Keystone State Tax Free Fund--Series II
Seeks generous tax-free income from high quality municipal bonds
Dear Shareholder:
We are writing to report to you on Keystone America State Tax Free
Fund--Series II for the twelve-month period as of November 30, 1995.
Following this letter we have included a performance summary of the
California Insured and the Missouri Tax Free Fund and an interview with Betsy
Blacher, head of Keystone's municipal bond department, who discusses the
market's performance.
Municipal bond market rebound
This was an unusually strong year for municipal bonds. After an unsettled
market in 1994, patience rewarded municipal bond investors in 1995. Interest
rates declined and bond prices rose as the slow growth economy kept inflation
under control. This 'soft landing' for the economy created a very positive
environment for bond investors, resulting in unusually strong one-year total
returns. The Lehman Municipal Bond Index--a widely recognized benchmark of
municipal bond performance--returned 18.91% for the twelve-month period which
ended November 30, 1995.
Relatively attractive values
Despite the strong performance of municipal bonds in 1995, they remained
attractive versus comparable U.S. Treasury securities. In fact, municipal
bond yields averaged about 93% of the yields on comparable long-term U.S.
Treasury bonds, a historically high level.(1) This meant that many investors
could obtain significantly better yields from municipal bonds than Treasuries
on an after-tax basis.
Outlook
We anticipate a continuation of the positive environment for municipal bonds
over the next twelve months. Interest rates should trend down as the economy
continues to slow and level off. However, we do not expect a recession in
1996. A slow growth environment could result in some price appreciation for
shareholders, but we believe most of the returns should come from income.
Municipal bond supply should remain tight in 1996. With the possibility of
rising demand, we think these factors should continue to provide positive
support for municipal bond prices and your Fund.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds [photo: Albert H. Elfner, III] [photo: George S. Bissell]
January 1996
- ------------
(1) Source: Keystone Investments, Inc. The average yield of a selection of
30-year AA-rated municipal bonds compared to the yield on a 30-year U.S.
Treasury bond yield on November 30, 1995.
1
<PAGE>
Keystone California Insured Tax Free Fund
Seeks to earn generous income, exempt from federal and state income tax,
while preserving capital.
Your Fund's Performance
Performance
For the twelve-month period which ended November 30, 1995:
Class A shares returned 19.63%,
Class B shares returned 18.95%, and
Class C shares returned 18.69%.
Portfolio strategy
Your Fund's strong performance was the result of declining interest rates and
our careful security selection over the twelve month period. As interest
rates declined and the financial crisis in Orange County unfolded, we saw
several opportunities for California municipal bond investors. During this
period, we maintained an average maturity that was longer than your Fund's
peer group. The average maturity of the Fund's holdings was 20 years on
November 30, 1995. Historically, longer maturity bonds tend to perform well
in an environment of declining interest rates.
********************************[Pie chart]************************************
Portfolio Quality Summary
as of November 30, 1995
S&P rating(2)
AAA 98%
A 1%
B 1%
Average portfolio quality: AAA
(percentage of portfolio assets)
(2)Where Standard & Poor's ratings were not available, we have used rating
from Fitch Investors Service, Moody's Investor Service, Inc. or another
nationally recognized statistical rating organization.
******************************************************************************
We also increased our holdings of uninsured, investment grade municipal
bonds--your Fund has the flexibility to invest up to 20% of net assets in
these bonds. We believed many of these bonds had been depressed by the Orange
County crisis. In January 1995 we began to increase our holdings of selected
investment grade (uninsured) bonds because they had underperformed the
California municipal bond market. In the months that followed, the California
municipal bond market traded back to its historical norm, and our uninsured
holdings outperformed considerably. By summer 1995, we decreased your Fund's
holdings of uninsured bonds and repositioned our assets into AAA-rated insured
bonds. Since that time, we believe quality has been the key to overall fund
stability and performance.
Economic environment
The California economy is finally regaining steam. Most of the jobs lost in
the last recession have been replaced and state tax receipts are coming in
ahead of estimates. New businesses are sprouting in the areas of
entertainment, technology, and international trade. In addition, the effect
of anticipated Medicare cuts should be minimized because California has
implemented a number of managed care programs.
Nevertheless, California continues to rely heavily on short-term financing to
meet its tremendous budget needs. Housing remains at depressed levels and the
state's ability to withstand another natural disaster is precarious. While
the state had an operating surplus of $820 million for fiscal 1995,
California has accumulated a deficit of $1.3 billion from prior years. The
state also has growing needs for schools and jails. While well on its way,
California has several years to go before its economy is structurally
healthy.
2
<PAGE>
Outlook
We expect to continue with our significant emphasis on the highest quality
(AAA-rated) bonds. With yield differences between high and lower grade
California bonds narrow, we believe there is little incentive for downgrading
at this time. In addition, over half the portfolio is held in discount bonds,
reflecting our continued belief in the appreciation potential of selected
California municipal bonds.
In view of the variety of the state's fiscal challenges, we believe that your
Fund's emphasis on insured bonds provides additional protection and
stability. The independent backing provided by the guarantor(s) enhances the
bonds' safety and liquidity, making them competitive with uninsured issues in
both quality and performance.
Tax-Equivalent Yields
Federal Tax Bracket(3)
- --------------------------------------------
31% 36% 39.6%
- --------------------------------------------
Combined federal/state rate
- --------------------------------------------
38.32% 45.82% 49.95%
- --------------------------------------------
Yield Taxable Equivalent Yield
- --------------------------------------------
4.5% 7.3% 8.3% 9.0%
- --------------------------------------------
5.0% 8.1% 9.2% 10.0%
- --------------------------------------------
5.5% 8.9% 10.2% 11.0%
- --------------------------------------------
(3)The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields are
hypothetical and do not represent the returns of any particular
investment.
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
3
<PAGE>
Keystone California Insured Tax Free Fund
***************************[Mountain chart]************************************
Growth of an investment in
Keystone California Insured Tax Free Fund
Class A
$ In Thousands
Initial Reinvested
Investment Distributions
2/94 9363 9404
3/94 8877 8962
4/94 8915 9043
5/94 8944 9114
6/94 8801 9011
7/94 8972 9230
8/94 8963 9263
9/94 8753 9088
10/94 8506 8874
11/94 8287 8688
12/94 8287 8730
1/95 8620 9123
2/95 8896 9458
3/95 8858 9463
4/95 8782 9424
5/95 9163 9876
6/95 8887 9521
7/95 8868 9644
8/95 8944 9770
9/95 8972 9845
10/95 9153 10088
11/95 9391 10394
A $10,000 investment in Keystone California Insured Tax Free Fund Class A
made on February 1, 1994 with all distributions reinvested was worth
$10,394 on November 30, 1995. Past performance is no guarantee of
future results.
*****************************************************************************
Twelve-Month Performance as of November 30, 1995
- -----------------------------------------------------------------------------
Class A Class B Class C
Total returns* 19.63% 18.95% 18.69%
Net asset value 11/30/94 $8.70 $8.68 $8.68
11/30/95 $9.86 $9.82 $9.80
Dividends $0.50 $0.47 $0.46
Capital gains None None None
* Before deducting any sales charges.
Historical Record as of November 30, 1995
- -----------------------------------------------------------------------------
Average Annual Returns Class A Class B Class C
1-year w/o sales charge 19.63% 18.95% 18.69%
1-year 13.95% 14.95% 18.69%
Life of Class 2.13% 2.33% 4.24%
Class A share performance is reported at the current maximum front-end sales
charge of 4.75%.
Class B shares purchased after June 1, 1995 are subject to a contingent
deferred sales charge (CDSC) that declines from 5% to 1% over six years from
the month purchased. Performance assumes that shares were redeemed after the
end of a one-year holding period and reflects the deduction of a 4% CDSC.
Class C share performance reflects the return you would have received after
holding shares for one year or more and redeeming after the end of that
period.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone fund by phone or in writing
for a $10 fee. The exchange fee is waived for individual investors who make
an exchange using Keystone's Automated Response Line (KARL). The Fund
reserves the right to change or terminate the exchange offer.
4
<PAGE>
Keystone Missouri Tax Free Fund
Seeks to earn generous income, exempt from federal and state income tax,
while preserving capital.
Your Fund's Performance
Performance
For the twelve-month period which ended November 30, 1995:
Class A shares returned 19.86%,
Class B shares returned 18.79%, and
Class C shares returned 18.78%.
Portfolio strategy
Your Fund's strong performance was the result of declining interest rates and
our careful security selection over the twelve month period. As interest
rates declined, we emphasized bonds we believed would benefit from the
declining interest rate environment: bonds with extended call protection,
zero coupon, and insured discount bonds. This strategy resulted in an average
maturity that was longer than your Fund's peer group. The average maturity of
the Fund's holdings was 20 years on November 30, 1995. Historically, longer
maturity bonds tend to perform better in an environment of declining interest
rates.
******************************[Pie chart]********************************
Portfolio Quality Summary
as of November 30, 1995
S&P rating(4)
AAA 48%
AA 26%
A 19%
BBB 7%
Average portfolio quality: AA
(as a percentage of portfolio assets)
(4)Where Standard & Poor's ratings were not available, we have used rating
from Fitch Investors Service, Moody's Investor Service, Inc. or another
nationally recognized statistical rating organization.
*****************************************************************************
By increasing the call protection of the portfolio, we attempted to preserve
your Fund's income and enhance its total return. We divested your Fund of
bonds with short calls and replaced them with bonds with ten year calls. Many
municipal bonds have "call" features that allow the issuer to redeem prior to
a bond's normal maturity date. Bonds are often called when interest rates
decline, forcing investors to reinvest proceeds at a lower rate. Whenever
possible, we also added premium, noncallable bonds.
We also increased our holdings of zero coupon bonds. These bonds tend to
react strongly to changes in interest rates. As rates declined these bonds
provided excellent returns to the portfolio. We also held about 25% of the
portfolio in insured discount bonds, which historically have tended to move
with the municipal bond market.
Economic Environment
Missouri has continued to broaden its economic base and reduce its dependence
on defense contracts and automobile manufacturing through growth in tourism,
health care and financial business services. New jobs growth has been strong
and the state's unemployment rate has been below the national average. Solid
fiscal management at the state level has resulted in balanced budgets year
after year.
Outlook
Our outlook for Missouri municipal bonds remains positive for 1996. We expect
rates to be stable or trend down and supply to remain tight. In view of
Missouri's track record of strong fiscal and economic performance, we do not
expect the state to be hurt as much as other states by proposed cuts in
Medicaid and agricultural subsidies. We think the state is on solid footing
and the environment should continue to be favorable for your Fund.
5
<PAGE>
Keystone Missouri Tax Free Fund
Tax-Equivalent Yields
Federal Tax Bracket(5)
- --------------------------------------------
31% 36% 39.6%
- --------------------------------------------
Combined federal/state rate
- --------------------------------------------
33.86% 38.46% 41.79%
- --------------------------------------------
Yield Taxable Equivalent Yield
- --------------------------------------------
4.5% 6.8% 7.3% 7.7%
- --------------------------------------------
5.0% 7.6% 8.1% 8.6%
- --------------------------------------------
5.5% 8.3% 8.9% 9.4%
- --------------------------------------------
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
(5)The table is based on federal tax brackets. The 31% bracket includes
single filers earning $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6%
bracket includes single and joint filers earning over $250,000. Yields are
hypothetical and do not represent the returns of any particular
investment.
6
<PAGE>
**************************[Mountain chart]*********************************
Growth of an investment in
Keystone Missouri Tax Free Fund Class A
$ In Thousands
Initial Reinvested
Investment Distributions
2/94 9420 9462
3/94 8982 9068
4/94 8925 9053
5/94 9001 9173
6/94 8925 9139
7/94 9058 9318
8/94 9048 9352
9/94 8839 9178
10/94 8610 8985
11/94 8306 8710
12/94 8506 8962
1/95 8734 9245
2/95 8915 9479
3/95 8934 9544
4/95 8925 9577
5/95 9220 9937
6/95 9048 9795
7/95 9020 9808
8/95 9125 9965
9/95 9163 10050
10/95 9296 10240
11/95 9439 10440
A $10,000 investment in Keystone Missouri Tax Free Fund
Class A made on February 1, 1994 with all distributions reinvested
was worth $10,440 on November 30, 1995. Past performance is
no guarantee of future results.
*****************************************************************************
Twelve-Month Performance as of November 30, 1995
- -----------------------------------------------------------------------------
Class A Class B Class C
Total returns* 19.86% 18.79% 18.78%
Net asset value 11/30/94 $8.72 $8.67 $8.66
11/30/95 $9.91 $9.80 $9.79
Dividends $0.50 $0.46 $0.46
Capital gains None None None
* Before deducting any sales charges.
Historical Record as of November 30, 1995
- -----------------------------------------------------------------------------
Average Annual Returns Class A Class B Class C
1-year w/o sales charge 19.86% 18.79% 18.78%
1-year 14.16% 14.79% 18.78%
Life of Class 2.38% 2.22% 4.18%
Class A share performance is reported at the current maximum front-end sales
charge of 4.75%.
Class B shares purchased after June 1, 1995 are subject to a contingent
deferred sales charge (CDSC) that declines from 5% to 1% over six years from
the month purchased. Performance assumes that shares were redeemed after the
end of a one-year holding period and reflects the deduction of a 4% CDSC.
Class C share performance reflects the return you would have received after
holding shares for one year or more and redeeming after the end of that
period.
The investment return and principal value will fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone fund by phone or in writing
for a $10 fee. The exchange fee is waived for individual investors who make
an exchange using Keystone's Automated Response Line (KARL). The Fund
reserves the right to change or terminate the exchange offer.
7
<PAGE>
Keystone State Tax Free Fund--Series II
A Discussion With
Fund Management
Betsy A. Blacher heads Keystone's municipal bond investment
team. Ms. Blacher is a professional with 16 years of investment
experience specializing in municipal bonds. She holds a
Bachelor's degree from Wheaton College in economics and
sociology. Together, with portfolio managers Daniel Rabasco and
George Kimball and analyst David Moore, the team evaluates
municipal bonds for Keystone tax free funds.
- ----------------------------------------------------------------------
In evaluating bonds for the Funds, Keystone
looks for . . .
(bullet) Strong credit ratings
(bullet) Responsible fiscal policies
(bullet) Solid financial positions
(bullet) Attractive values
Keystone's municipal bond team also evaluates local economic conditions, the
state legislative climate, the taxing power of the issuer and expected cash
flows from the project.
- ----------------------------------------------------------------------
Q What do the Funds offer investors?
A The Funds are designed for tax-sensitive investors. They seek consistent,
attractive income that is exempt from state and federal income tax. The
Funds offer professional management and diversification from a portfolio of
quality municipal bonds. We manage the Funds with careful attention to
credit quality and financial stability.
Q How did municipal bonds perform over the past year?
A Municipal bonds rebounded strongly as a slowing economy reduced the threat
of higher interest rates and inflation. Most bond holders more than
recovered from their losses in 1994 and recorded double-digit total
returns. This was a reversal from 1994 when yields rose and bond prices
declined. As growth moderated at the start of 1995, municipal bonds rallied
resulting in unusually positive total returns.
Q How did the Funds perform?
A The Funds generated returns that paralleled the strong performance of the
municipal bond market. At the beginning of 1995 we expected economic growth
to moderate and interest rates to decline. So, we emphasized bonds that we
expected to benefit from declining rates: non-callable, discount and zero
coupon bonds. Since callable bonds are likely to be bought back by the
issuer in this type of environment, we emphasized noncallable bonds to
preserve income as rates declined. At the same time, these bonds became
expensive relative to other municipal bonds and this contributed to the
Funds' price appreciation.
Discount bonds are sold at a discount from par, or value at maturity.
Historically these bonds have tended to provide more price appreciation in
a falling rate environment than bonds priced close to or above par.
Zero coupon bonds represented a small portion of the portfolio. But, these
bonds were important contributors to the Funds' strong price recovery.
Because zeros pay income at maturity, they have historically tended to be
the most sensitive to changes in interest rates. As rates declined, they
were among the best performing holdings in the portfolio.
We were pleased with the results of this strategy which helped the Funds
participate in the strong recovery of municipal bonds this year.
Q Total returns were impressive, but municipal bond yields declined. Why?
A Yields declined for nearly every municipal bond investor, including your
Funds. Slower economic growth lessens the potential for higher inflation
which reduces net bond yields. We held a number of high coupon bonds and
attempted to lock-in income by emphasizing selected non-callable bonds.
While the Funds' income still declined, we believe the portfolio's holdings
of these bonds helped the portfolio to maintain income.
8
<PAGE>
Q Did talk about a 'flat tax' in Washington affect municipal bonds?
A Discussions about a 'flat tax' limited performance that otherwise would
have been stronger than the impressive returns of 1995. The 'flat tax'
would have been a negative for municipal bonds because it would have taxed
municipal bond income. At this writing, the possibility of such a tax
appears remote. But, the mere discussion of it caused municipal bonds to
rise less in price than comparable U.S. Treasuries. As a result, we believe
that municipals are still attractive values.
Q What is your outlook?
A We continue to be cautiously optimistic about the municipal bond market. We
expect the economy to continue slowing to a sustainable, non-inflationary
level. This should provide the potential for stable to declining interest
rates over the next six months. In particular, we expect short-term
interest rates to decline further, which could result in some price
appreciation.
Q Why do you think growth will remain slow?
A Demographics are important to economic growth. With new home sales and new
family formation slowing, we think economic growth should remain moderate
compared to the 1980s and early 1990s. In addition, world economic growth
is a factor. In Europe, growth has been slow, even with cuts in interest
rates. Because U.S. growth is increasingly dependent on world growth,
economic growth should not be a threat to bond investors for some time.
Combined with a proposal to balance the federal budget, these could be
strong positives for municipal bond investors over the long term.
Q What should shareholders expect?
A We think shareholders should not expect a repeat of the unusually positive
performance in 1996; investors should look forward to returns to come
primarily from income rather than price appreciation in the months ahead.
Q Are municipal bond funds still a good value?
A Even after such a great year, we believe municipal bond yields are still
very attractive values compared to taxable bond yields. On November 30 the
yield on a 30-year AA-rated municipal bond equaled 93% of the yield on a
comparable U.S. Treasury bond. As rates declined, taxable bond yields
declined more than tax free yields. This increased the attractiveness of
municipal bonds compared to taxable bonds. As a result, the after-tax yield
of municipal bonds remains relatively high by historical standards.
*****************************[Bar Chart]*************************************
Relatively Attractive Municipal Bond Yields(6)
as of November 30, 1995
Municipal Bonds 5.7%
U.S. Treasury Bond 6.13%
Municipal bond yields recently equalled 93% of
the yield on a comparable U.S. Treasury bond.
(6) Source: Keystone Investments, Inc. Based on a selection of 30-year
AA-rated municipal bonds versus the yield on the 30-year U.S. Treasury
bond on November 30, 1995.
*****************************************************************************
[diamond]
This column is intended to answer questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investment Distributors, Inc.,
Attn: Shareholder Communications, 22nd Floor,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
9
<PAGE>
Growth of an Investment
************************[Line chart]**********************************
Comparison of change in value of a $10,000 investment in
each Class of Keystone California Insured Tax Free Fund and
the Lehman Municipal Bond Index.
$ In Thousands February 1, 1994 through November 30, 1995
Average Annual Total Return
1 Year Life of Class
Class A 13.95% 2.13%
Class B 14.95% 2.33%
Class C 18.69% 4.24%
Class A Class B Class C LMBI*
2/94 9404 9874 9873 10000
3/94 8962 9440 9448 9345
4/94 9043 9524 9532 9424
5/94 9114 9589 9596 9506
6/94 9011 9481 9487 9451
7/94 9230 9700 9705 9624
8/94 9263 9724 9728 9657
9/94 9088 9541 9524 9515
10/94 8874 9306 9288 9346
11/94 8688 9100 9092 9177
12/94 8730 9152 9132 9379
1/95 9123 9551 9529 9647
2/95 9458 9899 9877 9928
3/95 9463 9900 9879 10042
4/95 9424 9846 9835 10054
5/95 9876 10316 10305 10375
6/95 9621 10046 10024 10284
7/95 9644 10067 10045 10382
8/95 9770 10185 10163 10514
9/95 9845 10260 10238 10580
10/95 10088 10511 10488 10734
11/95 10394 10432 10791 10912
*LMBI = Lehman Municipal Bond Index
Past performance is no guarantee of future results. The performance of each
Class may vary based on differences in loads and fees paid by the shareholder
investing in the differenct classes. The Lehman Municipal Bond Index is
from January 31, 1994.
******************************************************************************
********************************[Line chart]**********************************
Comparison of change in value of a $10,000 investment in
each Class of Keystone Missouri Tax Free Fund and the
Lehman Municipal Bond Index.
$ In Thousands February 1, 1994 through November 30, 1995
Average Annual Total Return
1 Year Life of Class
Class A 14.16% 2.38%
Class B 14.79% 2.22%
Class C 18.78% 4.18%
Class A Class B Class C LMBI*
2/94 9462 9944 9934 10000
3/94 9068 9511 9510 9345
4/94 9053 9495 9493 9424
5/94 9173 9611 9608 9506
6/94 9139 9564 9570 9451
7/94 9318 9743 9748 9624
8/94 9352 9767 9772 9657
9/94 9178 9585 9568 9515
10/94 8985 9372 9364 9346
11/94 8710 9094 9075 9177
12/94 8962 9345 9325 9379
1/95 9245 9628 9607 9647
2/95 9479 9870 9849 9928
3/95 9544 9925 9904 10042
4/95 9577 9945 9924 10054
5/95 9937 10319 10297 10375
6/95 9795 10157 10146 10284
7/95 9808 10177 10156 10382
8/95 9965 10317 10306 10514
9/95 10050 10403 10381 10580
10/95 10240 10599 10577 10734
11/95 10440 10410 10780 10912
*LMBI = Lehman Municipal Bond Index
Past performance is no guarantee of future results. The performance of each
Class may vary based on differences in loads and fees paid by the shareholder
investing in the differenct classes. The Lehman Municipal Bond Index is from
January 31, 1994.
******************************************************************************
These charts graphically compare each Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of lines that represent the accumulated value of an
initial $10,000 investment for the period indicated. The lines illustrate a
hypothetical investment in:
1. Your Keystone Fund
Your Fund seeks current income, exempt from federal and state income taxes,
while preserving capital by investing in high quality municipal bonds. The
return is quoted after deducting sales charges (if applicable), fund
expenses, and transaction costs and assumes reinvestment of all
distributions.
2. Lehman Municipal Bond Index (LMBI)
The LMBI is a broad-based, unmanaged market index of securities issued by
state and local governments. It represents the price change and coupon income
of several thousand securities with various maturities and qualities.
Securities are selected and compiled by Lehman Brothers, Inc. according to
criteria that may be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the US. The index contains factors such as the prices of
services, housing, food, transportation and electricity which are compiled by
the US Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
10
<PAGE>
Keystone State Tax Free Fund--Series II
The indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate the indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help
you evaluate fund performance in conjunction with the other important
financial considerations such as safety, stability and consistency.
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
11
<PAGE>
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a
diversified portfolio of short-term securities, including commercial paper,
bankers' acceptances, certificates of deposit and other short-term
instruments. The fund pays income which can fluctuate daily. Liquidity and
safety of principal are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the
price at which the share is sold to the public.
12
<PAGE>
Keystone California Insured Tax Free Fund
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------
MUNICIPAL BONDS (100.6%)
Alameda County,
California,
Certificates of
Participation, Santa
Rita Jail Project
(MBIA) 5.700% 12/01/2014 $1,000,000 $1,011,650
Beverly Hills,
California, School
District (MBIA) 5.750 05/01/2020 500,000 508,135
California Housing
Finance Agency, Home
Mortgage, Series B 8.600 08/01/2019 250,000 263,727
California State Public
Works Board (AMBAC) 5.250 12/01/2013 40,000 39,582
California State
Universities and
Colleges, San Diego
State University
(AMBAC) 6.125 11/01/2024 1,000,000 1,051,110
California Statewide
Communities
Certificates (AMBAC) 5.500 10/01/2014 400,000 400,064
Corona, California,
Redevelopment Agency,
Tax Allocation,
Refunding
Redevelopment Project,
Area A, Series A
(FGIC) 6.250 09/01/2016 500,000 528,180
East Bay, California,
Municipal Utilities,
Water System (MBIA) 5.000 06/01/2021 300,000 279,969
La Canada, California,
Unified School
District (FGIC)
(effective yield
6.35%)(b) 0.000 08/01/2011 500,000 210,290
Los Angeles, California,
Community
Redevelopment Agency
Refunding, Tax
Allocation (FSA) 6.500 12/01/2016 750,000 807,300
Los Angeles, California,
Convention and
Exhibition Center
Authority, Lease
Refunding, Series A
(MBIA) 5.375 08/15/2018 240,000 236,429
Los Angeles, California,
Convention and
Exhibition Center
Authority, Lease
Refunding, Series A
(MBIA) 5.125 08/15/2013 400,000 385,704
Los Angeles, California,
Convention and
Exhibition Center
Authority, Lease
Refunding, Series A
(MBIA) 6.000 08/15/2010 1,000,000 1,052,740
Los Angeles, California,
Department of
Airports, Series A
(FGIC) 5.500 05/15/2010 120,000 121,064
Los Angeles, California,
Wastewater Systems
Revenue, Series B
(MBIA) 5.875 06/01/2024 680,000 694,906
Los Angeles County,
California,
Metropolitan
Transportation
Authority, Sales Tax
Revenue (AMBAC) 5.000 07/01/2025 350,000 327,512
Los Angeles County,
California,
Metropolitan
Transportation
Authority, Sales Tax
Revenue (AMBAC) 5.500 07/01/2017 1,000,000 1,000,400
MSR Public Power Agency,
California, San Juan
Project, Series B
(MBIA) 6.750 07/01/2011 400,000 434,540
Madera County,
California,
Certificates of
Participation, Valley
Children's Hospital
(MBIA) 6.250 03/15/2007 250,000 274,540
Oakland, California,
Redevelopment Agency,
Tax Allocation,
Central District
Redevelopment (MBIA) 5.000 09/01/2021 1,000,000 939,410
Oakland, California,
Pensions, Series A
(FGIC) 7.600 08/01/2021 3,750,000 4,116,112
Petaluma, California,
City Joint High School
District (MBIA)
(effective yield
5.70%)(b) 0.000 08/01/2011 1,375,000 587,208
Petaluma, California,
City Joint High School
District (MBIA)
(effective yield
5.75%)(b) 0.000 08/01/2012 1,555,000 623,866
Petaluma, California,
City Joint High School
District (MBIA)
(effective yield
5.80%)(b) 0.000 08/01/2013 1,755,000 660,828
Pleasant Hill,
California, Joint
Powers Financing,
Capital Improvement
Project, Series A
(MBIA) 5.250 12/01/2016 400,000 388,104
Rancho, California,
Water District
Financing Authority,
Series 1994 (MBIA) 5.000 08/15/2014 300,000 284,568
Rio Linda, California,
Unified School
District, Series A
(AMBAC) 7.400 08/01/2010 725,000 852,745
Sacramento, California,
Municipal Utility
District, Series D
(FGIC) 5.250 11/15/2012 650,000 636,305
See Notes to Schedule of Investments. (continued on next page)
13
<PAGE>
MUNICIPAL BONDS
(continued)
San Diego County,
California, Water
Authority, Water
Revenue Certificates
of Participation
(FGIC) 5.681% 04/23/2008 $1,100,000 $ 1,158,762
San Joaquin Hills,
California,
Transportation
Corridor Agency, Toll
Road Revenue 7.000 01/01/2030 400,000 422,344
San Jose, California,
Redevelopment Tax
Allocation (MBIA) 6.000 08/01/2015 980,000 1,058,067
San Jose-Santa Clara,
California, Water
Financing Authority,
Sewer Revenue, Series
A (FGIC) 5.375 11/15/2015 1,000,000 992,060
San Mateo, Foster City,
California, School
District Capital
Appreciation, Series C
(FGIC) (effective
yield 5.60%)(b) 0.000 09/01/2003 100,000 69,202
Santa Ana, California,
Financing Authority
(MBIA) 6.250 07/01/2015 300,000 332,895
Santa Ana, California,
Financing Authority
(MBIA) 6.250 07/01/2024 2,000,000 2,249,860
Southern California
Public Power
Authority,
Transmission Project
Revenue (FSA)
(effective yield
7.30%)(b) 0.000 07/01/2014 2,500,000 901,325
Vista, California,
Community Development
Commision, Tax
Allocation Revenue
(MBIA) 5.250 09/01/2015 2,000,000 1,942,240
Walnut Creek,
California,
Certificates of
Participation, John
Muir Medical Center
(MBIA) 5.000 02/15/2016 700,000 654,269
Walnut Valley,
California, Unified
School District,
Series A (MBIA) 6.000 08/01/2014 190,000 203,275
Yorba Linda, California,
Redevelopment Agency
Capital Appreciation
(MBIA) (effective
yield 5.80%)(b) 0.000 09/01/2016 1,000,000 305,500
---------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (Cost--$27,470,228) 29,006,787
---------------------------------------------------------------------------
TEMPORARY TAX-EXEMPT INVESTMENTS (1.5%)
Anaheim, California,
Certificates of
Participation (Cost
$430,000)(a) 3.800 08/01/2019 430,000 430,000
---------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $27,900,228)(c) 29,436,787
OTHER ASSETS AND LIABILITIES--NET (-2.1%) (604,208)
---------------------------------------------------------------------------
NET ASSETS (100.0%) $28,832,579
---------------------------------------------------------------------------
NOTE TO SCHEDULE OF INVESTMENTS:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at the date of purchase) is the annual yield
at which the bond accretes until its maturity date.
(c) The cost of investments for federal income tax purposes amounted to
$27,913,350. Gross unrealized appreciation and depreciation of
investments, based on identified tax cost, at November 30, 1995 are as
follows:
Gross unrealized
appreciation $1,525,781
Gross unrealized
depreciation (2,344)
---------
Net unrealized appreciation $1,523,437
=========
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--American Municipal Bond Assurance Corp.
FGIC--Financial Guaranty Insurance Corp.
FSA--Financial Security Assurance
MBIA--Municipal Bond Insurance Association
See Notes to Financial Statements.
14
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
February 1, 1994
Year (Commencement of
Ended Operations) to
November 30, November 30,
1995 1994
---------------------------------------------------------------
Net asset value, beginning
of period $ 8.70 $10.00
---------------------------------------------------------------
Income from investment
operations:
Net investment income 0.49 0.44
Net realized and
unrealized gain (loss)
on investments and
closed futures contracts 1.17 (1.30)
---------------------------------------------------------------
Total from investment
operations 1.66 (0.86)
---------------------------------------------------------------
Less distributions from:
Net investment income (0.47) (0.44)
In excess of net
investment income (0.03) 0.00
---------------------------------------------------------------
Total distributions (0.50) (0.44)
---------------------------------------------------------------
Net asset value, end of
period $ 9.86 $ 8.70
---------------------------------------------------------------
Total return (a) 19.63% (8.78%)(c)
Ratios/supplemental data
Ratios to average net
assets:
Total expenses (b) 0.72%(e) 0.41%(d)
Net investment income 5.37% 5.53%(d)
Portfolio turnover rate 119% 104%
---------------------------------------------------------------
Net assets, end of period
(thousands) $4,555 $3,006
---------------------------------------------------------------
(a) Excluding applicable sales charges.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before the expense reimbursement,
the "Ratio of total expenses to average net assets" would have been 1.31%
and 1.66% (annualized) for the fiscal year ended November 30, 1995 and
the period February 1, 1994 (Commencement of Operations) to November 30,
1994, respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Annualized.
(e) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio would have been 0.69%.
See Notes to Financial Statements.
15
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
February 1, 1994
Year (Commencement of
Ended Operations) to
November 30, November 30,
1995 1994
--------------------------------------------------------------------------
Net asset value, beginning of period $ 8.68 $10.00
--------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.44 0.40
Net realized and unrealized
gain (loss) on investments and
closed futures contracts 1.17 (1.28)
--------------------------------------------------------------------------
Total from investment operations 1.61 (0.88)
--------------------------------------------------------------------------
Less distributions from:
Net investment income (0.44) (0.40)
In excess of net investment income (0.03) (0.04)
--------------------------------------------------------------------------
Total distributions (0.47) (0.44)
--------------------------------------------------------------------------
Net asset value, end of period $ 9.82 $ 8.68
--------------------------------------------------------------------------
Total return (a) 18.95% (9.00%)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.48%(e) 1.16%(d)
Net investment income 4.57% 4.83%(d)
Portfolio turnover rate 119% 104%
--------------------------------------------------------------------------
Net assets, end of period (thousands) $22,743 $11,415
--------------------------------------------------------------------------
(a) Excluding applicable sales charges.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before the expense reimbursement,
the "Ratio of total expenses to average net assets" would have been 2.07%
and 2.36% (annualized) for the fiscal year ended November 30, 1995 and
for the period February 1, 1994 (Commencement of Operations) to November
30, 1994, respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Annualized.
(e) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio would have been 1.45%.
See Notes to Financial Statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
February 1, 1994
Year (Commencement of
Ended Operations) to
November 30, November 30,
1995 1994
- ---------------------------------------------------------------------
Net asset value, beginning of
period $ 8.68 $10.00
- ---------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.43 0.39
Net realized and unrealized
gain (loss) on investments
and closed futures contracts 1.15 (1.29)
- ---------------------------------------------------------------------
Total from investment
operations 1.58 (0.90)
- ---------------------------------------------------------------------
Less distributions from:
Net investment income (0.43) (0.39)
In excess of net investment
income (0.03) (0.03)
- ---------------------------------------------------------------------
Total distributions (0.46) (0.42)
- ---------------------------------------------------------------------
Net asset value, end of period $ 9.80 $ 8.68
- ---------------------------------------------------------------------
Total return (a) 18.69% (9.08%)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.49%(e) 1.16%(d)
Net investment income 4.51% 4.96%(d)
Portfolio turnover rate 119% 104%
- ---------------------------------------------------------------------
Net assets, end of period
(thousands) $1,535 $624
- ---------------------------------------------------------------------
(a) Excluding applicable sales charges.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before the expense reimbursement,
the "Ratio of total expenses to average net assets" would have been 2.07%
and 2.38% annualized for the fiscal year ended November 30, 1995 and for
the period February 1, 1994 (Commencement of Operations) to November 30,
1994, respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Annualized.
(e) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio would have been 1.46%.
See Notes to Financial Statements.
17
<PAGE>
Keystone California Insured Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1995
Assets (Notes 1 and 4):
Investments at market value (identified
cost--$27,900,228) $29,436,787
Cash 1,122
Receivable for:
Fund shares sold 30,261
Interest 471,665
Due from Investment Adviser 32,086
Unamortized organization expenses 4,291
Prepaid expenses 42
------------------------------------------------------------------
Total assets 29,976,254
------------------------------------------------------------------
Liabilities (Notes 1, 2 and 4):
Payable for:
Investments purchased 977,460
Fund shares redeemed 38,377
Distribution to shareholders 103,065
Commissions payable to Principal Underwriter 2,244
Accrued reimbursable expenses 3,200
Other accrued expenses 19,329
------------------------------------------------------------------
Total liabilities 1,143,675
------------------------------------------------------------------
Net assets $28,832,579
------------------------------------------------------------------
Net assets represented by (Note 1):
Paid-in capital $27,723,538
Accumulated distributions in excess of net
investment income (27,037)
Accumulated net realized gain (loss) on
investments and closed futures contract (400,481)
Net unrealized appreciation (depreciation)
on investments 1,536,559
------------------------------------------------------------------
Total net assets $28,832,579
------------------------------------------------------------------
Net asset value per share (Note 2):
Class A Shares
Net asset value of $4,554,679 / 462,058 shares
outstanding $9.86
Offering price per share ($9.86 / 0.9525)
(based on a sales charge of 4.75% of the
offering price on November 30, 1995) $10.35
Class B Shares
Net asset value of $22,743,281 / 2,317,182
shares outstanding $9.82
Class C Shares
Net asset value of $1,534,619 / 156,535 shares
outstanding $9.80
------------------------------------------------------------------
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Year Ended November 30, 1995
Investment Income (Note 1):
Interest $1,241,768
-------------------------------------------------------------------
Expenses (Notes 1, 2 and 4):
Management fee $ 113,353
Transfer agent fees 24,058
Custodian fees 34,925
Accounting 19,921
Auditing 5,342
Legal 14,222
Printing 19,075
Registration fees 5,582
Organization expenses 1,169
Distribution Plan expenses 158,568
Miscellaneous expenses 3,147
Reimbursement from Investment Adviser (122,277)
-------------------------------------------------------------------
Total expenses 277,085
Less: Expenses paid indirectly
(Note 4) (5,486)
-------------------------------------------------------------------
Net expenses 271,599
-------------------------------------------------------------------
Net investment income 970,169
-------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and futures contracts
(Notes 1 and 3):
Realized gain (loss) on:
Investments sold 1,017,407
Closed futures contracts (346,168)
-------------------------------------------------------------------
Net realized gain (loss) on
investments and closed futures
contracts 671,239
-------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on:
Investments 1,970,314
Futures contracts (87,875)
-------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on investments 1,882,439
-------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and futures
contracts 2,553,678
-------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $3,523,847
-------------------------------------------------------------------
18
<PAGE>
Keystone California Insured Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
February 1, 1994
(Commencement of
Year Ended Operations) to
November 30, November 30,
1995 1994
=========================================================================
Operations (Notes 1 and 3):
Net investment income $ 970,169 $ 449,809
Net realized gain (loss) on
investments and closed futures
contracts 671,239 (1,047,295)
Net change in unrealized
appreciation (depreciation) on
investments 1,882,439 (345,880)
- -------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 3,523,847 (943,366)
- -------------------------------------------------------------------------
Distributions to shareholders from
(Note 1):
Net investment income
Class A Shares (180,675) (103,422)
Class B Shares (746,674) (327,857)
Class C Shares (47,288) (17,973)
In excess of net investment
income
Class A Shares (12,433) 0
Class B Shares (51,381) (47,642)
Class C Shares (3,254) (2,036)
- -------------------------------------------------------------------------
Total distributions to
shareholders (1,041,705) (498,930)
- -------------------------------------------------------------------------
Capital share transactions
(Note 2):
Proceeds from shares sold:
Class A Shares 1,987,577 3,653,153
Class B Shares 11,405,882 13,549,247
Class C Shares 1,005,793 942,116
Payment for shares redeemed:
Class A Shares (918,227) (364,506)
Class B Shares (2,323,287) (1,189,908)
Class C Shares (229,742) (265,039)
Net asset value of shares issued
in reinvestment of dividends and
distributions:
Class A Shares 45,806 19,906
Class B Shares 307,457 132,637
Class C Shares 24,916 8,952
- -------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from capital share
transactions 11,306,175 16,486,558
- -------------------------------------------------------------------------
Total increase (decrease) in
net assets 13,788,317 15,044,262
Net assets:
Beginning of period 15,044,262 0
- -------------------------------------------------------------------------
End of period [Including
undistributed net investment
income (accumulated
distributions in excess of net
investment income) as follows:
November 1995--($27,037) and
November 1994--$4,468] (Note 1) $28,832,579 $15,044,262
- -------------------------------------------------------------------------
See Notes to Financial Statements.
19
<PAGE>
FEDERAL TAX STATUS-FISCAL 1995 DISTRIBUTIONS
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Tax-Exempt Income
Dividends
------------------------
Class A $0.50
------------------------
Class B $0.47
------------------------
Class C $0.46
------------------------
In January 1996, we will send you complete information on distributions paid
during the calendar year 1995 to assist you in completing your federal tax
return.
20
<PAGE>
Keystone Missouri Tax Free Fund
SCHEDULE OF INVESTMENTS--November 30, 1995
Coupon Maturity Principal Market
Rate Date Amount Value
-----------------------------------------------------------------------------
MUNICIPAL BONDS (96.4%)
Butler County, Missouri,
Public Facilities
Authority 6.500% 12/01/2014 $1,105,000 $1,191,720
Cape Girardeau County,
Missouri, Industrial
Development Authority,
Southeast Missouri
Hospital Association 5.250 06/01/2016 1,750,000 1,667,540
Chesterfield, Missouri,
General Obligation 6.300 02/15/2013 830,000 889,511
Clay County, Missouri,
Public Building
Authority 7.000 05/15/2014 1,000,000 1,132,160
Greene County, Missouri,
Single Family Mortgage
(effective yield
6.53%)(b) 0.000 03/01/2016 1,000,000 305,240
Jackson County,
Missouri, Single
Family Mortgage
Revenue (effective
yield 11.25%)(b) 0.000 03/01/2015 3,750,000 1,243,575
Missouri Higher
Education, Loan
Authority, Student
Loan, Series D 6.750 02/15/2009 500,000 525,810
Missouri Higher
Education, Student
Loan, Series A 5.450 02/15/2009 600,000 567,078
Missouri State
Environmental
Improvement and Energy
Resource Authority,
Union Electric Co.
Project 5.450 10/01/2028 700,000 678,405
Missouri State Fourth
Building, Series A 5.500 04/01/2020 4,000,000 4,057,120
Missouri State Health
and Educational
Facilities Authority,
Barnes-Jewish Inc. 5.250 05/15/2012 500,000 485,845
Missouri State Health
and Educational
Facilities Authority,
BJC Health Systems,
Series A 6.500 05/15/2020 500,000 542,010
Missouri State Health
and Educational
Facilities Authority,
Bethesda Health Group,
Project A 7.500 08/15/2012 1,000,000 1,042,970
Missouri State Health
and Educational
Facilities Authority,
National Benevolent
Association 6.000 02/01/2024 750,000 717,608
Missouri State Health
and Educational
Facilities Authority,
Series AA 6.250 06/01/2016 1,500,000 1,584,015
Missouri State Housing
Development
Commission, Single
Family, GNMA, Series A 7.125 12/01/2014 500,000 543,265
Missouri State Regional
Convention and Sports
Project 5.500 08/15/2013 950,000 942,229
Missouri State
Environmental
Improvement and Energy
Resource Authority, Water
Pollution Control,
Capital Appreciation
Revolving Program, Series
D effective yield
6.25%)(b) 0.000 01/01/2017 975,000 294,041
Missouri State
Environmental
Improvement and Energy
Resource Authority, Water
Pollution Control,
Capital Appreciation
Revolving Program, Series
D (effective yield
6.25%)(b) 0.000 01/01/2016 985,000 314,451
Missouri State
Environmental
Improvement and Energy
Resource Authority, Water
Pollution Control,
State Revolving
Program, Series A 6.050 07/01/2015 250,000 261,910
Missouri State
Environmental
Improvement and Energy
Resource Authority, Water
Pollution Control,
State Revolving
Program, Series B 5.800 01/01/2015 500,000 518,610
Missouri State
Environmental
Improvement and Energy
Resource Authority, Water
Pollution Control,
State Revolving
Program, Series B 7.200 07/01/2016 600,000 696,984
Missouri State
Environmental
Improvement and Energy
Resource Authority, Water
Pollution Control,
State Revolving
Program, Series E 5.625 07/01/2016 500,000 504,345
Puerto Rico
Commonwealth,
Refunding (Capital
Guaranty) 6.450 07/01/2017 500,000 533,345
Puerto Rico
Commonwealth,
Telephone Authority 5.400 01/01/2008 600,000 611,292
See Notes to Schedule of Investments. (continued on next page)
21
<PAGE>
MUNICIPAL BONDS (continued)
Puerto Rico Electric
Power Authority,
Series Z 5.250% 07/01/2021 $1,000,000 $ 950,120
Puerto Rico Electric
Power Authority,
Series T 6.000 07/01/2016 300,000 307,641
Puerto Rico Electric
Power Authority,
Series U 6.000 07/01/2014 320,000 328,150
Puerto Rico Electric
Power Authority,
Series Y 6.500 07/01/2006 1,000,000 1,131,790
St. Louis County,
Missouri, Industrial
Development Authority,
Health Facilities
Revenue, GNMA, Mother
of Perpetual Help 6.400 08/01/2035 500,000 530,135
St. Louis County,
Missouri, Regional
Convention and Sports
Facility, Convention
and Sports Project 5.750 08/15/2021 500,000 495,380
St. Louis County,
Missouri, Series D 5.650 02/01/2015 250,000 249,665
St, Louis, Missouri,
Industrial Development
Authority, Sewer and
Solid Waste Disposal
Facilities 5.875 11/01/2026 1,000,000 1,009,820
-----------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (Cost--$25,009,224) 26,853,780
-----------------------------------------------------------------------------
TEMPORARY TAX-EXEMPT INVESTMENTS (2.4%)
Missouri State Health
and Educational
Facilities Authority
(a) 3.650 12/01/2019 595,000 595,000
Missouri Higher
Education, Student
Loan, Series A (a) 3.850 06/01/2017 75,000 75,000
-----------------------------------------------------------------------------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (COST $670,000) 670,000
-----------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$25,679,224)(c) 27,523,780
OTHER ASSETS AND LIABILITIES--NET (1.2%) 343,940
-----------------------------------------------------------------------------
NET ASSETS (100.0%) $27,867,720
-----------------------------------------------------------------------------
NOTE TO SCHEDULE OF INVESTMENTS:
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of the
demand features.
(b) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until maturity date.
(c) The cost of investments for federal income tax purposes amounted to
$25,692,265. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at November 30, 1995 are as follows:
Gross unrealized
appreciation $1,831,515
Gross unrealized
depreciation 0
---------
Net unrealized appreciation $1,831,515
=========
LEGEND OF PORTFOLIO ABBREVIATIONS
GNMA--Government National Mortgage Association
See Notes to Financial Statements.
22
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout the period)
February 1, 1994
(Commencement of
Year Ended Operations) to
November 30, November 30,
1995 1994
- -------------------------------------------------------------------------
Net asset value, beginning of
period $8.72 $10.00
- -------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.50 0.44
Net realized and unrealized gain
(loss) on investments and closed
futures contracts 1.19 (1.28)
- -------------------------------------------------------------------------
Total from investment operations 1.69 (0.84)
- -------------------------------------------------------------------------
Less distributions from:
Net investment income (0.47) (0.44)
In excess of net investment income (0.03) 0.00(e)
- -------------------------------------------------------------------------
Total distributions (0.50) (0.44)
- -------------------------------------------------------------------------
Net asset value, end of period $9.91 $ 8.72
- -------------------------------------------------------------------------
Total return (a) 19.86% (8.55%)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 0.72%(f) 0.43%(d)
Net investment income 5.26% 5.38%(d)
Portfolio turnover rate 74% 25%
- -------------------------------------------------------------------------
Net assets, end of period
(thousands) $4,848 $3,581
- -------------------------------------------------------------------------
(a) Excluding applicable sales charges.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 1.32% and
1.54% (annualized) for the fiscal year ended November 30, 1995 and for
the period February 1, 1994 (Commencement of Operations) to November 30,
1994, respectively.
(c) Total return indicated is calculated from February 1, 1994 (Commencement
of Operations) to November 30, 1994.
(d) Annualized.
(e) Amount represents less than $0.01 per share.
(f) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio would have been 0.69%.
See Notes to Financial Statements.
23
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout the period)
February 1, 1994
(Commencement of
Year Ended Operations) to
November 30, November 30,
1995 1994
- -------------------------------------------------------------------------
Net asset value, beginning of
period $8.67 $10.00
- -------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.44 0.40
Net realized and unrealized gain
(loss) on investments and closed
futures contracts 1.15 (1.29)
- -------------------------------------------------------------------------
Total from investment operations 1.59 (0.89)
- -------------------------------------------------------------------------
Less distributions from:
Net investment income (0.43) (0.40)
In excess of net investment income (0.03) (0.04)
- -------------------------------------------------------------------------
Total distributions (0.46) (0.44)
- -------------------------------------------------------------------------
Net asset value, end of period $9.80 $ 8.67
- -------------------------------------------------------------------------
Total return (a) 18.79% (9.06)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.47%(e) 1.16%(d)
Net investment income 4.56% 4.70%(d)
Portfolio turnover rate 74% 25%
- -------------------------------------------------------------------------
Net assets, end of period
(thousands) $21,231 $12,906
- -------------------------------------------------------------------------
(a) Excluding applicable sales charges.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.08% and
2.49% (annualized) for year ended November 30, 1995 and for the period
February 1, 1994 (Commencement of Operations) to November 30, 1994,
respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Annualized.
(e) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio would have been 1.44%.
See Notes to Financial Statements.
24
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout the period)
February 1, 1994
(Commencement of
Year Ended Operations) to
November 30, November 30,
1995 1994
- -------------------------------------------------------------------------
Net asset value, beginning of
period $ 8.66 $10.00
- -------------------------------------------------------------------------
Income from investment operations
Net investment income 0.43 0.39
Net realized and unrealized gain
(loss) on investments and closed
futures contracts 1.16 (1.29)
- -------------------------------------------------------------------------
Total from investment operations 1.59 (0.90)
- -------------------------------------------------------------------------
Less distributions from:
Net investment income (0.43) (0.39)
In excess of net investment income (0.03) (0.05)
- -------------------------------------------------------------------------
Total distributions (0.46) (0.44)
- -------------------------------------------------------------------------
Net asset value, end of period $9.79 $ 8.66
- -------------------------------------------------------------------------
Total return (a) 18.78% (9.25%)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses (b) 1.46%(e) 1.15%(d)
Net investment income 4.56% 4.72%(d)
Portfolio turnover rate 74% 25%
- -------------------------------------------------------------------------
Net assets, end of period
(thousands) $1,788 $1,045
- -------------------------------------------------------------------------
(a) Excluding applicable sales charges.
(b) Figures are net of the expense reimbursement by Keystone in connection
with the voluntary expense limitation. Before expense reimbursement, the
"Ratio of total expenses to average net assets" would have been 2.07% and
2.60% (annualized) for the year ended November 30, 1995 and the period
February 1, 1994 (Commencement of Operations) to November 30, 1994,
respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Annualized.
(e) "Ratio of total expenses to average net assets" for the year ended
November 30, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio would have been 1.44%.
See Notes to Financial Statements.
25
<PAGE>
Keystone Missouri Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1995
Assets (Notes 1 and 4):
Investments at market value (identified
cost--$25,679,224) $27,523,780
Cash 128
Interest receivable 435,462
Due from Investment Adviser 34,400
Unamortized organization expenses 2,360
Prepaid expenses 44
------------------------------------------------------------------
Total assets 27,996,174
------------------------------------------------------------------
Liabilities (Notes 1, 2 and 4):
Income distribution payable 101,846
Commissions payable to Principal Underwriter 2,474
Accrued reimbursable expenses 3,200
Other accrued expenses 20,934
------------------------------------------------------------------
Total liabilities 128,454
------------------------------------------------------------------
Net assets $27,867,720
------------------------------------------------------------------
Net assets represented by (Note 1):
Paid-in capital $26,732,969
Accumulated distributions in excess of net
investment income (39,999)
Accumulated net realized gain (loss) on
investments and closed futures contracts (669,806)
Net unrealized appreciation on investments 1,844,556
------------------------------------------------------------------
Total net assets $27,867,720
------------------------------------------------------------------
Net asset value per share (Note 2)
Class A Shares
Net asset value of $4,848,325 / 489,023 shares
outstanding $ 9.91
Offering price per share ($9.91 / 0.9525)
(based on a sales charge of 4.75% of the
offering price November 30, 1995 $10.40
Class B Shares
Net asset value of $21,230,965 / 2,166,339
shares outstanding $ 9.80
Class C Shares
Net asset value of $1,788,430 / 182,615 shares
outstanding $ 9.79
------------------------------------------------------------------
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Year Ended November 30, 1995
-----------------------------------------------------------------
Investment Income (Note 1):
Interest $1,310,031
Expenses (Notes 1, 2 and 4):
Management fee $ 120,166
Transfer agent fees 33,338
Custodian fees 29,698
Accounting 20,721
Auditing 5,342
Legal 9,825
Printing 19,239
Registration fees 13,937
Organization expenses 592
Distribution Plan expenses 173,126
Miscellaneous expenses 3,782
Reimbursement from Investment Adviser (132,621)
-----------------------------------------------------------------
Total expenses 297,145
Less: Expenses paid indirectly
(Note 4) (5,258)
-----------------------------------------------------------------
Net expenses 291,887
-----------------------------------------------------------------
Net investment income 1,018,144
-----------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and futures contracts
(Notes 1 and 3)
Realized gain (loss) on:
Investments (50,881)
Closed futures contracts (354,300)
-----------------------------------------------------------------
Net realized gain (loss) on
investments and closed futures
contracts (405,181)
-----------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on:
Investments 3,182,450
Futures contracts (94,156)
-----------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on investments 3,088,294
-----------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and closed
futures contracts 2,683,113
-----------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $3,701,257
-----------------------------------------------------------------
26
<PAGE>
Keystone Missouri Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
February 1, 1994
(Commencement of
Year Ended Operations) to
November 30, November 30,
1995 1994
=========================================================================
Operations (Notes 1 and 3):
Net investment income $ 1,018,144 $ 416,949
Net realized gain (loss) on
investments and closed futures
contracts (405,181) (253,329)
Net change in unrealized
appreciation (depreciation) on
investments 3,088,294 (1,243,738)
- -------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 3,701,257 (1,080,118)
- -------------------------------------------------------------------------
Distributions to shareholders from
(Note 1):
Net investment income
Class A Shares (153,289) (58,702)
Class B Shares (791,351) (324,108)
Class C Shares (73,504) (34,139)
In excess of net investment
income
Class A Shares (11,167) (466)
Class B Shares (57,652) (58,892)
Class C Shares (5,355) (5,609)
- -------------------------------------------------------------------------
Total distributions to
shareholders (1,092,318) (481,916)
- -------------------------------------------------------------------------
Capital share transactions
(Note 2):
Proceeds from shares sold:
Class A Shares 4,076,405 4,347,894
Class B Shares 7,170,581 14,457,771
Class C Shares 931,369 1,600,310
Payment for shares redeemed-Class
A Shares
Class A Shares (3,330,599) (570,413)
Class B Shares (1,245,399) (479,634)
Class C Shares (414,529) (448,097)
Net asset value of shares issued
in reinvestment of dividends and
distributions:
Class A Shares 103,984 29,808
Class B Shares 392,566 144,139
Class C Shares 42,017 12,642
- -------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from capital
share transactions 7,726,395 19,094,420
- -------------------------------------------------------------------------
Total increase (decrease) in net
assets 10,335,334 17,532,386
Net assets:
Beginning of period 17,532,386 0
- -------------------------------------------------------------------------
End of period [Including
accumulated distributions in
excess of net investment income
as follows:
November 1995--($39,999) and
November 1994--($7,792)]
(Note 1) $27,867,720 $17,532,386
- -------------------------------------------------------------------------
See Notes to Financial Statements.
27
<PAGE>
FEDERAL TAX STATUS-FISCAL 1995 DISTRIBUTIONS
(Unaudited)
The per share distributions paid to you for fiscal 1995, whether taken in
shares or cash, are as follows:
Tax-Exempt Income
Dividends
------------------------
Class A $0.50
------------------------
Class B $0.46
------------------------
Class C $0.46
------------------------
In January 1996, we will send you complete information on distributions paid
during the calendar year 1995 to assist you in completing your federal tax
return.
28
<PAGE>
Keystone State Tax Free Fund-Series II
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone State Tax Free Fund-Series II ("FUND") (formerly Keystone America
State Tax Free Fund-Series II) was formed as a Massachusetts business trust
on December 15, 1993 and is registered under the Investment Company Act of
1940 (the "1940 Act") as an open-end management investment company. Keystone
Investment Management Company (formerly Keystone Custodian Funds, Inc.)
("Keystone") is the Investment Adviser. The FUND currently offers shares of
two separate non-diversified series evidencing interests in different
portfolios of securities (individually the "Fund", collectively the "FUNDS"):
Keystone California Insured Tax Free Fund ("California Fund") (formerly
Keystone America California Insured Tax Free Fund) and Keystone Missouri Tax
Free Fund ("Missouri Fund") (formerly Keystone America Missouri Tax Free
Fund). The Funds had no operations prior to February 1, 1994.
Each Fund currently issues three classes of shares. Class A shares are sold
subject to a maximum sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge which
varies depending on when shares were purchased and how long they are 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 (formerly Keystone Distributors, Inc.)
("KIDC"), the FUND's principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. (formerly
Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is privately owned
by an investor group consisting of members of current and former members of
management of Keystone and its affilates.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles.
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. 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
29
<PAGE>
future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time of entering into the transaction. A separate
account of liquid assets equal to the value of such purchase commitments will
be maintained until payment is made. When issued and delayed delivery
agreements are subject to risks from changes in the value based upon changes
in the level of interest rates and other market factors, both before and
after delivery.
C. Each Fund may enter into currency and other financial futures contracts as
a hedge against changes in interest or currency exchange rates. A futures
contract is an agreement between two parties to buy and sell a specific
amount of a commodity, security, financial instrument, or, in the case of a
stock index, cash at a set price on a future date. Upon entering into a
futures contract, each 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 a 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 a Fund's federal taxable income. In
addition to market risk, the Funds are subject to the credit risk that the
other party will not complete the obligations of the contract.
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.
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 regulations are primarily due to differences in the treatment of 12b-1
Distribution Plan charges and market discount of investment securities.
(2.) Capital Share Transactions
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of
the FUND were as follows:
30
<PAGE>
February 1,
1994
(Commencement
Year Ended of
November Operations) to
30, November 30,
1995 1994
--------------------------------------------------------------
California Fund
Class A Shares
Shares sold 210,863 382,583
Shares redeemed (99,402) (39,080)
Shares issued in reinvestment
of dividends and
distributions 4,943 2,151
--------------------------------------------------------------
Net increase (decrease) 116,404 345,654
--------------------------------------------------------------
Class B Shares
Shares sold 1,223,780 1,429,334
Shares redeemed (254,280) (129,251)
Shares issued in reinvestment
of dividends and
distributions 33,291 14,308
--------------------------------------------------------------
Net increase (decrease) 1,002,791 1,314,391
--------------------------------------------------------------
Class C Shares
Shares sold 107,136 99,167
Shares redeemed (25,172) (28,249)
Shares issued in reinvestment
of dividends and
distributions 2,687 966
--------------------------------------------------------------
Net increase (decrease) 84,651 71,884
--------------------------------------------------------------
Missouri Fund
Class A Shares
Shares sold 429,776 467,351
Shares redeemed (362,420) (60,027)
Shares issued in reinvestment
of dividends and
distributions 11,139 3,204
--------------------------------------------------------------
Net increase (decrease) 78,495 410,528
--------------------------------------------------------------
Class B Shares
Shares sold 769,123 1,523,789
Shares redeemed (134,192) (50,032)
Shares issued in reinvestment
of dividends and
distributions 42,162 15,489
--------------------------------------------------------------
Net increase (decrease) 677,093 1,489,246
--------------------------------------------------------------
Missouri Fund
Class C Shares
Shares sold 101,419 167,136
Shares redeemed (44,088) (47,712)
Shares issued in reinvestment
of dividends and
distributions 4,503 1,357
--------------------------------------------------------------
Net increase (decrease) 61,834 120,781
--------------------------------------------------------------
Each Fund bears some of the cost of selling its shares under a Distribution
Plan adopted with respect to its Class A, Class B and Class C shares pursuant
to Rule 12b-1 under the 1940 Act.
Each Class A Distribution Plan provides for payments at an annual rate of up
to 0.15% annually of the average daily net asset value of Class A shares to
pay expenses for 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 up to 0.15% of the
average daily net asset value of Class A shares maintained by such others and
remaining outstanding on the books of the Fund for specified periods.
Each Class B Distribution Plan provides for payments at an annual rate of
0.90% of the average daily net asset value of Class B shares to pay expenses
for the distribution of Class B shares. Amounts paid by each Fund under the
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
31
<PAGE>
Keystone State Tax Free Fund-Series II
share sold. Beginning approximately 12 months after the purchase of a Class B
share, the dealer or other party will receive service fees at an annual rate
of 0.15% of the average daily net asset value of the Class B shares
maintained by such others and remaining outstanding on the Fund's books for
specified periods. A contingent deferred sales charge will be imposed, if
applicable, on Class B shares purchased on or after June 1, 1995 at rates
ranging from a maximum of 5.00% of amounts redeemed during the first twelve
months following the date of purchase to 1.00% of amounts redeemed during the
sixth twelve month period following the date of purchase. Class B shares
purchased on or after June 1, 1995 that have been outstanding for eight years
from the month of purchase will automatically convert to Class A shares
without a front end sales charge or exchange fee. Class B shares purchased
prior to June 1, 1995 will retain their existing conversion rights.
Each Class C Distribution Plan provides for payments at an annual rate of up to
0.90% of the average daily net asset value of Class C shares to pay expenses for
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 normally equal to 0.75% of the price paid for
each share sold plus the first year's service fee in advance in the amount of
0.15% of the price paid for each Class C share. Beginning approximately 15
months after purchase, the dealer or other party will receive a commission at an
annual rate of 0.75% (subject to applicable limitations imposed by a rule of the
National Association of Security Dealers, Inc. ("NASD Rule")) plus service fees
at the annual rate of 0.15%, respectively, of the average net asset value of
each Class C share sold by such others and remaining outstanding on the 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 a majority of the outstanding voting shares of the
respective class. However, after the termination of any Distribution Plan, at
the discretion of the Board of Trustees, payments to KIDC may continue as
compensation for its services which had been earned while the Distribution
Plan was in effect.
For the year ended November 30, 1995 the California Fund paid KIDC $5,342,
$144,008 and $9,218 and the Missouri Fund paid $4,684, $154,093 and $14,349,
pursuant to each Fund's respective Class A, Class B and C Class Distribution
Plans.
Under the NASD Rule, the maximum uncollected amounts for which KIDC may seek
payment from the FUND under its Class B Distribution Plans are $881,590 and
$1,004,012 for shares purchased prior to June 1, 1995 and $503,630 and
$226,290 for shares purchased on or after June 1, 1995, for the California
Fund and the Missouri Fund, respectively, as of November 30, 1995. The
maximum uncollected amounts for which KIDC may seek payment from the FUND
under its Class C Distribution Plans are $94,402 and $123,873, respectively,
for the California Fund and the Missouri Fund as of November 30, 1995.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares pursuant to its respective
Distribution Plan.
(3.) Securities Transactions
As of November 30, 1995, the capital loss carryover for federal income
purposes for the California Fund was $387,000 which expires in 2002; and the
capital
32
<PAGE>
loss carryover for the Missouri Fund was $657,000 which expires as follows:
2002--$152,000 and 2003--$505,000.
Purchases and sales of investment securities, excluding short-term
securities, for the year ended November 30, 1995 were as follows:
Cost of Proceeds
Purchases From Sales
- ----------------------------------------------------
California Fund $35,705,748 $24,090,235
Missouri Fund $21,413,118 $15,927,734
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the FUND, dated December 15, 1993, Keystone provides investment
management and administative 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 declining
as net assets increase to 0.25% per annum, to the average daily net asset
value of each Fund.
During the year ended November 30, 1995, the California Fund and the Missouri
Fund paid or accrued to Keystone $113,353 and $120,166, respectively, for
investment management and administrative service fees.
Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary
of Keystone, is the FUND's transfer agent. During the year ended November 30,
1995, the California Fund and the Missouri Fund paid or accrued to KIRC
$24,058, and $33,338, respectively, for transfer agent fees.
During the year ended November 30, 1995, the California Fund and the Missouri
Fund paid or accrued to KII $19,921, and $20,721, respectively, for certain
accounting services.
Keystone had voluntarily limited the expenses of Class A Shares of each Fund
to 0.35% for the Fund's first six months, after which the expense limitation
was increased by 0.10% per quarter until May 15, 1995 when expenses were
limited to 0.75%; expenses for Class B and C shares were limited to 1.10% for
each Fund's first six months, after which the expense limitations were
similarly increased until May 15, 1995 when expenses were limited to 1.50%.
These expense limitations will continue until December 31, 1995. Keystone
will not be required to make such reimbursement to the extent it would result
in the Fund's inability to qualify as a regulated investment company under
the provisions of the Internal Revenue Code. In accordance with these expense
limitations, Keystone reimbursed the California Fund and the Missouri Fund
$122,277 and $132,621, respectively, for the year ended November 30, 1995.
Keystone does not intend to seek repayment for these amounts.
The FUND has entered into an expense offset arrangement with its custodian.
For the year ended November 30, 1995, the California Fund and the Missouri
Fund paid custody fees in the amount of $29,439 and $24,440, respectively,
and received a credit of $5,486 and $5,258, respectively, pursuant to the
expense offset arrangement, resulting in a total expense of $34,925 and
$29,698, respectively. The assets deposited with the custodian under this
expense offset arrangement could have been invested in an income-producing
asset.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the FUND. Officers of Keystone and affiliated Trustees receive no
compensation directly from the FUND. Currently, the Independent Trustees of
the FUND receive no compensation for their services.
33
<PAGE>
Keystone State Tax Free Fund-Series II
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone State Tax Free Fund--Series II
We have audited the financial statements of Keystone California Insured Tax
Free Fund and Keystone Missouri Tax Free Fund, portfolios of Keystone State
Tax Free Fund -- Series II (formerly Keystone America State Tax Free Fund --
Series II) ("FUND"), including the schedules of investments as of November
30, 1995 and the related statement of operations for the year then ended and
the statements of changes in net assets and financial highlights for the year
then ended and for the period from February 1, 1994 (Commencement of
Operations) to November 30, 1994. These financial statements and financial
highlights are the responsibility of the FUND's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of November 30, 1995 by correspondence with the custodian
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 California Insured Tax Free Fund and Keystone Missouri Tax Free
Fund, as of November 30, 1995, the results of their operations for the year
then ended and the changes in their net assets and financial highlights for
the year then ended and for the period from February 1, 1994 to November 30,
1994 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 5, 1996
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Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free,
1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your Keystone
account is available 24 hours a day through KARL. To speak with a Shareholder
Services representative about your account, call toll-free 1-800-343-2898
between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan investors
should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account at
any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your investment
by automatically reinvesting your Fund's distributions at net asset value
with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same Keystone
family quickly and easily for a nominal service fee. KARL gives you the added
ability to move your money any time of day, any day of the week. Keystone
offers a variety of funds with different investment objectives for your
changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to
move money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the check
writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours a
day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans, including
IRA, SEP-IRA, profit sharing, money purchase, and defined contribution plans.
For more information, please call Retirement Plan Services, toll-free at
1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
35
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[Back cover]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Insured Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Insured Tax Free Fund
Pennsylvania Tax Free Fund
Texas Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Hartwell Growth Fund
Omega Fund
Fund of the Americas
Strategic Development Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied
by the Fund's current prospectus. The prospectus contains important
information about the Fund including fees and expenses. Read it carefully
before you invest or send money. For a free prospectus on other
Keystone funds, contact your financial adviser or call Keystone.
[Keystone Investments logo]
P.O. Box 2121
Boston, Massachusetts 02106-2121
STW-AR-1/96
3.1 M ["Recycled" symbol]
[Front cover]
K E Y S T O N E
STATE
TAX FREE FUND
SERIES II
[PHOTO: Official-looking building with American flag flying]
CALIFORNIA INSURED TAX FREE FUND
MISSOURI TAX FREE FUND
[Keystone logo]
ANNUAL REPORT
NOVEMBER 30, 1995
