KEYSTONE STATE TAX FREE FUND
PROSPECTUS JULY 30, 1996
Keystone State Tax Free Fund (the "Trust") is a mutual fund that currently
consists of four separate series of shares evidencing interests in different
portfolios of securities (the "Fund(s)"): the Keystone Florida Tax Free Fund
(the "Florida Fund"), the Keystone Massachusetts Tax Free Fund (the
"Massachusetts Fund"), the Keystone New York Insured Tax Free Fund (the "New
York Insured Fund") and the Keystone Pennsylvania Tax Free Fund (the
"Pennsylvania 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, also seeks to provide a maximum level of income to its
shareholders that is exempt from the personal income taxes of the state for
which such Fund is named.
The Florida Fund also seeks to hold securities exempt from Florida intangible
taxes. At the present time, Florida does not impose a personal income tax.
The New York Insured Fund also seeks to hold securities exempt from New York
City personal income tax.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.
The Pennsylvania Fund also seeks to hold securities exempt from Pennsylvania
property taxes.
Each Fund invests principally in municipal obligations exempt from federal
income tax and municipal obligations issued by the state for which it is named
and its political subdivisions, agencies and instrumentalities.
Each Fund offers Class A, B and C shares. Information on share classes and
their fee and sales charge structures may be found in the "Fee Table," "How to
Buy Shares," "Alternative Sales Options," "Contingent Deferred Sales Charge and
Waiver of Sales Charges," "Distribution Plans," and "Trust Shares" sections of
this Prospectus.
This prospectus concisely states information about the Trust and its Funds
that you should know before investing. Please read it and retain it for future
reference.
Additional information about the Trust and its Funds is contained in a
statement of additional information dated July 30, 1996, 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 Trust
and its Funds, write to the address or call the telephone number listed on this
page.
SHARES OF THE TRUST 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.
KEYSTONE STATE TAX FREE FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
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.
TABLE OF CONTENTS
Page
Fee Table ....................................................... 3
Financial Highlights ............................................ 7
The Trust and Its Funds ......................................... 19
Investment Objective and Policies ............................... 19
Investment Restrictions ......................................... 23
Risk Factors .................................................... 24
Pricing Shares .................................................. 26
Dividends and Taxes ............................................. 27
Trust Management and Expenses ................................... 29
How to Buy Shares ............................................... 31
Alternative Sales Options ....................................... 32
Contingent Deferred Sales Charge and Waiver of Sales Charges .... 36
Distribution Plans .............................................. 37
How to Redeem Shares ............................................ 38
Shareholder Services ............................................ 40
Performance Data ................................................ 42
Trust Shares .................................................... 42
Additional Information .......................................... 43
Additional Investment Information ............................... (i)
Exhibit A ....................................................... A-1
Exhibit B ....................................................... B-1
<PAGE>
FEE TABLE
KEYSTONE FLORIDA TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of the Florida Fund will
bear directly or indirectly. For more complete descriptions of the various
costs and expenses, see the following sections of this prospectus: "Trust
Management and Expenses;" "How to Buy Shares;" "Alternative Sales Options;"
"Contingent Deferred Sales Charge and Waiver of Sales Charges;" "Distribution
Plans;" and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases ................ 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load .................................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original purchase declining to 1.00% in year and 0.00%
price or redemption proceeds, as applicable) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)(5) ......................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ........................................ 0.52% 0.52% 0.52%
12b-1 Fees ............................................. 0.15% 0.90%(7) 0.90%(7)
Other Expenses ......................................... 0.09% 0.06% 0.06%
---- ---- ----
Total Fund Operating Expenses .......................... 0.76% 1.48% 1.48%
==== ==== ====
<CAPTION>
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ................................................................... $55 $71 $ 88 $137
Class B ................................................................... $65 $77 $101 $157
Class C ................................................................... $25 $47 $ 81 $177
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ................................................................... $55 $71 $ 88 $137
Class B ................................................................... $15 $47 $ 81 $157
Class C ................................................................... $15 $47 $ 81 $177
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ------------
(1) Class B shares purchased on or after June 1, 1995 convert tax free to Class A shares after eight years. See
"Class B Shares" for more information.
(2) Class C shares are available only through dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company, the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifying retirement or
other plans are not subject to a sales charge, but may be subject to a contingent deferred sales charge. See "Class A
Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges" for an explanation of the charge.
(5) There is no fee for individual investors making exchanges over the Keystone Automated Response Line ("KARL"). (For a
description of KARL, see "Shareholder Services.")
(6) Expense ratios are for the fiscal year ended March 31, 1996 after giving effect to the reimbursement by Keystone
Investment Management Company ("Keystone") of expenses in accordance with certain voluntary expense limitations.
Currently, Keystone has voluntarily limited annual expenses of Class A, B and C shares to 0.75%, 1.50% and 1.50%,
respectively, of average daily net assets of each such class. Keystone intends to continue the foregoing expense
limitations on a calendar month-by-month basis. Keystone is under no obligation to maintain these limits and may modify or
or terminate them in the future. Absent voluntary expense limitations, expense ratios for the fiscal year ended March 31, 1996
for the Florida Fund's Class A, B and C shares would have been 0.92%, 1.68%, and 1.68%, respectively. Total Fund Operating
Expenses for the fiscal year ended March 31, 1996 include indirectly paid expenses.
(7) Long term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted by
rules adopted by the National Association of Securities Dealers, Inc. (the "NASD").
(8) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual
returns for the Fund may be greater or less than 5%.
</TABLE>
<PAGE>
FEE TABLE
KEYSTONE MASSACHUSETTS TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of the Massachusetts Fund
will bear directly or indirectly. For more complete descriptions of the
various costs and expenses, see the following sections of this prospectus:
"Trust Management and Expenses;" "How to Buy Shares;" "Alternative Sales
Options;" "Contingent Deferred Sales Charge and Waiver of Sales Charges;"
"Distribution Plans;" and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases ................ 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load .................................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original purchase declining to 1.00% in year and 0.00%
price or redemption proceeds, as applicable) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)(5).......................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ........................................ 0.55% 0.55% 0.55%
12b-1 Fees ............................................. 0.10% 0.90%(7) 0.90%(7)
Other Expenses ......................................... 0.10% 0.04% 0.04%
---- ---- ----
Total Fund Operating Expenses .......................... 0.75% 1.49% 1.49%
==== ==== ====
<CAPTION>
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ...................................................................... $55 $70 $ 87 $136
Class B ...................................................................... $65 $77 $101 $158
Class C ...................................................................... $25 $47 $ 81 $178
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ...................................................................... $55 $70 $ 87 $136
Class B ...................................................................... $15 $47 $ 81 $158
Class C ...................................................................... $15 $47 $ 81 $178
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ------------
(1) Class B shares purchased on or after June 1, 1995 convert tax free to Class A shares after eight years. See
"Class B Shares" for more information.
(2) Class C shares are available only through dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company, the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifying retirement or
other plans are not subject to a sales charge, but may be subject to a contingent deferred sales charge. See "Class A
Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges" for an explanation of the charge.
(5) There is no exchange fee for individual investors making exchanges over the Keystone Automated Response Line ("KARL").
(For a description of KARL, see "Shareholder Services.")
(6) Expense ratios are for the fiscal year ended March 31, 1996 after giving effect to the reimbursement by Keystone of
expenses in accordance with certain voluntary expense limitations. Currently, Keystone has voluntarily limited annual
expenses of Class A, B and C shares to 0.75%, 1.50% and 1.50%, respectively, of average daily net assets of each such
class. Keystone intends to continue the foregoing expense limitations on a calendar month-by-month basis. Keystone is
under no obligation to maintain these limits and may modify or terminate them in the future. Absent voluntary expense
limitations, expense ratios for the fiscal year ended March 31, 1996 for the Massachusetts Fund's Class A, B and C shares
would have been 1.59%, 2.38%, and 2.39%, respectively. Total Fund Operating Expenses for the fiscal year ended March 31, 1996
include indirectly paid expenses.
(7) Long term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted by
rules adopted by the NASD.
(8) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual
return for the Fund may be greater or less than 5%.
</TABLE>
<PAGE>
FEE TABLE
KEYSTONE NEW YORK INSURED TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of the New York Insured Fund
will bear directly or indirectly. For more complete descriptions of the
various costs and expenses, see the following sections of this prospectus:
"Trust Management and Expenses;" "How to Buy Shares," "Alternative Sales
Options;" "Contingent Deferred Sales Charge and Waiver of Sales Charges,"
"Distribution Plans;" and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases ................ 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load .................................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original purchase declining to 1.00% in year and 0.00%
price or redemption proceeds, as applicable) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)(5) ......................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ........................................ 0.55% 0.55% 0.55%
12b-1 Fees ............................................. 0.15% 0.90%(7) 0.90%(7)
Other Expenses ......................................... 0.05% 0.05% 0.05%
---- ---- ----
Total Fund Operating Expenses .......................... 0.75% 1.50% 1.50%
==== ==== ====
<CAPTION>
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ...................................................................... $55 $70 $ 87 $136
Class B ...................................................................... $65 $77 $102 $159
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 $159
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.
- ----------
(1) Class B shares purchased on or after June 1, 1995 convert tax free to Class A shares after eight years. See
"Class B Shares" for more information.
(2) Class C shares are available only through dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company, the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifying retirement or
other plans are not subject to a sales charge, but may be subject to a contingent deferred sales charge. See "Class A
Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges" for an explanation of the charge.
(5) There is no exchange fee for individual investors making exchanges over the Keystone Automated Response Line ("KARL").
(For a description of KARL, see "Shareholder Services.")
(6) Expense ratios are for the fiscal year ended March 31, 1996 after giving effect to the reimbursement by Keystone of
expenses in accordance with certain voluntary expense limitations. Currently, Keystone has voluntarily limited annual
expenses of Class A, B and C shares to 0.75%, 1.50% and 1.50%, respectively, of average daily net assets of each class.
Keystone intends to continue the foregoing expense limitations on a calendar month-by-month basis. Keystone is under no
obligation to maintain these limits and may modify or terminate them in the future. Absent voluntary expense limitations,
expense ratios for the fiscal year ended March 31, 1996 for the New York Insured Fund's Class A, B and C shares would have
been 1.31%, 2.05%, and 2.07%, respectively. Total Fund Operating Expenses for the fiscal year ended March 31, 1996 include
indirectly paid expenses.
(7) Long term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted by
rules adopted by the NASD.
(8) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual
return for the Fund may be greater or less than 5%.
</TABLE>
<PAGE>
FEE TABLE
KEYSTONE PENNSYLVANIA TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of the Pennsylvania Fund
will bear directly or indirectly. For more complete descriptions of the
various costs and expenses, see the following sections of this prospectus:
"Trust Management and Expenses;" "How to Buy Shares;" "Alternative Sales
Options;" "Contingent Deferred Sales Charge and Waiver of Sales Charges;"
"Distribution Plans;" and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK END LEVEL LOAD
LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge ........................................... 4.75%(3) None None
(as a percentage of offering price)
Contingent Deferred Sales Charge ....................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original purchase declining to 1.00% in year and 0.00%
price or redemption proceeds, as applicable) the sixth year and thereafter
0.00% thereafter
Exchange Fee (per exchange)(5) ......................... $10.00 $10.00 $10.00
ANNUAL FUND OPERATING EXPENSES(6)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ........................................ 0.53% 0.53% 0.53%
12b-1 Fees ............................................. 0.15% 0.90%(7) 0.90%(7)
Other Expenses ......................................... 0.08% 0.05% 0.05%
---- ---- ----
Total Fund Operating Expenses .......................... 0.76% 1.48% 1.48%
==== ==== ====
<CAPTION>
EXAMPLES(8) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ................................................................... $55 $71 $ 88 $137
Class B ................................................................... $65 $77 $101 $157
Class C ................................................................... $25 $47 $ 81 $177
You would pay the following expenses on a $1,000 investment, assuming no
redemption at the end of each period:
Class A ................................................................... $55 $71 $ 88 $137
Class B ................................................................... $15 $47 $ 81 $157
Class C ................................................................... $15 $47 $ 81 $177
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ------------
(1) Class B shares purchased on or after June 1, 1995 convert tax free to Class A shares after eight years. See
"Class B Shares" for more information.
(2) Class C shares are available only through dealers who have entered into special distribution agreements with Keystone
Investment Distributors Company, the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares in the amount of $1,000,000 or more and/or purchases made by certain qualifying retirement or
other plans are not subject to a sales charge, but may be subject to a contingent deferred sales charge. See "Class A
Shares" and "Contingent Deferred Sales Charge and Waiver of Sales Charges" for an explanation of the charge.
(5) There is no fee for individual investors making exchanges over the Keystone Automated Response Line ("KARL"). (For a
description of KARL, see "Shareholder Services.")
(6) Expense ratios are for the fiscal year ended March 31, 1996 after giving effect to the reimbursement by Keystone of
expenses in accordance with certain voluntary expense limitations. Currently, Keystone has voluntarily limited annual
expenses of Class A, B and C shares to 0.75%, 1.50% and 1.50%, respectively, of average daily net assets of each class.
Keystone intends to continue the foregoing expense limitations on a calendar month-by-month basis. Keystone is under no
obligation to maintain these limits and may modify or terminate them in the future. Absent voluntary expense limitations,
expense ratios for the fiscal year ended March 31, 1996 for the Pennsylvania Fund's Class A, B and C shares would have
been 0.99%, 1.74%, and 1.74%, respectively. Total Fund Operating Expenses for the fiscal year ended March 31, 1996 include
indirectly paid expenses.
(7) Long term shareholders may pay more than the economic equivalent of the maximum front end sales charges permitted by
rules adopted by the NASD.
(8) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual
returns for the Fund may be greater or less than 5%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE FLORIDA TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Florida Fund and has been audited by KPMG Peat Marwick LLP, the Trust's
independent auditors. The table appears in the Trust's Annual Report and
should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
<TABLE>
<CAPTION>
DECEMBER 28,
1990
YEAR ENDED MARCH 31, (COMMENCEMENT OF
------------------------------------------------ OPERATIONS) TO
1996 1995 1994 1993 1992 MARCH 31, 1991
----- ----- ----- ----- ----- ----------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF
YEAR ......................... $10.33 $10.29 $10.94 $10.43 $10.17 $10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .......... 0.56 0.56 0.58 0.61 0.72 0.18
Net realized and unrealized
gain (loss) on investments
and closed futures contracts . 0.27 0.07 (0.44) 0.64 0.30 0.17
------ ------ ------ ------ ------ ------
Total from investment operations 0.83 0.63 0.14 1.25 1.02 0.35
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income .......... (0.54) (0.56) (0.58) (0.61) (0.72) (0.18)
In excess of net investment
income ....................... (0.02) (0.03) (0.05) (0.03) 0 0
Net realized gain on investments 0 0 (0.16) (0.10) (0.04) 0
------ ------ ------ ------ ------ ------
Total distributions ............ (0.56) (0.59) (0.79) (0.74) (0.76) (0.18)
------ ------ ------ ------ ------ ------
NET ASSET VALUE END OF YEAR .... $10.60 $10.33 $10.29 $10.94 $10.43 $10.17
====== ====== ====== ====== ====== ======
TOTAL RETURN (c) ............... 8.16% 6.42% 1.01% 12.32% 10.34% 3.52%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ............... 0.76%(b) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Total expenses excluding
reimbursement .............. 0.92% 0.95% 1.00% 1.13% 1.21% 2.06%(a)
Net investment income ........ 5.32% 5.60% 5.16% 5.60% 6.82% 6.33%(a)
Portfolio turnover rate ........ 89% 129% 113% 95% 63% 5%
NET ASSETS END OF YEAR
(THOUSANDS) .................. $37,286 $42,239 $45,150 $42,997 $29,258 $6,922
- ---------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31, 1996 includes indirectly paid expenses.
Excluding indirectly paid expenses the expense ratio would have been 0.75%.
(c) Excluding applicable sales charges.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE FLORIDA TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Florida Fund and has been audited by KPMG Peat Marwick LLP, the Trust's
independent auditors. The table appears in the Trust's Annual Report and
should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
FEBRUARY 1,
1993
(DATE OF
INITIAL
YEAR ENDED MARCH 31, PUBLIC
---------------------------------- OFFERING) TO
MARCH 31,
1996 1995 1994 1993
----- ----- ----- -------------
NET ASSET VALUE
BEGINNING OF YEAR ...... $10.24 $10.27 $10.94 $10.81
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .... 0.48 0.53 0.52 0.08
Net realized and
unrealized gain (loss)
on investments and
closed futures contracts 0.28 0.02 (0.47) 0.14
------ ------ ------ ------
Total from investment
operations ............. 0.76 0.55 0.05 0.22
------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income..... (0.50) (0.49) (0.48) (0.08)
In excess of net
investment income ...... (0.02) (0.09) (0.08) (0.01)
Net realized gain on
investment ............. 0 0 (0.16) 0
------ ------ ------ ------
Total distributions ...... (0.52) (0.58) (0.72) (0.09)
------ ------ ------ ------
NET ASSET VALUE END OF
YEAR ................... $10.48 $10.24 $10.27 $10.94
====== ====== ====== ======
TOTAL RETURN (c) ......... 7.48% 5.61% 0.19% 2.06%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ......... 1.48%(b) 1.50% 1.50% 1.50%(a)
Total expenses excluding
reimbursement ........ 1.68% 1.68% 1.74% 1.73%(a)
Net investment income .. 4.58% 4.81% 4.21% 4.00%(a)
Portfolio turnover rate .. 89% 129% 113% 95%
NET ASSETS END OF
YEAR (THOUSANDS) ....... $54,433 $51,083 $19,984 $1,704
- ---------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.47%.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE FLORIDA TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Florida Fund and has been audited by KPMG Peat Marwick LLP, the Trust's
independent auditors. The table appears in the Trust's Annual Report and
should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
FEBRUARY 1,
1993
(DATE OF
INITIAL
YEAR ENDED MARCH 31, PUBLIC
------------------------------------ OFFERING) TO
MARCH 31,
1996 1995 1994 1993
----- ----- ----- ------------
NET ASSET VALUE
BEGINNING OF YEAR ...... $10.26 $10.28 $10.93 $10.81
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment income .... 0.48 0.47 0.51 0.07
Net realized and
unrealized gain (loss)
on investments and
closed futures contracts 0.28 0.08 (0.45) 0.14
------ ------ ------ ------
Total from investment
operations ............. 0.76 0.55 0.06 0.21
------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income .... (0.50) (0.49) (0.49) (0.07)
In excess of net investment
income ................. (0.02) (0.08) (0.06) (0.02)
Net realized gain on
investment ............. 0 0 (0.16) 0
------ ------ ------ ------
Total distributions ...... (0.52) (0.57) (0.71) (0.09)
------ ------ ------ ------
NET ASSET VALUE END OF
YEAR ................... $10.50 $10.26 $10.28 $10.93
====== ====== ====== ======
TOTAL RETURN (c) ......... 7.47% 5.61% 0.27% 1.95%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ......... 1.48%(b) 1.50% 1.50% 1.50%(a)
Total expenses excluding
reimbursement ........ 1.68% 1.70% 1.84% 1.63%(a)
Net investment income .. 4.60% 4.86% 4.26% 2.95%(a)
Portfolio turnover rate .. 89% 129% 113% 95%
NET ASSETS END OF
YEAR (THOUSANDS) ....... $11,795 $12,831 $13,096 $1,987
- --------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.47%.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE MASSACHUSETTS TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Massachusetts Fund and has been audited by KPMG Peat Marwick LLP, the
Trust's independent auditors. The table appears in the Trust's Annual Report
and should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
FEBRUARY 4, 1994
YEAR ENDED MARCH 31, (COMMENCEMENT
-------------------- OF OPERATIONS) TO
1996 1995 MARCH 31, 1994
---- ---- -----------------
NET ASSET VALUE BEGINNING
OF YEAR .................... $9.19 $9.17 $10.00
----- ----- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ........ 0.51 0.53 0.08
Net realized and unrealized gain
(loss) on investments and
closed futures contracts ... 0.09 0.02 (0.82)
----- ----- ------
Total from investment
operations ................. 0.60 0.55 (0.74)
----- ----- ------
LESS DISTRIBUTIONS FROM:
Net investment income ........ (0.48) (0.53) (0.08)
In excess of net investment
income ..................... (0.02) 0 (0.01)
----- ----- ------
Total distributions .......... (0.50) (0.53) (0.09)
----- ----- ------
NET ASSET VALUE END OF YEAR .. $9.29 $9.19 $ 9.17
===== ===== ======
TOTAL RETURN (c) ............. 6.64% 6.23% (7.40%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ............. 0.75%(b) 0.46% 0.35%(a)
Total expenses excluding
reimbursement ............ 1.59% 1.93% 3.22%(a)
Net investment income ...... 5.36% 5.90% 5.07%(a)
Portfolio turnover rate ...... 165% 77% 7%
NET ASSETS END OF YEAR
(THOUSANDS) ................ $1,786 $1,974 $1,472
- -----------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 0.74%.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE MASSACHUSETTS TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Massachusetts Fund and has been audited by KPMG Peat Marwick LLP, the
Trust's independent auditors. The table appears in the Trust's Annual Report
and should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
FEBRUARY 4, 1994
YEAR ENDED MARCH 31, (COMMENCEMENT
-------------------- OF OPERATIONS) TO
1996 1995 MARCH 31, 1994
---- ---- -----------------
NET ASSET VALUE BEGINNING OF
YEAR ........................ $9.15 $9.19 $10.00
----- ----- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ......... 0.43 0.48 0.08
Net realized and unrealized
gain (loss) on investments and
closed futures contracts .... 0.09 (0.01) (0.80)
----- ----- ------
Total from investment
operations .................. 0.52 0.47 (0.72)
----- ----- ------
LESS DISTRIBUTIONS FROM:
Net investment income ......... (0.43) (0.47) (0.07)
In excess of net investment
income ...................... (0.02) (0.04) (0.02)
----- ----- ------
Total distributions ........... (0.45) (0.51) (0.09)
----- ----- ------
NET ASSET VALUE, END OF YEAR .. $9.22 $9.15 $ 9.19
===== ===== ======
TOTAL RETURN (c) .............. 5.77% 5.41% (7.20%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses .............. 1.49%(b) 1.24% 1.10%(a)
Total expenses excluding
reimbursement ............. 2.38% 2.68% 4.60%(a)
Net investment income ....... 4.60% 5.15% 3.23%(a)
Portfolio turnover rate ....... 165% 77% 7%
NET ASSETS END OF YEAR
(THOUSANDS) ................. $7,274 $6,169 $1,817
- -------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.48%.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE MASSACHUSETTS TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Massachusetts Fund and has been audited by KPMG Peat Marwick LLP, the
Trust's independent auditors. The table appears in the Trust's Annual Report
and should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
FEBRUARY 4, 1994
YEAR ENDED MARCH 31, (COMMENCEMENT
-------------------- OF OPERATIONS) TO
1996 1995 MARCH 31, 1994
---- ---- -----------------
NET ASSET VALUE BEGINNING OF
YEAR ........................ $9.14 $9.19 $10.00
----- ----- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ......... 0.43 0.48 0.08
Net realized and unrealized gain
(loss) on investments and
closed futures contracts .... 0.10 (0.02) (0.80)
----- ----- ------
Total from investment
operations .................. 0.53 0.46 (0.72)
----- ----- ------
LESS DISTRIBUTIONS FROM:
Net investment income ......... (0.43) (0.47) (0.07)
In excess of net investment
income ...................... (0.02) (0.04) (0.02)
----- ----- ------
Total distributions ........... (0.45) (0.51) (0.09)
----- ----- ------
NET ASSET VALUE END OF YEAR ... $9.22 $9.14 $ 9.19
===== ===== ======
TOTAL RETURN (c) .............. 5.89% 5.20% (7.21%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses .............. 1.49%(b) 1.23% 1.10%(a)
Total expenses excluding
reimbursement ............. 2.39% 2.68% 4.91%(a)
Net investment income ....... 4.60% 5.11% 4.28%(a)
Portfolio turnover rate ....... 165% 77% 7%
NET ASSETS END OF YEAR
(THOUSANDS) ................. $2,303 $1,971 $369
- ----------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.48%.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE NEW YORK INSURED TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the New York Insured Fund and has been audited by KPMG Peat Marwick LLP, the
Trust's independent auditors. The table appears in the Trust's Annual Report
and should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
FEBRUARY 4, 1994
YEAR ENDED MARCH 31, (COMMENCEMENT
-------------------- OF OPERATIONS) TO
1996 1995 MARCH 31, 1994
---- ---- -----------------
NET ASSET VALUE BEGINNING OF
YEAR ........................ $9.44 $9.32 $10.00
----- ----- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ......... 0.48 0.52 0.09
Net realized and unrealized gain
(loss) on investments and
closed futures contracts .... 0.24 0.12 (0.68)
----- ----- ------
Total from investment
operations .................. 0.72 0.64 (0.59)
----- ----- ------
LESS DISTRIBUTIONS FROM:
Net investment income ......... (0.47) (0.52) (0.08)
In excess of net investment
income ...................... (0.02) 0 (0.01)
----- ----- ------
Total distributions ........... (0.49) (0.52) (0.09)
----- ----- ------
NET ASSET VALUE END OF YEAR ... $9.67 $9.44 $ 9.32
===== ===== ======
TOTAL RETURN (c) .............. 7.73% 7.08% (5.91%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses .............. 0.75%(b) 0.50% 0.35%(a)
Total expenses excluding
reimbursement ............. 1.31% 1.59% 4.44%(a)
Net investment income ....... 4.95% 5.48% 3.85%(a)
Portfolio turnover rate ....... 53% 77% 14%
NET ASSETS END OF YEAR
(THOUSANDS) ................. $3,947 $3,323 $680
- ----------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 0.74%.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE NEW YORK INSURED TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the New York Insured Fund and has been audited by KPMG Peat Marwick LLP, the
Trust's independent auditors. The table appears in the Trust's Annual Report
and should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
FEBRUARY 4, 1994
YEAR ENDED MARCH 31, (COMMENCEMENT
-------------------- OF OPERATIONS) TO
1996 1995 MARCH 31, 1994
---- ---- -----------------
NET ASSET VALUE BEGINNING OF
YEAR ........................ $9.38 $9.32 $10.00
----- ----- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ......... 0.41 0.47 0.08
Net realized and unrealized gain
(loss) on investments and closed
futures contracts ............. 0.24 0.09 (0.67)
----- ----- ------
Total from investment
operations .................. 0.65 0.56 (0.59)
----- ----- ------
LESS DISTRIBUTIONS FROM:
Net investment income ......... (0.42) (0.45) (0.06)
In excess of net investment
income ...................... (0.02) (0.05) (0.03)
----- ----- ------
Total distributions ........... (0.44) (0.50) (0.09)
----- ----- ------
NET ASSET VALUE END OF YEAR ... $9.59 $9.38 $ 9.32
===== ===== ======
TOTAL RETURN (c) .............. 7.02% 6.28% (5.91%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses .............. 1.50%(b) 1.25% 1.10%(a)
Total expenses excluding
reimbursement ............. 2.05% 2.35% 5.60%(a)
Net investment income ....... 4.19% 4.78% 3.01%(a)
Portfolio turnover rate ....... 53% 77% 14%
NET ASSETS END OF YEAR
(THOUSANDS) ................... $17,151 $11,907 $2,276
- ----------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.49%.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE NEW YORK INSURED TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the New York Insured Fund and has been audited by KPMG Peat Marwick LLP, the
Trust's independent auditors. The table appears in the Trust's Annual Report
and should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
FEBRUARY 4, 1994
YEAR ENDED MARCH 31, (COMMENCEMENT
-------------------- OF OPERATIONS) TO
1996 1995 MARCH 31, 1994
---- ---- -----------------
NET ASSET VALUE BEGINNING OF
YEAR ........................ $9.37 $9.31 $10.00
----- ----- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ......... 0.41 0.48 0.07
Net realized and unrealized
gain (loss) on investments
and closed futures contracts 0.24 0.07 (0.67)
----- ----- ------
Total from investment
operations .................. 0.65 0.55 (0.60)
----- ----- ------
LESS DISTRIBUTIONS FROM:
Net investment income ......... (0.42) (0.46) (0.07)
In excess of net investment
income ...................... (0.02) (0.03) (0.02)
----- ----- ------
Total distributions ........... (0.44) (0.49) (0.09)
----- ----- ------
NET ASSET VALUE END OF YEAR ... $9.58 $9.37 $ 9.31
===== ===== ======
TOTAL RETURN (c)............... 7.02% 6.18% (6.02%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses .............. 1.50%(b) 1.26% 1.10%(a)
Total expenses excluding
reimbursement ............. 2.07% 2.32% 5.13%(a)
Net investment income ....... 4.24% 4.88% 3.71%(a)
Portfolio turnover rate ....... 53% 77% 14%
NET ASSETS END OF YEAR
(THOUSANDS) ................. $2,296 $2,890 $255
- ------------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.48%.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE PENNSYLVANIA TAX FREE FUND
CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Pennsylvania Fund and has been audited by KPMG Peat Marwick LLP, the
Trust's independent auditors. The table appears in the Trust's Annual Report
and should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
<TABLE>
<CAPTION>
DECEMBER 27,
1990
YEAR ENDED MARCH 31, (COMMENCEMENT OF
-------------------------------------------------- OPERATIONS) TO
1996 1995 1994 1993 1992 MARCH 31, 1991
----- ----- ----- ----- ----- ----------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING
OF YEAR ...................... $10.91 $11.01 $11.42 $10.71 $10.25 $10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .......... 0.60 0.61 0.62 0.63 0.74 0.18
Net realized and unrealized
gain (loss) on investments
and closed futures contracts . 0.23 (0.09) (0.30) 0.75 0.46 0.25
------ ------ ------ ------ ------ ------
Total from investment operations 0.83 0.52 0.32 1.38 1.20 0.43
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income .......... (0.57) (0.61) (0.62) (0.63) (0.74) (0.18)
In excess of net investment
income ....................... (0.02) (0.01) (0.04) (0.02) 0 0
Net realized gain on investments 0 0 (0.06) (0.02) 0 0
In excess of net realized gain
on investments ............... 0 0 (0.01) 0 0 0
------ ------ ------ ------ ------ ------
Total distributions ............ (0.59) (0.62) (0.73) (0.67) (0.74) (0.18)
------ ------ ------ ------ ------ ------
NET ASSET VALUE END OF YEAR .... $11.15 $10.91 $11.01 $11.42 $10.71 $10.25
====== ====== ====== ====== ====== ======
TOTAL RETURN(c) ................ 7.66% 4.91% 2.58% 13.30% 12.07% 4.37%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ............... 0.76%(b) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Total expenses excluding
reimbursement .............. 0.99% 1.05% 1.06% 1.16% 1.68% 3.19%(a)
Net investment income ........ 5.29% 5.65% 5.27% 5.66% 6.92% 6.84%(a)
Portfolio turnover rate ........ 55% 97% 37% 20% 13% 8%
NET ASSETS END OF YEAR
(THOUSANDS) .................. $28,710 $30,450 $30,560 $35,502 $12,914 $2,979
- ------------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31, 1996 includes indirectly paid expenses.
Excluding indirectly paid expenses, the expense ratio would have been 0.75%.
(c) Excluding applicable sales charges.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE PENNSYLVANIA TAX FREE FUND
CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Pennsylvania Fund and has been audited by KPMG Peat Marwick LLP, the
Trust's independent auditors. The table appears in the Trust's Annual Report
and should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
FEBRUARY 1,
1993
(DATE OF
INITIAL
YEAR ENDED MARCH 31, PUBLIC
--------------------------------- OFFERING) TO
1996 1995 1994 MARCH 31, 1993
---- ---- ---- --------------
NET ASSET VALUE BEGINNING
OF YEAR ................ $10.81 $10.98 $11.42 $11.20
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .... 0.51 0.54 0.56 0.08
Net realized and
unrealized gain (loss)
on investments and
closed futures contracts 0.22 (0.10) (0.34) 0.24
------ ------ ------ ------
Total from investment
operations ............. 0.73 0.44 0.22 0.32
------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income ... (0.52) (0.53) (0.52) (0.08)
In excess of net
investment income ..... (0.02) (0.08) (0.07) (0.02)
Net realized gain on
investments ........... 0 0 (0.03) 0
In excess of net realized
gain on investments ... 0 0 (0.04) 0
------ ------ ------ ------
Total distributions ..... (0.54) (0.61) (0.66) (0.10)
------ ------ ------ ------
NET ASSET VALUE END OF
YEAR .................. $11.00 $10.81 $10.98 $11.42
====== ====== ====== ======
TOTAL RETURN (c) ........ 6.84% 4.15% 1.70% 2.82%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses ........ 1.48%(b) 1.50% 1.50% 1.50%(a)
Total expenses
excluding
reimbursement ....... 1.74% 1.80% 1.81% 1.69%(a)
Net investment income . 4.55% 4.89% 4.32% 3.44%(a)
Portfolio turnover rate . 55% 97% 37% 20%
NET ASSETS END OF YEAR
(THOUSANDS) ........... $37,719 $30,657 $21,958 $2,543
- ---------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.47%.
(c) Excluding applicable sales charges.
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE PENNSYLVANIA TAX FREE FUND
CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
The following table contains important financial information relating to
the Pennsylvania Fund and has been audited by KPMG Peat Marwick LLP, the
Trust's independent auditors. The table appears in the Trust's Annual Report
and should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are included in the statement
of additional information. Additional information about the Fund's performance
is contained in the Trust's Annual Report, which will be made available upon
request and without charge.
FEBRUARY 1,
1993
(DATE OF
INITIAL
YEAR ENDED MARCH 31, PUBLIC
-------------------------------- OFFERING) TO
1996 1995 1994 MARCH 31, 1993
---- ---- ---- --------------
NET ASSET VALUE BEGINNING
OF YEAR ................ $10.83 $11.00 $11.42 $11.20
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .... 0.51 0.53 0.54 0.07
Net realized and
unrealized gain (loss)
on investments and
closed futures contracts 0.23 (0.10) (0.32) 0.24
------ ------ ------ ------
Total from investment
operations ............. 0.74 0.43 0.22 0.31
------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income .... (0.52) (0.53) (0.52) (0.07)
In excess of net
investment income ...... (0.02) (0.07) (0.05) (0.02)
Net realized gain on
investments ............ 0 0 (0.03) 0
In excess of net realized
gain on investments .... 0 0 (0.04) 0
------ ------ ------ ------
Total distributions ...... (0.54) (0.60) (0.64) (0.09)
------ ------ ------ ------
NET ASSET VALUE END OF
YEAR ................... $11.03 $10.83 $11.00 $11.42
====== ====== ====== ======
TOTAL RETURN (c).......... 6.92% 4.05% 1.78% 2.81%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
%
Total expenses ......... 1.48%(b) 1.50% 1.50% 1.50(a)
Total expenses excluding
reimbursement ........ 1.74% 1.80% 1.90% 1.60%(a)
Net investment income .. 4.57% 4.90% 4.33% 2.50%(a)
Portfolio turnover rate .. 55% 97% 37% 20%
NET ASSETS END OF YEAR
(THOUSANDS) ............ $9,675 $9,559 $9,385 $952
- ---------
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March 31,
1996 includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been 1.47%.
(c) Excluding applicable sales charges.
<PAGE>
THE TRUST AND ITS FUNDS The Trust is a non-diversified open-end management
investment company commonly known as a mutual fund. The Trust was formed as a
Massachusetts business trust on September 13, 1990. The Trust is one of the more
than thirty funds managed or advised by Keystone Investment Management Company
("Keystone"), the Trust's investment adviser. The Trust currently consists of
four 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 and the New York Insured 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 Trust may offer additional
Funds in the future.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
Each of the Funds seeks the highest possible current income exempt from
federal income taxes, while preserving capital.
Since each Fund considers preservation of capital as well as the level of
tax-exempt income, each Fund may realize less income than a mutual fund willing
to expose shareholders' capital to greater risk.
The investment objective 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 approval of a majority of the affected Fund's outstanding
shares, as defined in the Investment Company Act of 1940 ("1940 Act") (which
means the lesser of (1) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (2) more than 50% of the
outstanding shares).
There can be no assurance that a Fund will achieve its investment objectives
since there is uncertainty in every investment.
FUNDS' PRINCIPAL INVESTMENTS
Under ordinary circumstances, each Fund invests substantially all and at least
80% of its assets in federally tax-exempt obligations, including municipal bonds
and notes and municipal tax-exempt commercial paper obligations that are
obligations issued by or on behalf of states, territories and possessions of the
United States ("U.S."), the District of Columbia and their political
subdivisions, agencies and instrumentalities, the interest from which is exempt
from federal income taxes, including the alternative minimum tax. Thus, it is
possible that up to 20% of a Fund's assets could be in securities subject to the
alternative minimum tax and/or in taxable obligations.
Municipal bonds include fixed, variable or floating rate general obligation
and revenue bonds (including municipal lease obligations, resource recovery
bonds and zero coupon bonds). Municipal notes include tax anticipation notes,
bond anticipation notes, revenue anticipation notes and project notes. Municipal
commercial paper obligations are unsecured promissory notes issued by
municipalities to meet short-term credit needs.
In addition, 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.
FLORIDA FUND
Under ordinary circumstances, the Florida Fund invests substantially all and
at least 80% of its assets in municipal obligations the interest from which is
exempt from federal taxes and the Florida intangibles tax.
For a further discussion of Florida tax treatment and the factors affecting
investment in Florida municipal obligations, see Exhibit A.
MASSACHUSETTS FUND
Under ordinary circumstances, the Massachusetts Fund invests substantially all
and at least 80% of its assets in securities the interest from which is exempt
from federal taxes and Massachusetts state income taxes. The Massachusetts Fund
invests in debt obligations of The Commonwealth of Massachusetts and its
political subdivisions, agencies, authorities and instrumentalities and debt
obligations of other qualifying issuers, such as U.S. territories.
The Massachusetts Fund invests at least 80% of its assets in investment grade
municipal obligations -- bonds rated at the date of investment within the four
highest grades by Standard & Poor's Corporation ("S&P") (AAA, AA, A and BBB), by
Moody's Investors Service ("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. Such high
yield, high risk bonds generally involve greater volatility of price and risk of
principal and income than bonds in the higher rating categories and are, on
balance, considered predominantly speculative. High yield bonds are also
commonly known as "junk bonds."
For a further discussion of Massachusetts tax treatment and the factors
affecting investment in Massachusetts municipal obligations, see Exhibit A.
NEW YORK INSURED FUND
Under ordinary circumstances, the New York Insured Fund invests substantially
all and at least 80% of its assets in securities the interest from which is
exempt from federal taxes and New York state income taxes. The New York Insured
Fund invests in debt obligations of the State of New York and its political
subdivisions, agencies, authorities and instrumentalities and debt obligations
of other qualifying issuers, such as U.S. territories.
As more fully discussed below in the section entitled "Insurance," at least
80% of the municipal securities in the investment portfolio of the New York
Insured Fund will be insured as to timely payment of both principal and
interest. The purpose of insuring these investments is to minimize credit risks
associated with defaults in municipal securities owned by the Fund. Such
insurance, however, does not insure against market risk and therefore will not
guarantee the market value of the securities in the Fund's portfolio upon which
the net asset value of the Fund's shares is based.
For a further discussion of New York tax treatment and the factors affecting
investment in New York municipal obligations, see Exhibit A.
PENNSYLVANIA FUND
Under ordinary circumstances, the Pennsylvania Fund invests substantially all
and at least 80% of its assets in municipal obligations the interest from which
is exempt from federal taxes and Pennsylvania state income taxes. The securities
include debt obligations of the Commonwealth of Pennsylvania and its political
subdivisions, agencies, authorities and instrumentalities and debt obligations
of other qualifying issuers, such as Puerto Rico and the Virgin Islands. In
addition, the Pennsylvania Fund attempts to invest in municipal obligations
exempt from Pennsylvania local income taxes and seeks to hold, on the annual
assessment date, municipal obligations exempt from Pennsylvania personal
property taxes.
For a further discussion of Pennsylvania tax treatment and the factors
affecting investment in Pennsylvania municipal obligations, see 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.
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 each Fund may invest in securities of any maturity, it is currently
expected that a Fund will not invest in securities with maturities of more than
30 years or less than 5 years (other than certain money market securities).
OTHER ELIGIBLE INVESTMENTS
Each Fund may invest up to 20% of its assets under ordinary circumstances and
up to 100% of its assets for temporary defensive purposes in the following types
of instruments: (1) commercial paper, including master demand notes, that at the
date of investment is rated A-1 (the highest grade by S&P), PRIME-1 (the highest
grade by Moody's) or, if not rated by such services, is issued by a company that
at the date of investment has an outstanding issue rated A or better by S&P or
Moody's; (2) obligations, including certificates of deposit and bankers'
acceptances, of banks or savings and loan associations that have at least $1
billion in assets as of the date of their most recently published financial
statements and are members of the Federal Deposit Insurance Corporation,
including U.S. branches of foreign banks and foreign branches of U.S. banks; (3)
corporate obligations (maturing in 13 months or less) that at the date of
investment are rated A or better by S&P or Moody's; (4) obligations issued or
guaranteed by the U.S. government or by any agency or instrumentality of the
U.S.; (5) qualified "private activity" industrial development bonds, the income
from which, while exempt from federal income tax under Section 103 of the
Internal Revenue Code of 1986, as amended (the "Code"), is includable in the
calculation of the federal alternative minimum tax; and (6) municipal
obligations, the income from which is exempt from federal income tax, but not
exempt from income tax, personal property tax or intangibles tax in a state for
which a Fund is named and where such taxes apply.
Each Fund may assume a temporary defensive position upon 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. Each Fund may
also engage in financial futures contracts and related options transactions for
hedging purposes but not for speculation. Each Fund may invest in municipal
obligations denominated in foreign currencies. Each Fund may use subsequently
developed investment techniques that are related to any of its investment
policies. None of the Funds are expected to enter into repurchase agreements in
the ordinary course of business.
In addition to the options and futures mentioned above, a Fund may, if
consistent with its investment objectives, also invest in certain other types of
"derivative investments," including structured securities.
For further information about the types of investments and investment
techniques available to the Funds, including the associated risks, see the "Risk
Factors" and "Additional Investment Information" sections of this prospectus and
the statement of additional information.
INSURANCE
At least 80% of the municipal securities in the portfolio of the 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 net asset value of the New York Insured Fund's shares.
NEW ISSUE INSURANCE POLICIES
New Issue Insurance Policies are obtained by the respective issuers of
municipal securities, and all premiums respecting such securities have been paid
in advance by such issuers. Such policies are noncancellable and will continue
in force so long as the municipal securities are outstanding and the respective
insurers remain in business. Since New Issue Insurance Policies remain in effect
as long as the securities are outstanding, the insurance may have an effect on
the resale value of the Insured Securities. Therefore, New Issue Insurance
Policies may be considered to represent an element of market value with regard
to the Insured Securities, but the exact effect, if any, of this insurance on
such market value cannot be estimated. The New York 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 expense of the New York Insured Fund and will be
reflected in its 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 ordinarily 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.
INVESTMENT RESTRICTIONS
Each Fund has adopted the fundamental restrictions summarized below,
which may not be changed without the approval of a majority of such Fund's
outstanding shares (as defined in the 1940 Act). These restrictions and certain
other fundamental and nonfundamental restrictions are set forth in the statement
of additional information. Unless otherwise stated, all references to a Fund's
assets are in terms of current market value.
Generally, each Fund may not:
(1) purchase any security of any issuer (other than issues of the U.S.
government, its agencies or instrumentalities) if as a result more than 25% of
its total assets would be invested in a single industry, including industrial
development bonds from the same facility or similar types of facilities;
governmental issuers of municipal bonds are not regarded as members of an
industry, and the Fund may invest more than 25% of its assets in industrial
development bonds;
(2) invest more than 10% of its assets in securities with legal or contractual
restrictions on resale or in securities for which market quotations are not
readily available, or in repurchase agreements maturing in more than seven days;
(3) borrow money or enter into reverse repurchase agreements, except that each
Fund may enter into reverse repurchase agreements or borrow money from banks for
temporary or emergency purposes in aggregate amounts up to one-third of the
value of the Fund's net assets; provided that while borrowings from banks (not
including reverse repurchase agreements) exceed 5% of the Fund's net assets, any
such borrowings will be repaid before additional investments are made; and
(4) make loans, except that each Fund may purchase or hold debt securities
consistent with its investment objectives, lend portfolio securities valued at
not more than 15% of its total assets to broker-dealers, and enter into
repurchase agreements.
The Funds are non-diversified under the 1940 Act. As a result, there is no
restriction under the 1940 Act on the percentage of assets that may be invested
at any time in the securities of any one issuer. The Funds intend to comply,
however, with the Code's diversification requirements and other requirements
applicable to "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).
The foregoing is only a summary of the Funds' investment restrictions and
policies. See the statement of additional information for details and the full
text of the Funds' investment restrictions and related policies.
RISK FACTORS
Like any investment, your investment in a Fund involves an element of risk.
Before you invest in a Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses.
Certain risks related to the Funds are discussed below. To the extent not
discussed in this section, specific risks attendant upon individual securities
or investment practices are discussed in "Additional Investment Information."
GENERAL
By itself, a Fund does not constitute a balanced investment program and is not
designed for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal or marketability. Shares of a Fund
would not be suitable for tax-exempt institutions and may not be suitable for
certain retirement plans that are unable to benefit from the Fund's federally
tax-exempt dividends. In addition, the Funds may not be appropriate investments
for entities that are "substantial users" of facilities financed by industrial
development bonds or related persons thereof.
To the extent that the Funds are not fully diversified, they may be more
susceptible to adverse economic, political or regulatory developments affecting
a single issuer than would be the case if the Funds were more broadly
diversified.
Should a Fund need to raise cash to meet a large number of redemptions it
might have to sell portfolio securities at a time when it would be
disadvantageous to do so.
In addition, the market value of the fixed income securities in which a Fund
may invest may vary inversely to changes in prevailing interest rates.
MUNICIPAL OBLIGATIONS
A Fund's ability to achieve its objectives depends partially on the prompt
payment by issuers of the interest on and principal of the municipal obligations
held by the Fund. A moratorium, default or other nonpayment of interest or
principal when due on any municipal obligation, 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. The enactment of such a proposal could materially affect the
availability of municipal obligations for investment by each Fund and the value
of the Fund's securities. In such an event, the Trust would reevaluate its
Funds' investment objectives and policies and consider changes in the structure
of the Funds or dissolution.
If and when a Fund invests in municipal lease obligations, the possibility
exists that a municipality may not appropriate the funds for lease payments. The
Trust's Board of Trustees will be responsible for determining, on an ongoing
basis, the credit quality of such leases, including an assessment of the
likelihood of cancellation of any such lease.
BELOW-INVESTMENT GRADE BONDS
The Massachusetts Fund may invest a portion
(not to exceed 20%) of its assets in high yield, high risk municipal bonds,
(commonly known as "junk bonds".) The degree to which the Fund will hold such
securities will, among other things, depend upon Keystone's economic forecast
and its judgment as to the comparative values offered by high yield, high risk
bonds and higher quality bonds. The Massachusetts Fund seeks to invest up to 20%
of its assets aggressively and to maximize return over time from a combination
of many factors, including high current income and capital appreciation from
high yield, high risk bonds. Although the total amount invested in high yield,
high risk securities will not exceed 20% of the assets of the Massachusetts
Fund, the Fund may (as a non-diversified fund) invest as much as the entire 20%
in the securities of a single issuer. To that extent, the Massachusetts Fund may
be more susceptible to adverse economic, political or regulatory developments
affecting a single issuer than would be the case if the Fund were more broadly
diversified.
Such aggressive investing involves risks that are greater than the risks of
investing in higher quality debt securities. These risks are discussed in
greater detail below and include risks from (1) interest rate fluctuation; (2)
changes in credit status, including weaker overall credit condition of issuers
and risks of default; (3) industry, market and economic risk; (4) volatility of
price resulting from broad and rapid changes in the value of underlying
securities; and (5) greater price variability and credit risks of such high
yield, high risk securities as zero coupon bonds and pay-in-kind ("PIK")
securities.
Specifically, investors should be aware of the following:
(1) securities rated BB or lower by S&P or Ba or lower by Moody's are
considered predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments;
(2) the value of high yield, high risk securities may be more susceptible to
real or perceived adverse economic, company or industry conditions than is the
case for higher quality securities;
(3) adverse market, credit or economic conditions could make it difficult at
certain times to sell certain high yield, high risk securities held by the Fund;
(4) the secondary market for high yield, high risk securities may be less
liquid than the secondary market for higher quality securities, which may affect
the value of certain high yield, high risk securities held by the Fund at
certain times; and
(5) high yield, high risk zero coupon securities may be subject to greater
changes in value due to market conditions, the absence of a cash interest
payment and the tendency of issuers of such securities to have weaker overall
credit conditions than other high yield, high risk securities.
These risks generally make high yield, high risk securities more appropriate
for long term investment.
These risks provide the opportunity for maximizing return over time on a
portion of the Massachusetts Fund's assets, but may result in greater upward and
downward movement of the net asset value per share of the Fund. As a result,
they should be carefully considered by investors.
The maximum return sought by the Massachusetts Fund with respect to up to 20%
of its assets is ordinarily associated with securities in the lower rating
categories of the recognized rating agencies or with securities that are
unrated. Such high yield, high risk securities are generally rated BB or lower
by S&P or Ba or lower by Moody's. The Fund may invest in securities that are
rated as low as D by S&P and C- by Moody's. These rating categories are
described in the section of this prospectus entitled "Additional Investment
Information." The Fund intends to invest in D rated debt only in cases where, in
Keystone's judgment, there is a distinct prospect of improvement in the issuer's
financial position as a result of the completion of reorganization or otherwise.
The Fund may also invest in unrated securities that, in Keystone's judgment,
offer comparable yields and risks to those of securities that are rated as well
as non-investment quality zero coupon and PIK securities.
Since the Fund takes an aggressive approach to investing a portion of its
assets, Keystone tries to maximize the return by controlling the risk associated
with those investments through diversification, credit analyses, review of
sector and industry trends, interest rate forecasts and economic analysis.
Keystone's analysis of securities focuses on factors such as asset values,
earnings prospects and the quality of management of the company. In making
investment recommendations, Keystone also considers current income, potential
for capital appreciation, maturity structure, quality guidelines, coupon
structure, average yield, percentage of zeros and PIKs, percentage of
non-accruing items and yield to maturity.
Keystone also considers the ratings of Moody's and S&P assigned to various
securities, but does not rely solely on such ratings because (1) Moody's and
S&P assigned ratings are based largely on historical financial data and may not
accurately reflect the current financial outlook of municipalities; and
(2) there can be large differences among the current financial conditions of
issuers within the same rating category.
TAX CONSIDERATIONS
For a discussion of the tax considerations for each state and special factors,
including the risks associated with investing in the municipal securities of a
single state, see 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.
The Funds value municipal obligations on the basis of valuations provided by a
pricing service, approved by the Trust's Board of Trustees, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value.
Each Fund values its short-term instruments as follows: short-term instruments
with maturities of sixty days or less are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of discount),
which, when combined with accrued interest, approximates market; short-term
instruments having maturities of more than sixty days for which market
quotations are readily available are valued at current market value; and
short-term instruments maturing in more than sixty days when purchased that are
held on the sixtieth day prior to maturity are valued at amortized cost (market
value on the sixtieth day adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates market and
which, in either case, reflects fair value as determined by the Board of
Trustees. All other investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
according to procedures established by the Board of Trustees.
DIVIDENDS AND TAXES
Each Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains annually. Shareholders
receive Fund distributions in the form of additional shares of that class of
shares upon which the distribution is based or, at the shareholder's option, in
cash. Shareholders of a Fund who have not opted to receive cash prior to the
payable date for any dividend from net investment income or the record date for
any capital gains distribution will have the number of such shares determined on
the basis of the Fund's net asset value per share computed at the end of that
day after adjustment for the distribution. Net asset value is used in computing
the number of shares in both capital gains and income distribution
reinvestments. There is a possibility that shareholders may lose the tax-exempt
status on accrued income on municipal bonds if shares of the Funds are redeemed
before a dividend has been declared.
Because Class A shares bear most of the costs of distribution of such shares
through payment of a front end sales charge while Class B and Class C shares
bear such expenses through a higher annual distribution fee, expenses
attributable to Class B shares and Class C shares will generally be higher than
those of Class A and income distributions paid by a Fund with respect to Class A
shares will generally be greater than those paid with respect to Class B and
Class C shares.
Account statements and/or checks, as appropriate, will be mailed within seven
days after the Fund pays a distribution. Unless the Trust receives instructions
to the contrary before the record or payable date, as the case may be, it will
assume that a shareholder wishes to receive that distribution and future capital
gains and income distributions in shares. Instructions continue in effect until
changed in writing.
Each of the Funds has qualified and intends to continue to qualify as a
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.
If a Fund qualifies and if it distributes substantially all of its net
investment income and net capital gains, if any, to shareholders, it will be
relieved of any federal income tax liability.
Any taxable dividend declared in October, November or December to shareholders
of record in such a month and paid by the following January 31 will be
includable in the taxable income of shareholders as if paid on December 31 of
the year in which the dividend was declared.
Each Fund expects that substantially all of its dividends will be "exempt
interest dividends," which should be treated as excludable from federal gross
income. In order to pay exempt interest dividends, at least 50% of the value of
the Fund's assets must consist of federally tax-exempt obligations at the close
of each quarter. An exempt interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by the Fund with respect to its net
federally excludable municipal obligation interest and designated as an exempt
interest dividend in a written notice mailed to each shareholder not later than
60 days after the close of its taxable year. The percentage of the total
dividends paid by a Fund with respect to any taxable year that qualifies as
exempt interest dividends will be the same for all shareholders of the Fund
receiving dividends with respect to such year. If a shareholder receives an
exempt interest dividend with respect to any share and such share has been held
for six months or less, any loss on the sale or exchange of such share will be
disallowed to the extent of the exempt interest dividend amount.
Any shareholder of a Fund who may be a "substantial user" of a facility
financed with an issue of tax-exempt obligations or a "related person" to such a
user should consult his tax adviser concerning his qualification to receive
exempt interest dividends should the Fund hold obligations financing such
facility.
Under regulations to be promulgated, to the extent attributable to interest
paid on certain private activity bonds, a Fund's exempt interest dividends,
while otherwise tax-exempt, will be treated as a tax preference item for
alternative minimum tax purposes. Corporate shareholders should also be aware
that the receipt of exempt interest dividends could subject them to alternative
minimum tax under the provisions of Section 56(g) of the Code (relating to
"adjusted current earnings").
Under particularly unusual circumstances, such as when a Fund is in a
prolonged defensive investment position, it is possible that no portion of a
Fund's distributions of income to its shareholders for a fiscal year would be
exempt from federal income tax. The Trust does not presently anticipate,
however, that such unusual circumstances will occur.
Since none of a Fund's income will consist of corporate dividends, no
distributions will qualify for the 70% corporate dividends received deduction.
Each Fund intends to distribute its net capital gains as capital gains
dividends. Shareholders should treat such dividends as long-term capital gains.
Each Fund will designate capital gains distributions as such by a written notice
mailed to each shareholder no later than 60 days after the close of the Fund's
taxable year. If a shareholder receives a capital gain dividend and holds his
shares for six months or less, then any allowable loss on disposition of such
shares will be treated as a long-term capital loss to the extent of such capital
gain dividend.
Interest on indebtedness incurred or continued by shareholders to purchase or
carry shares of a Fund will not be deductible for federal income tax purposes to
the extent of the portion of the interest expense relating to exempt interest
dividends. Such portion is determined by multiplying the total amount of
interest paid or accrued on the indebtedness by a fraction, the numerator of
which is the exempt interest dividends received by a shareholder in his taxable
year, and the denominator of which is the sum of the exempt interest dividends
and the taxable distributions out of the Fund's investment income and long-term
capital gains received by the shareholder.
The Funds may acquire options to "put" specified securities to municipal bond
dealers or issuers from whom the securities are purchased. It is expected that
each Fund will be treated for federal income tax purposes as the owner of the
municipal bonds acquired subject to the put. The interest on the municipal bonds
will be tax-exempt to the Funds, and the purchase price must be allocated
between such securities and the puts based upon their respective fair market
values. The IRS has not issued a published ruling on this matter and could reach
a different conclusion.
STATE INCOME TAXES
The exemption of interest on municipal bonds for federal income tax purposes
does not necessarily result in exemption under the income, corporate or personal
property tax laws of any state or city. Generally, individual shareholders of
the Funds receive tax-exempt treatment at the state level for distributions
derived from municipal securities of their state of residency. 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 Trust, 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 Trust, 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.
TRUST MANAGEMENT AND EXPENSES
TRUST MANAGEMENT
Under Massachusetts law, the Trust's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Trust
and its Funds. Subject to the authority of the Board of Trustees, Keystone
serves as investment adviser to the Trust and is responsible for
the overall management of the Trust's business and affairs.
INVESTMENT ADVISER
Keystone is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone has provided investment advisory and management services to investment
companies and private accounts since it was organized in 1932. Keystone is a
wholly-owned subsidiary of Keystone Investments, Inc. ("Keystone Investments"),
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Keystone Investments is a private corporation predominantly owned by current
and former members of management of Keystone and its affiliates. The shares of
Keystone Investments common stock beneficially owned by management are held in
a number of voting trusts, the trustees of which are George S. Bissell, Albert
H. Elfner, III, Edward F. Godfrey, Ralph J. Spuehler, Jr. and Rosemary D. Van
Antwerp. Keystone Investments provides accounting, bookkeeping, legal,
personnel and general corporate services to Keystone, its affiliates and the
Keystone Investments Family of Funds.
Pursuant to its Investment Advisory and Management Agreement with the Trust
(the "Advisory Agreement"), Keystone provides investment advisory and management
services to the Trust 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 payable daily.
The Advisory Agreement continues in effect from year to year with respect to a
Fund 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
such Fund. In either case, the terms of the Advisory Agreement and continuance
thereof must be approved by the vote of a majority of the Trust's disinterested
Trustees, as defined in the 1940 Act (the "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 Trust or Keystone, or may be terminated as to a Fund by a vote of
a majority of the shares of such Fund. The Advisory Agreement will terminate
automatically upon its assignment.
The Trust has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
FUND EXPENSES
Each Fund pays 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 legal counsel to the Independent
Trustees; fees payable to government agencies, including registration and
qualification fees of the Trust, the Funds and their shares under federal and
state securities laws; and certain extraordinary expenses. In addition, each
class of shares of a Fund will pay all of the expenses attributable to it. Such
expenses are currently limited to Distribution Plan expenses. Each Fund also
pays its brokerage commissions, interest charges and taxes and certain
extraordinary expenses.
During the fiscal year ended March 31, 1996, the Florida, Massachusetts, New
York Insured and Pennsylvania Funds paid or accrued to Keystone investment
management and administrative services fees of $557,537 (0.52% of the Fund's
average annual net assets), $62,760 (0.55% of the Fund's average annual net
assets), $118,589 (0.55% of the Fund's average annual net assets) and $402,467
(0.53% of the Fund's average annual net assets), respectively.
During the fiscal year ended March 31, 1996, the Florida, Massachusetts, New
York Insured and Pennsylvania Funds paid or accrued to Keystone Investor
Resource Center, Inc. ("KIRC"), the Trust's transfer and dividend disbursing
agent, $115,014, $15,192, $27,801 and $106,088, respectively, for shareholder
services. KIRC is a wholly-owned subsidiary of Keystone. During the year ended
March 31, 1996, the Florida, Massachusetts, New York Insured and Pennsylvania
Funds paid or accrued to Keystone Investments $24,275, $22,081, $23,082 and
$22,964, respectively, as reimbursement for certain accounting services.
Keystone has currently voluntarily agreed to limit the expenses of each Fund's
Class A, B, and C shares to 0.75%, 1.50%, and 1.50%, of each such class's
respective average daily net assets. Keystone currently intends to continue the
foregoing expense limitations on a calendar month-by-month basis. Keystone will
periodically evaluate the foregoing expense limitations and may modify or
terminate them in the future. Keystone will not be required to make
reimbursement to the extent it would result in a Fund's inability to qualify as
a regulated investment company under the Code. In accordance with certain
voluntary expense limitations in place during the fiscal year ended March 31,
1996, Keystone reimbursed the Florida, Massachusetts, New York Insured and
Pennsylvania Funds $196,232, $100,729, $119,608 and $190,132, respectively.
Each Fund may be subject to certain annual state expense limitations.
PORTFOLIO MANAGERS
George J. Kimball, a Keystone Vice President and Portfolio Manager, is
responsible for the day-to-day management of the New York Insured and Florida
Funds. Mr. Kimball has more than 10 years of investment experience.
Daniel A. Rabasco, a Keystone Vice President and Portfolio Manager, is
responsible for the day-to-day management of the Pennsylvania and
Massachusetts Funds. Mr. Rabasco has more than 9 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 consider as a factorthe number of shares of the Fund sold by such
broker-dealer. In addition, broker-dealers executing portfolio transactions may,
from time to time, be affiliated with the Trust, Keystone, the Trust'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 such Fund as well as in
advising its other clients.
PORTFOLIO TURNOVER
For the fiscal year ended March 31, 1995, the portfolio turnover rates for the
Florida, Massachusetts, New York Insured and Pennsylvania Funds were 129%, 77%,
77% and 97%, respectively.
For the fiscal year ended March 31, 1996, the portfolio turnover rates for the
Florida, Massachusetts, New York Insured and Pennsylvania Funds were 89%, 165%,
53% and 55%, respectively.
High portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs, which would be borne directly by a
Fund, as well as additional gains and/or losses to shareholders. For additional
information about brokerage and distributions, see the statement of additional
information.
HOW TO BUY SHARES
Shares of each Fund may be purchased from any broker-dealer that has a selling
agreement with Keystone Investment Distributors Company (the "Principal
Underwriter"), the Trust's principal underwriter. The Principal Underwriter is a
wholly-owned subsidiary of Keystone and is located at 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
In addition, you may open an account for the purchase of shares of a Fund by
mailing to the Trust, c/o Keystone Investor Resource Center, Inc., P.O. Box
2121, Boston, Massachusetts 02106-2121, a completed account application and a
check payable to the Trust. 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 and then sending in a completed account
application. Subsequent investments in a Fund's shares in any amount may be made
by check, by wiring federal funds or by an electronic funds transfer ("EFT").
Orders for the purchase of shares of a Fund will be confirmed at an offering
price equal to the net asset value per share next determined after receipt of
the order in proper form by the Principal Underwriter (generally as of the close
of the Exchange on that day) plus, in the case of Class A shares, the applicable
sales charge. Orders received by broker-dealers or other firms prior to the
close of the Exchange and received by the Principal Underwriter prior to the
close of its business day will be confirmed at the offering price effective as
of the close of the Exchange on that day.
Orders for shares of a Fund received other than as stated above will receive
the offering price equal to the net asset value per share next determined
(generally the next business day's offering price) plus, in the case of Class A
shares, the applicable sales charge.
The Trust reserves the right to determine the net asset value more frequently
than once a day if deemed desirable. Broker-dealers and other financial services
firms are obligated to transmit orders promptly.
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 broker-dealer promptly forwards payment to the
Principal Underwriter for shares being purchased through the dealer.
The Trust 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 Class A, B and C 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 as
follows: Class A shares purchased (1) in an amount equal to or exceeding
$1,000,000 or (2) by a corporate qualified retirement plan or a non-qualified
deferred compensation plan sponsored by a corporation having 100 or more
eligible employees (a "Qualifying Plan"), in either case without a front end
sales charge, will be subject to a contingent deferred sales charge for the 24
month period following the date of purchase.
CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares are sold without a sales charge at the time of purchase, but
are, with certain exceptions, subject to a deferred sales charge if they are
redeemed. Class B shares purchased on or after June 1, 1995 are subject to a
deferred sales charge upon redemption during the 72 month period from and
including the month of purchase. Class B shares purchased prior to June 1, 1995
are subject to a deferred sales charge upon redemption during the four calendar
years following purchase. Class B shares purchased on or after June 1, 1995 that
have been outstanding for eight years from and including the month of purchase
will automatically convert to Class A shares without the imposition of a
front-end sales charge or exchange fee. Class B shares purchased prior to June
1, 1995 retain their existing conversion rights.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares are sold without a sales charge at the time of purchase, but
are subject to a deferred sales charge if they are redeemed within one year
after the date of purchase. Class C shares are available only through
broker-dealers who have entered into special distribution agreements with the
Principal Underwriter.
Class A and B shares, pursuant to their Distribution Plans, currently pay an
annual service fee of up to 0.15% of the Fund's average daily net assets
attributable to the respective classes. Class C shares pay an annual service fee
of up to 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 prefer to pay the entire cost of distribution at the time
of investment, rather than spreading the cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares (in which case
100% of the purchase price is invested immediately), depending on the amount of
the purchase and the length of investment.
The Fund will not normally accept any purchase of Class B shares in the
amount of $250,000 or more and will not normally accept any purchase of Class C
shares in the amount of $1,000,000 or more.
----------------------------------------------
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge as
follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 ................................. 4.75% 4.99% 4.25%
$100,000 but less than $250,000 .................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000 .................... 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 .................. 1.50% 1.52% 1.50%
- ----------
*Rounded to the nearest one-hundredth percent.
</TABLE>
----------------------------------------------
Purchases of a Fund's Class A shares in the amount of $1 million or more
and/or purchases of Class A shares made by a Qualifying Plan or a tax-sheltered
annuity plan sponsored by a public educational entity having 5,000 or more
eligible employees (a "TSA Plan") will be at net asset value without the
imposition of a front-end sales charge (each such purchase, an "NAV Purchase").
With respect to NAV Purchases, the Principal Underwriter will pay
broker-dealers or others concessions based on (1) the investor's cumulative
purchases during the one-year period beginning with the date of the initial NAV
Purchase and (2) the investor's cumulative purchases during each subsequent
one-year period beginning with the first NAV Purchase following the end of the
prior period. For such purchases, concessions will be paid at the following
rate: 0.50% of the investment amount up to $4,999,999, plus 0.25% of the
investment amount over $4,999,999.
With the exception of Class A shares acquired by a TSA Plan, Class A shares
acquired in an NAV Purchase are subject to a contingent deferred sales charge of
0.50% upon redemption during the 24 month period commencing on the date the
shares were originally purchased. Class A shares acquired by a TSA Plan in an
NAV Purchase are not subject to a contingent deferred sales charge.
The sales charge is paid to the Principal Underwriter, which in turn normally
reallows a portion to your broker-dealer. In addition, your broker-dealer
currently will be paid periodic service fees at an annual rate of up to 0.15% of
the average daily net asset value of Class A shares maintained by such recipient
and outstanding on the books of the Trust for specified periods.
Upon written notice to broker-dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A shares
that are included in a broker-dealer or investment adviser managed fee based
program (a "wrap account") with a broker-dealer or investment adviser who has
entered into a special agreement with the Principal Underwriter. Initial sales
charges may be reduced or eliminated for persons purchasing Class A shares of
other Keystone America Funds. See Exhibit B to this Prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within six
months after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates when the
amount invested represents redemption proceeds from such unrelated registered
open-end investment company, and the shareholder either (1) paid a front-end
sales charge, or (2) was at some time subject to, but did not actually pay, a
contingent deferred sales charge with respect to the redemption proceeds. This
special net asset value purchase is currently being offered on a calendar
month-by-month basis and may be modified or terminated in the future.
In addition, upon prior notification to the Principal Underwriter, Class A
shares may be purchased at net asset value by clients of registered
representatives within six months after a change in the registered
representative's employment when the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by Keystone or its affiliates; and the shareholder either
(1) paid a front-end sales charge, or (2) was at some time subject to, but did
not actually pay, a contingent deferred sales charge with respect to the
redemption proceeds.
CLASS A DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures by the Fund,
currently limited to 0.15% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under each Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as broker-dealers) as
service fees at an annual rate of up to 0.15% of the average daily net asset
value of Class A shares maintained by the recipients and outstanding on the
books of the Fund for specified periods.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge.
With respect to Class B shares purchased on or after June 1, 1995, each Fund,
with certain exceptions, imposes a deferred sales charge in accordance with the
following schedule:
DEFERRED
SALES
CHARGE
REDEMPTION TIMING IMPOSED
- ----------------- -------
First twelve month period .................... 5.00%
Second twelve month period ................... 4.00%
Third twelve month period .................... 3.00%
Fourth twelve month period ................... 3.00%
Fifth twelve month period .................... 2.00%
Sixth twelve month period .................... 1.00%
No deferred sales charge is imposed on amounts redeemed thereafter.
With respect to Class B shares sold prior to June 1, 1995, each Fund, with
certain exceptions, imposes a deferred sales charge of 3.00% on shares redeemed
during the calendar year of purchase and the first calendar year after the year
of purchase; 2.00% on shares redeemed during the second calendar year after the
year of purchase; and 1.00% on shares redeemed during the third calendar year
after the year of purchase. No deferred sales charge is imposed on amounts
redeemed thereafter.
When imposed, the deferred sales charge is deducted from the redemption
proceeds otherwise payable to the shareholder. The deferred sales charge is
retained by the Principal Underwriter. Amounts received by the Principal
Underwriter under the Class B Distribution Plans are reduced by deferred sales
charges retained by the Principal Underwriter. See "Contingent Deferred Sales
Charge and Waiver of Sales Charges" below.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years from and including the month of purchase will automatically
convert to Class A shares (which are subject to a lower Distribution Plan
charge) without imposition of a front-end sales charge or exchange fee. Class B
shares purchased prior to June 1, 1995 will similarly convert to Class A shares
at the end of seven calendar years after the year of purchase. (Conversion of
Class B shares represented by stock certificates will require the return of the
stock certificates to KIRC.) The Class B shares so converted will no longer be
subject to the higher expenses borne by Class B shares. Because the net asset
value per share of the Class A shares may vary from that of the Class B shares
at the time of conversion, although the dollar value will be the same, a
shareholder may receive more or fewer Class A shares than the number of Class B
shares converted. Under current law, it is the Trust's opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Trustees will consider
what action, if any, is appropriate and in the best interests of the Class B
shareholders.
CLASS B DISTRIBUTION PLANS
Each Fund has adopted Distribution Plans with respect to its Class B shares
(the "Class B Distribution Plans") that provide for expenditures by the Fund at
an annual rate of up to 1.00% of the average daily net asset value of Class B
shares (currently limited to 0.90%) to pay expenses of the distribution of Class
B shares. Payments under the Class B Distribution Plans are currently made to
the Principal Underwriter (which may reallow all or part to others, such as
broker-dealers) (1) as commissions for Class B shares sold and (2) as
shareholder service fees. Amounts paid or accrued to the Principal Underwriter
under (1) and (2) in the aggregate may not exceed the annual limitation referred
to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold plus the
first year's service fee in advance in the amount of 0.15% of the price paid for
each Class B share sold. Beginning approximately 12 months after the purchase of
a Class B share, the broker-dealer or other party will receive service fees at
an annual rate of 0.15% of the average daily net asset value of such Class B
share maintained by the recipient and outstanding on the books of the Fund for
specified periods. See "Distribution Plans" below.
CLASS C SHARES
Class C shares are offered only through broker-dealers who have special
distribution agreements with the Principal Underwriter. Class C shares are
offered at net asset value, without an initial sales charge. With certain
exceptions, each Fund may impose a deferred sales charge of 1.00% on shares
redeemed within one year after the date of purchase. No deferred sales charge is
imposed on amounts redeemed thereafter. If imposed, the deferred sales charge is
deducted from the redemption proceeds otherwise payable to you. The deferred
sales charge is retained by the Principal Underwriter. See "Contingent Deferred
Sales Charge and Waiver of Sales Charges" below.
CLASS C DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan with respect to its Class C shares
(the "Class C Distribution Plan") that provides for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class C shares
(currently limited to 0.90%) to pay expenses incurred in connection with the
distribution of Class C shares. Payments under the Class C Distribution Plan are
currently made to the Principal Underwriter (which may reallow all or part to
others, such as broker-dealers) (1) as commissions for Class C shares sold and
(2) as shareholder service fees. Amounts paid or accrued to the Principal
Underwriter under (1) and (2) in the aggregate may not exceed the annual
limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold,
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately 15 months after
purchase, the broker-dealers or other party will receive a commission at an
annual rate of 0.75% (subject to NASD rules -- see "Distribution Plans") plus
service fees at the annual rate of 0.25%, respectively, of the average daily net
asset value of each Class C share maintained by the recipients on the books of
the Fund for specified periods. See "Distribution Plans" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any contingent deferred sales charge imposed upon the redemption of Class A,
Class B or Class C shares is a percentage of the lesser of (1) the net asset
value of the shares redeemed or (2) the net asset value at time of purchase of
such shares.
No contingent deferred sales charge is imposed when amounts redeemed are
derived from (1) increases in the value of an account above the net cost of such
shares due to increases in the net asset value per share of a Fund; (2) certain
shares with respect to which a Fund did not pay a commission on issuance,
including shares acquired through reinvestment of dividend income and capital
gains distributions; (3) certain Class A shares held for more than two years;
(4) Class B shares held during more than four consecutive calendar years or more
than 72 months, as the case may be; or (5) Class C shares held for more than one
year. Upon request for redemption, shares not subject to the contingent deferred
sales charge will be redeemed first. Thereafter, shares held the longest will be
the first to be redeemed.
Each Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a contingent deferred sales charge to
certain Directors, Trustees, officers and employees of the Fund and Keystone and
certain of their affiliates, to registered representatives of firms with dealer
agreements with the Principal Underwriter and to a bank or trust company acting
as a trustee for a single account. See the statement of additional information
for more details.
With respect to Class A shares purchased by a Qualifying Plan at net asset
value or Class C shares purchased by a Qualifying Plan, no contingent deferred
sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifying Plan. This waiver is not available in
the event a Qualifying Plan (as a whole) redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a redemption of
shares of a Fund in the event of (1) death or disability of the shareholder; (2)
a lump-sum distribution from a 401(k) plan or other benefit plan qualified under
the Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of accounts having an aggregate net asset value of
less than $1,000; (5) automatic withdrawals under an automatic withdrawal plan
of up to 1.5% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
From time to time, the Principal Underwriter may provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of a Fund. In addition, broker-dealers may, from time to
time, receive additional cash payments. The Principal Underwriter may also
provide written information to broker-dealers with whom it has dealer agreements
that relates to sales incentive campaigns conducted by such broker-dealers for
their representatives as well as financial assistance in connection with
pre-approved seminars, conferences and advertising. No such programs or
additional compensation will be offered to the extent they are prohibited by the
laws of any state or any self-regulatory agency such as the NASD. Broker-dealers
to whom substantially the entire sales charge on Class A shares is reallowed may
be deemed to be underwriters as that term is defined under the Securities Act of
1933.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to broker-dealers that satisfy certain criteria
established from time to time by the Principal Underwriter. These conditions
relate to increasing sales of shares of the Keystone funds over specified
periods and certain other factors. Such payments may, depending on the
broker-dealer's satisfaction of the required conditions, be periodic and may be
up to 0.25% of the value of shares sold by such broker-dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to broker-dealers for the sale of shares, as described above)
to banks and other financial services firms that facilitate transactions in
shares of 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 broker-dealers pursuant to state
law.
DISTRIBUTION PLANS
As discussed above, each Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and Class
C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD currently limits the amount that a Fund may pay annually in
distribution costs for the sale of its shares and shareholder service fees. The
NASD limits annual expenditures to 1% of the aggregate average daily net asset
value of a Fund's shares, of which 0.75% may be used to pay such distribution
costs and 0.25% may be used to pay shareholder service fees. The NASD also
limits the aggregate amount that a Fund may pay for such distribution costs to
6.25% of gross share sales since the inception of a 12b-1 Distribution Plan,
plus interest at the prime rate plus 1% on such amounts (less any contingent
deferred sales charges paid by shareholders to the Principal Underwriter)
remaining unpaid from time to time.
The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plans that exceed current annual payments permitted to be received by the
Principal Underwriter from a Fund. The Principal Underwriter intends to seek
full payment of such charges from a Fund (together with annual interest thereon
at the prime rate plus 1%) at such time in the future as, and to the extent
that, payment thereof by a Fund would be within the permitted limits.
If the Trust's Independent Trustees authorize such payments, the effect would
be to extend the period of time during which the Trust incurs the maximum amount
of costs allowed by a Distribution Plan. If a Distribution Plan is terminated,
the Principal Underwriter will ask the Independent Trustees to take whatever
action they deem appropriate under the circumstances with respect to payment of
such amounts.
In connection with financing its distribution costs, including commission
advances to dealers and others, the Principal Underwriter has sold to a
financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Trust
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plan completely.
If it terminates such Distribution Plan, the Trust may be subject to possible
adverse distribution consequences.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class.
For the Florida, Massachusetts, New York Insured and Pennsylvania Funds
unreimbursed Class B Distribution Plan expenses at March 31, 1996 for Class B
shares sold prior to June 1, 1995 were $2,946,854 (5.41% of Class B net assets),
$366,916 (5.04% of Class B net assets), $741,567 (4.32% of Class B net assets)
and $1,849,989 (4.90% of Class B net assets), respectively. For Class B shares
sold after June 1, 1995, unreimbursed Class B Distribution expenses at March 31,
1996 for the Florida, Massachusetts, New York Insured and Pennsylvania Funds
were $510,361 (0.94% of Class B net assets), $55,979 (0.77% of Class B net
assets), $290,287 (1.69% of Class B net assets), and $491,259 (1.30% of Class B
net assets), respectively.
For the Florida, Massachusetts, New York Insured and Pennsylvania Funds,
unreimbursed Class C Distribution Plan expenses at March 31, 1996 were
$1,295,524 (10.98% of Class C net assets), $142,771 (6.20% of Class C net
assets), $213,519 (9.30% of Class C net assets), and $823,047 (8.51% of Class C
net assets) respectively.
For the year ended March 31, 1996, the Florida, Massachusetts, New York
Insured and Pennsylvania Funds paid the Principal Underwriter (1) $56,304,
$2,256, $5,591, and $44,529, respectively, pursuant to each Fund's Class A
Distribution Plan; (2) $456,390, $56,056, $116,859 and $282,940, respectively,
pursuant to each Fund's Class B Distribution Plan for Class B shares sold prior
to June 1, 1995 and $34,480, $7,645, $22,305 and $36,440, respectively, pursuant
to each Fund's Class B Distribution Plan for Class B shares sold on or after
June 1, 1995; and (3) $111,012, $19,215, $21,248, and $87,375, respectively,
pursuant to each Fund's Class C Distribution Plan.
Broker-dealers or others may receive different levels of compensation
depending on which class of shares they sell. Payments pursuant to a
Distribution Plan are included in the operating expenses of the class.
HOW TO REDEEM SHARES
Fund shares may be redeemed for cash at the redemption value upon written
order by the shareholder(s) to the Trust, c/o KIRC, and presentation to the
Trust of a properly endorsed share certificate if certificates have been issued.
The redemption value equals the net asset value adjusted for fractions of a
cent and may be more or less than the shareholder's cost depending upon changes
in the value of the Fund's portfolio securities between purchase and redemption.
The Fund may impose a deferred sales charge at the time of redemption of
certain shares as explained in "Alternative Sales Options." If imposed, the Fund
deducts the deferred sales charge from the redemption proceeds otherwise payable
to the shareholder.
Shareholders may also redeem shares through their broker-dealers. The
Principal Underwriter, acting as agent for the Trust, stands ready to
repurchase a Fund's shares upon orders from broker-dealers.
At various times, the Trust may be requested to redeem shares for which it has
not yet received good payment. In such a case, the Trust will mail the
redemption proceeds upon clearance of the purchase check, which may take up to
15 days or more. Any delay may be avoided by purchasing shares with a certified
check drawn on a U.S. bank or by bank wire of funds or by EFT. Although the
mailing of a redemption check or the wiring or EFT of redemption proceeds may be
delayed, the redemption value will be determined and the redemption processed in
the ordinary course of business upon-receipt of proper documentation. In such a
case, after redemption and prior to the release of the proceeds, no appreciation
or depreciation will occur in the value of the redeemed shares, and no interest
will be paid on the redemption proceeds. If the mailing of a redemption has been
delayed, the check will be mailed or the proceeds wired or sent EFT promptly
after good payment has been collected.
If the Trust receives a redemption or repurchase order, but the shareholder
has not clearly indicated the amount of money or number of shares involved, the
Trust cannot execute the order. In such cases, the Trust will request the
missing information from you and process the order the day it receives such
information.
For the protection of shareholders, SIGNATURES ON CERTIFICATES, STOCK POWERS
AND ALL WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK
EXCHANGE MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER
THE SECURITIES ACT OF 1934 AND KIRC'S POLICIES. The Trust and KIRC may not only
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 Trust and KIRC reserve the right to
withdraw this waiver at any time.
TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by calling toll free 1-800-343-2898. To engage in telephone transactions
generally, you must complete the appropriate sections of the Fund's application.
In order to insure that instructions received by KIRC are genuine, when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If you cannot reach the Trust by telephone, you should follow the procedures
for redeeming by mail or through a broker-dealer as set forth above.
SMALL ACCOUNTS
Because of the high cost of maintaining small accounts, the Trust reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No deferred
sales charges are applied to such redemptions.
GENERAL
The Trust reserves the right at any time to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose or change fees.
Except as otherwise noted, neither the Trust, KIRC nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL") or by telephone. KIRC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Trust, KIRC nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that KIRC
reasonably believes to be genuine.
The Trust 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 Trust
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
A shareholder who has obtained the appropriate prospectus 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, except as noted below, may be exchanged for the same type of
Class B shares of other Keystone America Funds and the same type of Class B
shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone America
Funds and Class C shares of KLT.
Class B shares purchased on or after June 1, 1995 cannot be exchanged for
Class B shares of Keystone Capital Preservation and Income Fund during the 24
month period commencing with and including the month of purchase.
The exchange of Class B shares and Class C shares will not be subject to a
contingent deferred sales charge. However, if the shares being tendered for
exchange are
(1) Class A shares acquired in an NAV Purchase or otherwise without a
front end sales charge,
(2) Class B shares that have been held for less than 72 months or four
years, as the case may be, or
(3) Class C shares that have been held for less than one year,
and are still subject to a deferred sales charge, such charge will carry over to
the shares being acquired in the exchange transaction.
You may exchange shares for another Keystone fund for a $10 fee by calling or
writing to Keystone. The exchange fee is waived for individual investors who
make an exchange using KARL. Shares purchased by check are eligible for exchange
after 15 days. If the shares being tendered for exchange are still subject to a
deferred sales charge, such charge will carry over to the shares being acquired
in the exchange transaction. The Trust reserves the right, after providing
shareholders with the required notice, to change the terms of or terminate this
exchange offer, including the right to change the service charge for any
exchange.
Orders to exchange a certain class of shares of a Fund for the corresponding
class of shares of KLT will be executed by redeeming the shares of the Fund and
purchasing the corresponding class of shares of KLT at the net asset value of
such shares next determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. In all other
cases, orders for exchanges received by the Trust prior to 4:00 p.m. eastern
time on any day the Trust is open for business will be executed at the
respective net asset values determined as of the close of business that day.
Orders for exchanges received after 4:00 p.m. eastern time on any business day
will be executed at the respective net asset values determined at the close of
the next business day.
An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, 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 Trust with one telephone call. You must allow two business days after the
call for the transfer to take place. For money recently invested, you must allow
normal check clearing time before redemption proceeds are sent to your bank.
You may also arrange for systematic monthly or quarterly investments in your
Keystone America account. Once proper authorization is given, your bank account
will be debited to purchase shares in the Fund specified in your account
application. You will receive confirmation from the Principal Underwriter for
every transaction.
To change the amount of or terminate a Keystone America Money Line service
(which could take up to 30 days), you must write to KIRC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, and include your account number.
SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, if your Fund account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100 and may be as much as 1.5% per
month or 4.5% per quarter of the total net asset value of the Fund shares in
your account when the Systematic Income Plan is opened. Excessive withdrawals
may decrease or deplete the value of your account. Moreover, because of the
effect of the applicable sales charge, a Class A investor should not make
continuous purchases of a Fund's shares while participating in a Systematic
Income Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America Fund. This results in more shares being
purchased when the selected fund's net asset value is relatively low and fewer
shares being purchased when the fund's net asset value is relatively high, which
may cause a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must establish an account
in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application (1) the dollar amount of each
monthly or quarterly investment (minimum $100) you wish to make and (2) the fund
in which the investment is to be made. Thereafter, on the first day of the
designated month an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and invested
in shares of the designated fund.
If you are a Class A investor and paid a sales charge on your initial
purchase, the shares purchased will be eligible for Rights of Accumulation and
the sales charge applicable to the purchase will be determined accordingly. In
addition, the value of shares purchased will be included in the total amount
required to fulfill a Letter of Intent. If a sales charge was not paid on the
initial purchase, a sales charge will be imposed at the time of subsequent
purchases and the value of shares purchased will become eligible for Rights of
Accumulation and Letters of Intent.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class of
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on the application and indicate the Keystone America Fund(s) into which
distributions are to be invested. The value of shares purchased will be
ineligible for Rights of Accumulation and Letters of Intent.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at current
net asset value.
PERFORMANCE DATA
From time to time a Fund may advertise "total return," "current yield" and a
"tax equivalent yield." ALL DATA IS BASED ON HISTORICAL EARNINGS. PAST
PERFORMANCE SHOULD NOT BE CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE
PERIOD OF TIME. Total return and current yield are computed separately for each
class of shares of 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 or applicable contingent deferred 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 Trust may also include comparative performance information for each class
of shares when advertising or marketing the Trust's shares, such as data from
Lipper Analytical Services, Inc., Morningstar, Inc., S&P, Ibbotson
Associates or other industry publications.
TRUST SHARES
The Trust currently issues shares of four separate series evidencing interests
in different portfolio securities. Each Fund currently issues Class A, B and C
shares. The Trust is authorized to issue additional series or classes of shares.
Shares of a Fund participate in dividends and distributions and have equal
voting, liquidation and other rights with other shares of the Fund except that
(1) expenses related to the distribution of each series or 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 series or class; (2) each series or class
of shares has exclusive voting rights with respect to its Distribution Plan; (3)
each series or class has different exchange privileges; and (4) each series or
class generally has a different designation. When issued and paid for, the
shares of each Fund will be fully paid and nonassessable by the Trust. 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 Trust does not have annual meetings. The Trust will have special
meetings, from time to time, as required under its Declaration of Trust and
under the 1940 Act. As provided in the Trust's Declaration of Trust,
shareholders have the right to remove Trustees by an affirmative vote of
two-thirds of the outstanding shares. A special meeting of the shareholders will
be held when holders of 10% of the outstanding shares request a meeting for the
purpose of removing a Trustee. The Fund is prepared to assist shareholders in
communications with one another for the purpose of convening such a meeting as
prescribed by section 16(c) of the 1940 Act.
Under Massachusetts law, it is possible that a Trust shareholder may be held
personally liable for the Trust's obligations. The Trust's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Trust's obligations and provides indemnification from Trust
assets for any shareholder held personally liable for the Trust's obligations.
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
Trust's transfer agent and dividend disbursing agent.
When the Trust determines from its records that more than one account in the
Trust is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Trust intends, when an annual
report or a semi-annual report of the Trust 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 Trust
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating. The following criteria are used in making that assessment:
1. amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note); and
2. source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 -- Strong capacity to pay principal and interest. Those issues
determined to possess a very strong capacity to pay debt service are
given a plus (+) designation.
2. SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the terms of
the notes.
3. SP-3 -- Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note
rating symbols, combined with the commercial paper symbols, are used (for
example, "SP -- 1+/A-1+").
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
1. likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. nature of and provisions of the obligation; and
3. protection afforded by and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the successful
completion of the project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion.
Bond ratings are as follows:
1. AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
2. AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
3. A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
4. BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
A Moody's rating for municipal short-term obligations will be designated
Moody's Investment Grade or ("MIG"). These ratings recognize the difference
between short-term credit risk and long-term risk. Factors affecting the
liquidity of the borrower and the short-term cyclical elements are critical in
short-term ratings.
A short-term rating may also be assigned on issues with a demand feature --
variable rate demand obligation ("VRDO"). Such ratings will be designated as
VMIG. Short-term ratings on issues with demand features are differentiated by
the use of the VMIG symbol to reflect such characteristics as payment upon
periodic demand rather than fixed maturity dates and payment relying on the
external liquidity.
The note ratings are as follows:
1. MIG1/VMIG1 This designation denotes the best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
2. MIG2/VMIG2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
3. MIG3/VMIG3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
4. MIG4/VMIG4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
B. CORPORATE AND MUNICIPAL BOND RATINGS
1. Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
2. Aa -- Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long term risks appear somewhat larger than in Aaa securities.
3. A -- Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
4. Baa -- Bonds rated Baa are considered to be medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
CON. (--) -- Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (1) earnings of projects under
construction, (2) earnings of projects unseasoned in operation experience, (3)
rentals that begin when facilities are completed, or (4) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the Aa, A, and Baa groups that Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, and Baa 1.
FITCH CORPORATE AND MUNICIPAL RATINGS
A. MUNICIPAL NOTES
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally three years or less. These
include commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes. The short-term rating places greater emphasis on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
The note ratings are as follows:
1. F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
2. F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
3. F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned the two higher ratings.
4. F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
B. CORPORATE AND MUNICIPAL BOND RATINGS
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
PLUS (+) OR MINUS (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA category.
A CONDITIONAL rating is premised on the successful completion of a project or
the occurrence of a specific event.
Debt rated BB, B, CCC, CC and C by S&P is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Debt rated C1 by S&P is debt (income bonds) on which no interest is being paid.
Debt rated D by S&P is in default and payment of interest and/ or repayment of
principal is in arrears. Bonds that are rated CAA by Moody's are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds that are rated CA by Moody's
represent obligations that are speculative in a high degree. Such issues are
often in default or have other market shortcomings. Bonds that are rated C by
Moody's are the lowest rated bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Debt rated BB, B, CCC, CC, and C by Fitch is regarded as speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
represents the highest degree of speculation. Debt rated DDD, DD, and D are in
default on interest and/or principal payments.
DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
AVAILABLE TO THE FUNDS
A Fund may engage in the following investment practices to the extent
described in the prospectus and the statement of additional information.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S., and a Fund may be subject to the risks associated with the
holding of such property overseas. Examples of governmental actions would be the
imposition of currency controls, interest limitations, withholding taxes,
seizure of assets or the declaration of a moratorium. Various provisions of
federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF
FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by a Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. A Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement,
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes acquired by a Fund permit a Fund to demand payment
of principal and accrued interest at any time (on not more than seven days'
notice). Notes acquired by a Fund may have maturities of more than one year,
provided that (1) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days notice, and (2) the rate of interest on
such notes is adjusted automatically at periodic intervals which normally will
not exceed 31 days, but may extend up to one year. The notes will be deemed to
have a maturity equal to the longer of the period remaining to the next interest
rate adjustment or the demand notice period. Because these types of notes are
direct lending arrangements between the lender and borrower, such instruments
are not normally traded and there is no secondary market for these notes,
although they are redeemable and thus repayable by the borrower at face value
plus accrued interest at any time. Accordingly, a Fund's right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. In connection with master demand note arrangements, Keystone considers,
under standards established by the Board of Trustees, earning power, cash flow
and other liquidity ratios of the borrower and will monitor the ability of the
borrower to pay principal and interest on demand. These notes are not typically
rated by credit rating agencies. Unless rated, a Fund may invest in them only if
at the time of an investment the issuer meets the criteria established for
commercial paper discussed in the statement of additional information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements; i.e., the Fund purchases a
security subject to the Fund's obligation to resell and the seller's obligation
to repurchase that security at an agreed upon price and date, such date usually
being not more than seven days from the date of purchase. The resale price is
based on the purchase price plus an agreed upon market rate of interest that is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement imposes an obligation on the seller to pay the agreed upon price,
which obligation is in effect secured by the value of the underlying security.
The value of the underlying security is at least equal to the amount of the
agreed upon resale price and marked to market daily. The Fund may enter into
such agreements only with respect to U.S. government and foreign government
securities, which may be denominated in U.S. or foreign currencies. The Fund may
enter into such repurchase agreements with foreign banks and securities dealers
approved in advance by the Fund's Trustees. Whether a repurchase agreement is
the purchase and sale of a security or a collateralized loan has not been
definitively established. This might become an issue in the event of the
bankruptcy of the other party to the transaction. It does not presently appear
possible to eliminate all risks involved in repurchase agreements. These risks
include the possibility of a decline in the market value of the underlying
securities, as well as delay and costs to the Fund in connection with bankruptcy
proceedings. Therefore, it is the policy of the Fund to enter into repurchase
agreements only with large, well-capitalized banks that are members of the
Federal Reserve System and with primary dealers in U.S. government securities
(as designated by the Federal Reserve Board) whose creditworthiness has been
reviewed and found satisfactory by the Fund. The Securities and Exchange
Commission deems a repurchase agreement to be, in effect, a loan by the Fund.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, the Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. The Fund intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions.
Reverse repurchase agreements involve the risk that the market value of the
securities that the Fund is obligated to repurchase may decline below the
repurchase price. If not fully secured or collateralized, reverse repurchase
agreements would magnify the potential for gain or loss on the portfolio
securities of the Fund and, therefore, increase the possibility of fluctuation
in the Fund's net asset value. Such practices may constitute leveraging. The
Fund intends to only invest in fully secured or collateralized reverse
repurchase agreements.
"WHEN ISSUED" SECURITIES
Each Fund may also purchase and sell securities and currencies on a when
issued and delayed delivery basis. When issued or delayed delivery transactions
arise when securities or currencies are purchased or sold by a Fund with payment
and delivery taking place in the future in order to secure what is considered to
be an advantageous price and yield to the Fund at the time of entering into the
transaction. When a Fund engages in when issued and delayed delivery
transactions, the Fund relies on the buyer or seller, as the case may be, to
consummate the sale. Failure to do so may result in a Fund missing the
opportunity to obtain a price or yield considered to be advantageous. When
issued and delayed delivery transactions may be expected to occur a month or
more before delivery is due. However, no payment or delivery is made by a Fund
until it receives payment or delivery from the other party to the transaction. A
separate account of liquid assets equal to the value of such purchase
commitments will be maintained until payment is made. When issued and delayed
delivery agreements are subject to risks from changes in value based upon
changes in the level of interest rates, currency rates and other market factors,
both before and after delivery. A Fund does not accrue any income on such
securities or currencies prior to their delivery. To the extent each Fund
engages in when issued and delayed delivery transactions, it will do so
consistent with its investment objective and policies and not for the purpose of
investment leverage.
LOANS OF SECURITIES TO BROKER-DEALERS
Each Fund may lend securities to brokers and dealers pursuant to agreements
requiring that the loans be continuously secured by cash or securities of the
U.S. government, its agencies or instrumentalities, or any combination of cash
and such securities, as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to a Fund if as a result the aggregate of all outstanding
securities loans exceeds 15% of the value of the Fund's total assets taken at
their current value. A Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other
high-grade, short-term obligations or interest bearing cash equivalents.
Although voting rights attendant to securities loaned pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted by a Fund if, in the opinion of the Fund, a material event affecting the
investment is to occur. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. Loans may
only be made to borrowers deemed to be of good standing, under standards
approved by the Board of Trustees, when the income to be earned from the loan
justifies the attendant risks.
DERIVATIVES
Each Fund may use derivatives in furtherance of its investment objective.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates,
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices. Derivatives can be used
to earn income or protect against risk, or both. For example, one party with
unwanted risk may agree to pass that risk to another party who is willing to
accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Funds to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. Each Fund is permitted to use derivatives for
one or more of these purposes. Each of these uses entails greater risk than if
derivatives were used solely for hedging purposes. The Funds use futures
contracts and related options for hedging purposes. Derivatives are a valuable
tool which, when used properly, can provide significant benefit to a Fund's
shareholders. Keystone is not an aggressive user of derivatives with respect to
the Funds. However, a Fund may take positions in those derivatives that are
within its investment policies if, in Keystone's judgement, this represents an
effective response to current or anticipated market conditions. Keystone's use
of derivatives is subject to continuous risk assessment and control from the
standpoint of a Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options, futures,
forwards and swaps -- from which virtually any type of derivative transaction
can be created. Further information regarding options and futures, is provided
later in this section and is provided in the Trust's statement of additional
information.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. See "Structured Securities" below.
The term "derivative" is also sometimes used to describe securities involving
rights to a portion of the cash flows from an underlying pool of mortgages or
other assets from which payments are passed through to the owner of, or that
collateralize, the securities.
While the judicious use of derivatives by experienced investment managers such
as Keystone can be beneficial, derivatives also involve risks different from,
and, in certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives that investors should understand before
investing in a Fund.
* Market Risk -- This is the general risk attendant to all investments that the
value of a particular investment will decline or otherwise change in a way
detrimental to a Fund's interest.
* Management Risk -- Derivative products are highly specialized instruments that
require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to a Fund's portfolio and the ability to forecast price,
interest rate or currency exchange rate movements correctly.
* Credit Risk -- This is the risk that a loss may be sustained by a Fund as a
result of the failure of another party to a derivative (usually referred to as
a "counterparty") to comply with the terms of the derivative contract. The
credit risk for exchange traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order to
reduce overall credit risk. For privately negotiated derivatives, there is no
similar clearing agency guarantee. Therefore, a Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative in
evaluating potential credit risk.
* Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
* Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
* Other Risks -- Other risks in using derivatives include the risk of mispricing
or improper valuation and the inability of derivatives to correlate perfectly
with underlying assets, rates and indices. Many derivatives, in particular
privately negotiated derivatives, are complex and often valued subjectively.
Improper valuations can result in increased cash payment requirements to
counterparties or a loss of value to a Fund. Derivatives do not always
perfectly or even highly correlate or track the value of the assets, rates or
indices they are designed to closely track. Consequently, a Fund's use of
derivatives may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Fund's investment objective.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. A Fund may write (i.e., sell) covered call and put
options. By writing a call option, the Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, a Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. A Fund also may write straddles
(combinations of covered puts and calls on the same underlying security).
Each Fund may only write "covered" options. This means that so long as a Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
a Fund has written options against all of its securities which are available for
writing options, the Fund may be unable to write additional options unless it
sells a portion of its portfolio holdings to obtain new securities against which
it can write options. If this were to occur, higher portfolio turnover and
correspondingly greater brokerage commissions and other transaction costs may
result. However, the Funds do not expect that this will occur.
Each Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, a Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS Each Fund may purchase put or call options, including
purchasing put or call options for the purpose of offsetting previously written
put or call options of the same series.
If a Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying
security or dispose of assets held in a segregated account until the options
expire or are exercised.
An option position may be closed out only in a secondary market for an option
of the same series. Although a Fund generally will write only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market will exist for any particular option at any particular
time, and for some options no secondary market may exist. In such event, it
might not be possible to effect a closing transaction in a particular option.
Options on some securities are relatively new, and it is impossible to predict
the amount of trading interest that will exist in such options. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair a Fund's ability to
use such options to achieve its investment objective.
OPTIONS TRADING MARKETS Options in which each Fund will trade generally are
listed on national securities exchanges. Exchanges on which such options
currently are traded include the Chicago Board Options Exchange and the New
York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any Exchange, but traded in the over-the-counter
market. Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions could fail to
meet their obligations to a Fund. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on its use of options
discussed herein, each Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.
The staff of the 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 a Fund, are considered to
be invested in illiquid securities or assets for the purpose of calculating
whether the Fund is in compliance with its investment restriction relating to
illiquid investments.
FUTURES TRANSACTIONS
Each Fund may enter into currency and other financial futures contracts and
write options on such contracts. Each Fund intends to enter into such contracts
and related options for hedging purposes. Each Fund will enter into futures on
securities or currencies or index-based futures contracts in order to hedge
against changes in interest or exchange rates or securities prices. A futures
contract on securities or currencies is an agreement to buy or sell securities
or currencies at a specified price during a designated month. A futures contract
on a securities index does not involve the actual delivery of securities, but
merely requires the payment of a cash settlement based on changes in the
securities index. A Fund does not make payment or deliver securities upon
entering into a futures contract. Instead, it puts down a margin deposit, which
is adjusted to reflect changes in the value of the contract and which continues
until the contract is terminated.
Each Fund may sell or purchase futures contracts. When a futures contract is
sold by a Fund, the value of the contract will tend to rise when the value of
the underlying securities or currencies declines and to fall when the value of
such securities or currencies increases. Thus, each Fund sells futures contracts
in order to offset a possible decline in the value of its securities or
currencies. If a futures contract is purchased by a Fund, the value of the
contract will tend to rise when the value of the underlying securities or
currencies increases and to fall when the value of such securities or currencies
declines. Each Fund intends to purchase futures contracts in order to establish
what is believed by Keystone to be a favorable price and rate of return for
securities or favorable exchange rate for currencies the Fund intends to
purchase.
Each Fund also intends to purchase put and call options on futures contracts
for hedging purposes. A put option purchased by a Fund would give it the right
to assume a position as the seller of a futures contract. A call option
purchased by a Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires a Fund to pay a premium. In exchange for the premium, a Fund becomes
entitled to exercise the benefits, if any, provided by the futures contract, but
is not required to take any action under the contract. If the option cannot be
exercised profitably before it expires, a Fund's loss will be limited to the
amount of the premium and any transaction costs.
Each Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. A Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that a Fund will be able to enter into an offsetting transaction with
respect to a particular contract at a particular time. If a Fund is not able to
enter into an offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the contract and to complete the contract
according to its terms, in which case it would continue to bear market risk on
the transaction.
Although futures and options transactions are intended to enable a Fund to
manage market, interest rate or exchange rate risk, unanticipated changes in
interest rates, exchange rates or market prices could result in poorer
performance than if it had not entered into these transactions. Even if Keystone
correctly predicts interest or exchange rate movements, a hedge could be
unsuccessful if changes in the value of a Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between a Fund's futures and securities or currencies positions may be caused by
differences between the futures and securities or currencies markets or by
differences between the securities or currencies underlying a Fund's futures
position and the securities or currencies held by or to be purchased for a Fund.
Keystone will attempt to minimize these risks through careful selection and
monitoring of the Fund's futures and options positions.
The Funds do not intend to use futures transactions for speculation or
leverage. Each Fund has the ability to write options on futures, but currently
intends to write such options only to close out options purchased by a Fund. The
Funds will not change these policies without supplementing the information in
the FUND's prospectus and statement of additional information.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, if permitted by its investment policies, each Fund may
invest in securities of foreign issuers. When a Fund invests in foreign
securities they usually will be denominated in foreign currencies, and the Fund
temporarily may hold funds in foreign currencies. Thus, the value of Fund shares
will be affected by changes in exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, a Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency a Fund will
deliver or receive when the contract is completed) is fixed when a Fund enters
into the contract. A Fund usually will enter into these contracts to stabilize
the U.S. dollar value of a security it has agreed to buy or sell. Each Fund
intends to use these contracts to hedge the U.S. dollar value of a security it
already owns, particularly if a Fund expects a decrease in the value of the
currency in which the foreign security is denominated. Although a Fund will
attempt to benefit from using forward contracts, the success of its hedging
strategy will depend on Keystone's ability to predict accurately the future
exchange rates between foreign currencies and the U.S. dollar. The value of a
Fund's investments denominated in foreign currencies will depend on the relative
strength of those currencies and the U.S. dollar, and a Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by a Fund. Each Fund
may also purchase and sell options related to foreign currencies in connection
with hedging strategies.
VARIABLE AND FLOATING RATE INSTRUMENTS Fixed-income securities may have fixed,
variable or floating rates of interest. Variable and floating rate securities
pay interest at rates that are adjusted periodically, according to a specified
formula. A "variable" interest rate adjusts at predetermined intervals (e.g.,
daily, weekly or monthly), while a "floating" interest rate adjusts whenever a
specified benchmark rate (such as the bank prime lending rate) changes.
If permitted by its investment policies, a Fund may invest in fixed-income
securities that pay interest at a coupon rate equal to a base rate, plus
additional interest for a certain period of time if short-term interest rates
rise above a predetermined level or "cap." The amount of such an additional
interest payment typically is calculated under a formula based on a short-term
interest rate index multiplied by a designated factor.
INVERSE FLOATING RATE SECURITIES If permitted by its investment policies, a
Fund may also invest in securities with rates that move inversely to market
rates ("inverse floaters"). An inverse floater bears an interest rate that
resets in the opposite direction of the change in a specified interest rate
index. As market interest rates rise, the interest rate on the inverse floater
goes down, and vice versa. Inverse floaters tend to exhibit greater price
volatility than fixed-rate bonds of similar maturity and credit quality. The
interest rates on inverse floaters may be significantly reduced, even to zero,
if interest rates rise. Moreover, the secondary market for inverse floaters may
be limited in rising interest rate environments.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in market value.
STRUCTURED SECURITIES Structured securities generally represent interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of structured securities backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
securities to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured securities is dependent
on the extent of the cash flow on the underlying instruments. Because structured
securities typically involve no credit enhancement, their credit risk generally
will be equivalent to that of the underlying instruments. Structured securities
of a given class may be either subordinated or unsubordinated to the right of
payment of another class. Subordinated structured securities typically have
higher yields and present greater risks than unsubordinated structured
securities.
<PAGE>
EXHIBIT A
KEYSTONE FLORIDA TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Florida does not presently impose an income tax on individuals and thus
individual shareholders of the Florida Fund will not be subject to any Florida
state income tax on distributions received from the Florida Fund. Shares of the
Florida Fund may, however, be subject to Florida intangible personal property
tax imposed on certain property held on January 1 of each year. Corporate
shareholders, depending on the domicile of the corporation, may be subject to
Florida corporate income taxes depending on the portion of the Florida Fund's
income that is allocable to Florida under applicable Florida law.
According to a technical assistance advisement from the State of Florida,
Department of Revenue, shares of the Florida Fund owned by a Florida resident
will be exempt from the intangible personal property tax so long as its
portfolio assets consist 100% of securities that are exempt from the intangible
personal property tax, including Florida municipal bonds and/or municipal bonds
issued by the U.S. Government or the governments of Puerto Rico or Guam. The
technical assistance advisement will not be binding on the Department of Revenue
for any shareholder of the Fund; however, such advisements are considered
helpful in understanding the Department's position on any particular tax issue.
SPECIAL FACTORS AFFECTING THE FLORIDA FUND
Under current law, the State of Florida is required to maintain a balanced
budget so that current expenses are met from current revenues. Florida does not
currently impose a tax on personal income. It does impose a tax on corporate
income derived from activities within the State. In addition, Florida imposes an
ad valorem tax on certain intangible property (see above) as well as sales and
use taxes. These taxes are the principal source of funds to meet State expenses,
including repayment of, and interest on, obligations backed solely by the full
faith and credit of the State.
Florida's Constitution permits the issuance of state or municipal obligations
pledging the full faith and credit of the State, with a concurring vote by the
respective electors, to finance or refinance capital projects authorized by the
Legislature. The State Constitution also provides that the Legislature shall
appropriate monies sufficient to pay debt service on state bonds pledging the
full faith and credit of the State as they become due. All State tax revenues,
other than trust funds dedicated by the State Constitution for other purposes,
are available for such an appropriation, if required.
On the other hand, municipalities and other political subdivisions of the
State principally rely on a combination of ad valorem taxes on real property,
user fees and occupational license fees to meet their day-to-day expenses
including the repayment of principal of, and interest on, their obligations
backed by their full faith and credit. (Revenue bonds, of course, are dependent
on the revenue generated by a specific facility or enterprise.)
Florida has experienced substantial population increases as a result of
migration to Florida from other areas of the U.S. and from foreign countries.
This population growth is expected to continue, and it is anticipated that
corresponding increases in State revenues will be necessary during the next
decade to meet increased burdens on the various public and social services
provided by the State.
Florida's ability to meet increasing expenses will be dependent in part upon
the State's continued ability to foster business and economic growth. Florida
has experienced significant increases in the technology-based and other light
industries and in the service sector. This growth has diversified the State's
overall economy, which at one time was dominated by the citrus and tourism
industries. The State's economic and business growth could be restricted,
however, by the natural limitations on Florida's water supplies.
<PAGE>
KEYSTONE MASSACHUSETTS TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Under Massachusetts law, individual shareholders of the Massachusetts Fund who
are subject to Massachusetts personal income tax will not be subject to
Massachusetts personal income tax on dividends paid by the Massachusetts Fund to
the extent such dividends are exempt from federal income tax and are derived
from interest payments on Massachusetts municipal securities. Long term capital
gains distributions are taxable as long term capital gains, except that such
distributions derived from the sale of certain Massachusetts obligations are
exempt from Massachusetts personal income tax. These obligations, which are few
in number, are those issued pursuant to legislation that specifically exempts
gain on their sale from Massachusetts income taxation. Dividends and other
distributions are not exempt from Massachusetts corporate excise tax.
SPECIAL FACTORS AFFECTING THE MASSACHUSETTS FUND
Because it invests primarily in Massachusetts municipal securities, the fund
may be effected by any political, economic, regulatory, legal or other
developments that constrain the taxing, spending, and revenue collection
authority of issuers of Massachusetts municipal securities or otherwise affect
the ability of such issuers to pay interest or repay principal or any premium.
Several statutes limit the taxing authority of certain Massachusetts
governmental entities and may impair the ability of some issuers of
Massachusetts municipal securities to maintain debt service on their
obligations. Any significant imbalance in revenues and expenditures is likely to
affect the bond ratings and credit standing of the public authorities and
municipalities within Massachusetts as well as of The Commonwealth itself.
The Commonwealth of Massachusetts and certain of its cities and towns and
public bodies have experienced in the past, and may experience in the future,
financial difficulties that may adversely affect their credit standing. The
prolonged effects of such financial difficulties could adversely affect the
market value of the municipal securities held by the Massachusetts Fund. The
information summarized below describes some of the more significant factors that
could affect the Massachusetts Fund or the ability of the obligors to pay debt
service on certain of the securities. The sources of such information are the
official statements of issuers located in The Commonwealth of Massachusetts as
well as other publicly available documents, and statements of public officials.
The Massachusetts Fund is not aware of facts which would render such information
inaccurate.
The Massachusetts economy has shifted from labor intensive manufacturing to
services, especially in the medical and biotechnology areas. Although The
Commonwealth experienced an economic slowdown during the recent recession,
especially in high technology, real estate, banking, and defense, there are
signs of improvement. While roughly 9.5% of the employment base was lost between
1989 and 1991, employment rose 0.4% between November 1992 and November 1993.
Although job losses continued in high tech manufacturing and finance during 1992
and 1993, strong gains were registered in services, construction and high tech
non-manufacturing. The December 1993 unemployment rate was 6.3% compared to 6.4%
for the nation. In addition, per capita personal income averaged 118% of the
national average in 1992.
Although The Commonwealth experienced quite a slowdown during the recession
with spending exceeding revenues, beginning in 1991, The Commonwealth has
experienced a turn-around in its finances with revenues exceeding spending.
Budgeted expenditures for fiscal 1989, 1990 and 1991 were approximately $12.643
billion, $13.260 billion and $13.659 billion, respectively while budgeted
revenues and other sources for those years were approximately $11.970 billion,
$12.008 billion and $13.634 billion, respectively. By comparison, budgeted
revenues and other sources increased by approximately 0.7% from fiscal 1991 to
fiscal 1992, while tax revenues increased by 5.4% for the same period. Budgeted
expenditures in fiscal 1992 were 1.7% lower than fiscal 1991 budgeted
expenditures. Furthermore, total revenues and other sources for fiscal 1993
increased approximately 6.9% from fiscal 1992, while tax revenues increased by
4.7% for the same period. Budgeted expenditures and other uses in fiscal 1993
were approximately 9.6% higher than fiscal 1992 expenditures and other uses.
Fiscal 1993 ended with positive fund balances of $562.5 million, including a
combined balance of $452.1 million in the stabilization and undesignated general
funds. By comparison, The Commonwealth ended the 1989 fiscal year with fund
balances in deficit by $319.3 million.
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.
The fiscal 1994 budget provided for expenditures of approximately $15.52
billion, an increase of 5.6% over fiscal 1993 levels. Budgeted revenues and
other sources for fiscal 1994 were approximately $15.55 billion, which is 5.7%
higher than fiscal 1993 levels. This amount included estimated tax revenues of
approximately $10.61 billion, which is 6.8% higher than fiscal 1993 tax
revenues. 1994 tax revenues were approximately $87 million below the Department
of Revenue's estimate of $10.694 billion. Fiscal 1994 ended with a combined
balance of approximately $589 million in the budgeted operating funds.
Fiscal 1995 tax revenue collections were approximately $11.16 billion,
approximately $12 million above the Department of Revenue's revised fiscal year
1995 tax revenue estimate of $10.15 billion, or 5.3%, above
fiscal 1994 tax revenues of $10.607 billion. Budgeted revenues and other
sources, including non-tax revenues, collected in fiscal 1995 were approximately
$16.39 billion, approximately $842 million or 5.4%, above the fiscal 1994
budgeted revenues of $15.55 billion. Budgeted expenditures and other uses of
funds in fiscal 1995 were approximately $16.26 billion, approximately $736
million or 4.7%, above fiscal 1994 budgeted expenditures and uses of $15.52
billion. As calculated by the controller in the preliminary financial report,
the amount of surplus funds (as so defined) for fiscal 1995 was approximately
$90.8 million, of which $55.9 million was available to be carried forward as a
beginning balance for fiscal 1996. Of the balance, approximately $27.9 million
was deposited in the Stabilization Fund, and approximately $7 million was
deposited in the Cost Relief Fund.
The fiscal 1996 budget, as signed into law by the Governor on June 21, 1995,
provides for expenditures of approximately $16.998 billion, a $739 million, or
4.5%, increase over fiscal 1995 spending. The largest single spending increase
in the fiscal 1996 budget is approximately $232 million to continue funding the
comprehensive educational reform legislation enacted in 1993. Budgeted revenues
and other sources to be collected in fiscal 1996 are estimated to be
approximately $16.778 billion. This amount includes estimated fiscal 1996 tax
revenues of $11.653 billion, which was approximately $490 million, or 4.3%,
higher than fiscal 1995 tax revenues.
As of December 31, 1995, the Governor had signed into law fiscal 1996
supplemental appropriations totaling approximately $23.5 million, including
approximately $12.6 million to fund higher education collective bargaining
contracts and $5.6 million for the Department of Social Services. These
appropriations were offset by approximately $10.4 million in line item
reductions, including a reduction of $9.8 million for the State's debt service
contract assistance to the MBTA. Based on preliminary figures, through December
1995, fiscal 1996 tax revenue collections have totaled approximately $5.378
billion, approximately $239 million, or 4.7%, greater than tax revenue
collections for the same period in fiscal 1995. Tax revenue collections to date
are within the benchmark range set by the Department of Revenue and are $20.7
million, or 0.4%, below the mid-point of such benchmark range.
The Governor's plan to provide permanent passenger vehicle registration and
lifetime operating licenses, if it continues in effect, is estimated to reduce
state revenues by approximately $90 million annually, though the fiscal 1996
cost is expected to be minimal.
In connection with a proposal to reorganize state government, the Governor
also announced on November 1, 1995, that he would propose to reduce the personal
income tax rate on earned income from 5.95% to 5.45%. The cost to the
Commonwealth of the proposed tax reduction has been estimated to be
approximately $500 million per year.
On November 28, 1995, the Governor approved a modified version of the
legislation he had filed in September to establish a "single sales factor"
apportionment formula for the business corporation's tax. As finally enacted,
the legislation applies the new formula, effective January 1, 1996, to certain
federal defense contractors and phases the new formula in over five years to
manufacturing firms generally. The Department of Revenue estimates that the new
law will reduce revenues by $44 million in fiscal 1996 and by $90 million in
fiscal 1997. If the new formula were fully effective for all covered businesses,
the Department estimates that the annual revenue reduction would be $100 million
to $150 million.
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.
<PAGE>
KEYSTONE NEW YORK INSURED TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Individual shareholders of the New York Insured Fund who are subject to New
York State and New York City personal income tax will not be subject to New York
State or City personal income tax on dividends paid by the New York Insured Fund
to the extent that they are derived from interest on obligations of the State of
New York and its political subdivisions that is exempt from federal income tax.
In addition, dividends derived from interest on debt obligations issued by
certain other governmental entities (for example, U.S.
territories) will be similarly exempt.
For New York State and City personal income tax purposes, long term capital
gain distributions are taxable as long term capital gains regardless of the
length of time shareholders have owned their shares. Short term capital gains
and any other taxable distribution of income are taxable as ordinary income.
To the extent that investors are obligated to pay state or local taxes outside
of the State of New York, dividends earned by an investment in the New York
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 INSURED FUND
As described in the prospectus, the New York Insured Fund will generally
invest in New York municipal obligations. The New York Insured Fund is therefore
susceptible to political, economic, or regulatory factors affecting New York
State and governmental bodies within New York State. Some of the more
significant events and conditions relating to the financial situation in New
York are summarized below. The following information provides only a brief
summary of the complex factors affecting the financial situation in New York, is
derived from sources that are generally available to investors and is believed
to be accurate. It is based on information drawn from official statements and
prospectuses issued by, and other information reported by, the State of New York
by its various public bodies, and by other entities located within the State,
including the City of New York, in connection with the issuance of their
respective securities.
New York State historically has been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. Statewide, urban
centers have experienced significant changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
New York City has also had to face great competition as other major cities have
developed financial and business capabilities which make them less dependent on
the specialized services traditionally available almost exclusively in New York
City.
During the 1982-83 recession, overall economic activity in the State declined
less than that of the nation as a whole. However, in the calendar years 1984
through 1991, the State's rate of economic expansion was somewhat slower than
that of the nation. In the 1990-91 recession, the economy of the State, and that
of the rest of the Northeast, was more heavily damaged than that of the nation
as a whole and has been slower to recover. The total employment growth rate in
the State has been below the national average since 1984. The unemployment rate
in the State dipped below the national rate in the second half of 1981 and
remained lower until 1991; since then, it has been higher. According to data
published by the U.S. Bureau of Economic Analysis, during the past ten years,
total personal income in the State rose slightly faster than the national
average only from 1986 through 1988.
The State has the second highest combined state and local tax burden in the
United States. The burden of State and local taxation, in combination with the
many other causes of regional economic dislocation, may have contributed to the
decisions of some businesses and individuals to relocate outside, or not locate
within, the State.
In recent years, State actions affecting the level of receipts and
disbursements, as well as the relative strength of the State and regional
economy, actions of the Federal government and other factors, have created
structural budget gaps for the State. These gaps resulted from a significant
disparity between recurring revenues and the costs of maintaining or increasing
the level of support for State programs. The 1995-96 enacted budget combines
significant tax and program reductions, which will, in the current and future
years, lower both the recurring receipts base (before the effect of any economic
stimulus from such tax reductions) and the historical annual growth in State
program spending. Notwithstanding these changes, the State can expect to
continue to confront structural deficits in future years.
The State's current fiscal year commenced on April 1, 1996, and ends on March
31, 1997, and is referred to herein as the State's 1996-97 Fiscal Year. As of
May 22, 1996, the State's budget for the 1996-97 Fiscal Year was not yet enacted
by the State Legislature.
The 1996-97 Financial Plan projects balance on a cash basis in the General
Fund. It reflects a continuing strategy of substantially reduced State spending,
including program restructurings, reductions in social welfare spending, and
efficiency and productivity initiatives. Total General Fund receipts and
transfers from other funds are projected to be $31.32 billion, a decrease of
$1.4 billion from total receipts projected in the current fiscal year. Total
General Fund disbursements and transfers to their funds are projected to be
$31.22 billion, a decrease of $1.5 billion from spending totals projected for
the current fiscal year. After adjustments and transfers for comparability
between the 1995-96 and 1996-97 State Financial Plans, the Executive Budget
proposes an absolute year-to-year decline in General Fund spending of 5.8
percent. Spending from all funding sources (including federal aid) is proposed
to increase by 0.4 percent from the prior fiscal year after adjustments and
transfers for comparability.
On May 15, 1996, it was announced that the State owed local governments
approximately $430 million for services provided to handicapped children in 1994
and earlier. Funds to cover such payments were not included in the 1996-97
Financial Plan.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities,
but also by entities, such as the Federal government, that are not under the
control of the State. For example, various proposals relating to Federal tax and
spending policies that are currently being publicly discussed and debated could,
if enacted, have a significant impact on the State's financial condition in the
current and future fiscal years. Because of the uncertainty and unpredictability
of the changes, their impact cannot, as a practical matter, be included in the
assumptions underlying the State's projections of this time.
The fiscal health of the State is closely related to the fiscal health of its
localities, particularly the City of New York, which has required and continues
to require significant financial assistance from the State.
New York City depends on State Aid both to enable it to balance its budget and
to meet its cash requirements. New York City has achieved balanced operating
results for each of its fiscal years since 1981 as reported in accordance with
the then-applicable GAP Standards.
During the 1990 and 1991 fiscal years, New York City experienced significant
shortfalls in almost all of its major tax sources and increases in social
service costs, and was required to take actions to close substantial budget gaps
in order to maintain balanced budgets n accordance with its financial plan.
New York State's authorities are generally responsible for financing,
constructing and operating revenue-producing public benefit facilities. The
fiscal stability of the State is related, in part, to the fiscal stability of
its public authorities. Public authorities are not subject to the constitutional
restrictions on the incurrence of debt which applies to the State itself and
may issue bonds and notes within the amounts permitted by, and as otherwise
restricted by, their legislative authorization. The State's access to the public
credit markets could be impaired, and the market price of its outstanding debt
may be materially adversely affected, if any of its public authorities were to
default on their respective obligations, particularly those using the financing
techniques referred to as State-supported or State-related.
Certain localities in addition to New York City could have financial problems
leading to requests for additional State assistance during the State's 1995-1996
fiscal year and thereafter. The potential impact on the State of such requests
by localities is not included in the projections of the State receipts and
disbursements in the State's 1995-1996 fiscal year.
Certain litigation pending against the State by its officers or employees
could affect adversely the financial condition of the State in the 1995-1996
fiscal year or thereafter. Adverse developments in these proceedings or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced 1995-1996 State Financial Plan. The State believes that the 1995-1996
State Financial Plan includes sufficient reserves for the payment of judgments
that may be required during the 1995-1996 fiscal year. There can be no
assurance, however, that an adverse decision in any of these proceedings would
not exceed the amount of the 1995-1996 State Financial Plan reserves for the
payment of judgments and, thereby, affect the ability of the State to maintain a
balanced 1995-1996 State Financial Plan.
An expanded discussion is contained in the statement of additional
information.
<PAGE>
KEYSTONE PENNSYLVANIA TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
Individual shareholders of the Pennsylvania Fund who are subject to the
Pennsylvania personal income tax, as either residents or non-residents of the
Commonwealth of Pennsylvania, will not be subject to Pennsylvania personal
income tax on distributions of interest made by the Pennsylvania Fund that are
attributable to (1) obligations issued by the Commonwealth of Pennsylvania, any
public authority, commission, board or agency created by the Commonwealth of
Pennsylvania, any political subdivision of the Commonwealth of Pennsylvania or
any public authority created by any such political subdivision (collectively,
"Pennsylvania Obligations"); and (2) obligations of the U.S. and
certain qualifying agencies, instrumentalities, territories and possessions of
the United States, the interest from which are statutorily free from state
taxation in the Commonwealth of Pennsylvania under the laws of the Commonwealth
or the U.S. (collectively, "U.S. Obligations"). Distributions attributable to
most other sources will not be exempt from Pennsylvania personal income tax.
Distributions of gains attributable to Pennsylvania Obligations and U.S.
Obligations (collectively "Exempt Obligations") will be subject to the
Pennsylvania personal income tax.
Shares of the Pennsylvania Fund that are held by individual shareholders who
are Pennsylvania residents subject to the Pennsylvania county personal property
tax will be exempt from such tax to the extent that the Pennsylvania Fund's
portfolio consists of Exempt Obligations on the annual assessment date.
Nonresidents of the Commonwealth of Pennsylvania are not subject to the
Pennsylvania county personal property tax. Corporations are not subject to
Pennsylvania personal property taxes. For shareholders who are residents of the
City of Philadelphia, distributions of interest derived from Exempt Obligations
are not taxable for purposes of the Philadelphia School District investment
income tax provided that the Pennsylvania Fund reports to its investors the
percentage of Exempt Obligations held by it for the year. The Pennsylvania Fund
will report such percentage to its shareholders.
Distributions of interest, but not gains, realized on Exempt Obligations are
not subject to the Pennsylvania corporate net income tax. The Pennsylvania
Department of Revenue also takes the position that shares of funds similar to
the Pennsylvania Fund are not considered exempt assets of a corporation for the
purpose of determining its capital stock value subject to the Commonwealth's
capital stock and franchise taxes.
SPECIAL FACTORS AFFECTING THE PENNSYLVANIA FUND
Historically, Pennsylvania is among the leading states in manufacturing and
mining, and its steel and coal industries have been of national importance.
However, due in part to the decline in the steel and coal industries,
Pennsylvania's economy has become more diversified, with major new sources of
growth in the service and trade sectors. The Commonwealth's unemployment rate is
below the national average, and its per capita income is slightly above the
national average. The Commonwealth's General Fund, through which taxes are
received and debt service is made, had unappropriated balance surpluses for the
years ended June 30, 1994 and June 30, 1995.
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.
<PAGE>
EXHIBIT B
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of a Fund alone or in combination with
Class A shares of other Keystone America Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Code; a pension, profit-sharing or other employee benefit plan whether or
not qualified under Section 401 of the Code; or other organized
groups of persons, whether incorporated or not, provided the organization has
been in existence for at least six months and has some purpose other than the
purchase of redeemable securities of a registered investment company at a
discount. In order to qualify for a lower sales charge, all orders from an
organized group will have to be placed through a single investment dealer or
other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may combine
concurrent direct purchases of Class A shares of two or more of the "Eligible
Funds," as defined below. For example, if a Purchaser concurrently invested
$75,000 in one of the other "Eligible Funds" and $75,000 in a Fund, the sales
charge would be that applicable to a $150,000 purchase, i.e., 3.75% of the
offering price, as indicated in the Sales Charge schedule in the prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of a Fund's
shares, a Purchaser is entitled to accumulate current purchases with the current
value of previously purchased Class A shares of the Fund and Class A shares of
certain other eligible funds that are still held in (or exchanged for shares of
and are still held in) the same or another eligible fund ("Eligible Fund(s)").
The Eligible Funds presently consist of the Keystone America Funds and Keystone
Liquid Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75% of the offering price as indicated in the Sales
Charge schedule. KIRC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By doing so, the Purchaser agrees to invest within a
thirteen-month period a specified amount, which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor a Fund to sell, the amount
indicated.
After the Letter of Intent is received by KIRC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary), 5% of the dollar amount specified on the application will be held
in escrow by KIRC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to the Principal
Underwriter any difference between the sales charge on the amount specified and
on the amount actually attained. If the Purchaser does not within 20 days after
written request by the Principal Underwriter or his dealer pay such difference
in sales charge, KIRC will redeem an appropriate number of the escrowed shares
in order to realize such difference. Shares remaining after any such redemption
will be released by KIRC. Any redemptions made by the Purchaser during the
thirteen-month period will be subtracted from the amount of the purchases for
purposes of determining whether the Letter of Intent has been completed. In the
event of a total redemption of the account prior to completion of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption and the balance will be forwarded to the Purchaser.
By signing the application, the Purchaser irre-
vocably constitutes and appoints KIRC his attorney to surrender for redemption
any or all escrowed shares with full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or KIRC that
a Letter of Intent is in effect each time a purchase is made.
<PAGE>
- ------------------------------------
KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Strategic Development Fund
Small Company Growth Fund II
- ------------------------------------
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
FLATF-P 7/96 [Recycle Logo]
3.5M
--------------------------------------------
KEYSTONE
FLORIDA
TAX FREE FUND
--------------------------------------------
[Logo]
PROSPECTUS AND
APPLICATION
<PAGE>
- ------------------------------------
KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Strategic Development Fund
Small Company Growth Fund II
- ------------------------------------
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
MATF-P 7/96 [Recycle Logo]
1.5M
--------------------------------------------
KEYSTONE
MASSACHUSETTS
TAX FREE FUND
--------------------------------------------
[Logo]
PROSPECTUS AND
APPLICATION
<PAGE>
- ------------------------------------
KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Strategic Development Fund
Small Company Growth Fund II
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[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
NYTF-P 7/96 [Recycle Logo]
2M
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KEYSTONE
NEW YORK INSURED
TAX FREE FUND
--------------------------------------------
[Logo]
PROSPECTUS AND
APPLICATION
<PAGE>
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KEYSTONE AMERICA
FUND FAMILY
*
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Strategic Development Fund
Small Company Growth Fund II
- ------------------------------------
[Logo] KEYSTONE
INVESTMENTS
Keystone Investment Distributors Company
200 Berkeley Street
Boston, Massachusetts 02116-5034
PATF-P 7/96 [Recycle Logo]
3.5M
--------------------------------------------
KEYSTONE
PENNSYLVANIA
TAX FREE FUND
--------------------------------------------
[Logo]
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE STATE TAX FREE FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
KEYSTONE STATE TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
JULY 30, 1996
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
State Tax Free Fund (formerly Keystone America State Tax Free Fund) (the
"Trust") dated July 30, 1996. A copy of the prospectus may be obtained from
Keystone Investment Distributors Company (formerly Keystone Distributors, Inc.)
(the "Principal Underwriter"), the Trust's principal underwriter, 200 Berkeley
Street, Boston, Massachusetts 02116-5034, or your broker-dealer.
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TABLE OF CONTENTS
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Page
The Trust 2
Investment Policies 2
Investment Restrictions 7
Valuation of Securities 11
Sales Charges 12
Distribution Plans 16
Investment Adviser 21
Trustees and Officers 24
Principal Underwriter 29
Brokerage 31
Declaration of Trust 33
Standardized Total Return and Yield Quotations 35
Additional Information 39
Appendix A A-1
Appendix B B-1
Financial Statements F-1
Independent Auditors' Report F-53
(Keystone Florida Tax Free Fund,
Keystone Pennsylvania Tax Free Fund,
Keystone Massachusetts Tax Free Fund, and
Keystone New York Insured Tax Free Fund)
<PAGE>
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THE TRUST
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The Trust is a non-diversified open-end management investment company
(commonly known as a mutual fund). The Trust was formed as a Massachusetts
business trust on September 13, 1990. The Trust is one of more than thirty funds
managed or advised by Keystone Investment Management Company ("Keystone"), the
Trust's investment adviser. The Trust currently consists of the following four
separate series, evidencing interests in different portfolios of securities:
Keystone Florida Tax Free Fund, Keystone Massachusetts Tax Free Fund, Keystone
New York Insured Tax Free Fund and Keystone Pennsylvania Tax Free Fund (each, a
"Fund," and collectively, the "Funds"). The Keystone Pennsylvania Tax Free Fund
(the "Pennsylvania Fund") and the Keystone Florida Tax Free Fund (the "Florida
Fund") were established on September 19, 1990. The Keystone Massachusetts Tax
Free Fund (the "Massachusetts Fund") and the Keystone New York Insured Tax Free
Fund (the "New York Insured Fund")were established on February 21, 1992. The
Massachusetts Fund and the New York Insured Fund were not offered to the public
prior to February 4, 1994.
The essential information about the Trust and its Funds is contained in
its prospectus. This statement of additional information provides additional
information about the Trust and its Funds that may be of interest to some
investors.
For special factors affecting each Fund, see Appendix A to this
statement of additional information.
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INVESTMENT POLICIES
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Each Fund invests primarily in municipal obligations that are exempt
from federal income tax and are also exempt from certain specified taxes in the
state for which it is named. In addition, the Funds invest in certain other
securities as described below.
MUNICIPAL OBLIGATIONS
Municipal obligations include debt obligations issued by or on behalf
of a state, a territory or a possession of the United States ("U.S."), the
District of Columbia or any political subdivision, agency or instrumentality
thereof (for example, counties, cities, towns, villages, districts, authorities)
to obtain funds for various public purposes, including the construction of a
wide range of public facilities such as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which municipal obligations may be issued include the
refunding of outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to lend to public or private institutions for the
construction of facilities, such as educational, hospital and housing
facilities. In addition, certain types of industrial development bonds have been
or may be issued by or on behalf of public authorities to finance certain
privately-operated facilities, and certain local facilities for water supply,
gas, electricity or sewage or solid waste disposal. Such obligations are
included within the term municipal obligations if the interest paid thereon
qualifies as fully exempt from federal income tax. The income of certain types
of industrial development bonds used to finance certain privately-operated
facilities (qualified private activity bonds) issued after August 7, 1986, while
exempt from federal income tax, is includable for the purposes of the
calculation of the alternative minimum tax. Other types of industrial
development bonds, the proceeds from which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities, may constitute municipal obligations, although the current federal
tax laws place substantial limitations on the size of such issues.
The two principal classifications of municipal obligations are "general
obligation" and limited obligation or "revenue" bonds. General obligation bonds
are obligations involving the credit of an issuer possessing taxing power and
are payable from the issuer's general unrestricted revenues and not from any
particular fund or revenue source. Their payment may be dependent upon an
appropriation by the issuer's legislative body and may be subject to
quantitative limitations on the issuer's taxing power. The characteristics and
methods of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer. Limited obligation or revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, such as the user of the facility. Industrial
development bonds that are municipal obligations are, in most cases, revenue
bonds and generally are not payable from the unrestricted revenues of the
issuer. The credit quality of industrial development revenue bonds is usually
directly related to the credit standing of the owner or user of the facilities.
There are, of course, variations in the security of municipal obligations, both
within a particular classification and between classifications, depending on
numerous factors.
The yields on municipal obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the municipal obligations market, size of a
particular offering, and the maturity of the obligation and rating of the issue.
The ratings of Standard & Poor's Corporation ("S&P"), Moody's Investors Service
("Moody's") and Fitch Investor Services, Inc. - Municipal Division ("Fitch"), as
described herein and in the prospectus, represent their opinions as to the
quality of the municipal obligations that they undertake to rate. It should be
emphasized, however, that ratings are general and not absolute standards of
quality. Consequently, municipal obligations with the same maturity, interest
rate and rating may have different yields while municipal obligations of the
same maturity and interest rate with different ratings may have the same yield.
It should also be noted that the standards of disclosure applicable to and the
amount of information relating to the financial condition of issuers of
municipal obligations are not generally as extensive as those generally relating
to corporations.
Subsequent to its purchase by a Fund, a municipal obligation or other
investment may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Fund. Neither event requires a Fund to sell
such obligation from its portfolio, but 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 objective depends
upon the continuing ability of issuers of municipal obligations to pay interest
and principal when due. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the federal Bankruptcy Act, and laws, if any, that may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that the result of litigation
or other conditions may materially affect the power or ability of an issuer to
pay principal of and interest on its municipal obligations when due. In
addition, the market for municipal obligations is often thin and can be
temporarily affected by large purchases and sales, including those by a Fund.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations, and similar proposals may well be introduced
in the future. The enactment of such a proposal could materially affect the
availability of municipal obligations for investment by the Funds and the value
of the Funds' portfolios. In which event, the Trust would reevaluate the
investment objectives 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, personal property tax or intangibles tax in a state for which a Fund is
named and where such taxes apply.
Each Fund may assume a temporary defensive position upon Keystone's
determination that market conditions so warrant. If a Fund is investing
defensively, it is not pursuing its investment objectives.
From time to time the Massachusetts Fund may invest in zero coupon
bonds. The Fund does not expect to have enough zero coupons bonds to have a
material effect on dividends. The Trust 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.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVES
The investment objective of each Fund is fundamental and may not be
changed without approval of the holders of a majority of such Fund's outstanding
voting shares (as defined in the Investment Company Act of 1940 (the "1940 Act")
i.e., the lesser of (1) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (2) more than 50% of the
outstanding shares).
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INVESTMENT RESTRICTIONS
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The investment restrictions as summarized below are fundamental for
each Fund and may not be changed without the approval of a majority of such
Fund's outstanding voting shares. Unless otherwise stated, all references to the
assets of a Fund are in terms of current market value.
Each Fund may not do the following:
(1) purchase any security of any issuer (other than issues of the U.S.
government, its agencies or instrumentalities) if as a result more than 25% of
its total assets would be invested in a single industry, including in industrial
development bonds from the same facility or similar types of facilities;
governmental issuers of municipal bonds are not regarded as members of an
industry and a Fund may invest more than 25% of its assets in industrial
development bonds;
(2) invest more than 10% of its assets in securities with legal or
contractual restrictions on resale or in securities for which market quotations
are not readily available, or in repurchase agreements maturing in more than
seven days;
(3) issue senior securities; the purchase or sale of securities on a
"when issued" basis, or collateral arrangement with respect to the writing of
options on securities, are not deemed to be the issuance of a senior security;
(4) borrow money or enter into reverse repurchase agreements, except
that a Fund may enter into reverse repurchase agreements or borrow money from
banks for temporary or emergency purposes in aggregate amounts up to one-third
of the value of the Fund's net assets; provided that while borrowings from banks
(not including reverse repurchase agreements) exceed 5% of the Fund's net
assets, any such borrowings will be repaid before additional investments are
made;
(5) purchase securities on margin except that it may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities;
(6) make loans, except that a Fund may purchase or hold debt securities
consistent with its investment objectives, lend portfolio securities valued at
not more than 15% of its total assets to broker-dealers and enter into
repurchase agreements;
(7) purchase securities of other investment companies, except as part
of a merger, consolidation, purchase of assets or similar transaction;
(8) purchase or sell commodities or commodity contracts or real estate,
except that it may purchase and sell securities secured by real estate and
securities of companies which invest in real estate, and may engage in currency
or other financial futures contracts and related options transactions; and
(9) underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
The Funds are non-diversified under the federal securities laws. The
1940 Act does not restrict the percentage of a non-diversified fund's assets
that may be invested at any time in the securities of any one issuer. The Funds
intend to comply, however, with the Code's diversification requirements and
other requirements applicable to "regulated investment companies" so that they
will not be subject to U.S. federal income tax on income and capital gain
distributions to shareholders. For this reason, each Fund has adopted the
additional investment restriction set forth below, which may not be changed
without the approval of shareholders. Specifically, a Fund may not purchase a
security if more than 25% of the Fund's total assets would be invested in the
securities of a single issuer (other than the U.S. government, its agencies and
instrumentalities); or, with respect to 50% of the Fund's total assets, if more
than 5% of such assets would be invested in the securities of a single issuer
(other than the U.S. government, its agencies and instrumentalities).
To the extent the Funds are not fully diversified, they may be more
susceptible to adverse economic, political or regulatory developments affecting
a single issuer than would be the case if the Funds were more broadly
diversified.
As a matter of practice, each Fund treats reverse repurchase agreements
as borrowings for purposes of compliance with the limitations of the 1940 Act.
Reverse repurchase agreements will be taken into account along with borrowings
from banks for purposes of the 5% limit set forth in the fourth fundamental
investment restriction above.
Additional restrictions adopted for each Fund, which may be changed by
the Board of Trustees, provide that a Fund may not purchase or retain securities
of an issuer if, to the knowledge of the Trust, officers, Trustees or Directors
of the Trust 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 Trust or Keystone
have a substantial beneficial interest in the securities of such issuer.
Portfolio securities of a Fund may not be purchased from or sold or loaned to
Keystone or any affiliate thereof or any of their Directors, officers or
employees.
None of the Funds presently intends to invest more than 25% of its
total assets in municipal obligations the payment of which depends on revenues
derived from a single facility or similar types of facilities. Since certain
municipal obligations may be related in such a way that an economic, business or
political development or change affecting one such security could likewise
affect the other securities, a change in this policy could result in increased
investment risk, but no change is presently contemplated.
For the purposes of the first and ninth fundamental investment
restrictions set forth above, each Fund will treat (1) each state, territory and
possession of the U.S., the District of Columbia and, if its assets and revenues
are separate from those of the entity or entities creating it, each political
subdivision, agency and instrumentality of any one (or more, as in the case of a
multi state authority or agency) of the foregoing as an issuer of all securities
that are backed primarily by its assets or revenues; (2) each company as an
issuer of all securities that are backed primarily by its assets or revenues;
and (3) each of the foregoing entities as an issuer of all securities that it
guarantees; provided, however, that for the purpose of the first fundamental
investment restriction no entity shall be deemed to be an issuer of a security
that it guarantees so long as no more than 10% of a Fund's total assets (taken
at current value) are invested in securities guaranteed by the entity and
securities of which it is otherwise deemed to be an issuer.
The Trust has undertaken to a state securities authority that, so long
as the state authority requires that shares of a Fund are registered for sale in
that state: (1) the Fund will not invest in real estate limited partnerships;
(2) the Fund will not invest in oil, gas or other mineral leases; and (3) 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
Trust may make commitments more restrictive than the investment restrictions
described above. Should the Trust 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 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 maturing in 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;
3. short-term instruments maturiting in 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 Trust 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.
Taxable securities for which market quotations are readily available
are valued on a consistent basis at that price quoted that, in the opinion of
the 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.
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SALES CHARGES
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GENERAL
Each Fund offers Class A, B and C shares. Class A shares are
offered with a maximum front end sales charge of 4.75% payable at the time of
purchase of Fund shares ("Front-End Load Option"). Class B shares purchased on
or after June 1, 1995 are subject to a contingent deferred sales charge payable
upon redemption during the 72 month period from and including the month of
purchase. Class B shares purchased prior to June 1, 1995 are sold subject to a
contingent deferred sales charge payable upon redemption within three calendar
years after the first year of purchase ("Back-End Load Option"). Class B shares
purchased on or after June 1, 1995 that have been outstanding eight years from
and including the month of purchase will automatically convert to Class A shares
without imposition of a front-end sales charge or exchange fee. Class B shares
purchased prior to June 1, 1995 that have been outstanding during seven calendar
years will similarly convert to Class A shares. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to Keystone Investor Resource Center, Inc., the Trust's transfer
and dividend dispersing agent ("KIRC").) Class C shares are sold subject to a
contingent deferred sales charge payable upon redemption within one year after
purchase ("Level Load Option"). Class C shares are available only through
dealers who have entered into special distribution agreements with the Trust's
Principal Underwriter. The Trust's prospectus contains a general description of
how investors may buy shares of the Trust 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 CHARGE
In order to reimburse a Fund for certain expenses relating to the sale
of its shares (see "Distribution Plans"), a contingent deferred sales charge is
imposed at the time of redemption of certain Fund shares, as described below. If
imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to you. The deferred sales charge is retained by the Principal
Underwriter. See "Calculation of Contingent Deferred Sales Charge" below.
CLASS A SHARES
With certain exceptions, purchases of Class A shares made (1) in an
amount equal to or exceeding $1,000,000 and/or (2) by a corporate qualified
retirement plan or a non-qualified deferred compensation plan sponsored by a
corporation having 100 or more eligible employees (a "Qualifying Plan"), in
either case without a front-end sales charge, will be subject to a contingent
deferred sales charge of 0.50% during the 24 month period following the date of
purchase.
CLASS B SHARES
With respect to Class B shares purchased on or after June 1, 1995, each
Fund, with certain exceptions, will impose a deferred sales charge as a
percentage of the lesser of net asset value or net cost of such Class B shares
redeemed during succeeding twelve-month periods following the month of purchase
as follows: 5% during the first twelve-month period; 4% during the second
twelve-month period; 3% during the third twelve-month period; 3% during the
fourth twelve-month period; 2% during the fifth twelve-month period, and 1%
during the sixth twelve-month period. No deferred sales charge is imposed on
amounts redeemed thereafter.
With respect to Class B shares purchased prior to June 1, 1995, each
Fund, with certain exceptions, will impose a deferred sales charge of 3.00% on
shares redeemed during the calendar year of purchase and during the first
calendar year after purchase; 2.00% on shares redeemed during the second
calendar year after purchase; and 1.00% on shares redeemed during the third
calendar year after the year of purchase. No deferred sales charge is imposed on
amounts redeemed thereafter.
Amounts received by the Principal Underwriter under the Class B
Distribution Plans are reduced by deferred sales charges retained by the
Principal Underwriter. See "Calculation of Contingent Deferred Sales Charge"
below.
CLASS C SHARES
With certain exceptions, a Fund will impose a deferred sales charge of
1% on Class C shares redeemed within one year after the date of purchase. No
deferred sales charge is imposed on amounts redeemed thereafter.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any contingent deferred sales charge imposed upon the redemption of
Class A, Class B or Class C shares is a percentage of the lesser of (1) the net
asset value of the shares redeemed or (2) the net asset value at time of
purchase of such shares.
No contingent deferred sales charge is imposed when you redeem amounts
derived from (1) increases in the value of an account above the net cost of such
shares due to increases in the net asset value per share of a Fund; (2) certain
shares with respect to which a Fund did not pay a commission on issuance,
including shares acquired through reinvestment of dividend income and capital
gains distributions; (3) Certain Class A shares held for more than two years;
(4) Class B shares held during more than four consecutive calendar years or more
than 72 months, as the case may be; or (5) Class C shares held for more than one
year.
Upon request for redemption, a Fund will redeem shares not subject to
the contingent deferred sales charge first. Thereafter, a Fund will redeem
shares held the longest first. No contingent deferred sales charge is applicable
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, for purposes of
any future contingent deferred sales charge, the date of purchase of the shares
being exchanged is deemed to be the date the shares being acquired by exchange
were originally purchased.
WAIVER OF SALES CHARGES
Shares may also be sold, to the extent permitted by applicable law,
regulations, interpretations or exemptions, at net asset value without the
imposition of an initial sales charge to (1) certain Directors, Trustees,
officers, full-time employees and sales representatives of the Trust, Keystone
Management, Keystone, Keystone Investments, Inc. ("Keystone Investments"), and
their affiliates or the Principal Underwriter, who have been such for not less
than ninety days; (2) a pension and profit-sharing plan established by such
companies and their affiliates, for the benefit of their Directors, Trustees,
officers, full-time employees and sales representatives; or (3) a registered
representative of a firm with a dealer agreement with the Principal Underwriter,
provided, however, that all such sales are made upon the written assurance of
the purchaser that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by the Trust.
No initial sales charge is charged on a purchase of shares of a Fund by
a bank or trust company in a single account in the name of such bank or trust
company as trustee if the initial investment in shares of one of the Funds or
any fund in the Keystone Investments Family of Funds is at least $500,000 and
any commission paid at the time of such purchase is not more than 1% of the
amount invested.
In addition, no contingent deferred sales charge is imposed on redemptions of
shares.
With respect to Class A shares purchased by a Qualifying Plan at net
asset value or Class C shares purchased by a Qualifiying Plan, no contingent
deferred sales charge will be imposed on any redemptions made specifically by an
individual participant in the Qualifiying Plan. This waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially all of its
assets.
In addition, no contingent deferred sales charge is imposed on a
redemption of shares of a Fund in the event of (1) death or disability of the
shareholder; (2) a lump-sum distribution from a benefit plan qualified under the
Employee Retirement Income Security Act of 1974 ("ERISA"); (3) automatic
withdrawals from ERISA plans if the shareholder is at least 59 1/2 years old;
(4) involuntary redemptions of an account having an aggregate net asset value of
less than $1,000; (5) automatic withdrawals under an automatic withdrawal plan
of up to 1 1/2% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
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DISTRIBUTION PLANS
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Rule 12b-1 under the 1940 Act permits investment companies, such as the
Trust, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including the adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1.
Each Fund's Class A, B and C Distribution Plans have been approved by
the Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust, as defined in the 1940 Act, and the Trustees
who have no direct or indirect financial interest in the Distribution Plan or
any agreement related thereto (the "Independent Trustees").
The National Association of Securities Dealers, Inc. (the "NASD")
limits the amount that a Fund may pay annually in distribution costs for sale of
its shares and shareholder service fees. The NASD limits annual expenditures to
1% of the aggregate average daily net asset value of its shares, of which 0.75%
may be used to pay such distribution costs and 0.25% may be used to pay
shareholder service fees. The NASD also limits the aggregate amount that a Fund
may pay for such distribution costs to 6.25% of gross share sales since the
inception of the 12b-1 Plan, plus interest at the prime rate plus 1% on such
amounts (less any contingent deferred sales charges paid by shareholders to the
Principal Underwriter).
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that a Fund may expend daily
amounts at an annual rate that is 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 the Principal Underwriter) to enable
the Principal Underwriter to pay or to have paid to others who sell Class A
shares a service or other fee, at such intervals as the Principal Underwriter
may determine, in respect of Class A shares maintained by such recipients and
outstanding on the books of the Trust for specified periods.
Amounts paid by a Fund under its Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.15% of the average net asset value of Class A shares maintained
by such recipients and outstanding on the books of the Trust for specified
periods.
CLASS B DISTRIBUTION PLANS
Each Fund's Class B Distribution Plans provide that the Fund may expend
daily amounts at an annual rate of up to 1.00% (currently limited to 0.90%) of
the Fund's average daily net asset value attributable to Class B shares to
finance any activity that is primarily intended to result in the sale of Class B
shares, including, without limitation, expenditures consisting of
payments to the principal underwriter of the Fund (currently the Principal
Underwriter) (1) to enable the Principal Underwriter to pay to others (dealers)
commissions in respect of Class B shares sold since inception of the
Distribution Plans; and (2) to enable the Principal Underwriter to pay or to
have paid to others a service fee, at such intervals as the Principal
Underwriter may determine, in respect of Class B shares maintained by any such
recipients and outstanding on the books of the Fund for specified periods.
The Principal Underwriter generally reallows to broker-dealers or
others a commission equal to 4.00% of the price paid for each Class B share sold
plus the first year's service fee in advance in the amount of 0.15% of the price
paid for each Class B share sold. Beginning approximately 12 months after the
purchase of a Class B share, the broker-dealer or other party receives service
fees at an annual rate of 0.15% of the average daily net asset value of such
Class B share maintained by the recipient and outstanding on the books of the
Fund for specified periods.
The Principal Underwriter intends, but is not obligated, to continue to
pay or accrue distribution charges incurred in connection with each Class B
Distribution Plan that exceed current annual payments that the Fund is permitted
to pay to the Principal Underwriter. The Principal Underwriter intends to seek
full payment of such charges from a Fund (together with annual interest thereon
at the prime rate plus 1%) at such time in the future as, and to the extent
that, payment thereof by the Fund would be within the permitted limits.
If the Trust's Independent Trustees authorize such payments, the effect
would be to extend the period of time during which a Fund incurs the maximum
amount of costs allowed by a Class B Distribution Plan. If a Class B
Distribution Plan is terminated, the Principal Underwriter will ask the
Independent Trustees to take whatever action they deem appropriate under the
circumstances with respect to payment of such amounts.
In connection with financing its distribution costs, including
commission advances to dealers and others, the Principal Underwriter has sold to
a financial institution substantially all of its 12b-1 fee collection rights and
contingent deferred sales charge collection rights in respect of Class B shares
sold during the two-year period commencing approximately June 1, 1995. The Trust
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminated such shares' Distribution Plan completely.
If it terminated such Distribution Plan, the Trust may be subject to possible
adverse distribution consequences.
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 the
principal underwriter of the Fund (currently the Principal Underwriter) (1) to
enable the Principal Underwriter to pay to others (dealers) commissions in
respect of Class C shares sold since inception of the Distribution Plan; and (2)
to enable the Principal Underwriter to pay or to have paid to others a service
fee, at such intervals as the Principal Underwriter may determine, in respect of
Class C shares maintained by any such recipients and outstanding on the books of
the Fund for specified periods.
The Principal Underwriter generally reallows to brokers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold. Beginning approximately fifteen months after
purchase, brokers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25% of the
average daily net asset value of each Class C share maintained by the recipients
and outstanding on the books of the Fund for specified periods.
DISTRIBUTION PLANS - GENERAL
Each of the Distribution Plans may be terminated as to a Fund at any
time by vote of the Independent Trustees or by a vote of a majority of the
appropriate outstanding voting shares of the respective Fund.
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 Independent Trustees.
While the Distribution Plans are in effect, the Trust will be required
to commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The total amounts paid by a Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above, and the amounts
and purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan and may also
require that total expenditures by a Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by a Distribution Plan as
stated above.
The Independent Trustees of the Trust have determined that the sales of
each Fund's shares resulting from payments under its Distribution Plan are
expected to benefit such Fund.
During the fiscal year ended March 31, 1996, the Florida ,
Massachusetts, New York Insured and Pennsylvania Funds paid the Principal
Underwriter (1) $56,304, $2,256, $5,591 and $44,529, respectively, pursuant to
each Fund's Class A Distribution Plan; (2) $456,390, $56,056, $116,859 and
$282,940, respectively, pursuant to each Fund's Class B Distribution Plan for
Class B shares sold prior to June 1, 1995; $34,480, $7,645, $22,305 and $36,440,
respectively, pursuant to each Fund's Class B Distribution Plan for Class B
shares sold on or after June 1, 1995; and (3) $111,012, $19,215, $21,248, and
$87,375, respectively, pursuant to each Fund's Class C Distribution Plan.
For the Florida, Massachusetts, New York Insured and Pennsylvania
Funds, unreimbursed Class B Distribution Plan expenses at March 31, 1996 for
Class B shares sold prior to June 1, 1995 were $2,946,854 (5.41% of Class B net
assets), $366,916 (5.04% of Class B net assets), $741,567 (4.32% of Class B net
assets) and $1,849,989 (4.90% of Class B net assets), respectively. For Class B
shares sold after June 1, 1995, unreimbursed Class B Distribution expenses at
March 31, 1996 for the Florida, Massachusetts, New York Insured and Pennsylvania
Funds were $510,361 (0.94% of Class B net assets), $55,979 (0.77% of Class B net
assets), $290,287 (1.69% of Class B net assets), and $491,259 (1.30% of Class B
net assets), respectively.
For Class C shares, unreimbursed Class C Distribution expenses at March
31, 1996 for the Florida, Massachusetts, New York Insured and Pennsylvania Funds
were $1,295,524 (10.98% of Class C net assets), $142,771 (6.20% of Class C net
assets), $213,519 (9.30% of Class C net assets), and $823,047 (8.51% of Class C
net assets), respectively.
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INVESTMENT ADVISER
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Subject to the general supervision of the Trust's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034
serves as investment adviser to the Trust and is responsible for the overall
management of the Trust's business and affairs. Keystone, organized in 1932, is
a wholly-owned subsidiary of Keystone Investments, 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
Keystone Investments is a private corporation predominantly owned by
current and former members of management of Keystone's management and its
affiliates. The shares of Keystone Investments common stock beneficially owned
by current and former members of management are held in a number of voting
trusts, the trustees of which are George S. Bissell, Albert H. Elfner, III,
Edward F. Godfrey, Ralph J. Spuehler, Jr. and Rosemary D. Van Antwerp. Keystone
Investments provides accounting, bookkeeping, legal, personnel and general
corporate services to Keystone Management, Keystone, their affiliates and the
Keystone Investments Family of Funds.
Pursuant to the Investment Advisory and Management Agreement with the
Trust dated August 19, 1993 (the "Advisory Agreement") and subject to the
supervision of the Trust's Board of Trustees, Keystone manages and administers
the operation of the Trust and its Funds, and manages the investment and
reinvestment of each Fund's assets in conformity with such Fund's investment
objective and restrictions. The Advisory Agreement stipulates that Keystone
shall provide office space and all necessary office facilities, equipment and
personnel in connection with its services. The Advisory Agreement also
stipulates that Keystone shall pay or reimburse the Trust for the compensation
of Trust 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 Trust,
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 Trust 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 Trust; expenses of shareholders' and Trustees' meetings; charges and
expenses of legal counsel for the Trust and for its Independent Trustees on
matters relating to the Trust; charges and expenses of filing annual and other
reports with the SEC and other authorities, and all extraordinary charges and
expenses of the Trust.
Each Fund pays Keystone a fee for its services to the Fund at the
annual rate set forth below:
Aggregate Net Asset
Management Value of the
Fee Shares of the Fund
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0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000
computed as of the close of business each business day and payable
daily.
The Advisory Agreement continues in effect from year to year only if
approved at least annually by (1) the Trust's Board of Trustees or by a vote of
a majority of the outstanding shares of each Fund and (2) 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 Trust'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, 1994, the Florida Fund and the
Pennsylvania Fund paid or accrued to Keystone investment management and
administrative services fees of $363,939 and $291,982, 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 service fees of
$2,167 and $1,473, respectively.
During the year ended March 31, 1995, the Florida Fund, the
Pennsylvania Fund, the Massachusetts Fund and the New York Insured Fund paid or
accrued to Keystone investment management and administrative services fees of
$515,205, $357,852, $43,636 and $63,808, respectively.
During the year ended March 31, 1996, the Florida Fund, the
Pennsylvania Fund, the Massachusetts Fund and the New York Insured Fund paid or
accrued to Keystone investment management and administrative services fees of
$557,537, $402,467, $62,760 and $118,589, respectively.
Keystone has voluntarily limited the expenses of each Fund's Class A, B
and C shares to 0.75%, 1.50%, and 1.50% of average daily net assets,
respectively. Keystone intends to continue the foregoing expense limitations on
a calendar month-by-month basis. Keystone will periodically evaluate the expense
limitations and may modify or terminate them in the future. Keystone would not
be required to make such reimbursement to any Fund to the extent it would result
in the Fund's inability to qualify as a regulated investment company under the
Code. In accordance with voluntary expense limitations in effect during the
fiscal year ended March 31, 1996, Keystone reimbursed the Florida,
Massachusetts, New York Insured and Pennsylvania Funds $196,232, $100,729,
$119,608 and $190,132 respectively.
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TRUSTEES AND OFFICERS
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Trustees and officers of the Trust, their principal occupations and
some of their affiliations over the last five years are as follows:
*ALBERT H. ELFNER, III: President, Chief Executive Officer and Trustee of the
Fund; Chairman of the Board, President, Director and Chief Executive
Officer of Keystone Investments, Keystone, Keystone Management Inc.
(Keystone Management") and Keystone Software, Inc. ("Keystone Software");
President, Chief Executive Officer and Trustee or Director of all other
funds in the Keystone Investments Family of Funds; Chairman of the Board
and Director of Keystone Institutional Company, Inc. ("Keystone
Institutional") (formerly named Keystone Investment Management Corporation)
and Keystone Fixed Income Advisors ("KFIA"); Director and President of
Keystone Asset Corporation, Keystone Capital Corporation, and Keystone
Trust Company; Director of the Principal Underwriter, KIRC, and Fiduciary
Investment Company, Inc. ("FICO"); Director of Boston Children's Services
Association; Trustee of Anatolia College, Middlesex School, and Middlebury
College; Member, Board of Governors, New England Medical Center; former
Director and President of Hartwell Keystone Advisers, Inc. ("Hartwell
Keystone"); former Director and Vice President of Robert Van Partners,
Inc.; and former Trustee of Neworld Bank.
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Professor, Finance Department, George Washington
University; President, Amling & Company (investment advice); Member, Board
of Advisers, Credito Emilano (banking); and former Economics and Financial
Consultant, Riggs National Bank.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Investment Counselor to Appleton Partners,
Inc.; former Managing Director, Seaward Management Corporation (investment
advice) and former Director, Executive Vice President and Treasurer, State
Street Research & Management Company (investment advice).
*GEORGE S. BISSELL: Chairman of the Board and Trustee of the Fund; Director of
Keystone Investments; Chairman of the Board and Trustee or Director of all
other Keystone Investments Funds; Director and Chairman of the Board of
Hartwell Keystone; Chairman of the Board and Trustee of Anatolia College;
Trustee of University Hospital (and Chairman of its Investment Committee);
former Chairman of the Board and Chief Executive Officer of Keystone
Investments; and former Chief Executive Officer of the Trust.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Director and former Executive Vice President,
National Alliance of Business; former Vice President, Educational Testing
Services; former Executive Director, Coalition of Essential Schools, Brown
University; and former Dean, School of Business, Adelphi University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; former Group Vice President, Textron Corp.; and
former Director, Peoples Bank (Charlotte, N.C).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Director of Phoenix Total Return Fund and Equifax, Inc.;
Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund and The
Phoenix Big Edge Series Fund; and former President, Morehouse College.
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Chairman of the Board, Director and Executive Vice
President, The London Harness Company; Managing Partner, Roscommon Capital
Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments and Keystone.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Of Counsel, Keyser, Crowley & Meub, P.C.;
Member, Governor's (VT) Council of Economic Advisers; Chairman of the Board
and Director, Central Vermont Public Service Corporation and Hitchcock
Clinic; Director, Vermont Yankee Nuclear Power Corporation, Vermont
Electric Power Company, Inc., Grand Trunk Corporation, Central Vermont
Railway, Inc., S.K.I. Ltd., Sherburne Corporation, Union Mutual Fire
Insurance Company, New England Guaranty Insurance Company, Inc. and the
Investment Company Institute; former Governor of Vermont; former Director
and President, Associated Industries of Vermont; former Chairman and
President, Vermont Marble Company; former Director of Keystone; and former
Director and Chairman of the Board, Green Mountain Bank.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all other
Keystone Investments Funds; Executive Vice President, DHR International,
Inc. (executive recruitment); former Senior Vice President, Boyden
International Inc. (executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411 International, Inc. and J & M
Cumming Paper Co.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Chairman, Environmental Warranty, Inc., and Consultant,
Drake Beam Morin, Inc. (executive outplacement); Director of Connecticut
Natural Gas Corporation, Trust Company of Connecticut, Hartford Hospital,
Old State House Association and Enhance Financial Services, Inc.; 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; former Managing Director of
Russell Miller, Inc.; and former Member, Georgetown College Board of
Advisors;
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all other Keystone
Investments Funds; Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky &
Armentano, P.C.; President, Nassau County Bar Association; former Associate
Dean and Professor of Law, St. John's University School of Law.
EDWARD F. GODFREY: Senior Vice President of the Fund; Senior Vice President of
all other Keystone Investments Funds; Director, Senior Vice President,
Chief Financial Officer and Treasurer of Keystone Investments, the
Principal Underwriter, Keystone Asset Corporation, Keystone Capital
Corporation, Keystone Trust Company; Treasurer of Keystone Institutional
and FICO; Treasurer and Director of Keystone Management and Keystone
Software; Vice President and Treasurer of KFIA; and Director of KIRC;
former Treasurer of Hartwell Keystone and Robert Van Partners, Inc.
JAMES R. McCALL: Senior Vice President of the Fund; Senior Vice President of all
other Keystone Investments Funds; and President of Keystone.
J. KEVIN KENELY: Treasurer of the Trust; Treasurer of all other Keystone
Investments Funds; Vice President and former Controller of Keystone
Investments, Keystone, the Principal Underwriter, FICO and Keystone
Software; former Controller of Keystone Asset Corporation and Keystone
Capital Corporation.
CHRISTOPHER P. CONKEY: Vice President of the Trust; Vice President of certain
other Keystone Investments Funds and Senior Vice President of Keystone.
ROSEMARY D. VAN ANTWERP: Senior Vice President and Secretary of the Fund; Senior
Vice President and Secretary of all other Keystone Investments Funds;
Senior Vice President, General Counsel and Secretary of Keystone; Senior
Vice President, General Counsel, Secretary and Director of the Principal
Underwriter, Keystone Management and Keystone Software; Senior Vice
President and General Counsel of Keystone Institutional; Senior Vice
President, General Counsel and Director of FICO and KIRC; Vice President
and Secretary of KFIA; Senior Vice President, General Counsel and Secretary
of Keystone Investments, Keystone Asset Corporation, Keystone Capital
Corporation and Keystone Trust Company; former Senior Vice President and
Secretary of Hartwell Keystone and Robert Van Partners, Inc.
* This Trustee may be considered an "interested person" within the meaning of
the 1940 Act.
Mr. Elfner and Mr. Bissell are "interested persons" by virtue of their
positions as officers and/or Directors of Keystone Investments and several of
its affiliates including Keystone, the Principal Underwriter and KIRC. Mr.
Elfner and Mr. Bissell own shares of Keystone Investments. Mr. Elfner is
Chairman of the Board, Chief Executive Officer and Director of Keystone
Investments. Mr. Bissell is a Director of Keystone Investments.
During the fiscal year ended March 31, 1996, no Trustee affiliated with
Keystone or any officer received any direct remuneration from the Trust. During
this same period, the unaffiliated Trustees received no retainers and fees.
Annual retainers and meeting fees paid by all funds in the Keystone Investments
Family of Funds (which includes more than 30 mutual funds) for the year ended
December 31, 1995, totaled $450,716. As of April 30, 1996, the Trust's Trustees
and officers did not own any shares of the Florida Fund, the Pennsylvania Fund
and the New York Insured Fund. As of April 30, 1996, the Trust's Trustees and
officers beneficially owned in the aggregate less than 1.0% of the Class A
shares and none of the Class B or C Shares then outstanding of the Massachusetts
Fund.
The address of all the Trust's Trustees and officers and the address of
the Trust is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
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PRINCIPAL UNDERWRITER
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The Trust has entered into Principal Underwriting Agreements (the
"Underwriting Agreements") with the Principal Underwriter, a wholly-owned
subsidiary of Keystone.
The Principal
Underwriter, as agent, currently has the right to obtain subscriptions and to
sell shares of the Funds to the public. In so doing, the Principal Underwriter
may retain and employ representatives to promote distribution of the Funds'
shares and may obtain orders from broker-dealers and others, acting as
principals, for sales of shares. No such representative or broker-dealer has
any authority to act as agent for the Fund. The Principal Underwriter has not
undertaken to buy or to find purchasers for any specific number of shares. The
Principal Underwriter may receive payments from each Fund pursuant to such
Fund's Distribution
All subscriptions and sales of shares by the Principal Underwriter are
at the offering price of the shares, such price being in accordance with the
provisions of the Trust's Declaration of Trust, By-Laws, the current prospectus
and statement of additional information. All orders are subject to acceptance by
the Trust and the Trust reserves the right, in its sole discretion, to reject
any order received. Under the Underwriting Agreements, the Trust is not liable
to anyone for failure to accept any order.
The Trust has agreed under the Underwriting Agreements 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.
From time to time, if in the Principal Underwriter's judgment it could
benefit the sales of a Fund's shares, the Principal Underwriter may provide to
selected dealers promotional materials and selling aids, including, but not
limited to, personal computers, related software and Fund data files.
The Principal Underwriter has agreed that it will in all respects duly
conform with all state and federal laws applicable to the sale of the shares.
The Principal Underwriter has also agreed that it will indemnify and hold
harmless the Trust, and each person who has been, is or may be a Trustee or
officer of the Trust, against expenses reasonably incurred by any of them in
connection with any claim, action, suit or proceeding to which any of them may
be a party, which arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Trust.
The Underwriting Agreements will remain in effect as long as its terms
and continuance are approved at least annually by vote of (1) a majority of the
Trust's Independent Trustees cast in person at a meeting called for that
purpose, and (2) by vote of a majority of Trustees as to any Fund or by vote of
a majority of the outstanding shares of the affected Funds.
The Underwriting Agreements may be terminated, without penalty, on 60
days' written notice by the Trust's Independent Trustees or the Principal
Underwriter or terminated as to any Fund by a vote of a majority of outstanding
shares of such Fund. The Underwriting Agreements will terminate automatically
upon their "assignment," as that term is defined in the 1940 Act.
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BROKERAGE
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It is Keystone's policy, in effecting transactions in the Trust's
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
broker's 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 or Keystone is considered to be in
addition to and not in lieu of, services required to be performed by Keystone
under the Advisory Agreement with the Trust. 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 Trust 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 Trust's Board of
Trustees has determined, however, that the Funds consider 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 Trust with respect to brokerage is and will be
reviewed by the Trust'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 that is
equitable to each fund or account. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the 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.
In no instance are portfolio securities purchased from or sold to
Keystone, the Principal Underwriter or any of their affiliated persons, as
defined in the 1940 Act and rules and regulations issued thereunder.
For the fiscal years ended March 31, 1994, March 31, 1995 and March 31,
1996, the Funds did not pay any brokerage commissions.
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DECLARATION OF TRUST
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MASSACHUSETTS BUSINESS TRUST
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated September 13, 1990 (the "Declaration of Trust"). The
Trust is similar in most respects to a business corporation. The principal
distinction between the Trust and a corporation relates to the shareholder
liability described below. A copy of the Declaration of Trust was filed as an
exhibit to the Trust's Registration Statement. This summary is qualified in its
entirety by reference to the 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. Upon liquidation, Fund shares are entitled to a pro rata share of the
Fund based on the relative net assets of each class.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Trust were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because the
Trust's Declaration of Trust (1) contains an express disclaimer of shareholder
liability for obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or the Trustees; and (2) provides for indemnification out
of Trust property for any shareholder held personally liable for the obligations
of the Trust.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Trust does not hold
annual meetings. At meetings called for the initial election of Trustees or to
consider other matter, shares of a Fund are entitled to one vote per share.
Shares generally vote together as one class on all matters, except that each
Fund has exclusive voting rights with respect to matters which affect only that
Fund. Classes of shares of a Fund have equal voting rights except that each
class of shares has exclusive voting rights with respect to its respective
Distribution Plan. No amendment may be made to the Declaration of Trust that
adversely affects any class of shares without the approval of a majority of the
shares of that class. Shares have non-cumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of Trustees
can elect 100% of the Trustees to be elected at a meeting and, in such event,
the holders of the remaining 50% or less of the shares voting will not be able
to elect any Trustees.
After the initial meeting to elect Trustees no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when 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 Trust or promoting the interests of the Trust 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.
TOTAL RETURN
CLASS A SHARES
For the fiscal year ended March 31, 1996, the average annual total
returns (including front-end sales charge) for Class A of the Florida Fund, the
Pennsylvania Fund, the Massachusetts Fund and the New York Insured Fund were
3.03%, 2.55%, 1.57% and 2.61% respectively.
The average annual total returns (including front-end sales charge) for
Class A of the Florida Fund and the Pennsylvania Fund for the five year period
ended March 31, 1996 were 6.54% and 6.98%, respectively.
For the period February 4, 1994 (commencement of operations) to March
31, 1996, the average annual total returns (including front-end sales charge)
for Class A of the Massachusetts and New York Insured Fund were (0.04%) and
1.55%, respectively.
For the period December 28, 1990 (commencement of operations) to March
31, 1996, the average annual total return (including front-end sales charge) for
Class A of the Florida Fund was 6.91%.
For the period December 27, 1990 (commencement of operations) to March
31, 1996, the average annual total return (including front-end sales charge) for
Class A of the Pennsylvania Fund was 7.49%.
CLASS B SHARES
For the fiscal year ended March 31, 1996, the average annual total
returns (including contingent deferred sales charge) for Class B of the Florida
Fund, the Pennsylvania Fund, the Massachusetts Fund and the New York Insured
Fund were 3.48%, 2.84%, 1.77%, and 3.02%, respectively.
For the period February 1, 1993 (commencement of operations) to March
31, 1996, the average annual total returns (including contingent deferred sales
charge) for Class B of the Florida Fund and the Pennsylvania Fund were 3.98% and
4.05%, respectively.
For the period February 4, 1994 (commencement of operations) to March
31, 1996, the average annual total returns (including contingent deferred sales
charge) for Class B of the Massachusetts Fund and New York Insured Fund were
0.32% and 1.90%, respectively.
CLASS C SHARES
For the fiscal year ended March 31, 1996, the total returns (including
contingent deferred sales charge) for Class C of the Florida Fund, the
Pennsylvania Fund, the Massachusetts Fund, and the New York Insured Fund were
7.47%, 6.92%, 5.89% and 7.02% respectively.
For the period February 1, 1993 (commencement of operations) to March
31, 1996, the average annual total returns (including contingent deferred sales
charge) for Class C of the Florida Fund and the Pennsylvania Fund were 4.81% and
4.92%, respectively.
For the period February 4, 1994 (commencement of operations) to March
31, 1996, the average annual total returns (including contingent deferred sales
charge) for Class C of the Massachusetts Fund and New York Insured Fund were
1.54% and 3.09%, respectively.
CURRENT YIELD AND TAX EQUIVALENT YIELD
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of a Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. Such yield will include
income from sources other than municipal obligations, if any.
For the 30-day period ended March 31, 1996, the current yields of Class
A of the Florida Fund, the Pennsylvania Fund, the Massachusetts Fund and the New
York Insured Fund were 4.90%, 5.14%, 5.15% and 4.69%, respectively.
For the 30-day period ended March 31, 1996, the current yields of Class
B of the Florida Fund, the Pennsylvania Fund, the Massachusetts Fund and the New
York Insured Fund were 4.39%, 4.64%, 4.65% and 4.18%, respectively.
For the 30-day period ended March 31, 1996, the current yields of Class
C of the Florida Fund, the Pennsylvania Fund, the Massachusetts Fund and the New
York Insured Fund were 4.38%, 4.65%, 4.65% and 4.17%, 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 yields for an investor in the 31% federal tax
bracket for the 30-day period ended March 31, 1996 for Class A of the Florida
Fund, the Pennsylvania Fund, the Massachusetts Fund and the New York Insured
Fund were 7.10%, 7.45%, 7.46%, and 6.80%, respectively.
The tax equivalent yields for an investor in the 31% federal tax
bracket for the 30-day period ended March 31, 1996 for Class B of the Florida
Fund, the Pennsylvania Fund, the Massachusetts Fund and the New York Insured
Fund were 6.36%, 6.72%, 6.74% and 6.06%, respectively.
The tax equivalent yield for an investor in the 31% federal tax bracket
for the 30-day period ended March 31, 1996 for Class C of the Florida Fund, the
Pennsylvania Fund, the Massachusetts Fund and the New York Insured Fund was
6.36%, 6.74%, 6.74% and 6.04%, 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 (the "Custodian") of all securities and
cash of the Trust. The Custodian performs no investment management functions
for the Trust, but, in addition to its custodial services, is responsible for
accounting and related record keeping on behalf of the Trust.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
Certified Public Accountants, are the independent auditors for the Trust.
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 Trust.
Except as otherwise stated in its prospectus or required by law, the
Trust reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Trust's
prospectus, statement of additional information or in supplemental sales
literature issued by the Trust or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Trust's prospectus and statement of additional information omit
certain information contained in the registration statement filed with the
Commission, a copy of which may be obtained from the Commission's principal
office in Washington, D.C. upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
As of April 30, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr E 3rd FL, Jacksonville, FL 32246-6484, owned 10.999% of
the outstanding Class A shares of the Florida Fund.
As of April 30, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr E 3rd Floor, Jacksonville, FL 32246-6484, owned 18.910%
of the outstanding Class B shares of the Florida Fund.
As of April 30, 1996, Merrill Lynch Pierce, Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr E 3rd Flr, Jacksonville, FL, 32246-6484, owned 31.052%
of the outstanding Class C shares of the Florida Fund.
As of April 30, 1996, PaineWebber FBO, Betty J. Puskar, Trustee and
Betty J. Puskar, Revocable Trust, 708 Ocean Drive, Juno Beach, FL 33408, owned
5.709% of the outstanding Class C shares of the Florida Fund.
As of April 30, 1996, Merrill Lynch Pierce, Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr E 3rd Flr, Jacksonville, FL 32246-6484, owned 7.081% of
the outstanding Class A shares, and 9.213% of the outstanding Class B shares of
the Pennsylvania Fund.
As of April 30, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr. E. 3rd Floor Jacksonville, FL 32246-6484, owned
28.072% of the outstanding Class C shares of the Pennsylvania Fund.
As of April 30, 1996, PaineWebber FBO, Robert Cougle, Debra K. Cougle
JT WROS, 10506 Old 22, Kutztown, PA 19530, owned 7.095% of the outstanding Class
C shares of the Pennsylvania Fund.
As of April 30, 1996, Richard Nakashian, P.O. Box 3150, Pocasset,
Massachusetts 02559-3150, owned 11.918% of the outstanding Class A shares of the
Massachusetts Fund.
As of April 30, 1996, Ida R. Rodriguez Trust #21528, Keystone Trust
Company TTEE, 58 Helen Rd, Needham, MA 02192-3934 owned 6.876% of the
outstanding Class A shares of the Massachusetts Fund.
As of April 30, 1996, Dolores S. Faber, 20 Buttonwood Street, New
Bedford, Massachusetts 02740-1550 owned 5.883% of the outstanding Class A shares
of the Massachusetts Fund.
As of April 30, 1996, Shirley W Tower TTEE, Shirley W Tower Trust, U/A
DTD 9/18/92, 119 Brookhaven Drive, E Longmeadow, Massachusetts 01028-1474, owned
5.620% of the outstanding Class A shares of the Massachusetts Fund.
As of April 30, 1996, Anthony H. Cincotta, 13 Shipway Place,
Charlestown, Massachusetts 02129-4301, owned 8.539% of the outstanding Class C
shares of the Massachusetts Fund.
As of April 30, 1996, Salvatore M. Moscariello & Irene A. Moscariello
JT TEN, 24 Van Norden Road, Reading, MA 01867-1244, owned 5.843% of the
outstanding Class C shares of the Massachusetts Fund.
As of April 30, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry, 4800 Deer Lake Dr E 3rd Fl, Jacksonville, FL 32246-6484, owned 6.353% of
the outstanding Class A shares of the New York Insured Fund.
As of April 30, 1996, Prudential Securities FBO, Sandra N. Franck, 345
West 70th Street, Apt. 6F, New York, NY 10023, owned 5.606% of the outstanding
Class A shares of the Massachusetts Fund.
As of April 30, 1996, Merrill Lynch Pierce Fenner & Smith, Attn: Book
Entry 4800 Deer Lake Dr E 3rd Fl, Jacksonville, FL 32246-6484, owned 13.750% of
the outstanding Class B shares of the New York Insured Fund.
As of April 30, 1996, Fred Zucker, 20 Old Brook Road, Dix Hills, New
York 11746-4430 owned 15.967% of the outstanding Class C shares of the New York
Insured Fund
As of April 30, 1996, Bear Stearns Securities Corp FBO 626-60277-10, 1
Metrotech Center North, Brooklyn, NY 11201-3859, owned 11.837% of the
outstanding Class C shares of the New York Insured Fund.
As of April 30, 1996, Carol T. Whitman, PO Box 43 Whippleville, NY
12995, owned 6.959% of the outstanding Class C shares of the New York Insured
Fund.
As of April 30, 1996, NFSC FEBO #CM5-020052, Otto and Gertrand Steckel
Huber, 605 Harrison, Harrison, NY 10528-1406, owed 8.876% of the outstanding
Class C shares of the New York Insured Fund.
As of April 30, 1996, Prudential Securities FBO Laurie D Was TTEE,
Laurie D Was Irr Trust of 1995 U/A DTD 05/02/95, New York, New York 10012-3288
owned 6.266% of the outstanding Class C shares of the New York Insured Fund.
As of April 30, 1996, Carol l. Moore, Rt. 2 Box 1055, Chateaugay, New
York 12920-9522, owned 5.446% of the outstanding Class C shares of the New York
Insured Fund.
The Trust is one of 15 different investment companies in the Keystone
America Family, which offers a range of choices to serve shareholder needs. In
addition to the Trust, 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 CAPITAL PRESERVATION AND INCOME FUND - Seeks high current income,
consistent with low volatility of principal, by investing in adjustable rate
securities issued by the U.S. government, its agencies or instrumentalities.
KEYSTONE FUND OF THE AMERICAS - Seeks long-term growth of capital through
investments in equity and debt securities in North America (the U.S. and Canada)
and Latin America (Mexico and countries in South and Central America).
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 25%).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE OMEGA FUND - Seeks maximum capital growth from common
stocks and securities convertible into common stocks.
KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long-term capital growth through
investments primarily in equity securities of companies with small market
capitalizations.
KEYSTONE STATE TAX FREE FUND - SERIES II - A mutual fund consisting of two
separate series of shares investing in different portfolio securities which
seeks the highest possible current income, exempt from federal income taxes and
applicable state taxes.
KEYSTONE STRATEGIC DEVELOPMENT FUND - Seeks long-term capital growth by
investing primarily in equity securities.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
<PAGE>
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APPENDIX A
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KEYSTONE FLORIDA TAX FREE FUND
REVENUES
The State accounts for its receipts using fund accounting. It has
established the General Revenue Fund, the Working Capital Fund and various other
trust funds, which are maintained for the receipt of monies which under law or
trust agreements must be maintained separately.
The General Revenue Fund consists of all monies received by the State
from every source whatsoever which are not allocable to the other funds. Major
sources of tax revenues for the General Revenue Fund are the sales and use tax,
the corporate income tax, and the intangible personal property tax, which are
projected for fiscal year 1996-97 to amount to 72%, 8% and 4%, respectively, of
the total receipts of that fund.
The Florida Constitution and its statutes mandate that the State budget
as a whole and each separate fund within the State budget be kept in balance
from currently available revenues for each fiscal year.
SALES AND USE TAX
The greatest single source of tax receipts in Florida is the sales and
use tax, which is projected to amount to $10.9 billion for fiscal year 1996-97.
The sales tax is 6% of the sales price of tangible personal property sold at
retail in the state. The use tax is 6% of the cash price or fair market value of
tangible personal property when it is not sold but is used, or stored for use,
in the State. In other words, the use tax applies to the use of tangible
personal property in Florida, which was purchased in another state but would
have been subject to the sales tax if purchased in Florida. Approximately 10% of
the sales tax is designated for local governments and is distributed to the
respective counties in which collected for use by such counties and
municipalities therein. In addition to this distribution, local governments may
(by referendum) assess a 1% sales surtax within their county. Proceeds from this
local option sales surtax can be earmarked for funding countywide bus and rapid
transit systems, local infrastructure construction and maintenance, medical care
for indigents and capital projects for county school districts as set forth in
Section 212.055(2), of the Florida Statutes.
The two taxes, sales and use, stand as complements to each other, and
taken together provide a uniform tax upon either the sale at retail or the use
of all tangible personal property irrespective of where it may have been
purchased. The sales tax also includes a levy on the following: (I) rentals on
tangible personal property and accommodations in hotels, motels, some
apartments, offices, real estate, parking and storage places in parking lots,
garages and marinas for motor vehicles or boats; (ii) admissions to places of
amusements, most sports and recreation events; (iii) utilities, except those
used in homes; and (iv) restaurant meals and expendables used in radio and
television broadcasting. Exemptions include: groceries; medicines; hospital
rooms and meals; seeds, feeds, fertilizers and farm crop protection materials;
purchases by religious, charitable and educational nonprofit institutions;
professional services, insurance and certain personal service transactions;
newspapers; apartments used as permanent dwellings; and kindergarten through
community college athletic contests or amateur plays.
OTHER STATE TAXES
Other taxes which Florida levies include the motor fuel tax, corporate
income tax, intangible property tax, documentary stamp tax, gross receipts
utilities tax and severance tax on the production of oil and gas and the mining
of solid minerals, such as phosphate and sulfur.
LOCAL GOVERNMENT DEBT
Numerous government units, counties, cities, school districts and
special taxing districts, issue general obligation bonds backed by their taxing
power. State and local government units may issue revenue obligations, which are
supported by the revenues generated from the particular projects or enterprises.
Examples include obligations issued to finance the construction of water and
sewer systems, health care facilities and educational facilities. In some cases,
sewer or water revenue obligations may be additionally secured by the full faith
and credit of the State.
OTHER FACTORS
The performance of the obligations issued by Florida, its
municipalities, subdivisions and instrumentalities are in part tied to
state-wide, regional and local conditions within Florida. Adverse changes to
state-wide, regional or local economies may adversely affect the
creditworthiness of Florida, its municipalities, etc. Also, some revenue
obligations may be issued to finance construction of capital projects which are
leased to nongovernmental entities. Adverse economic conditions might affect
those lessees' ability to meet their obligations to the respective governmental
authority which in turn might jeopardize the repayment of the principal of, or
the interest on, the revenue obligations.
KEYSTONE MASSACHUSETTS TAX FREE FUND
The Commonwealth of Massachusetts and certain of its cities and towns
and public bodies have experienced in the past, and may experience in the
future, financial difficulties that may adversely affect their credit standing.
The prolonged effects of such financial difficulties could adversely affect the
market value of the municipal securities held by the Massachusetts Fund. The
information summarized below describes some of the more significant factors that
could effect the Massachusetts Fund or the ability of the obligors to pay debt
service on certain of the securities. The sources of such information are the
official statements of issuers located in the Commonwealth of Massachusetts as
well as other publicly available documents, and statements of public officials.
The Massachusetts Fund has not independently verified any of the information
contained in such statements and documents but the Massachusetts Fund is not
aware of facts which would render such information inaccurate.
GENERAL
The Commonwealth's constitution requires, in effect, that its budget,
though not necessarily its operating expenditures and revenue, be balanced each
year. In addition, the Commonwealth has certain budgetary procedures and fiscal
controls in place that are designed to ensure that sufficient cash is available
to meet the Commonwealth's obligations, that state expenditures are consistent
with periodic allotments of annual appropriations and that funds are expended
consistent with statutory and public purposes. The condition of the 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
experienced a turn-around in its finances with revenues exceeding spending.
Budgeted expenditures for fiscal 1989, 1990 and 1991 were approximately $12.64
billion, $13.26 billion and $13.66 billion, respectively while budgeted revenues
and other sources for those years were approximately $11.97, $12.01 billion and
$13.63 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.
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.
The fiscal 1994 budget provided for expenditures of approximately
$15.52 billion, an increase of 5.6% over fiscal 1993 levels. Budgeted revenues
and other sources for fiscal 1994 were approximately $15.55 billion, which is
5.7% higher than fiscal 1993 levels. This amount included estimated tax revenues
of approximately $10.61 billion, which is 6.8% higher than fiscal 1993 tax
revenues. 1994 tax revenues were approximately $87 million below the Department
of Revenue's estimate of $10.694 billion. Fiscal 1994 ended with a combined
balance of approximately $589 million in the budgeted operating funds.
Fiscal 1995 tax revenue collections were approximately $11.16 billion,
approximately $12 million above the Department of Revenue's revised fiscal year
1995 tax revenue estimate of $10.15 billion and $544 million, or 5.3%, above
fiscal 1994 tax revenues of $10.607 billion. Budgeted revenues and other
sources, including non-tax revenues, collected in fiscal 1995 were approximately
$16.39 billion, approximately $842 million or 5.4%, above the fiscal 1994
budgeted revenues of $15.55 billion. Budgeted expenditures and other uses of
funds in fiscal 1995 were approximately $16.26 billion, approximately $736
million or 4.7%, above fiscal 1994 budgeted expenditures and uses of $15.52
billion. As calculated by the controller in the preliminary financial report,
the amount of surplus funds (as so defined) for fiscal 1995 was approximately
$90.8 million, of which $55.9 million was available to be carried forward as a
beginning balance for fiscal 1996. Of the balance approximately $27.9 million
was deposited in the Stabilization Fund, and approximately $7 million was
deposited in the Cost Relief Fund.
The fiscal 1996 budget, as signed into law by the Governor on June 21,
1995, provides for expenditures of approximately $16.998 billion, a $739
million, or 4.5%, increase over fiscal 1995 spending. The largest single
spending increase in the fiscal 1996 budget is approximately $232 million to
continue funding the comprehensive educational reform legislation enacted in
1993. Budgeted revenues and other sources to be collected in fiscal 1996 are
estimated to be approximately $16.778 billion. This amount includes estimated
fiscal 1996 tax revenues of $11.653 billion, which was approximately $490
million, or 4.3%, higher than fiscal 1995 tax revenues.
As of December 31, 1995, the Governor had signed into law fiscal 1996
supplemental appropriations totaling approximately $23.5 million, including
approximately $12.6 million to fund higher education collective bargaining
contracts and $5.6 million for the Department of Social Services. These
appropriations were offset by approximately $10.4 million in line item
reductions, including a reduction of $9.8 million for the State's debt service
contract assistance to the MBTA. Based on preliminary figures, through December
1995, fiscal 1996 tax revenue collections have totaled approximately $5.378
billion, approximately $239 million, or 4.7%, greater than tax revenue
collections for the same period in fiscal 1995. Tax revenue collections to date
are within the benchmark range set by the Department of Revenue and are $20.7
million, or 0.4%, below the mid-point of such benchmark range.
The Governor's plan to provide permanent passenger vehicle registration
and lifetime operating licenses, if it continues in effect, is estimated to
reduce state revenues by approximately $90 million annually, though the fiscal
1996 cost is expected to be minimal.
In connection with a proposal to reorganize state government, the
Governor also announced on November 1, 1995, that he would propose to reduce the
personal income tax rate on earned income from 5.95% to 5.45%. The cost to the
Commonwealth of the proposed tax reduction has been estimated to be
approximately $500 million per year.
On November 28, 1995 the Governor approved a modified version of the
legislation he had filed in September to establish a "single sales factor"
apportionment formula for the business corporation's tax. As finally enacted,
the legislation applies the new formula, effective January 1, 1996, to certain
federal defense contractors and phases the new formula in over five years to
manufacturing firms generally. The Department of Revenue estimates that the new
law will reduce revenues by $44 million in fiscal 1996 and by $90 million in
fiscal 1997. If the new formula were fully effective for all covered businesses,
the Department estimates that the annual revenue reduction would be $100 million
to $150 million.
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.
Unlike Chapter 29B, as described below, the initiative petition did not
exclude principal and interest payments on Commonwealth debt obligations from
the scope of its tax limit. However, the preamble contained in Chapter 62F
provides that "although not specifically required by anything contained in this
chapter, it is assumed that from allowable state tax revenues, as defined
herein, the Commonwealth will give priority attention to the funding of state
financial assistance to local governmental units, obligations under the state
governmental pensions systems, and payment of principal and interst on debt and
other obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However, rather than
utilizing a three-year average wage and salary growth rate, as used by Chapter
62F, Chapter 29B utilizes an allowable state revenue growth factor equal to 1/3
of the positive percentage gain in Massachusetts wages and salaries, as reported
by the federal government during the three calendar years immediately preceding
the end of a given fiscal year. Additionally, unlike Chapter 62F, Chapter 29B
allows for an increase in maximum state tax revenues to fund the increase in
local aid and excludes from its definition of state tax revenues (i) income
derived from local option taxes and excises, and (ii) revenues needed to fund
debt service costs.
Tax revenues in fiscal 1989 through fiscal 1995 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
1996 will not reach the limit imposed by either of these statutes.
PROPOSITION 2 1/2
In November 1980, voters in the Commonwealth approved a statewide tax
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain levels of property taxation and to limit the charges and fees imposed
on cities and towns by certain governmental entities, including county
governments. Proposition 2 1/2 is not a provision of the state constitution and
accordingly is subject to amendment or repeal by the legislature. Proposition 2
1/2, as amended to date, limits the property taxes that may be levied by any
city or town in any fiscal year to the lesser of (i) 2.5% of the full and fair
cash valuation of the real estate and personal property therein, and (ii) 2.5%
over the previous year's levy limit plus any growth in the tax base from certain
new construction and parcel subdivisions. Proposition 2 1/2 also limits any
increase in the charges and fees assessed by certain governmental entities,
including county governments, on cities and towns to the sum of (i) 2.5% of the
total charges and fees imposed in the preceding fiscal year, and (ii) any
increase in charges for services customarily provided locally or services
obtained by the city or town at its option. The law contains certain override
provisions and, in addition, permits debt service on specific bonds and notes
and expenditures for capital projects to be excluded from the limits by a
majority vote at a general or special election.
Many communities have responded to the limitations imposed by
Proposition 2 1/2 through statutorily permitted overrides and exclusions.
Override activity peaked in fiscal 1991, 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, 59 communities added $16.3 million through override
votes and in fiscal 1994, only 48 communities had successful override referenda
which added $8.4 million to their levy limits. In fiscal 1995, 32 communities
added $8.8 million. Although Proposition 2 1/2 will continue to constrain local
property or tax revenues, significant capacity exists for overrides in nearly
all cities and towns.
In addition to overrides, Proposition 2 1/2 allows a community, through
voter approval, to assess taxes in excess of its levy limit for the payment of
certain capital projects (capital outlay expenditure exclusions) and for the
payment of specified debt service costs (debt exclusions). Capital exclusions
were passed by 24 communities in fiscal 1995 and total $3.7 million. In fiscal
1995, the impact of successful debt exclusion votes going back as far as fiscal
1983, was to raise the levy limits of 217 communities by $119 million.
LOCAL AID
During the 1980's, the Commonwealth increased payments to its cities,
towns, and regional school districts ("Local Aid") to mitigate the impact of
Proposition 2 1/2 on local programs and services. In fiscal 1996, approximately
19.1% of the Commonwealth's budget is estimated to be allocated to direct local
aid. Local Aid payments to cities, towns, and regional school districts take the
form of both direct and indirect assistance.
Direct local aid decreased from $2.608 billion in fiscal 1991 to $2.359
billion in fiscal 1992, increased to $2.547 billion in fiscal 1993 and increased
to 2.727 billion in fiscal 1994. Fiscal 1995 expenditures for direct local aid
were $2.976 billion, which is an increase of approximately 9.1% above the fiscal
1994 level. It is estimated that fiscal 1996 expenditures for direct local aid
will be $3.242 billion, which is an increase of approximately 8.9% above the
fiscal 1995 level.
A statute adopted by voter initiative petition at the November 1990
statewide election regulates the distribution of Local Aid to cities and towns,
by requiring, subject to appropriation, that no less than 40% of collections
from personal income taxes, sales and use taxes, corporate excise taxes, and
lottery fund proceeds be distributed to cities and towns. Under the law, the
Local Aid distribution to each city or town would equal no less than 100% of the
total Local Aid received for fiscal 1989. Distributions in excess of fiscal 1989
levels would be based on new formulas. By its terms, the new formula would have
called for a substantial increase in direct Local Aid in fiscal 1992, and would
call for such an increase in fiscal 1993 and 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 1991 fiscal
program expenditures.
For fiscal 1993, program expenditures were $14.696 billion,
representing a 9.6% increase from fiscal 1992. Fiscal 1994 budgeted expenditures
were $15.523 billion, an increase of 5.6% from fiscal 1993. Fiscal 1995 budgeted
expenditures were $16.259 billion, an increase of 4.7% from fiscal 1994. It is
estimated that fiscal 1996 budgeted expenditures will be $16.998 billion, an
increase of 4.5% over fiscal 1995 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. Total pension
expenditures for fiscal 1994 and fiscal 1995 were $908.9 million and $969.2
million, respectively, and are estimated at $1.032 billion for fiscal 1996.
LITIGATION
There are pending in state and federal courts within the Commonwealth
various suits in which the Commonwealth is a party. In the opinion of the
Attorney General, no litigation is pending or, to his knowledge, threatened
which is likely to result, either individually or in the aggregate, in final
judgments against the Commonwealth that would affect materially its financial
condition.
OTHER FACTORS
Many factors affect the financial condition of the Commonwealth,
including many social, environmental, and economic conditions, which are beyond
the control of the Commonwealth. As with most urban states, the continuation of
many of the Commonwealth's programs, particularly its human service programs,
is, in significant part, dependent upon continuing federal reimbursements, which
have been declining.
KEYSTONE NEW YORK TAX FREE FUND
As described in the prospectus, the New York Insured Fund will
generally invest in New York municipal obligations. The New York Insured Fund is
therefore susceptible to political, economical, or regulatory factors affecting
New York State and governmental bodies within New York State. Some of the more
significant events and conditions relating to the financial situation in New
York are summarized below. The following information provides only a brief
summary of the complex factors affecting the financial situation in New York, is
derived from sources that are generally available to investors and is believed
to be accurate. It is based on information drawn from official statements and
prospectuses issued by, and other information reported by, the State of New York
by its various public bodies, and by other entities located within the State,
including the City of New York, in connection with the issuance of their
respective securities.
THE STATE
New York State (for purposes of this section of the Appendix, "the
State") historically has been one of the wealthiest states in the nation. For
decades, however, the State has grown more slowly than the nation as a whole,
gradually eroding its relative economic position. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business. New York City
(for purposes of this section of the Appendix, "the City") has also had to face
great competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
During the 1982-83 recession, overall economic activity in the State
declined less than that of the nation as a whole. However, in calendar years
1984 through 1991, the State's rate of economic expansion was somewhat slower
than that of the nation. In the 1990-91 recession, the economy of the State, and
that of the rest of the Northeast, was more heavily damaged than that of the
nation as a whole and has been slower to recover. The total employment growth
rate in the State has been below the national average since 1984. The
unemployment rate in the State dipped below the national rate in the second half
of 1981 and remained lower until 1991; since then, it has been higher. According
to data published by the U.S. Bureau of Economic Analysis, during the past ten
years, total personal income in the State rose slightly faster than the national
average only from 1986 through 1988.
Between 1975 and 1990 total employment grew by 21.3 percent while the
labor force grew only by 15.7 percent, unemployment fell from 9.5 percent to 5.2
percent of the labor force. In 1991 and 1992, however, total employment in the
State fell by 457,000, or 5.5 percent. As a result, the unemployment rate rose
to 8.5 percent, reflecting a recession that has had a particularly strong impact
on the entire Northeast. Calendar years 1993 and 1994 saw only a partial
recovery.
Although the State ranks 22nd in the nation for its state tax burden,
the State has the second highest combined state and local tax burden in the
United States. The burden of State and local taxation, in combination with the
many other causes of regional economic dislocation, may have contributed to the
decisions of some businesses and individuals to relocate outside, or not locate
within, the State. To stimulate economic growth, the State has developed
programs, including the provision of direct financial assistance, designed to
assist businesses to expand existing operations located within the State and to
attract new businesses to the State. In addition, the State has provided various
tax incentives to encourage business relocation and expansion.
The 1995-96 budget reflected significant actions to reduce the burden
of State taxation, including adoption of a 3-year, 20 percent reduction in the
State's personal income tax and a variety of more modest changes in other
levies. In combination with business tax reductions enacted in 1994, these
actions will reduce State taxes by over $5.5 billion by the 1997-98 fiscal year,
when compared to the estimated yield in that year of the State tax structure as
it applied in 1993-94.
In recent years, State actions affecting the level of receipts and
disbursements, as well as the relative strength of the State and regional
economy, actions of the Federal government and other factors, have created
structural budget gaps for the State. These gaps resulted from a significant
disparity between recurring revenues and the costs of maintaining or increasing
the level of support for State programs. The 1995-96 enacted budget combined
significant tax and program reductions which will, in the current and future
years, lower both the recurring receipts base (before the effect of any economic
stimulus from such tax reductions) and the historical annual growth in State
program spending. Notwithstanding these changes, the State can expect to
continue to confront structural deficits in future years.
1996-97 Fiscal Year
The State's current fiscal year commenced on April 1, 1996, and ends on
March 31, 1997, and is referred to herein as the State's 1996-97 Fiscal Year. As
of May 22, 1996, the State's budget for the 1996-97 Fiscal Year was not yet
enacted by the State Legislature.
The Governor presented his 1996-97 Executive Budget to the Legislature
on December 15, 1995, one month before the legal deadline. The Executive Budget
also contains financial projections for the State's 1997-98 and 1998-99 fiscal
years and an updated Capital Plan. As provided by the State Constitution, the
Governor submitted amendments to his 1996-97 Executive Budget within 30 days
following submission. There can be no assurance that the Legislature will enact
the Executive Budget as proposed by the Governor into law, or that the State's
adopted budget projections will not differ materially and adversely from the
projections set forth herein.
The 1996-97 Financial Plan projects balance on a cash basis in the
General Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $31.32 billion, a
decrease of $1.4 billion from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to their funds are
projected to be $31.22 billion, a decrease of $1.5 billion from spending totals
projected for the current fiscal year. After adjustments and transfers for
comparability between the 1995-96 and 1996-97 State Financial Plans, the
Executive Budget proposes an absolute year-to-year decline in General Fund
spending of 5.8 percent. Spending from all funding sources (including federal
aid) is proposed to increase by 0.4 percent from the prior fiscal year after
adjustments and transfers for comparability.
The Executive Budget proposes $3.9 billion in actions to balance the
1996-97 Financial Plan. Before reflecting any actions proposed by the Governor
to restrain spending, General Fund disbursements for 1996-97 were projected at
$35 billion, an increase of $2.3 billion or 7 percent from 1995-96. This
increase would have resulted from growth in Medicaid, inflationary increases in
school aid, higher fixed costs such as pensions and debt service, collective
bargaining agreements, inflation, and the loss of non-recurring resources that
offset spending in 1995-96. Receipts would have been expected to fall by $1.6
billion. This reduction would have been attributable to modest growth in the
State's economy and underlying tax base, the loss of non-recurring revenues
available in 1995-96 and implementation of previously enacted tax reduction
programs.
The Executive Budget proposes to close this gap primarily through a
series of spending reductions and cost containment measures. The Executive
Budget projects (1) over $1.8 billion in savings from cost containment and other
actions in social welfare programs, including Medicaid, welfare and various
health and mental health programs; (ii) $1.3 billion in savings from a reduced
State General Fund share of Medicaid made available from anticipated changes in
the federal Medicaid program, including an increase in the federal share of
Medicaid; (iii) over $450 million in savings from reforms and cost avoidance in
educational services (including school aid and higher education), while
providing fiscal relief from certain State mandates that increase local
spending; and (iv) $350 million in savings from efficiencies and reductions in
other State programs. The assumption regarding an increased share of federal
Medicaid funding has received bipartisan Congressional support and would benefit
32 states, including New York.
The 1996-97 Financial Plan projects receipts of $31.32 billion and
spending of $31.22 billion, allowing for a deposit of $85 million to the
Contingency Reserve Fund and a required repayment of $15 million to the Tax
Stabilization Reserve Fund.
On May 15, 1996, it was announced that the State owed local governments
approximately $430 million for services provided to handicapped children in 1994
and earlier. Funds to cover such payments were not included in the 1996-97
Financial Plan.
1995-96 Fiscal Year
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995-96 fiscal year was formulated on June 20, 1995 and
was based on the State's budget as enacted by the Legislature and signed into
law by the Governor. The State Financial Plan is updated quarterly pursuant to
law in July, October and January.
The 1995-96 budget was the first to be enacted in the administration of
the Governor, who assumed office on January 1, 1995. It was the first budget in
over half a century which proposed and, as enacted, projected an absolute
year-over-year decline in General Fund disbursements. Spending for State
operations was projected to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (i.e., excluding Federal aid) was
proposed to increase by only 2.5 percent from the prior fiscal year, in contrast
to the prior decade when such spending growth averaged more than 6.0 percent
annually.
In his Executive Budget, the Governor indicated that in the 1995-96
fiscal year, the State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts, to
spur economic growth and provide relief for low and middle-income taxpayers,
which were larger than those ultimately adopted, and which added $240 million to
the then projected imbalance or budget gap, bringing the total to approximately
$5 billion.
This gap was projected to be closed in the 1995-96 State Financial Plan
based on the enacted budget, through a series of actions, mainly spending
reductions and cost containment measures and certain reestimates that are
expected to be recurring, but also through the use of one-time solutions. The
State Financial Plan projected (I) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State workforce, SUNY and CUNY, mental hygiene programs, capital
projects, the prison system and fringe benefits; (iii) $300 million in savings
from local assistance reforms, including actions affecting school aid and
revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in revenue
measures, primarily a new Quick Draw Lottery game, changes to tax payment
schedules, and the sale of assets; and (v) $300 million from reestimates in
receipts.
There are risks and uncertainties concerning the future-year impact of
tax reductions and other measures in the 1995-96 budget.
The 1995-96 State Financial Plan included actions that will have an
effect on the budget outlook for State fiscal year 1996-97 and beyond. The DOB
estimated that the 1995-96 State Financial Plan contains actions that provide
nonrecurring resources or savings totaling approximately $900 million. These
included the use of balances set aside originally for mass transportation aid
($220 million), the use of a reserve established to fund pension supplementation
cost ($110 million) and the use of lottery balances ($62 million) The
Comptroller believed that the amount of nonrecurring resources or savings
exceeds $1.0 billion. The DOB also estimates that the 1995-96 State Financial
Plan contained nonrecurring expenditures totaling nearly $250 million. These
include the payment of social services litigation ($65 million), the deposit to
the Contingency Reserve Fund ($40 million), the payment of 1993-94 pension
charges ($56 million) and aid for maintenance costs of local schools ($45
million). The net amount of nonrecurring resources used in the 1995-96 State
Financial Plan, accordingly, was estimated by the DOB at over $600 million.
In addition to this use of nonrecurring resources, the 1995-96 State
Financial Plan reflected actions that will directly affect the State' 1996-97
fiscal year baseline receipts and disbursements. The three-year plan to reduce
State personal income taxes will decrease State tax receipts by an estimated
$1.7 billion in State fiscal year 1996-97, in addition to the amount of
reduction in State fiscal year 1995-96. Further significant reductions in the
personal income tax are scheduled for the 1997-98 State fiscal year. Other tax
reductions enacted in 1994 and 1995 are estimated to cause an additional
reduction in receipts of over $500 million in 1996-97, as compared to the level
of receipts in 1995-96. Similarly, many actions taken to reduce disbursements in
the State's 1995-96 fiscal year are expected to provide greater reductions in
State fiscal year 1996-97. These include actions to reduce the State workforce,
reduce Medicaid and welfare expenditures and slow community mental hygiene
program development. The net impact of these factors is expected to produce a
potential imbalance in receipts and disbursements in State fiscal year 1996-97
As part of the early release of the 1996-97 Executive Budget, the State
updated its 1995-96 cash-basis State Financial Plan (the "Financial Plan
Update") on December 15, 1995, as a part of the Governor's Executive Budget
presentation.
The State updated its forecast of national and State economic activity
through the end of calendar year 1996. The national economic forecast remained
basically unchanged from the initial forecast on which the original 1995-96
State Financial Plan was based, while the State economic forecast was marginally
weaker.
Actual receipts through the first two quarters of the 1995-96 State
fiscal year fell short of expectations by $101 million. Much of this shortfall
was due to timing-related delays in sources other than taxes. Based on the
revised economic outlook and actual receipts for the first six months of
1995-96, projected General Fund receipts for the 1995-96 State fiscal year were
reduced by $73 million, offset by $2 million in increased revenues and transfers
associated with actions taken in the Management Review Plan. Actual
disbursements through the first six months of the fiscal year were $89 million
less than projected, primarily because of delays in processing payments
following delayed enactment of the State budget. No savings were included in the
Mid-Year Update from this slower-than-expected spending. Projected disbursements
for the 1995-96 State fiscal year were reduced by $30 million because spending
increases in local assistance and State operations was more than offset by debt
service savings and the reductions from the Management Review Plan.
The 1995-96 General Fund Financial Plan continued to be balanced, with
reductions in projected receipts offset by an equivalent reduction in projected
disbursements. Modest changes were made to the Mid-Year Update, reflecting two
more months of actual results, deficiency requests by State agencies (the
largest of which is for school aid resulting from revisions to data submitted by
school districts), and administrative efficiencies achieved by State agencies.
Total General Fund receipts are expected to be approximately $73 million lower
than estimated at the time of the Mid-Year Update. Tax receipts were projected
to be $29.57 billion, $8 million less than in the earlier plan. Miscellaneous
receipts and transfers from other funds were estimated at $3.15 billion, $65
million lower than in the Mid-Year Update. The largest single change in these
estimates is attributable to the lag in achieving $50 million in proceeds from
sales of State assets, which are unlikely to be completed prior to the end of
the fiscal year.
Projected General Fund disbursements were reduced by a total of $73
million, with changes made in most major categories of the 1995-96 State
Financial Plan. The reduction in overall spending masks the impact of deficiency
requests totaling more than $140 million, primarily for school aid and tuition
assistance to college students. Offsetting reductions in spending are
attributable to the continued maintenance of strict controls on spending through
the fiscal year by State agencies, yielding savings of $50 million. Reductions
of $49 million in support for capital projects reflect a stringent review of all
capital spending. Reductions of $30 million in debt service costs reflect
savings from refundings undertaken in the current fiscal year, as well as
savings from lower interest rates in the financial market. Finally, the 1995-96
Financial Plan reflected reestimates based on actual results through November,
the largest of which is a reduction of $70 million in projected costs for income
maintenance. This reduction is consistent with declining caseload projections.
The balance in the General Fund at the close of the 1995-96 fiscal year
was expected to be $172 million, entirely attributable to monies in the Tax
Stabilization Reserve Fund following the required $15 million payment into that
Fund. A $40 million deposit to the Contingency Reserve Fund included as part of
the enacted 1995-96 budget will not be made, and the minor balance of $1 million
currently in the Fund will be transferred to the General Fund. These Contingency
Reserve Fund monies are expected to support payments from the General Fund for
litigation related to the State's Medicaid program, and for federal
disallowances.
Changes in federal aid programs currently pending in Congress were not
expected to have a material impact on the State's 1995-96 Financial Plan,
although prolonged interruptions in the receipt of federal grants could create
adverse developments, the scope of which can not be estimated at this time. The
major remaining uncertainties in the 1995-96 State Financial Plan continue to be
those related to the economy and tax collections, which could produce either
favorable or unfavorable variances during the balance of the year.
Past Years
New York State's financial operations have improved during recent
fiscal years. During the period 1989-90 through 1991-92, the State incurred
General Fund operating deficits that were closed with receipts from the issuance
of tax and revenue anticipation notes ("TRANs"). First, the national recession,
and then the lingering economic slowdown in the New York and regional economy,
resulted in repeated shortfalls in receipts and three budget deficits. For its
1992-93, 1993-94 and 1994-95 fiscal years, the State recorded balanced budgets
on a cash basis, with substantial fund balances in 1992-93 and 1993-94, and a
smaller fund balance in 1994-95 as described below.
1994-95 Fiscal Year
New York State ended its 1994-95 fiscal year with the General Fund in
balance. The closing fund balance of $158 million reflects $157 million in the
Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund
("CRF"). The CRF was established in State fiscal year 1993-94, funded partly
with surplus moneys, to assist the State in financing the 1994-95 fiscal year
costs of extraordinary litigation known or anticipated at that time; the opening
fund balance in State fiscal year 1994-95 was $265 million. The $241 million
change in the fund balance reflects the use of $264 million in the CRF as
planned, as well as the required deposit of $23 million to the Tax Stabilization
Reserve Fund. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited at the end of the State's 1994-95
fiscal year to continue the process of restructuring the State's cash flow as
part of the Local Governmental Assistance Corporation ("LGAC") program.
Compared to the State Financial Plan for 1994-95 as formulated on June
16, 1994, reported receipts fell short of original projections by $1.163
billion, primarily in the categories of personal income and business taxes. Of
this amount, the personal income tax accounts for $800 million, reflecting weak
estimated tax collections and lower withholding due to reduced wage and salary
growth, more severe reductions in brokerage industry bonuses than projected
earlier, and deferral of capital gains realizations in anticipation of potential
Federal tax changes. Business taxes fell short by $373 million, primarily
reflecting lower payments from banks as substantial overpayments of 1993
liability depressed net collections in 1994-95 fiscal year. These shortfalls
were offset by better performance in the remaining taxes, particularly the user
taxes and fees, which exceeded projections by $210 million. Of this amount, $227
million was attributable to certain restatements for accounting treatment
purposes pertaining to the CRF and LGAC; these restatements had no impact on
balance in the General Fund.
Disbursements were also reduced from original projections by $848
million. After adjusting for the net impact of restatements relating to the CRF
and LGAC which raised disbursements by $38 million, the variance is $886
million. Well over two-thirds of this variance is in the category of grants to
local governments, primarily reflecting the conservative nature of the original
estimates of projected costs for social services and other programs. Lower
education costs are attributable to the availability of $110 million in
additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated
in January 1995 by the Governor to reduce spending to avert a potential gap in
the 1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
non-essential capital projects. These actions, together with $71 million in
other measures comprised the Governor's $159 million gap-closing plan, submitted
to the Legislature in connection with the 1995-96 Executive Budget.
1993-94 Fiscal Year
The State ended its 1993-94 fiscal year with a balance of $1.140
billion in the tax refund reserve account, $265 million in the CRF and $134
million in its Tax Stabilization Reserve Fund. These fund balances were
primarily the result of an improving national economy, State employment growth,
tax collections that exceeded earlier projections and disbursements that were
below expectations. Deposits to the personal income tax refund reserve have the
effect of reducing reported personal income tax receipts in the fiscal year when
made and withdrawals from such reserve increase receipts in the fiscal year when
made. The balance in the tax refund reserve account was used to pay taxpayer
refunds.
Of the $1.140 billion deposited in the tax refund reserve account,
$1.026 billion was available for budgetary planning purposes in the 1994-95
fiscal year. The remaining $114 million was redeposited in the tax refund
reserve account at the end of the State's 1993-94 fiscal year to continue the
process of restructuring the State's cash flow as part of the LGAC program. The
balance in the CRF was reserved to meet the cost of litigation facing the State
in its 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in 1993-94 exceeded those originally projected when the
State Financial Plan for that year was formulated on April 16, 1993 by $1.002
billion. Greater-than-expected receipts in the personal income tax, the bank
tax, the corporation franchise tax and the estate tax accounted for most of this
variance, and more than offset weaker-than-projected collections from the sales
and use tax and miscellaneous receipts. Collections from individual taxes were
affected by various factors including changes in Federal business laws,
sustained profitability of banks, strong performance of securities firms, and
higher-than-expected consumption of tobacco products following price cuts.
The higher receipts resulted, in part, because the New York economy
performed better than forecasted. Employment growth started in the first quarter
of the State's 1993-94 fiscal year, and, although this lagged behind the
national economic recovery, the growth in New York began earlier than
forecasted. The New York economy exhibited signs of strength in the service
sector, in construction, and in trade. Long Island and the Mid-Hudson Valley
continued to lag behind the rest of the State in economic growth.
The DOB believes that approximately 100,000 jobs were added during the 1993-94
fiscal year.
Disbursements and transfers from the General Fund were $303 million
below the level projected in April 1993, an amount that would have been $423
million had the State not accelerated the payment of Medicaid billings, which in
the April 1993 State Financial Plan were planned to be deferred into the 1994-95
fiscal year. Compared to the estimates included in the State Financial Plan
formulated in April 1993, lower disbursements resulted form lower spending for
Medicaid, capital projects, and debt service (due to refundings) and $114
million used to restructure the State's cash flow as part of the LGAC program.
Disbursements were higher than expected for general support for public schools,
the State share of income maintenance, overtime for prison guards, and highway
snow and ice removal. The State also made the first of six required payments to
the State of Delaware related to the settlement of Delaware's litigation against
the State regarding the disposition of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded
the CRF as a way to assist the State in financing the cost of litigation
affecting the State. The CRF was initially funded with a transfer of $100
million attributable to the positive margin recorded in the 1992-93 fiscal year.
In addition, the State augmented this initial deposit with $132 million in debt
service savings attributable to the refinancing of State and public authority
bonds during 1993-94. A year-end transfer of $36 million was also made to the
CRF, which, after a disbursement for authorized fund purposes, brought the CRF
balance a the end of 1993-94 to $265 million. This amount was $165 million
higher than the amount originally targeted for this reserve fund.
1992-93 Fiscal Year
The State ended its 1992-93 fiscal year with a balance of $671 million
in the tax refund reserve account and $67 million in the Tax Stabilization
Reserve Fund.
The State's 1992-93 fiscal year was characterized by performance that
was better than projected for the national and regional economies. National
gross domestic product, State personal income, and State employment and
unemployment performed better than originally projected in April 1992. This
favorable economic performance, particularly at year end, combined with a
tax-induced acceleration of income into 1992, was the primary cause of the
General Fund surplus. Personal income tax collections were more than $700
million higher than originally projected (before reflecting the tax refund
reserve account transaction), primarily in the withholding and estimated payment
components of the tax.
There were large, but mainly offsetting, variances in other categories
of receipts. Significantly higher-than-projected business tax collections and
the receipt of unbudgeted payments from the Medical Malpractice Insurance
Association ("MMIA") and the New York Racing Association approximately offset
the loss of an anticipated $200 million Federal reimbursement, the loss of
certain budgeted hospital differential revenue as a result of unfavorable court
decisions, and shortfalls in certain miscellaneous revenues.
Disbursements and transfers to other funds were $45 million above
projections in April 1992, although this includes a $150 million payment to
health insurers (financed with a receipt from the MMIA made pursuant to
legislation passed in January 1992). All other disbursements were $105 million
lower than projected. This reduction primarily reflected lower costs in
virtually all categories of spending, including Medicaid, local health programs,
agency operations, fringe benefits, capital projects and debt service as
partially offset by higher-than-anticipated costs for education programs.
Local Government Assistance Corporation
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. The legislation authorized LGAC
to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a period
of years, the issuance of these long-term obligations, which are to be amortized
over no more than 30 years, was expected to eliminate the need for continued
short-term seasonal borrowing. The legislation also dedicated revenues equal to
one-quarter of the four cent State sales and use tax to pay debt service on
these bonds. The legislation also imposed a cap on the annual seasonal borrowing
of the State at $4.7 billion, less net proceeds of bonds issued by LGAC and
bonds issued to provide for capitalized interest, except as cases where the
Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing above
the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
This provision capping the seasonal borrowing was included as a covenant with
LGAC's bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net
proceeds of $4.7 billion, completing the program. The impact of LGAC's borrowing
is that the State is able to meet its cash flow needs in the first quarter of
the fiscal year without relying on short-term seasonal borrowings. The 1995-96
State Financial Plan includes no spring borrowing nor did the 1994-95 State
Financial Plan, which was the first time in 35 years there was no short-term
seasonal borrowing. This reflects the success of the LGAC program in permitting
the State to accelerate local aid payments form the first quarter of the current
fiscal year to the fourth quarter of the previous fiscal year.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State funds dedicated for transportation purposes), and not
by the full faith and credit of the State. In addition, the proposed
constitutional amendment would (i) permit multiple purpose general obligation
bond proposals to be proposed on the same ballot, (ii) require that State debt
be incurred only for capital projects included in a multi-year capital financing
plan, and (iii) prohibit, after its effective date, lease-purchase and
contractual-obligation financings mechanisms for State facilities.
The State anticipates that its capital programs will be financed, in
part, through borrowings by the State and public authorities in the 1995-96
fiscal year. The State expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming outstanding BANs) and $186
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $33 million in COPs during the State's 1995-96
fiscal year for equipment purchases and $14 million for capital purposes. The
projection of the State regarding its borrowings for the 1995-96 fiscal year may
change if circumstances require.
LGAC is authorized to provide net proceeds of up to $529 million during
the State's 1995-96 fiscal year, to redeem notes sold in June 1995, completing
its financing program as discussed above.
Ratings
On July 13, 1995, Standard & Poor's confirmed its rating on the State's
general obligation bonds of A-. On July 3, 1995 Moody's confirmed its rating on
the State's general obligation long-term indebtedness of A.
THE CITY OF NEW YORK
The fiscal health of the State is closely related to the fiscal health
of its localities, particularly the City of New York, which has required and
continues to require significant financial assistance from the State. The City
depends on State Aid both to enable the City to balance its budget and to meet
its cash requirements. The City has achieved balanced operating results for each
of its fiscal years since 1981 as reported in accordance with the
then-applicable GAAP Standards. During the 1990 and 1991 fiscal years, the City
experienced significant shortfalls in almost all of its major tax sources and
increases in social service costs, and was required to take actions to close
substantial budget gaps in order to maintain balanced budgets in accordance with
its financial plan. For fiscal 1993, the City achieved balanced operating
results.
In response to the City's financial crisis in 1975, the State took
action to assist the City in returning to fiscal stability. Among these actions,
the State created the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for the City of New York ( the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs, the Office of the State Deputy Comptroller for New York ("OSDC") in the
Office of the State Comptroller to assist the Control Board in exercising its
powers and responsibilities, and a "Control Period" which existed from 1975 to
1986 during which the City was subject to certain statutorily-prescribed fiscal
controls. Although the Control Board terminated the Control Period in 1986 when
certain statutory conditions were met, thus suspending certain Control Board
powers, the Control Board, MAC and OSDC continue to exercise various fiscal
monitoring functions over the City, and upon the occurrence or "substantial
likelihood and imminence" of the occurrence of certain events, including, but
not limited to, a City operating budget deficit of more than $100 million, the
Control Board is required by law to reimpose a "Control Period." Currently, the
City and its "Covered Organizations" (i.e., those which receive or may receive
monies from the City directly, indirectly or contingently) operate under a
four-year financial plan which the City prepares annually and periodically
updates. The City's Financial Plan includes its capital, revenue and expense
projections and outlines proposed gap-closing programs for years with projected
budget gaps.
The City submits its financial plans as well as the periodic updates to
the Control Board for its review. In August 1993, the City submitted to the
Control Board its 1994-1997 Financial Plan. The Financial Plan projected a
balanced budget in fiscal 1994, based on revenues of approximately $31.250
billion. The Financial Plan also predicted budget gaps of approximately $1.3
billion in fiscal year 1995, $1.8 billion in fiscal year 1996 and $2.0 billion
in fiscal year 1997.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid are not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided for
in the City's Financial Plan or if other uncertainties materialize that reduce
expected revenues or increase projected expenditures, then, to avoid operating
deficits, the City may be required to implement additional actions, including
increases in taxes and reductions in essential City services. The City might
also seek additional assistance from the State.
On July 10, 1995, Standard & Poor's revised downward its rating on City
general obligation bonds from A- to BBB+ and removed City bonds from
CreditWatch. Standard & Poor's stated that "structural budgetary balance remains
elusive because of persistent softness in the City's economy, highlighted by
weak job growth and a growing dependence on the historically volatile financial
services sector." Other factors identified by Standard & Poor's in lowering its
rating on City bonds included a trend of using one-time measures, including debt
refinancings, to close projected budget gaps, dependence on unratified labor
savings to help balance the Financial Plan, optimistic projections of additional
federal and State aid or mandate relief, a history of cash flow difficulties
caused by State budget delays and continued high debt levels. Fitch Investors
Service, Inc. continues to rate City general obligation bonds A-. Moody's rating
for City general obligation bonds is Baa1.
AUTHORITIES
New York State's authorities are generally responsible for financing,
constructing and operating revenue-producing public benefit facilities. The
fiscal stability of the State is related, in part, to the fiscal stability of
its public authorities. Public authorities are not subject to the constitutional
restrictions on the inccurrence of debt which applies to the State itself and
may issue bonds and notes within the amounts permitted by, and as otherwise
restricted by, their legislative authorization. The State's access to the public
credit markets could be impaired, and the market price of its outstanding debt
may be materially adversely affected, if any of its public authorities were to
default on their respective obligations, particularly those using the financing
techniques referred to as State-supported or State-related.
As of September 30, 1994, the date of the latest data available, there
were 18 public authorities that had outstanding debt of $100 million or more,
and the aggregate outstanding debt including refunding bonds, of the these 18
public authorities was $70.3 billion.
As of March 31, 1995, aggregate public authority debt outstanding as
State-supported debt was $27.9 billion and as State-related debt was $36.1
billion.
Public authority operating expenses and debt service costs are
generally paid by revenues generated by the projects financed or operated, such
as tolls charged for the use of highways, bridges or tunnels, rentals charged
for housing units, and charges for occupancy at medical care facilities. In
addition, State legislation authorizes several financing techniques for public
authorities. Also, there are statutory arrangements providing for state local
assistance payments, otherwise payable to localities, to be made under certain
circumstances to public authorities. Although the state has no obligation to
provide additional assistance to localities whose local assistance payments have
been paid to public authorities under those arrangements if local assistance
payments are so diverted, the affected localities could seek additional state
assistance. Some authorities also received monies from state appropriations to
pay for the operating costs of certain programs.
The Metropolitan Transportation Authority (the "MTA") oversees the
operation of New York City's bus and subway systems and, through its affiliates
and subsidiaries, operates certain commuter rail and bus lines and a rapid
transit line. Through an affiliate, the MTA operates certain intrastate toll
bridges and tunnels. The MTA has depended and will continue to depend upon
Federal, State, local government and agency support to operate the mass transit
portion of these operations because fare revenues are insufficient. If current
revenue projections are not realized and/or operating expenses exceed current
projections, the MTA may be required to seek additional state assistance, raise
fares or take other actions.
Since 1980, the State has enacted several taxes that provide revenues
for mass transit purposes, including assistance to the MTA. In addition, since
1987, State law has required that the proceeds of 1/4 of 1% of mortgage
recording tax paid on certain mortgages in the Metropolitan Transportation
Region served by the MTA be deposited in a special MTA fund for operating or
capital expenses. Further, in 1993, the State dedicated a portion of certain
additional state petroleum business tax receipts to fund operating or capital
assistance to the MTA. For the 1995-1996 State Fiscal Year, total state
assistance to the MTA is estimated at approximately $1.1 billion.
In 1993, State legislation authorized the funding of a 5-year $9.56
billion MTA Capital Plan for the 5-year period, 1993 through 1996 (the
"1992-1996 Capital Program"). The MTA has received approval of the 1992-1996
Capital Program based on this legislation from the MTA Capital Program Review
Board, as state law requires. This is the third 5-year plan since the
legislature authorized procedures for the adoption, approval and amendment of a
5-year plan in 1981 for a capital program designed to upgrade the performance of
the MTA's transportation system and to supplement, replace and rehabilitate
facilities and equipment. The MTA and its affiliates are collectively authorized
to issue an aggregate of $3.1 billion of bonds (net of certain statutory
exclusion) to finance a portion of the 1992-1996 Capital Program.
There can be no assurance that all the necessary governmental actions
for the 1992-1996 Capital Program or future capital programs will be taken, that
funding sources currently identified will not be decreased or eliminated, or
that the 1992-1996 Capital Program, or parts thereof, will not be delayed or
reduced. If the Capital Program is delayed or reduced, ridership and fair
revenues may decline, which could, among other things, impair the MTA's ability
to meet its operating expenses without additional state assistance.
AGENCIES AND LOCALITIES
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance during the State's
1995-1996 fiscal year and thereafter. The potential impact on the State of such
requests by localities is not included in the projections of the State receipts
and disbursements in the State's 1995-1996 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board of the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the State to
assist Yonkers could result in allocation of State resources in amounts that
cannot yet be determined.
Municipalities and school districts have engaged in substantial short
term and long term borrowing. In 1993, the total indebtedness of all localities
in the State other than New York City was approximately $17.7 billion. A small
portion of this indebtedness represented borrowing to finance budgetary deficits
and was issued pursuant to enabling State legislation. State law requires the
Comptroller to review and make recommendations concerning the budgets of these
local government units other than New York City authorized by State law to issue
debt to finance deficits during the period that such deficit financing is
outstanding. Fifteen localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending 1993.
From time to time, Federal expenditure reductions could reduce, or in
some cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, New York City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities face anticipated and
potential problems resulting from certain pending litigation, judicial
decisions, and long-range economic trends. Long range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing State assistance in the
future.
LITIGATION
Certain litigation pending against the State or its officers or
employees could affect adversely the financial condition of the State in the
1995-1996 fiscal year or thereafter. Adverse developments in these proceedings
or the initiation of new proceedings could affect the ability of the State to
maintain a balanced 1995-1996 State Financial Plan. The State believes that the
1995-1996 State Financial Plan includes sufficient reserves for the payment of
judgments that may be required during the 1995-1996 fiscal year. There can be no
assurance, however, that an adverse decision in any of these proceedings would
not exceed the amount of the 1995-1996 State Financial Plan reserves for the
payment of judgments and, thereby, affect the ability of the State to maintain a
balanced 1995-1996 State Financial Plan. Among the more significant of these
cases are those that involve: (1) the validity of agreements and treaties by
which various Indian tribes transferred title to the state of certain land in
central and upstate New York; (2) certain aspects of the State's Medicaid rates
and regulations; (3) treatment provided at several state mental health
facilities; (4)alleged responsibility of State officials to assist in remedying
racial segregation in the City of Yonkers;(5) the validity of certain surchages
on hospital bills and (6) the assessment of petroleum business taxes on fuel
purchased out of state.
KEYSTONE PENNSYLVANIA TAX FREE FUND
GENERAL
The Commonwealth of Pennsylvania, the fifth most populous state,
historically has been identified as a heavy industry state, although that
reputation has changed with the decline of the coal, steel and railroad
industries and the resulting diversification of the Commonwealth's industrial
composition. The major new sources of growth are in the service sector,
including trade, medical and health services, educational and financial
institutions. Manufacturing has fallen behind in both the service sector and the
trade sector as a source of employment in Pennsylvania. The Commonwealth is the
headquarters for 58 major corporations. Pennsylvania's average annual
unemployment rate for the years 1990 through 1995 on average remained below the
nation's annual average unemployment rate. The seasonally adjusted unemployment
rate for both Pennsylvania and the United States for March, 1996 was 5.6%. The
population of Pennsylvania, 12,072 million people in 1995 according to the U.S.
Bureau of the Census, represents an increase from the 1986 estimate of 11,784
million. Per capita income in Pennsylvania for 1994 of $22,196 was higher than
the per capita income of the United States of $21,699. 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, 1993, June 30, 1994 and June 30, 1995
with fund balances of $698,945, $892,940 and positive $688,304, respectively.
DEBT
The Commonwealth may incur debt to rehabilitate areas affected by
disaster, debt approved by the electorate, debt for certain capital projects
(for projects such as highways, public improvements, transportation assistance,
flood control, redevelopment assistance, site development and industrial
development) and tax anticipation debt payable in the fiscal year of issuance.
The Commonwealth had outstanding general obligation debt of $5,045 million at
June 30, 1995. 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 May 15, 1996, 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, 2001, the Commonwealth has projected that
it will issue notes and bonds totaling $1,982 million and retire bonded debt in
the principal amount of $1,800 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, 1995, total combined debt
outstanding for these agencies was $7,102 million. The debt of these agencies is
supported by assets of, or revenues derived from, the various projects financed
and is not an obligation of the Commonwealth. Some of these agencies, however,
are indirectly dependent on Commonwealth appropriations. The only obligations of
agencies in the Commonwealth that bear a moral obligation of the Commonwealth
are those issued by the Pennsylvania Housing Finance Agency ("PHFA"), a
state-created agency which provides housing for lower and moderate income
families, and The Hospitals and Higher Education Facilities Authority of
Philadelphia (the "Hospital Authority"), an agency created by the City of
Philadelphia to acquire and prepare various sites for use as intermediate care
facilities for the mentally retarded.
LOCAL GOVERNMENT DEBT
Numerous local government units in Pennsylvania issue general
obligation (i.e., backed by taxing power) debt, including counties, cities,
boroughs, townships and school districts. School district obligations are
supported indirectly by the Commonwealth. The issuance of non-electoral general
obligation debt is limited by constitutional and statutory provisions. Electoral
debt, i.e., that approved by the voters, is unlimited. In addition, local
government units and municipal and other authorities may issue revenue
obligations that are supported by the revenues generated from particular
projects or enterprises. Examples include municipal authorities (frequently
operating water and sewer systems), municipal authorities formed to issue
obligations benefitting hospitals and educational institutions, and industrial
development authorities, whose obligations benefit industrial or commercial
occupants. In some cases, sewer or water revenue obligations are guaranteed by
taxing bodies and have the credit characteristics of general obligations debt.
LITIGATION
Pennsylvania is currently involved in certain litigation where adverse
decisions could have an adverse impact on its ability to pay debt service. In
Baby Neal v. Commonwealth, the American Civil Liberties Union filed a lawsuit
against the Commonwealth seeking an order that would require the Commonwealth to
provide additional funding for child welfare services. County of Allegheny v.
Commonwealth of Pennsylvania involves litigation regarding the state
constitutionality of the statutory scheme for county funding of the judicial
system. In Pennsylvania Association of Rural and Small Schools v. Casey, the
constitutionality of Pennsylvania's system for funding local school districts
has been challenged. No estimates for the amount of these claims are available.
OTHER FACTORS
The performance of the obligations held by the Fund issued by the
Commonwealth, its agencies, subdivisions and instrumentalities are in part tied
to state-wide, regional and local conditions within the Commonwealth and to the
creditworthiness of certain non-Commonwealth related obligers, depending upon
the Pennsylvania Fund's portfolio mix at any given time. Adverse changes to the
state-wide, regional or local economies or changes in government may adversely
affect the creditworthiness of the Commonwealth, its agencies and
municipalities, and certain other non-government related obligers of
Pennsylvania tax-free obligations (e.g., a university, a hospital or a corporate
obligor). The City of Philadelphia, for example, experienced severe financial
problems which impaired its ability to 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.
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APPENDIX B
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CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria are used in making that
assessment:
a. Amortization schedule (the larger the final maturity relative to
other maturities the more likely it will be treated as a note), and
b. Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 - Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
2. SP-2 - Satisfactory capacity to pay principal and interest.
3. SP-3 - Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as
part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+" ).
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of
the creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default and capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the
successful completion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
C. BOND RATINGS ARE AS FOLLOWS:
a. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
b. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay prncipal in accordance with the terms of teh obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D. MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. Aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
3. A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
4. Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. Ba - Bonds which are rated Ba are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interst and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
CON. (---) - Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the Aa, A, and Baa groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa 1, A 1, and Baa 1.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes), and obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
some of which may be subject to repurchase agreements.
COMMERCIAL PAPER
Commercial paper will consist of issues rated at the time of purchase
A-1, by Standard & Poor's Corporation (S&P), or Prime-1 by Moody's Investors
Service, Inc., (Moody's) or F-1 by Fitch Investors Services, Inc. (Fitch's); or,
if not rated, will be issued by companies which have an outstanding debt issue
rated at the time of purchase Aaa, Aa or A by Moody's, or AAA, AA or A by S&P,
or will be determined by Keystone to be of comparable quality.
A. S&P RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1. A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
2. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
1. The rating PRIME-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated PRIME-1 (or related supporting institutions) are
deemed to have a superior capacity for repayment of short term promissory
obligations. Repayment capacity of PRIME-1 issuers is normally evidenced by the
following characteristics:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate reliance on
debt and ample asset protection;
4) broad margins in earnings coverage of fixed financial charges and
high internal cash generation; and
5) well established access to a range of financial markets and
assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks or of savings and loan associations, including their
branches abroad, and of U.S. branches of foreign banks, which are members of the
Federal Reserve System or the Federal Deposit Insurance Corporation, and have at
least $1 billion in deposits as of the date of their most recently published
financial statements.
The Funds will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Funds do not
currently intend to purchase foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by a Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance and securities issued by the Government
National Mortgage Association ("GNMA"). Treasury bills have maturities of one
year or less. Treasury notes have maturities of one to ten years and Treasury
bonds generally have maturities of greater than ten years at the date of
issuance. GNMA securities include GNMA mortgage pass-through certificates. Such
securities are supported by the full faith and credit of the U.S.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the U.S.,
Small Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration,
The Tennessee Valley Authority, District of Columbia Armory Board and Federal
National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, a Fund will invest in
the securities issued by such an instrumentality only when Keystone determines
under standards established by the Board of Trustees that the credit risk with
respect to the instrumentality does not make its securities unsuitable
investments. U.S. government securities do not include international agencies or
instrumentalities in which the U.S. government, its agencies or
instrumentalities participate, such as the World Bank, Asian Development Bank or
the Inter-American Development Bank, or issues insured by the Federal Deposit
Insurance Corporation.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations purchased primarily through Certificates of
Participation ("COPs") are used by state and local governments to finance the
purchase of property, and function much like installment purchase obligations.
The payments made by the municipality under the lease are used to repay interest
and principal on the bonds issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. The lessor is, in effect, a lender secured by the property being
leased. A feature which distinguishes CPOs from municipal debt is that the lease
which is the subject of the transaction must contain a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that provides that, while
the municipality will use its best efforts to make lease payments, the
municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds. Local administrations,
being faced with increasingly tight budgets, therefore have more discretion to
curtail payments under COPs than they do to curtail payments on traditionally
funded debt obligations. If the government lessee does not appropriate
sufficient monies to make lease payments, the lessor or its agent is typically
entitled to repossess the property. In most cases, however, the private sector
value of the property will be less than the amount the government lessee was
paying.
Criteria considered by the rating agencies and 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 Trust intends to enter into arrangements with its custodian and
with Brokers to enable the initial margin of a Fund and any variation margin to
be held in a segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before 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 Trust believes that no
additional techniques have been identified for employment by the Funds in the
foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
A Fund will not enter into a futures contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin deposits on such
futures contracts.
The Funds intend that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that a Fund owns, or futures contracts will be purchased to protect a
Fund against an increase in the price of securities it intends to purchase. The
Funds do not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts will be deposited in a segregated account with the Trust's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, a Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for a Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of a Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, a Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
RISKS OF FUTURES CONTRACTS
Financial futures contracts prices are volatile and are influenced,
among other things, by changes in stock prices, market conditions, prevailing
interest rates and anticipation of future stock prices, market movements or
interest rate changes, all of which in turn are affected by economic conditions,
such as government fiscal and monetary policies and actions, and national and
international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in a Fund's portfolio. In addition,
futures contract transactions involve the remote risk that a party be unable to
fulfill its obligations and that the amount of the obligation will be beyond the
ability of the clearing broker to satisfy. A decision of whether, when and how
to hedge involves the exercise of skill and judgment, and even a well conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, a Fund would presumably have sustained comparable losses if, instead of
entering into the futures contract, it had invested in the underlying financial
instrument. Furthermore, in order to be certain that a Fund has sufficient
assets to satisfy its obligations under a futures contract, the Fund will
establish a segregated account in connection with its futures contracts which
will hold cash or cash equivalents equal in value to the current value of the
underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for financial futures
contracts, there are several special risks relating to options on futures
contracts. The ability to establish and close out positions on such options will
be subject to the development and maintenance of a liquid secondary market.
There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. A Fund will not purchase options
on any futures contract unless and until it believes that the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to a Fund, even though the use of a futures contract would not,
such as when there is no movement in the level of the futures contract.
<PAGE>
Page 16
- ----------------------------------
Keystone Florida Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ----------------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.8%)
Bay County, Florida, Hospital Systems Revenue Refunding,
Bay Medical Center Project 8.000% 10/01/2019 $2,500,000 $ 2,778,525
Brevard County, Florida, Health Facilities Authority
Revenue Refunding, Devereux Foundation (MBIA) 5.125 11/01/2019 2,320,000 2,097,628
Brevard County, Florida, Health Facilities Authority
Revenue Refunding, Wuesthoff Memorial Hospital (MBIA) 7.200 04/01/2013 3,000,000 3,353,760
Broward County, Florida, Collateralized Home Mortgage 7.125 03/01/2017 195,000 203,621
Broward County, Florida, Resource Recovery, South Project 7.950 12/01/2008 2,500,000 2,767,975
Charlotte County, Florida, Utility Revenue (FGIC) 6.750 10/01/2013 1,000,000 1,104,320
City of Tarpon Springs Health Facilities Authority,
Florida, Hospital Refunding, Helen Ellis Hospital 7.625 05/01/2021 1,000,000 1,036,910
City of Tarpon Springs Health Facilities Authority,
Florida, Hospital Refunding, Tarpon Springs Hospital
Foundation, Inc. 8.750 05/01/2012 500,000 526,955
Commonwealth of Puerto Rico, Aqueduct and Sewer Authority
Revenue 5.000 07/01/2015 4,000,000 3,592,240
Commonwealth of Puerto Rico, Aqueduct and Sewer Authority
Revenue 5.000 07/01/2019 1,640,000 1,446,710
Commonwealth of Puerto Rico, Aqueduct and Sewer Authority
Revenue 6.250 07/01/2012 2,000,000 2,110,620
Commonwealth of Puerto Rico, Highway Authority, Series Q 7.750 07/01/2010 125,000 143,380
Dade County, Florida, Aviation Revenue, Series C (MBIA) 5.750 10/01/2025 2,200,000 2,172,896
Dade County, Florida, Educational Facilities Authority
Revenue (St. Thomas University) 6.000 01/01/2010 2,000,000 2,022,740
Dade County, Florida, Housing Finance Agency, Single Family
Mortgage 7.000 03/01/2024 185,000 191,166
Dade County, Florida, School District, General Obligation 7.375 07/01/2008 40,000 44,445
Dade County, Florida, Seaport Refunding (MBIA) 5.125 10/01/2016 2,000,000 1,843,360
Dade County, Florida, Seaport Refunding (MBIA) 5.125 10/01/2021 2,500,000 2,264,350
Duval County, Florida, Single Family Mortgage Refunding
(FGIC) 7.300 07/01/2011 80,000 84,032
Escambia County, Florida, Pollution Control, Champion
International Corp. Project 6.900 08/01/2022 2,400,000 2,499,960
Florida Housing Finance Agency, Home Ownership Mortgage 7.500 09/01/2014 180,000 191,196
Florida State Board of Education Capital Outlay Refunding,
Public Education, Series D 4.750 06/01/2016 2,000,000 1,751,420
Florida State Board of Education Capital Outlay Refunding,
Public Education, Series E 5.000 06/01/2020 2,000,000 1,781,120
Florida State Department of Transportation, Turnpike
Revenue Bonds, Series 1991A (AMBAC) 7.125 07/01/2018 125,000 141,830
Florida State Transportation, Jacksonville Transportation
Authority 9.000 01/01/2000 1,000,000 1,101,100
Gainesville, Florida, Utilities System Revenue, Series B 7.500 10/01/2008 3,435,000 4,131,584
Gainesville, Florida, Utilities System Revenue, Series B 7.500 10/01/2009 3,695,000 4,446,378
Hillsborough County, Florida, Capital Improvement Program
Revenue, County Center Project, Series B (MBIA) 5.000 07/01/2017 2,000,000 1,823,620
<PAGE>
Page 17
- ----------------------------------
Keystone Florida Tax Free Fund
Hollywood, Florida, Water and Sewer System Revenue (FGIC) 6.875% 10/01/2021 $ 535,000 $ 603,223
Huron Valley, Michigan, School District Capital
Appreciation (effective yield 6.651%) (MBIA)(b) 0.000 05/01/2019 2,925,000 724,025
Indian River County, Florida, Water and Sewer Systems
Revenue (FGIC) 6.500 05/01/2016 400,000 441,356
Jacksonville, Florida, Health Facilities Authority, St.
Luke's Hospital Association 7.125 11/15/2020 3,000,000 3,209,040
Jacksonville, Florida, Hospital Authority, Baptist Medical
Center Project, Series A (MBIA) 7.300 06/01/2019 350,000 378,367
Lee County, Florida, School Board, Certificates of
Participation, Series A (FSA) 7.750 08/01/2004 1,000,000 1,168,120
Lee County, Florida, School Board, Certificates of
Participation, Series A (FSA) 7.750 08/01/2005 1,500,000 1,752,180
Miami, Florida, Health Facilities Authority, Health
Facilities Revenue, Mercy Hospital, Series A (AMBAC) 6.750 08/01/2020 350,000 391,545
Miami, Florida, Special Obligation Revenue (FGIC) 6.000 02/01/2016 1,000,000 1,020,510
Miramar, Florida, Wastewater Improvement Assessment Revenue
(FGIC) 6.750 10/01/2016 1,000,000 1,087,720
New York, New York, General Obligation, Series F 5.750 02/01/2015 3,000,000 2,796,720
New York State Urban Development Corp. Revenue, State
Facilities 5.700 04/01/2020 5,000,000 4,737,150
North Springs Improvement District, Florida, Water and
Sewer Revenue, Series B (MBIA) 6.500 12/01/2016 1,335,000 1,453,361
Okaloosa County, Florida, Gas District, Refunding and
Improvement (MBIA) 6.850 10/01/2014 2,550,000 2,866,302
Orange County, Florida, Health Facilities Authority,
Hospital Revenue, Adventist Health (AMBAC) 5.250 11/15/2020 2,000,000 1,834,460
Orange County, Florida, Housing Finance Authority, GNMA
Collateralized Mortgage, Series B (AMT) 8.100 11/01/2021 2,260,000 2,352,841
Orlando, Florida, Utilities Commission, Water and Electric 6.000 10/01/2010 4,000,000 4,212,600
Orlando-Orange County, Florida, Expressway Authority (FGIC) 8.250 07/01/2015 40,000 52,058
Palm Beach County, Florida, General Obligation 6.500 07/01/2010 1,880,000 2,074,824
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project (AMT) 6.700 02/15/2015 2,000,000 2,007,680
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project (AMT) 6.850 02/15/2021 3,000,000 3,011,370
Palm Beach County, Florida, Solid Waste Industrial
Development, Osceola Power Project (AMT) 6.850 01/01/2014 3,500,000 3,554,635
Palm Beach County, Florida, Solid Waste Industrial
Development, Osceola Power Project (AMT) 6.950 01/01/2022 2,000,000 2,023,400
Puerto Rico Electric Power Authority 7.000 07/01/2011 200,000 226,778
San Antonio, Texas, Electric & Gas Revenue, Capital
Appreciation, Series B (FGIC) (effective yield 7.098%)
(b) 0.000 02/01/2009 2,500,000 1,220,175
(Continued on next page)
<PAGE>
Page 18
- ----------------------------------
Keystone Florida Tax Free Fund
MUNICIPAL BONDS (continued)
Tallahassee, Florida, Health Facilities, Tallahassee
Memorial Regional Medical Project (MBIA) 6.625% 12/01/2013 $2,000,000 $ 2,192,120
Tampa, Florida, Capital Improvement Program Revenue, Series B 8.375 10/01/2018 1,250,000 1,325,238
Tampa, Florida, Subordinate Guaranteed Entitlement Revenue,
Series B (ETM) 8.500 10/01/2018 45,000 49,481
Tampa, Florida, Sports Authority Revenue, Tampa Bay Arena
(MBIA) 5.750 10/01/2020 1,000,000 1,008,010
Texas Municipal Power Agency Revenue, Capital Appreciation
(MBIA) (effective yield 6.149%) (b) 0.000 09/01/2017 3,000,000 835,290
University of Puerto Rico, University Revenues, Series M
(MBIA) 5.250 06/01/2025 2,000,000 1,848,740
West Melbourne, Florida, Water and Sewer Revenue (FGIC) 6.750 10/01/2014 1,000,000 1,115,150
- ----------------------------------------------------------- ------- ------- ------- --------
TOTAL MUNICIPAL BONDS (Cost--$98,723,553) 101,228,310
=========================================================== ======= ======= ======= ========
TEMPORARY TAX-EXEMPT INVESTMENTS (0.5%)
Dade County, Florida, Water and Sewer System Revenue Bond,
Series 1994 (Cost--$490,000) (a) 3.300 10/05/2022 490,000 490,000
- ----------------------------------------------------------- ------- ------- ------- --------
TOTAL INVESTMENTS (Cost--$99,213,553) (c) 101,718,310
OTHER ASSETS AND LIABILITIES--NET (1.7%) 1,795,674
- ----------------------------------------------------------- ------- ------- ------- --------
NET ASSETS (100.0%) $103,513,984
=========================================================== ======= ======= ======= ========
</TABLE>
(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 annual basis until maturity.
(c) The cost of investments for federal income tax purposes amounted to
$99,588,715. Gross unrealized appreciation and unrealized depreciation of
investments, based on identified tax cost, at March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $ 3,654,683
Gross unrealized depreciation (1,525,088)
------------------------------- ------------
Net unrealized appreciation $ 2,129,595
================================ ============
</TABLE>
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corporation
AMT--Subject to Alternative Minimum Tax
ETM -- Escrowed to Maturity
FGIC--Federal Guaranty Insurance Company
FSA--Financial Security Assistance
MBIA--Municipal Bond Investors Assurance
See Notes to Financial Statements.
<PAGE>
Page 19
- ----------------------------------
Keystone Massachusetts Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.1%)
Franklin, Massachusetts, School Improvements (MBIA) 5.250% 11/15/2013 $ 500,000 $ 481,445
Lawrence, Massachusetts, School Improvements (AMBAC) 6.250 02/15/2009 450,000 477,090
Massachusetts Bay Transportation Authority, General
Transportation, Series A 7.000 03/01/2011 750,000 857,393
Massachusetts Bay Transportation Authority, General
Transportation, Series A 6.250 03/01/2012 400,000 425,248
Massachusetts Educational Financing Loan Authority (AMBAC) 6.000 01/01/2012 300,000 296,805
Massachusetts Municipal Wholesale Electric, Power Supply
Systems, Series B 6.750 07/01/2008 460,000 493,189
Massachusetts State Health and Educational Facilities
Authority, Capital Asset Project, Series F (MBIA) 7.300 10/01/2018 475,000 519,740
Massachusetts State Health and Educational Facilities
Authority, Cape Islands Rehabilitation Hospital, Series A 7.875 08/15/2024 500,000 506,630
Massachusetts State Health and Educational Facilities
Authority, Children's Hospital, Series E 6.200 10/01/2016 240,000 243,194
Massachusetts State Health and Educational Facilities
Authority, Dana Farber Cancer Project, Series G-1 6.250 12/01/2022 500,000 500,335
Massachusetts State Health and Educational Facilities
Authority, McLean Hospital, Series C (FGIC) 6.500 07/01/2010 550,000 594,259
Massachusetts State Health and Educational Facilities
Authority, New England Deaconess Hospital 6.875 04/01/2022 500,000 515,005
Massachusetts State Housing Finance Agency, Series A
(AMBAC) 6.600 07/01/2014 300,000 310,977
Massachusetts State Industrial Finance Agency, Harvard
Community Health Plan, Inc., Series B 8.125 10/01/2017 525,000 562,832
Massachusetts State Industrial Finance Agency, Solid Waste
Disposal, Molten Metal Technology Project 8.250 08/01/2014 250,000 260,815
Massachusetts State Industrial Finance Agency, Solid Waste
Disposal, Senior Lien, Massachusetts Recycling Associates 9.000 08/01/2016 1,000,000 983,530
Massachusetts State Water Pollution, Series 2 6.125 02/01/2008 525,000 568,076
Massachusetts State Water Pollution, Massachusetts Water
Resources Authority Loan, Series A 5.300 08/01/2010 1,000,000 971,000
Massachusetts State Water Resources Authority, Series B
(MBIA) 6.250 12/01/2013 600,000 635,568
North Adams, Massachusetts, School Improvement (AMBAC) 5.700 03/01/2013 600,000 593,328
University of Massachusetts, Building Authority, Series A
(MBIA) 5.500 05/01/2015 250,000 239,104
- ----------------------------------------------------------- ------- ------- ------- --------
TOTAL MUNICIPAL BONDS (Cost--$10,988,639) 11,035,563
============================================================ ======= ======= ======= ========
TEMPORARY TAX-EXEMPT INVESTMENTS (1.6%)
Massachusetts State Health and Educational Facilities
Authority, (Capital Assets Program), Series D (MBIA)
(Cost--$180,000) (a) 3.750 01/01/2035 180,000 180,000
- ----------------------------------------------------------- ------- ------- ------- --------
</TABLE>
(continued on next page)
<PAGE>
Page 20
- ----------------------------------
Keystone Massachusetts Tax Free Fund
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS--March 31, 1996
Market
Value
- --------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
TOTAL INVESTMENTS (Cost--$11,168,639) b) $11,215,563
OTHER ASSETS AND LIABILITIES--NET (1.3%) 147,758
- --------------------------------------- -------- -------- -------- ----------
NET ASSETS (100.0%) $11,363,321
======================================= ======== ======== ======== ============
</TABLE>
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) The cost of investments for federal income tax purposes amounted to
$11,168,639. Gross unrealized appreciation and unrealized depreciation of
investments, based on identified tax cost, at March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $ 165,408
Gross unrealized depreciation (118,484)
- ------------------------------- ---------
Net unrealized appreciation $ 46,924
=============================== =========
</TABLE>
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corporation
FGIC--Federal Guaranty Insurance Company
MBIA--Municipal Bond Investors Assurance
See Notes to Financial Statements.
<PAGE>
Page 21
- ----------------------------------
Keystone New York Insured Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ----------------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (96.7%)
Buffalo, New York, Series E (AMBAC) 6.500% 12/01/2022 $ 465,000 $ 502,879
Erie County, New York, Water Authority, Fourth Resolution
(AMBAC) (effective yield 6.824%) (b) 0.000 12/01/2017 770,000 162,901
Hempstead Town, New York, General Obligation, Series B
(FGIC) 5.625 02/01/2015 550,000 540,727
Metropolitan Transportation Authority, New York, Commuter
Facilities, Series A (MBIA) 6.125 07/01/2014 1,400,000 1,439,410
Nassau County, New York, Combined Sewer District, Series B
(FGIC) 6.000 05/01/2014 695,000 711,805
New Rochelle, New York, General Obligation, Series B (MBIA) 6.150 08/15/2017 600,000 625,098
New York City, New York, General Obligation, Series D
(MBIA) 6.000 08/01/2006 285,000 292,034
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System, Series A (FGIC) 7.000 06/15/2015 705,000 767,683
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System, Series A (FGIC) 7.000 06/15/2015 695,000 757,724
New York Resources Recovery Agency, Electric Light and
Power Improvements, Series B (AMBAC) 7.250 07/01/2011 100,000 117,985
New York State Dormitory Authority, City University Systems
(FGIC) 7.000 07/01/2009 1,200,000 1,398,012
New York State Dormitory Authority, City University, 3rd
General Resources, Series 2 (MBIA) 6.250 07/01/2019 450,000 460,733
New York State Dormitory Authority, Fordham University
(FGIC) 5.750 07/01/2015 500,000 497,020
New York State Dormitory Authority, Mount Sinai Medical
School, Series A (MBIA) 5.000 07/01/2021 125,000 112,425
New York State Dormitory Authority, State University
Educational Facilities (AMBAC) 5.875 05/15/2011 250,000 259,418
New York State Dormitory Authority, State University
Educational Facilities, Series A (FSA) 5.250 05/15/2015 600,000 567,348
New York State Dormitory Authority, University of Rochester
Strong Memorial (MBIA) 5.500 07/01/2021 200,000 190,554
New York State Energy Research and Development, Brooklyn
Union Gas Co Project, Series A (MBIA) 5.500 01/01/2021 500,000 478,480
New York State Energy Research and Development,
Consolidated Edison (AMBAC) 6.100 08/15/2020 500,000 505,830
New York State Housing Finance Agency, Multi-family
Mortgage, Series B (AMBAC) 6.250 08/15/2014 875,000 882,035
New York State Medical Care Facilities Finance Agency,
Mental Health Services Facilities 6.375 11/15/2019 250,000 251,085
New York State Medical Care Facilities Finance Agency,
Mental Health Services Facilities (FGIC) 6.375 08/15/2014 1,000,000 1,035,890
New York State Medical Care Facilities Finance Agency,
Mental Health Services Facilities, Series C (MBIA) 6.000 08/15/2015 500,000 507,310
New York State Urban Development Corp., Correctional
Capital Facilities, Series A 6.500 01/01/2009 600,000 621,090
New York State Urban Development Corp., Correctional
Capital Facilities, Series A (FSA) 6.500 01/01/2010 1,000,000 1,098,040
(Continued on next page)
<PAGE>
Page 22
- ----------------------------------
Keystone New York Insured Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1996
Municipal Bonds (continued)
New York State Urban Development Corp., Correctional
Capital Facilities, Series 5 (MBIA) 5.500% 01/01/2025 $1,000,000 $ 947,560
New York State Urban Development, Series A (MBIA) 5.500 04/01/2016 500,000 482,325
Niagara Falls, New York, Public Improvement (MBIA) 7.500 03/01/2014 700,000 855,512
Niagara Falls, New York, Public Improvement (MBIA) 7.500 03/01/2016 750,000 916,770
Niagara Falls, New York, Public Improvement (MBIA) 7.500 03/01/2017 750,000 915,990
Niagara, New York, Frontier Transportation Authority,
Greater Buffalo International Airport (AMBAC) 6.125 04/01/2014 100,000 101,782
Port Authority of New York and New Jersey 6.125 06/01/2014 500,000 513,290
Puerto Rico, Electric Power Authority 6.500 07/01/2006 900,000 1,014,111
Rochester, New York, General Obligation, Series A (AMBAC) 5.000 08/15/2018 140,000 129,002
Suffolk County, New York, Industrial Development Agency,
Southwest Sewer Systems (FGIC) 6.000 02/01/2008 1,000,000 1,069,260
Triborough Bridge and Tunnel Authority, New York, General
Purpose, Series X 6.625 01/01/2012 805,000 891,270
- ----------------------------------------------------------- ------- ------- ------- --------
TOTAL MUNICIPAL BONDS (Cost--$21,907,721) 22,620,388
=========================================================== ======= ======= ======= ========
TEMPORARY TAX-EXEMPT INVESTMENTS (2.3%)
New York City, New York, Municipal Water Finance Authority,
Series C (FGIC) (a) 3.800 06/15/2022 200,000 200,000
New York City, New York, Sub Series A-5 (a) 3.800 08/01/2015 335,000 335,000
- ----------------------------------------------------------- ------- ------- ------- --------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS
(Cost--$535,000) 535,000
=========================================================== ======= ======= ======= ========
TOTAL INVESTMENTS (Cost--$22,442,721) (c) 23,155,388
OTHER ASSETS AND LIABILITIES--NET (1.0%) 239,132
- ----------------------------------------------------------- ------- ------- ------- --------
NET ASSETS (100.0%) $23,394,520
=========================================================== ======= ======= ======= ========
</TABLE>
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an accrual basis until maturity.
(c) The cost of investments for federal income tax purposes amounted to
$22,462,470. Gross unrealized appreciation and unrealized depreciation of
investments, based on identified tax cost, at March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized
appreciation $ 824,037
Gross unrealized
depreciation (131,119)
- ---------------------------- --------
Net unrealized appreciation $ 692,918
============================ ========
</TABLE>
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Indemnity Corporation
FGIC--Federal Guaranty Insurance Company
FSA--Financial Security Assistance
MBIA--Municipal Bond Investors Assurance
See Notes to Financial Statements.
<PAGE>
Page 23
- ----------------------------------
Keystone Pennsylvania Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ----------------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.7%)
Allegheny County, Pennsylvania, Airport Revenue, Greater
Pittsburgh International Airport 6.625% 01/01/2022 $ 750,000 $ 778,133
Allegheny County, Pennsylvania, Finance Authority, Single
Family Mortgage 6.600 11/01/2014 1,000,000 1,031,260
Allegheny County, Pennsylvania, Higher Education Building
Authority, Duquesne University Project (AMBAC) 5.000 03/01/2016 2,000,000 1,820,900
Allegheny County, Pennsylvania, Hospital Development,
University of Pittsburgh Medical Center (MBIA) 5.350 12/01/2015 2,000,000 1,879,180
Allegheny County, Pennsylvania, Industrial Development
Authority, USX Corp. 6.700 12/01/2020 2,000,000 2,040,580
Allentown, Pennsylvania Area Hospital Authority, Sacred
Heart Hospital of Allentown, Series A 6.750 11/15/2014 1,750,000 1,727,180
Beaver County, Pennsylvania, Industrial Development
Authority, Pollution Control, Ohio Edison Co. Project,
Series A 7.750 09/01/2024 1,170,000 1,238,702
Berks County, Pennsylvania, Capital Appreciation Second
Series (FGIC) (effective yield 5.550%) (b) 0.000 05/15/2015 3,400,000 1,104,150
Berks County, Pennsylvania, Capital Appreciation Second
Series (FGIC) (effective yield 5.600%) (b) 0.000 05/15/2016 3,460,000 1,049,037
Berks County, Pennsylvania, Capital Appreciation Second
Series (FGIC) (effective yield 5.600%) (b) 0.000 05/15/2018 2,800,000 745,808
Cambria County, Pennsylvania, General Obligation, Series A
(FGIC) 6.625 08/15/2012 4,485,000 4,802,000
Central Bucks, Pennsylvania School District, Series A 6.900 11/15/2013 1,000,000 1,127,890
Delaware County, Pennsylvania, Industrial Development
Authority, Pollution Control, Philadelphia Electric Co.,
Series A 7.375 04/01/2021 850,000 906,899
Erie County, Pennsylvania, Industrial Development
Authority, Environmental Improvement, International Paper
Co. Project, Series A 7.625 11/01/2018 500,000 556,810
Greencastle Antrim, Pennsylvania, School District, Capital
Appreciation, Series B (MBIA) (effective yield 5.848%)
(b) 0.000 01/01/2014 1,025,000 354,681
Greencastle Antrim, Pennsylvania, School District, Capital
Appreciation, Series B (MBIA) (effective yield 5.898%)
(b) 0.000 01/01/2015 1,000,000 325,930
Greencastle Antrim, Pennsylvania, School District, Capital
Appreciation, Series B (MBIA) (effective yield 5.898%)
(b) 0.000 01/01/2016 1,955,000 600,185
Hazleton, Pennsylvania, Area School District, Compound
Interest, Series B (effective yield 6.300%) (b) 0.000 03/01/2018 5,265,000 1,410,651
Lehigh County, Pennsylvania, General Purpose Authority,
Good Shepherd Rehabilitation Hospital 7.500 11/15/2021 1,000,000 1,041,480
Lehigh County, Pennsylvania, General Purpose Authority,
Lehigh Valley Hospital, Series A (MBIA) 7.000 07/01/2016 1,250,000 1,422,375
Mon Valley, Pennsylvania, Sewage Revenue (MBIA) 6.550 11/01/2019 1,305,000 1,390,478
Monroeville, Pennsylvania, Hospital Authority, Forbes
Health System 6.250 10/01/2015 1,000,000 966,860
(Continued on next page)
<PAGE>
Page 24
- ----------------------------------
Keystone Pennsylvania Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1996
MUNICIPAL BONDS (CONTINUED)
Montgomery County, Pennsylvania, Higher Education and
Health Authority, Northwestern Corp. 7.000% 06/01/2012 $ 700,000 $ 694,806
Montgomery County, Pennsylvania, Higher Education and
Health Authority, Waverly Heights Project 6.250 01/01/2018 1,000,000 946,230
Montgomery County, Pennsylvania, Industrial Development,
Pollution Control, Philadelphia Electric Co. 7.600 04/01/2021 950,000 1,013,774
Northumberland County, Pennsylvania, Commonwealth Lease
(effective yield 6.820%) (b) 0.000 10/15/2012 4,200,000 1,647,828
Pennsylvania Economic Development Financing Authority,
Northhampton Generator Project, Series A (c) 6.600 01/01/2019 2,450,000 2,348,913
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project, Series D (c) 7.125 12/01/2015 1,200,000 1,256,712
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project, Series D (c) 7.150 12/01/2018 3,000,000 3,135,720
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northhampton University Project (c) 6.500 01/01/2013 2,200,000 2,120,294
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series 33 6.900 04/01/2017 1,000,000 1,033,460
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series 34 A (FHA/FNMA) 6.850 04/01/2016 1,500,000 1,545,525
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series 40 6.800 10/01/2015 750,000 773,933
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series 47 5.700 10/01/2016 1,500,000 1,445,280
Pennsylvania State Industrial Development Authority,
Economic Development (AMBAC) 7.000 01/01/2006 1,500,000 1,699,875
Pennsylvania Intragovernmental Cooperation Authority,
Special Tax, City of Philadelphia Funding Program 6.800 06/15/2022 2,500,000 2,772,200
Pennsylvania Intragovernmental Cooperation Authority,
Special Tax, Philadelphia Funding Program (FGIC) 6.750 06/15/2021 1,000,000 1,091,720
Pennsylvania State Industrial Development Authority,
Economic Revenue Bonds 7.000 07/01/2006 1,000,000 1,138,490
Pennsylvania State Higher Educational Facilities Authority,
Thomas Jefferson University, Series A 6.625 08/15/2009 1,450,000 1,587,054
Philadelphia, Pennsylvania, Hospital & Higher Education
Facilities, Albert Einstein Medical Center 7.625 04/01/2011 1,150,000 1,223,370
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Albert Einstein Medical Center 7.000 10/01/2021 945,000 985,106
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Graduate Health Systems Education Facilities,
Series A 7.250 07/01/2018 1,225,000 1,256,875
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Temple University, Series A 6.625 11/15/2023 2,300,000 2,354,004
(Continued on next page)
<PAGE>
Page 25
- ----------------------------------
Keystone Pennsylvania Tax Free Fund
MUNICIPAL BONDS (CONTINUED)
Philadelphia, Pennsylvania, Water & Waste Water (MBIA) 6.250% 08/01/2012 $1,000,000 $ 1,065,400
Philadelphia, Pennsylvania, Water & Waste Water (MBIA) 5.500 08/01/2014 1,500,000 1,436,175
Puerto Rico Highway Authority, Series Q 7.750 07/01/2010 325,000 372,788
Puerto Rico Commonwealth, Linked Bond Payment Obligation
(MBIA) 7.000 07/01/2010 5,500,000 6,301,130
Robinson, Pennsylvania, Municipal Water & Sewer, Capital
Appreciation, Series A (FGIC) (effective yield 5.800%) (b) 0.000 05/15/2012 1,880,000 738,765
Robinson, Pennsylvania, Municipal Water & Sewer, Capital
Appreciation, Series A (FGIC) (effective yield 5.850%) (b) 0.000 05/15/2013 1,880,000 691,370
Robinson, Pennsylvania, Municipal Water & Sewer, Capital
Appreciation, Series A (FGIC) (effective yield 5.930%) (b) 0.000 05/15/2016 1,710,000 522,542
Scranton-Lackawanna, Pennsylvania, Health and Welfare
Authority, Allied Services Rehabilitation Facility 7.600 07/15/2020 1,000,000 1,008,760
Westmoreland County, Pennsylvania, Municipal Authority
Capital Appreciation, Series A (FGIC) (effective yield
6.150%) (b) 0.000 08/15/2019 2,000,000 494,280
Westmoreland County, Pennsylvania, Series G (FGIC)
(effective yield 5.599%) (b) 0.000 06/01/2013 3,715,000 1,360,393
- ----------------------------------------------------------- ------- ------- ------- --------
TOTAL MUNICIPAL BONDS (Cost--$72,157,229) 74,383,941
=========================================================== ======= ======= ======= ========
TEMPORARY TAX-EXEMPT INVESTMENTS (1.1%)
Sayre County, Pennsylvania Health Care Facilities
Authority, Variable Rate (VHA Pennsylvania Capital
Financing Project) Series F (a) 3.250 12/01/2020 10,000 10,000
Sayre County, Pennsylvania Health Care Facilities
Authority, Variable Rate (VHA Pennsylvania Capital
Financing Project) Series I (a) 3.250 12/01/2020 700,000 700,000
Sayre County, Pennsylvania Health Care Facilities
Authority, Variable Rate (VHA Pennsylvania Capital
Financing Project) Series K (a) 3.250 12/01/2020 110,000 110,000
- ----------------------------------------------------------- ------- ------- ------- --------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (Cost--$820,000) 820,000
=========================================================== ======= ======= ======= ========
TOTAL INVESTMENTS (Cost--$72,977,229) (d) 75,203,941
OTHER ASSETS AND LIABILITIES--NET (1.2%) 900,129
- ----------------------------------------------------------- ------- ------- ------- --------
NET ASSETS (100.0%) $76,104,070
=========================================================== ======= ======= ======= ========
</TABLE>
(Continued on next page)
<PAGE>
Page 26
- ----------------------------------
Keystone Pennsylvania Tax Free Fund
SCHEDULE OF INVESTMENTS--March 31, 1996
(a) Variable or floating rate instruments with periodic demand features. The
fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at date of purchase) is the yield at which the
bond accretes on an annual basis until maturity date.
(c) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
(d) The cost of investments for federal income tax purposes amount to
$72,977,229. Gross unrealized appreciation and unrealized depreciation of
investments, based on identified tax cost, at March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $2,800,897
Gross unrealized depreciation (574,185)
- ------------------------------- ----------
Net unrealized appreciation $2,226,712
=============================== ==========
</TABLE>
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--AMBAC Idemnity Corporation
FGIC--Federal Guaranty Insurance Company
FHA--Federal Housing Authority
FNMA--Federal National Mortgage Association
MBIA-- Municipal Bond Investors Assurance
See Notes to Financial Statements.
<PAGE>
Page 27
- ----------------------------------
Keystone Florida Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
December 28, 1990
(Commencement of
Year Ended March 31, Operations) to
March 31,
1996 1995 1994 1993 1992 1991
- ----------------------------------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 10.33 $ 10.29 $ 10.94 $ 10.43 $ 10.17 $10.00
- ----------------------------------- ------- ------- ------- ------- ------- --------
Income from investment operations:
Net investment income 0.56 0.56 0.58 0.61 0.72 0.18
Net realized and unrealized gain
(loss) on investments and closed
futures contracts 0.27 0.07 (0.44) 0.64 0.30 0.17
- ----------------------------------- ------- ------- ------- ------- ------- --------
Total from investment operations 0.83 0.63 0.14 1.25 1.02 0.35
- ----------------------------------- ------- ------- ------- ------- ------- --------
Less distributions from:
Net investment income (0.54) (0.56) (0.58) (0.61) (0.72) (0.18)
In excess of net investment income (0.02) (0.03) (0.05) (0.03) 0 0
Net realized gain on investments 0 0 (0.16) (0.10) (0.04) 0
- ----------------------------------- ------- ------- ------- ------- ------- --------
Total distributions (0.56) (0.59) (0.79) (0.74) (0.76) (0.18)
- ----------------------------------- ------- ------- ------- ------- ------- --------
Net asset value end of year $ 10.60 $ 10.33 $ 10.29 $ 10.94 $ 10.43 $10.17
================================== ====== ======= ======= ======= ======= ========
Total return (c) 8.16% 6.42% 1.01% 12.32% 10.34% 3.52%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.76%(b) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Total expenses excluding
reimbursement 0.92% 0.95% 1.00% 1.13% 1.21% 2.06%(a)
Net investment income 5.32% 5.60% 5.16% 5.60% 6.82% 6.33%(a)
Portfolio turnover rate 89% 129% 113% 95% 63% 5%
- ----------------------------------- ------- ------- ------- ------- ------- --------
Net assets end of year (thousands) $37,286 $42,239 $45,150 $42,997 $29,258 $6,922
================================== ====== ======= ======= ======= ======= ========
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 0.75%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 28
- ----------------------------------
Keystone Florida Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1,
1993
(Date of
Year Ended March 31, Initial
Public
Offering) to
March 31,
1996 1995 1994 1993
- -------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 10.24 $ 10.27 $ 10.94 $10.81
- -------------------------------------------- --------- --------- --------- -----------
Income from investment operations:
Net investment income 0.48 0.53 0.52 0.08
Net realized and unrealized gain (loss) on
investments and closed futures contracts 0.28 0.02 (0.47) 0.14
- -------------------------------------------- --------- --------- --------- -----------
Total from investment operations 0.76 0.55 0.05 0.22
- -------------------------------------------- --------- --------- --------- -----------
Less distributions from:
Net investment income (0.50) (0.49) (0.48) (0.08)
In excess of net investment income (0.02) (0.09) (0.08) (0.01)
Net realized gain on investments 0 0 (0.16) 0
- -------------------------------------------- --------- --------- --------- -----------
Total distributions (0.52) (0.58) (0.72) (0.09)
- -------------------------------------------- --------- --------- --------- -----------
Net asset value end of year $ 10.48 $ 10.24 $ 10.27 $10.94
============================================ ========= ========= ========= ===========
Total return (c) 7.48% 5.61% 0.19% 2.06%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.48%(b) 1.50% 1.50% 1.50%(a)
Total expenses excluding reimbursement 1.68% 1.68% 1.74% 1.73%(a)
Net investment income 4.58% 4.81% 4.21% 4.00%(a)
Portfolio turnover rate 89% 129% 113% 95%
- -------------------------------------------- --------- --------- --------- -----------
Net assets end of year (thousands) $54,433 $51,083 $19,984 $1,704
============================================ ========= ========= ========= ===========
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.47%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 29
- ----------------------------------
Keystone Florida Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1993
(Date of Initial
Year Ended March 31, Public Offering)
to
1996 1995 1994 March 31, 1993
- -------------------------------------------------------- ------- ------ ------ ----------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 10.26 $ 10.28 $ 10.93 $10.81
- -------------------------------------------------------- ----- ---- ---- --------------
Income from investment operations:
Net investment income 0.48 0.47 0.51 0.07
Net realized and unrealized gain (loss) on investments
and closed futures contracts 0.28 0.08 (0.45) 0.14
- -------------------------------------------------------- ----- ---- ---- --------------
Total from investment operations 0.76 0.55 0.06 0.21
- -------------------------------------------------------- ----- ---- ---- --------------
Less distributions from:
Net investment income (0.50) (0.49) (0.49) (0.07)
In excess of net investment income (0.02) (0.08) (0.06) (0.02)
Net realized gain on investments 0 0 (0.16) 0
- -------------------------------------------------------- ----- ---- ---- --------------
Total distributions (0.52) (0.57) (0.71) (0.09)
- -------------------------------------------------------- ----- ---- ---- --------------
Net asset value end of year $ 10.50 $ 10.26 $ 10.28 $10.93
======================================================== ===== ===== ===== ==============
Total return (c) 7.47% 5.61% 0.27% 1.95%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.48%(b) 1.50% 1.50% 1.50%(a)
Total expenses excluding reimbursement 1.68% 1.70% 1.84% 1.63%(a)
Net investment income 4.60% 4.86% 4.26% 2.95%(a)
Portfolio turnover rate 89% 129% 113% 95%
- -------------------------------------------------------- ----- ---- ---- --------------
Net assets end of year (thousands) $11,795 $12,831 $13,096 $1,987
======================================================== ===== ===== ===== ==============
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.47%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 30
- ----------------------------------
Keystone Massachusetts Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 4,
1994
(Commencement
Year Ended March 31, of
Operations)
to
March 31,
1996 1995 1994
- -------------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
Net asset value beginning of year $ 9.19 $ 9.17 $10.00
- -------------------------------------------------------- --------- --------- -----------
Income from investment operations:
Net investment income 0.51 0.53 0.08
Net realized and unrealized gain (loss) on investments
and closed futures contracts 0.09 0.02 (0.82)
- -------------------------------------------------------- --------- --------- -----------
Total from investment operations 0.60 0.55 (0.74)
- -------------------------------------------------------- --------- --------- -----------
Less distributions from:
Net investment income (0.48) (0.53) (0.08)
In excess of net investment income (0.02) 0 (0.01)
- -------------------------------------------------------- --------- --------- -----------
Total distributions (0.50) (0.53) (0.09)
- -------------------------------------------------------- --------- --------- -----------
Net asset value end of year $ 9.29 $ 9.19 $ 9.17
======================================================== ========= ========= ===========
Total return (c) 6.64% 6.23% (7.40%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.75%(b) 0.46% 0.35%(a)
Total expenses excluding reimbursement 1.59% 1.93% 3.22%(a)
Net investment income 5.36% 5.90% 5.07%(a)
Portfolio turnover rate 165% 77% 7%
- -------------------------------------------------------- --------- --------- -----------
Net assets end of year (thousands) $1,786 $1,974 $1,472
======================================================== ========= ========= ===========
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 0.74%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 31
- ----------------------------------
Keystone Massachusetts Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement of
Year Ended March 31, Operations)
to
March 31,
1996 1995 1994
- -------------------------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
Net asset value beginning of year $ 9.15 $ 9.19 $10.00
- -------------------------------------------------------- -------- -------- ----------
Income from investment operations:
Net investment income 0.43 0.48 0.08
Net realized and unrealized gain (loss) on investments
and closed futures contracts 0.09 (0.01) (0.80)
- -------------------------------------------------------- -------- -------- ----------
Total from investment operations 0.52 0.47 (0.72)
- -------------------------------------------------------- -------- -------- ----------
Less distributions from:
Net investment income (0.43) (0.47) (0.07)
In excess of net investment income (0.02) (0.04) (0.02)
- -------------------------------------------------------- -------- -------- ----------
Total distributions (0.45) (0.51) (0.09)
- -------------------------------------------------------- -------- -------- ----------
Net asset value end of year $ 9.22 $ 9.15 $ 9.19
======================================================== ======== ======== ==========
Total return (c) 5.77% 5.41% (7.20%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.49%(b) 1.24% 1.10%(a)
Total expenses excluding reimbursement 2.38% 2.68% 4.60%(a)
Net investment income 4.60% 5.15% 3.23%(a)
Portfolio turnover rate 165% 77% 7%
- -------------------------------------------------------- -------- -------- ----------
Net assets end of year (thousands) $7,274 $6,169 $1,817
======================================================== ======== ======== ==========
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.48%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 32
- ----------------------------------
Keystone Massachusetts Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement of
Year Ended March 31, Operations)
to
March 31,
1996 1995 1994
- -------------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
Net asset value beginning of year $ 9.14 $ 9.19 $10.00
- -------------------------------------------------------- --------- --------- -----------
Income from investment operations:
Net investment income 0.43 0.48 0.08
Net realized and unrealized gain (loss) on investments
and closed futures contracts 0.10 (0.02) (0.80)
- -------------------------------------------------------- --------- --------- -----------
Total from investment operations 0.53 0.46 (0.72)
- -------------------------------------------------------- --------- --------- -----------
Less distributions from:
Net investment income (0.43) (0.47) (0.07)
In excess of net investment income (0.02) (0.04) (0.02)
- -------------------------------------------------------- --------- --------- -----------
Total distributions (0.45) (0.51) (0.09)
- -------------------------------------------------------- --------- --------- -----------
Net asset value end of year $ 9.22 $ 9.14 $ 9.19
======================================================== ========= ========= ===========
Total return (c) 5.89% 5.20% (7.21%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.49%(b) 1.23% 1.10% (a)
Total expenses excluding reimbursement 2.39% 2.68% 4.91% (a)
Net investment income 4.60% 5.11% 4.28% (a)
Portfolio turnover rate 165% 77% 7%
- -------------------------------------------------------- --------- --------- -----------
Net assets end of year (thousands) $2,303 $1,971 $ 369
======================================================== ========= ========= ===========
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.48%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 33
- ----------------------------------
Keystone New York Insured Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement of
Year Ended March 31, Operations) to
March 31,
1996 1995 1994
- -------------------------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
Net asset value beginning of year $ 9.44 $ 9.32 $10.00
- -------------------------------------------------------- -------- -------- ----------
Income from investment operations:
Net investment income 0.48 0.52 0.09
Net realized and unrealized gain (loss) on investments
and closed futures contracts 0.24 0.12 (0.68)
- -------------------------------------------------------- -------- -------- ----------
Total from investment operations 0.72 0.64 (0.59)
- -------------------------------------------------------- -------- -------- ----------
Less distributions from:
Net investment income (0.47) (0.52) (0.08)
In excess of net investment income (0.02) 0 (0.01)
- -------------------------------------------------------- -------- -------- ----------
Total distributions (0.49) (0.52) (0.09)
- -------------------------------------------------------- -------- -------- ----------
Net asset value end of year $ 9.67 $ 9.44 $ 9.32
======================================================== ======== ======== ==========
Total return (c) 7.73% 7.08% (5.91%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.75%(b) 0.50% 0.35%(a)
Total expenses excluding reimbursement 1.31% 1.59% 4.44%(a)
Net investment income 4.95% 5.48% 3.85%(a)
Portfolio turnover rate 53% 77% 14%
- -------------------------------------------------------- -------- -------- ----------
Net assets end of year (thousands) $3,947 $3,323 $ 680
======================================================== ======== ======== ==========
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 0.74%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 34
- ----------------------------------
Keystone New York Insured Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement of
Operations)
Year Ended March 31, to
March 31,
1996 1995 1994
- -------------------------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
Net asset value beginning of year $ 9.38 $ 9.32 $10.00
- -------------------------------------------------------- -------- -------- ----------
Income from investment operations:
Net investment income 0.41 0.47 0.08
Net realized and unrealized gain (loss) on investments
and closed futures contracts 0.24 0.09 (0.67)
- -------------------------------------------------------- -------- -------- ----------
Total from investment operations 0.65 0.56 (0.59)
- -------------------------------------------------------- -------- -------- ----------
Less distributions from:
Net investment income (0.42) (0.45) (0.06)
In excess of net investment income (0.02) (0.05) (0.03)
- -------------------------------------------------------- -------- -------- ----------
Total distributions (0.44) (0.50) (0.09)
- -------------------------------------------------------- -------- -------- ----------
Net asset value end of year $ 9.59 $ 9.38 $ 9.32
======================================================== ======== ======== ==========
Total return (c) 7.02% 6.28% (5.91%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.50%(b) 1.25% 1.10%(a)
Total expenses excluding reimbursement 2.05% 2.35% 5.60%(a)
Net investment income 4.19% 4.78% 3.01%(a)
Portfolio turnover rate 53% 77% 14%
- -------------------------------------------------------- -------- -------- ----------
Net assets end of year (thousands) $17,151 $11,907 $2,276
======================================================== ======== ======== ==========
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.49%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 35
- ----------------------------------
Keystone New York Insured Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 4, 1994
(Commencement of
Year Ended March 31, Operations) to
March 31,
1996 1995 1994
- -------------------------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
Net asset value beginning of year $ 9.37 $ 9.31 $10.00
- -------------------------------------------------------- -------- -------- ----------
Income from investment operations:
Net investment income 0.41 0.48 0.07
Net realized and unrealized gain (loss) on investments
and closed futures contracts 0.24 0.07 (0.67)
- -------------------------------------------------------- -------- -------- ----------
Total from investment operations 0.65 0.55 (0.60)
- -------------------------------------------------------- -------- -------- ----------
Less distributions from:
Net investment income (0.42) (0.46) (0.07)
In excess of net investment income (0.02) (0.03) (0.02)
- -------------------------------------------------------- -------- -------- ----------
Total distributions (0.44) (0.49) (0.09)
- -------------------------------------------------------- -------- -------- ----------
Net asset value end of year $ 9.58 $ 9.37 $ 9.31
======================================================== ======== ======== ==========
Total return (c) 7.02% 6.18% (6.02%)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.50%(b) 1.26% 1.10%(a)
Total expenses excluding reimbursement 2.07% 2.32% 5.13%(a)
Net investment income 4.24% 4.88% 3.71%(a)
Portfolio turnover rate 53% 77% 14%
- -------------------------------------------------------- -------- -------- ----------
Net assets end of year (thousands) $2,296 $2,890 $ 255
======================================================== ======== ======== ==========
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.48%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 36
- ----------------------------------
Keystone Pennsylvania Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
December
27, 1990
(Commencement
Year Ended March 31, of Operations)
to
March 31,
1996 1995 1994 1993 1992 1991
- ------------------------------------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 10.91 $ 11.01 $ 11.42 $ 10.71 $ 10.25 $10.00
- ------------------------------------- ------ ------ ------ ------ ------ -------
Income from investment operations:
Net investment income 0.60 0.61 0.62 0.63 0.74 0.18
Net realized and unrealized gain
(loss) on investments and closed
futures contracts 0.23 (0.09) (0.30) 0.75 0.46 0.25
- ------------------------------------- ------ ------ ------ ------ ------ -------
Total from investment operations 0.83 0.52 0.32 1.38 1.20 0.43
- ------------------------------------- ------ ------ ------ ------ ------ -------
Less distributions from:
Net investment income (0.57) (0.61) (0.62) (0.63) (0.74) (0.18)
In excess of net investment income (0.02) (0.01) (0.04) (0.02) 0 0
Net realized gain on investments 0 0 (0.06) (0.02) 0 0
In excess of net realized gain on
investments 0 0 (0.01) 0 0 0
- ------------------------------------- ------ ------ ------ ------ ------ -------
Total distributions (0.59) (0.62) (0.73) (0.67) (0.74) (0.18)
- ------------------------------------- ------ ------ ------ ------ ------ -------
Net asset value end of year $ 11.15 $ 10.91 $ 11.01 $ 11.42 $ 10.71 $10.25
===================================== ====== ====== ====== ====== ====== =======
Total return (c) 7.66% 4.91% 2.58% 13.30% 12.07% 4.37%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.76%(b) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Total expenses excluding
reimbursement 0.99% 1.05% 1.06% 1.16% 1.68% 3.19%(a)
Net investment income 5.29% 5.65% 5.27% 5.66% 6.92% 6.84%(a)
Portfolio turnover rate 55% 97% 37% 20% 13% 8%
- ------------------------------------- ------ ------ ------ ------ ------ -------
Net assets end of year (thousands) $28,710 $30,450 $30,560 $35,502 $12,914 $2,979
===================================== ====== ====== ====== ====== ====== =======
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 0.75%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 37
- ----------------------------------
Keystone Pennsylvania Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1,
1993
(Date of
Year Ended March 31, Initial
Public
Offering) to
March 31,
1996 1995 1994 1993
- -------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 10.81 $ 10.98 $ 11.42 $11.20
- -------------------------------------------- --------- --------- --------- -----------
Income from investment operations:
Net investment income 0.51 0.54 0.56 0.08
Net realized and unrealized gain (loss) on
investments and closed futures contracts 0.22 (0.10) (0.34) 0.24
- -------------------------------------------- --------- --------- --------- -----------
Total from investment operations 0.73 0.44 0.22 0.32
- -------------------------------------------- --------- --------- --------- -----------
Less distributions from:
Net investment income (0.52) (0.53) (0.52) (0.08)
In excess of net investment income (0.02) (0.08) (0.07) (0.02)
Net realized gain on investments 0 0 (0.03) 0
In excess of net realized gain on
investments 0 0 (0.04) 0
- -------------------------------------------- --------- --------- --------- -----------
Total distributions (0.54) (0.61) (0.66) (0.10)
- -------------------------------------------- --------- --------- --------- -----------
Net asset value end of year $ 11.00 $ 10.81 $ 10.98 $11.42
============================================= ========= ========= ========= ===========
Total return (c) 6.84% 4.15% 1.70% 2.82%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.48%(b) 1.50% 1.50% 1.50%(a)
Total expenses excluding reimbursement 1.74% 1.80% 1.81% 1.69%(a)
Net investment income 4.55% 4.89% 4.32% 3.44%(a)
Portfolio turnover rate 55% 97% 37% 20%
- -------------------------------------------- --------- --------- --------- -----------
Net assets end of year (thousands) $37,719 $30,657 $21,958 $2,543
============================================= ========= ========= ========= ===========
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.47%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 38
- ----------------------------------
Keystone Pennsylvania Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1,
1993
(Date of
Year Ended March 31, Initial
Public
Offering) to
March 31,
1996 1995 1994 1993
-------------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $10.83 $11.00 $11.42 $11.20
-------------------------------------------- -------- -------- -------- ----------
Income from investment operations:
Net investment income 0.51 0.53 0.54 0.07
Net realized and unrealized gain (loss) on
investments and closed futures contracts 0.23 (0.10) (0.32) 0.24
-------------------------------------------- -------- -------- -------- ----------
Total from investment operations 0.74 0.43 0.22 0.31
-------------------------------------------- -------- -------- -------- ----------
Less distributions from:
Net investment income (0.52) (0.53) (0.52) (0.07)
In excess of net investment income (0.02) (0.07) (0.05) (0.02)
Net realized gain on investments 0 0 (0.03) 0
In excess of net realized gain on
investments 0 0 (0.04) 0
-------------------------------------------- -------- -------- -------- ----------
Total distributions (0.54) (0.60) (0.64) (0.09)
-------------------------------------------- -------- -------- -------- ----------
Net asset value end of year $11.03 $10.83 $11.00 $11.42
============================================= ======== ======== ======== ==========
Total return (c) 6.92% 4.05% 1.78% 2.81%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.48%(b) 1.50% 1.50% 1.50%(a)
Total expenses excluding reimbursement 1.74% 1.80% 1.90% 1.60%(a)
Net investment income 4.57% 4.90% 4.33% 2.50%(a)
Portfolio turnover rate 55% 97% 37% 20%
-------------------------------------------- -------- -------- -------- ----------
Net assets end of year (thousands) $9,675 $9,559 $9,385 $ 952
============================================= ======== ======== ======== ==========
</TABLE>
(a) Annualized.
(b) "Ratio of total expenses to average net assets" for the year ended March
31, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses, the expense ratio would have been 1.47%.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
Page 39
- ----------------------------------
Keystone State Tax Free Fund
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES New York
March 31, 1996 Florida Massachusetts Insured
Tax Free Tax Free Tax Free Pennsylvania
Fund Fund Fund Tax Free Fund
-------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Assets (Notes 1 and 4)
Investments at market value (identified
cost--$99,213,553, $11,168,639,
$22,442,721 and $72,977,229, respectively) $101,718,310 $11,215,563 $23,155,388 $75,203,941
Cash 827 3,361 4,743 3,633
Receivable for:
Fund shares sold 79,237 15,000 38,300 101,032
Interest 2,194,071 179,073 293,085 1,218,902
Due from Investment Adviser 21,206 10,711 14,729 17,286
Unamortized organization expenses 0 6,749 1,779 0
Prepaid expenses and other assets 3,790 330 635 2,740
-------------------------------------------- --------- --------- --------- -----------
Total assets 104,017,441 11,430,787 23,508,659 76,547,534
-------------------------------------------- --------- --------- --------- -----------
Liabilities (Notes 2 and 4)
Payable for:
Fund shares redeemed 29,500 0 0 94,216
Distributions to shareholders 436,130 44,308 86,023 316,693
Distribution fee payable 6,476 133 1,713 2,057
Accrued reimbursable expenses 1,963 1,962 3,163 3,108
Other accrued expenses 29,388 21,063 23,240 27,390
-------------------------------------------- --------- --------- --------- -----------
Total liabilities 503,457 67,466 114,139 443,464
-------------------------------------------- --------- --------- --------- -----------
Net assets $103,513,984 $11,363,321 $23,394,520 $76,104,070
============================================ ========= ========= ========= ===========
Net assets represented by (Note 1)
Paid-in capital $103,665,607 $11,436,317 $22,811,201 $76,398,658
Accumulated distributions in excess of net
investment income (436,130) (2,872) (37,903) (227,211)
Accumulated net realized loss on
investments (2,220,250) (117,048) (91,445) (2,294,089)
Net unrealized appreciation on investments 2,504,757 46,924 712,667 2,226,712
-------------------------------------------- --------- --------- --------- -----------
Total net assets $103,513,984 $11,363,321 $23,394,520 $76,104,070
============================================ ========= ========= ========= ===========
Net assets consists of
Class A $ 37,285,975 $ 1,785,923 $ 3,947,213 $28,710,303
Class B 54,433,294 7,274,378 17,151,468 37,718,609
Class C 11,794,715 2,303,020 2,295,839 9,675,158
-------------------------------------------- --------- --------- --------- -----------
$103,513,984 $11,363,321 $23,394,520 $76,104,070
============================================ ========= ========= ========= ===========
Shares outstanding (Note 2)
Class A 3,518,094 192,338 408,090 2,575,175
Class B 5,195,041 788,724 1,789,124 3,428,337
Class C 1,123,702 249,905 239,549 877,001
-------------------------------------------- --------- --------- --------- -----------
Net asset value per share
Class A $10.60 $9.29 $9.67 $11.15
============================================ ========= ========= ========= ===========
Class A--Offering price (based on sales
charge of 4.75%) $11.13 $9.75 $10.15 $11.71
============================================ ========= ========= ========= ===========
Class B $10.48 $9.22 $9.59 $11.00
============================================ ========= ========= ========= ===========
Class C $10.50 $9.22 $9.58 $11.03
============================================ ========= ========= ========= ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
Page 40
- ----------------------------------
Keystone State Tax Free Fund
STATEMENTS OF OPERATIONS
Year ended March 31, 1996
<TABLE>
<CAPTION>
New York
Florida Massachusetts Insured
Tax Free Tax Free Tax Free Pennsylvania
Fund Fund Fund Tax Free Fund
- ---------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Investment income (Note 1)
Interest $6,522,711 $ 696,692 $1,230,032 $4,569,649
Expenses (Notes 1, 2 and 4)
Management fee 557,537 62,760 118,589 402,467
Transfer agent fees 115,014 15,192 27,801 106,088
Custodian fees 77,642 25,312 33,260 57,898
Accounting 24,275 22,081 23,082 22,964
Auditing 9,884 10,133 10,198 12,609
Legal 13,039 10,039 10,104 11,416
Printing 8,502 9,886 14,364 8,544
Registration fees 20,613 9,522 9,311 7,341
Amortization of organization expenses 3,695 2,296 611 4,713
Distribution Plan expenses 658,186 85,172 166,003 451,284
Other expenses 10,395 2,910 3,524 7,065
Reimbursement from Investment Adviser (196,232) (100,729) (119,608) (190,132)
- ---------------------------------------- --------- --------- --------- -----------
Total expenses 1,302,550 154,574 297,239 902,257
Less: Indirectly paid expenses (Note 4) (15,121) (1,100) (4,075) (8,886)
- ---------------------------------------- --------- --------- --------- -----------
Net expenses 1,287,429 153,474 293,164 893,371
- ---------------------------------------- --------- --------- --------- -----------
Net investment income 5,235,282 543,218 936,868 3,676,278
- ---------------------------------------- --------- --------- --------- -----------
Net realized and unrealized gain (loss)
on investments
and closed futures contracts (Note 3)
Realized gain (loss) on:
Investments 3,430,076 293,370 346,747 1,496,403
Closed futures contracts (95,129) (37,945) (21,260) (205,349)
- ---------------------------------------- --------- --------- --------- -----------
Net realized gain on investments and
closed futures contracts 3,334,947 255,425 325,487 1,291,054
Net change in unrealized appreciation
(depreciation) on investments (479,647) (134,154) 155,265 216,658
- ---------------------------------------- --------- --------- --------- -----------
Net realized and unrealized gain on
investments and closed futures
contracts 2,855,300 121,271 480,752 1,507,712
- ---------------------------------------- --------- --------- --------- -----------
Net increase in net assets resulting
from operations $8,090,582 $ 664,489 $1,417,620 $5,183,990
======================================== ========= ========= ========= ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
Page 41
- ----------------------------------
Keystone State Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
Year ended March 31, 1996
<TABLE>
<CAPTION>
New York
Florida Massachusetts Insured
Tax Free Tax Free Tax Free Pennsylvania
Fund Fund Fund Tax Free Fund
-------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 5,235,282 $ 543,218 $ 936,868 $ 3,676,278
Net realized gain on investments and closed
futures contracts 3,334,947 255,425 325,487 1,291,054
Net change in unrealized appreciation
(depreciation) on investments (479,647) (134,154) 155,265 216,658
-------------------------------------------- --------- --------- --------- -----------
Net increase in net assets resulting from
operations 8,090,582 664,489 1,417,620 5,183,990
-------------------------------------------- --------- --------- --------- -----------
Distributions to shareholders from (Note 1)
Net investment income:
Class A (2,068,359) (117,886) (181,786) (1,540,624)
Class B (2,582,018) (342,321) (676,349) (1,676,905)
Class C (584,905) (103,305) (104,583) (458,750)
In excess of net investment income:
Class A (81,365) (435) (7,630) (51,793)
Class B (101,572) (1,262) (28,387) (56,375)
Class C (23,009) (380) (4,389) (15,423)
-------------------------------------------- --------- --------- --------- -----------
Total distributions to shareholders (5,441,228) (565,589) (1,003,124) (3,799,870)
-------------------------------------------- --------- --------- --------- -----------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A 2,637,449 728,640 1,043,090 1,823,609
Class B 10,874,867 1,573,350 6,303,488 9,365,368
Class C 980,649 458,371 749,393 1,526,571
Payment for shares redeemed:
Class A (9,315,509) (1,015,238) (613,550) (5,114,776)
Class B (9,762,560) (727,777) (1,757,331) (3,838,463)
Class C (2,573,632) (198,311) (1,480,195) (1,930,722)
Net asset value of shares issued in
reinvestment of distributions:
Class A 564,333 65,247 111,251 862,452
Class B 1,035,196 206,616 423,530 1,004,041
Class C 271,631 59,663 80,146 355,643
-------------------------------------------- --------- --------- --------- -----------
Net increase (decrease) in net assets
resulting from capital share transactions (5,287,576) 1,150,561 4,859,822 4,053,723
-------------------------------------------- --------- --------- --------- -----------
Total increase (decrease) in net assets (2,638,222) 1,249,461 5,274,318 5,437,843
Net assets
Beginning of year 106,152,206 10,113,860 18,120,202 70,666,227
-------------------------------------------- --------- --------- --------- -----------
End of year $103,513,984 $11,363,321 $23,394,520 $76,104,070
============================================ ========= ========= ========= ===========
Accumulated distributions in excess of net
investment income ($436,130) ($2,872) ($37,903) ($227,211)
============================================ ========= ========= ========= ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
Page 42
- ----------------------------------
Keystone State Tax Free Fund
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
Year ended March 31, 1995
New York
Florida Massachusetts Insured
Tax Free Tax Free Tax Free Pennsylvania
Fund Fund Fund Tax Free Fund
- ------------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 5,108,143 $ 421,104 $ 570,628 $ 3,489,024
Net realized loss on investments and closed
futures contracts (4,751,748) (350,345) (393,232) (3,542,502)
Net change in unrealized appreciation on
investments 5,556,382 415,075 698,999 2,918,746
- ------------------------------------------------- --------- --------- --------- -----------
Net increase in net assets resulting from
operations 5,912,777 485,834 876,395 2,865,268
- ------------------------------------------------- --------- --------- --------- -----------
Distributions to shareholders from (Note 1)
Net investment income:
Class A (2,468,849) (103,346) (110,893) (1,714,136)
Class B (1,881,744) (230,929) (372,207) (1,329,520)
Class C (757,551) (85,245) (86,125) (445,368)
In excess of net investment income:
Class A (119,609) 0 0 (23,117)
Class B (331,735) (20,118) (39,019) (196,143)
Class C (127,027) (6,857) (6,749) (58,900)
Total distributions to shareholders (5,686,515) (446,495) (614,993) (3,767,184)
- ------------------------------------------------- --------- --------- --------- -----------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A 6,022,911 1,279,775 2,912,705 4,586,195
Class B 35,365,150 4,802,858 10,641,995 11,181,757
Class C 6,570,695 1,731,526 2,663,844 3,274,301
Payment for shares redeemed:
Class A (9,676,164) (846,310) (389,013) (5,294,580)
Class B (5,409,666) (609,227) (1,379,298) (2,964,040)
Class C (7,105,015) (182,930) (128,154) (3,313,655)
Net asset value of shares issued in reinvestment
of distributions:
Class A 712,811 60,782 46,401 942,252
Class B 829,201 125,304 220,338 877,275
Class C 385,988 55,445 58,568 375,859
- ------------------------------------------------- --------- --------- --------- -----------
Net increase in net assets resulting from
capital share transactions 27,695,911 6,417,223 14,647,386 9,665,364
- ------------------------------------------------- --------- --------- --------- -----------
Total increase in net assets 27,922,173 6,456,562 14,908,788 8,763,448
Net assets
Beginning of year 78,230,033 3,657,298 3,211,414 61,902,779
- ------------------------------------------------- --------- --------- --------- -----------
End of year $106,152,206 $10,113,860 $18,120,202 $70,666,227
- ------------------------------------------------- --------- --------- --------- -----------
Undistributed net investment income (Accumulated
distributions in excess of net investment
income) --
End of year ($445,095) $20,294 $25,850 ($106,519)
================================================ ========= ========= ========= ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
Page 43
- ----------------------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone State Tax Free Fund ("FUND") was formed as a Massachusetts business
trust on September 13, 1990 and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company. Keystone Investment Management Company ("Keystone") is
the Investment Adviser and Manager. The FUND currently offers shares of five
separate non-diversified series evidencing interests in different portfolios
of securities (individually a "Fund", collectively the "Funds"). These
financial statements include four series of the FUND: the Keystone Florida
Tax Free Fund ("Florida Fund"), the Keystone Massachusetts Tax Free Fund
("Massachusetts Fund"), the Keystone New York Insured Tax Free Fund ("New
York Fund") and the Keystone Pennsylvania Tax Free Fund ("Pennsylvania
Fund"). The Funds seek the highest possible current income exempt from
federal income taxes, while preserving capital.
Each Fund currently offers three classes of shares. Class A shares are sold
subject to a maximum sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge which
varies depending on when shares were purchased and how long they have been
held. Class C shares are sold subject to a contingent deferred sales charge
payable upon redemption within one year of purchase, and are available only
through dealers who have entered into special distribution agreements with
Keystone Investment Distributors Company ("KIDC"), the FUND's principal
underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"),
a Delaware corporation. KII is privately owned by an investor group
consisting predominantly of members of current and former management of
Keystone and its affiliates.
The following is a summary of significant accounting policies consistently
followed by the Funds in preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles,
which requires management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Funds.
A. Tax-exempt bonds are valued 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.
B. Each Fund may enter into financial futures contracts as a hedge against
changes in interest rates. A futures contract is an agreement between two
parties to buy and sell a specific amount of a commodity, security, financial
instrument, or, in the case of a stock
<PAGE>
Page 44
- ----------------------------------
Keystone State Tax Free Fund
index, cash at a set price on a future date. Upon entering into a futures
contract the Fund is required to deposit with a broker an amount ("initial
margin") equal to a certain percentage of the purchase price indicated in the
futures contract. Subsequent payments ("variation margin") are made or
received by the Fund each day, as the value of the underlying instrument or
index fluctuates, and are recorded for book purposes as unrealized gains or
losses by the Fund. For federal tax purposes, any futures contracts which
remain open at fiscal year end are marked-to-market and the resultant net
gain or loss is included in the Fund's taxable income. In addition to market
risk, the Fund is subject to the credit risk that the other party will not
complete the obligations of the contract.
C. When-issued or delayed delivery transactions arise when securities or
currencies are purchased or sold by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. A separate account of liquid assets equal to the value of such
purchase commitments will be maintained until payment is made. When-issued
and delayed agreements are subject to risks from changes in value based upon
changes in the level of interest rates and other market factors, both before
and after delivery.
D. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis. All
premiums and original issue discounts are amortized/accreted for both
financial reporting and federal income tax purposes.
E. Each Fund has qualified, and intends to qualify in the future, as a
regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). Thus, each Fund is relieved of any
federal income tax liability by distributing all of its net taxable
investment income and net taxable capital gains, if any, to its shareholders.
Each Fund intends to avoid excise tax liability by making the required
distributions under the Internal Revenue Code.
F. 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. As of
March 31, 1996 all such costs have been fully amortized for the Florida Fund
and the Pennsylvania Fund.
G. Each Fund intends to declare dividends from net investment income daily
and distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains, if any, at least
annually. Distributions are determined in accordance with income tax
regulations. The significant differences between financial statement amounts
available for distribution and distributions made in accordance with income
tax regulation are primarily due to the deferral of losses for income tax
purposes that have been recognized for financial statement purposes.
(2.) Capital Share Transactions
The FUND's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest, without par value. Transactions in
shares of the Funds were as follows:
<PAGE>
Page 45
- ----------------------------------
<TABLE>
<CAPTION>
Florida Fund
----------------
Year Ended March 31,
----------------------
Class A 1996 1995
- ---------------- -------- ----------
<S> <C> <C>
Shares sold 247,533 594,097
Shares redeemed (873,200) (961,330)
Shares issued in
reinvestment of
dividends and
distributions 53,198 70,513
---------------- ------- --------
Net decrease (572,469) (296,720)
================ ======= ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Class B
Shares sold 1,027,017 3,504,376
Shares redeemed (918,380) (544,344)
Shares issued in
reinvestment of
dividends and
distributions 98,392 82,908
---------------- ------- --------
Net increase 207,029 3,042,940
================ ======= ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Class C
Shares sold 92,047 643,062
Shares redeemed (244,752) (704,324)
Shares issued in
reinvestment of
dividends and
distributions 25,773 38,331
---------------- ------- --------
Net decrease (126,932) (22,931)
================ ======= ========
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund
- ----------------------
Year Ended March 31,
----------------------
Class A 1996 1995
- ---------------------- -------- ----------
<S> <C> <C>
Shares sold 77,233 141,360
Shares redeemed (106,698) (93,803)
Shares issued in
reinvestment of
dividends and
distributions 6,900 6,770
- ---------------------- ------- --------
Net increase
(decrease) (22,565) 54,327
====================== ======= ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Class B
Shares sold 170,546 532,363
Shares redeemed (78,313) (69,932)
Shares issued in
reinvestment of
dividends and
distributions 22,195 14,043
---------------- ------- --------
Net increase 114,428 476,474
================ ======= ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Class C
Shares sold 48,902 189,623
Shares redeemed (21,034) (20,305)
Shares issued in
reinvestment of
dividends and
distributions 6,401 6,195
---------------- ------- --------
Net increase 34,269 175,513
================ ======= ========
</TABLE>
<PAGE>
Page 46
- ----------------------------------
Keystone State Tax Free Fund
<TABLE>
<CAPTION>
New York Fund
----------------
Year Ended March 31,
----------------------
Class A 1996 1995
---------------- -------- ----------
<S> <C> <C>
Shares sold 107,459 315,837
Shares redeemed (63,070) (41,667)
Shares issued in
reinvestment of
dividends and
distributions 11,515 5,049
---------------- ------- --------
Net increase 55,904 279,219
================ ======= ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Class B
Shares sold 658,066 1,155,373
Shares redeemed (182,936) (153,738)
Shares issued in
reinvestment of
dividends and
distributions 44,023 24,119
---------------- ------- --------
Net increase 519,153 1,025,754
================ ======= ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Class C
Shares sold 77,987 288,523
Shares redeemed (155,157) (14,006)
Shares issued in
reinvestment of
dividends and
distributions 8,359 6,435
---------------- ------- --------
Net increase
(decrease) (68,811) 280,952
================ ======= ========
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania Fund
- ----------------------
Year Ended March 31,
----------------------
Class A 1996 1995
- ---------------------- -------- ----------
<S> <C> <C>
Shares sold 162,995 422,375
Shares redeemed (455,676) (494,154)
Shares issued in
reinvestment of
dividends and
distributions 76,584 87,463
- ---------------------- ------- --------
Net increase
(decrease) (216,097) 15,684
====================== ======= ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Class B
Shares sold 844,393 1,037,572
Shares redeemed (343,491) (282,691)
Shares issued in
reinvestment of
dividends and
distributions 90,532 82,087
---------------- ------- --------
Net increase 591,434 836,968
================ ======= ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Class C
Shares sold 136,525 306,060
Shares redeemed (173,811) (312,198)
Shares issued in
reinvestment of
dividends and
distributions 31,980 34,993
---------------- ------- --------
Net increase
(decrease) (5,306) 28,855
================ ======= ========
</TABLE>
<PAGE>
Page 47
- ----------------------------------
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.
Each Class A Distribution Plan provides for expenditures, which are limited
to an annual rate of up to 0.25% (currently limited to 0.15%) of the average
daily net asset value of Class A shares, to pay expenses related to the
distribution of Class A shares. Amounts paid by each Fund to KIDC under the
Class A Distribution Plan are currently used to pay others (such as dealers)
service fees at an annual rate of 0.15% of the average daily net asset value
of Class A shares maintained by such others on the books of the Fund for
specified periods.
Each Class B Distribution Plan provides for expenditures, which are limited
to 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 related to the
distribution of Class B shares. For Class B shares sold on or after June 1,
1995, amounts paid by each Fund under such shares' Class B Distribution Plan
are currently used to pay others (such as dealers) a commission at the time
of purchase normally equal to 4.00% of the price paid for each Class B share
sold plus the first year's service fee in advance in the amount of 0.15% of
the price paid for each Class B share sold. Beginning approximately 12 months
after the purchase of such Class B shares, the dealer or other party will
receive service fees at an annual rate of 0.15% of the average daily net
asset value of each such Class B shares maintained by such others and
remaining on the Fund's books for specified periods. A contingent deferred
sales charge will be imposed, if applicable, on Class B shares purchased on
or after June 1, 1995 at rates ranging from a maximum of 5.00% of amounts
redeemed during the first twelve month period from and including the date of
purchase to 1.00% of amounts redeemed during the sixth twelve month period
from and including the date of purchase. Class B shares purchased on or after
June 1, 1995 that have been outstanding for eight years from and including
the month of purchase will automatically convert to Class A shares without a
front-end sales charge or exchange fee. Class B shares purchased prior to
June 1, 1995 retain their existing conversion rights.
Each Class C Distribution Plan provides for expenditures, which are limited
to 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 related to the
distribution of Class C shares. Amounts paid by each Fund under the Class C
Distribution Plan are currently used to pay others (such as dealers) a
commission at the time of purchase equal to 0.75% of the price paid for each
share sold plus the first year's service fee in advance in the amount of
0.25% of the price paid for each Class C share. Beginning approximately 15
months after purchase, the dealer or other party will receive a commission at
an annual rate of 0.75% (subject to applicable limitations imposed by the
National Association of Securities Dealers, Inc. ("NASD")) plus service fees
at an annual rate of 0.25%, respectively, of the average net asset value of
each Class C share sold by such others and maintained on the Fund's books for
specified periods.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plans, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the Distribution Plan was in effect.
For the year ended March 31, 1996, amounts paid to KIDC pursuant to each
Fund's Class A, Class B, and Class C Distribution Plans were as follows:
<PAGE>
Page 48
- ----------------------------------
Keystone State Tax Free Fund
<TABLE>
<CAPTION>
Florida Fund
-------------
<S> <C>
Class A $ 56,304
Class B prior to June 1, 1995 456,390
Class B on or after June 1, 1995 34,480
Class C 111,012
</TABLE>
<TABLE>
<CAPTION>
Massachusetts
Fund
-----------------
<S> <C>
Class A $ 2,256
Class B prior to June 1, 1995 56,056
Class B on or after June 1, 1995 7,645
Class C 19,215
</TABLE>
<TABLE>
<CAPTION>
New York Fund
--------------
<S> <C>
Class A $ 5,591
Class B prior to June 1, 1995 116,859
Class B on or after June 1, 1995 22,305
Class C 21,248
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania
Fund
----------------
<S> <C>
Class A $ 44,529
Class B prior to June 1, 1995 282,940
Class B on or after June 1, 1995 36,440
Class C 87,375
</TABLE>
Under applicable NASD rules, the maximum uncollected amounts for which KIDC
may seek payment from the Funds under its Class B Distribution Plans as of
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
Florida Fund
-------------
<S> <C>
Shares purchased prior to June 1, 1995 $2,946,854
Shares purchased on or after June 1, 1995 510,361
</TABLE>
<TABLE>
<CAPTION>
Massachusetts
Fund
--------------
<S> <C>
Shares purchased prior to June 1, 1995 $366,916
Shares purchased on or after June 1, 1995 55,979
</TABLE>
<TABLE>
<CAPTION>
New York Fund
--------------
<S> <C>
Shares purchased prior to June 1, 1995 $741,567
Shares purchased on or after June 1, 1995 290,287
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania
Fund
--------------
<S> <C>
Shares purchased prior to June 1, 1995 $1,849,989
Shares purchased on or after June 1, 1995 491,259
</TABLE>
As of March 31, 1996 the maximum uncollected amounts for which KIDC may seek
payment from the Funds under its Class C Distribution Plans are $1,295,524,
$142,771, $213,519 and $823,047, for the Florida Fund, the Massachusetts
Fund, the New York Fund and the Pennsylvania Fund, respectively.
Presently, each Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares pursuant to its Distribution
Plan.
(3.) Securities Transactions
As of March 31, 1996, the Funds had approximate capital loss carryovers for
federal income tax purposes as follows:
<TABLE>
<CAPTION>
Florida Fund
-------------
<S> <C>
Capital Loss Carryover $1,845,000
Expires 2002 1,845,000
</TABLE>
<TABLE>
<CAPTION>
Massachusetts
Fund
--------------
<S> <C>
Capital Loss Carryover $117,000
Expires 2002 117,000
</TABLE>
<TABLE>
<CAPTION>
New York Fund
--------------
<S> <C>
Capital Loss Carryover $72,000
Expires 2002 1,000
Expires 2003 71,000
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania
Fund
--------------
<S> <C>
Capital Loss Carryover $2,294,000
Expires 2002 1,503,000
Expires 2003 791,000
</TABLE>
Purchases and sales of investment securities, excluding short-term
securities, for the year ended March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Cost of Proceeds
Purchases from Sales
---------- ------------
<S> <C> <C>
FLORIDA FUND $93,445,604 $101,076,090
MASSACHUSETTS FUND 19,566,916 18,349,095
NEW YORK FUND 15,459,323 11,114,467
PENNSYLVANIA FUND 45,460,964 40,281,694
</TABLE>
<PAGE>
Page 49
- ----------------------------------
(4.) Investment Management Agreement and other Transactions
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the FUND, Keystone provides investment management and
administrative services to each Fund. In return, Keystone is paid a
management fee computed and paid daily. The management fee is calculated by
applying percentage rates, which start at 0.55% and decline to 0.25% per
annum as net assets increase, to the net asset value of each Fund.
Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary
of Keystone, serves as each Fund's transfer and dividend disbursing agent.
During the year ended March 31, 1996, the Florida Fund, the Massachusetts
Fund, the New York Fund and the Pennsylvania Fund paid or accrued to KIRC
$115,014, $15,192, $27,801 and $106,088, respectively, for transfer agent
fees.
During the year ended March 31, 1996, the Florida Fund, the Massachusetts
Fund, the New York Fund and the Pennsylvania Fund paid or accrued to KII
$24,275, $22,081, $23,082 and $22,964, respectively, for certain accounting
services.
Keystone has voluntarily agreed to limit all expenses incurred for Class A
shares of the Florida Fund and 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 assets.
Keystone voluntarily limited the expenses of the Class A shares of the
Massachusetts Fund and the New York Fund to 0.65% until May 15, 1995 when
expenses were limited to 0.75%; expenses for Class B and Class C shares were
limited to 1.40% until May 15, 1995 when expenses were limited to 1.50%.
Keystone will not be required to reimburse a Fund to an extent that 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 expense
limitations then in effect, Keystone reimbursed the Florida Fund, the
Massachusetts Fund, the New York Fund, and the Pennsylvania Fund $196,232,
$100,729, $119,608 and $190,132, respectively, for the year ended March 31,
1996. Keystone does not intend to seek repayment of these amounts.
The Funds have entered into an expense offset arrangement with their
custodian. For the year ended March 31, 1996, the Florida Fund, the
Massachusetts Fund, the New York Fund and the Pennsylvania Fund paid custody
fees in the amount of $62,521, $24,212, $29,185 and $49,012, respectively,
and received a credit of $15,121, $1,100, $4,075 and $8,886, respectively,
pursuant to the expense offset arrangement, resulting in a total expense of
$77,642, $25,312, $33,260 and $57,898, respectively. The assets deposited
with the custodian under this expense offset arrangement could have been
invested in income-producing assets.
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 Funds receive no compensation for their services.
<PAGE>
Page 50
- ----------------------------------
Keystone State Tax Free Fund
Independent Auditors' Report
The Trustees and Shareholders of
Keystone State Tax Free Fund
We have audited the accompanying statements of assets and liabilities of
Keystone Florida Tax Free Fund, Keystone Massachusetts Tax Free Fund,
Keystone New York Insured Tax Free Fund and Keystone Pennsylvania Tax Free
Fund, portfolios of Keystone State Tax Free Fund, including the schedules of
investments as of March 31, 1996, and the related statements of operations
for the year then ended, the statements of changes in net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period ended March 31, 1996 and for the
period from December 28, 1990 (commencement of operations) to March 31, 1991
for Keystone Florida Tax Free Fund, for each of the years in the two-year
period ended March 31, 1996 and for the period from February 4, 1994
(commencement of operations) to March 31, 1994 for Keystone Massachusetts Tax
Free Fund and Keystone New York Insured Tax Free Fund, and for each of the
years in the five-year period ended March 31, 1996 and for the period from
December 27, 1990 (commencement of operations) to March 31, 1991 for Keystone
Pennsylvania Tax Free Fund. 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 audits 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, 1996 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Florida Tax Free Fund, Keystone Massachusetts Tax Free Fund,
Keystone New York Insured Tax Free Fund and Keystone Pennsylvania Tax Free
Fund, portfolios of Keystone State Tax Free Fund as of March 31, 1996, the
results of their operations for the year then ended, the changes in their net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years or periods specified in the first
paragraph above in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
April 26, 1996
<PAGE>
Page 51
- ----------------------------------
FEDERAL TAX STATUS--1996 Fiscal year distributions
(Unaudited)
The per share distributions paid to you for fiscal 1996, whether taken in
shares or cash, are as follows:
<TABLE>
<CAPTION>
Tax-Exempt Income Dividends
-------------------------------
Class A Class B Class C
------- ------- ---------
<S> <C> <C> <C>
Florida Tax Free Fund $0.56 $0.52 $0.52
Massachusetts Tax Free Fund 0.50 0.45 0.45
New York Insured Tax Free Fund 0.49 0.44 0.44
Pennsylvania Tax Free Fund 0.59 0.54 0.54
</TABLE>
In January 1997, complete information on calendar year 1996 distributions
will be forwarded to you to assist you in completing your 1996 federal income
tax return.
