings are as follows:
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 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 (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.
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.
DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES AVAILABLE
TO THE FUND
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S., and a Fund may be subject to the risks associated with the
holding of such property overseas. Various provisions of federal law governing
domestic branches do not apply to foreign branches of domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by a Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer, as borrower. 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 purchased by
a 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 a Fund may
have maturities of more than one year, provided that (1) the Fund is entitled to
payment of principal and accrued interest upon not more than seven days' notice,
and (2) the rate of interest on such notes is adjusted automatically at periodic
intervals that normally will not exceed 31 days, but may extend up to one year.
The notes are deemed to have a maturity equal to the longer of the period
remaining to the next interest rate adjustment or the demand notice period.
Because these types of notes are direct lending arrangements between the lender
and the borrower, such instruments are not normally traded and there is no
secondary market for these notes, although they are redeemable and thus
repayable by the borrower at face value plus accrued interest at any time.
Accordingly, a Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. In connection with master
demand notes, Keystone considers, under standards established by the Board of
Trustees, earning power, cash flow and other liquidity ratios of the borrower
and monitors the ability of the borrower to pay principal and interest on
demand. These notes are not typically rated by credit rating agencies. Unless
rated, a Fund will invest in them only if the issuer meets the criteria
established for commercial paper, discussed in the statement of additional
information, which limits such investments to commercial paper rated A-1 by S&P
and Prime-1 by Moody's.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with member banks of the Federal
Reserve System which have at least $1 billion in assets, primary dealers in U.S.
government securities or other financial institutions believed by Keystone to be
creditworthy. Such persons are required to be registered as U.S. government
securities dealers with an appropriate regulatory organization. Under such
agreements, the bank, primary dealer or other financial institution agrees 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, and such value
is 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, each 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. A 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, a Fund could
experience both delays in liquidating the underlying securities and losses
including (1) possible declines in the value of the underlying securities during
the period while a Fund seeks to enforce its rights thereto; (2) possible
subnormal levels of income and lack of access to income during this period; and
(3) expenses of enforcing its rights. The Board of Trustees of the FUND has
established procedures to evaluate the creditworthiness of each party with whom
a Fund enters into repurchase agreements by setting guidelines and standards of
review for Keystone and monitoring Keystone's actions with regard to repurchase
agreements. It is not expected that a Fund will, in the ordinary course of its
business, enter into a repurchase agreement.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, a Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. A Fund intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will establish a
segregated account with the FUND's custodian containing liquid assets having a
value not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to maintain such value. Reverse repurchase
agreements involve the risk that the market value of the securities that a Fund
is obligated to repurchase may decline below the repurchase price. Borrowing and
reverse repurchase agreements magnify the potential for gain or loss on the
portfolio securities of a Fund and, therefore, increase the possibility of
fluctuation in the Fund's net asset value. Such practices may constitute
leveraging. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its trustee
or receiver may receive an extension of time to determine whether to enforce 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
has taken the position that reverse repurchase agreements are subject to the
percentage limit on borrowings imposed on a Fund under the 1940 Act.
"WHEN ISSUED" SECURITIES
A Fund may also purchase and sell securities and currencies on a when issued
and delayed delivery basis. When issued or delayed delivery transactions arise
when securities or currencies are purchased or sold by a Fund with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield to the Fund at the time of entering into the
transaction. It is expected that a Fund will engage in "when issued"
transactions on a regular basis since a substantial portion of new issues of
municipal obligations is offered on a "when issued" basis. When a Fund engages
in when issued and delayed delivery transactions, a Fund relies on the buyer or
seller, as the case may be, to consummate the sale. Failure to do so may result
in a Fund missing the opportunity to obtain a price or yield considered to be
advantageous. When issued and delayed delivery transactions may be expected to
occur a month or more before delivery is due. However, no payment or delivery is
made by a Fund until it receives payment or delivery from the other party to the
transaction. A separate account of liquid assets equal to the value of such
purchase commitments will be maintained until payment is made. When issued and
delayed delivery agreements are subject to risks from changes in value based
upon changes in the level of interest rates and other market factors, both
before and after delivery. A Fund does not accrue any income on such securities
prior to their delivery. To the extent a Fund engages in when issued and delayed
delivery transactions, it will do so for the purpose of acquiring portfolio
securities consistent with its investment objectives and policies and not for
the purpose of investment leverage. No Fund currently intends to invest more
than 5% of its assets in when issued or delayed delivery transactions.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. A Fund may write (i.e., sell) covered call and put
options. By writing a call option, a Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, a Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. A Fund also may write straddles
(combinations of covered puts and calls on the same underlying security).
A 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
a Fund has written options against all of its securities that 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. The FUND does not expect, however, that this will occur.
A Fund will be considered "covered" with respect to a put option it writes if,
so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, a Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, the Fund might
become obligated to purchase the underlying security for more than its current
price upon exercise.
PURCHASING OPTIONS
A Fund may purchase put or call options, including purchasing put or call
options for the purpose of offsetting previously written put or call options of
the same series. If a Fund is unable to effect a closing purchase transaction
with respect to covered options it has written, a Fund will not be able to sell
the underlying securities or dispose of assets held in a segregated account
until the options expire or are exercised.
An option position may be closed out only in a secondary market for an option
of the same series. Although a Fund generally will write only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market will exist for any particular option at any particular
time, and for some options no secondary market may exist. In such event, it
might not be possible to effect a closing transaction in a particular option.
Options on some securities are relatively new, and it is impossible to predict
the amount of trading interest that will exist in such options. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair a Fund's ability to
use such options to achieve its investment objectives.
OPTIONS TRADING MARKETS. Options in which a Fund will trade are generally
listed on national securities exchanges. Exchanges on which such options
currently are traded include the Chicago Board Options Exchange and the New
York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any exchange but traded in the over-the-counter
market. Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions could fail to
meet their obligations to a Fund. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on its use of options
discussed herein, each Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.
The staff of the Securities and Exchange Commission is of the view that the
premiums that a Fund pays for the purchase of unlisted options, and the value of
securities used to cover unlisted options written by 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 policies relating to
illiquid securities.
FUTURES TRANSACTIONS
A Fund may enter into financial futures contracts and write options on such
contracts. Each Fund intends to enter into such contracts and related options
for hedging purposes. Each Fund will enter into futures contracts on securities
and index-based futures contracts in order to hedge against changes in interest
or exchange rates or securities prices. A futures contract on securities is an
agreement to buy or sell securities at a specified price during a designated
month. A futures contract on a securities index does not involve the actual
delivery of securities, but merely requires the payment of a cash settlement
based on changes in the securities index. A Fund does not make payment or
deliver securities upon entering into a futures contract. Instead, it puts down
a margin deposit, which is adjusted to reflect changes in the value of the
contract and which continues until the contract is terminated.
A Fund may sell or purchase financial futures contracts. When a futures
contract is sold by a Fund, the value of the contract will tend to rise when the
value of the underlying securities declines and to fall when the value of such
securities increases. Thus, a Fund sells futures contracts in order to offset a
possible decline in the value of its securities. If a futures contract is
purchased by a Fund, the value of the contract will tend to rise when the value
of the underlying securities increases and to fall when the value of such
securities declines. Each Fund intends to purchase futures contracts in order to
fix what is believed by Keystone to be a favorable price and rate of return for
securities the Fund intends to purchase.
Each Fund also intends to purchase put and call options on financial 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 a Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires a Fund to pay a premium. In exchange for the premium, a Fund becomes
entitled to exercise the benefits, if any, provided by the futures contract, but
is not required to take any action under the contract. If the option cannot be
exercised profitably before it expires, each Fund's loss will be limited to the
amount of the premium and any transaction costs.
A Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. A Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that 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 a Fund to
manage market or interest rate risk, unanticipated changes in interest rates or
market prices could result in poorer performance than if it had not entered into
these transactions. Even if Keystone correctly predicts interest rate movements,
a hedge could be unsuccessful if changes in the value of a Fund's futures
position did not correspond to changes in the value of its investments. This
lack of correlation between a Fund's futures and securities positions may be
caused by differences between the futures and securities markets or by
differences between the securities underlying the Fund's futures position and
the securities held by or to be purchased for the Fund. Keystone will attempt to
minimize these risks through careful selection and monitoring of each Fund's
futures and options positions.
The Funds do not intend to use futures transactions for speculation or
leverage. Each Fund has the ability to write options on futures, but intends to
write such options only to close out options purchased by the Fund. None of the
Funds will change these policies unless and until the information in the
prospectus and statement of additional information is supplemented.
LOANS OF SECURITIES TO BROKER-DEALERS
A Fund may lend securities to brokers and dealers pursuant to agreements
requiring that the loans be continuously secured by cash or securities of the
U.S. government, its agencies or instrumentalities or any combination of cash
and such securities, as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to a Fund if as a result the aggregate of all outstanding
securities loans exceeds 15% of the value of the Fund's total assets taken at
their current value. A Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other
high-grade, short-term obligations or interest bearing cash equivalents.
Although voting rights attendant to securities loaned pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted by 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, however, to borrowers deemed to be of good standing, under
standards approved by the Board of Trustees, when the income to be earned from
the loan justifies the attendant risks.
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Australia Income Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Equity Income Fund
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund, Inc.
Omega Fund, Inc.
Fund of the Americas
KEYSTONE
Distributors, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
STFFLA-P 8/94
10M
KEYSTONE
AMERICA
FLORIDA
TAX FREE FUND
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Australia Income Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Equity Income Fund
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund, Inc.
Omega Fund, Inc.
Fund of the Americas
KEYSTONE
Distributors, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
STFPA-P 8/94
15M
KEYSTONE
AMERICA
PENNSYLVANIA
TAX FREE FUND
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Australia Income Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Equity Income Fund
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund, Inc.
Omega Fund, Inc.
Fund of the Americas
KEYSTONE
Distributors, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
STFTX-P 8/94
5M
KEYSTONE
AMERICA
TEXAS
TAX FREE FUND
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Australia Income Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Equity Income Fund
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund, Inc.
Omega Fund, Inc.
Fund of the Americas
KEYSTONE
Distributors, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
STFMA-P 8/94
7M
KEYSTONE
AMERICA
MASSACHUSETTS
TAX FREE FUND
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Australia Income Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Equity Income Fund
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund, Inc.
Omega Fund, Inc.
Fund of the Americas
KEYSTONE
Distributors, Inc.
200 Berkeley Street
Boston, Massachusetts 02116-5034
STFNY-P 8/94
15M
KEYSTONE
AMERICA
NEW YORK INSURED
TAX FREE FUND
PROSPECTUS AND
APPLICATION
KEYSTONE AMERICA STATE TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1994
This statement of additional information is not a prospectus, but relates
to, and should be read in conjunction with, the prospectus of Keystone America
State Tax Free Fund (the "FUND") dated August 1, 1994. A copy of the prospectus
may be obtained from Keystone Distributors, Inc. ("KDI"), the FUND's current
principal underwriter ("Principal Underwriter"), 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
TABLE OF CONTENTS
Page
The FUND 2
Investment Policies 2
Investment Restrictions 6
Valuation and Redemption of Securities 9
Sales Charges 10
Distribution Plans 13
Investment Adviser 16
Trustees and Officers 19
Principal Underwriter 25
Brokerage 26
Declaration of Trust 28
Standardized Total Return and Yield Quotations 30
Additional Information 31
Appendix A A-1
Appendix B B-1
Financial Statements F-1
Independent Auditors' Report F-26
(Keystone America Florida Tax Free Fund and
Keystone America Texas Tax Free Fund)
Financial Statements F-27
Independent Auditors' Report F-60
(Keystone America Pennsylvania Tax Free Fund,
Keystone America Massachusetts Tax Free Fund and
Keystone America New York Insured Tax Free Fund)
<PAGE>
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
The FUND is a non-diversified, open-end management investment company
commonly known as a mutual fund. The FUND was formed as a Massachusetts business
trust on September 13, 1990. The FUND is one of the thirty funds managed or
advised by Keystone Custodian Funds, Inc. ("Keystone"), the FUND's investment
adviser. The FUND currently consists of the following five separate series
evidencing interests in different portfolios of securities: Keystone America
Florida Tax Free Fund, Keystone America Massachusetts Tax Free Fund, Keystone
America New York Insured Tax Free Fund, Keystone America Pennsylvania Tax Free
Fund and Keystone America Texas Tax Free Fund (each, a "Fund," and collectively,
the "Funds"). The Keystone America Pennsylvania Tax Free Fund ("Pennsylvania
Fund") and the Keystone America Florida Tax Free Fund ("Florida Fund") were
established on September 19, 1990. The Keystone America Massachusetts Tax Free
Fund ("Massachusetts Fund"), the Keystone America New York Insured Tax Free Fund
("New York Insured Fund") and the Keystone America Texas Tax Free Fund ("Texas
Fund") were established on February 21, 1992. The Massachusetts Fund and the New
York Insured Fund were not offered to the public prior to February 1, 1994.
The essential information about the FUND and its Funds is contained in
its prospectus. This statement of additional information provides additional
information about the FUND and its Funds that may be of interest to some
investors.
For special factors affecting each Fund, see Appendix A to this
statement of additional information.
- --------------------------------------------------------------------------------
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
Each Fund invests primarily in municipal obligations that are exempt
from federal income tax and also exempt from certain specified taxes in the
state for which it is named. In addition, the Funds invest in certain other
securities as described below.
MUNICIPAL OBLIGATIONS
Municipal obligations include debt obligations issued by or on behalf
of a state, a territory or a possession of the United States ("U.S."), the
District of Columbia or any political subdivision, agency or instrumentality
thereof (for example, counties, cities, towns, villages, districts, authorities)
to obtain funds for various public purposes, including the construction of a
wide range of public facilities such as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which municipal obligations may be issued include the
refunding of outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to lend to public or private institutions for the
construction of facilities, such as educational, hospital and housing
facilities. In addition, certain types of industrial development bonds have been
or may be issued by or on behalf of public authorities to finance certain
privately-operated facilities, and certain local facilities for water supply,
gas, electricity or sewage or solid waste disposal. Such obligations are
included within the term municipal obligations if the interest paid thereon
qualifies as fully exempt from federal income tax. The income of certain types
of industrial development bonds used to finance certain privately-operated
facilities (qualified private activity bonds) issued after August 7, 1986, while
exempt from federal income tax, is includable for the purposes of the
calculation of the alternative minimum tax. Other types of industrial
development bonds, the proceeds from which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities, may constitute municipal obligations, although the current federal
tax laws place substantial limitations on the size of such issues.
The two principal classifications of municipal obligations are "general
obligation" and limited obligation or "revenue" bonds. General obligation bonds
are obligations involving the credit of an issuer possessing taxing power and
are payable from the issuer's general unrestricted revenues and not from any
particular fund or revenue source. Their payment may be dependent upon an
appropriation by the issuer's legislative body and may be subject to
quantitative limitations on the issuer's taxing power. The characteristics and
methods of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer. Limited obligation or revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, such as the user of the facility. Industrial
development bonds that are municipal obligations are, in most cases, revenue
bonds and generally are not payable from the unrestricted revenues of the
issuer. The credit quality of industrial development revenue bonds is usually
directly related to the credit standing of the owner or user of the facilities.
There are, of course, variations in the security of municipal obligations, both
within a particular classification and between classifications, depending on
numerous factors.
The yields on municipal obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the municipal obligations market, size of a
particular offering, and the maturity of the obligation and rating of the issue.
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P"), as described below, represent their opinions as to the
quality of the municipal obligations that they undertake to rate. It should be
emphasized, however, that ratings are general and not absolute standards of
quality. Consequently, municipal obligations with the same maturity, interest
rate and rating may have different yields while municipal obligations of the
same maturity and interest rate with different ratings may have the same yield.
It should also be noted that the standards of disclosure applicable to and the
amount of information relating to the financial condition of issuers of
municipal obligations are not as extensive as those generally relating to
corporations.
Subsequent to its purchase by a Fund, an issue of municipal obligations
or other investment may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but Keystone will
consider such an event in its determination of whether the Fund should continue
to hold such obligation in its portfolio.
The ability of each Fund to achieve its investment objectives is
dependent upon the continuing ability of issuers of municipal obligations to
meet their obligations to pay interest and principal when due. Obligations of
issuers of municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the federal Bankruptcy Act, and laws, if any, that may be enacted by Congress
or state legislatures extending the time for payment of principal or interest,
or both, or imposing other constraints upon enforcement of such obligations.
There is also the possibility that as a result of litigation or other
conditions, the power or ability of any one or more issuers to pay, when due,
principal of and interest on its or their municipal obligations may be
materially affected. In addition, the market for municipal obligations is often
thin and can be temporarily affected by large purchases and sales, including
those by a Fund.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations, and similar proposals may well be introduced
in the future. If such a proposal were enacted, the availability of municipal
obligations for investment by the Funds and the value of the Funds' portfolios
could be materially affected, in which event the FUND would reevaluate the
investment objective and policies of its Funds and consider changes in the
structure of the Funds or dissolution.
The Tax Reform Act of 1986 made significant changes in the federal tax
status of certain obligations that were previously fully federally tax-exempt.
As a result, three categories of such obligations issued after August 7, 1986
now exist: (1) "public purpose" bonds, the income from which remains fully
exempt from federal income tax; (2) qualified "private activity" industrial
development bonds, the income from which, while exempt from federal income tax
under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code")
is includable in the calculation of the federal alternative minimum tax; and (3)
"private activity" (private purpose) bonds, the income from which is not exempt
from federal income tax. A Fund will not invest in private purpose bonds and,
except as described under "Other Eligible Investments," will not invest in
qualified "private activity" industrial development bonds whose distributions
are subject to the alternative minimum tax.
OTHER ELIGIBLE INVESTMENTS
A Fund may invest up to 20% of its assets under ordinary circumstances,
and up to 100% of its assets for temporary defensive purposes in the following
types of instruments: (1) commercial paper, including master demand notes, that
at the date of investment is rated A-1 (the highest grade by S&P), Prime-1 (the
highest grade by Moody's) or, if not rated by such services, is issued by a
company that at the date of investment has an outstanding issue rated A or
better by S&P or Moody's; (2) obligations, including certificates of deposit and
bankers' acceptances, of banks, or savings and loan associations, that have at
least $1 billion in assets as of the date of their most recently published
financial statements that are members of the Federal Deposit Insurance
Corporation, including U.S. branches of foreign banks and foreign branches of
U.S. banks; (3) corporate obligations (maturing in 13 months or less) that at
the date of investment are rated A or better by S&P or Moody's; (4) obligations
issued or guaranteed by the U.S. government or by any agency or instrumentality
of the U.S.; (5) qualified "private activity" industrial development bonds the
income from which, while exempt from federal income tax under Section 103 of the
Code, is includable in the calculation of the federal alternative minimum tax;
and (6) municipal obligations, the income of which is exempt from federal income
tax, but not exempt from income tax in Pennsylvania, or which are not exempt
from personal property or intangibles tax in Florida or Pennsylvania, as the
case may be. Each Fund will assume a temporary defensive position when, for
example, Keystone determines that market conditions so warrant. If a Fund is
investing defensively, it is not pursuing its objectives.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVES
The investment objectives of each Fund are fundamental and may not be
changed without approval of the holders of a majority of such Fund's outstanding
voting shares (which means the lesser of (1) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are represented or (2)
more than 50% of the outstanding shares).
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INVESTMENT RESTRICTIONS
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The investment restrictions set forth below are fundamental for each
Fund and may not be changed without the vote of a majority of such Fund's
outstanding voting shares. Unless otherwise stated, all references to the assets
of a Fund are in terms of current market value. Each Fund may not do the
following:
(1) purchase any security of any issuer (other than issues of the U.S.
government, its agencies or instrumentalities) if as a result more than 25% of
its total assets would be invested in a single industry, including in industrial
development bonds from the same facility or similar types of facilities;
governmental issuers of municipal bonds are not regarded as members of an
industry and a Fund may invest more than 25% of its assets in industrial
development bonds;
(2) invest more than 10% of its assets in securities with legal or
contractual restrictions on resale or in securities for which market quotations
are not readily available, or in repurchase agreements maturing in more than
seven days;
(3) 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;
(4) 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;
(5) 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;
(6) borrow money or enter into reverse repurchase agreements, except
that a Fund may enter into reverse repurchase agreements or borrow money from
banks for temporary or emergency purposes in aggregate amounts up to one-third
of the value of the Fund's net assets; provided that while borrowings from banks
(not including reverse repurchase agreements) exceed 5% of the Fund's net
assets, any such borrowings will be repaid before additional investments are
made;
(7) 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;
(8) 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;
(9) make loans, except that a Fund may purchase or hold debt securities
consistent with its investment objectives, lend portfolio securities valued at
not more than 15% of its total assets to broker-dealers and enter into
repurchase agreements;
(10) purchase securities of other investment companies, except as part
of a merger, consolidation, purchase of assets or similar transaction;
(11) purchase or sell commodities or commodity contracts or real
estate, except that it may purchase and sell securities secured by real estate
and securities of companies which invest in real estate, and may engage in
currency or other financial futures contracts and related options transactions;
or
(12) underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
The Funds are non-diversified under the federal securities laws. As
non-diversified Funds, there is no restriction under the Investment Company Act
of 1940 ("1940 Act") on the percentage of assets that may be invested at any
time in the securities of any one issuer. The Funds intend to comply, however,
with the Code's diversification requirements and other requirements applicable
to "regulated investment companies" so that they will not be subject to U.S.
federal income tax on income and capital gain distributions to shareholders. For
this reason, each Fund has adopted the additional investment restriction set
forth below, which may not be changed without the approval of shareholders.
Specifically, a Fund may not (1) purchase a security if more than 25% of the
Fund's total assets would be invested in the securities of a single issuer
(other than the U.S. government, its agencies and instrumentalities); or (2)
with respect to 50% of the Fund's total assets, if more than 5% of such assets
would be invested in the securities of a single issuer (other than the U.S.
government, its agencies and instrumentalities).
As a matter of practice, each Fund treats reverse repurchase agreements
as borrowings for purposes of compliance with the limitations of the 1940 Act.
Reverse repurchase agreements will be taken into account along with borrowings
from banks for purposes of the 5% limit set forth in the sixth fundamental
investment restriction above.
To the extent the Funds are not fully diversified, they may be more
susceptible to adverse economic, political or regulatory developments affecting
a single issuer than would be the case if the Funds were more broadly
diversified.
Additional restrictions adopted for each Fund, which may be changed by
the Board of Trustees, provide that a Fund may not purchase or retain securities
of an issuer if, to the knowledge of the FUND, officers, Trustees or Directors
of the FUND or Keystone each owning beneficially more than 1/2 of 1% of the
securities of such issuer own in the aggregate more than 5% of the securities of
such issuer, or such persons or management personnel of the FUND or Keystone
have a substantial beneficial interest in the securities of such issuer.
Portfolio securities of a Fund may not be purchased from or sold or loaned to
Keystone or any affiliate thereof or any of their Directors, officers or
employees.
None of the Funds presently intends to invest more than 25% of its
total assets in municipal obligations the payment of which depends on revenues
derived from a single facility or similar types of facilities. Since certain
municipal obligations may be related in such a way that an economic, business or
political development or change affecting one such security could likewise
affect the other securities, a change in this policy could result in increased
investment risk, but no change is presently contemplated.
For the purposes of the first, third, and twelfth fundamental
investment restrictions set forth above, each Fund will treat (1) each state,
territory and possession of the U.S., the District of Columbia and, if its
assets and revenues are separate from those of the entity or entities creating
it, each political subdivision, agency and instrumentality of any one (or more,
as in the case of a multistate authority or agency) of the foregoing as an
issuer of all securities that are backed primarily by its assets or revenues;
(2) each company as an issuer of all securities that are backed primarily by its
assets or revenues; and (3) each of the foregoing entities as an issuer of all
securities that it guarantees; provided, however, that for the purpose of the
first fundamental investment restriction no entity shall be deemed to be an
issuer of a security that it guarantees so long as no more than 10% of a Fund's
total assets (taken at current value) are invested in securities guaranteed by
the entity and securities of which it is otherwise deemed to be an issuer.
The Texas Fund has undertaken to a state securities authority that, so
long as the state authority requires and shares of the Fund are registered for
sale in that state, (1) the Fund will not purchase puts, calls, straddles,
spreads or combinations thereof, if by reason thereof the value of its aggregate
investment in such securities will exceed 5% of its total assets except that it
may purchase "stand-by commitments" and master demand notes; and (2) the Fund
will maintain 300% asset coverage on any leverage or bank borrowings.
The FUND has undertaken to a state securities authority that, so long
as the state authority requires and shares of a Fund are registered for sale in
that state, the Fund will (1) not invest in real estate limited partnerships;
and (2) not invest in oil, gas or other mineral leases.
Further, the FUND has undertaken to a state securities authority that,
so long as the state authority requires and shares of a Fund are registered for
sale in that state, all loans of portfolio securities will be made in accordance
with fair, just and equitable practice and the collateral values of portfolio
securities loaned will be maintained at no less than 100% by "marking to market"
daily.
In order to permit the sale of a Fund's shares in certain states, the
FUND may make commitments more restrictive than the investment restrictions
described above. Should the FUND determine that any such commitment is no longer
in the best interests of the affected Fund, it will revoke the commitment by
terminating sales of its shares in the state involved.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
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VALUATION AND REDEMPTION OF SECURITIES
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Current values for each Fund's portfolio securities may be determined
in the following manner:
1. securities for which market quotations are readily available are
valued at the mean of the bid and asked prices at the time of valuation;
2. (a) instruments having maturities of sixty days or less when
purchased are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market;
(b) investments maturing in more than sixty days when purchased
that are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest, approximates
market; and which, in either case, reflects fair value as determined by the
FUND's Board of Trustees;
3. short-term instruments having maturities of more than sixty days for
which market quotations are readily available are valued at current market
value; and
4. the following securities are valued at prices deemed in good faith
to be fair under procedures established by the Board of Trustees: (a)
securities, including restricted securities, for which market quotations are not
readily available; and (b) other assets.
The FUND believes that reliable market quotations are generally not
readily available for purposes of valuing municipal obligations. As a result,
depending on the particular municipal obligations owned by a Fund, it is likely
that most of the valuations for such obligations will be based upon their fair
value determined under procedures approved by the Board of Trustees. The Board
of Trustees has authorized the use of a pricing service to determine the fair
value of each Fund's municipal obligations and certain other securities. Non
tax-exempt securities for which market quotations are readily available are
valued on a consistent basis at that price quoted which, in the opinion of the
Board of Trustees or the person designated by the Board of Trustees to make the
determination, most nearly represents the market value of the particular
security. Any securities for which market quotations are not readily available
or other assets are valued on a consistent basis at fair value as determined in
good faith using methods prescribed by the FUND's Board of Trustees.
The FUND has obligated itself under the 1940 Act to redeem for cash all
shares presented for redemption by any one shareholder in any 90 day period up
to the lesser of $250,000 or 1% of a Fund's assets.
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SALES CHARGES
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GENERAL
Each Fund offers three classes of shares. Class A shares are offered
with a maximum front end sales charge of 4.75% payable at the time of purchase
of Fund shares ("Front End Load Option"). Class B shares are sold subject to a
contingent deferred sales charge payable upon redemption within three calendar
years after the first year of purchase ("Back End Load Option"). Class B shares
that have been outstanding during seven calendar years will automatically
convert to Class A shares, without imposition of a front end sales charge.
(Conversion of Class B shares represented by stock certificates will require the
return of the stock certificates to Keystone Investment Resource Center, Inc.
("KIRC")). Class C shares are sold subject to a contingent deferred sales charge
payable upon redemption within one year after purchase ("Level Load Option").
Class C shares are available only through dealers who have entered into special
distribution agreements with KDI, the FUND's Principal Underwriter. The FUND's
prospectus contains a general description of how investors may buy shares of the
FUND, as well as a table of applicable sales charges for Class A shares, a
discussion of reduced sales charges applicable to subsequent purchases and a
description of applicable contingent deferred sales charges.
CONTINGENT DEFERRED SALES CHARGES
In order to reimburse a Fund for certain expenses relating to the sale
of its shares (See "Distribution Plan"), a contingent deferred sales charge may
be imposed at the time of redemption of certain Fund shares, as follows:
CLASS A SHARES
With certain exceptions, purchases of Class A shares in the amount of
$1,000,000 on which no sales charge has been paid will be subject to a
contingent deferred sales charge of 0.25% upon redemption during the one year
period commencing on the date the shares were originally purchased. The
contingent deferred sales charge will be retained by KDI. See "Calculation of
Contingent Deferred Sales Charge" below.
CLASS B SHARES
With certain exceptions, a Fund may impose a deferred sales charge of
3.00% on shares redeemed during the calendar year of purchase and during the
first calendar year after purchase; 2.00% on shares redeemed during the second
calendar year after purchase; and 1.00% on shares redeemed during the third
calendar year after purchase. No deferred sales charge is imposed on amounts
redeemed thereafter. If imposed, the deferred sales charge is deducted from the
redemption proceeds otherwise payable to you. The deferred sales charge is
retained by KDI. See "Calculation of Contingent Deferred Sales Charge" below.
CLASS C SHARES
With certain exceptions, a Fund may impose a deferred sales charge of
1% on shares redeemed within one year after the date of purchase. No deferred
sales charge is imposed on amounts redeemed thereafter. If imposed, the deferred
sales charge is deducted from the redemption proceeds otherwise payable to you.
The deferred sales charge is retained by KDI. See "Calculation of Contingent
Deferred Sales Charge" below.
REDEMPTION OF CERTAIN CLASS A SHARES
Class A shares purchased prior to January 1, 1991 and redeemed within
four calendar years of purchase may be subject to a 2.0% contingent deferred
sales charge. In instances where an existing shareholder purchases additional
Class A shares after January 1, 1991 and subsequently requests a redemption of a
portion of his Class A shares, the shares first redeemed will be those purchased
after January 1, 1991 that were not purchased subject to a contingent deferred
sales charge.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge imposed upon the redemption of
Class A, Class B or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net cost of such shares. No
contingent deferred sales charge is imposed when you redeem amounts derived from
(1) increases in the value of your account above the net cost of such shares due
to increases in the net asset value per share of a Fund; (2) certain shares with
respect to which a Fund did not pay a commission on issuance, including shares
acquired through reinvestment of dividend income and capital gains
distributions; (3) Class C shares and certain Class A shares held during more
than one year; or (4) Class B shares held during more than four consecutive
calendar years. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares held
the longest will be the first to be redeemed. There is no contingent deferred
sales charge when the shares of a class are exchanged for the shares of the same
class of another Keystone America Fund. Moreover, when shares of one such class
of a fund have been exchanged for shares of another such class of a fund, the
calendar year of the exchange is assumed to be the year shares tendered for
exchange were originally purchased.
WAIVER OF SALES CHARGES
Shares also may be sold, to the extent permitted by applicable law,
regulations, interpretations or exemptions, at net asset value without the
imposition of an initial sales charge to (1) certain officers, Directors,
Trustees, full-time employees and sales representatives of the FUND, Keystone
Management, Inc. ("Keystone Management"), Keystone, Keystone Group, Inc.
("Keystone Group"), Harbor Capital Management Company, Inc., any one of their
subsidiaries or KDI, who have been such for not less than ninety days; (2) a
pension and profit-sharing plan established by such companies, their
subsidiaries and affiliates, for the benefit of their officers, Directors,
Trustees, full-time employees and sales representatives; or (3) a registered
representative of a firm with a dealer agreement with KDI, provided all such
sales are made upon the written assurance that the purchase is made for
investment purposes and that the securities will not be resold except through
redemption by the FUND.
No initial sales charge is charged on a purchase of shares of a Fund by
a bank or trust company in a single account in the name of such bank or trust
company as trustee if the initial investment in shares of one of the Funds or
any Keystone mutual fund is at least $500,000.
In addition, no contingent deferred sales charge is imposed on a
redemption of shares of a Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a benefit plan qualified under the
Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of an account having an aggregate net asset value of
less than $1,000; or (5) automatic withdrawals under an automatic withdrawal
plan of up to 1 1/2% per month of the shareholder's initial account balance.
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DISTRIBUTION PLANS
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Rule 12b-1 under the 1940 Act permits investment companies, such as the
FUND, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1. On September 19, 1990,
each Fund's Class A Distribution Plan was approved by the FUND's Board of
Trustees, including a majority of the Trustees who are not interested persons of
the FUND, as defined in the 1940 Act ("Independent Trustees"), and the Trustees
who have no direct or indirect financial interest in the Distribution Plan or
any agreement related thereto (the "Rule 12b-1 Trustees," who are the same as
the Independent Trustees). The Class A Distribution Plans were approved by the
Funds' shareholders on December 19, 1991. On November 17, 1992, the Class B and
Class C Distribution Plans of each Fund were approved by the FUND's Board of
Trustees, including a majority of the Independent Trustees (each Class A, B, and
C Distribution Plan, a "Distribution Plan," and collectively, "Distribution
Plans").
DISTRIBUTION PLANS IN GENERAL
A new rule of the National Association of Securities Dealers, Inc.
("NASD") limits the amount that a Fund may pay annually in distribution costs
for sale of its shares and shareholder service fees. The rule limits annual
expenditures to 1% of the aggregate average daily net asset value of its shares,
of which 0.75% may be used to pay such distribution costs and 0.25% may be used
to pay shareholder service fees. The new NASD rule also limits the aggregate
amount that a Fund may pay for such distribution costs to 6.25% of gross share
sales since the inception of the 12b-1 Plan, plus interest at the prime rate
plus 1% on such amounts (less any contingent deferred sales charges paid by
shareholders to KDI).
CLASS A DISTRIBUTION PLAN.
The Class A Distribution Plan provides that a Fund may expend daily
amounts at an annual rate currently limited to up to 0.15% of the Fund's average
daily net asset value attributable to Class A shares to finance any activity
that is primarily intended to result in the sale of Class A shares, including,
without limitation, expenditures consisting of payments to a Principal
Underwriter of a Fund (currently KDI) to enable the Principal Underwriter to pay
or to have paid to others who sell Class A shares a service or other fee, at
such intervals as the Principal Underwriter may determine, in respect of Class A
shares previously sold by any such others and remaining outstanding during the
period in respect of which such fee is or has been paid.
Amounts paid by a Fund under its Class A Distribution Plan are
currently used to pay others, such as dealers, service fees at an annual rate of
up to 0.15% of the average net asset value of Class A shares sold by such others
and remaining outstanding on the books of the Fund for specific periods.
CLASS B DISTRIBUTION PLAN
The Class B Distribution Plan provides that a Fund may expend daily
amounts at an annual rate of up to 1.00% (currently limited to 0.90%) of the
Fund's average daily net asset value attributable to Class B shares to finance
any activity that is primarily intended to result in the sale of Class B shares,
including, without limitation, expenditures consisting of payments to a
Principal Underwriter of the Fund (currently KDI) to enable the Principal
Underwriter to pay to others (dealers) commissions in respect of Class B shares
sold since inception of the Distribution Plan; and (2) to enable the Principal
Underwriter to pay or to have paid to others a service fee, at such intervals as
the Principal Underwriter may determine, in respect of Class B shares previously
sold by any such others and remaining outstanding during the period in respect
of which such fee is or has been paid.
Amounts paid by a Fund under its Class B Distribution Plan are
currently used to pay others (dealers) (1) a commission normally equal to 3.00%
for each share sold; and/or (2) service fees at an annual rate of 0.15% of the
average net asset value of shares sold by such others and remaining outstanding
on the books of the Fund for specified periods.
KDI intends, but is not obligated, to continue to pay or accrue
distribution charges incurred in connection with the Class B Distribution Plan
that exceed current annual payments permitted to be received by KDI from the
Fund. KDI intends to seek full payment of such charges from the Fund (together
with annual interest thereon at the prime rate plus one percent) at such time in
the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that a Fund may expend daily
amounts at an annual rate of up to 1.00% (currently limited to 0.90%) of the
Fund's average daily net asset value attributable to Class 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 a
Principal Underwriter of a Fund (currently KDI) to enable the Principal
Underwriter to pay to others (dealers) commissions in respect of Class C shares
sold since inception of the Distribution Plan; and (2) to enable the Principal
Underwriter to pay or to have paid to others a service fee, at such intervals as
the Principal Underwriter may determine, in respect of Class C shares previously
sold by any such others and remaining outstanding during the period in respect
of which such fee is or has been paid.
Amounts paid by the Fund under the Class C Distribution Plan are
currently used to pay others (dealers) (1) a payment at the time of purchase of
1.00% of the value of each share sold, such payment to consist of a commission
in the amount of 0.75% plus the first year's service fee in advance in the
amount of 0.25%, and (2) beginning approximately fifteen months after purchase,
a commission at an annual rate of 0.75% (subject to the NASD rule - see
"Distribution Plans") plus service fees at an annual rate of 0.25%,
respectively, of the average daily net asset value of each 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 as to a Fund at any
time by vote of the Rule 12b-1 Trustees or by a vote of a majority of the
outstanding voting shares of the Fund. After the termination of the Class B
Distribution Plan, KDI would be entitled to receive payment, at the annual rate
of 1.00% of the average daily net asset value of Class B shares, as compensation
for its services which had been earned at any time during which the Class B
Distribution Plan was in effect. For the Florida Fund, the Pennsylvania Fund,
the Texas Fund, the Massachusetts Fund and the New York Insured Fund
unreimbursed Class B Distribution Plan expenses at March 31, 1994 were
$1,296,714 (1.7% of net assets), $1,408,304 (2.3% of net assets), $119,969 (2.6%
of net assets), $120,510 (3.3% of net assets) and $149,797 (4.7% of net assets),
respectively.
Any change in a Distribution Plan that would materially increase the
distribution expenses of the affected Fund provided for in a Distribution Plan
requires the Fund's shareholders' approval. Otherwise, the Distribution Plans
may be amended by the Trustees, including the Rule 12b-1 Trustees.
While the Distribution Plans are in effect, the FUND will be required
to commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The total amounts paid by a Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limit specified above, and the amounts
and purposes of expenditures under a Distribution Plan must be reported to the
Rule 12b-1 Trustees quarterly. The Rule 12b-1 Trustees may require or approve
changes in the implementation or operation of a Distribution Plan and may also
require that total expenditures by a Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by a Distribution Plan as
stated above.
During the fiscal year ended March 31, 1994, the Florida Fund,
Pennsylvania Fund and the Texas Fund paid, and, during the period ended March
31, 1994, the Massachusetts Fund and the New York Insured Fund paid KDI (1)
$69,333, $47,974, $3,293, $155 and $128, respectively, pursuant to each Fund's
Class A Distribution Plan; (2) $91,806, $117,658, $10,756, $1,306 and $1,567,
respectively, pursuant to each Fund's Class B Distribution Plan; and (3)
$91,943, $62,419, $5,929, $426, and $340, respectively, pursuant to each Fund's
Class C Distribution Plan.
The Independent Trustees of the FUND have determined that the sales of
each Fund's shares resulting from payments under its Distribution Plan are
expected to benefit such Fund.
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INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the FUND's Board of Trustees,
Keystone serves as investment adviser to the FUND and is responsible for the
overall management of the FUND's business and affairs.
Keystone, located at 200 Berkeley Street, Boston, Massachusetts
02116-5034, has provided investment advisory and management services to
investment companies and private accounts since it was organized in 1932.
Keystone is a wholly-owned subsidiary of Keystone Group, 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
Keystone Group is a corporation privately owned by current and former
members of management of Keystone and its affiliates. The shares of Keystone
Group common stock beneficially owned by current and former members of
management are held in a number of voting trusts, the trustees of which are
George S. Bissell, Albert H. Elfner, III, Roger T. Wickers, Edward F. Godfrey,
and Ralph J. Spuehler, Jr. Keystone Group provides accounting, bookkeeping,
legal, personnel and general corporate services to Keystone Management,
Keystone, their affiliates and the Keystone Group of Mutual Funds.
Pursuant to the Investment Advisory and Management Agreement with the
FUND dated August 19, 1993 (the "Advisory Agreement") and subject to the
supervision of the FUND's Board of Trustees, Keystone manages and administers
the operation of the FUND and its Funds, and manages the investment and
reinvestment of each Fund's assets in conformity with such Fund's investment
objectives and restrictions. The Advisory Agreement stipulates that Keystone
shall provide office space, all necessary office facilities, equipment and
personnel in connection with its services as well as pay or reimburse the FUND
for the compensation of FUND officers and Trustees who are affiliated with the
investment adviser. The Advisory Agreement requires Keystone to pay all of its
expenses incurred in connection with its services. All charges and expenses
other than those specifically referred to as being borne by Keystone will be
paid by the FUND, including, but not limited to, custodian charges and expenses;
bookkeeping and auditors' charges and expenses; transfer agent charges and
expenses; fees of Independent Trustees; brokerage commissions, brokers' fees and
expenses; issue and transfer taxes; costs and expenses under the Distribution
Plans; taxes and trust fees payable to governmental agencies; the cost of share
certificates; fees and expenses of the registration and qualification of the
FUND and its shares with the Securities and Exchange Commission (sometimes
referred to herein as the "SEC" or the "Commission") or under state or other
securities laws; expenses of preparing, printing and mailing prospectuses,
statements of additional information, notices, reports and proxy materials to
shareholders of the FUND; expenses of shareholders' and Trustees' meetings;
charges and expenses of legal counsel for the FUND and for the Trustees of the
FUND on matters relating to the FUND; charges and expenses of filing annual and
other reports with the SEC and other authorities, and all extraordinary charges
and expenses of the FUND.
Each Fund pays Keystone a fee for its services to the Fund at the
annual rate set forth below:
<PAGE>
Aggregate Net
Asset
Management Value of the
Fee Shares of the Fund
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0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000
Computed as of the close of business each business day and paid daily.
The Advisory Agreement continues in effect from year to year only if
approved at least annually by the FUND's Board of Trustees or by a vote of a
majority of the outstanding shares of each Fund, and such renewal has been
approved by the vote of a majority of the Independent Trustees cast in person at
a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated, without penalty, on 60 days' written notice by the
FUND's Board of Trustees or by a vote of a majority of outstanding shares of
each Fund. The Advisory Agreement will terminate automatically upon its
"assignment" as that term is defined in the 1940 Act.
During the year ended March 31, 1992, the Florida Fund and the
Pennsylvania Fund paid or accrued to Keystone investment management and
administrative services fees of $105,520 and $43,864, respectively. During the
period ended March 31, 1992, the Texas Fund paid or accrued to Keystone
investment management and administrative services fees of $483.
During the year ended March 31, 1993, the Florida Fund, the
Pennsylvania Fund, and the Texas Fund paid or accrued to Keystone investment
management and administrative services fees of $199,288, $138,570, and $8,092,
respectively.
During the year ended March 31, 1994, the Florida Fund, the
Pennsylvania Fund and the Texas Fund paid or accrued to Keystone investment
management and administrative services fees of $363,939, $291,982 and $22,246,
respectively. During the period ended March 31, 1994, the Massachusetts Fund and
the New York Insured Fund paid or accrued to Keystone investment management and
administrative services fees of $2,167 and $1,473, respectively.
Until January 1, 1995, Keystone has voluntarily limited annual expenses
of Class A shares of the Florida, Pennsylvania and Texas Funds to 0.75% of
average net assets and has voluntarily limited annual expenses of Class B and C
shares of each Fund to 1.50% of average net assets. Keystone has voluntarily
limited expenses of the Class A shares of the Massachusetts Fund and the New
York Insured Fund to 0.35% of average daily net assets until August 15, 1994;
0.45% until November 15, 1994; 0.55% until February 15, 1995; and 0.65% until
May 15, 1995. Thereafter, expenses of Class A shares will be limited to 0.75%
until December 31, 1995. Expenses of these Funds' Class B and C shares will be
limited to 1.10% until August 15, 1994; 1.20% until November 15, 1994; 1.30%
until February 15, 1995; and 1.40% until May 15, 1995. Thereafter, expenses of
Class B and C shares will be limited to 1.50% until December 31, 1995. In sum,
all of the above expense limitations will continue until December 31, 1995.
Thereafter and from time to time in the future, a redetermination of whether to
continue the expense limitations and, if so, at what rate, will be made.
Keystone would not be required to make such reimbursement to any Fund to the
extent it would result in the Fund's inability to qualify as a regulated
investment company under the Code. In accordance with these voluntary expense
limitations, Keystone reimbursed the Florida Fund, the Pennsylvania Fund, the
Texas Fund, the Massachusetts Fund and the New York Insured Fund (1) $122,324,
$107,397, $72,371, $5,910 and $2,434 respectively, with respect to each Fund's
Class A shares; (2) $23,487, $40,539, $32,035, $5,082 and $7,843 respectively,
with respect to each Fund's Class B shares; and (3) $30,782, $25,273, $15,135,
$1,624, and $1,373, respectively, with respect to each Fund's Class C shares.
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TRUSTEES AND OFFICERS
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Trustees and officers of the FUND, their principal occupations and some
of their affiliations over the last five years are as follows:
*GEORGE S. BISSELL: Chairman of the Board, Trustee and Chief Executive Officer
of the FUND; Chairman of the Board, Director and Chief Executive Officer of
Keystone Group, Keystone, Keystone Management, Keystone Software Inc.
("Keystone Software"), Keystone Fixed Income Advisers, Inc. ("KFIA") and
KIRC; Chairman of the Board, Chief Executive Officer and Trustee or
Director of Keystone America Capital Preservation and Income Fund, Keystone
America Capital Preservation and Income Fund II, Keystone America
Intermediate Term Bond Fund, Keystone America Strategic Income Fund,
Keystone America World Bond Fund, Keystone Australia Income Fund, Keystone
Tax Free Income Fund, Keystone America State Tax Free Fund, Keystone
America State Tax Free Fund - Series II, Keystone America Equity Income
Fund, Keystone America Global Opportunities Fund, Keystone America Hartwell
Emerging Growth Fund, Inc., Keystone America Hartwell Growth Fund, Inc.,
Keystone America Omega Fund, Inc., Keystone Fund of the Americas Luxembourg
and Keystone Fund of the Americas - U.S. (collectively, "Keystone America
Funds"); Keystone Custodian Funds, Series B-1, B-2, B-4, K-1, K-2, S-1,
S-3, and S-4; Keystone International Fund, Keystone Tax Free Fund, Keystone
Tax Exempt Trust, Keystone Liquid Trust (collectively, "Keystone Custodian
Funds"); Keystone Institutional Adjustable Rate Fund and Master Reserves
Trust (all such funds, collectively, "Keystone Group Funds"); Chairman of
the Board, Hartwell Keystone Advisers, Inc. ("Hartwell Keystone"); Director
of Keystone Investment Management Corporation ("KIMCO"); Chairman of the
Board and Trustee of Anatolia College; and Trustee of University Hospital
(and Chairman of its Investment Committee).
FREDERICK AMLING: Trustee of the FUND; Trustee or Director of all other Keystone
Group Funds; Professor, Finance Department, George Washington University;
President, Amling & Company (investment advice); Member, Board of Advisers,
Credito Emilano (banking); and former Economics and Financial Consultant,
Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the FUND; Trustee or Director of all other
Keystone Group Funds; Managing Director, Seaward Management Corporation
(investment advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment advice).
*ALBERT H. ELFNER, III: President and Trustee of the FUND; President and Trustee
or Director of all other Keystone Group Funds; Director and Vice Chairman
of Keystone; Chief Operating Officer, President and Director of Keystone
Group; Chairman of the Board and Director of KIMCO and KFIA; President and
Director of Keystone Management, Hartwell Keystone and Keystone Software;
Director of KDI, KIRC, Fiduciary Investment Company, Inc. ("FICO") and
Robert Van Partners, Inc.; Director of Boston Children's Services
Association and Trustee of Anatolia College, Middlesex School and
Middlebury College; Member, Board of Governors, New England Medical Center;
former Trustee of Neworld Bank; and former President of Keystone.
EDWIN D. CAMPBELL: Trustee of the FUND; Trustee or Director of all other
Keystone Group Funds; Executive Director, Coalition of Essential Schools,
Brown University; Director and former Executive Vice President, National
Alliance of Business; former Vice President, Educational Testing Services;
and former Dean, School of Business, Adelphi University.
CHARLES F. CHAPIN: Trustee of the FUND; Trustee or Director of all other
Keystone Group Funds; former Group Vice President, Textron Corp.; and
former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the FUND; Trustee or Director of all other Keystone
Group Funds; President, Morehouse College; 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.
K. DUN GIFFORD: Trustee of the FUND; Trustee or Director of all other Keystone
Group Funds; Chairman of the Board, Director and Executive Vice President,
The London Harness Company; Managing Partner, Roscommon Capital Corp.;
Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Group and Keystone.
F. RAY KEYSER, JR.: Trustee of the FUND; Trustee or Director of all other
Keystone Group Funds; Of Counsel, Keyser, Crowley & Meub, P.C.; Member,
Governor's (VT) Council of Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation and Hitchcock Clinic;
Director, Vermont Yankee Nuclear Power Corporation, Vermont Electric Power
Company, Inc., Grand Trunk Corporation, Central Vermont Railway, Inc.,
S.K.I. Ltd., Sherburne Corporation, Union Mutual Fire Insurance Company,
New England Guaranty Insurance Company, Inc. and the Investment Company
Institute; former Governor of Vermont; former Director and President,
Associated Industries of Vermont; former Chairman and President, Vermont
Marble Company; former Director of Keystone; and former Director and
Chairman of the Board, Green Mountain Bank.
DAVID M. RICHARDSON: Trustee of the FUND; Trustee or Director of all other
Keystone Group Funds; Executive Vice President, DHR International, Inc.
(executive recruitment); former Senior Vice President, Boyden International
Inc. (executive recruitment); and Director, Commerce and Industry
Association of New Jersey, 411 International, Inc. and J & M Cumming Paper
Co.
RICHARD J. SHIMA: Trustee of the FUND; Trustee or Director of all other Keystone
Group Funds; Consultant, Russell Miller, Inc. (investment bankers) and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Trust Company of Connecticut, Hartford
Hospital, Old State House Association and Enhanced Financial Services,
Inc.; Member, Georgetown College Board of Advisors; Chairman, Board of
Trustees, Hartford Graduate Center; Trustee, Kingswood-Oxford School and
Greater Hartford YMCA; former Director, Executive Vice President and Vice
Chairman of The Travelers Corporation; and former Managing Director of
Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the FUND; Trustee or Director of all other Keystone
Group Funds; Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky &
Armentano, P.C.; President, Nassau County Bar Association; former Associate
Dean and Professor of Law, St. John's University School of Law.
EDWARD F. GODFREY: Senior Vice President of the FUND; Senior Vice President of
all other Keystone Group Funds; Senior Vice President, Chief Financial
Officer and Treasurer of Keystone Group and KDI; Director, Senior Vice
President, Chief Financial Officer and Treasurer of Keystone; Treasurer of
KIMCO, Keystone Management, Keystone Software, Inc. and FICO; and Treasurer
and Director of Hartwell Keystone.
JAMES R. McCALL: Senior Vice President of the FUND; Senior Vice President of all
other Keystone Group Funds; and President of Keystone.
ROGER T. WICKERS: Senior Vice President of the FUND; Senior Vice President of
all other Keystone Group Funds; Director, Senior Vice President, General
Counsel and Secretary, Keystone Group and KDI; Director and Secretary,
Keystone and Vice President, Assistant Secretary and Director, Keystone
Management.
KEVIN J. MORRISSEY: Treasurer of the FUND; Treasurer of all other Keystone Group
Funds; Vice President of Keystone Group; and former Vice President and
Treasurer of KIRC.
ROSEMARY D. VAN ANTWERP: Vice President and Secretary of the FUND; Vice
President and Secretary of all other Keystone Group Funds; Senior Vice
President and General Counsel of Keystone, Keystone Management, Hartwell
Keystone, KIRC, KFIA, Keystone Software and KIMCO; Vice President,
Assistant Secretary and Associate General Counsel of Keystone Group; Senior
Vice President, General Counsel, Director and Assistant Clerk, FICO;
Assistant Secretary of KDI.
BETSY A. BLACHER: Vice President of the FUND; Vice President of Keystone and
Vice President of one other Keystone Group Fund and 2 Keystone America
Funds.
THOMAS S. DRUMM: Vice President of the FUND; Senior Vice President of Keystone;
and Vice President of 11 Keystone America Funds, 2 other Keystone Group
Funds, 4 Keystone Custodian Funds and Keystone Institutional Adjustable
Rate Fund.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Bissell and Mr. Elfner are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Group and several of its
affiliates including Hartwell Keystone, KDI and KIRC. Mr. Bissell and Mr. Elfner
own shares of Keystone Group. Mr. Bissell is Chairman of the Board, Chief
Executive Officer and Director of Keystone Group. Mr. Elfner is President,
Director and Chief Operating Officer of Keystone Group.
The Board of Trustees of the FUND has established an Advisory Board
composed principally of former Trustees. The members of the Advisory Board are
James R. Dempsey, Knight Edwards, Donald T. Ellis, John M. Haffenreffer, Philip
B. Harley, Everett P. Pope, John W. Sharp, Spencer R. Stuart, Russel R. Taylor,
and Charles M. Williams. The Advisory Board will advise the Board of Trustees
and Keystone with respect to the management and operation of the FUND. The
recommendations of the Advisory Board will be considered by the Board of
Trustees and Keystone, but will not be binding on them.
The principal occupations and affiliations of the members of the
Advisory Board over the past five years are set forth below:
JAMES R. DEMPSEY: a private investor; Director or Trustee, Convest Energy
Corporation, Superior Electric Co., Phoenix Total Return Fund, Phoenix
Multi-Portfolio Fund, Phoenix Series Fund, The Phoenix Big Edge Series
Fund; former Chairman of the Board, Transatlantic Investment Capital
Corporation, Transatlantic Capital Corporation and former Trustee or
Director of 7 Keystone Group Funds.
KNIGHT EDWARDS: Of Counsel, Edwards & Angell; Member of the Board of Managers of
7 variable annuity separate accounts of The Travelers Insurance Company
("Travelers"); Trustee, 5 mutual funds sponsored by Travelers; and former
Trustee or Director of 8 Keystone Group Funds.
DONALD T. ELLIS: President, D.T. Ellis Associates; Associate, Michael Saunders &
Co., real estate broker; former Senior Vice President, Goldman Financial
Services, Inc.; former President, Chief Executive Officer and Treasurer,
Scott Seaboard Corporation; and former Trustee or Director of 8 Keystone
Group Funds.
JOHN M. HAFFENREFFER: Vice President, Director and Treasurer of Haffenreffer &
Co.; Member of the Corporation and Treasurer of Haffenreffer Benevolent
Corp.; Director and Member of the Executive Committee of Liberty Bank and
Trust Company; Director of the Massachusetts Council of Churches; Vice
President, Director and Treasurer, Forest Hills Company; former Director of
Keystone; and former Trustee or Director of all Keystone Group Funds.
PHILIP B. HARLEY: Director of General Host Corporation, Stamford, Connecticut; a
private investor; former Director, President and Chief Executive Officer,
Baker Perkins, Inc.; former Director, Baker Perkins Holdings Ltd. (U.K.);
and former Trustee or Director of all Keystone Group Funds.
EVERETT P. POPE: former Chairman and Trustee, Bowdoin College; former Chairman
of the Board and President of Workingmens Cooperative Bank; former
Chairman, Massachusetts Higher Education Assistance Corporation (guarantor
of student loans); and former Trustee or Director of all Keystone Group
Funds.
JOHN W. SHARP: Governor and past President of Montreal General Hospital, Canada;
Honorary Vice Chairman and former National President of Boy Scouts of
Canada; Honorary Colonel, The Black Watch Royal Highland Regiment of
Canada; former Director of Keystone and Unimed, Inc.; former Chairman and
President, Vilas Industries, Ltd. (Canada); former Chairman, Moyer School
supplies, Ltd. (Canada); former Senior Economic Adviser, Province of
Quebec, in New York City; former registered representative with F.H. Deacon
Hodgson Ltd.; and former Trustee or Director of all Keystone Group Funds.
SPENCER R. STUART: Director of U.S. Tobacco Company, Asset Guaranty Inc.,
International Finance Group and Enhanced Financial Services Inc.; Director
and Chairman, Human Resources Committee, Allegheny International, Inc.;
former Director of Western Airlines, Inc., International Finance Group and
Keystone; former Chairman, Council of Managing Advisers, Dean Witter
Reynolds Bank; Founder/former Chairman of Spencer Stuart & Associates; and
former Trustee or Director of all Keystone Group Funds.
RUSSEL R. TAYLOR: Trustee of the Gintel Funds, Greenwich, Connecticut; Associate
Professor and Director, H.W. Taylor Institute of Entrepreneurial Studies,
College of New Rochelle; former Director of Annis Furs, Inc. and
Minnetonka, Inc.; and former Trustee or Director of all Keystone Group
Funds.
CHARLES M. WILLIAMS: Director, Horace Mann Educator Corp.; President, Charles M.
Williams Associates; Advisory Director, Orix U.S.A., Inc.; Director of Fort
Dearborn Income Securities, Inc., 4 Merrill Lynch Funds, National Life
Insurance Company of Vermont and the Institute for Financial Management,
Inc.; President of Charles M. Williams Associates, Inc.; George Gund
Professor of Commercial Banking, Emeritus, at Harvard University Graduate
School of BusineAdministration; former Director of Keystone, Hammermill
Paper Co., Sonat, Inc., United States Leasing International, Inc.; and
former Trustee or Director of all Keystone Custodian Funds and Keystone
America Funds.
During the fiscal year ended March 31, 1994, no Trustee affiliated with
Keystone or any officer received any direct remuneration from the FUND. During
this same period, the nonaffiliated Trustees waived payment of retainers and
fees. As of June 30, 1994, the FUND's Trustees, officers and Advisory Board
Members beneficially owned less than 1% of the Class A then outstanding shares
of the Florida Fund, the Pennsylvania Fund, the Texas Fund and the New York
Insured Fund. As of June 30, 1994, the FUND's Trustees, officers and Advisory
Board Members beneficially owned in the aggregate 37.2% of the Class A shares
then outstanding shares of the Massachusetts Fund. As of June 30, 1994, the
FUND's Trustees, officers and Advisory Board Members beneficially owned less
than 1% of the Funds' Class B and C shares then outstanding.
The address of all the FUND's Trustees, officers and Advisory Board
Members and the address of the FUND is 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
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The FUND has entered into a Principal Underwriting Agreement (the
"Underwriting Agreement"), dated August 19, 1993 with KDI, a wholly-owned
subsidiary of Keystone. KDI, as agent, has agreed to use its best efforts to
find purchasers for the shares. KDI may retain and employ representatives to
promote distribution of the shares and may obtain orders from brokers, dealers
and others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that KDI will bear the expense of preparing, printing and
distributing advertising and sales literature and prospectuses used by it. In
its capacity as principal underwriter, KDI may receive payments from each Fund
pursuant to such Fund's Distribution Plan.
All subscriptions and sales of shares by KDI are at the offering price
of the shares in accordance with the provisions of the FUND's Declaration of
Trust, By-Laws, the current prospectus and statement of additional information.
All orders are subject to acceptance by the FUND and the FUND reserves the right
in its sole discretion to reject any order received. Under the Underwriting
Agreement, the FUND is not liable to anyone for failure to accept any order.
The FUND has agreed under the Underwriting Agreement to pay all
expenses in connection with registration of the shares of its Funds with the
Commission as well as auditing and filing fees in connection with registration
of such shares under the various state "blue-sky" laws, and KDI assumes the cost
of sales literature and preparation of prospectuses used by it and certain other
expenses.
From time to time, if in KDI's judgment it could benefit the sales of a
Fund's shares, KDI may use its discretion in providing to selected dealers
promotional materials and selling aids, including, but not limited to, personal
computers, related software and Fund data files.
KDI has agreed that it will in all respects duly conform with all state
and federal laws applicable to the sale of the shares and will indemnify and
hold harmless the FUND, and each person who has been, is or may be a Trustee or
officer of the FUND, against expenses reasonably incurred by any of them in
connection with any claim, or in connection with any action, suit or proceeding
to which any of them may be a party, which arises out of or is alleged to arise
out of any misrepresentation or omission to state a material fact on the part of
KDI or any other person for whose acts KDI is responsible or is alleged to be
responsible, unless such misrepresentation or omission was made in reliance upon
written information furnished by the FUND.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved by a majority of the FUND's Rule
12b-1 Trustees at least annually at a meeting called for that purpose and if its
continuance is approved annually by vote of a majority of the Rule 12b-1
Trustees or by vote of a majority of the outstanding shares of the affected
Funds.
The Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the FUND's Rule 12b-1 Trustees or KDI or terminated as
to any Fund by a vote of a majority of outstanding shares of such Fund. The
Underwriting Agreement will terminate automatically upon its "assignment" as
that term is defined in the 1940 Act.
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BROKERAGE
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It is the policy of the FUND, in effecting transactions in portfolio
securities, to seek best execution of orders at the most favorable prices. The
determination of what may constitute best execution and price in the execution
of a securities transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net economic result to a Fund,
involving both price paid or received and any commissions and other costs paid,
the efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, the availability of the
broker to stand ready to execute potentially difficult transactions in the
future and the financial strength and stability of the broker. Management weighs
such considerations in determining the overall reasonableness of brokerage
commissions paid.
Subject to the foregoing, a factor in the selection of brokers is the
receipt of research services, such as analyses and reports concerning issuers,
industries, securities, economic factors and trends and other statistical and
factual information. Any such research and other statistical and factual
information provided by brokers to a Fund is considered to be in addition to and
not in lieu of services required to be performed by Keystone under its Advisory
Agreement with the FUND. The cost, value and specific application of such
information are indeterminable and cannot be practically allocated among the
Funds and other clients of Keystone who may indirectly benefit from the
availability of such information. Similarly, a Fund may indirectly benefit from
information made available as a result of transactions effected for such other
clients. Under the Advisory Agreement, Keystone is permitted to pay higher
brokerage commissions for brokerage and research services in accordance with
Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone does
follow such a practice, it will do so on a basis that is fair and equitable to
the Funds.
The FUND expects that purchases and sales of municipal obligations and
temporary instruments usually will be principal transactions. Municipal
obligations and temporary instruments are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. There usually
will be no brokerage commissions paid by a Fund for such purchases. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark up
or reflect a dealer's mark down. Where transactions are made in the
over-the-counter market, each Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
Each Fund may participate, if and when practicable, in group bidding
for the purchase directly from an issuer of certain securities for the Fund's
portfolio in order to take advantage of the lower purchase price available to
members of such a group.
Neither Keystone nor the Funds intend to place securities transactions
with any particular broker-dealer or group thereof. The FUND's Board of Trustees
has determined, however, that the Funds may follow a policy of considering sales
of shares as a factor in the selection of broker-dealers to execute portfolio
transactions, subject to the requirements of best execution, including best
price, described above.
The policy of the FUND with respect to brokerage is and will be
reviewed by the FUND's Board of Trustees from time to time. Because of the
possibility of further regulatory developments affecting the securities
exchanges and brokerage practices generally, the foregoing practices may be
changed, modified or eliminated.
Investment decisions for the Funds are made independently by Keystone
from those of the other funds and investment accounts managed by Keystone. It
may frequently develop that the same investment decision is made for more than
one fund. Simultaneous transactions are inevitable when the same security is
suitable for the investment objective of more than one account. When two or more
funds or accounts are engaged in the purchase or sale of the same security, the
transactions are allocated as to amount in accordance with a formula which is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Funds are concerned. In other cases, however, it is believed that the
ability of a Fund to participate in volume transactions will produce better
executions for the Fund.
For the fiscal years and/or periods, as the case may be, ended March
31, 1992, March 31, 1993 and March 31, 1994, the Funds did not pay any brokerage
commissions.
In no instance are portfolio securities purchased from or sold to
Keystone, KDI or any of their affiliated persons, as defined in the 1940 Act and
rules and regulations issued thereunder.
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DECLARATION OF TRUST
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MASSACHUSETTS BUSINESS TRUST
The FUND is a Massachusetts business trust established under a
Declaration of Trust dated September 13, 1990 ("Declaration of Trust"). The FUND
is similar in most respects to a business corporation. The principal distinction
between the FUND and a corporation relates to the shareholder liability
described below. A copy of the Declaration of Trust 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 share of a Fund
represents an equal proportionate interest in such Fund with each other share of
the Fund. Each Fund currently issues three classes of shares, but may issue
additional classes or series of shares. Upon liquidation, Fund shares are
entitled to a pro rata share of the Fund based on the relative net assets of
each class. Shareholders have no preemptive or conversion rights. Shares are
transferable, redeemable and fully assignable as collateral. There are no
sinking fund provisions.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the FUND were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because (1)
the FUND's Declaration of Trust contains an express disclaimer of shareholder
liability for obligations of the FUND; and (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) because the Declaration of Trust
provides for indemnification out of FUND property for any shareholder held
personally liable for the obligations of the FUND.
VOTING RIGHTS
Under the Declaration of Trust, the FUND does not hold annual meetings.
Shares of a Fund are entitled to one vote per share. Shares generally vote
together as one class on all matters, except that each Fund has exclusive voting
rights with respect to matters which affect only that Fund. Classes of shares of
a Fund have equal voting rights except that each class of shares has exclusive
voting rights with respect to its respective Distribution Plan. No amendment may
be made to the Declaration of Trust adversely that affects any class of shares
without the approval of a majority of the shares of that class. Shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Trustees can elect 100% of the Trustees to
be elected at a meeting and, in such event, the holders of the remaining 50% or
less of the shares voting will not be able to elect any Trustees.
After the initial meeting to elect Trustees no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, until such time as less than a majority of the Trustees holding office
have been elected by shareholders, at which time the Trustees then in office
will call a shareholders' meeting for election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares. Any
Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only
for his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person; provided, however, that
nothing in the Declaration of Trust shall protect a Trustee against any
liability for his willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties.
The Trustees have absolute and exclusive control over the management
and disposition of all assets of the Funds and may perform such acts as in their
sole judgment and discretion are necessary and proper for conducting the
business and affairs of the FUND or promoting the interests of the FUND and its
Funds and the shareholders.
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STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
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Total return quotations for a class of shares of a Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, 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.
For the period December 27, 1990 (commencement of operations) to March
31, 1994, the cumulative total return (including front-end sales charge) for
Class A of the Florida Fund and the Pennsylvania Fund was 23.43% and 29.48%,
respectively. The cumulative total return (including front-end sales charge) for
Class A of the Florida Fund and the Pennsylvania Fund for the three year period
ended March 31, 1994 was 19.24% and 24.06%, respectively. For the period March
2, 1992 (commencement of operations) to March 31, 1994, the cumulative total
return (including front-end sales charge) for Class A of the Texas Fund was
9.77%. For the fiscal year ended March 31, 1994, the total return (including
front-end sales charge) for Class A of the Florida Fund, the Pennsylvania Fund,
and the Texas Fund was (3.79)%, (2.29)% and (3.22)% respectively. For the period
February 4, 1994 (commencement of operations) to March 31, 1994, the cumulative
total return (including front-end sales charge) for Class A of the Massachusetts
and New York Insured Fund was (11.80)% and (10.38)%, respectively.
For the period February 1, 1993 (commencement of operations) to March
31, 1994, the cumulative total return (including contingent deferred sales
charge) for Class B of the Florida Fund, the Pennsylvania Fund and the Texas
Fund was (0.60)%, 1.63% and (0.52), respectively. For the fiscal year ended
March 31, 1994, the total return (including contingent deferred sales charge)
for Class B of the Florida Fund, the Pennsylvania Fund, and the Texas Fund was
(2.63)% and (1.18)%, and (2.55)% respectively. For the period February 4, 1994
(commencement of operations) to March 31, 1994, the cumulative total return
(including contingent deferred sales charge) for Class B of the Massachusetts
and New York Insured Fund was (9.96)% and (8.71)%, respectively.
For the period February 1, 1993 (commencement of operations) to March
31, 1994, the cumulative total return (including contingent deferred sales
charge) for Class C of the Florida Fund, the Pennsylvania Fund and the Texas
Fund was 2.23%, 4.64% and 1.83%, respectively. For the fiscal year ended March
31, 1994, the total return (including contingent deferred sales charge) for
Class C of the Florida Fund, the Pennsylvania Fund, and the Texas Fund was 0.27%
and 1.78%, and (0.03)% respectively. For the period February 4, 1994
(commencement of operations) to March 31, 1994, the cumulative total return
(including contingent deferred sales charge) for Class C of the Massachusetts
and New York Insured Fund was (8.13)% and (6.95)%, 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 a Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. Such yield will include
income from sources other than municipal obligations, if any. For the 30-day
period ended March 31, 1994, the current yield of Class A of the Florida Fund,
the Pennsylvania Fund, the Texas Fund, the Massachusetts Fund and the New York
Insured Fund was 5.18%, 5.17%, 5.24%, 4.95% and 4.49%, respectively. For the
30-day period ended March 31, 1994, the current yield of Class B of the Florida
Fund, the Pennsylvania Fund, the Texas Fund, the Massachusetts Fund and the New
York Insured Fund was 4.61%, 4.65%, 4.74%, 4.07% and 3.91%, respectively. For
the 30-day period ended March 31, 1994, the current yield of Class C of the
Florida Fund, the Pennsylvania Fund, the Texas Fund, the Massachusetts Fund and
the New York Insured Fund was 4.65%, 4.66%, 4.80%, 4.43% and 3.90%,
respectively.
Tax equivalent yield is, in general, the current yield divided by a
factor equal to one minus a stated income tax rate and reflects the yield a
taxable investment would have to achieve in order to equal on an after-tax basis
a tax-exempt yield. The tax equivalent yield for the 30-day period ended March
31, 1994 for Class A of the Florida Fund, the Pennsylvania Fund, the Texas Fund,
the Massachusetts Fund and the New York Insured Fund was 7.51%, 7.49%, 7.59%,
7.17% and 6.51%, respectively. The tax equivalent yield for the 30-day period
ended March 31, 1994 for Class B of the Florida Fund, the Pennsylvania Fund, the
Texas Fund, the Massachusetts Fund and the New York Insured Fund was 6.68%,
6.74%, 6.87%, 5.90% and 5.67%, respectively. The tax equivalent yield for the
30-day period ended March 31, 1994 for Class C of the Florida Fund, the
Pennsylvania Fund, the Texas Fund, the Massachusetts Fund and the New York
Insured Fund was 6.74%, 6.75%, 6.96%, 6.42% and 5.65%, respectively.
Any given yield or total return quotation should not be considered
representative of the Fund's yield or total return for any future period.
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ADDITIONAL INFORMATION
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State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian of all securities and cash of the FUND
("Custodian"). The Custodian performs no investment management functions for the
FUND, but, in addition to its custodial services, is responsible for accounting
and related record keeping on behalf of the FUND.
KPMG Peat Marwick, One Boston Place, Boston, Massachusetts 02108,
Certified Public Accountants, are the independent auditors for the FUND.
KIRC, located at 101 Main Street, Cambridge, Massachusetts 02142-1519,
is a wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the FUND.
Except as otherwise stated in its prospectus or required by law, the
FUND reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the FUND's
prospectus, statement of additional information or in supplemental sales
literature issued by the FUND or KDI, and no person is entitled to rely on any
information or representation not contained therein.
The FUND's prospectus and statement of additional information omit
certain information contained in the registration statement filed with the
Commission, a copy of which may be obtained from the Commission's principal
office in Washington, D.C. upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
As of June 30, 1994, Merrill Lynch Pierce Fenner & Smith, Atten: Book
Entry, 4800 Deer Lake Dr E 3rd FL, Jacksonville, FL 32246-6484, owned 12.43% of
the outstanding Class A shares of the Florida Fund.
As of June 30, 1994, Merrill Lynch Pierce Fenner & Smith, Atten: Book
Entry, 4800 Deer Lake Dr E 3rd Floor, Jacksonville, FL 32246-6484, owned 19.9%
of the outstanding Class B shares of the Florida Fund.
As of June 30, 1994, Merrill Lynch Pierce, Fenner & Smith, Atten: Book
Entry, 4800 Deer Lake Dr E 3rd Flr, Jacksonville, FL, 32246-6484, owned 29.0% of
the outstanding Class C shares of the Florida Fund. As of June 30, 1994,
PaineWebber FBO, Janice W. Goldstein, 3134 Ellicott St., NW, Washington, D.C.
20008-2025, owned 20.5% of the outstanding Class C shares of the Florida Fund.
As of June 30, 1994, Merrill Lynch Pierce, Fenner & Smith, Atten: Book
Entry, 4800 Deer Lake Dr E 3rd Flr, Jacksonville, FL 32246-6484, owned 9.67% of
the outstanding Class A shares; 11.0% of Class B shares and 49.2% of the
outstanding Class C shares of the Pennsylvania Fund.
As of June 30, 1994, Odelia B. McCarley, 20450 Huebner Road #11222,
San Antonio, TX 78258-3908, owned 19.7% of the outstanding Class A shares of the
Texas Fund. As of June 30, 1994, Merrill Lynch Pierce, Fenner & Smith, Atten:
Book Entry, 4800 Deer Lake Dr E 3rd Flr, Jacksonville, FL 32246-6484, owned
11.3% of the outstanding Class A shares of the Texas Fund. As of June 30, 1994,
James C. McClung, 3883 Turtle Creek Blvd. T-14, Dallas, TX 75219-4403, owned
9.3% of the outstanding Class A shares of the Texas Fund.
As of June 30, 1994, Teresa Holdren, 4910 Dollar Reef, Baycliff, Texas
77518, owned 12.82% of the outstanding Class B shares of the Texas Fund. As of
June 30, 1994, Mary Jo Clark, Post Office Box 25366, Houston, Texas 77265-5366,
owned 9.51% of the outstanding Class B shares of the Texas Fund. As of June 30,
1994, Merrill Lynch Pierce, Fenner & Smith, Atten: Book Entry, 4800 Deer lake Dr
E 3rd Flr, Jacksonville, FL 32246-6484, owned 9.3% of the outstanding Class B
shares of the Texas Fund. As of June 30, 1994, Rauscher Pierce Refsnes FBO Marie
S. Wood, 3504 42nd Street, Lubbock, Texas 79413, owned 5.24% of the outstanding
Class B shares of the Texas Fund. As of June 30, 1994, Prudential Securities
FBO, Little Trust, Taylor Eugene Little TTEE, Under Agreement 10/16/91, FBO:
Taylor Eugene Little, 1307 Briarpark, TX 77042 owned 5.18% of the outstanding
Class B shares of the Texas Fund. As of June 30, 1994, Edith Ann Holdren, 5135
Mimosa, Bellaire, Texas 77401, owned 5.13% of the outstanding Class B shares of
the Texas Fund. As of June 30, 1994, Alexander S. Hochman, Muriel A. Hochman Ten
Com,. 5320 Patrick Henry, Bellaire, Texas 77401, owned 5.05% of the outstanding
Class B shares of the Texas Fund.
As of June 30, 1994, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr. E 3rd FL, Jackson, FL 32246-6484 owned 90% of the
outstanding Class C shares of the Texas Fund.
As of June 30, 1994, Albert H. Elfner III, 53 Chestnut St, Boston, MA
02108-3506 owned 24.1% of the outstanding Class A shares of the Massachusetts
Fund. As of June 30, 1994, George S. Bissell, 78 Forrest Street, Wellesley, MA
02181-6828 owned 12.3% of the outstanding Class A shares of the Massachusetts
Fund. As of June 30, 1994, Richard Nakashian, P.O. Box 3150, Pocasset,
Massachusetts 02559, owned 10.3% of the outstanding Class A shares of the
Massachusetts Fund. As of June 30, 1994, Ida R. Rodriguez Trust #21528, The MASS
Co Inc TTEE, 58 Helen Rd, Needham, MA 02192-3934 owned 7.01% of the outstanding
Class A shares of the Massachusetts Fund. As of June 30, 1994, Raymond J.
Quintin Exec, O/E.O. Albert S. Broad Land, 355 Union Street, NE, Bedford, MA
02740 owned 6.21% of the outstanding Class A shares of the Massachusetts Fund.
As of June 30, 1994, Katherine L. Bruce, Trust #20646 The Mass Co Inc. TTEE, 208
Winthrop Road, Brookline, MA 02146-4415 owned 5.17% of the outstanding Class A
shares of the Massachusetts Fund.
As of June 30, 1994, Bowen David & Co, P.O. Box 1647, Boston, MA
02105-1647 owned 5.18% of the outstanding Class B shares of the Massachusetts
Fund. As of June 30, 1994, John T. Marion JR Trust #21081 The Mass Co Inc TTEE,
949 Main Street Apt. C, Woburn, MA 01801-1261 owned 5% of the outstanding Class
B shares of the Massachusetts Fund.
As of June 30, 1994, Salvatore M. Moscariello & Irene A. Moscariello JT
TEN, 24 Van Norden Road, Reading, MA 01867, owned 8.23% of the outstanding Class
C shares of the Massachusetts Fund. As of June 30, 1994, PaineWebber for the
Benefit of Mrs. Gladys Wilder, 38 Forrest Street, Norwell, MA 02061-2128, owned
6.31% of the Class C shares of the Massachusetts Fund. As of June 30, 1994,
Malcolm Groves TTEE Malcolm Groves Family Trust DTD July 18, 1983, PO Box 24,
Cummaquid, MA 02637, owned 5.48% of the outstanding Class C shares of the
Massachusetts Fund. As of June 30, 1994, Ernest Tasho, Gloria M. Tasho, 24
Sommerset St, Worcester, MA 01609, owned 5.46% of the outstanding Class C shares
of the Massachusetts Fund. As of June 30, 1994, John L. Lubin & Sylvia Lubin JT
TEN, 4 Imrie St, Randolph, MA 02368, owned 5.15% of the outstanding Class C
shares of the Massachusetts Fund.
As of June 30, 1994, Smith Barney Shearson, 00106214222, 388 Greenwich
Street, New York, NY 10013, owned 8.72% of the outstanding Class A shares of the
New York Insured Fund. As of June 30, 1994, Merrill Lynch Pierce Fenner & Smith,
Attn: Book Entry, 4800 Deer Lake Dr E 3rd Fl, Jacksonville, FL 32246-6484, owned
5.6% of the outstanding Class A shares of the New York Insured Fund.
As of June 30, 1994, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry 4800 Deer Lake Dr E 3rd Fl, Jacksonville, FL 32246-6484, owned 10.09% of
the outstanding Class B shares of the New York Insured Fund. As of June 30,
1994, Estate of Carroll D. Wright, Glenn H. Wallace Pers. Rep, 269 Whitney
Place, Buffalo, New York 14201, owned 6.87% of the outstanding Class B shares of
the New York Insured Fund.
As of June 30, 1994, Bear Stearns Securities Corp FBO 640-40507-15, 1
Metrotech Center North, Brooklyn, NY 11201-3859, owned 28.37% of the outstanding
Class C shares of the New York Insured Fund. As of June 30, 1994, Arlene
Meltzer, 363 Cochran Place, Valley Stream, NY 12995, owned 16.08% of the
outstanding Class C shares of the New York Insured Fund. As of June 30, 1994,
Carol T. Whitman, PO Box 43 Whippleville, NY 12995, owned 15.94% of the
outstanding Class C shares of the New York Insured Fund. As of June 30, 1994,
Bear Stearns Securities Corp. FBO 418-00487-14, 1 Metrotech Center North,
Brooklyn, NY 11201, owned 11% of the outstanding Class C shares of the New York
Insured Fund. As of June 30, 1994, Carol L. Moore, Rt. 2 Box 1055, chateaugay,
NY 12920-9522, owned 5.57% of the outstanding Class C shares of the New York
Insured Fund. As of June 30, 1994, Bear Stearns Securities Corp. FBO
418-00486-15, 1 Metrotech Center North, Brooklyn, NY 11201, owned 5.51% of the
outstanding Class C shares of the New York Insured Fund.
The FUND is one of 16 different investment companies in the Keystone
America family, which offers a range of choices to serve shareholder needs. In
addition to the FUND, the Keystone America family includes the following funds
with the various investment objectives described below:
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE AMERICA HARTWELL GROWTH FUND, INC. - Seeks capital appreciation by
investment in securities selected for their long-term growth prospects.
KEYSTONE AMERICA 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 AMERICA CAPITAL PRESERVATION AND INCOME FUND - II - Seeks high level of
current income, consistent with low volatility of principal, by investing under
ordinary circumstances at least 65% in adjustable rate securities issued by the
U.S. government, its agencies or instrumentalities.
KEYSTONE AMERICA EQUITY INCOME FUND - Seeks above-average income, dividend
growth and capital appreciation potential from quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 25%).
KEYSTONE AMERICA GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from
foreign and domestic securities.
KEYSTONE AMERICA GOVERNMENT SECURITIES FUND - Seeks income and capital
preservation from U.S. government securities.
KEYSTONE AMERICA INTERMEDIATE TERM BOND FUND - Seeks income, capital
preservation and price appreciation potential from investment grade corporate
bonds.
KEYSTONE AMERICA OMEGA FUND, INC. - Seeks maximum capital growth from common
stocks and securities convertible into common stocks.
KEYSTONE AMERICA STATE TAX FREE FUND - SERIES II - A mutual fund consisting of
two separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE AMERICA 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 AMERICA TAX FREE INCOME FUND - Seeks income exempt from federal income
taxes and capital preservation from the four highest grades of municipal bonds.
KEYSTONE AMERICA 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 AUSTRALIA FUNDS, INC. - A mutual fund consisting of two portfolios: The
Australia Short-Term Income Fund and the Australia Income Fund. The Australia
Income Fund seeks a high level of current income by investing at least 65% of
its total assets in Australian dollar denominated debt obligations. The
Australia Short Term Income Fund seeks a high level of current income,
consistent with the security of the Fund's capital and the maintenance of
liquidity.
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the U.S. and Canada)
and Latin America (Mexico and countries in South and Central America).
APPENDIX A
KEYSTONE AMERICA FLORIDA TAX FREE FUND
REVENUES
The State accounts for its receipts using fund accounting. It has
established the General Revenue Fund, the Working Capital Fund and various other
trust funds, which are maintained for the receipt of monies which under law or
trust agreements must be maintained separately.
The General Revenue Fund consists of all monies received by the State
from every source whatsoever which are not allocable to the other funds. Major
sources of tax revenues for the General Revenue Fund are the sales and use tax,
the corporate income tax, and the beverage tax, which are projected for fiscal
year 1994-95 to amount to 71%, 8% and 3%, respectively, of the total receipts of
that fund.
The Florida Constitution and its statutes mandate that the State budget
as a whole and each separate fund within the State budget be kept in balance
from currently available revenues for each fiscal year.
SALES AND USE TAX
The greatest single source of tax receipts in Florida is the sales and
use tax, which is projected to amount to 9.83 billion dollars for fiscal year
1994-95. The sales tax is 6% of the sales price of tangible personal property
sold at retail in the state. The use tax is 6% of the cash price or fair market
value of tangible personal property when it is not sold but is used, or stored
for use, in the State. In other words, the use tax applies to the use of
tangible personal property in Florida, which was purchased in another state but
would have been subject to the sales tax if purchased in Florida. Approximately
10% of the sales tax is designated for local governments and is distributed to
the respective counties in which collected for use by such counties and
municipalities therein. In addition to this distribution, local governments may
(by referendum) assess a 1% sales surtax within their county. Proceeds from this
local option sales surtax can be earmarked for funding countywide bus and rapid
transit systems, local infrastructure construction and maintenance, and medical
care for indigents, as set forth in Section 212.055(2), of the Florida Statutes.
The two taxes, sales and use, stand as complements to each other, and
taken together provide a uniform tax upon either the sale at retail or the use
of all tangible personal property irrespective of where it may have been
purchased. The sales tax also includes a levy on the following: (i) rentals on
tangible personal property and accommodations in hotels, motels, some
apartments, offices, real estate, parking and storage places in parking lots,
garages and marinas for motor vehicles or boats; (ii) admissions to places of
amusements, most sports and recreation events; (iii) utilities, except those
used in homes; and (iv) restaurant meals and expendables used in radio and
television broadcasting. Exemptions include: groceries; medicines; hospital
rooms and meals; seeds, feeds, fertilizers and farm crop protection materials;
purchases by religious, charitable and educational nonprofit institutions;
professional services, insurance and certain personal service transactions;
newspapers; apartments used as permanent dwellings; and kindergarten through
community college athletic contests or amateur plays.
OTHER STATE TAXES
Other taxes which Florida levies include the motor fuel tax, corporate
income tax, intangible property tax, documentary stamp tax, gross receipts
utilities tax and severance tax on the production of oil and gas and the mining
of solid minerals, such as phosphate and sulfur.
LOCAL GOVERNMENT DEBT
Numerous government units, counties, cities, school districts and
special taxing districts, issue general obligation bonds backed by their taxing
power. State and local government units may issue revenue obligations, which are
supported by the revenues generated from the particular projects or enterprises.
Examples include obligations issued to finance the construction of water and
sewer systems, health care facilities and educational facilities. In some cases,
sewer or water revenue obligations may be additionally secured by the full faith
and credit of the State.
OTHER FACTORS
The performance of the obligations issued by Florida, its
municipalities, subdivisions and instrumentalities are in part tied to
state-wide, regional and local conditions within Florida. Adverse changes to
state-wide, regional or local economies may adversely affect the
creditworthiness of Florida, its municipalities, etc. Also, some revenue
obligations may be issued to finance construction of capital projects which are
leased to nongovernmental entities. Adverse economic conditions might affect
those lessees' ability to meet their obligations to the respective governmental
authority which in turn might jeopardize the re-payment of the principal of, or
the interest on, the revenue obligations.
KEYSTONE AMERICA MASSACHUSETTS TAX FREE FUND
GENERAL
The Commonwealth's constitution requires, in effect, that its budget,
though not necessarily its operating expenditures and revenue, be balanced each
year. In addition, the Commonwealth has certain budgetary procedures and fiscal
controls in place that are designed to ensure that sufficient cash is available
to meet the Commonwealth's obligations, that state expenditures are consistent
with periodic allotments of annual appropriations and that the funds are
expended consistent with statutory and public purposes. The General Fund is
generally regarded as the principal indicator of whether the Commonwealth's
operating revenues and expenses are in balance. The other principal operating
funds (the Local Aid Fund and the Highway Fund) are customarily funded to at
least a zero balance.
Although the Commonwealth experienced quite a slowdown during the recession
with spending exceeding revenues, beginning in 1991 the Commonwealth has
experienced a turn-around in its finances with revenues exceeding spending.
Budgeted expenditures for fiscal 1989, 1990 and 1991 were approximately $12.643
billion, $13.260 billion and $13.659 billion, respectively while budgeted
revenues and other sources for those years were approximately $11.970, $12.008
billion and $13.634 billion, respectively. By comparison, budgeted revenues and
other sources increased by approximately 0.7% from fiscal 1991 to fiscal 1992,
while tax revenues increased by 5.4% for the same period. Budgeted expenditures
in fiscal 1992 were 1.7% lower than fiscal 1991 budgeted expenditures.
Furthermore, total revenues and other sources for fiscal 1993 increased
approximately 6.9% from fiscal 1992, while tax revenues increased by 4.7% for
the same period. Budgeted expenditures and other uses in fiscal 1993 were
approximately 9.6% higher than fiscal 1992 expenditures and other uses. As of
1993 fiscal year end, the Commonwealth showed a year-end cash position of
approximately $622.2 million, as compared to a projected position of $485.1
million. By comparison, the Commonwealth ended the 1989 fiscal year with fund
balances in deficit by $319.3 million.
The fiscal 1994 budget, as signed into law by the Governor on July 19,
1993, provides for expenditures of approximately $15.500 billion, an increase of
5.5% over fiscal 1993 levels. Budgeted revenues for fiscal 1994 are estimated to
be approximately $15.483 billion, which is 5.3% higher than fiscal 1993
expenditures. This amount includes estimated tax revenues of approximately
$10.560 billion, which is 6.3% higher than fiscal 1993 tax revenues. For fiscal
1994, a combined balance of $541.4 million is expected in the stabilization and
undesignated general funds. The fiscal 1994 budget is based upon numerous
spending and revenue estimates, the achievement of which cannot be assured.
In June 1993, new comprehensive education reform legislation was enacted.
It is expected that this legislation will require annual increases in
expenditures for education purposes above fiscal 1993 base spending of $1.289
billion of approximately $175 million in fiscal 1994, $141 million in fiscal
1995 and $662 million in fiscal 1996. The fiscal 1994 budget includes $175
million in appropriations to satisfy this legislation. Municipalities and
agencies of the Commonwealth are experiencing the same economic effects.
Moreover, they are affected by the financial condition of the Commonwealth,
because they receive substantial funding from the Commonwealth.
LIMITATIONS ON TAX REVENUES
In Massachusetts, efforts to limit and reduce levels of taxation have been
underway for several years. Limits were established on state tax revenues by
legislation enacted on October 25, 1986 and by an initiative petition approved
by the voters on November 4, 1986. The two measures are inconsistent in several
respects.
Chapter 62F, which was added to the General Laws by initiative petition in
November 1986, establishes a state tax revenue growth limit for each fiscal year
equal to the average positive rate of growth in total wages and salaries in the
Commonwealth, as reported by the federal government, during the three calendar
years immediately preceding the end of such fiscal year. Chapter 62F also
requires that allowable state tax revenues be reduced by the aggregate amount
received by local governmental units from any newly authorized or increased
local option taxes or excises. Any excess in state tax revenue collections for a
given fiscal year over the prescribed limit, as determined by the State Auditor,
is to be applied as a credit against the then current personal income tax
liability of all taxpayers in the Commonwealth in proportion to the personal
income tax liability of all taxpayers in the Commonwealth for the immediately
preceding tax year. The legislation enacted in October 1986, which added Chapter
29B to the General Laws, also establishes an allowable state revenue growth
factor by reference to total wages and salaries in the Commonwealth. However,
rather than utilizing a three-year average wage and salary growth rate, as used
by Chapter 62F, Chapter 29B utilizes an allowable state revenue growth factor
equal to 1/3 of the positive percentage gain in Massachusetts wages and salaries
during the three calendar years immediately preceding the end of a given fiscal
year.
Tax revenues in fiscal 1989 through fiscal 1993 were lower than the limit
set by either Chapter 62F or Chapter 29B. The Executive Office for
Administration and Finance currently estimates that state tax revenues in fiscal
1994 will not reach the limit imposed by either of these statutes.
In January 1992, the Governor announced his intention to seek an amendment
to the state constitution that would require any Commonwealth tax increase to
receive at least a two-thirds majority vote in each house of the Legislature. No
action has yet been taken on this proposal.
PROPOSITION 2 1/2
In November 1980, voters in the Commonwealth approved a statewide tax
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain levels of property taxation and to limit the charges and fees imposed
on cities and towns by certain governmental entities, including county
governments. Proposition 2 1/2 is not a provision of the state constitution and
accordingly is subject to amendment or repeal by the legislature. Proposition 2
1/2, as amended to date, limits the property taxes that may be levied by any
city or town in any fiscal year to the lesser of (i) 2.5% of the full and fair
cash valuation of the real estate and personal property therein, and (ii) 2.5%
over the previous year's levy limit plus any growth in the tax base from certain
new construction and parcel subdivisions. Proposition 2 1/2 also limits any
increase in the charges and fees assessed by certain governmental entities,
including county governments, on cities and towns to the sum of (i) 2.5% of the
total charges and fees imposed in the preceding fiscal year, and (ii) any
increase in charges for services customarily provided locally or services
obtained by the city or town at its option.
Many communities have responded to the limitations imposed by
Proposition 2 1/2 through statutorily permitted overrides and exclusions.
Override activity peaked in fiscal 1991, when 182 communities attempted votes on
one of the three types of referenda questions (override of levy limit, exclusion
of debt service, or exclusion of capital expenditures) and 100 passed at least
one question, adding $58.5 million to their levy limits. In fiscal 1992, 67 of
143 communities had successful votes totalling $31.0 million. In fiscal 1993, 83
communities attempted a vote; two-thirds of them (56) passed questions
aggregating $16.4 million. Although Proposition 2 1/2 will continue to constrain
local property tax revenues, significant capacity exists for overrides in every
community.
LOCAL AID
During the 1980's, the Commonwealth increased payments to its cities,
towns, and regional school districts ("Local Aid") to mitigate the impact of
Proposition 2 1/2 on local programs and services. In fiscal 1994, approximately
28.7% of the Commonwealth's budget is estimated to be allocated to Local Aid.
Local Aid payments to cities, towns, and regional school districts take the form
of both direct and indirect assistance.
Direct local aid decreased from $2.961 billion in fiscal 1989 to $2.328
billion in fiscal 1992 and increased to $2.547 billion in fiscal 1993. It is
estimated that fiscal 1994 expenditures for direct Local Aid will be $2.737
billion, which is an increase of approximately 7.5% above the fiscal 1993 level.
The additional amount of indirect Local Aid provided over and above direct Local
Aid was approximately $1.717 billion in fiscal 1993. It is estimated that in
fiscal 1994 approximately $1.717 billion of indirect Local Aid will also be
paid.
A statute adopted by voter initiative petition at the November 1990
statewide election regulates the distribution of Local Aid to cities and towns,
by requiring, subject to appropriation, that no less than 40% of collections
from personal income taxes, sales and use taxes, corporate excise taxes, and
lottery fund proceeds be distributed to cities and towns. Under the law, the
Local Aid distribution to each city or town would equal no less than 100% of the
total Local Aid received for fiscal 1989. Distributions in excess of fiscal 1989
levels would be based on new formulas. By its terms, the new formula would have
called for a substantial increase in direct Local Aid in fiscal 1992, and would
call for such an increase in fiscal 1993 and subsequent years. However, Local
Aid payments expressly remain subject to annual appropriation, and fiscal 1992
and fiscal 1993 appropriations for Local Aid did not meet, and fiscal 1994
appropriations for Local Aid do not meet, the levels set forth in the initiative
law.
COMMONWEALTH EXPENDITURES
From fiscal 1989 to fiscal 1991, total program expenditures of the
Commonwealth (which excludes interfund transfers) in its budgeted operating
funds increased at an average annual rate of approximately 4.0%. Fiscal 1992
program expenditures were $13.420 billion, or 1.7% lower than 1992 fiscal
program expenditures.
For fiscal 1993, program expenditures were $14.696 billion, representing a
9.6% increase from fiscal 1992. It is estimated that fiscal 1994 program
expenditures will total $15.500 billion, an increase of 5.5% over fiscal 1993
levels.
Commonwealth expenditures since fiscal 1989 largely reflect significant
growth in several programs and services provided by the Commonwealth,
principally Local Aid, Medicaid and group health insurance, public assistance
programs, debt service, pensions, higher education and assistance to the
Massachusetts Bay Transportation Authority and regional transit authorities.
The Commonwealth is responsible for the payment of pension benefits for
state employees and for school teachers throughout the state. The Commonwealth
is also responsible for cost of living increases payable to local government
retirees. State pension expenditures have risen dramatically as the Commonwealth
has appropriated moneys to partially address the unfunded liabilities that had
accumulated over several decades of "pay-as-you-go" administration of the
pension systems for which it is responsible. For several years during the 1980s,
the Commonwealth made substantial direct appropriations to pension reserves, in
addition to paying current benefits. In 1988, the Commonwealth adopted a funding
schedule under which it is required to fund future pension liabilities currently
and to amortize the accumulated unfunded liabilities over 40 years. Total
pension expenditures increased at an average annual rate of 7.1% from $659.7
million in fiscal 1989 to $868.2 million in fiscal 1993. The estimated pension
expenditures for fiscal 1994 are $951.0 million representing an increase of 9.5%
over fiscal 1993 expenditures.
OTHER FACTORS
Many factors affect the financial condition of the Commonwealth, including
many social, environmental, and economic conditions, which are beyond the
control of the Commonwealth. As with most urban states, the continuation of many
of the Commonwealth's programs, particularly its human service programs, is, in
significant part, dependent upon continuing federal reimbursements which have
been declining.
KEYSTONE AMERICA NEW YORK TAX FREE FUND
GENERAL
During the 1980's, New York's economy underperformed the nation's. The
State's economic performance was reflected in a contracting economic base and
dwindling economic growth that resulted in an erosion of the State's relative
economic influence. A review of the decade's employment trends indicates that
the State consistently lagged the nation in employment growth. In contrast to
the State's relative underperformance, New York City's economy grew steadily.
Economic growth was attributed to a 14.4% overall employment increase. The
service sector increased 3.5% per year and the finance and real estate sector
experienced an annual 2.9% increase. The bull markets of the 1980s gave powerful
economic impetus to the financial sector. The boom in the finance sector
aggravated local inflationary pressure. Between 1980 and 1989 the City's
consumer price index increased 4.6% per year versus a 3.6% increase for the
nation and overall wage rates climbed 7.1% per year, approximately 3.5
percentage points above the U.S. rate. The 1987 stock market crash was a turning
point in the City's economic direction. The ripple effect of the post-crash
layoffs in the finance, insurance and real estate sectors resulted in a stagnant
city economy.
The New York economy was severely impacted by the recession, but it has
begun to show signs of recovery. The recession has been more severe in New York
than in other parts of the nation, owning to a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an overbuilt real
estate market. More than 564,000 jobs were lost during the recession,
representing 7% of the pre-recession base. During 1993 employment continued to
decline but at diminishing rates (a 0.3% decline during 1993), indicating a
stabilizing economy. A modest job growth of approximately 0.8% is anticipated
for 1994. Through the year 1988 New York's employment growth is expected to
average approximately 1.4% per year, compared to the 2.3% annual expansion
experienced during 1983-1988. It is anticipated that New York's service and
trade sectors will be the major contributors to this growth, while the
manufacturing sector is expected to continue to contract. The State's economy is
significantly affected by New York City's economy by virtue of New York City's
dominance in population and economic activity. New York City accounts for
approximately 41% of the State's population and personal income.
The revised 1993-1994 State Financial Plan is based on an economic
projection that New York will perform more poorly than the nation as a whole.
Real gross domestic product grew modestly during calendar year 1992 and is
expected to show increased growth in calendar 1993. Many uncertainties exist in
forecasts of the State's economy, which could have an adverse effect on the
State, and there can be no assurance that the State economy will not experience
worse-than-predicted results in the 1994 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
For fiscal 1993, State financial operations produced a $671 million
surplus on a general fund budget of nearly $31 billion. This surplus followed
four years of operating deficits. The accumulated general fund deficit peaked in
1991 at $6.2 billion and has since decreased to $2.6 billion for fiscal 1993.
Debt reform is the principal cause for this improvement. Short-term borrowing is
only $850 million for the current fiscal year, the lowest level since 1969. To
reduce borrowing costs and improve market access, the Governor is proposing a
constitutional amendment to limit issuance of appropriation bonds and to create
tax-backed debt.
The State's updated financial plan estimates that fiscal 1994 will achieve
an ending cash balance of approximately $299 million. This larger than
anticipated surplus is a result of a stabilizing economy, improving tax
collections and slowing expenditure growth. The 1993 and 1994 budgets were
enacted in a timely manner and were based on realistic economic forecasts,
conservative revenue assumptions and some spending restraint. The Governor's
proposed budget for fiscal 1995 provides for general fund spending growth of
4.3%, use of the current year surplus, modest tax cuts and a small level of
non-recurring measures. The fiscal 1995 budget relies on modest growth of the
economy and includes growth in personal income withholding and sales and use tax
receipts of 5.3% and 4.1%, respectively.
Significant litigation exists at the State level of government. A suit
filed by a taxpayer activist challenges the constitutionality of the
transportation financing plan. Also, in November 1993, the Court of Appeals
affirmed a lower court's decision, declaring that certain accounting changes
made in funding methods of the State retirement system were unconstitutional.
The State may also be liable for significant payments related to a U.S. Supreme
Court decision involving abandoned property.
STATE FINANCING ACTIVITIES
For the four fiscal years prior to fiscal year 1992, the State incurred
operating deficits in the general fund. In fiscal 1993, the State began the
process of financial reform. Based upon realistic economic and revenue
estimates, the fiscal year 1993 financial plan exceeded expectations and closed
the year with a general fund operating surplus of $671 million in the General
Fund. The surplus revenues were deposited into a tax refund reserve account,
which typically had been funded in the $300-$350 million range. Overfunding of
this reserve allows some additional fiscal flexibility which was not present in
recent prior State budgets.
New York, for the second consecutive year, passed its fiscal 1994
budget essentially on time. The State faced a $3.7 billion budget gap for fiscal
year 1994, as determined by baseline projections. The Governor's 1994 budget
addressed this gap by reducing expenditures by $1.6 billion and increasing
revenues by $2.1 billion. The budget is based upon conservative economic
assumptions, which fall below those forecasted by the leading independent
forecasters.
During the past several years, the State has been forced to borrow on a
seasonal basis due to cash flow timing problems. In June 1990, the Local
Government Assistance Corporation ("LGAC") was formed as a public benefit
corporation for the purpose of issuing long term obligations designed to
eliminate this need. The legislation which created the LGAC specified that the
obligations will be amortized over no more than 30 years and put a $4.7 billion
cap, net of LGAC proceeds, on the seasonal borrowing program. This cap may be
exceeded in cases where the Governor and the legislature have certified the need
for additional borrowing and have devised a method for reducing it back to the
cap no later than the fourth fiscal year after the limit is exceeded. If this
cap were to be exceeded, it could result in action by the rating agencies which
could adversely affect prices of bonds held by the Fund. To date, LGAC has
issued its bonds to provide net proceeds of $3.281 billion and has been
authorized to issue its bonds to provide net proceeds of up to an additional
$703 million during the State's 1994 fiscal year.
In April 1993, legislation was also enacted providing for significant
changes in the long term financing practices of the State and the Authorities.
The Legislature passed a proposed constitutional amendment that would permit the
State, without a voter referendum, but within a formula-based cap, to issue
revenue bonds, which would be debt of the State secured solely by a pledge of
certain State tax receipts (including those allocated to State funds dedicated
for transportation purposes) and not by the full faith and credit of the State.
In addition, the proposed amendment would require that State debt be incurred
only for capital projects included in a multi-year capital financing plan and
would prohibit lease-purchase and contractual obligation financing mechanisms
for State facilities. The Governor and the Legislative leaders have indicated
that public hearings will be held on the proposed constitutional amendment.
Before becoming effective, the proposed constitutional amendment must first be
passed again by the next separately-elected Legislature and then approved by
voters at a general election, so that it could not become effective until after
the general election in November 1995.
THE CITY OF NEW YORK
The fiscal health of the State is closely related to the fiscal health of
its localities, particularly the City of New York, which has required and
continues to require significant financial assistance from the State. During the
1990 and 1991 fiscal years, the City experienced significant shortfalls in
almost all of its major tax sources and increases in social service costs, and
has been required to take actions to close substantial budget gaps in order to
maintain balanced budgets in accordance with its financial plan. For fiscal
1993, the City achieved balanced operating results.
In response to the City's financial crisis in 1975, the State took a number
of steps to assist the City in returning to fiscal stability. Among these
actions, the State created the Municipal Assistance Corporation for the City of
New York ("MAC") to provide financing assistance to the City. The State also
enacted the New York State Financial Emergency Act for the City of New York
(the "Financial Emergency Act") which, among other things, established the New
York State Financial Control Board (the "Control Board") to oversee the City's
financial affairs. The State also established the Office of the State Deputy
Comptroller for New York ("OSDC") in the Office of the State Comptroller to
assist the Control Board in exercising its powers and responsibilities.
The City operates under a four year Financial Plan which is prepared
annually and is periodically updated. On June 30, 1986, the Control Board's
powers of approval over the City's Financial Plan were suspended pursuant to the
Financial Emergency Act. However, the Control Board, MAC and OSDC continue to
exercise various monitoring functions relating to the City's financial position.
The City submits its financial plans as well as the periodic updates to the
Control Board for its review. In August 1993, the City submitted to the Control
Board its 1994-1997 Financial Plan. The Financial Plan projects a balanced
budget in fiscal 1994, based on revenues of approximately 31.250 billion. The
Financial Plan also predicts budget gaps of approximately $1.3 billion in fiscal
year 1995, $1.8 billion in fiscal year 1996 and $2.0 billion in fiscal year
1997.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid are not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided for
in the City's Financial Plan or if other uncertainties materialize that reduce
expected revenues or increase projected expenditures, then, to avoid operating
deficits, the City may be required to implement additional actions, including
increases in taxes and reductions in essential City services. The City might
also seek additional assistance from the State.
AUTHORITIES
New York State's authorities are generally responsible for financing,
constructing and operating revenue-producing public benefit facilities. As of
September 30, 1992, there were 18 Authorities that had outstanding debt of $100
million or more. The aggregate outstanding debt, including refunding bonds, of
these 18 Authorities was $62.2 billion as of September 30, 1992, of which
approximately $8.2 billion was moral obligation debt and approximately $17.1
billion was financed under lease-purchase or contractual-obligation financing
arrangements. While Authorities are generally supported by revenues generated,
financed or operated by projects of the Authorities, in recent years, the State
has provided financial assistance through appropriations to enable certain
Authorities (in particular, the New York State Urban Development Corporation and
the New York State Housing Finance Agency) to meet their financial obligations.
Further assistance to these Authorities is expected to be required to continue
in the future.
The Metropolitan Transportation Authority (the "MTA") oversees the
operation of New York City's bus and subway systems and, through its affiliates
and subsidiaries, operates certain commuter rail and bus lines and a rapid
transit line. Through an affiliate, the MTA operates certain intrastate toll
bridges and tunnels. The MTA has depended and will continue to depend upon
Federal, State, local government and agency support to operate the mass transit
portion of these operations because fare revenues are insufficient. The MTA and
the commuter railroads ended their 1991 fiscal year with their budgets balanced
on a cash basis. For 1993, a $69.8 million cash surplus has been projected. The
1994 operating budget proposal projects a $66 million cash surplus.
In 1981 the Legislature authorized procedures for the adoption, approval
and amendment of a five year plan for a capital program designed to upgrade the
performance of the MTA's transportation systems and to supplement, replace and
rehabilitate facilities and equipment, and also granted certain additional
bonding authorization for the capital program. The MTA has submitted to the
State several 1992-96 Capital Program proposals which have been rejected. A one
year program of approximately $1.6 billion has been deemed approved in the
interim.
AGENCIES AND LOCALITIES
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance during the State's
1993-1994 fiscal year and thereafter. The potential impact on the State of such
requests by localities is not included in the projections of the State receipts
and disbursements in the State's 1993-1994 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board of the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the Governor
or the State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short term
and long term borrowing. In 1991, the total indebtedness of all localities in
the State was approximately $32.2 billion, of which $16.8 billion was debt of
New York City (excluding $6.7 billion in Municipal Assistance Corporation debt);
a small portion of this indebtedness represented borrowing to finance budgetary
deficits and was issued pursuant to enabling State legislation. State law
requires the Comptroller to review and make recommendations concerning the
budgets of these local government units other than New York City authorized by
State law to finance deficits during the period that such deficit financing is
outstanding. Fifteen localities had outstanding indebtedness for deficit
financing at the close of their fiscal years ending 1991. In 1992, an unusually
large number of local government units requested authorization for deficit
financing. According to the Comptroller, ten local governmental units were
authorized to issue deficit financing in the aggregate amount of $131.1 million,
including Nassau County for $65 million in six-year deficit bonds and Suffolk
County for $36 million in six-year deficit bonds. Certain proposed federal
expenditure reductions would reduce, or in some cases eliminate, federal funding
of some local programs and accordingly might impose substantial increased
expenditure requirements on affected localities. If the State, New York City or
any of the Authorities were to suffer serious financial difficulties
jeopardizing their respective access to the public credit markets, the
marketability of notes and bonds issued by localities within the State could be
adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions, and long range
economic trends. The longer range potential problems of declining city
population, increasing expenditures and other economic trends could adversely
affect localities and require increasing State assistance in the future.
LITIGATION
Certain litigation pending against the State or its officers or
employees could have a substantial long term adverse effect on State finances.
Among the more significant of these cases are those that involve: (1) the
validity of agreements and treaties by which various Indian tribes transferred
title to the state of certain land in central and upstate New York; (2) certain
aspects of the State's Medicaid rates and regulations; (3) treatment provided at
several state mental health facilities; (4) contamination in the Love Canal area
of Niagara Falls; (5) alleged responsibility of State officials to assist in
remedying racial segregation in the City of Yonkers; and (6) challenges to
certain public authority financial programs.
Adverse developments in those proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced
1993-1994 State Financial Plan. An adverse decision in any of the above cited
proceedings could exceed the amount of the Revised 1993-1994 State Financial
Plan reserve for the payment of judgments and, therefore, could affect the
ability of the State to maintain a balanced 1993-1994 State Financial Plan.
KEYSTONE AMERICA PENNSYLVANIA TAX FREE FUND
GENERAL
The Commonwealth of Pennsylvania, the fifth most populous state,
historically has been identified as a heavy industry state, although that
reputation has changed with the decline of the coal, steel and railroad
industries and the resulting diversification of the Commonwealth's industrial
composition. The major new sources of growth are in the service sector,
including trade, medical and health services, educational and financial
institutions. Manufacturing has fallen behind in both the service sector and the
trade sector as a source of employment in Pennsylvania. The Commonwealth is the
home for more than 268,600 businesses and the headquarters for 64 major
corporations. Pennsylvania's average annual unemployment rate for the years
1988, 1989 and 1990 remained slightly below the nation's annual average
unemployment rate, and Pennsylvania's average annual unemployment rate for the
years 1991, 1992 and 1993 remained slightly above the nation's annual average
unemployment rate. The seasonally adjusted unemployment rate for Pennsylvania
for April, 1994 was 6.6% compared to 6.4% for the United States. The population
of Pennsylvania, 12,048 million people in 1993 according to the U.S. Bureau of
the Census, represents an increase from the 1984 estimate of 11,816 million.
Per capita income in Pennsylvania for 1992 of $20,410 was higher than the per
capita income of the United States of $20,114. The Commonwealth's General Fund,
which receives all tax receipts and most other revenues and through which debt
service on all general obligations of the Commonwealth are made, closed fiscal
years ended June 30, 1991, June 30, 1992 and June 30, 1993 with fund balances of
negative $980,936, positive $87,455 and positive $698,945, respectively.
DEBT
The Commonwealth may incur debt to rehabilitate areas affected by
disaster, debt approved by the electorate, debt for certain capital projects
(for projects such as highways, public improvements, transportation assistance,
flood control, redevelopment assistance, site development and industrial
development) and tax anticipation debt payable in the fiscal year of issuance.
The Commonwealth had outstanding general obligation debt of $4,969 million at
December 31, 1993. The Commonwealth is not permitted to fund deficits between
fiscal years with any form of debt. All year-end deficit balances must be funded
within the succeeding fiscal year's budget. At March 17, 1994, all outstanding
general obligation bonds of the Commonwealth were rated AA- by Standard & Poor's
Corporation and A-1 by Moody's Investors Service, Inc. (see Appendix B). There
can be no assurance that these ratings will remain in effect in the future. Over
the five-year period ending June 30, 1999, the Commonwealth has projected that
it will issue notes and bonds totaling $2,944.3 million and retire bonded debt
in the principal amount of $2,930.7 million.
Certain agencies created by the Commonwealth have statutory
authorization to incur debt for which Commonwealth appropriations to pay debt
service thereon are not required. As of December 31, 1993, total combined debt
outstanding for these agencies was $5,767.7 million. The debt of these agencies
is supported by assets of, or revenues derived from, the various projects
financed and is not an obligation of the Commonwealth. Some of these agencies,
however, are indirectly dependent on Commonwealth appropriations. The only
obligations of agencies in the Commonwealth that bear a moral obligation of the
Commonwealth are those issued by the Pennsylvania Housing Finance Agency
("PHFA"), a state-created agency which provides housing for lower and moderate
income families, and The Hospitals and Higher Education Facilities Authority of
Philadelphia (the "Hospital Authority"), an agency created by the City of
Philadelphia to acquire and prepare various sites for use as intermediate care
facilities for the mentally retarded. As of December 31, 1993, PHFA had $2,065.5
million of revenue bonds and notes outstanding.
LOCAL GOVERNMENT DEBT
Numerous local government units in Pennsylvania issue general
obligation (i.e., backed by taxing power) debt, including counties, cities,
boroughs, townships and school districts. School district obligations are
supported indirectly by the Commonwealth. The issuance of non-electoral general
obligation debt is limited by constitutional and statutory provisions. Electoral
debt, i.e., that approved by the voters, is unlimited. In addition, local
government units and municipal and other authorities may issue revenue
obligations that are supported by the revenues generated from particular
projects or enterprises. Examples include municipal authorities (frequently
operating water and sewer systems), municipal authorities formed to issue
obligations benefitting hospitals and educational institutions, and industrial
development authorities, whose obligations benefit industrial or commercial
occupants. In some cases, sewer or water revenue obligations are guaranteed by
taxing bodies and have the credit characteristics of general obligations debt.
OTHER FACTORS
The performance of the obligations held by the Fund issued by the
Commonwealth, its agencies, subdivisions and instrumentalities are in part tied
to state-wide, regional and local conditions within the Commonwealth and to the
creditworthiness of certain non-Commonwealth related obligors, depending upon
the Pennsylvania Fund's portfolio mix at any given time. Adverse changes to the
state-wide, regional or local economies or changes in government may adversely
affect the creditworthiness of the Commonwealth, its agencies and
municipalities, and certain other non-government related obligors of
Pennsylvania tax-free obligations (e.g., a university, a hospital or a corporate
obligor). The City of Philadelphia, for example, experienced severe financial
problems which impaired its ability to borrow money and adversely affected the
ratings of its obligations and their marketability. Conversely, some obligations
held by the Fund will be almost exclusively dependent on the creditworthiness of
one underlying obligor, such as a project occupant or provider of credit or
liquidity support.
KEYSTONE AMERICA TEXAS TAX FREE FUND
GENERAL
The collapse of oil prices in the mid-1980s adversely affected the
Texas economy due to the State's heavy dependence on oil production. The economy
has become more stable due to the decreased role of the oil and gas industry and
increased diversification into other employment sectors such as the service
producing sectors, including transportation and public utilities, finance,
insurance, real estate, services, trade and government, which are currently the
major sources of job growth in Texas. Unlike the rest of the U.S., in Texas
manufacturing jobs are increasing. Based on information from the Texas
Employment Commission, non-farm employment in Texas has reached an all-time high
of 7.4 million. Texas' jobless rate declined from nearly 10 percent in the
summer of 1986 to about 6% in the middle of 1990. It rose again after 1990, and
was approximately 6.9% in 1993, compared to a national average of 6.8%.
The Comptroller of Public Accounts of the State of Texas predicts that
the overall Texas economy will out-pace national economic growth in the long
term by an annual average of one-half percentage point. Of course, there can be
no assurances that this forecast will be realized. Moreover, even if it is
realized, the State's economic performance as a whole would not necessarily be
indicative of the financial performance of the State or local governments,
especially in regions of the State which do not perform as well as the State as
a whole.
STATE GOVERNMENT REVENUES
The state government ended each of the past six fiscal years with cash
surpluses. At the end of fiscal 1993, the State had a $1,693 million cash
balance in the general revenue fund, as compared with a $609 million cash
balance at the end of fiscal 1992. In May, 1993, the Legislature approved a $70
billion state budget for the biennium commencing September 1, 1993.
Historically, the primary sources of the state government's revenues
have been sales taxes, mineral severance taxes and federal grants. Federal
grants were the State's main revenue source, accounting for 28.4% of state
revenues during fiscal 1993, while sales tax accounted for 27% of state revenue
during Fiscal 1993. The remainder of the State government's revenues are derived
primarily from the motor fuels tax and other excise taxes, licenses, fees and
permits and interest and investment income. Much of the State government's
revenues are special revenues which are dedicated by the State constitution or
statute to specific purposes which may be inconsistent with the payment of debt
service on State obligations. In addition, the State government manages two
important trust funds--the Permanent University Fund and Permanent School
Fund--endowed with proceeds of the sale or lease of dedicated State lands,
including mineral interests, the income from which is constitutionally dedicated
to the support of State universities and public primary and secondary schools,
respectively.
The State constitution prohibits the State government from levying ad
valorem taxes on property for general revenue purposes. The State constitution
also limits the rate of growth of appropriations from tax revenues not dedicated
by the constitution during any biennium to the estimated rate of growth for the
State's economy. The Legislature may avoid the constitutional limitation if it
finds, by a majority vote of both houses, that an emergency exists. The State
constitution authorizes the Legislature to provide by law for the implementation
of this restriction, and the Legislature, pursuant to such authorization, has
defined the estimated rate of growth in the State's economy to mean the
estimated increase in State personal income.
STATE GOVERNMENT DEBT
With certain exceptions, the Constitution generally prohibits the
creation of debt by or for the State. The limitations of the Constitution do not
prohibit the issuance of revenue bonds, since the Texas courts have held that
certain obligations which are not payable from tax sources do not create a
"debt" within the meaning of the Constitution. The State and various state
agencies have issued revenue bonds payable from the revenues produced by various
facilities. Furthermore, obligations which are payable from funds expected to be
available during the current budget period do not constitute "debt" within the
meaning of the Constitution. Short term obligations, such as tax and revenue
anticipation notes which the Treasurer is authorized to issue solely to
coordinate the State's cash flow within a fiscal year, and which must mature and
be paid in full during the biennium in which they were issued, are not deemed to
be debt within the meaning of the constitutional prohibition. In addition, State
agencies may issue revenue bonds payable from payments to be made by the State
government for a lease or purchase of financed facilities, subject to biennial
appropriations. These bonds are considered "moral obligations" of the State
government, since failure to appropriate funds could injure the State's credit
in the marketplace, although the State government is not legally obligated to do
so.
At times, the voters of Texas, by constitutional amendment, have
authorized the issuance of debt by the State, including general obligation bonds
backed by the full faith and credit of the State. In some cases the authorized
debt requires the approval of the Legislature, but in other cases, the
constitutional amendments permit the debt to be issued without specific
legislative action. Of the general obligation bonds authorized by the State's
voters through November 30, 1993, $3.6 billion then remained outstanding and an
additional $4.975 billion were yet to be issued. These bonds include bonds that
may be issued by the Veterans' Land Board for veterans to purchase land and
housing, the Water Development Board for conservation and development of water
resources, the Parks and Wildlife Department for acquisition and development of
state parks, the Texas Higher Education Coordinating Board to finance student
loans, the Department of Agriculture for the purchase of farm and ranch real
estate,and the Texas Public Finance Authority to finance, repair and construct
facilities such as corrections and mental health institutions. In addition, the
voters have authorized the respective Boards of Regents of the University of
Texas System and the Texas A&M University System to issue bonds payable from
income from the Permanent University Fund up to 30% of the book value of the
Permanent University Fund, exclusive of real estate at the time of issuance.
LOCAL GOVERNMENT REVENUES
Various state laws place limits upon the amounts of tax that can be
levied upon the property subject to ad valorem taxes within various taxing
units, such as cities, counties and districts which have ad valorem taxing
powers (including without limitation, school and hospital districts). Because ad
valorem taxes are computed upon the appraised property valuations and property
appraisals are required to be conducted only every three years, it may be
several years before any decline in property values will be reflected in
decreases in tax collections. Conversely, if the energy industry should
experience an upturn or property values otherwise rebound, there may be a
similar lag time before the rise in property values results in increased ad
valorem tax collections. Areas whose tax bases include substantial oil and gas
producing properties are especially adversely affected by this.
FUNDING OF PUBLIC EDUCATION
On May 31, 1993, the Texas governor signed a comprehensive legislative
revision to the school finance provisions of the Texas Education Code. The
legislative revisions resulted from a series of court decisions commonly
referred to as Edgewood v. Kirby, in which Texas courts have declared the Texas
school finance system unconstitutional under Texas law. Generally, the courts
declared the school finance system unconstitutional because there must be a
"direct and close correlation between a district's tax effort and the
educational resources available to it," and because districts must have
"substantially equal access to similar revenues per pupil at similar levels of
tax effort." Previous legislative efforts to correct the school system were
declared unconstitutional.
As under prior law, the reform legislation retains a two tier system of
local school finance. Tier one and tier two are funded by district ad valorem
taxes on local property and by state available school funds and state
appropriation. However, guaranteed revenue levels under each tier are lower than
other recent legislative revisions. Attempting to equalize access to revenues,
the legislation requires either the redistribution of a property-rich school
district's tax base or tax revenues by adjusting the local tax base,
consolidating districts, or redistributing local tax revenues.
A state district court has found the reform legislation to be
constitutional; however, the decision has been appealed to the Texas Supreme
Court. Either the legislative revision or successful challenges to such revision
could substantially and adversely affect the obligation and ability of certain
Texas school districts to repay their property tax supported bonds. A successful
challenge to the legislative plan could also adversely affect the financial
condition and prospects of the Texas State Government.
Public higher education in the State is funded through a combination of
tuition, student fees and other local funds (including gifts from benefactors),
income from the Permanent University Fund and appropriations made by the
Legislature. Tuition rates are set by the Legislature, except that institutions
may double the tuition rate for graduate students. Many student fees are set by
the boards of regents of the various colleges and universities.
OTHER FACTORS
The Texas Fund expects to invest its assets in general obligation
bonds, moral obligation bonds, and revenue bonds issued by the State and local
governments to finance their own works or to finance private enterprises.
Payment of the revenue bonds will depend on the financial performance of the
enterprises financed, which may include public water, sewer, and electric
utility systems, municipal airports, nonprofit hospitals, multi-family
residential housing developments, portfolios of single-family mortgages or
student loans, and other enterprises. The performance of these enterprises may
be affected by industry trends, competition, labor relations, prevailing
interest rates, and similar factors which cannot be predicted with certainty.
Payment of general and moral obligation bonds will depend upon the future
financial condition of the issuing governments and their other obligations,
including obligations concerning public education, criminal detention
facilities, and other matters which have been or hereafter may be imposed by the
courts. The financial performance of financed enterprises and local governments
could be adversely affected not only by any downturn in the State's economy as a
whole, but also by regional or local factors such as closings of military bases,
layoffs by large employers, and the rate at which federal instrumentalities
dispose of the large amount of real estate held by insolvent financial
institutions under their management.
APPENDIX B
CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria are used in making that
assessment:
a. Amortization schedule (the larger the final maturity relative to
other maturities the more likely it will be treated as a note), and
b. Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 - Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
2. SP-2 - Satisfactory capacity to pay principal and interest.
3. SP-3 - Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as
part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+" ).
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of
the creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default and capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the
successful completion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
C. BOND RATINGS ARE AS FOLLOWS:
a. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
b. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the ad-verse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay prncipal in accordance with the terms of teh obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D. MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. Aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in AAA securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in AAA
securities.
3. A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
4. Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. Ba - Bonds which are rated Ba are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interst and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through BAA in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modi-fier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
CON. (---) - Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the Aa, A, and Baa groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa 1, A 1, and Baa 1.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes), and obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
some of which may be subject to repurchase agreements.
COMMERCIAL PAPER
Commercial paper will consist of issues rated at the time of purchase
A-1, by Standard & Poor's Corporation (S&P), or PRIME-1 by Moody's Investors
Service, Inc., (Moody's) or F-1 by Fitch Investors Services, Inc. (Fitch's); or,
if not rated, will be issued by companies which have an outstanding debt issue
rated at the time of purchase AAA, AA or A by Moody's, or AAA, AA or A by S&P,
or will be determined by Keystone to be of comparable quality.
A. S&P RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1. A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
2. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
1. The rating PRIME-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated PRIME-1 (or related supporting institutions) are
deemed to have a superior capacity for repayment of short term promissory
obligations. Repayment capacity of PRIME-1 issuers is normally evidenced by the
following characteristics:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate
reliance on debt and ample asset protection;
4) broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and
5) well established access to a range of financial markets and
assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks or of savings and loan associations, including their
branches abroad, and of U.S. branches of foreign banks, which are members of the
Federal Reserve System or the Federal Deposit Insurance Corporation, and have at
least $1 billion in deposits as of the date of their most recently published
financial statements.
The Funds will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Funds do not
currently intend to purchase foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by a Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance and securities issued by the Government
National Mortgage Association (GNMA). Treasury bills have maturities of one year
or less. Treasury notes have maturities of one to ten years and Treasury bonds
generally have maturities of greater than ten years at the date of issuance.
GNMA securities include GNMA mortgage pass-through certificates. Such securities
are supported by the full faith and credit of the U.S.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the U.S.,
Small Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration,
The Tennessee Valley Authority, District of Columbia Armory Board and Federal
National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, a Fund will invest in
the securities issued by such an instrumentality only when Keystone determines
under standards established by the Board of Trustees that the credit risk with
respect to the instrumentality does not make its securities unsuitable
investments. U.S. government securities do not include international agencies or
instrumentalities in which the U.S. government, its agencies or
instrumentalities participate, such as the World Bank, Asian Development Bank or
the Inter-American Development Bank, or issues insured by the Federal Deposit
Insurance Corporation.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations purchased primarily through Certificates of
Participation ("CPO's") are used by state and local governments to finance the
purchase of property, and function much like installment purchase obligations.
The payments made by the municipality under the lease are used to repay interest
and principal on the bonds issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. The lessor is, in effect, a lender secured by the property being
leased. A feature which distinguishes CPOs from municipal debt is that the lease
which is the subject of the transaction must contain a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that provides that, while
the municipality will use its best efforts to make lease payments, the
municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds. Local administrations,
being faced with increasingly tight budgets, therefore have more discretion to
curtail payments under COPs than they do to curtail payments on traditionally
funded debt obligations. If the government lessee does not appropriate
sufficient monies to make lease payments, the lessor or its agent is typically
entitled to repossess the property. In most cases, however, the private sector
value of the property will be less than the amount the government lessee was
paying.
Criteria considered by the rating agencies and Keystone in assessing the
risk of appropriation include the issuing municipality's credit rating,
evaluation of how essential the leased property is to the municipality and term
of the lease compared to the useful life of the leased property. The Board of
Trustees reviews the COPs held in each Fund's portfolio to assure that they
constitute liquid investments based on various factors reviewed by Keystone and
monitored by the Board. Such factors include (a) the credit quality of such
securities and the extent to which they are rated or, if unrated, comply with
existing criteria and procedures followed to ensure that they are of quality
comparable to the ratings required for each Fund's investment, including an
assessment of the likelihood that the leases will not be cancelled; (b) the size
of the municipal securities market, both in general and with respect to COPs;
and (c) the extent to which the type of COPs held by each Fund trade on the same
basis and with the same degree of dealer participation as other municipal bonds
of comparable credit rating or quality.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Funds intend to enter into financial futures contracts as a hedge
against changes in prevailing levels of interest rates to seek relative
stability of principal and to establish more definitely the effective return on
securities held or intended to be acquired by a Fund or as a hedge against
changes in the prices of securities held by a Fund or to be acquired by a Fund.
A Fund's hedging may include sales of futures as an offset against the effect of
expected increases in interest rates or securities prices and purchases of
futures as an offset against the effect of expected declines in interest rates.
For example, when a Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when a Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, a Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by doing so, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Funds intend to engage in options transactions which are related to
financial futures contracts for hedging purposes and in connection with the
hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Funds' exposure to
interest rate and/or market fluctuations, the Funds may be able to hedge their
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Funds do not intend to
take delivery of the instruments underlying futures contracts they hold, the
Funds do not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify financial instruments or financially
based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the United States are The Board of
Trade of the City of Chicago, the Chicago Mercantile Exchange, the International
Monetary Market (a division of the Chicago Mercantile Exchange), the New York
Futures Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
a Fund, as seller, to deliver the type of financial instrument specified in the
contract at a specified future time for a specified price. The purchase of an
interest rate futures contract creates an obligation by a Fund, as purchaser, to
accept delivery of the type of financial instrument specified at a specified
future time for a specified price. The specific securities delivered or
accepted, respectively, at settlement date, are not determined until at or near
that date. The determination is in accordance with the rules of the exchange on
which the futures contract sale or purchase was made.
Currently, interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, Government National Mortgage Association
(GNMA) certificates, 90-day domestic bank certificates of deposit, 90-day
commercial paper, and 90-day Eurodollar certificates of deposit. It is expected
that futures contracts trading in additional financial instruments will be
authorized. The standard contract size is $100,000 for futures contracts in U.S.
Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000 for
the other designated contracts. While U.S. Treasury bonds, U.S. Treasury bills
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
futures contracts in U.S. government securities are not obligations of the U.S.
Treasury.
INDEX BASED FUTURES CONTRACTS, OTHER THAN STOCK INDEX BASED
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed, the Funds will sell interest rate index
and other index based futures contracts to hedge against changes which are
expected to affect the Funds' portfolios.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by a Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to a Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from
the Broker, are made on a daily basis as the value of the underlying instrument
or index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when a
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, a Fund may elect to close the position. A final determination
of variation margin is then made, additional cash is required to be paid to or
released by the Broker, and the Fund realizes a loss or gain.
The FUND intends to enter into arrangements with its custodian and with
Brokers to enable the initial margin of a Fund and any variation margin to be
held in a segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which a Fund enters into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument or index and same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which a Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e. on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to a Fund.
There can be no assurance, however, that a Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If a Fund is not able to enter into an offsetting transaction,
the Fund will continue to be required to maintain the margin deposits on the
contract and to complete the contract according to its terms.
OPTIONS ON FINANCIAL FUTURES
The Funds intend to purchase call and put options on financial futures
contracts and sell such options to terminate an existing position. Options on
futures are similar to options on stocks except that an option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) rather than to purchase or sell
stock at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account. This amount
represents the amount by which the market price of the futures contract at
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and value of the futures contract.
The Funds intend to use options on financial futures contracts in
connection with hedging strategies. In the future the Funds may use such options
for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on financial futures contracts
is analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by a Fund. Put options may be purchased to hedge a portfolio
of stocks or debt instruments or a position in the futures contract upon which
the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of call options on financial futures contracts represents
a means of obtaining temporary exposure to market appreciation at limited risk.
It is analogous to the purchase of a call option on an individual stock, which
can be used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the futures contract upon which it is
based, or upon the price of the underlying financial instrument or index itself,
purchase of a call option may be less risky than the ownership of the interest
rate or index based futures contract or the underlying securities. Call options
on commodity futures contracts may be purchased to hedge against an interest
rate increase or a market advance when a Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING FINANCIAL FUTURES CONTRACTS OR
RELATED OPTIONS
The Funds may employ new investment techniques involving financial
futures contracts and related options. The Funds intend to take advantage of new
techniques in these areas which may be developed from time to time and which are
consistent with the Fund's investment objective. The FUND believes that no
additional techniques have been identified for employment by the Funds in the
foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
A Fund will not enter into a futures contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin deposits on such
futures contracts.
The Funds intend that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that a Fund owns, or futures contracts will be purchased to protect a
Fund against an increase in the price of securities it intends to purchase. The
Funds do not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts will be deposited in a segregated account with the FUND's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, a Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for a Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of a Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, a Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
RISKS OF FUTURES CONTRACTS
Financial futures contracts prices are volatile and are influenced,
among other things, by changes in stock prices, market conditions, prevailing
interest rates and anticipation of future stock prices, market movements or
interest rate changes, all of which in turn are affected by economic conditions,
such as government fiscal and monetary policies and actions, and national and
international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in a Fund's portfolio. In addition,
futures contract transactions involve the remote risk that a party be unable to
fulfill its obligations and that the amount of the obligation will be beyond the
ability of the clearing broker to satisfy. A decision of whether, when and how
to hedge involves the exercise of skill and judgment, and even a well conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, a Fund would presumably have sustained comparable losses if, instead of
entering into the futures contract, it had invested in the underlying financial
instrument. Furthermore, in order to be certain that a Fund has sufficient
assets to satisfy its obligations under a futures contract, the Fund will
establish a segregated account in connection with its futures contracts which
will hold cash or cash equivalents equal in value to the current value of the
underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for financial futures
contracts, there are several special risks relating to options on futures
contracts. The ability to establish and close out positions on such options will
be subject to the development and maintenance of a liquid secondary market.
There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. A Fund will not purchase options
on any futures contract unless and until it believes that the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to a Fund, even though the use of a futures contract would not,
such as when there is no movement in the level of the futures contract.
EXHIBIT A
GLOSSARY OF TERMS
CLASS OF OPTIONS. Options covering the same underlying security.
CLEARING CORPORATION. The Options Clearing Corporation, Trans Canada
Options, Inc., The European Options Clearing Corporation B.V., or the London
Options Clearing House.
CLOSING PURCHASE TRANSACTIONS. A transaction in which an investor who
is obligated as a writer of an option or seller of a futures contract terminates
his obligation by purchasing on an Exchange an option of the same series as the
option previously written or futures contract identical to the futures contract
previously sold, as the case may be. (Such a purchase does not result in the
ownership of an option or futures contract.)
CLOSING SALE TRANSACTION. A transaction in which an investor who is the
holder or buyer of an outstanding option or futures contract liquidates his
position as a holder or seller by selling an option of the same series as the
option previously purchased or futures contract identical to the futures
contract previously purchased. (Such sale does not result in the investor
assuming the obligations of a writer or seller).
COVERED CALL OPTION WRITER. A writer of a call option who, so long as
he remains obligated as a writer, owns the shares of the underlying security or
holds on a share for share basis a call on the same security where the exercise
price of the call held is equal to or less than the exercise price of the call
written, or, if greater than the exercise price of the call written, the
difference is maintained by the writer in cash, U.S. Treasury bills, or other
high grade, short term obligations in a segregated account with the writer's
broker or custodian.
COVERED PUT OPTION WRITER. A writer of a put option who, so long as he
remains obligated as a writer, has deposited Treasury bills with a value equal
to or greater than the exercise price with a securities depository and has
pledged them to the Options Clearing Corporation for the account of the
brokerdealer carrying the writer's position or holds on a share for share basis
a put on the same security as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written, or,
if less than the exercise price of the put written, the difference is maintained
by the writer in cash, U.S. Treasury bills, or other high grade, short term
obligations in a segregated account with the writer's broker or custodian.
SECURITIES EXCHANGE. A securities exchange on which call and put
options are traded. The U.S. Exchanges are as follows: The Chicago Board Options
Exchange; American Stock Exchange; New York Stock Exchange; Philadelphia Stock
Exchange; and Pacific Stock Exchange. The foreign securities exchanges in Canada
are the Toronto Stock Exchange and the Montreal Stock Exchange, in the
Netherlands, the European Options Exchange, and in the United Kingdom, the Stock
Exchange (London).
Those issuers whose common stocks have been approved by the Exchanges as
underlying securities for option transactions are published in various financial
publications.
COMMODITIES EXCHANGE. A commodities exchange on which futures contracts
are traded which is regulated by exchange rules that have been approved by the
Commodity Futures Trading Commission. The U.S. exchanges are as follows: The
Chicago Board of Trade of the City of Chicago; Chicago Mercantile Exchange;
International Monetary Market; (a division of the Chicago Mercantile Exchange);
the Kansas City Board of Trade; and the New York Futures Exchange.
EXERCISE PRICE. The price per unit at which the holder of a call option
may purchase the underlying security upon exercise or the holder of a put option
may sell the underlying security upon exercise.
EXPIRATION DATE. The latest date when an option may be exercised or a
futures contract must be completed according to its terms.
HEDGING. An action taken by an investor to neutralize an investment
risk by taking an investment position which will move in the opposite direction
as the risk being hedged so that a loss (or gain) on one will tend to be offset
by a gain (or loss) on the other.
OPTION. Unless the context otherwise requires, the term "option" means
either a call or put option issued by a Clearing Corporation, as defined above.
A call option gives a holder the right to buy from such Clearing Corporation the
number of shares of the underlying security covered by the option at the stated
exercise price by the filing of an exercise notice prior to the expiration time
of the option. A put option gives a holder the right to sell to a Clearing
Corporation the number of shares of the underlying security covered by the
option at the stated exercise price by the filing of an exercise notice prior to
the expiration time of the option. The Fund will sell ("write") and purchase
puts only on U.S. Exchanges.
OPTION PERIOD. The time during which an option may be exercised,
generally from the date the option is written through its expiration date.
PREMIUM. The price of an option agreed upon between the buyer and
writer or their agents in a transaction on the floor of an Exchange.
SERIES OF OPTIONS. Options covering the same underlying security and
having the same exercise price and expiration date.
INDEX BASED FUTURES CONTRACT. An index based futures contract is a
bilateral agreement pursuant to which a party agrees to buy or deliver at
settlement an amount of cash equal to $500 times the difference between the
closing value of an index on the expiration date and the price at which the
futures contract is originally struck. Index based futures are traded on
Commodities Exchanges. Currently index based stock index futures contracts can
be purchased or sold with respect to the Standard & Poor's Corporation (S&P) 500
Stock Index and S&P 100 Stock Index on the Chicago Mercantile Exchange, the New
York Stock Exchange Composite Index on the New York Futures Exchange and the
Value Line Stock Index and Major Market Index on the Kansas City Board of Trade.
UNDERLYING SECURITY. The security subject to being purchased upon the
exercise of a call option or subject to being sold upon the exercise of a put
option.
<PAGE>
Keystone America Pennsylvania Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1994
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (93.8%)
Allegheny County, Pennsylvania, Industrial Development
Authority, Nursing Home 5.700% 09/01/2030 $ 2,250,000 $ 2,025,000
Beaver County, Pennsylvania, Industrial Development
Authority, Mansfield Project 7.000 06/01/2021 200,000 213,500
Beaver County, Pennsylvania, Industrial Development
Authority, Ohio Edison Co. 7.750 09/01/2024 1,170,000 1,235,812
Bucks County, Pennsylvania, Industrial Development
Authority, Grandview Hospital Project 7.000 07/01/2021 205,000 229,856
Cambria County, Pennsylvania, Hospital Development
Authority 8.875 07/01/2018 330,000 386,100
Clinton County, Pennsylvania, Pollution Control,
International Paper Co. 5.375 05/01/2004 1,500,000 1,436,250
Commonwealth of Puerto Rico, General Obligation 7.250 07/01/2010 75,000 85,031
County of Allegheny, Pennsylvania, Airport Revenue 5.625 01/01/2016 1,000,000 897,500
County of Allegheny, Pennsylvania, Airport Revenue 6.625 01/01/2022 750,000 764,062
Delaware County, Pennsylvania, Crozier Chester Medical
Center 7.500 12/15/2020 45,000 51,694
Delaware County, Pennsylvania, Industrial Development
Authority, Philadelphia Electric Co. 7.375 04/01/2021 850,000 891,437
Delaware County, Pennsylvania, Industrial Development
Authority, Resource Recovery Project 8.100 12/01/2013 45,000 48,656
Erie County Hospital Authority, Pennsylvania, Hospital
Revenue, St. Vincent's Hospital 6.375 07/01/2022 500,000 501,875
Guthrie Health Care Systems Facility of Sayre,
Pennsylvania 7.100 03/01/2017 410,000 441,775
Langhorne Manor Borough, Pennsylvania, Higher Education
and Health Authority, Lower Bucks County Hospital 7.350 07/01/2022 1,500,000 1,522,500
Lehigh County, Pennsylvania, General Purpose Authority,
Good Shepherd Rehabilitation Hospital 7.500 11/15/2021 1,000,000 1,027,500
Lehigh County, Pennsylvania, Pennsylvania Power & Light
Co. Project 6.400 11/01/2021 3,000,000 3,022,500
Luzerne County, Pennsylvania, Industrial Development
Authority, Pennsylvania Gas & Water 6.050 01/01/2019 1,510,000 1,351,450
Montgomery County, Pennsylvania, Higher Education and
Health Authority, St. Joseph's University 6.500 12/15/2022 750,000 765,000
Montgomery County, Pennsylvania, Industrial Development
and Pollution Control, Philadelphia Electric Co. 7.600 04/01/2021 950,000 1,002,250
Northumberland County, Pennsylvania (effective yield
6.82%)(b) 0.000 10/15/2012 4,200,000 1,349,250
Pennsylvania Convention Center Authority 6.700 09/01/2016 250,000 263,438
Pennsylvania Economic Development Financing Authority
Resources Recovery, Northhampton University Project 6.600 01/01/2019 1,500,000 1,378,125
Pennsylvania General Obligation 5.000 04/15/2010 1,700,000 1,515,125
Pennsylvania General Obligation 5.375 05/01/2013 2,000,000 1,822,500
Pennsylvania Higher Education Facilities Authority,
Allegheny General Hospital 7.250 09/01/2017 110,000 117,288
Pennsylvania Housing Finance Agency, Rental Housing 5.800 01/01/2018 500,000 474,375
See Notes to Schedule of Investments. (Continued on next page)
<PAGE>
Keystone America Pennsylvania Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1994
Coupon Maturity Principal Market
Rate Date Amount Value
Municipal Bonds (continued)
Pennsylvania Housing Finance Agency, Single Family
Mortgage 6.850% 04/01/2016 $1,500,000 $1,558,125
Pennsylvania Housing Finance Agency, Single Family
Mortgage 6.900 04/01/2017 1,000,000 1,043,750
Pennsylvania Housing Finance Agency, Single Family
Mortgage 7.375 10/01/2016 65,000 69,225
Pennsylvania Housing Finance Agency, Single Family
Mortgage (c) 10.166 04/01/2025 1,700,000 1,670,250
Pennsylvania Industrial Development Authority, Economic
Revenue Bonds 7.000 01/01/2011 4,205,000 4,378,456
Pennsylvania Intergovernmental Cooperation Authority 5.000 06/15/2022 2,000,000 1,635,000
Pennsylvania Intragovernmental Cooperation Authority 6.800 06/15/2022 2,500,000 2,737,500
Pennsylvania State Higher Education Facilities Authority,
Thomas Jefferson University 6.625 08/15/2009 1,450,000 1,475,375
Philadelphia Municipal Development Authority,
Pennsylvania, Correctional Facilities 7.800 04/01/2018 5,000 5,631
Philadelphia Municipal Development Authority,
Pennsylvania, Correctional Facilities 7.800 04/01/2018 40,000 46,000
Philadelphia, Pennsylvania, Gas Works 6.375 07/01/2026 2,200,000 2,125,750
Philadelphia, Pennsylvania, Gas Works 7.250 01/01/2010 50,000 53,938
Philadelphia, Pennsylvania, Gas Works 7.700 06/15/2011 205,000 238,313
Philadelphia, Pennsylvania, Gas Works 7.700 06/15/2011 95,000 106,638
Philadelphia, Pennsylvania, Hospital & Higher Education
Facilities, Albert Einstein Medical Center 7.000 10/01/2021 945,000 963,900
Philadelphia, Pennsylvania, Hospital & Higher Education
Facilities, Albert Einstein Medical Center 7.625 04/01/2011 900,000 952,875
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilites, Graduate Health System 6.250 07/01/2019 530,000 477,663
Philadelphia, Pennsylvania Hospitals And Higher Education
Facilities Authority, Children's Hospital 5.375 02/15/2014 1,000,000 877,500
Philadelphia, Pennsylvania, School District 5.375 07/01/2005 3,000,000 2,872,500
Philadelphia, Pennsylvania, Water And Waste Water 5.750 06/15/2013 1,000,000 900,000
Pottsville, Pennsylvania, Hospital Authority, Good
Samaritan Medical Center 5.000 08/15/2012 2,500,000 2,115,625
Puerto Rico Aqueduct and Sewer Authority 7.875 07/01/2017 350,000 385,000
Puerto Rico General Obligation 5.400 07/01/2007 2,000,000 1,887,500
Puerto Rico Highway Authority 7.750 07/01/2010 325,000 377,000
Scranton-Lackawanna, Pennsylvania, Health and Welfare
Authority Revenue, Walters Institute Project 8.125 07/15/2028 400,000 440,500
Scranton-Lackawanna, Pennsylvania, Health and Welfare
Authority Revenue, Mercy Health 6.900 01/01/2023 110,000 115,775
Somerset County, Pennsylvania, General Authority 6.250 10/15/2011 300,000 319,500
South Fork Municipal Authority, Pennsylvania, Conemaugh
Valley Memorial Hospital 5.625 07/01/2010 1,000,000 945,000
Washington County, Pennsylvania, Hospital Revenue,
Shadyside Hospital 7.450 12/15/2018 155,000 177,475
See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS--March 31, 1994
Coupon Maturity Principal Market
Rate Date Amount Value
Municipal Bonds (continued)
Westmoreland County, Pennsylvania, Industrial Development
Authority, Westmoreland Health System 5.375% 07/01/2011 $2,500,000 $2,287,500
TOTAL MUNICIPAL BONDS (Cost--$58,967,805) 58,059,113
TEMPORARY TAX-EXEMPT INVESTMENTS (4.5%)
Philadelphia, Pennsylvania, Redevelopment Authority
School Revenue Bonds (Pennsylvania School for the Deaf)
(a) 2.250 12/01/2014 1,155,000 1,155,000
Sayre County, Pennsylvania, Health Care Facilities
Authority, Variable Rate Demand Hospital Revenue Bonds
(VHA of Pennsylvania Inc. Capital Asset Financing
Program) Series 1985B (a) 2.200 12/01/2020 1,225,000 1,225,000
Sayre Pennsylvania Health Care Facs Authority, Variable
Rate Hospital Revenue Bonds (VHA of Pennsylvania, Inc.
Capital Asset Financing Program), Series 1985I (a) 2.200 12/01/2020 415,000 415,000
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS
(Cost--$2,795,000) 2,795,000
TOTAL INVESTMENTS (Cost--$61,762,805) (d) 60,854,113
OTHER ASSETS AND LIABILITIES--NET (1.7%) 1,048,666
NET ASSETS (100.0%) $61,902,779
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of the
demand features.
(b) Effective yield (calculated at the date of purchase) is the yield at which
the bond accretes on an accrual basis until maturity date.
(c) Represents securities that pay interest at a rate that increases (decreases)
with a decline (increase) in short-term tax-free market index. Interest rate
disclosed is the rate in effect on March 31, 1994.
(d) The cost of investments for federal income tax purposes amounted to
$61,763,469. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at March 31, 1994 are as follows:
Gross unrealized appreciation $1,254,571
Gross unrealized depreciation (2,163,927)
Net unrealized depreciation ($909,356)
<PAGE>
Keystone America Pennsylvania Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
December 27, 1990
(Commencement of
Year Ended March 31, Operations) to
1994 1993 1992 March 31, 1991
<S> <C> <C> <C> <C>
Net asset value beginning of period $11.4200 $10.7100 $10.2500 $10.0000
Income from investment operations
Investment income--net 0.6161 0.6349 0.7426 0.1806
Realized gains (losses) on investments--net (0.2990) 0.7499 0.4600 0.2500
Total income from investment operations 0.3171 1.3848 1.2026 0.4306
Less distributions
Dividends from investment income--net (0.6195) (0.6349) (0.7426) (0.1806)
Distributions in excess of investment
income--net (c) (0.0376) (0.0199) 0 0
Distributions from realized gains on
investments--net (0.0633) (0.0200) 0 0
Distributions in excess of realized gains on
investments--net (0.0067) 0 0 0
Total distributions (0.7271) (0.6748) (0.7426) (0.1806)
Net asset value end of period $11.0100 $11.4200 $10.7100 $10.2500
Total return (d) 2.58% 13.30% 12.07% 4.37%
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 0.75% 0.68% 0.65% 0.65%(a)
Investment income--net 5.27% 5.66% 6.92% 6.84%(a)
Portfolio turnover rate 37% 20% 13% 8%
Net assets end of period (thousands) $30,560 $35,502 $12,914 $2,979
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, "Ratio
of operating and management expenses to average net assets" would have been
1.06%, 1.16%, 1.68% and 3.19% (annualized) for the fiscal years ended March
31,1994, 1993 and 1992 and the period December 27, 1990 (commencement of
operations) to March 31, 1991,
respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis net investment (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income--net." Similarly, capital gain distributions in
excess of book basis capital gains (or tax basis gains on a temporary basis)
are presented as "Distributions in excess of realized gains on
investments--net." For the fiscal year ended March 31, 1993, distributions in
excess of book basis net income were charged to paid-in capital.
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Keystone America Pennsylvania Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
February 1, 1993
(Date of Initial
Year Ended Public Offering) to
March 31, 1994 March 31, 1993
Net asset value beginning of
period $11.4200 $11.2000
Income from investment
operations
Investment income--net 0.5556 0.0809
Realized gains (losses) on
investments--net (0.3390) 0.2359
Total income from investment
operations 0.2166 0.3168
Less distributions
Dividends from investment
income--net (0.5201) (0.0809)
Distributions in excess of
investment income--net (c) (0.0665) (0.0159)
Distributions from realized
gains on investments--net (0.0343) 0
Distributions in excess of
realized gains on
investments--net (0.0357) 0
Total distributions (0.6566) (0.0968)
Net asset value end of period $10.9800 $11.4200
Total return 1.70% 2.82%
Ratios/supplemental data
Ratios to average net assets:
Operating and management
expenses (b) 1.50% 1.50%(a)
Investment income--net 4.32% 3.44%(a)
Portfolio turnover rate 37% 20%
Net assets end of period
(thousands) $ 21,958 $ 2,543
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before the expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would have
been 1.81% and 1.69% (annualized) for the year ended March 31, 1994 and the
period February 1, 1993 (Date of Initial Public Offering) to March 31, 1993,
respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis net investment (or tax
basis net income on a temporary basis) are presented a "Distributions in
excess of investment income--net." Similarly, capital gain distributions in
excess of book basis capital gains (or tax basis gains on a temporary basis)
are presented as "Distributions in excess of realized gains on
investment--net." For the period February 1, 1993 (Date of Initial Public
Offering) to March 31, 1993, distributions in excess of book basis net income
were charged to paid-in capital.
<PAGE>
Keystone America Pennsylvania Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
February 1, 1993
(Date of Initial
Year Ended Public Offering) to
March 31, 1994 March 31, 1993
Net asset value beginning of
period $ 11.4200 $ 11.2000
Income from investment
operations
Investment income--net 0.5462 0.0710
Realized gains (losses) on
investments--net (0.3217) 0.2448
Total income from investment
operations 0.2245 0.3158
Less distributions
Dividends from investment
income--net (0.5219) (0.0710)
Distributions in excess of
investment income--net (c) (0.0526) (0.0248)
Distributions from realized
gains on investments--net (0.0337) 0
Distributions in excess of
realized gains on
investments--net (0.0363) 0
Total distributions (0.6445) (0.0958)
Net asset value end of period $ 11.0000 $ 11.4200
Total return 1.78% 2.81%
Ratios/supplemental data
Ratios to average net assets:
Operating and management
expenses (b) 1.50% 1.50%(a)
Investment income--net 4.33% 2.50%(a)
Portfolio turnover rate 37% 20%
Net assets end of period
(thousands) $ 9,385 $ 952
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before the expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would have
been 1.90% and 1.60% (annualized) for the year ended March 31, 1994 and the
period February 1, 1993 (Date of Initial Public Offering) to March 31, 1993,
respectively.
(c) Effective April 1, 1993 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis net investment (or tax
basis net income on a temporary basis) are presented as "Distributions in
excess of investment income--net." Similarly, capital gain distributions in
excess of book basis capital gains (or tax basis gains on a temporary basis)
are presented as "Distributions in excess of realized gains on
investments--net." For the period February 1, 1993 (Date of Initial Public
Offering) to March 31, 1993 distributions is excess of book basis net income
were charged to paid-in capital.
See Notes to Financial Statements.
<PAGE>
Keystone America Pennsylvania Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES--March 31, 1994
ASSETS:
Investments at market value (identified cost--
$61,762,805)(Note 1) $60,854,113
Cash 3,968
Receivable for:
Fund shares sold 286,589
Interest 1,102,152
Due from Investment Adviser (Note 4) 36,426
Unamortized organization expenses (Note 1) 11,081
Prepaid expenses 3,579
Total assets 62,297,908
Liabilities:
Payable for:
Fund shares redeemed 62,266
Income distributions 310,919
Accrued reimbursable expenses (Note 4) 124
Other accrued expenses 21,820
Total liabilities 395,129
Net assets $61,902,779
Net assets represented by (Note 1):
Paid-in capital $62,848,781
Accumulated distributions in excess of
investment income--net (108,524)
Accumulated realized gains (losses) on
investments--net 71,214
Net unrealized depreciation on investments (908,692)
Total net assets $61,902,779
Net asset value and redemption price per share
(Note 2):
Class A Shares ($11.01 on 2,775,588 shares
outstanding) $30,560,010
Class B Shares ($10.98 on 1,999,935 shares
outstanding) 21,958,194
Class C Shares ($11.00 on 853,452 shares
outstanding) 9,384,575
$61,902,779
Offering price per share:
Class A Shares (including sales charge of
4.75%)(Note 2) $ 11.56
Class B Shares $ 10.98
Class C Shares $ 11.00
STATEMENT OF OPERATIONS--
Year Ended March 31, 1994
Investment Income:
Interest $ 3,173,490
Expenses (Notes 1, 2 and 4):
Management fee $ 291,982
Shareholder services 78,621
Custodian fees 40,765
Accounting 15,023
Auditing 11,718
Legal 11,446
Printing 21,295
Registration fees 8,519
Amortization of organization expenses 6,447
Distribution Plan expenses 228,051
Postage and mailing 1,161
Miscellaneous expenses 2,262
Total expenses 717,290
Less: Reimbursement from Investment
Adviser (Note 4) (173,209)
Net expenses 544,081
Investment income--net (Note 1) 2,629,409
Realized and unrealized gain (loss) on
investments--net:
Realized gain on investments sold:
Proceeds from sales 18,875,809
Cost of investments sold 18,615,606
Realized gain on investments--net
(Note 3) 260,203
Net unrealized appreciation
(depreciation) on investments:
Beginning of year 1,901,418
End of year (908,692)
Increase (decrease) in unrealized
appreciation or depreciation--net (2,810,110)
Net loss on investments (2,549,907)
Net increase in net assets resulting
from operations $ 79,502
See Notes to Financial Statements.
<PAGE>
Keystone America Pennsylvania Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended March 31,
1994 1993
Operations:
Investment income--net (Note 1) $ 2,629,409 $ 1,424,236
Realized gains on investments--net
(Note 3) 260,203 133,066
Increase (decrease) in unrealized
appreciation or depreciation--net (2,810,110) 1,612,339
Net increase in net assets resulting
from operations 79,502 3,169,641
Distributions to shareholders from
(Notes 1 and 5):
Investment income--net--Class A
Shares (1,799,163) (1,417,148)
In excess of investment
income--net--Class A Shares (109,066) (44,459)
Realized gains from
investments--net--Class A Shares (190,387) (46,774)
In excess of realized gains from
investments--net--Class A Shares (20,150) 0
Investment income--net--Class B
Shares (559,910) (6,134)
In excess of investment
income--net--Class B Shares (71,503) (1,206)
Realized gains from
investments--net--Class B Shares (46,226) 0
In excess of realized gains from
investments--net--Class B Shares (48,235) 0
Investment income--net--Class C
Shares (270,336) (954)
In excess of investment
income--net--Class C Shares (27,275) (333)
Realized gains from
investments--net--Class C Shares (23,591) 0
In excess of realized gains from
investments--net--Class C Shares (25,409) 0
Total distributions to shareholders (3,191,251) (1,517,008)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A
Shares 9,860,800 22,000,245
Proceeds from shares sold--Class B
Shares 20,840,298 2,587,074
Proceeds from shares sold--Class C
Shares 9,480,902 956,646
Payment for shares redeemed--Class A
Shares (14,642,422) (2,132,094)
Payment for shares redeemed--Class B
Shares (460,192) (35,622)
Payment for shares redeemed--Class C
Shares (686,320) 0
Net asset value of shares issued in
reinvestment of distributions from:
Investment income--net and in excess
of investment income--net--
Class A Shares 856,370 1,009,943
Investment income--net and in excess
of investment income--net--
Class B Shares 331,750 6,588
Investment income--net and in excess
of investment income--net--
Class C Shares 200,252 1,048
Realized gain from investments--net
and in excess of realized gain from
investments--net--Class A Shares 126,877 36,109
Realized gain from investments--net
and in excess of realized gain from
investments--net--Class B Shares 68,449 0
Realized gain from investments--net
and in excess of realized gain from
investments--net--Class C Shares 40,740 0
Net increase in net assets resulting
from capital share transactions 26,017,504 24,429,937
Total increase in net assets 22,905,755 26,082,570
Net assets:
Beginning of year 38,997,024 12,914,454
End of year [including accumulated
distributions in excess of investment
income-- net as follows: March
1994--($108,524) and March
1993--0--](Note 1) $ 61,902,779 $38,997,024
See Notes to Financial Statements.
<PAGE>
Keystone America Pennsylvania Tax Free Fund
FEDERAL TAX STATUS--Fiscal 1994 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1994, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends Capital Gains
Short- Long-
Tax-exempt Term Term Total
$0.6571 $0.0700 --0-- $0.7271
Class B Shares
Income Dividends Capital Gains
Short- Long-
Tax-exempt Term Term Total
$0.5866 $0.0700 --0-- $0.6566
Class C Shares
Income Dividends Capital Gains
Short- Long-
Tax-exempt Term Term Total
$0.5745 $0.0700 --0-- $0.6445
In January 1995 complete information on calendar year 1994 distributions will
be forwarded to you to assist in completing your 1994 federal income tax
return.
See Notes to Financial Statements
<PAGE>
Keystone America Massachusetts Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1994
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (103.9%)
Boston, Massachusetts 5.000% 07/01/2011 $100,000 $ 87,625
Boston, Massachusetts,
Boston City Hospital 5.750 02/15/2023 100,000 88,875
Burlington,
Massachusetts, General
Obligation 5.200 01/15/2014 140,000 123,725
Commonwealth of
Massachusetts, General
Obligation 5.000 01/01/2014 100,000 85,125
Lawrence, Massachusetts,
General Obligation 6.250 02/15/2009 100,000 102,750
Massachusetts Industrial
Finance Agency, Harvard
Community Health Plan,
Inc. 8.125 10/01/2017 165,000 179,850
Massachusetts Bay
Transportation Authority,
Series B 6.200 03/01/2016 180,000 177,525
Massachusetts Educational
Financing Authority (b) 6.000 01/01/2012 150,000 144,562
Massachusetts Health And
Educational Facilities
Authority, Smith College 5.750 07/01/2016 150,000 140,625
Massachusetts Health And
Educational Facilities
Authority, Children's
Hospital 6.200 10/01/2016 110,000 107,938
Massachusetts Health And
Educational Facilities
Authority, Holyoke
Hospital 6.500 07/01/2015 200,000 189,750
Massachusetts Health And
Educational Facilities
Authority, Lahey Clinic
Medical Center 5.375 07/01/2023 200,000 171,250
Massachusetts Health And
Educational Facilities
Authority, Massachusetts
Eye And Ear Infirmary 7.375 07/01/2011 65,000 67,925
Massachusetts Health And
Educational Facilities
Authority, Massachusetts
General Hospital 5.375 07/01/2011 115,000 104,075
Massachusetts Health And
Educational Facilities
Authority, McLean
Hospital 6.500 07/01/2010 35,000 35,788
Massachusetts Health And
Educational Facilities
Authority, Wakefield
Hospital 5.875 07/01/2018 45,000 39,319
Massachusetts Health And
Educational Facilities
Authority, Wheaton
College 5.250 07/01/2014 300,000 264,000
Massachusetts Health And
Educational Facilities
Authority, Winchester
Hospital 5.750 07/01/2024 150,000 132,562
Massachusetts Housing
Finance Agency 5.950 12/01/2014 250,000 242,187
Massachusetts Municipal
Wholesale Electric, Power
Supply System 6.750 07/01/2008 160,000 165,600
Massachusetts Port
Authority 5.000 07/01/2018 125,000 105,000
Massachusetts Water
Abatement Trust 5.250 08/01/2014 125,000 113,281
Massachusetts Water
Resources Authority 6.000 12/01/2011 180,000 174,375
Massachusetts Water
Resources Authority 6.500 07/15/2021 165,000 180,881
North Adams,
Massachusetts, Limited
Tax General Obligation 5.700 03/01/2013 50,000 47,125
North Reading,
Massachusetts, Limited
Tax General Obligation 5.750 08/01/2006 135,000 133,650
Puerto Rico Highway
Authority 5.250 07/01/2020 25,000 21,219
Puerto Rico Industrial,
Tourist, Educational,
Medical And Environmental
Control Facilities
Authority 5.700 08/01/2013 265,000 242,806
Puerto Rico, Telephone
Authority 5.400 01/01/2008 45,000 42,863
Quincy, Massachusetts,
Quincy Hospital 5.250 01/15/2016 100,000 87,125
TOTAL MUNICIPAL BONDS
(Cost -- $4,033,378) 3,799,381
See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS--March 31, 1994
Coupon Maturity Principal Market
Rate Date Amount Value
TEMPORARY TAX-EXEMPT
INVESTMENTS (12.3%)
Massachusetts Health And
Educational Facilities
Authority (Capital Assets
Program), Series D(a) 2.200% 01/01/2035 $190,000 $ 190,000
Massachusetts Health And
Educational Facilities
Authority (Harvard
University Issue), Series
1985I(a) 2.100 08/01/2017 30,000 30,000
Massachusetts Industrial
Finance Authority Health
Facility Revenue
Refunding Bonds (Beverly
Enterprises--
Massachusetts
Incorporated/Dedham
Project), Series 1985(a) 2.800 04/01/2009 105,000 105,000
Massachusetts Industrial
Finance Authority Revenue
Bonds (New England
Deaconess Association
Project), Series 1993B(a) 2.200 04/01/2023 125,000 125,000
TOTAL TEMPORARY
TAX-EXEMPT INVESTMENTS
(Cost--$450,000) 450,000
TOTAL INVESTMENTS
(Cost--$4,483,378)(c) 4,249,381
OTHER ASSETS AND
LIABILITIES--NET (-16.2%) (592,083)
NET ASSETS (100.0%) $3,657,298
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of the
demand features.
(b) At March 31, 1994 securities purchased on a when-issued basis totaled
$144,562.
(c) The cost of investments for federal income tax purposes amounted to
$4,485,323. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at March 31, 1994 are as follows:
Gross unrealized appreciation $ 0
Gross unrealized depreciation (235,942)
Net unrealized depreciation ($235,942)
<PAGE>
Keystone America Massachusetts Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Net asset value beginning of
period $10.0000
Income from investment
operations
Investment income--net 0.0872
Realized gains (losses) on
investments-net (0.8241)
Total income from investment
operations (0.7369)
Less distributions
Dividends from investment
income--net (0.0854)
Distributions in excess of
investment income--net (0.0077)
Total distributions (0.0931)
Net asset value end of period $ 9.1700
Total return (c) (7.40%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management
expenses (b) 0.35%(a)
Investment income--net 5.07%(a)
Portfolio turnover rate 7%
Net assets end of period
(thousands) $1,472
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would have
been 3.22% (annualized) for the period February 4, 1994 (Commencement of
Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Keystone America Massachusetts Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Net asset value beginning of period $10.0000
Income from investment operations
Investment income--net 0.0839
Realized gains (losses) on investments--net (0.8008)
Total income from investment operations (0.7169)
Less distributions
Dividends from investment income--net (0.0670)
Distributions in excess of investment income--net (0.0261)
Total distributions (0.0931)
Net asset value end of period $ 9.1900
Total return (c) (7.20%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.10%(a)
Investment income--net 3.23%(a)
Portfolio turnover rate 7%
Net assets end of period (thousands) $1,817
</TABLE>
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would have
been 4.60% (annualized) for the period February 4, 1994 (Commencement of
Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Keystone America Massachusetts Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Net asset value beginning of period $10.0000
Income from investment operations
Investment income--net 0.0807
Realized gains (losses) on investments--net (0.7989)
Total income from investment operations (0.7182)
Less distributions
Dividends from investment income--net (0.0738)
Distributions in excess of investment income--net (0.0180)
Total distributions (0.0918)
Net asset value end of period $ 9.1900
Total return (c) (7.21%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.10%(a)
Investment income--net 4.28%(a)
Portfolio turnover rate 7%
Net assets end of period (thousands) $369
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would have
been 4.91% (annualized) for the period February 4, 1994 (Commencement of
Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Keystone America Massachusetts Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1994
ASSETS:
Investments at market value (identified cost--
$4,483,378)(Note 1) $4,249,381
Cash 4,549
Receivable for:
Fund shares sold 109,215
Interest 50,223
Due from Investment Adviser (Note 4) 12,616
Prepaid expenses 20
Total assets 4,426,004
Liabilities:
Payable for:
Investments purchased 743,082
Income distribution 15,079
Accrued expenses 10,545
Total liabilities 768,706
Net assets $3,657,298
Net assets represented by (Note 1):
Paid-in capital $3,909,863
Accumulated distributions in excess of
investment income--net (1,803)
Accumulated realized gains (losses) on
investments--net (16,765)
Net unrealized depreciation on investments (233,997)
Total net assets $3,657,298
Net asset value and redemption price per share
(Note 2):
Class A Shares ($9.17 on 160,576 shares outstanding) $1,471,731
Class B Shares ($9.19 on 197,822 shares outstanding) 1,817,030
Class C Shares ($9.19 on 40,123 shares outstanding) 368,537
$3,657,298
Offering price per share:
Class A Shares (including sales charge of 4.75%)(Note
2) $ 9.63
Class B Shares $ 9.19
Class C Shares $ 9.19
STATEMENT OF OPERATIONS--
February 4, 1994 (Commencement
of Operations) to March 31, 1994
Investment Income:
Interest $ 19,726
Expenses (Notes 1, 2 and 4):
Management fee $ 2,167
Shareholder services 246
Custodian fees 2,210
Auditing 3,182
Legal 1,053
Printing 3,841
Registration fees 758
Distribution Plan expenses 1,887
Miscellaneous expenses 60
Total expenses 15,404
Less: Reimbursement from Investment
Adviser (Note 4) (12,616)
Net expenses 2,788
Investment income--net (Note 1) 16,938
Realized and unrealized gain (loss)
on investments--net:
Realized gain on investments sold:
Proceeds from sales 167,494
Cost of investments sold 184,259
Realized loss on investments--net
(Note 3) (16,765)
Net unrealized appreciation
(depreciation) on investments:
Beginning of period 0
End of period (233,997)
Increase (decrease) in unrealized
appreciation or depreciation--net (233,997)
Net loss on investments (250,762)
Net decrease in net assets resulting
from operations ($ 233,824)
See Notes to Financial Statements.
<PAGE>
Keystone America Massachusetts Tax Free Fund
STATEMENT OF CHANGES IN NET ASSETS
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Operations:
Investment income--net (Note 1) $16,938
Realized loss on investments--net (Note
3) (16,765)
Increase (decrease) in unrealized
appreciation or depreciation--net (233,997)
Net decrease in net assets resulting
from operations (233,824)
Distributions to shareholders from
(Notes 1 and 5):
Investment income--net--Class A Shares (10,428)
In excess of investment
income--net--Class A Shares (942)
Investment income--net--Class B Shares (4,687)
In excess of investment
income--net--Class B Shares (1,824)
Investment income--net--Class C Shares (1,823)
In excess of investment
income--net--Class C Shares (445)
Total distributions to shareholders (20,149)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A
Shares 1,681,688
Proceeds from shares sold--Class B
Shares 1,926,809
Proceeds from shares sold--Class C
Shares 401,620
Payment for shares redeemed--Class A
Shares (91,900)
Payment for shares redeemed--Class B
Shares (4,920)
Payment for shares redeemed--Class C
Shares (4,920)
Net asset value of shares issued in
reinvestment of distributions from:
Investment income--net and in excess of
investment income--net--
Class A Shares 2,378
Investment income--net and in excess of
investment income--net--
Class B Shares 160
Investment income--net and in excess of
investment income--net--
Class C Shares 356
Net increase in net assets resulting
from capital share transactions 3,911,271
Total increase in net assets 3,657,298
Net assets:
Beginning of period 0
End of period [Including accumulated
distributions in excess of investment
income--net as follows: March
1994--($1,803)](Note 1) $3,657,298
See Notes to Financial Statements.
<PAGE>
Keystone America Massachusetts Tax Free Fund
FEDERAL TAX STATUS--Fiscal 1994 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1994, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.0931
Class B Shares
Income Dividends
Tax-exempt
$0.0931
Class C Shares
Income Dividends
Tax-exempt
$0.0918
In January 1995 complete information on calendar year 1994 distributions will
be forwarded to you to assist in completing your 1994 federal income tax
return.
See Notes to Financial Statements.
<PAGE>
Keystone America New York Insured Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1994
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (85.5%)
Broome County, New York, Public
Safety Facility 5.250% 04/01/2018 $ 60,000 $ 53,550
Buffalo, New York Sewer
Authority 5.250 07/01/2008 135,000 125,550
Buffalo, New York, General
Obligation 5.250 04/01/2010 105,000 96,731
Cattaraugus County, New York,
General Obligation 5.000 08/01/2007 200,000 185,000
Commonwealth of Puerto Rico,
General Obligation 5.250 07/01/2018 100,000 84,875
Nassau County, New York,
Combined Sewer District 5.300 07/01/2007 20,000 19,025
Nassau County, New York,
Combined Sewer District 6.000 05/01/2014 200,000 197,250
New York City, General
Obligation 5.750 08/01/2010 90,000 86,513
New York Resources Recovery
Agency (b) 7.250 07/01/2011 100,000 110,375
New York State Dormitory
Authority, Fordham University 5.750 07/01/2015 250,000 234,062
New York State Dormitory
Authority, Mount Sinai Medical
School 5.000 07/01/2021 125,000 104,063
New York State Dormitory
Authority, New York University 5.000 07/01/2008 100,000 89,000
New York State Energy Research
And Development Authority
Facilities 5.250 08/15/2020 100,000 87,625
New York State Energy, New York
State Electric & Gas 5.700 12/01/2028 160,000 143,200
New York State Medical Care
Facilities Finance Agency 5.800 11/01/2013 100,000 94,875
New York State Medical Care
Facilities Finance Agency 5.800 08/15/2022 175,000 163,187
New York State Power Authority 5.250 01/01/2018 40,000 35,350
New York State Thruway
Authority 5.000 01/01/2014 25,000 21,688
Niagara Falls, New York Bridge
Commission 5.250 10/01/2021 140,000 121,450
Onondaga County, New York,
Resource Recovery Agency 6.875 05/01/2006 80,000 80,000
Port Authority of New York And
New Jersey 5.000 07/15/2024 150,000 125,812
Rochester, New York, General
Obligation 5.000 08/15/2018 180,000 155,700
Suffolk County, New York
Industrial Development Agency,
Southwest Sewer Systems 6.000 02/01/2008 100,000 100,875
Triborough Bridge And Tunnel
Authority, New York 6.000 01/01/2019 140,000 135,975
Westchester County, New York
Industrial Development 5.750 07/01/2009 100,000 95,875
TOTAL MUNICIPAL BONDS (Cost --
$2,889,203) 2,747,606
TEMPORARY TAX-EXEMPT
INVESTMENTS (17.0%)
New York City General
Obligation Bonds, Fiscal 1993,
Series B(a) 2.600 10/01/2020 185,000 185,000
New York City Trust for
Cultural Resources Adjustable
Tender Revenue Bonds (American
Museum of Natural History),
Series 1991B(a) 2.100 04/01/2021 160,000 160,000
New York State Housing Finance
Agency Multi-Family Housing,
Series A(a) 2.050 11/01/2028 100,000 100,000
New York State Thruway
Authority General Revenue Bonds
Variable Rate Demand Notes(a) 2.800 01/01/2024 100,000 100,000
TOTAL TEMPORARY TAX-EXEMPT
INVESTMENTS
(Cost --$545,000) 545,000
See Notes to Schedule of Investments.
<PAGE>
Market
Value
SCHEDULE OF INVESTMENTS--March 31, 1994
TOTAL INVESTMENTS
(Cost--$3,434,203) (c) $3,292,606
OTHER ASSETS AND
LIABILITIES--NET(-2.5%) (81,192)
NET ASSETS (100.0%) $3,211,414
</TABLE>
Notes to Schedule of Investments:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of the
demand features.
(b) At March 31, 1994 securities purchased on a when-issued basis totaled
$110,375.
(c) The cost of investments for federal income tax purposes amounted to
$3,435,064. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at March 31, 1994 are as follows:
Gross unrealized appreciation $ 0
Gross unrealized depreciation (142,458)
Net unrealized depreciation ($142,458)
<PAGE>
Keystone America New York Insured Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Net asset value beginning of period $10.0000
Income from investment operations
Investment income--net 0.0862
Realized gains (losses) on
investment--net (0.6748)
Total income from investment
operations (0.5886)
Less distributions
Dividends from investment income--net (0.0784)
Distributions in excess of investment
income--net (0.0130)
Total distributions (0.0914)
Net asset value end of period $ 9.3200
Total return (c) (5.91%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 0.35%(a)
Investment income--net 3.85%(a)
Portfolio turnover rate 14%
Net assets end of period (thousands) $680
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would have
been 4.44% (annualized) for the period February 4, 1994 (Commencement of
Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Keystone America New York Insured Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Net asset value beginning of period $10.0000
Income from investment operations
Investment income--net 0.0812
Realized gains (losses) on
investments--net (0.6698)
Total income from investment
operations (0.5886)
Less distributions
Dividends from investment income--net (0.0620)
Distributions in excess of investment
income--net (0.0294)
Total distributions (0.0914)
Net asset value end of period $ 9.3200
Total return (c) (5.91%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.10%(a)
Investment income--net 3.01%(a)
Portfolio turnover rate 14%
Net assets end of period (thousands) $2,276
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would have
been 5.60% (annualized) for the period February 4, 1994 (Commencement of
Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Keystone America New York Insured Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Net asset value beginning of period $10.0000
Income from investment operations
Investment income--net 0.0736
Realized gains (losses) on
investments--net (0.6735)
Total income from investment
operations (0.5999)
Less distributions
Dividends from investment income--net (0.0664)
Distributions in excess of investment
income--net (0.0237)
Total distributions (0.0901)
Net asset value end of period $ 9.3100
Total return (c) (6.02%)
Ratios/supplemental data
Ratios to average net assets:
Operating and management expenses (b) 1.10%(a)
Investment income--net 3.71%(a)
Portfolio turnover rate 14%
Net assets end of period (thousands) $255
(a) Annualized.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of operating and management expenses to average net assets" would have
been 5.13% (annualized) for the period February 4, 1994 (Commencement of
Operations) to March 31, 1994.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Keystone America New York Insured Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES--
March 31, 1994
ASSETS:
Investments at market value (identified cost--
$3,434,203)(Note 1) $3,292,606
Cash 4,113
Receivable for:
Fund shares sold 248,076
Interest 35,456
Due from Investment Adviser (Note 4) 11,650
Prepaid expenses 15
Total assets 3,591,916
Liabilities:
Payable for:
Investments purchased 361,074
Income distribution 9,432
Accrued expenses 9,996
Total liabilities 380,502
Net assets $3,211,414
Net assets represented by (Note 1):
Paid-in capital $3,365,491
Accumulated distributions in excess of
investment income--net (1,759)
Accumulated realized gains (losses) on
investments--net (10,721)
Net unrealized depreciation on investments (141,597)
Total net assets $3,211,414
Net asset value and redemption price per share
(Note 2):
Class A Shares ($9.32 on 72,967 shares
outstanding) $ 680,233
Class B Shares ($9.32 on 244,217 shares
outstanding) 2,276,012
Class C Shares ($9.31 on 27,408 shares
outstanding) 255,169
$3,211,414
Offering price per share:
Class A Shares (including sales charge of
4.75%)(Note 2) $ 9.78
Class B Shares $ 9.32
Class C Shares $ 9.31
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
February 4, 1994 (Commencement
of Operations) to March 31, 1994
Investment Income:
Interest $ 11,302
Expenses (Notes 1, 2 and 4):
Management fee $ 1,473
Shareholder services 426
Custodian fees 1,600
Auditing 3,182
Printing 3,941
Registration fees 379
Legal 1,053
Distribution Plan expenses 2,035
Miscellaneous expenses 60
Total expenses 14,149
Less: Reimbursement from Investment Adviser
(Note 4) (11,650)
Net expenses 2,499
Investment income--net (Note 1) 8,803
Realized and unrealized gain (loss) on
investments:
Realized gain on investments sold:
Proceeds from sales 173,979
Cost of investments sold 184,700
Realized loss on investments--net (Note 3) (10,721)
Unrealized gain (loss) on investments--net:
Net unrealized appreciation (depreciation)
on investments:
Beginning of period 0
End of period (141,597)
Increase (decrease) in unrealized
appreciation or depreciation--net (141,597)
Net loss on investments (152,318)
Net decrease in net assets resulting from
operations ($143,515)
<PAGE>
Keystone America New York Insured Tax Free Fund
STATEMENT OF CHANGES IN NET ASSETS
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Operations:
Investment income--net (Note 1) $ 8,803
Realized loss on investments--net (Note 3) (10,721)
Increase (decrease) in unrealized appreciation
or depreciation--net (141,597)
Net decrease in net assets resulting from
operations (143,515)
Distributions to shareholders from (Notes 1
and 5):
Investment income--net--Class A Shares (2,291)
In excess of investment income--net--Class A
Shares (380)
Investment income--net--Class B Shares (5,248)
In excess of investment income--net--Class B
Shares (2,489)
Investment income--net--Class C Shares (1,264)
In excess of investment income--net--Class C
Shares (452)
Total distributions to shareholders (12,124)
Capital share transactions (Note 2):
Proceeds from shares sold--Class A Shares 872,036
Proceeds from shares sold--Class B Shares 2,543,473
Proceeds from shares sold--Class C Shares 429,008
Payment for shares redeemed--Class A Shares (159,452)
Payment for shares redeemed--Class B Shares (160,779)
Payment for shares redeemed--Class C Shares (157,276)
Net asset value of shares issued in
reinvestment of distributions from investment
income--net and in excess of investment
income--net Class B Shares 43
Net increase in net assets resulting from
capital share transactions 3,367,053
Total increase in net assets 3,211,414
Net assets:
Beginning of period 0
End of period [Including accumulated
distributions in excess of investment
income--net as follows: March
1994--($1,759)](Note 1) $3,211,414
See Notes to Financial Statements.
<PAGE>
Keystone America New York Insured Tax Free Fund
FEDERAL TAX STATUS--Fiscal 1994 Distributions
(Unaudited)
The per share distributions paid to you for fiscal 1994, whether taken in
shares or cash, are as follows:
Class A Shares
Income Dividends
Tax-exempt
$0.0914
Class B Shares
Income Dividends
Tax-exempt
$0.0914
Class C Shares
Income Dividends
Tax-exempt
$0.0901
In January 1995 complete information on calendar year 1994 distributions will
be forwarded to you to assist in completing your 1994 federal income tax
return.
See Notes to Financial Statements.
<PAGE>
Keystone America State Tax Free Fund
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Keystone America State Tax Free Fund ("FUND") was formed as a Massachusetts
business trust on September 13, 1990. Keystone Custodian Funds, Inc.
("Keystone") is the Investment Adviser and Manager. The FUND currently offers
shares of five separate series evidencing interests in different portfolios
of securities. These financial statements are provided for three series of
the FUND, the Keystone America Pennsylvania Tax Free Fund ("Pennsylvania
Fund") which was established September 19, 1989 and had no operations prior
to December 27, 1990, and the Massachusetts Tax Free Fund ("Massachusetts
Fund") and the New York Insured Tax Free Fund ("New York Fund") which were
established February 21, 1992 and had no operations prior to February 4, 1994
(together the "Funds" and each individually a "Fund"). Financial statements
for two series of the FUND, the Keystone America Florida Tax Free Fund and
the Keystone America Texas Tax Free Fund are provided in a separate annual
report. The FUND is registered under the Investment Company Act of 1940 as a
nondiversified open-end investment company.
Each Fund currently issues Class A, Class B and Class C shares. Class A
shares are charged a sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption within the three calendar years after the year of purchase.
Class C shares are sold subject to a contingent deferred sales charge payable
upon redemption within one year of purchase. Class C shares are available
only through dealers who have entered into special distribution agreements
with Keystone Distributors, Inc. ("KDI"), the FUND's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Group, Inc. ("KGI"), a
Delaware corporation. KGI is privately owned by an investor group consisting
of members of current management. Keystone Investor Resource Center, Inc.
("KIRC") a wholly-owned subsidiary of Keystone, is the FUND's transfer agent.
The following is a summary of significant accounting policies consistently
followed by the FUND in 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
purchase cost as adjusted for amortization of premium or accretion of
discount) which when combined with accrued interest approximates market.
Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value.
Short-term investments maturing in more than sixty days when purchased which
are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount) which when combined with accrued interest approximates
market. All other securities and other assets are valued at fair value as
determined in good faith using methods prescribed by the Board of Trustees.
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
<PAGE>
advantageous price and yield to the Fund at the time of entering into the
transaction. A separate account of liquid assets equal to the value of such
purchase commitments will be maintained until payment is made. When issued
and delayed agreements are subject to risks from changes in value based upon
changes in the level of interest rates and other market factors, both before
and after delivery.
B. Securities transactions are accounted for on the trade date. 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. Realized gains and losses are recorded on the identified
cost basis.
C. The Pennsylvania Fund has qualified and the Pennsylvania, Massachusetts
and the New York Funds intend to qualify in the future as regulated
investment companies under the Internal Revenue Code of 1986, as amended
("Internal Revenue Code"). Thus, each Fund is relieved of any federal income
tax liability by distributing all of its net tax basis investment income and
net tax basis capital gains, if any, to its shareholders. The tax-exempt
interest portion of each dividend is declared uniformly based on the ratio of
each Fund's tax-exempt and taxable income for the entire year. Each Fund
intends to avoid excise tax liability by making the required distributions
under the Internal Revenue Code.
D. Organization expenses are being amortized to operations over a five-year
period on a straight-line basis. In the event any of the initial shares are
redeemed by any holder thereof during the five-year amortization period,
redemption proceeds will be reduced by any unamortized organization expenses
in the same proportion as the number of initial shares being redeemed bears
to the number of initial shares outstanding at the time of redemption.
E. Distributions from net investment income are based on tax basis net
income. From time to time, the Fund may distribute dividends which exceed
book basis net income. Excess distributions were previously charged to
paid-in capital. Effective April 1, 1993, the FUND adopted Statement of
Position 93-2: Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain and Return of Capital Distributions by
Investment Companies. As a result of this statement, the FUND changed the
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions determined
in accordance with income tax regulations. Accordingly, the following
reclassifications have been made to reflect activity for the year ended March
31, 1994 for the Pennsylvania Fund and for the period February 4, 1994 to
March 31, 1994 (commencement of operations) for the Massachusetts Fund and
the New York Fund; a decrease in paid-in capital of $159,615, $1,408 and
$1,562, an increase in accumulated distributions in excess of net investment
income of $99,320, $1,408 and $1,562 and an increase in accumulated realized
gains (losses) on investment transactions of $60,295, $0 and $0,
respectively.
F. Certain reclassifications have been made to prior year amounts in the
Pennsylvania Fund to reflect current year presentation. These
reclassifications had no effect on the operations of the Pennsylvania Fund.
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:
<PAGE>
Keystone America State Tax Free Fund
Pennsylvania Fund
Class A Shares
Year Ended
1994 1993
Shares sold 842,721 1,999,286
Shares redeemed (1,258,721) (191,331)
Shares issued in
reinvestment of
distributions from:
Investment income--net
and in excess of
investment income--net 72,813 90,620
Realized gains--net and in
excess of realized
gains--net 10,881 3,280
Net increase (decrease) (332,306) 1,901,855
Keystone America State Tax Free Fund
Class B Shares
February 1, 1993
(Date of Initial
Year Ended Public Offering)
March 31, 1994 to March 31, 1993
Shares sold 1,782,476 225,196
Shares redeemed (39,183) (3,111)
Shares issued in
reinvestment of
distributions from:
Investment income--net
and in excess of
investment income--net 28,106 576
Realized gains--net and
in excess of realized
gains--net 5,875 0
Net increase 1,777,274 222,661
Pennsylvania Fund
Class C Shares
February 1, 1993
(Date of Initial
Year Ended Public Offering)
March 31, 1994 to March 31, 1993
Shares sold 808,331 83,279
Shares redeemed (58,600) 0
Shares issued in
reinvestment of
distributions from:
Investment income--net
and in excess of
investment income--net 16,856 92
Realized gains--net and
in excess of realized
gains--net 3,494 0
Net increase 770,081 83,371
Massachusetts
Fund
Class A Shares
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Shares sold 169,889
Shares redeemed (9,554)
Shares issued in reinvestment of
distributions
from investment income--net and in
excess
of investment income--net 241
Net increase 160,576
<PAGE>
Massachusetts
Fund
Class B Shares
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Shares sold 198,306
Shares redeemed (500)
Shares issued in reinvestment of
distributions
from investment income--net and in
excess
of investment income--net 16
Net increase 197,822
Class C Shares
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Shares sold 40,587
Shares redeemed (500)
Shares issued in reinvestment of
distributions
from investment income--net and in
excess
of investment income--net 36
Net increase 40,123
New York Fund
Class A Shares
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Shares sold 89,267
Shares redeemed (16,300)
Net increase 72,967
New York Fund
Class B Shares
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Shares sold 260,571
Shares redeemed (16,358)
Shares issued in reinvestment of
distributions
from investment income--net and in
excess
of investment income--net 4
Net increase 244,217
Class C Shares
February 4, 1994
(Commencement of
Operations) to
March 31, 1994
Shares sold 43,808
Shares redeemed (16,400)
Net increase 27,408
Each Fund bears some of the costs of selling its shares under a Distribution
Plan adopted with respect to its Class A, Class B and Class C shares.
Each Class A Distribution Plan provides for payments which are currently
limited to 0.15% annually of the average daily net asset value of Class A
shares to pay expenses of the distribution of Class A shares. Amounts paid by
each Fund to KDI under a Class A Distribution Plan are currently used to pay
others, such as dealers, service fees at an annual rate of up to 0.15% of the
average net asset value of shares sold by such others and remaining
outstanding on the books of the Fund for specified periods.
<PAGE>
Keystone America State Tax Free Fund
Each Class B Distribution Plan provides for payments at an annual rate of up
to 1.00% (currently limited to 0.90%) of the average daily net asset value of
Class B shares to pay expenses of the distribution of Class B shares. Amounts
paid by each Fund under a Class B Distribution Plan are currently used to pay
others (dealers) (i) a commission at the time of purchase normally equal to
3.00% of the value of each share sold; and/or (ii) service fees currently at
an annual rate of 0.15% of the average net asset value of share sold by such
others and remaining outstanding on the books of the Fund for specified
periods.
Each Class C Distribution Plan provides for payments at an annual rate of up
to 1.00% of the average daily net asset value of Class C shares to pay
expenses of the distribution of Class C shares. Amounts paid by each Fund
under a Class C Distribution Plan are currently used to pay others
(dealers)(i) a payment at the time of purchase of 1.00% of the value of each
share sold, such payment to consist of a commission in the amount of 0.75%
and the first year's service fee in advance in the amount of 0.25%; and (ii)
beginning approximately 15 months after purchase, a commission at an annual
rate of 0.75% (subject to applicable limitations imposed by the rules of the
National Association of Securities Dealers, Inc.) and service fees at an
annual rate of 0.25% of the average net asset value of shares sold by such
other 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 termination of a Class B
Distribution Plan, payments to KDI will continue at the annual rate of 1.00%
of the average daily net asset value of Class B shares, as compensation for
its services which had been earned while such Class B Distribution Plan was
in effect. Such unreimbursed distribution expenses at March 31, 1994 for
Class B shares were $1,408,304, $120,510 and $149,797 for the Pennsylvania
Fund, the Massachusetts Fund and the New York Fund, respectively.
For the year ended March 31, 1994 the Pennsylvania Fund and for the period from
February 4, 1994 (commencement of operations) to March 31, 1994, the
Massachusetts Fund and the New York Fund paid KDI (i) $47,974, $155 and $128,
respectively, pursuant to each Fund's Class A Distribution Plan; (ii) $117,658,
$1,306 and $1,567, respectively, pursuant to each Fund's Class B Distribution
Plan; and (iii) $62,419, $426 and $340, respectively, pursuant to each Fund's
Class C Distribution Plan.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares.
3. Securities Transactions
As of March 31, 1994, the Massachusetts Fund and the New York Fund had loss
carryovers for federal income tax purposes of approximately $15,000 and
$10,000, respectively, which expire in 2002. Purchases and sales of
investment securities (including proceeds received at maturity) for the year
ended March 31, 1994 for each Fund were as follows:
Pennsylvania Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $43,929,523 $18,875,809
Short-term commercial and
tax-exempt notes 39,955,000 40,590,000
$83,884,523 $59,465,809
<PAGE>
Massachusetts Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $4,217,637 $167,494
Short-term commercial and
tax-exempt notes 1,400,000 950,000
$5,617,637 $1,117,494
New York Fund
Cost of Proceeds
Purchases From Sales
Tax-exempt investments $3,073,903 $173,979
Short-term commercial and
tax-exempt notes 1,630,000 1,085,000
$4,703,903 $1,258,979
4. Investment Management and Transactions with Affiliates
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the FUND, dated November 29, 1990, Keystone provided investment
advisory and management services to the FUND and its Funds.
In return, Keystone was paid an amount computed and paid daily by applying
percentage rates, which start at 0.55% and decline, as net assets increase,
to 0.25%, to the net asset value of each Fund. During the period ended March
31, 1994, the Pennsylvania Fund, the Massachusetts Fund and the New York Fund
paid or accrued to Keystone investment management and administrative services
fees of $291,982, $2,167 and $1,473, respectively.
During the year ended March 31, 1994 the Pennsylvania Fund paid or accrued to
KIRC $78,621 for shareholder services and a total of $15,023 to KIRC and KGI
as reimbursement for certain accounting services. During the period February
4, 1994 (commencement of operations) to March 31, 1994, the Massachusetts
Fund and the New York Fund paid or accrued to KIRC $246 and $426,
respectively, for shareholder services. The accounting services fees for the
Massachusetts Fund and the New York Fund were waived for the period February
4, 1994 (commencement of operations) to March 31, 1994.
Keystone has voluntarily agreed to limit all expenses Class A Shares of the
Pennsylvania Fund to 0.75% of average daily net assets and has limited annual
expenses of the Class B Shares and Class C Shares to 1.50% of average daily
net asset value.
Keystone has voluntarily limited the expenses of the Class A Shares of the
Massachusetts Fund and the New York Fund to 0.35% until August 15, 1994,
after which the expense limitation will be increased by 0.10% every three
months until May 15, 1995 when expenses will be limited to 0.75% until
December 31, 1995: expenses of Class B Shares and Class C Shares of those
Funds will be limited to 1.10% until August 15, 1994, after which the expense
limitation will be increased by 0.10% every three months until May 15, 1994
when expenses will be limited to 1.50% until December 31, 1995. Keystone will
not be required to make such reimbursement to the extent it would result in a
Fund's inability to qualify as a regulated investment company under the
provisions of the Internal Revenue Code. In accordance with these expense
limitations, Keystone reimbursed the Pennsylvania Fund, the Massachusetts
Fund and the New York Fund (i) $107,397, $5,910 and $2,434, respectively,
with respect to each Fund's Class A Shares; (ii) $40,539, $5,082 and $7,843,
respectively, with respect to each Fund's Class B Shares; and (iii) $25,273,
$1,624 and $1,373, respectively, with respect to each Fund's Class C Shares.
Keystone does not intend to seek repayment for these amounts.
<PAGE>
Keystone America State Tax Free Fund
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the FUND. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund. Currently, the Independent Trustees of
the FUND receive no compensation for their services.
5. Distributions to Shareholders
Each Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains, if any, at least
annually.
<PAGE>
Index to Financial Statements
Page
Keystone America Pennsylvania Tax Free Fund
Schedule of Investments as of March 31, 1994 13
Financial Highlights--for a share outstanding
throughout the period:
Class A shares from December 27, 1990 to March 31, 1994 16
Class B shares from February 1, 1993 to March 31, 1994 17
Class C shares from February 1, 1993 to March 31, 1994 18
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1994 19
Statement of Operations for the year ended March 31, 1994 19
Statements of Changes in Net Assets for each of the
years in the two year period ended
March 31, 1994 20
Federal Tax Status (Unaudited) 21
Keystone America Massachusetts Tax Free Fund
Schedule of Investments as of March 31, 1994 22
Financial Highlights--for a share outstanding
throughout the period:
Class A shares from February 4, 1994 to March 31, 1994 24
Class B shares from February 4, 1994 to March 31, 1994 25
Class C shares from February 4, 1994 to March 31, 1994 26
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1994 27
Statement of Operations for the period February 4,
1994 to March 31, 1994 27
Statement of Changes in Net Assets for the period
February 4, 1994 to March 31, 1994 28
Federal Tax Status (Unaudited) 29
Keystone America New York Insured Tax Free Fund
Schedule of Investments as of March 31, 1994 30
Financial Highlights--for a share outstanding
throughout the period:
Class A shares from February 4, 1994 to March 31, 1994 32
Class B shares from February 4, 1994 to March 31, 1994 33
Class C shares from February 4, 1994 to March 31, 1994 34
Financial Statements:
Statement of Assets and Liabilities as of March 31, 1994 35
Statement of Operations for the period February 4,
1994 to March 31, 1994 35
Statement of Changes in Net Assets for the period
February 4, 1994 to March 31, 1994 36
Federal Tax Status (Unaudited) 37
Notes to Financial Statements 38
Independent Auditors' Report 46
<PAGE>
Keystone America State Tax Free Fund
Independent Auditors' Report
The Trustees and Shareholders
Keystone America State Tax Free Fund
We have audited the financial statements of Keystone America Pennsylvania Tax
Free Fund, Keystone America Massachusetts Tax Free Fund and Keystone America
New York Insured Tax Free Fund, portfolios of Keystone America State Tax Free
Fund ("FUND"), including the schedules of investments, and the financial
highlights as listed in the accompanying index. 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 March 31, 1994 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of
Keystone America Pennsylvania Tax Free Fund, Keystone America Massachusetts
Tax Free Fund and Keystone America New York Insured Tax Free Fund as of March
31, 1994, the results of their operations, the changes in their net assets
and the financial highlights for each of the periods specified in the
accompanying index in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK
Boston, Massachusetts
May 13, 1994
