<PAGE>
KEYSTONE STATE TAX FREE FUND
PROSPECTUS JULY 30, 1996
AS SUPPLEMENTED JANUARY 1, 1997
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 Tax Free Fund (the "New York
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 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
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.
KEYSTONE STATE TAX FREE FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
Each Fund invests principally in municipal obligations exempt from federal
income tax and municipal obligations issued by the state for which it is named
and its political subdivisions, agencies and instrumentalities.
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 "Expense
Information," "How to Buy Shares," "Alternative Sales Options," "Contingent
Deferred Sales Charge and Waiver of Sales Charges," "Distribution Plans and
Agreements" 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, as supplemented, which
has been filed with the Securities and Exchange Commission and is incorporated
by reference into this prospectus. For a free copy, or for other information
about the Trust and its Funds, write to the address or call the telephone number
listed on this page.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT INSURED OR OTHERWISE PROTECTED BY
THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
Expense Information ................................................. 3
Financial Highlights ................................................ 7
The Trust and Its Funds ............................................. 19
Investment Objectives and Policies .................................. 19
Investment Restrictions ............................................. 23
Risk Factors ........................................................ 24
Pricing Shares ...................................................... 26
Dividends and Taxes ................................................. 26
Trust Management and Expenses ....................................... 28
Distribution Plans and Agreements ................................... 31
How to Buy Shares ................................................... 35
Alternative Sales Options ........................................... 35
Contingent Deferred Sales Charge and Waiver of Sales Charges ........ 38
How to Redeem Shares ................................................ 39
Shareholder Services ................................................ 41
Performance Data .................................................... 43
Trust Shares ........................................................ 43
Additional Information .............................................. 44
Additional Investment Information ................................... (i)
Exhibit A ........................................................... A-1
Exhibit B ........................................................... B-1
<PAGE>
EXPENSE INFORMATION
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 Agreements"; and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT-END BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases ................ 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load .................................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original 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 ........................................... None None None
ANNUAL FUND OPERATING EXPENSES(5)
(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%(6) 0.90%(6)
Other Expenses ......................................... 0.09% 0.06% 0.06%
----- ----- -----
Total Fund Operating Expenses .......................... 0.76% 1.48% 1.48%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES(7) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ................................................................... $55 $71 $ 88 $137
Class B ................................................................... $65 $77 $101 $148
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 $148
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 after January 1, 1997, convert tax free to Class
A shares after seven years. See "Class B Shares" for more information.
(2) Class C shares are available only through dealers who have entered into
special distribution agreements with Evergreen Keystone Distributor, Inc.,
the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares made after January 1, 1997, in the amount of
$1,000,000 or more are not subject to a sales charge at the time of
purchase, but may be subject to a contingent deferred sales charge. See
"Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales
Charges" for an explanation of the charge.
(5) 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
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.
(6) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by rules adopted by the National
Association of Securities Dealers, Inc. (the "NASD").
(7) The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual returns for the Funds may be
greater or less than 5%.
</TABLE>
<PAGE>
EXPENSE INFORMATION
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 Agreements"; and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT-END BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases ................ 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load .................................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original 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 ........................................... None None None
ANNUAL FUND OPERATING EXPENSES(5)
(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%(6) 0.90%(6)
Other Expenses ......................................... 0.10% 0.04% 0.04%
----- ----- -----
Total Fund Operating Expenses .......................... 0.75% 1.49% 1.49%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES(7) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ...................................................................... $55 $70 $ 87 $136
Class B ...................................................................... $65 $77 $101 $148
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 $148
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 after January 1, 1997, convert tax free to Class
A shares after seven years. See "Class B Shares" for more information.
(2) Class C shares are available only through dealers who have entered into
special distribution agreements with Evergreen Keystone Distributor, Inc.,
the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares made after January 1, 1997, in the amount of
$1,000,000 or more are not subject to a sales charge at the time of
purchase, but may be subject to a contingent deferred sales charge. See
"Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales
Charges" for an explanation of the charge.
(5) 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.
(6) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by rules adopted by the NASD.
(7) The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Funds may be
greater or less than 5%.
</TABLE>
<PAGE>
EXPENSE INFORMATION
KEYSTONE NEW YORK 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 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 Agreements;'" and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT-END BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases ................ 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load .................................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original 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 ........................................... None None None
ANNUAL FUND OPERATING EXPENSES(5)
(After Expense Reimbursements)
(as a percentage of average net assets)
Management Fees ........................................ 0.55% 0.55% 0.55%
12b-1 Fees ............................................. 0.15% 0.90%(6) 0.90%(6)
Other Expenses ......................................... 0.05% 0.05% 0.05%
----- ----- -----
Total Fund Operating Expenses .......................... 0.75% 1.50% 1.50%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES(7) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ...................................................................... $55 $70 $ 87 $136
Class B ...................................................................... $65 $77 $102 $149
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 $149
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 after January 1, 1997, convert tax free to Class
A shares after seven years. See "Class B Shares" for more information.
(2) Class C shares are available only through dealers who have entered into
special distribution agreements with Evergreen Keystone Distributor, Inc.,
the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares made after January 1, 1997, in the amount of
$1,000,000 or more are not subject to a sales charge at the time of
purchase, but may be subject to a contingent deferred sales charge. See
"Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales
Charges" for an explanation of the charge.
(5) 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 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.
(6) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by rules adopted by the NASD.
(7) The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual return for the Funds may be
greater or less than 5%.
</TABLE>
<PAGE>
EXPENSE INFORMATION
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 Agreements"; and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT END BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD-OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases ................ 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Load .................................... 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of the lesser of original 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 ........................................... None None None
ANNUAL FUND OPERATING EXPENSES(5)
(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%(6) 0.90%(6)
Other Expenses ......................................... 0.08% 0.05% 0.05%
----- ----- -----
Total Fund Operating Expenses .......................... 0.76% 1.48% 1.48%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES(7) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each period:
Class A ................................................................... $55 $71 $ 88 $137
Class B ................................................................... $65 $77 $101 $148
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 $148
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 after January 1, 1997, convert tax free to Class
A shares after seven years. See "Class B Shares" for more information.
(2) Class C shares are available only through dealers who have entered into
special distribution agreements with Evergreen Keystone Distributor, Inc.,
the Fund's principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the
amount invested increases. See "Class A Shares."
(4) Purchases of Class A shares made after January 1, 1997, in the amount of
$1,000,000 or more are not subject to a sales charge at the time of
purchase, but may be subject to a contingent deferred sales charge. See
"Class A Shares" and "Contingent Deferred Sales Charge and Waiver of Sales
Charges" for an explanation of the charge.
(5) 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.
(6) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by rules adopted by the NASD.
(7) The Securities and Exchange Commission requires use of a 5% annual return
figure for purposes of this example. Actual returns for the Funds may be
greater or less than 5%.
</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.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED MARCH 31, (DATE OF INITIAL
----------------------------------- PUBLIC OFFERING) TO
1996 1995 1994 MARCH 31, 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 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.
</TABLE>
<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.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
YEAR ENDED MARCH 31, (DATE OF INITIAL
------------------------------------ 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 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.
</TABLE>
<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.
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
YEAR ENDED MARCH 31, (COMMENCEMENT
--------------------- OF OPERATIONS) TO
1996 1995 MARCH 31, 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 0.02
contracts ............................................................. 0.09 (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.
</TABLE>
<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 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 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>
FEBRUARY 4, 1994
YEAR ENDED MARCH 31, (COMMENCEMENT
-------------------- OF OPERATIONS) TO
1996 1995 MARCH 31, 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
(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.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE NEW YORK 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 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 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 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>
FEBRUARY 4, 1994
YEAR ENDED MARCH 31, (COMMENCEMENT
--------------------- OF OPERATIONS) TO
1996 1995 MARCH 31, 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
(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.
</TABLE>
<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.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
(DATE OF
YEAR ENDED MARCH 31, INITIAL PUBLIC
--------------------------------- OFFERING) TO
1996 1995 1994 MARCH 31, 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
(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.
</TABLE>
<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.
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
(DATE OF
YEAR ENDED MARCH 31, INITIAL PUBLIC
-------------------------------- OFFERING) TO
1996 1995 1994 MARCH 31, 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
(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.
</TABLE>
<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 advised
and managed 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 Fund were established on February 21, 1992. Shares of the
Massachusetts Fund and the New York Fund were not offered prior to February 4,
1994. The Trust may offer additional Funds in the future.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
Each of the Funds seeks the highest possible current income exempt from
federal income taxes, while preserving capital.
Since each Fund considers preservation of capital as well as the level of
tax-exempt income, each Fund may realize less income than a mutual fund
willing to expose shareholders' capital to greater risk.
The investment objectives of each Fund and the requirement that each Fund
invest, under ordinary circumstances, at least 80% of its assets in federally
tax-exempt municipal obligations that are also exempt from certain taxes in
the state for which it is named, as set forth 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 (a "1940 Act Majority").
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 to hold securities exempt from Florida
intangible taxes.
The Pennsylvania Fund seeks 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 FUND
Under ordinary circumstances, the New York Fund invests substantially all
and at least 80% of its assets in securities the interest from which is exempt
from federal taxes and New York state income taxes. The New York Fund invests
in debt obligations of the State of New York and its political subdivisions,
agencies, authorities and instrumentalities and debt obligations of other
qualifying issuers, such as U.S. territories.
As more fully discussed below in the section entitled "Insurance," at least
80% of the municipal securities in the investment portfolio of the New York
Fund will be insured as to timely payment of both principal and interest. The
purpose of insuring these investments is to minimize credit risks associated
with defaults in municipal securities owned by the Fund. Such insurance,
however, does not insure against market risk and therefore will not guarantee
the market value of the securities in the Fund's portfolio upon which the net
asset value of the Fund's shares is based.
For a further discussion of New York tax treatment and the factors affecting
investment in New York municipal obligations, see 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
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 Fund's portfolio. Similarly, because
the net asset value of the New York 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 Fund's shares.
NEW ISSUE INSURANCE POLICIES
New Issue Insurance Policies are obtained by the respective issuers of
municipal securities, and all premiums respecting such securities have been
paid in advance by such issuers. Such policies are noncancellable and will
continue in force so long as the municipal securities are outstanding and the
respective insurers remain in business. Since New Issue Insurance Policies
remain in effect as long as the securities are outstanding, the insurance may
have an effect on the resale value of the Insured Securities. Therefore, New
Issue Insurance Policies may be considered to represent an element of market
value with regard to the Insured Securities, but the exact effect, if any, of
this insurance on such market value cannot be estimated. The New York Fund
will purchase municipal securities subject to New Issue Insurance Policies
only if the claims paying ability of the insurer thereof is rated AAA by S&P
or Aaa by Moody's.
PORTFOLIO INSURANCE POLICIES
Portfolio Insurance Policies are obtained by the New York 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
Fund. Premium rates for each issue of securities covered by the policy are
fixed for the life of the New York 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 Fund and will be
reflected in its average annual expenses. Premiums are paid from the New York
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 Fund and covered by the policy,
except for nonpayment of premiums.
SECONDARY INSURANCE POLICIES
The New York 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 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 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 Fund in determining the net capital gain or loss realized by the
Fund upon the sale of such Insured Security.
INVESTMENT RESTRICTIONS
Each Fund has adopted the fundamental restrictions summarized below, which
may not be changed without the vote of a 1940 Act Majority of such Fund's
outstanding shares. These restrictions and certain other fundamental and
nonfundamental restrictions are set forth in the statement of additional
information. Unless otherwise stated, all references to a Fund's assets are
in terms of current market value.
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 could affect the
market value and liquidity of that particular security in addition to that of
other municipal obligations held by a Fund. In addition, the market for
municipal obligations is often thin and can be temporarily affected by large
purchases and sales, including those by a Fund.
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 Fund computes its net asset value as of the close of trading (currently
4:00 p.m. eastern time) on each day that the New York Stock Exchange (the
"Exchange") is open. However, the Fund does not compute its net asset value on
days when changes in the value of 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. 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 (a "RIC") under the Code. Each Fund is a separate
taxable entity for purposes of Code provisions applicable to RICs. Each of the
Funds qualifies if, among other things, it distributes to its shareholders at
least 90% of its net investment income for its fiscal year. Each Fund also
intends to make timely distributions, if necessary, sufficient in amount to
avoid the nondeductible 4% excise tax imposed on a RIC to the extent that it
fails to distribute, with respect to each calendar year, at least 98% of its
ordinary income for such calendar year and 98% of its net capital gains for
the one-year period ending on October 31 of such calendar year.
If a Fund qualifies as a RIC and if it distributes substantially all of its
net investment income and net capital gains, if any, to shareholders, it will
be relieved of any federal income tax liability.
Any taxable dividend declared in October, November or December to
shareholders of record in such a month and paid by the following January 31
will be includable in the taxable income of shareholders as if paid on
December 31 of the year in which the dividend was declared.
Each Fund expects that substantially all of its dividends will be "exempt
interest dividends," which should be treated as excludable from federal gross
income. In order to pay exempt interest dividends, at least 50% of the value
of the Fund's assets must consist of federally tax-exempt obligations at the
close of each quarter. An exempt interest dividend is any dividend or part
thereof (other than a capital gain dividend) paid by the Fund with respect to
its net federally excludable municipal obligation interest and designated as
an exempt interest dividend in a written notice mailed to each shareholder not
later than 60 days after the close of its taxable year. The percentage of the
total dividends paid by a Fund with respect to any taxable year that qualifies
as exempt interest dividends will be the same for all shareholders of the Fund
receiving dividends with respect to such year. If a shareholder receives 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 provides investment advice, management and administrative services to
the Trust.
INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone is a wholly-
owned subsidiary of Keystone Investments, Inc. ("Keystone Investments").
Keystone Investments provides accounting, bookkeeping, legal, personnel and
general corporate services to Keystone, its affiliates, and the Keystone
Investments Families of Funds. Both Keystone and Keystone Investments are
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, Keystone Investments succeeded to the business of a
corporation with the same name, but under different ownership. Keystone
Investments is a wholly-owned subsidiary of First Union National Bank of North
Carolina ("FUNB"). FUNB is a subsidiary of First Union Corporation ("First
Union"), the sixth largest bank holding company in the U.S. based on total
assets as of September 30, 1996.
First Union is headquartered in Charlotte, North Carolina, and had $133.9
billion in consolidated assets as of September 30, 1996. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the U.S. The Capital Management Group of FUNB ("CMG"),
together with Lieber & Company and Evergreen Asset Management Corp.
("Evergreen Asset"), wholly-owned subsidiaries of FUNB, manage or otherwise
oversee the investment of over $50 billion in assets belonging to a wide range
of clients, including the Evergreen Family of Funds.
Pursuant to its Investment Advisory and Management Agreement with the Trust
(the "Advisory Agreement"), Keystone manages the investment and reinvestment
of each Fund's assets, supervises the operation of the Trust and each Fund and
provides all necessary office space, facilities and equipment.
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.
Keystone's fee is computed as of the close of business each business day and
payable daily.
The Advisory Agreement continues in effect for two years from its effective
date, and, thereafter, from year to year 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 shareholders 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 Independent Trustees (Trustees who are not "interested persons"
of the Trust, as defined in the 1940 Act, and who have no direct or indirect
financial interest in any Fund's Distribution Plan or any agreement related
thereto) cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated 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 shareholders of such Fund. The Advisory
Agreement will terminate automatically upon its assignment.
PRINCIPAL UNDERWRITER
Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of Furman Selz LLC ("Furman Selz"),
which is not affiliated with First Union, is now the Fund's principal
underwriter (the "Principal Underwriter"). EKD replaces Evergreen Keystone
Investment Services, Inc. (formerly Keystone Investment Distributors Company)
("EKIS") as the Trust's principal underwriter. EKIS may no longer act as
principal underwriter of the Trust due to regulatory restrictions imposed by
the Glass-Steagall Act upon national banks such as FUNB and their affiliates,
that prohibit such entities from acting as the underwriters or distributors of
mutual fund shares. While EKIS may no longer act as principal underwriter of
the Fund as discussed above, EKIS may continue to receive compensation from
the Fund or the Principal Underwriter in respect of underwriting and
distribution services performed prior to the termination of EKIS as principal
underwriter. In addition, EKIS may also be compensated by the Principal
Underwriter for the provision of certain marketing support services to the
Principal Underwriter at an annual rate of up to .75% of the average daily net
assets of the Fund, subject to certain restrictions. Both EKD and Furman Selz
are located at 230 Park Avenue, New York, New York 10169.
SUB-ADMINISTRATOR
Furman Selz provides officers and certain administrative services to the
Fund pursuant to a sub-administration agreement. For its services under that
agreement, Furman Selz receives a fee from Keystone at the maximum annual rate
of .01% of the average daily net assets of the Fund.
It is expected that on or about January 2, 1997, Furman Selz will transfer
EKD, and its related mutual fund distribution and administration business, to
BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as sub-
administrator for the Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
PORTFOLIO MANAGERS
George J. Kimball, a Keystone Vice President is responsible for the day-to-
day management of the New York and Florida Funds. Mr. Kimball has more than 10
years of investment experience.
Daniel A. Rabasco, a Keystone Vice President is responsible for the day-to-
day management of the Pennsylvania and Massachusetts Funds. Mr. Rabasco has
more than 9 years of investment experience.
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 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 and Pennsylvania Funds paid or accrued $115,014, $15,192, $27,801 and
$106,088, respectively, to Evergreen Keystone Service Company (formerly
Keystone Investor Resource Center, Inc.) ("EKSC"), for services rendered as
the Trust's transfer and dividend disbursing agent. EKSC, a wholly-owned
subsidiary of Keystone, is located at 200 Berkeley Street, Boston,
Massachusetts 02116-5034. During the year ended March 31, 1996, the Florida,
Massachusetts, New York and Pennsylvania Funds paid or accrued $24,275,
$22,081, $23,082 and $22,964, respectively, to Keystone Investments 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
a 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 the
expense limitations in place during the fiscal year ended March 31, 1996,
Keystone reimbursed the Florida, Massachusetts, New York and Pennsylvania
Funds $196,232, $100,729, $119,608 and $190,132, respectively.
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 the number of shares of the Fund sold by the
broker-dealer. In addition, broker-dealers executing portfolio transactions may,
from time to time, be affiliated with the Trust, Keystone, the 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 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 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.
CODE OF ETHICS
The Trust has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
DISTRIBUTION PLANS AND AGREEMENTS
CLASS A DISTRIBUTION PLAN
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 the Class A Distribution Plan are currently made to the
Principal Underwriter (which may reallow all or part to others, such as
broker-dealers), as service fees at an annual rate of up to 0.15% of the
average daily net asset value of Class A shares maintained by the recipient
and outstanding on the books of such Fund for specified periods.
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% (currently limited to 0.90%) of the average
daily net asset value of Class B shares to pay expenses of the distribution of
Class B shares. Payments under the Class B Distribution Plans are currently
made to the Principal Underwriter (which may reallow all or part to others,
such as broker-dealers) and to EKIS, the predecessor to the Fund's Principal
Underwriter, (1) as commissions for Class B shares sold, (2) as shareholder
service fees, and (3) as interest. Amounts paid or accrued to the Principal
Underwriter or EKIS in the aggregate may not exceed the annual limitation
referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold. The
broker-dealer or other party will also receive service fees at an annual rate
of 0.15% of the value of Class B shares maintained by the recipient and
outstanding on the books of such Fund for specified periods. See "Distribution
Plans Generally" 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 by the Fund
at an annual rate of up to 1.00% (currently limited to 0.90%) of the average
daily net asset value of Class C shares to pay expenses of the Distribution
of Class C shares. Payments under the Class C Distribution Plan are currently
made to the Principal Underwriter (which may reallow all or part to others,
such as dealers) and to EKIS, the predecessor to the Fund's Principal
Underwriter, (1) as commissions for Class C shares sold, (2) as shareholder
service fees, and (3) as interest. Amounts paid or accrued to the Principal
Underwriter or EKIS in the aggregate may not exceed the annual limitation
referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission in the amount of 0.75% of the price paid for each
Class C share sold, plus the first year's service fee in advance in the amount
of 0.25% of the price paid for each Class C share sold, and, beginning
approximately fifteen months after purchase, a commission at an annual rate of
0.75% (subject to NASD rules -- see "Distribution Plans Generally") plus
service fees which are paid at the annual rate of 0.25%, respectively, of the
value of Class C shares maintained by the recipient and outstanding on the
books of a Fund for specified periods. See "Distribution Plans Generally"
below.
DISTRIBUTION PLANS GENERALLY
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 limits the amount that a Fund may pay annually in distribution
costs for the sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1% of the aggregate average daily net asset value of
its shares, of which 0.75% may be used to pay 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 Distribution Plan, plus interest at the
prime rate plus 1% on such amounts (less any contingent deferred sales charges
("CDSCs") paid by shareholders to the Principal Underwriter) remaining unpaid
from time to time.
In connection with financing its distribution costs, including commission
advances to broker-dealers and others, EKIS, the predecessor to the Principal
Underwriter, sold to a financial institution substantially all of its 12b-1
fee collection rights and CDSC collection rights in respect of Class B shares
sold during the period beginning approximately June 1, 1995 through November
30, 1996. Each Fund has agreed not to reduce the rate of payment of 12b-1 fees
in respect of such Class B shares, unless it terminates such shares'
Distribution Plan completely. If it terminates such Distribution Plan, each
Fund may be subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to compensate
broker-dealers or other persons for distributing shares of each Fund will be
provided by FUNB or its affiliates.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. If a Distribution Plan is terminated, the Principal
Underwriter and EKIS will ask the Independent Trustees to take whatever action
they deem appropriate under the circumstances with respect to payment of
Advances (as defined below).
For the Florida, Massachusetts, New York 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 (6.40% of Class B net assets), $366,916
(6.14% of Class B net assets), $741,567 (5.97% of Class B net assets) and
$1,849,989 (6.19% of Class B net assets), respectively. For Class B shares sold
on or after June 1, 1995, unreimbursed Class B Distribution expenses at March
31, 1996 for the Florida, Massachusetts, New York and Pennsylvania Funds were
$510,361 (6.08% of Class B net assets), $55,979 (4.31% of Class B net assets),
$290,287 (6.14% of Class B net assets), and $491,259 (6.28% of Class B net
assets), respectively.
For the Florida, Massachusetts, New York 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.
Broker-dealers or others may receive different levels of compensation
depending on which class of shares they sell. Payments pursuant to a
Distribution Plan are included in the operating expenses of the class.
DISTRIBUTION AGREEMENTS
The Trust has entered into principal underwriting agreements with the
Principal Underwriter (each a "Distribution Agreement") with respect to each
class. Pursuant to its Distribution Agreements, the Trust will compensate the
Principal Underwriter for its services as distributor at an annual rate that
may not exceed .25 of 1% of the Trust's average daily net assets attributable
to Class A shares, .75 of 1% of the Trust's average daily net assets
attributable to the Class B shares, subject to certain restrictions, and .75
of 1% of the Trust's average daily net assets attributable to the Class C
shares.
Each Fund may also make payments under its Distribution Plans, in amounts of
up to .25 of 1% of its average daily net assets on an annual basis,
attributable to Class A, B and C shares, respectively, to compensate
organizations, which may include, among others, the Principal Underwriter and
Keystone or their respective affiliates, for services rendered to shareholders
and/or the maintenance of shareholder accounts.
A Fund may not pay any distribution or servicing fees during any fiscal
period in excess of NASD limits. Since the Principal Underwriter's
compensation under the Distribution Agreements is not directly tied to the
expenses incurred by the Principal Underwriter, the amount of compensation
received by it under the Distribution Agreements during any year may, subject
to certain conditions, be more than its actual expenses and may result in a
profit to the Principal Underwriter. Distribution expenses incurred by the
Principal Underwriter in one fiscal year that exceed the level of compensation
paid to the Principal Underwriter for that year may be paid from distribution
fees received from a Fund in subsequent fiscal years.
The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plans that exceed current annual payments permitted to be received by the
Principal Underwriter from a Fund ("Advances"). The Principal Underwriter
intends to seek full reimbursement for such Advances from such Fund (together
with annual interest thereon at the prime rate plus one percent) at such time in
the future as, and to the extent that, payment thereof by the Fund would be
within the permitted limits. If the 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 Distribution Plan.
In states where the Principal Underwriter is not registered as a broker-
dealer, shares of a Fund will only be sold through other broker-dealers or
other financial institutions that are registered.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of a Fund's shares. In addition, broker-dealers may, from
time to time, receive additional cash payments. The Principal Underwriter may
also provide written information to those broker-dealers with whom it has
dealer agreements that relates to sales incentive campaigns conducted by such
broker-dealers for their representatives as well as financial assistance in
connection with pre-approved seminars, conferences and advertising. No such
programs or additional compensation will be offered to the extent they are
prohibited by the laws of any state or any self-regulatory agency such as the
NASD. Broker-dealers to whom substantially the entire sales charge on Class A
shares is reallowed may be deemed to be underwriters as that term is defined
under the 1933 Act.
The Principal Underwriter may, at its own expense, pay concessions in
addition to those described above to broker-dealers including, from time to
time, to First Union Brokerage Services, Inc., an affiliate of Keystone, that
satisfy certain criteria established from time to time by the Principal
Underwriter. These conditions relate to increasing sales of shares of the
Keystone funds over specified periods and certain other factors. Such payments
may, depending on the broker-dealer's satisfaction of the required conditions,
be periodic and may be up to 1.00% of the value of shares sold by such broker-
dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to 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.
State securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as broker-dealers pursuant to state laws.
EFFECTS OF BANKING LAWS
The Glass-Steagall Act currently limits the ability of depository
institutions (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event the Glass-
Steagall Act is deemed to prohibit depository institutions from accepting
payments under the arrangement described above, or should Congress relax
current restrictions on depository institutions, the Board of Trustees will
consider what action, if any, is appropriate.
The Glass-Steagall Act and other banking laws and regulations also presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Trust. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase
of shares of such an investment company upon the order of its customer.
Keystone and its affiliates, since they are direct or indirect subsidiaries of
FUNB, are subject to and in compliance with the aforementioned laws and
regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could prevent Keystone Investments or its affiliates
from performing the services required under the investment advisory contract
or from acting as agent in connection with the purchase of shares of a fund by
its customers. In such event, it is expected that the Trustees would identify,
and call upon each Fund's shareholders to approve, a new investment adviser.
If this were to occur, it is not anticipated that the shareholders of any Fund
would suffer any adverse financial consequences.
HOW TO BUY SHARES
You may purchase shares of each Fund from any broker-dealer that has a selling
agreement with the Principal Underwriter. In addition, you may purchase shares
of a Fund by mailing to the Trust, c/o Evergreen Keystone Service Company, P.O.
Box 2121, Boston, Massachusetts 02106-2121, a completed account application and
a check payable to the Trust. You may also telephone 1-800-343-2898 to obtain
the number of an account to which you can wire or electronically transfer funds
and then send in a completed account application. Subsequent investments in any
amount may be made by check, by wiring Federal funds, by direct deposit or by an
electronic funds transfer ("EFT").
Orders for the purchase of shares of a Fund will be confirmed at the public
offering price, which is equal to the net asset value per share next
determined after receipt of the order in proper form by the Principal
Underwriter (generally as of the close of the Exchange on that day) plus, in
the case of Class A shares, the applicable sales charge. Orders received by
broker-dealers or other firms prior to the close of the Exchange and received
by the Principal Underwriter prior to the close of its business day will be
confirmed at the offering price effective as of the close of the Exchange on
that day. Broker-dealers and other financial services firms are obligated to
transmit orders promptly.
Orders for shares received other than as stated above will receive the
public offering price, which is equal to the net asset value per share next
determined (generally, the next business day's offering price) plus, in the
case of Class A shares, the applicable sales charge.
The Trust reserves the right to determine the net asset value more
frequently than once a day if deemed desirable.
The initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases.
The 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 EKSC by calling toll free
1-800-343-2898 or writing to EKSC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
This prospectus provides information regarding the Class A, B, and C shares
offered by each Fund:
CLASS A SHARES -- FRONT-END LOAD OPTION
With certain exceptions, Class A shares are sold with a sales charge at the
time of purchase. Class A shares are not subject to a CDSC when they are
redeemed except as follows: Class A shares purchased after January 1, 1997, in
an amount equal to or exceeding $1 million, without a front-end sales charge,
will be subject to a contingent deferred sales charge during the month of
purchase and the 12- month period following the month of purchase.
CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are, with certain exceptions, subject to a
CDSC if redeemed during the month of purchase and the 72-month period
following the month of purchase. Class B shares purchased after January 1,
1997, that have been outstanding for seven years after the month of purchase,
will automatically convert to Class A shares without the imposition of a
front-end sales charge or exchange fee.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are subject to a CDSC if they are redeemed
during the month of purchase and the 12-month period following the month of
purchase. Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Principal Underwriter.
Class A and B shares, pursuant to their Distribution Plan, currently pay an
annual service fee of 0.15% of each 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 each Fund's average daily net assets attributable to
Class C. In addition to the service fee, the Class B and C Distribution Plans
provide for the payment of an annual distribution fee of up to 0.75% of the
average daily net assets attributable to their respective classes. As a
result, income distributions paid by a Fund with respect to Class B and Class
C shares will generally be less than those paid with respect to Class A
shares.
Investors who would rather pay the entire cost of distribution at the time
of investment, rather than spreading such cost over time, might consider
Class A shares. Other investors might consider Class B or Class C shares (in
which case, 100% of the purchase price is invested immediately), depending on
the amount of the purchase and the intended length of investment.
The Funds will not normally accept any purchase of Class B shares in the
amount of $250,000 or more and will not normally accept any purchase of
Class C shares in the amount of $500,000 or more.
----------------------------------------------
CLASS A SHARES
Class A shares are currently offered at the public offering price, which is
equal to net asset value plus an initial sales charge as follows:
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- --------------------------------------------------------------------------------
Less than $50,000 ................. 4.75% 4.99% 4.25%
$50,000 but less than $100,000 .... 4.50% 4.71% 4.25%
$100,000 but less than $250,000 ... 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 . 2.00% 2.04% 1.75%
- ----------
*Rounded to the nearest one-hundredth percent.
----------------------------------------------
Purchases of a Fund's Class A shares made after January 1, 1997, (i) in the
amount of $1 million or more; (ii) by a corporate or certain other qualified
retirement plan or a non-qualified deferred compensation plan or a Title I tax
sheltered annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan"), or a TSA plan sponsored by a public
educational entity having 5,000 or more eligible employees (an "Educational
TSA Plan"); or (iii) by (a) institutional investors, which may include bank
trust departments and registered investment advisers; (b) investment advisers,
consultants or financial planners who place trades for their own accounts or
the accounts of their clients and who charge such clients a management,
consulting, advisory or other fee; (c) clients of investment advisers or
financial planners who place trades for their own accounts if the accounts are
linked to the master account of such investment advisers or financial planners
on the books of the broker-dealer through whom shares are purchased; (d)
institutional clients of broker-dealers, including retirement and deferred
compensation plans and the trusts used to fund these plans, which place trades
through an omnibus account maintained with the Fund by the broker-dealer; and
(e) employees of FUNB and its affiliates, EKD and any broker-dealer with whom
EKD has entered into an agreement to sell shares of the Fund, and members of
the immediate families of such employees, will be at net asset value without
the imposition of a front-end sales charge. Certain broker-dealers or other
financial institutions may impose a fee on transactions in shares of the
Funds.
With respect to purchases of the Funds' Class A shares made after January 1,
1997, in the amount of $1 million or more, the Principal Underwriter will pay
broker-dealers or others concessions at the following rate: 1.00% of the
investment amount up to $2,999,999; plus 0.50% of the investment amount
between $3,000,000 and $4,999,999; plus 0.25% of the investment amount over
$4,999,999.
With respect to purchases of the Funds' Class A shares made after January 1,
1997, by Qualifying Plans and Educational TSA Plans, the Principal Underwriter
will pay broker-dealers and others concessions at the rate of 0.50% of the net
asset value of the shares purchased. These payments are subject to reclaim in
the event the shares are redeemed within twelve months after purchase.
Purchases of the Funds' Class A shares made after January 1, 1997, in the
amount of $1 million or more, are subject to a CDSC of 1.00% upon redemption
during the month of purchase and the 12-month period following the month of
purchase.
The sales charge is paid to the Principal Underwriter, which in turn
normally reallows a portion to your broker-dealer. In addition, your broker-
dealer currently will be paid periodic service fees at an annual rate of up to
0.15% of the value of Class A shares maintained by such recipient and
outstanding on the books of the Fund for specified periods.
Upon written notice to broker-dealers with whom it has dealer agreements,
the Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A
shares that are offered in connection with certain fee based programs, such as
wrap accounts sponsored or managed by broker-dealers, investment advisers, or
others who have entered into special agreements with the Principal
Underwriter. Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of a Fund alone or in combination with
Class A shares of other Keystone America Funds. See Exhibit A to this
prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within
30 days after a change in the registered representative's employment when the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front-end sales charge, or
(2) was at some time subject to, but did not actually pay, a CDSC with respect
to the redemption proceeds.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within
30 days after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates when the
amount invested represents redemption proceeds from such unrelated registered
open-end investment company, and the shareholder either (1) paid a front-end
sales charge, or (2) was at some time subject to, but did not actually pay, a
CDSC with respect to the redemption proceeds. This special net asset value
purchase is currently being offered on a calendar month-by-month basis and may
be modified or terminated in the future.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With respect to shares purchased after January 1, 1997, each Fund,
with certain exceptions, imposes a CDSC on Class B shares redeemed as follows:
CDSC
REDEMPTION TIMING IMPOSED
- ----------------- -------
Month of purchase and the first twelve-month period following
the month of purchase ........................................ 5.00%
Second twelve-month period following the month of purchase ..... 4.00%
Third twelve-month period following the month of purchase ...... 3.00%
Fourth twelve-month period following the month of purchase ..... 3.00%
Fifth twelve-month period following the month of purchase ...... 2.00%
Sixth twelve-month period following the month of purchase ...... 1.00%
No CDSC is imposed on amounts redeemed thereafter.
When imposed, the CDSC is deducted from the redemption proceeds otherwise
payable to you. The CDSC is retained by the Principal Underwriter or its
predecessor. Amounts received by the Principal Underwriter or its predecessor
under the Class B Distribution Plans are reduced by CDSCs retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales
Charge and Waiver of Sales Charges" below.
Class B shares purchased after January 1, 1997, that have been outstanding for
seven years after the month of purchase, will automatically convert to Class A
shares (which are subject to a lower Distribution Plan charge) without
imposition of a front-end sales charge or exchange fee. (Conversion of Class B
shares represented by stock certificates will require the return of the stock
certificates to EKSC.) The Class B shares so converted will no longer be subject
to the higher distribution expenses and other expenses, if any, borne by Class B
shares. Because the net asset value per share of Class A shares may be higher or
lower than that of the Class B shares at the time of conversion, although the
dollar value will be the same, a shareholder may receive more or fewer Class A
shares than the number of Class B shares converted. Under current law, it is the
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
interest of such Class B shareholders.
CLASS C SHARES
Class C shares are offered only through broker-dealers who have special
distribution agreements with the Principal Underwriter. Class C shares are
offered at net asset value, without an initial sales charge. With certain
exceptions, each Fund imposes a CDSC of 1.00% on shares redeemed during the
month of purchase and the 12-month period following the month of purchase. No
CDSC is imposed on amounts redeemed thereafter. If imposed, the CDSC is
deducted from the redemption proceeds otherwise payable to you. The CDSC is
retained by the Principal Underwriter or its predecessor. See "Contingent
Deferred Sales Charge and Waiver of Sales Charges" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any CDSC imposed upon the redemption of Class A, Class B, or Class C shares is
a percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net asset value at the time of purchase of such shares.
With respect to shares purchased after January 1, 1997, no CDSC is imposed
when you redeem amounts derived from (1) increases in the value of shares
redeemed above the net cost of such shares; (2) certain shares with respect to
which 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 12 months after the month of
purchase; (4) Class B shares held for more than 72 months after the month of
purchase; or (5) Class C shares held for more than one year after the month of
purchase. Upon request for redemption, shares not subject to the CDSC will be
redeemed first. Thereafter, shares held the longest will be the first to be
redeemed.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC will
be imposed on any redemptions made specifically by an individual participant
in the Qualifying Plan. This waiver is not available in the event a Qualifying
Plan (as a whole) redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of 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 the Systematic Income Plan
of up to 1.0% per month of the shareholder's initial account balance; (6)
withdrawals consisting of loan proceeds to a retirement plan participant; (7)
financial hardship withdrawals made by a retirement plan participant; or (8)
withdrawals consisting of returns of excess contributions or excess deferral
amounts made to a retirement plan participant.
Each Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a CDSC to certain Directors, Trustees,
officers and employees of the Fund, Keystone, the Principal Underwriter and
certain of their affiliates, and to members of the immediate families of such
persons; to registered representatives of firms with dealer agreements with the
Principal Underwriter; and to a bank or trust company acting as a trustee for a
single account. See the statement of additional information.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net redemption value by writing
to the Trust, c/o EKSC, and presenting a properly endorsed share certificate
(if certificates have been issued) to the Trust. Your signature(s) on the
written order and certificates must be guaranteed as described below. In order
to redeem by telephone or to engage in telephone transactions generally, you
must complete the authorization in your account application. Proceeds for
shares redeemed on telephone order will be deposited by wire or EFT only to
the bank account designated in your account application.
You may also redeem your shares through your broker-dealer. The Principal
Underwriter, acting as agent for the Trust, stands ready to repurchase Fund
shares upon orders from broker-dealers and will calculate the net asset value
on the same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable CDSC, to the broker-dealer placing the order
within seven days thereafter. The Principal Underwriter charges no fee for
this service. Your broker-dealer, however, may charge a service fee.
The redemption value equals the net asset value per share adjusted for
fractions of a cent and may be more or less than your cost depending upon
changes in the value of a Fund's portfolio securities between purchase and
redemption. A CDSC may be imposed by a Fund at the time of redemption of
certain shares as explained in "How to Buy Shares." If imposed, the CDSC is
deducted from the redemption proceeds otherwise payable to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the 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 15
days or more. Any delay may be avoided by purchasing shares either with a
certified check, by Federal Reserve or bank wire of funds, by direct deposit
or by EFT. Although the mailing of a redemption check or the wiring or EFT of
redemption proceeds may be delayed, the redemption value will be determined
and the redemption processed in the ordinary course of business upon receipt
of proper documentation. In such a case, after the redemption and prior to the
release of the proceeds, no appreciation or depreciation will occur in the
value of the redeemed shares, and no interest will be paid on the redemption
proceeds. If the payment of a redemption has been delayed, the check will be
mailed or the proceeds wired or sent EFT promptly after good payment has been
collected.
The Trust computes the amount due you at the close of the Exchange at the
end of the day on which it has received all proper documentation from you.
Payment of the amount due on redemption, less any applicable CDSC (as
described above), will be made within seven days thereafter except as
discussed herein.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL
WRITTEN ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE
MEMBER, A BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE
SECURITIES EXCHANGE ACT OF 1934 AND EKSC'S POLICIES. The Trust or EKSC may
waive this requirement or may require additional documents in certain cases.
Currently, the requirement for a signature guarantee has been waived on
redemptions of $50,000 or less when the account address of record has been the
same for a minimum period of 30 days. The Trust and EKSC reserve the right to
withdraw this waiver at any time.
If the Trust receives a redemption order, but you have 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 on the day such information is received.
TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. As mentioned above, to
engage in telephone transactions generally, you must complete the appropriate
sections of a Fund's application.
In order to insure that instructions received by EKSC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation
of your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if
the address and bank account of record have been the same for a minimum period
of 30 days.
If you cannot reach the Trust by telephone, you should follow the procedures
for redeeming by mail or through a broker-dealer as set forth herein.
SMALL ACCOUNTS
Due to the high cost of maintaining small accounts, the 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 CDSCs
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 fees.
Except as otherwise noted, neither the Trust, EKSC, nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder in writing, over the Keystone
Automated Response Line ("KARL"), or by telephone. EKSC will employ reasonable
procedures to confirm that instructions received over KARL or by telephone are
genuine. Neither the Trust, EKSC, nor the Principal Underwriter will be liable
when following instructions received over KARL or by telephone that EKSC
reasonably believes to be genuine.
The 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 EKSC by writing or
by calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price and yield
quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll
free 1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a
week.
EXCHANGES
If you have obtained the appropriate prospectus, you may exchange shares of
a Fund for shares of certain other Keystone America Funds and Keystone Liquid
Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone
America Funds and Class A shares of KLT;
Class B shares may be exchanged for the same type of Class B shares of
other Keystone America Funds and the same type of Class B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone
America Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
CDSC. However, if the shares being tendered for exchange are
(1) Class A shares acquired without a front-end sales charge,
(2) Class B shares that have been held for less than 72 months, or
(3) Class C shares that have been held for less than one year,
and are still subject to a CDSC, such charge will carry over to the shares
being acquired in the exchange transaction.
You may exchange shares for another Keystone fund by calling or writing to
EKSC or by using KARL. As noted above, if the shares being tendered for
exchange are still subject to a CDSC, such charge will carry over to the
shares being acquired in the exchange transaction. The Trust reserves the
right to terminate this exchange offer or to change its terms, including the
right to charge for exchanges.
Orders to exchange a certain class of shares of the Fund for the
corresponding class of shares of KLT will be executed by redeeming the shares
of the Fund and purchasing the corresponding class of shares of KLT at the net
asset value of such shares next determined after the proceeds from such
redemption become available, which may be up to seven days after such
redemption. In all other cases, orders for exchanges received by the 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. An exchange constitutes a sale for federal income tax purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
AUTOMATIC INVESTMENT PLAN
With a Keystone Automatic Investment Plan, you can automatically transfer as
little as $25 per month or $75 per quarter from your bank account or KLT to
the Keystone fund of your choice. Your bank account will be debited for each
transfer. You will receive confirmation with your next account statement.
To establish or terminate an Automatic Investment Plan or to change the
amount or schedule of your automatic investments, you may write to or call
EKSC. Please include your account numbers. Termination may take up to 30 days.
RETIREMENT PLANS
The Trust has various retirement plans available to you, including Individual
Retirement Accounts (IRAs); Rollover IRAs; Simplified Employee Pension Plans
(SEPs); Salary Reduction Plans (SARSEPs); Tax Sheltered Annuity Plans; 403(b)
(7) Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money
Purchase Plans. For details, including fees and application forms, call toll
free 1-800-247-4075 or write to EKSC.
SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $75 and may be as much as 1.0% per
month or 3.0% per quarter of the total net asset value of the Fund shares in
your account when the Systematic Income Plan was opened. Fixed withdrawal
payments are not subject to a CDSC. Excessive withdrawals may decrease or
deplete the value of your account. Moreover, because of the effect of the
applicable sales charge, a Class A investor should not make continuous
purchases of the Fund's shares while participating in a Systematic Income
Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each
month or each quarter in any Keystone America Fund. This results in more
shares being purchased when the selected fund's net asset value is relatively
low and fewer shares being purchased when the fund's net asset value is
relatively high and may result in a lower average cost per share than a less
systematic investment approach.
Prior to participating in dollar cost averaging, you must establish an
account in a Keystone America Fund or a money market fund managed or advised
by Keystone. You should designate on the application (1) the dollar amount of
each monthly or quarterly investment you wish to make and (2) the fund in
which the investment is to be made. Thereafter, on the first day of the
designated month, an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and
invested in shares of the designated fund.
If you are a Class A investor and paid a sales charge on your initial
purchase, the shares purchased will be eligible for Rights of Accumulation and
the sales charge applicable to the purchase will be determined accordingly. In
addition, the value of shares purchased will be included in the total amount
required to fulfill a Letter of Intent. If a sales charge was not paid on the
initial purchase, a sales charge will be imposed at the time of subsequent
purchases, and the value of shares purchased will become eligible for Rights
of Accumulation and Letters of Intent. See Exhibit A -- "Reduced Sales
Charges" at the back of the prospectus.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class
of Keystone America Fund shares you may own automatically invested to purchase
the same class of shares of any other Keystone America Fund. You may select
this service on your application and indicate the Keystone America Fund(s)
into which distributions are to be invested. The value of shares purchased
will be ineligible for Rights of Accumulation and Letters of Intent. See
Exhibit A -- "Reduced Sales Charges" at the back of the prospectus.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at
current net asset value.
PERFORMANCE DATA
From time to time a Fund may advertise "total return," "current yield" and a
"tax equivalent yield." ALL DATA IS BASED ON HISTORICAL RESULTS. PAST
PERFORMANCE SHOULD NOT BE CONSIDERED REPRESENTATIVE OF RESULTS FOR ANY FUTURE
PERIOD OF TIME. Total return and current yield are computed separately for each
class of shares of 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
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
A Fund may enter into repurchase agreements with member banks of the Federal
Reserve System having at least $1 billion in assets, primary dealers in U.S.
government securities or other financial institutions believed by Keystone to
be creditworthy. Such persons must be registered as U.S. government securities
dealers with appropriate regulatory organizations. Under such agreements, the
bank, primary dealer or other financial institution agrees upon entering into
the contract to repurchase the security at a mutually agreed upon date and
price, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during
such period. Under a repurchase agreement, the seller must maintain the value
of the securities subject to the agreement at not less than the repurchase
price, such value being determined on a daily basis by marking the underlying
securities to their market value. Although the securities subject to the
repurchase agreement might bear maturities exceeding a year, the Funds only
intend to enter into repurchase agreements that provide for settlement within
a year and usually within seven days. Securities subject to repurchase
agreements will be held by the Trust's custodian or in the Federal Reserve
book entry system. The Funds do not bear the risk of a decline in the value of
the underlying security unless the seller defaults under its repurchase
obligation. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, a Fund could experience both delays in liquidating the
underlying securities and losses, including (1) possible declines in the value
of the underlying securities during the period while the Fund seeks to enforce
its rights thereto; (2) possible subnormal levels of income and lack of access
to income during this period; and (3) expenses of enforcing its rights. The
Board of Trustees has established procedures to evaluate the creditworthiness
of each party with whom each Fund enters into repurchase agreements by setting
guidelines and standards of review for Keystone and monitoring Keystone's
actions with regard to repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, a Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. Each Fund intends
to enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions.
At the time a Fund enters into a reverse repurchase agreement, it will
establish a segregated account with the Trust's custodian containing liquid
assets such as U.S. government securities or other high grade debt securities
having a value not less than the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities that a Fund is obligated to repurchase may decline below the
repurchase price. Reverse repurchase agreements magnify the potential for gain
or loss on the portfolio securities of a Fund and, therefore, increase the
possibility of fluctuation in the Fund's net asset value. In the event the
buyer of securities under a reverse repurchase agreement files for bankruptcy
or becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce a Fund's obligation to
repurchase the securities and the Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such determination.
"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 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
Massachusetts 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 presently not aware of facts which
would render such information inaccurate.
The Massachusetts economy shifted from labor intensive manufacturing to
services, especially in the medical and biotechnology areas. Although The
Commonwealth experienced an economic slowdown during the 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 significate changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and
business. New York City has also had to face great competition as other major
cities have developed financial and business capabilities which make them less
dependent on the specialized services traditionally available almost
exclusively in New York City.
During the 1982-83 recession, overall economic activity in the State
declined less than that of the nation as a whole. However, in the calendar
years 1984 through 1991, the State's rate of economic expansion was somewhat
slower than that of the nation. In the 1990-91 recession, the economy of the
State, and that of the rest of the Northeast, was more heavily damaged than
that of the nation as a whole and has been slower to recover. The total
employment growth rate in the State has been below the national average since
1984. The unemployment rate in the State dipped below the national rate in the
second half of 1981 and remained lower until 1991; since then, it has been
higher. According to data published by the U.S. Bureau of Economic Analysis,
during the past ten years, total personal income in the State rose slightly
faster than the national average only from 1986 through 1988.
The State has the second highest combined state and local tax burden in the
United States. The burden of State and local taxation, in combination with the
many other causes of regional economic dislocation, may have contributed to
the decisions of some businesses and individuals to relocate outside, or not
locate within, the State.
In recent years, State actions affecting the level of receipts and
disbursements, as well as the relative strength of the State and regional
economy, actions of the Federal government and other factors, have created
structural budget gaps for the State. These gaps resulted from a significant
disparity between recurring revenues and the costs of maintaining or
increasing the level of support for State programs. The 1995-96 enacted budget
combines significant tax and program reductions, which will, in the current
and future years, lower both the recurring receipts base (before the effect of
any economic stimulus from such tax reductions) and the historical annual
growth in State program spending. Notwithstanding these changes, the State can
expect to continue to confront structural deficits in future years.
The State's current fiscal year commenced on April 1, 1996, and ends on
March 31, 1997, and is referred to herein as the State's 1996-97 Fiscal Year.
As of May 22, 1996, the State's budget for the 1996-97 Fiscal Year was not yet
enacted by the State Legislature.
The 1996-97 Financial Plan projects balance on a cash basis in the General
Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $31.32 billion, a
decrease of $1.4 billion from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to their funds are
projected to be $31.22 billion, a decrease of $1.5 billion from spending
totals projected for the current fiscal year. After adjustments and transfers
for comparability between the 1995-96 and 1996-97 State Financial Plans, the
Executive Budget proposes an absolute year-to-year decline in General Fund
spending of 5.8 percent. Spending from all funding sources (including federal
aid) is proposed to increase by 0.4 percent from the prior fiscal year after
adjustments and transfers for comparability.
On May 15, 1996, it was announced that the State owed local governments
approximately $430 million for services provided to handicapped children in
1994 and earlier. Funds to cover such payments were not included in the
1996-97 Financial Plan.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. For example, various proposals
relating to Federal tax and spending policies that are currently being
publicly discussed and debated could, if enacted, have a significant impact on
the State's financial condition in the current and future fiscal years.
Because of the uncertainty and unpredictability of the changes, their impact
cannot, as a practical matter, be included in the assumptions underlying the
State's projections of this time.
The fiscal health of the State is closely related to the fiscal health of
its localities, particularly New York City, which has required and continues
to require significant financial assistance from the State.
New York City depends on State Aid both to enable it to balance its budget
and to meet its cash requirements. New York City has achieved balanced
operating results for each of its fiscal years since 1981 as reported in
accordance with the then-applicable GAP Standards.
During the 1990 and 1991 fiscal years, New York City experienced significant
shortfalls in almost all of its major tax sources and increases in social
service costs, and was required to take actions to close substantial budget
gaps in order to maintain balanced budgets n accordance with its financial
plan.
New York State's authorities are generally responsible for financing,
constructing and operating revenue-producing public benefit facilities. The
fiscal stability of the State is related, in part, to the fiscal stability of
its public authorities. Public authorities are not subject to the
constitutional restrictions on the incurrence of debt which applies to the
State itself and may issue bonds and notes within the amounts permitted by,
and as otherwise restricted by, their legislative authorization. The State's
access to the public credit markets could be impaired, and the market price of
its outstanding debt may be materially adversely affected, if any of its
public authorities were to default on their respective obligations,
particularly those using the financing techniques referred to as State-
supported or State-related.
As of September 30, 1994, the date of the latest data available, there were
18 public authorities that had outstanding debt of $100 million or more, and
the aggregate outstanding debt including refunding bonds, of the these 18
public authorities was $70.3 billion.
As of March 31, 1995, aggregate public authority debt outstanding as State-
supported debt was $27.9 billion and as State-related debt was $36.1 billion.
Public authority operating expenses and debt service costs are generally
paid by revenues generated by the projects financed or operated, such as tolls
charged for the use of highways, bridges or tunnels, rentals charged for
housing units, and charges for occupancy at medical care facilities. In
addition, State legislation authorizes several financing techniques for public
authorities. Also, there are statutory arrangements providing for state local
assistance payments, otherwise payable to localities, to be made under certain
circumstances to public authorities. Although the state has no obligation to
provide additional assistance to localities whose local assistance payments
have been paid to public authorities under those arrangements if local
assistance payments are so diverted, the affected localities could seek
additional state assistance. Some authorities also received monies from state
appropriations to pay for the operating costs of certain programs.
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance during the
State's 1995-1996 fiscal year and thereafter. The potential impact on the
State of such requests by localities is not included in the projections of the
State receipts and disbursements in the State's 1995-1996 fiscal year.
Certain litigation pending against the State by its officers or employees
could affect adversely the financial condition of the State in the 1995-1996
fiscal year or thereafter. Adverse developments in these proceedings or the
initiation of new proceedings could affect the ability of the State to
maintain a balanced 1995-1996 State Financial Plan. The State believes that
the 1995-1996 State Financial Plan includes sufficient reserves for the
payment of judgments that may be required during the 1995-1996 fiscal year.
There can be no assurance, however, that an adverse decision in any of these
proceedings would not exceed the amount of the 1995-1996 State Financial Plan
reserves for the payment of judgments and, thereby, affect the ability of the
State to maintain a balanced 1995-1996 State Financial Plan.
An expanded discussion is contained in the statement of additional
information.
<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 United
States and certain qualifying agencies, instrumentalities, territories and
possessions of the U.S., the interest from which are statutorily free from
state taxation in the Commonwealth of Pennsylvania under the laws of the
Commonwealth or the U.S. (collectively, "U.S. Obligations"). Distributions
attributable to most other sources will not be exempt from Pennsylvania
personal income tax. Distributions of gains attributable to Pennsylvania
Obligations and U.S. Obligations (collectively "Exempt Obligations") will be
subject to the Pennsylvania personal income tax.
Shares of the Pennsylvania Fund that are held by individual shareholders who
are Pennsylvania residents subject to the Pennsylvania county personal
property tax will be exempt from such tax to the extent that the Pennsylvania
Fund's portfolio consists of Exempt Obligations on the annual assessment date.
Nonresidents of the Commonwealth of Pennsylvania are not subject to the
Pennsylvania county personal property tax. Corporations are not subject to
Pennsylvania personal property taxes. For shareholders who are residents of
the City of Philadelphia, distributions of interest derived from Exempt
Obligations are not taxable for purposes of the Philadelphia School District
investment income tax provided that the Pennsylvania Fund reports to its
investors the percentage of Exempt Obligations held by it for the year. The
Pennsylvania Fund will report such percentage to its shareholders.
Distributions of interest, but not gains, realized on Exempt Obligations are
not subject to the Pennsylvania corporate net income tax. The Pennsylvania
Department of Revenue also takes the position that shares of funds similar to
the Pennsylvania Fund are not considered exempt assets of a corporation for
the purpose of determining its capital stock value subject to the
Commonwealth's capital stock and franchise taxes.
SPECIAL FACTORS AFFECTING THE PENNSYLVANIA FUND
Historically, Pennsylvania is among the leading states in manufacturing and
mining, and its steel and coal industries have been of national importance.
However, due in part to the decline in the steel and coal industries,
Pennsylvania's economy has become more diversified, with major new sources of
growth in the service and trade sectors. The Commonwealth's unemployment rate
is below the national average, and its per capita income is slightly above the
national average. The Commonwealth's General Fund, through which taxes are
received and debt service is made, had unappropriated balance surpluses for
the years ended June 30, 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 the Fund alone or in combination
with Class A shares of other Keystone America Funds. Only Class A shares
subject to an initial or deferred sales charge are eligible for inclusion in
reduced sales charge programs.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her
spouse and children under the age of 21; a trustee or other fiduciary of a
single trust estate or single fiduciary account established for their benefit;
an organization exempt from federal income tax under Section 501 (c)(3) or
(13) of the Internal Revenue Code; a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal
Revenue Code; or other organized groups of persons, whether incorporated or
not, provided the organization has been in existence for at least six months
and has some purpose other than the purchase of redeemable securities of a
registered investment company at a discount. In order to qualify for a lower
sales charge, all orders from an organized group will have to be placed
through a single investment dealer or other firm and identified as originating
from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may
combine concurrent direct purchases of Class A shares of two or more of the
"Eligible Funds," as defined below. For example, if a Purchaser concurrently
invested $75,000 in one of the other "Eligible Funds" and $75,000 in the Fund,
the sales charge would be that applicable to a $150,000 purchase, i.e., 3.75%
of the offering price, as indicated in the Sales Charge Schedule in the
prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of the
Fund's Class A shares, a Purchaser is entitled to accumulate current purchases
with the current value of previously purchased Class A shares of the Fund and
Class A shares of certain other eligible funds that are still held in (or
exchanged for shares of and are still held in) the same or another eligible
fund ("Eligible Fund(s)"). The Eligible Funds are the Keystone America Funds
and Keystone Liquid Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the
next lower sales charge of 3.75% of the offering price as indicated in the
Sales Charge schedule. EKSC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be
granted subject to confirmation of the Purchaser's holdings. The Right of
Accumulation may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount
specified on the application, as described in this prospectus. The Letter of
Intent does not obligate the Purchaser to purchase, nor the Fund to sell, the
amount indicated.
After the Letter of Intent is received by EKSC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated
on the application. The Letter of Intent may be back-dated up to ninety days
so that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not
apply toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to
the difference between the sales charge paid and the sales charge applicable
to purchases actually made. Out of the initial purchase (or subsequent
purchases, if necessary) 5% of the dollar amount specified on the application
will be held in escrow by EKSC in the form of shares registered in the
Purchaser's name. The escrowed shares will not be available for redemption,
transfer or encumbrance by the Purchaser until the Letter of Intent is
completed or the higher sales charge paid. All income and capital gains
distributions on escrowed shares will be paid to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser
will be notified and the escrowed shares will be released. If the intended
investment is not completed, the Purchaser will be asked to remit to the
Principal Underwriter any difference between the sales charge on the amount
specified and on the amount actually attained. If the Purchaser does not
within 20 days after written request by the Principal Underwriter or his
dealer pay such difference in sales charge, EKSC will redeem an appropriate
number of the escrowed shares in order to realize such difference. Shares
remaining after any such redemption will be released by EKSC. Any redemptions
made by the Purchaser during the thirteen-month period will be subtracted from
the amount of the purchases for purposes of determining whether the Letter of
Intent has been completed. In the event of a total redemption of the account
prior to completion of the Letter of Intent, the additional sales charge due
will be deducted from the proceeds of the redemption and the balance will be
forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and appoints
EKSC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or EKSC
that a Letter of Intent is in effect each time a purchase is made.
<PAGE>
---------------------------------------
KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
---------------------------------------
- ---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
- ---------------------------------
Evergreen Keystone Distributor, Inc.
230 Park Avenue
New York, New York 10169
FLTFF-P Sup. 1/97
4.5M [recycle logo]
540097
---------------------------------------
KEYSTONE
[graphic omitted]
FLORIDA
TAX FREE FUND
---------------------------------------
---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
---------------------------------
PROSPECTUS AND
APPLICATION
<PAGE>
---------------------------------------
KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
---------------------------------------
- ---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
- ---------------------------------
Evergreen Keystone Distributor, Inc.
230 Park Avenue
New York, New York 10169
MATFF-P Sup. 1/97
2.5M [recycle logo]
540098
---------------------------------------
KEYSTONE
[graphic omitted]
MASSACHUSETTS
TAX FREE FUND
---------------------------------------
---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
---------------------------------
PROSPECTUS AND
APPLICATION
<PAGE>
---------------------------------------
KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
---------------------------------------
- ---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
- ---------------------------------
Evergreen Keystone Distributor, Inc.
230 Park Avenue
New York, New York 10169
NYTFF.P Sup. 1/97
4M [recycle logo]
540100
---------------------------------------
KEYSTONE
[graphic omitted]
NEW YORK
TAX FREE FUND
---------------------------------------
---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
---------------------------------
PROSPECTUS AND
APPLICATION
<PAGE>
---------------------------------------
KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
---------------------------------------
- ---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
- ---------------------------------
Evergreen Keystone Distributor, Inc.
230 Park Avenue
New York, New York 10169
PATFF-P Sup. 1/97
4.8M [recycle logo]
540101
---------------------------------------
KEYSTONE
[graphic omitted]
PENNSYLVANIA
TAX FREE FUND
---------------------------------------
---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
---------------------------------
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE STATE TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
JULY 30, 1996
AS SUPPLEMENTED JANUARY 1, 1997
This statement of additional information is not a prospectus, but
relates to, and should be read in conjunction with, the prospectus of Keystone
State Tax Free Fund (the "Trust") dated July 30, 1996, as supplemented. You may
obtain a copy of the prospectus from the Trust's principal underwriter,
Evergreen Keystone Distributor, Inc., or your broker-dealer. Evergreen Keystone
Distributor, Inc. is located at 230 Park Avenue, New York, New York 10169.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
The Trust .............................................................. 2
Investment Policies .................................................... 2
Investment Restrictions ................................................ 5
Valuation of Securities ................................................ 7
Sales Charges .......................................................... 8
Distribution Plans ..................................................... 10
Investment Adviser ..................................................... 13
Trustees And Officers .................................................. 15
Principal Underwriter .................................................. 18
Sub-administrator ...................................................... 20
Brokerage .............................................................. 20
Declaration of Trust ................................................... 22
Standardized Total Return and Yield Quotations ......................... 23
Additional Information ................................................. 25
Appendix A ............................................................. A-1
Appendix B ............................................................. B-1
Financial Statements ................................................... F-1
<PAGE>
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THE TRUST
- -------------------------------------------------------------------------------
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 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 Tax Free Fund and Keystone Pennsylvania Tax Free Fund
(each, a "Fund," and collectively, the "Funds"). The Keystone Pennsylvania Tax
Free Fund ("Pennsylvania Fund") and the Keystone Florida Tax Free Fund ("Florida
Fund") were established on September 19, 1990. The Keystone Massachusetts Tax
Free Fund ("Massachusetts Fund") and the Keystone New York Tax Free Fund ("New
York Fund")were established on February 21, 1992. The Massachusetts Fund and the
New York Fund were not offered to the public prior to February 4, 1994.
Keystone Investment Management Company ("Keystone") is each Fund's
investment adviser. Evergreen Keystone Distributor, Inc. (formerly Evergreen
Funds Distributor, Inc.) ("EKD" or the "Principal Underwriter") is the Trust's
principal underwriter. Evergreen Keystone Investment Services, Inc. (formerly
Keystone Investment Distributors Company) ("EKIS") is the predecessor to the
Principal Underwriter. See "Investment Adviser" and "Principal Underwriter"
below.
The essential information about the 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
- -------------------------------------------------------------------------------
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 coupon 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, as amended (the
"1940 Act") i.e., the lesser of (1) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented or (2) more
than 50% of the outstanding shares).
- -------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
The investment restrictions as summarized below are fundamental for
each Fund and may not be changed without the approval of a 1940 majority of such
Fund's outstanding shares. Unless otherwise stated, all references to the assets
of a Fund are in terms of current market value.
Each Fund may not do the following:
(1) purchase any security of any issuer (other than issues of the U.S.
government, its agencies or instrumentalities) if as a result more than 25% of
its total assets would be invested in a single industry, 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.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
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VALUATION OF SECURITIES
- -------------------------------------------------------------------------------
Current values for 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 maturing 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
- -------------------------------------------------------------------------------
Each Fund offers three classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, a Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. A Fund charges a CDSC as
reimbursement for certain expenses, such as commissions or shareholder servicing
fees, that it has incurred in connection with the sale of its shares (see
"Distribution Plans"). If imposed, a Fund deducts CDSCs from the redemption
proceeds you would otherwise receive. CDSCs attributable to your shares are, to
the extent permitted by the National Association of Securities Dealers, Inc.
("NASD"), paid to the Principal Underwriter or its predecessor. See the
prospectus for additional information on a particular class.
CLASS DISTINCTIONS
Class A Shares
With certain exceptions, when you purchase Class A shares after January
1, 1997, you will pay a maximum sales charge of 4.75%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
Class B Shares
Each Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares purchased after January 1, 1997,
each Fund charges a CDSC on shares redeemed as follows:
Redemption Timing CDSC Rate
----------------- ---------
Month of purchase and the first twelve-month
period following the month of purchase .................. 5.00%
Second twelve-month
period following the month of purchase .................. 4.00%
Third twelve-month
period following the month of purchase .................. 3.00%
Fourth twelve-month
period following the month of purchase .................. 3.00%
Fifth twelve-month
period following the month of purchase .................. 2.00%
Sixth twelve-month
period following the month of purchase .................. 1.00%
Thereafter ................................................... 0.00%
Class B shares purchased after January 1, 1997, that have been
outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificate to Evergreen Keystone Service
Company (formerly Keystone Investor Resource Center, Inc.) ("EKSC") the Trust's
transfer and dividend disbursing agent.)
Class C Shares
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. Each Fund
offers Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, a Fund will charge a CDSC of 1.00%, if you redeem
shares purchased after January 1, 1997, during the month of your purchase and
the 12-month period following the month of your purchase. See "Calculation of
Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net cost of such shares. Upon request for redemption, a Fund
will redeem shares not subject to the CDSC first. Thereafter, a Fund will redeem
shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
Exchanges
A Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Keystone America Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, a Fund will compute any future
CDSC based upon the date you originally purchased the shares you tendered for
exchange.
Waiver of Sales Charges
Purchases of Class A shares made after January 1, 1997, (i) in the
amount of $1 million or more; (ii) by a corporate or certain other qualified
retirement plan or a non-qualified deferred compensation plan or a Title 1 tax
sheltered annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan") or a TSA plan sponsored by a public
educational entity having 5,000 or more eligible employees (an "Educational TSA
Plan"); or (iii) by (a) institutional investors, which may include bank trust
departments and registered investment advisers; (b) investment advisers,
consultants or financial planners who place trades for their own accounts or the
accounts of their clients and who charge such clients a management, consulting,
advisory or other fee; (c) clients of investment advisers or financial planners
who place trades for their own accounts if the accounts are linked to the master
account of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased; (d) institutional clients of
broker-dealers, including retirement and deferred compensation plans and the
trusts used to fund these plans, which place trades through an omnibus account
maintained with a Fund by the broker-dealer; and (e) employees of First Union
National Bank of North Carolina ("FUNB") and its affiliates, EKD and any
broker-dealer with whom EKD has entered into an agreement to sell shares of a
Fund, and members of the immediate families of such employees, will be at net
asset value without the imposition of a front-end sales charge. Certain
broker-dealers or other financial institutions may impose a fee on transactions
in shares of the Funds.
Shares of a Fund may also be sold, to the extent permitted by
applicable law, regulations, interpretations, or exemptions, at net asset value
without the imposition of an initial sales charge to (1) certain Directors,
Trustees, officers, full-time employees or sales representatives of the Fund,
Keystone, the Principal Underwriter, and certain of their affiliates who have
been such for not less than ninety days, and to members of the immediate
families of such persons; (2) a pension and profit-sharing plan established by
such companies, their subsidiaries and affiliates, for the benefit of their
Directors, Trustees, officers, full-time employees, and sales representatives;
or (3) a registered representative of a firm with a dealer agreement with the
Principal Underwriter; provided, however, that all such sales are made upon the
written assurance that the purchase is made for investment purposes and that the
securities will not be resold except through redemption by a Fund.
No initial sales charge or CDSC is imposed on purchases or redemptions
of shares of a Fund by a bank or trust company in a single account in the name
of such bank or trust company as trustee, if the initial investment in shares of
a Fund or any fund in the Keystone Investments Family of Funds, purchased
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1.00% of the amount invested.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC
will be imposed on any redemptions made specifically by an individual
participant in the Qualifying Plan. This waiver is not available in the event a
Qualifying Plan, as a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of 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 a Systematic Income Plan of up to 1.0% per month of the
shareholder's initial account balance; (6) withdrawals consisting of loan
proceeds to a retirement plan participant; (7) financial hardship withdrawals
made by a retirement plan participant; or (8) withdrawals consisting of returns
of excess contributions or excess deferral amounts made to a retirement plan
participant.
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DISTRIBUTION PLANS
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Rule 12b-1 under the 1940 Act permits investment companies, such as the
Funds, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").
The Funds' Class A, 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 who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees").
The NASD limits the amount that a Fund may pay annually in distribution
costs for sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1.00% of the aggregate average daily net asset value of
its shares, of which 0.75% may be used to pay such distribution costs and 0.25%
may be used to pay shareholder service fees. The NASD also limits the aggregate
amount that a Fund may pay for such distribution costs to 6.25% of gross share
sales since the inception of the Distribution Plan, plus interest at the prime
rate plus 1% on such amounts (less any CDSCs paid by shareholders to the
Principal Underwriter) remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that a Fund may expend daily
amounts at an annual rate, which is currently limited to 0.15% of such Fund's
average daily net asset value attributable to Class A shares, to finance any
activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to 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 any such intervals
as the Principal Underwriter may determine, in respect of Class A shares
maintained by any such recipient and outstanding on the books of such Fund for
specified periods.
Amounts paid by a Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.15% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of such Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Class B Distribution Plans provide that a Fund may expend daily
amounts at an annual rate of up to 1.00% (currently limited to 0.90%) of such
Fund's average daily net asset value attributable to Class B shares to finance
any activity that is primarily intended to result in the sale of Class B shares,
including, without limitation, expenditures consisting of payments to the
Principal Underwriter and/or its predecessor. Payments are made to the Principal
Underwriter (1) to enable the Principal Underwriter to pay to others
(broker-dealers) commissions in respect of Class B shares sold since inception
of a Distribution Plan; (2) to enable the Principal Underwriter to pay or to
have paid to others a service fee, at such intervals as the Principal
Underwriter may determine, in respect of Class B shares maintained by any such
recipient and outstanding on the books of such Fund for specified periods; and
(3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission equal to 4.00% of the price paid for each Class B share
sold. The broker-dealer or other party may also receive service fees at an
annual rate of 0.15% of the average daily net asset value of such Class B share
maintained by the recipient and outstanding on the books of a Fund for specified
periods.
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 ("Advances"). The Principal Underwriter
intends to seek full reimbursement of such Advances from such 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 such Fund would be within
the permitted limits. If the Trust's Independent Trustees authorize such
reimbursements of Advances, the effect would be to extend the period of time
during which such Fund incurs the maximum amount of costs allowed by the Class B
Distribution Plans.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, EKIS, the predecessor to the
Principal Underwriter sold to a financial institution substantially all of its
12b-1 fee collection rights and CDSC collection rights in respect of Class B
shares sold during the period beginning approximately June 1, 1995 through
November 30, 1996. The 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 Plans, the
Funds may be subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to
compensate broker-dealers or other persons for distributing shares of the Funds
will be provided by FUNB or its affiliates.
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 such
Fund's average daily net asset value attributable to Class C shares to finance
any activity that is primarily intended to result in the sale of Class C shares,
including, without limitation, expenditures consisting of payments to the
Principal Underwriter and/or its predecessor. Payments are made to the Principal
Underwriter (1) to enable the Principal Underwriter to pay to others
(broker-dealers) commissions in respect of Class C shares sold since inception
of the Distribution Plan; (2) to enable the Principal Underwriter to pay or to
have paid to others a service fee, at such intervals as the Principal
Underwriter may determine, in respect of Class C shares maintained by any such
recipient and outstanding on the books of such Fund for specified periods; and
(3) as interest.
The Principal Underwriter generally reallows to broker-dealers or
others a commission in the amount of 0.75% of the price paid for each Class C
share sold plus the first year's service fee in advance in the amount of 0.25%
of the price paid for each Class C share sold. Beginning approximately fifteen
months after purchase, broker-dealers or others receive a commission at an
annual rate of 0.75% (subject to NASD rules) plus service fees at the annual
rate of 0.25%, respectively, of the average daily net asset value of each Class
C share maintained by the recipient and outstanding on the books of a Fund for
specified periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by a Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by a Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, the Principal Underwriter and EKIS will ask the Independent
Trustees to take whatever action they deem appropriate under the circumstances
with respect to payment of such Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of a Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by votes of
the majority of both (1) the Trust's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the Trust will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The Independent Trustees of the Trust have determined that the sales of
the Funds' shares resulting from payments under the Distribution Plans have
benefited the respective Fund.
During the fiscal year ended March 31, 1996, the Florida,
Massachusetts, New York and Pennsylvania Funds paid EKIS (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.
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INVESTMENT ADVISER
- -------------------------------------------------------------------------------
Subject to the general supervision of the Trust's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to each Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of Keystone
Investments, 200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, the predecessor corporation to Keystone
Investments and indirectly each subsidiary of Keystone Investments, including
Keystone, were acquired (the "Acquisition") by FUNB, a wholly-owned subsidiary
of First Union Corporation ("First Union"). The predecessor corporation to
Keystone Investments was acquired by FUNB by merger into a wholly-owned
subsidiary of FUNB, which entity then succeeded to the business of the
predecessor corporation. Contemporaneously with the Acquisition, each Fund
entered into a new investment advisory agreement with Keystone and into a
principal underwriting agreement with EKD, a wholly-owned subsidiary of Furman
Selz LLC ("Furman Selz"). The new investment advisory agreement (the "Advisory
Agreement") was approved by the shareholders of each Fund on December 9, 1996,
and became effective on December 11, 1996.
Keystone Investments and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $133.9 billion in consolidated assets as of
September 30, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB, together with Lieber & Company and
Evergreen Asset Management Corp., wholly-owned subsidiaries of FUNB, manage or
otherwise oversee the investment of over $50 billion in assets belonging to a
wide range of clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Trust's Board of Trustees, Keystone furnishes to each Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of each Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
Each Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to, (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees of Independent
Trustees; (5) brokerage commissions, brokers' fees and expenses; (6) issue and
transfer taxes; (7) costs and expenses under the Distribution Plan; (8) taxes
and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
such Fund and its shares with the SEC or under state or other securities laws;
(11) expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
such Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges
and expenses of legal counsel for such Fund and for the Independent Trustees of
the Trust on matters relating to such Fund; (14) charges and expenses of filing
annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of such Fund.
Each Fund pays Keystone a fee for its services at the annual rate of:
Aggregate Net Asset
Management Value of the
Fee Shares of the Fund
- -------------------------------------------------------------------------------
0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000.
Keystone's fee is computed as of the close of business each business day and
payable daily.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Fund or by a vote of a majority of a
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Trust's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
During the 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 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 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 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 currently intends to continue the foregoing expense
limitations on a calendar month-by-month basis. Keystone will periodically
evaluate the expense limitations and may modify or terminate them in the future.
Keystone would not be required to make such reimbursement to any Fund to the
extent it would result in the Fund's inability to qualify as a regulated
investment company under the Code. In accordance with voluntary expense
limitations in effect during the fiscal year ended March 31, 1996, Keystone
reimbursed the Florida, Massachusetts, New York and Pennsylvania Funds $196,232,
$100,729, $119,608 and $190,132 respectively.
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TRUSTEES AND OFFICERS
- -------------------------------------------------------------------------------
Trustees and officers of the Trust, their principal occupations and
some of their affiliations over the last five years are as follows:
FREDERICK AMLING: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Professor, Finance Department, George
Washington University; President, Amling & Company
(investment advice); and former Member, Board of
Advisers, Credito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of all the Evergreen funds other than
Evergreen Investment Trust; real estate developer and
construction consultant; and President of Centrum
Equities and Centrum Properties, Inc.
CHARLES A. AUSTIN III: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Investment Counselor to Appleton Partners,
Inc.; and former Managing Director, Seaward
Management Corporation (investment advice).
FOSTER BAM: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of all the Evergreen funds other than
Evergreen Investment Trust; Partner in the law firm
of Cummings & Lockwood; Director, Symmetrix, Inc.
(sulphur company) and Pet Practice, Inc. (veterinary
services); and former Director, Chartwell Group Ltd.
(Manufacturer of office furnishings and accessories),
Waste Disposal Equipment Acquisition Corporation and
Rehabilitation Corporation of America (rehabilitation
hospitals).
*GEORGE S. BISSELL: Chairman of the Board, Chief Executive Officer and
Trustee of the Trust; Chairman of the Board, Chief
Executive Officer and Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and Chairman
of its Investment Committee); former Director and
Chairman of the Board of Hartwell Keystone; and
former Chairman of the Board, Director and Chief
Executive Officer of Keystone Investments.
EDWIN D. CAMPBELL: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Principal, Padanaram Associates, Inc.; and
former Executive Director, Coalition of Essential
Schools, Brown University.
CHARLES F. CHAPIN: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; and former Director, Peoples Bank (Charlotte,
NC).
K. DUN GIFFORD: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine;
Chairman and President, Oldways Preservation and
Exchange Trust (education); former Chairman of the
Board, Director, and Executive Vice President, The
London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Associates
(environmental consulting); and former Director,
Keystone Investments and Keystone.
JAMES S. HOWELL: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman and Trustee of the Evergreen funds;
former Chairman of the Distribution Foundation for
the Carolinas; and former Vice President of Lance
Inc. (food manufacturing).
LEROY KEITH, JR.: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman of the Board and Chief Executive
Officer, Carson Products Company; Director of Phoenix
Total Return Fund and Equifax, Inc.; Trustee of
Phoenix Series Fund, Phoenix Multi-Portfolio Fund,
and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman and Of Counsel, Keyser, Crowley &
Meub, P.C.; Member, Governor's (VT) Council of
Economic Advisers; Chairman of the Board and
Director, Central Vermont Public Service Corporation
and Lahey Hitchcock Clinic; Director, Vermont Yankee
Nuclear Power Corporation, Grand Trunk Corporation,
Grand Trunk Western Railroad, Union Mutual Fire
Insurance Company, New England Guaranty Insurance
Company, Inc., and the Investment Company Institute;
former Director and President, Associated Industries
of Vermont; former Director of Keystone, Central
Vermont Railway, Inc., S.K.I. Ltd., and Arrow
Financial Corp.; and former Director and Chairman of
the Board, Proctor Bank and Green Mountain Bank.
GERALD M. MCDONELL: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of the Evergreen funds; and Sales
Representative with Nucor-Yamoto, Inc. (Steel
producer).
THOMAS L. MCVERRY: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of the Evergreen funds; former Vice
President and Director of Rexham Corporation; and
former Director of Carolina Cooperative Federal
Credit Union.
*WILLIAM WALT PETTIT: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of the Evergreen funds; and Partner in
the law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Vice Chair and former Executive Vice
President, DHR International, Inc. (executive
recruitment); former Senior Vice President, Boyden
International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New
Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
RUSSELL A. SALTON, III MD: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of the Evergreen funds; Medical
Director, U.S. Health Care/Aetna Health Services; and
former Managed Health Care Consultant; former
President, Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Trustee of the Evergreen funds; and Attorney,
Law Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Chairman, Environmental Warranty, Inc.
(Insurance agency); Executive Consultant, Drake Beam
Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Hartford
Hospital, Old State House Association, Middlesex
Mutual Assurance Company, and Enhance Financial
Services, Inc.; Chairman, Board of Trustees, Hartford
Graduate Center; Trustee, Greater Hartford YMCA;
former Director, Vice Chairman and Chief Investment
Officer, The Travelers Corporation; former Trustee,
Kingswood-Oxford School; and former Managing Director
and Consultant, Russell Miller, Inc.
*ANDREW J. SIMONS: Trustee of the Trust; Trustee or Director of all
other funds in the Keystone Investments Families of
Funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; Adjunct Professor of Law
and former Associate Dean, St. John's University
School of Law; Adjunct Professor of Law, Touro
College School of Law; and former President, Nassau
County Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Trust; President and
Treasurer of all other funds in the Keystone
Investments Families of Funds; President and
Treasurer of the Evergreen funds; Senior Managing
Director, Furman Selz LLC since 1992; Managing
Director from 1984 to 1992; 230 Park Avenue, Suite
910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Trust; Secretary of all other funds
in the Keystone Investments Families of Funds; Senior
Vice President and Director of Administration and
Regulatory Services, BISYS Fund Services; 3435
Stelzer Road, Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Trust within the
meaning of the 1940 Act.
Mr. Bissell is deemed an "interested person" of the Trust by virtue of
his ownership of stock of First Union Corporation ("First Union"), of which
Keystone is an indirect wholly-owned subsidiary. See "Investment Adviser." Mr.
Pettit and Mr. Simons may each be deemed an "interested person" as a result of
certain legal services rendered to a subsidiary of First Union by their
respective law firms, Holcomb and Pettit, P.A. and Farrell, Fritz, Caemmerer,
Cleary, Barnosky & Armentano, P.C. As of the date hereof, Mr. Pettit and Mr.
Simons are each applying for an exemption from the SEC which would allow them to
retain their status as an Independent Trustee.
After the transfer of EKD and its related mutual fund distribution and
administration business to BISYS, it is expected that all of the officers of the
Trust will be officers and/or employees of BISYS. See "Sub-administrator."
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 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 shares of the Massachusetts
Fund.
Except as set forth above, 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 (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaces EKIS as the Trust's principal underwriter.
EKIS may no longer act as principal underwriter of the Trust due to regulatory
restrictions imposed by the Glass-Steagall Act upon national banks such as FUNB
and their affiliates, that prohibit such entities from acting as the
underwriters of mutual fund shares. While EKIS may no longer act as principal
underwriter of the Trust as discussed above, EKIS may continue to receive
compensation from the Trust or the Principal Underwriter in respect of
underwriting and distribution services performed prior to the termination of
EKIS as principal underwriter. In addition, EKIS may also be compensated by the
Principal Underwriter for the provision of certain marketing support services to
the Principal Underwriter at an annual rate of up to .75% of the average daily
net assets of a Fund, subject to certain restrictions.
The Principal Underwriter, as agent, has agreed to use its best efforts
to find purchasers for the shares. The Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from broker-dealers, and others, acting as principals, for sales of
shares to them. The Underwriting Agreements provide that the Principal
Underwriter will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. The Principal
Underwriter or EKIS, its predecessor, may receive payments from the Trust
pursuant to the Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the public offering price of the shares, which is determined in accordance
with the provisions of the Trust's Declaration of Trust, By-Laws, current
prospectuses 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.
Each Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
The Principal Underwriter has agreed that it will, in all respects,
duly conform with all state and federal laws applicable to the sale of the
shares. The Principal Underwriter has also agreed that it will indemnify and
hold harmless the 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 that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Trust.
Each Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Trust's Independent Trustees, and (ii) by vote of a majority of
the Trust's Trustees, in each case, cast in person at a meeting called for that
purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Principal Underwriter's judgment, it
could benefit the sales of shares, the Principal Underwriter may provide to
selected broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software, and data files.
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SUB-ADMINISTRATOR
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Furman Selz provides officers and certain administrative services to
each Fund pursuant to a sub-administration agreement. For its services under
that agreement Furman Selz will receive from Keystone an annual fee at the
maximum annual rate of .01% of the average daily net assets of each Fund. Furman
Selz is located at 230 Park Avenue, New York, New York 10169.
It is expected that on or about January 2, 1997, Furman Selz will
transfer EKD, and its related mutual fund distribution and administration
business, to BISYS Group, Inc. ("BISYS"). At that time, BISYS will succeed as
sub-administrator for each Fund. It is not expected that the acquisition of the
mutual fund distribution and administration business by BISYS will affect the
services currently provided by EKD or Furman Selz.
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BROKERAGE
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SELECTION OF BROKERS
In effecting transactions in portfolio securities for a Fund, Keystone
seeks the best execution of orders at the most favorable prices. Keystone
determines whether a broker has provided a Fund with best execution and price in
the execution of a securities transaction by evaluating, among other things:
1. overall direct net economic result to such Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large block
is involved;
4. the broker's readiness to execute potentially difficult transactions
in the future;
5. the financial strength and stability of the broker; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors and
trends and other statistical and factual information.
The Funds' management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should a Fund or Keystone receive research and other statistical and
factual information from a broker, such Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone is required to perform
under the Advisory Agreement (as defined below). Keystone believes that the
cost, value and specific application of such information are indeterminable and
cannot be practically allocated between a Fund and its other clients who may
indirectly benefit from the availability of such information. Similarly, a Fund
may indirectly benefit from information made available as a result of
transactions effected for Keystone's other clients. Under the Advisory
Agreement, Keystone is permitted to pay higher brokerage commissions for
brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event Keystone follows such a practice,
it will do so on a basis that is fair and equitable to the Funds.
Neither any Fund nor Keystone intends on placing securities
transactions with any particular broker. The Trust's Board of Trustees has
determined, however, that a Fund may consider sales of such Fund's shares as a
factor in the selection of brokers to execute portfolio transactions, subject to
the requirements of best execution described above.
BROKERAGE COMMISSIONS
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.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, a Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for each Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of a Fund's securities, the Trust believes that in other
cases its ability to participate in volume transactions will produce better
executions.
A Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, the Principal Underwriter, or any of their affiliated
persons, as defined in the 1940 Act.
The Board of Trustees will, from time to time, review the Trust's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the Board
of Trustees may change, modify or eliminate any of the foregoing practices.
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; (2) 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 (3) provides for indemnification out
of Trust property for any shareholder held personally liable for the obligations
of the Trust.
VOTING RIGHTS
Under the terms of 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 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 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 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 Fund were 0.32% and
1.90%, respectively.
CLASS C SHARES
For the fiscal year ended March 31, 1995, 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 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 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 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 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 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 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 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 Fund was 6.35%,
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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REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets
in any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
GENERAL
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian (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.
EKSC, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
is a wholly-owned subsidiary of Keystone and acts as transfer agent and dividend
disbursing agent for the 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 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 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
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 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 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 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 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
Fund.
The Trust is one of 16 different investment companies in the Keystone
America Family, which offers a range of choices to serve shareholder needs. In
addition to the Trust, the Keystone America Family includes the following funds
with the various investment objectives described below:
KEYSTONE BALANCED FUND II - Seeks current income and capital appreciation
consistent with the preservation of capital.
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 GLOBAL RESOURCES AND DEVELOPMENT FUND - Seeks long-term capital growth
by investing primarily in equity securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE OMEGA FUND, INC. - 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 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 apparently indemnified 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 interest on debt and
other obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However, rather than
utilizing a three-year average wage and salary growth rate, as used by Chapter
62F, Chapter 29B utilizes an allowable state revenue growth factor equal to 1/3
of the positive percentage gain in Massachusetts wages and salaries, as reported
by the federal government during the three calendar years immediately preceding
the end of a given fiscal year. Additionally, unlike Chapter 62F, Chapter 29B
allows for an increase in maximum state tax revenues to fund the increase in
local aid and excludes from its definition of state tax revenues (i) income
derived from local option taxes and excises, and (ii) revenues needed to fund
debt service costs.
Tax revenues in fiscal 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 totaling $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 Fund will generally invest
in New York municipal obligations. The New York Fund is therefore susceptible to
political, economical, or regulatory factors affecting New York State and
governmental bodies within New York State. Some of the more significant events
and conditions relating to the financial situation in New York are summarized
below. The following information provides only a brief summary of the complex
factors affecting the financial situation in New York, is derived from sources
that are generally available to investors and is believed to be accurate. It is
based on information drawn from official statements and prospectuses issued by,
and other information reported by, the State of New York by its various public
bodies, and by other entities located within the State, including the City of
New York, in connection with the issuance of their respective securities.
THE STATE
New York State (for purposes of this section of the Appendix, "the
State") historically has been one of the wealthiest states in the nation. For
decades, however, the State has grown more slowly than the nation as a whole,
gradually eroding its relative economic position. Statewide, urban centers have
experienced significate changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business. New York City
(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
