PAGE 1
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Keystone State Tax Free Fund--Series II
Dear Shareholder:
We are writing to report on the activities of Keystone State Tax Free
Fund--Series II for the twelve-month period which ended November 30, 1996.
Following this letter we have included a performance summary of the California
and Missouri Tax Free Funds and an interview with Keystone's municipal bond
department.
Municipal bonds experienced several interest rate environments over the
past year. This included sudden and dramatic shifts in market sentiment and
resulted in increased volatility for all fixed-income investments. The Lehman
Municipal Bond Index--a widely recognized benchmark of municipal bond
performance--returned 5.88% for the twelve-month period.
Adjustments and Resolutions
At the beginning of this reporting period, market sentiment was driven by an
outlook for slow economic growth, low inflation and the possibility of
tax-reform legislation. While the prospect of tax-law changes created
uncertainty and limited the performance of municipal bonds in late 1995 and
early 1996, prices continued to rise because investors anticipated a favorable
economic and interest rate climate.
In February 1996, the trend of interest rates underwent a sharp and rapid
reversal. Reports of strength in employment stimulated investors' concerns about
robust economic growth and future inflation. Investors revised their interest
rate outlooks, waiting for longer-term trends to appear. During this
transitional period, volatility characterized the fixed-income markets, in
general.
By mid-year, the economy was confirmed to be growing at a moderate pace and
inflation remained well-
contained. Enactment of tax-reform legislation became viewed as unlikely.
With these uncertainties resolved, investors became more confident that a
steadier investment climate could prevail. The tax-exempt sector regained
stability and then began to gather strength, with yields eventually returning to
levels that rivaled those of a year ago.
Outlook
As we approach 1997, the stage appears to be set for the continuation of
moderate economic growth and low inflation. We believe this should help to
provide a relatively stable interest rate climate with yields trading within a
narrow range. In light of the recent rally made by the municipal bond market, we
would anticipate that over the coming months, much of the Fund's total return
will result from income as opposed to price appreciation.
We are pleased to inform you that Keystone has been acquired by First Union
Corporation. First Union, based in Charlotte, N.C. is the nation's sixth largest
bank holding company with assets of approximately $130 billion. Keystone
Investment Management Company will continue to be the investment adviser,
responsible for managing your Fund's portfolio. Your Fund will continue to be
managed with the same style and philosophy as in the past.
First Union also owns another mutual fund management company, Evergreen
Asset Management Corp. Together, Evergreen and Keystone manage approximately $30
billion in assets. Some services will now be conducted under the "Evergreen
Keystone Funds" umbrella.
(continued on next page)
<PAGE>
PAGE 2
- --------------------------------------
Keystone State Tax Free Fund--Series II
We believe the partnership between Evergreen and Keystone will strengthen
our ability to offer you outstanding investment management services.
We appreciate your continued support of Keystone funds. If you have any
questions or comments about your investment, please feel free to write to us.
Sincerely, [photos of Elfner and Bissell]
/s/Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment Management Company
/s/George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
January 1997
[photo captions] Albert H. Elfner, III George S. Bissell
<PAGE>
PAGE 3
- --------------------------------------------------------------------
Keystone State Tax Free Fund--Series II
A Discussion With
Your Fund's Management
The Keystone State Tax Free Funds are managed by Keystone's municipal bond team,
headed by senior portfolio manager Betsy Hutchings. The team includes
portfolio managers George Kimball, Daniel A. Rabasco, analyst David Moore
and trader Craig Kasap. The team is
dedicated to researching, analyzing and evaluating
municipal bonds for Keystone funds.
Q What do the Funds offer investors?
A The Funds are designed for tax-sensitive investors who seek a high level of
current income exempt from federal income tax, while preserving capital.(1) The
Funds offer professional management and diversification by investing in a
portfolio of quality municipal bonds.
Q How do you select securities for the Fund?
A Our management team employs an intensive research process, paying careful
attention to credit quality and financial stability. We structure the portfolio
with bonds that meet our high credit standards. Our holdings typically have the
characteristics that we believe are necessary for good performance in the
current and anticipated interest rate environment. We emphasize diversification
and focus on maximizing the Fund's income.
Q What was the environment like for municipal bonds over the past year?
A Municipal bond investors experienced several different investment
environments over the past year. At the beginning of the reporting period,
investors were still benefiting from last year's strong bond market rally, which
pushed the prices of fixed-income securities in general, higher. The possibility
of tax-reform also influenced the municipal market at the time, however.
Investors were concerned that tax-law changes would threaten the tax-favored
status of municipal bonds and approached the market with caution. This caused
the performance of municipal bonds to lag that of the benchmark, U.S. Treasuries
in late 1995 and early 1996.
In February 1996, interest rates reversed course and rose sharply. Reports
of a strengthening employment market raised investors concerns about robust
economic growth and future inflation. The fixed-income markets became volatile
as investors waited for longer-term economic trends to emerge. In addition to
the changes taking place in the economy, municipal bonds investors also focused
on the uncertainties of the campaign season and the possibility of tax-reform.
Q Did this volatility continue throughout 1996?
A No, it began to subside by mid-year. Concerns about tax-reform began to
fade as enactment of any proposals became unlikely. Reports also began to
confirm that the economy was growing at a moderate pace and inflation was
well-contained. With these issues becoming resolved, investors developed
confidence that a steadier interest rate environment would prevail.
Q What was the environment like at the end of the reporting period?
A As of the end of this fiscal year, the investment environment for municipal
bonds was relatively stable. Economic growth has remained moderate and inflation
has been minimal, which is positive for interest rates. Cash flow into the
municipal bond market has been light. We attribute much of that to the
relatively low level of interest rates having to compete with the strong
performance of the stock market.
- -------------------------
(1)For investors in certain tax situations, a portion of income may be subject
to the federal alternative minimum tax (AMT).
<PAGE>
PAGE 4
- --------------------------------------------------------------------
Keystone State Tax Free Fund--Series II
Also as of the end of the reporting period, investors' primary focus was
expected future Federal Reserve Board policy. We believe that municipal bond
yields will be most affected by the events influencing the greater fixed-income
market over the next few months and that the driving force will be the strength
of the economy and the level of inflation.
Q What is your outlook for municipal bonds over the next six months?
A Our outlook is one of cautious optimism. We believe that interest rates and
the economy will be the greatest influence on municipal bonds over the coming
months, rather than issues that are specific to the tax-exempt market, such as
tax-reform. We expect the economy to grow at a rate of approximately 2% and
inflation to fall in the 3% area; and that this pattern of moderate economic
growth and low inflation should set the stage for a relatively stable interest
rate environment.
However, we are cautious about the degree to which prices can improve
further, in light of the decline in interest rates that has taken place over the
past few months. We anticipate that much of the Fund's total return will result
from income reinvestment over the next few months.
Q Are municipal bonds still an attractive investment?
A We think municipal bonds still provide value to the long-term investor
seeking tax-advantaged income, because of the yields an investor receives after
taxes and inflation. Since inflation continues to be relatively low, "real"
interest rates, or the interest rate an investor receives after inflation is
subtracted, is high by historical standards. Further, as of November 30, 1996,
municipal bonds yielded approximately 90%(2) of U.S. Treasuries with comparable
maturities. These two factors contribute to what we believe is an attractive
level of current income.
[diamond]
This column is intended to answer
questions about your Fund.
If you have a question you would like answered,
please write to:
Evergreen Keystone Investment Services, Inc.
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.2
- -------------------------
(2)Based on the Revenue Bond Index, a widely followed index of 25 of the most
current actively traded municipal bonds in the tax-exempt market.
<PAGE>
PAGE 5
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Keystone California Tax Free Fund
Your Fund's Performance
Your Fund's objective is to seek the highest possible current income, exempt
from federal and state income taxes, while preserving capital.(3) At least 80%
of your Fund's investments are insured as to timely payment of both principal
and interest. The Fund is managed by George Kimball, vice president in
Keystone's municipal bond department.
Performance
For the twelve-month period which ended November 30, 1996:
Class A shares returned 3.99%,
Class B shares returned 3.23%, and
Class C shares returned 3.34%.
Portfolio Strategy
Our primary strategy was to manage the Fund's average maturity based on our
interest rate outlook. We had lengthened the average maturity in late 1995 and
early 1996 in anticipation of a decline in interest rates. We later shortened
average maturity to increase the Fund's flexibility and enhance price stability
when interest rates rose. Our most recent move was to adopt a neutral interest
rate stance relative to the Fund's competitive group, when the municipal market
regained stability. In late 1995, the Fund primarily was invested in bonds with
maturites ranging from 25-30 years. During most of the fiscal year, however, the
Fund invested in bonds with 20-25 year maturities.
As of November 30, 1996, the Fund's average quality was AAA. The average
maturity of the portfolio stood at 19.3 years, slightly shorter than 20 years,
where it was in May. Throughout the period, we invested in bonds that would
maintain the Fund's call protection.
- -------------------------
(3)For investors in certain tax situations, a portion of income may be subject
to the federal alternative minimum tax (AMT).
Looking forward, the Fund is positioned for a stable interest rate
environment. In light of the recent improvement in the municipal bond market, we
believe that most of the Fund's total return in the next few months will be
generated by income rather than price appreciation. We will continue to seek
those situations that will build the Fund's income, which may include increasing
our position in higher yielding securities that meet our stringent credit
criteria.
Economic Environment
California's economy has improved considerably over the past several years. The
state has recaptured all of the jobs lost during its recession of several years
ago. That recession was the worst economic downturn that California had
experienced since the Great Depression. Job growth has come primarily from
international trade, business services, high technology and entertainment and
tourism. With job cuts in defense and aerospace winding down, we believe the
state should benefit from moderate-to-strong employment growth over the next few
years.
Despite the improvement in California's economy and its favorable
employment outlook, we continue to view the state with caution. California still
has an accumulated budget deficit and we expect the budget will remain stressed
due to spending pressures for education, social services and corrections.
Further, while we anticipate spending pressures to build, we believe revenue
limitations will continue to be imposed by Propositions 13, 62 and 218.
Name Change
The name of the Fund was changed on December 11, 1996 from California Insured
Tax Free Fund to California Tax Free Fund. The investment policy of the Fund
remains unchanged and at least 80% of the Fund's investments will continue to be
insured as to the timely payment of principal and interest.
<PAGE>
PAGE 6
- --------------------------------------
Keystone California Tax Free Fund
[typeset representation of mountain chart]
Growth of an investment in
Keystone California Tax Free Fund
Class A
In Thousands
Initial Reinvested
Investment Distributions
2/94 9523.81 9523.81
11/94 8285.714 8687.197
11/95 9390.476 10393.28
11/96 9266.666 10807.99
A $10,000 investment in Keystone California Tax Free Fund Class A made on
February 1, 1994 with all distributions reinvested was worth $10,809 on November
30, 1996. Past performance is no guarantee of future results.
[end mountain chart]
Taxable Equivalent Yields(4)
<TABLE>
<S> <C> <C> <C>
Federal Tax Bracket
---------------------------------------
31% 36% 39.6%
---------- ---------- ----------
(combined state & federal) (37.42%) (41.95%) (45.22%)
- --------------------------- ---------- ---------- ----------
Yield Taxable Equivalent Yields
- --------------------------- ---------------------------------------
4.0% 6.4% 6.9% 7.3%
5.0% 8.0% 8.6% 9.1%
6.0% 9.6% 10.3% 11.0%
- --------------------------- ---------- ---------- ----------
</TABLE>
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
- ------------
(4)The table is based on 1996 federal tax brackets. The 31% bracket includes
single filers earning $58,151-121,300 and joint filers earning $96,901-147,700;
the 36% bracket includes single filers earning $121,301-263,750 and joint filers
earning $147,701-263,750; the 39.6% bracket includes single and joint filers
earning over $263,750.
Twelve-Month Performance as of November 30, 1996
- -------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Total returns* 3.99% 3.23% 3.34%
Net asset value 11/30/95 $9.86 $9.82 $9.80
11/30/96 $9.73 $9.69 $9.68
Distributions $0.50 $0.43 $0.43
Capital Gains none none none
</TABLE>
*Before deducting any sales charges
Historical Record as of November 30, 1996
- -------------------------------------
<TABLE>
<CAPTION>
Cumulative total returns Class A Class B Class C
<S> <C> <C> <C>
1-year w/o sales charge 3.99% 3.23% 3.34%
1-year -0.95% -0.72% 3.34%
Life of Class 8.09% 8.84% 11.52%
Average annual returns
1-year w/o sales charge 3.99% 3.23% 3.34%
1-year -0.95% -0.72% 3.34%
Life of Class 2.78% 3.03% 3.92%
</TABLE>
Class A, Class B and Class C share performance is reported from the commencement
of investment operations on February 1, 1994.
Class A share performance is reported at the current maximum front-end
sales charge of 4.75%.
Class B share performance reflects the deduction of the contingent deferred
sales charge of 3% assuming shares were redeemed after the end of the period.
Class C share performance reflects the return you would have received after
holding shares for one year and redeeming at the end of the 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. The Fund reserves the right to change or terminate
the exchange offer.
<PAGE>
PAGE 7
- --------------------------------------------------------------------
Keystone Missouri Tax Free Fund
Your Fund's Performance
Your Fund's objective is to seek the highest possible current income, exempt
from federal and state income taxes, while preserving capital.(5) The Fund is
managed by Daniel A. Rabasco, vice president in Keystone's municipal bond
department.
Performance
For the twelve-month period which ended November 30, 1996:
Class A shares returned 4.66%,
Class B shares returned 3.83%, and
Class C shares returned 3.83%.
Portfolio Strategy
Our primary strategy was to manage the Fund's average maturity, based on our
interest rate outlook. We entered 1996 having extended the average maturity, in
anticipation of a continuing decline in interest rates. We later made several
adjustments. These included shortening the average maturity when interest rates
rose and then positioning the Fund for a neutral stance relative to its
competitive group when we believed that the municipal bond market had regained
stability. Early in the year, we had invested in non-callable zero coupon bonds
and bonds with 30-year maturities. For most of the fiscal year, the Fund was
invested in bonds with 15-20 year maturities.
We also sought to build and maintain the Fund's income by purchasing
higher-yielding BBB-rated securities--primarily hospital bonds--and
emphasizing call protection.
- -------------------------
(5)For investors in certain tax situations, a portion of income may be subject
to the federal alternative minimum tax (AMT).
As of November 30, 1996, your Fund's average quality was AA. The average
maturity of the portfolio stood at 19 years.
Looking ahead, we will continue to seek bonds that meet our stringent
credit standards and that we believe will enhance the Fund's income stream. We
think that bonds providing a solid level of quality still provide attractive
value. These may include, among others: quality revenue bonds--such as water and
sewer bonds, transportation bonds, and bonds issued by electric utilities.
Economic Environment
Missouri continues to exhibit economic strength and sound fiscal management. The
state's economy is still outperforming that of the nation. Missouri's 3.6%
unemployment rate for October 1996 is well-below the national rate of 5.4%. Job
growth has resulted primarily from growth in the service sector, particularly in
health and computer services. The state also continues to generate large budget
surpluses.
Our outlook for Missouri is favorable. We believe that Missouri's
relatively low cost of living and its role as a distribution hub in the central
U.S. will reward the state with above average economic growth. While there may
be job losses in manufacturing, we expect them to be offset by growth in the
service sector.
Demand for Missouri bonds has been strong. The state's debt levels are
extremely low; and while we anticipate an increase in Missouri bond issuance, we
believe that the additional debt will be met with solid demand.
<PAGE>
PAGE 8
- --------------------------------------------------------------------
Keystone Missouri Tax Free Fund
[typeset representation of mountain chart]
Growth of an investment in
Keystone Missouri Tax Free Fund Class A
Initial Reinvested
Investment Distributions
2/94 9523.81 9523.81
11/94 8304.762 8709.467
11/95 9438.095 10439.76
11/96 9390.476 10926.31
A $10,000 investment in Keystone Missouri Tax Free Fund Class A made on February
1, 1994 with all distributions reinvested was worth $10,928 on November 30,
1996. Past performance is no guarantee of future results.
[end mountain chart]
Taxable Equivalent Yields(6)
<TABLE>
<CAPTION>
Federal Tax Bracket
---------------------------------------------
<S> <C> <C> <C>
31% 36% 39.6%
---------- ---------- ----------
(combined state & federal) (35.14%) (39.84%) (43.22%)
- --------------------------- ---------- ---------- ----------
Yield Taxable Equivalent Yields
- --------------------------- ---------------------------------------------
4.0% 6.2% 6.6% 7.0%
5.0% 7.7% 8.3% 8.8%
6.0% 9.3% 10.0% 10.6%
- --------------------------- ---------- ---------- ----------
</TABLE>
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
- -------------------------
(6)The table is based on 1996 federal tax brackets. The 31% bracket includes
single filers earning $58,151-121,300 and joint filers earning $96,901-147,700;
the 36% bracket includes single filers earning $121,301-263,750 and joint filers
earning $147,701-263,750; the 39.6% bracket includes single and joint filers
earning over $263,750.
Twelve-Month Performance as of November 30, 1996
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Total returns* 4.66% 3.83% 3.83%
Net asset value 11/30/95 $9.91 $9.80 $9.79
11/30/96 $9.86 $9.74 $9.73
Distributions $0.49 $0.42 $0.42
Capital Gains none none none
</TABLE>
* Before deducting any sales charges
Historical Record as of November 30, 1996
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative total returns Class A Class B Class C
<S> <C> <C> <C>
1-year w/o sales charge 4.66% 3.83% 3.83%
1-year -0.31% -0.14% 3.83%
Life of Class 9.28% 9.24% 11.93%
Average annual returns
1-year w/o sales charge 4.66% 3.83% 3.83%
1-year -0.31% -0.14% 3.83%
Life of Class 3.18% 3.17% 4.06%
</TABLE>
Class A, Class B and Class C share performance is reported from the commencement
of investment operations on February 1, 1994.
Class A share performance is reported at the current maximum front-end sales
charge of 4.75%.
Class B share performance reflects the deduction of the contingent deferred
sales charge of 3% assuming shares were redeemed after the end of the period.
Class C share performance reflects the return you would have received after
holding shares for one year and redeeming at the end of the 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.
The Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 9
- --------------------------------------
Growth of an Investment
[typeset representation of line chart]
Comparison of change in value of a $10,000 investment
in each Class of Keystone California Tax Free Fund,
the Lehman Municipal Bond Index and the Consumer
Price Index.
In Thousands February 1, 1994 through November 30, 1996
Average Annual Total Returns
----------------------------
1 Year Life of Class
Class A -0.95% 2.78%
Class B -0.72% 3.03%
Class C 3.34% 3.92%
Lehman Consumer
Municipal Price
Bond Index Index
Class A Class B Class C (LMBI) (CPI)
2/94 9524 10000 10000 10000 10000
11/94 8687 9100 9092 9177 10239
11/95 10393 10825 10791 10912 10506
11/96 10808 10884 11152 11553 10848
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 different classes. Lehman Municipal Bond Index is from
January 31, 1994.
[end line chart]
Components of the Chart
The chart is composed of three lines that represent the accumulated value of an
initial $10,000 investment for the period indicated. The lines illustrate a
hypothetical investment in:
1. Keystone America State Tax Free Fund-- Series II
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
[typeset representation of line chart]
Comparison of change in value of a $10,000 investment
in each Class of Keystone Missouri Tax Free Fund, the
Lehman Municipal Bond Index and the Consumer
Price Index.
In Thousands February 1, 1994 through November 30, 1996
Average Annual Total Returns
----------------------------
1 Year Life of Class
Class A -0.31% 3.18%
Class B -0.14% 3.17%
Class C 3.83% 4.06%
Lehman Consumer
Municipal Price
Bond Index Index
Class A Class B Class C (LMBI) (CPI)
2/94 9524 10000 10000 10000 10000
11/94 8709 9094 9075 9177 10239
11/95 10440 10802 10780 10912 10506
11/96 10926 10924 11193 11553 10848
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 different classes. Lehman Municipal Bond Index is from
January 31, 1994.
[end line chart]
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 U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable benchmark
for investors who seek to outperform increases in the cost of living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult
<PAGE>
PAGE 10
- --------------------------------------
Keystone State Tax Free Fund--Series II
for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund\'s 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.
The 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 index does 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.
<PAGE>
PAGE 11
- --------------------------------------
Keystone California Tax Free Fund
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
========= ============= ============= ============
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.6%)
California Educational Facilities Authority Revenue, Loyola
Marymount University (MBIA) 5.875% 10/01/2016 $1,045,000 $1,083,780
California Health Facilities Finance Authority, Insured Health
Facilities-Catholic, Series A (AMBAC) 5.750 07/01/2015 1,000,000 1,008,160
California Housing Finance Agency, Home Mortgage, Series L (MBIA) 6.400 08/01/2027 500,000 515,295
California Housing Finance Agency, Multi-Family Housing,
Series B (AMBAC) 6.050 08/01/2016 2,000,000 2,028,260
California State Public Works Board, Department of Corrections,
Series B (MBIA) 5.625 11/01/2016 500,000 505,625
California State Public Works Board, Department of Corrections,
Series D 5.375 11/01/2014 500,000 490,050
California State Public Works Board, Various University of
California Projects, Series A 5.500 06/01/2014 1,000,000 1,003,210
Central Coast Water Authority, California, State Water Project
Regional Facilities, Series A (AMBAC) 5.000 10/01/2022 1,000,000 939,330
East Bay, California Municipal Utility District, Wastewater
Treatment System (FGIC) 5.000 06/01/2026 500,000 467,930
Elk Grove, California, Unified School District, Special Tax,
Community Facilities, District No. 1 (AMBAC) 6.500 12/01/2024 500,000 579,905
Los Angeles, California, Community Redevelopment Agency
Refunding, Tax Allocation (FSA) 6.500 12/01/2016 750,000 814,688
Los Angeles, California, Convention and Exhibition Center
Authority, Lease Refunding, Series A (MBIA) 6.000 08/15/2010 1,000,000 1,093,850
Los Angeles County, California, Transportation Commission, Sales
Tax Revenue, Proposition C, Second SR, Series A, (MBIA) 6.250 07/01/2013 1,000,000 1,058,610
MSR Public Power Agency, California, San Juan Project, Series B (MBIA) 6.750 07/01/2011 400,000 438,832
Madera County, California, Certificates of Participation, Valley
Children's Hospital (MBIA) 6.250 03/15/2007 250,000 277,092
Oakland, California, Revenue Refunding, Series A (FGIC) 7.600 08/01/2021 1,750,000 1,881,863
Rialto, California, Special Tax, Community Facilities District 87-1 (FSA) 5.625 09/01/2018 500,000 499,015
Rio Linda, California, Unified School District, Series A (AMBAC) 7.400 08/01/2010 1,000,000 1,150,600
Riverside County, California, Transportation Commission, Sales Tax
Revenue, Series A (FGIC) 6.000 06/01/2009 1,000,000 1,097,660
Sacramento County, California, Airport System Revenue, Series A 6.000 07/01/2011 1,000,000 1,056,910
San Bernardino, California, Joint Powers Financing Authority, Tax
Allocation Revenue, Series A (FSA) 5.750 10/01/2015 1,000,000 1,020,480
San Diego County, California, Water Authority, Water Revenue,
Certificates of Participation (FGIC) 5.681 04/23/2008 2,000,000 2,118,100
San Francisco, California, City and County Airport Commission,
International Airport Revenue, Second Series-Issue 12-B (FGIC) 5.650 05/01/2024 300,000 302,427
San Francisco, California, State Building Authority, San Francisco
Civic Center Complex A (AMBAC) 6.000 12/01/2009 500,000 545,000
</TABLE>
(continued on next page)
<PAGE>
PAGE 12
- --------------------------------------
Keystone California Tax Free Fund
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
========= ============= ============= =============
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (continued)
San Jose, California, Redevelopment Tax Allocation, Merged Area
Redevelopment Project (MBIA) 6.000% 08/01/2015 $1,230,000 $1,332,643
San Mateo, Foster City, California, School District Capital
Appreciation, Series C (FGIC) (effective yield 5.60%)(b) 0.000 09/01/2003 100,000 72,601
Santa Ana, California, Financing Authority Lease, Police
Administration and Holding Facility, Series A (MBIA) 6.250 07/01/2015 300,000 335,691
Santa Ana, California, Financing Authority Lease, Police
Administration and Holding Facility, Series A (MBIA) 6.250 07/01/2024 1,000,000 1,130,830
South Orange County, California, Public Financing Authority,
Special Tax Revenue, Sr. Lien, Series A (MBIA) 7.000 09/01/2009 1,000,000 1,187,500
Southern California Public Power Authority, Transmission Project
Revenue (FSA)(effective yield 5.90%)(b) 0.000 07/01/2014 1,500,000 572,220
University of California, Hospital-University of California Medical
Center (AMBAC) 5.750 07/01/2024 1,000,000 1,009,650
Walnut Valley, California, Unified School District, Series A, (MBIA) 6.000 08/01/2014 190,000 205,331
Windsor, California, United School District, Capital Appreciation
(FGIC) (effective yield 5.83%)(b) 0.000 08/01/2016 1,415,000 468,747
- ---------------------------------------------------------------------- -------- ------------ ----------- ----------
TOTAL MUNICIPAL BONDS (Cost--$27,370,995) 28,291,885
====================================================================== ==========
TEMPORARY TAX-EXEMPT INVESTMENT (3.0%)
Anaheim, California, Certificates of Participation
(Cost--$875,000)(a) 3.500 08/01/2019 875,000 875,000
- ---------------------------------------------------------------------- -------- ------------ ----------- ----------
TOTAL INVESTMENTS (Cost--$28,245,995)(c) 29,166,885
OTHER ASSETS AND LIABILITIES--NET (-0.6%) (167,190)
- ---------------------------------------------------------------------- ----------
NET ASSETS (100.0%) $28,999,695
====================================================================== ==========
</TABLE>
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at the date of purchase) is the annual yield at
which the bond accretes until its maturity date.
(c) The cost of investments for federal income tax purposes is identical. Gross
unrealized appreciation and depreciation of investments, based on
identified tax cost, at November 30, 1996 are as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 955,765
Gross unrealized depreciation (34,875)
---------
Net unrealized appreciation $ 920,890
=========
</TABLE>
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Financial Guaranty Insurance Corporation
FSA--Financial Security Assurance
MBIA--Municipal Bond Insurance Association
See Notes to Financial Statements.
<PAGE>
PAGE 13
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1994
(Commencement of
Year Ended November 30, Operations) to
1996 1995 November 30, 1994
=============== =============== ===================
<S> <C> <C> <C>
Net asset value beginning of year $ 9.86 $ 8.70 $10.00
- ------------------------------------------------------- ------- ------ -----
Income from investment operations:
Net investment income 0.48 0.49 0.44
Net realized and unrealized gain (loss) on investments
and closed futures contracts (0.11) 1.17 (1.30)
- ------------------------------------------------------- ------- ------ -----
Total from investment operations 0.37 1.66 (0.86)
- ------------------------------------------------------- ------- ------ -----
Less distributions from:
Net investment income (0.48) (0.47) (0.44)
In excess of net investment income (0.02) (0.03) 0
- ------------------------------------------------------- ------- ------ -----
Total distributions (0.50) (0.50) (0.44)
- ------------------------------------------------------- ------- ------ -----
Net asset value end of year $ 9.73 $ 9.86 $ 8.70
======================================================= ======= ====== =====
Total return (d) 3.99% 19.63% (8.78%)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.77%(b) 0.72%(b) 0.41%(a)
Total expenses excluding reimbursement 1.19% 1.31% 1.66%(a)
Net investment income 5.06% 5.37% 5.53%(a)
Portfolio turnover rate 120% 119% 104%
- ------------------------------------------------------- ------- ------ -----
Net assets end of year (thousands) $ 4,759 $4,555 $3,006
======================================================= ======= ====== ======
</TABLE>
(a) Annualized
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 0.75% and 0.69% for the years ended November 30, 1996 and 1995,
respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 14
- --------------------------------------
Keystone California Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1994
(Commencement of
Year Ended November 30, Operations) to
1996 1995 November 30, 1994
=============== =============== ===================
<S> <C> <C> <C>
Net asset value beginning of year $ 9.82 $ 8.68 $ 10.00
- ------------------------------------------------------- ------- ------- ------
Income from investment operations:
Net investment income 0.41 0.44 0.40
Net realized and unrealized gain (loss) on investments
and closed futures contracts (0.11) 1.17 (1.28)
- ------------------------------------------------------- ------- ------- ------
Total from investment operations 0.30 1.61 (0.88)
- ------------------------------------------------------- ------- ------- ------
Less distributions from:
Net investment income (0.41) (0.44) (0.40)
In excess of net investment income (0.02) (0.03) (0.04)
- ------------------------------------------------------- ------- ------- ------
Total distributions (0.43) (0.47) (0.44)
- ------------------------------------------------------- ------- ------- ------
Net asset value end of year $ 9.69 $ 9.82 $ 8.68
======================================================= ======= ======= ======
Total return (d) 3.23% 18.95% (9.00%)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.52%(b) 1.48%(b) 1.16%(a)
Total expenses excluding reimbursement 1.94% 2.07% 2.36%(a)
Net investment income 4.31% 4.57% 4.83%(a)
Portfolio turnover rate 120% 119% 104%
- ------------------------------------------------------- ------- ------- ------
Net assets end of year (thousands) $22,719 $22,743 $11,415
======================================================= ======= ======= ======
</TABLE>
(a) Annualized
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 1.50% and 1.45% for the years ended November 30, 1996 and 1995,
respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 15
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1994
(Commencement of
Year Ended November 30, Operations) to
1996 1995 November 30, 1994
=============== =============== ===================
<S> <C> <C> <C>
Net asset value beginning of year $ 9.80 $ 8.68 $10.00
- ------------------------------------------------------- ------ ------ -----
Income from investment operations:
Net investment income 0.41 0.43 0.39
Net realized and unrealized gain (loss) on investments
and closed futures contracts (0.10) 1.15 (1.29)
- ------------------------------------------------------- ------ ------ -----
Total from investment operations 0.31 1.58 (0.90)
- ------------------------------------------------------- ------ ------ -----
Less distributions from:
Net investment income (0.41) (0.43) (0.39)
In excess of net investment income (0.02) (0.03) (0.03)
- ------------------------------------------------------- ------ ------ -----
Total distributions (0.43) (0.46) (0.42)
- ------------------------------------------------------- ------ ------ -----
Net asset value end of year $ 9.68 $ 9.80 $ 8.68
======================================================= ====== ====== =====
Total return (d) 3.34% 18.69% (9.08%)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.52%(b) 1.49%(b) 1.16%(a)
Total expenses excluding reimbursement 1.94% 2.07% 2.38%(a)
Net investment income 4.31% 4.51% 4.96%(a)
Portfolio turnover rate 120% 119% 104%
- ------------------------------------------------------- ------ ------ -----
Net assets end of year (thousands) $1,521 $1,535 $ 624
======================================================= ====== ====== =====
</TABLE>
(a) Annualized
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 1.50% and 1.46% for the years ended November 30, 1996 and 1995,
respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 16
- -------------------------
Keystone California Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1996
- --------------------------------------------------------------------------------
Assets
Investments at market value
(identified cost--$28,245,995) $29,166,885
Cash 8,231
Receivable for:
Fund shares sold 11,553
Interest 481,489
Due from Investment Adviser 9,466
Unamortized organization expenses 2,931
Prepaid expenses 145
- ----------------------------------------------------- -------------
Total assets 29,680,700
- ----------------------------------------------------- -------------
Liabilities
Payable for:
Investments purchased 544,555
Distributions to shareholders 109,573
Due to related parties 4,673
Other accrued expenses 22,204
- ----------------------------------------------------- -------------
Total liabilities 681,005
- ----------------------------------------------------- -------------
Net assets $28,999,695
- ----------------------------------------------------- -------------
Net assets represented by
Paid-in capital $28,336,083
Accumulated distributions in excess of
net investment income (84,575)
Accumulated net realized loss on
investments and closed futures contracts (172,703)
Net unrealized appreciation on investments 920,890
- ----------------------------------------------------- -------------
Total net assets $28,999,695
- ----------------------------------------------------- -------------
Net asset value per share (Note 2)
Class A Shares
Net asset value of $4,759,213 / 488,904 shares
outstanding $9.73
Maximum offering price per share ($9.73 / 0.9525)
(based on a sales charge of 4.75% of the
offering price on November 30, 1996) $10.22
Class B Shares
Net asset value of $22,719,468 / 2,344,553 shares
outstanding $9.69
Class C Shares
Net asset value of $1,521,014 / 157,192 shares
outstanding $9.68
--------------------------------------------------- -----------
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Year Ended November 30, 1996
- --------------------------------------------------------------------------------
Investment income
Interest $1,721,469
- -------------------------------------- --------- ------------
Expenses (Notes 4, 5 and 6)
Management fee $ 163,334
Transfer agent fees 30,208
Custodian fees 37,531
Accounting, auditing and legal fees 43,561
Organization expenses 1,360
Distribution Plan expenses 231,970
Other 31,341
Reimbursement from Investment Adviser (124,138)
- -------------------------------------- --------- ------------
Total expenses 415,167
Less: Indirectly paid expenses (4,860)
- -------------------------------------- --------- ------------
Net expenses 410,307
- -------------------------------------- --------- ------------
Net investment income 1,311,162
- -------------------------------------- --------- ------------
Net realized and unrealized loss on
investments and closed futures
contracts (Note 3)
Net realized gain (loss) on:
Investments 309,298
Closed futures contracts (58,763)
- -------------------------------------- --------- ------------
Net realized gain on investments and
closed futures contracts 250,535
Net change in unrealized appreciation
(depreciation) on investments (615,669)
- -------------------------------------- ------------ ------------
Net realized and unrealized loss on
investments and closed futures
contracts (365,134)
------------------------------------ --------- ----------
Net increase in net assets
resulting from operations $ 946,028
- -------------------------------------- --------- ------------
<PAGE>
PAGE 17
- --------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended November 30,
1996 1995
============================================================================= ======== ========
<S> <C> <C>
Operations
Net investment income $ 1,311,162 $ 970,169
Net realized gain on investments and closed futures contracts 250,535 671,239
Net change in unrealized appreciation (depreciation) on investments (615,669) 1,882,439
- ------------------------------------------------------------------------------ ----------- -----------
Net increase in net assets resulting from operations 946,028 3,523,847
- ------------------------------------------------------------------------------ ----------- -----------
Distributions to shareholders from (Note 1)
Net investment income:
Class A (235,059) (180,675)
Class B (1,007,294) (746,674)
Class C (68,809) (47,288)
In excess of net investment income:
Class A (10,964) (12,433)
Class B (46,983) (51,381)
Class C (3,209) (3,254)
- ------------------------------------------------------------------------------ ----------- -----------
Total distributions to shareholders (1,372,318) (1,041,705)
- ------------------------------------------------------------------------------ ----------- -----------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A 1,349,960 1,987,577
Class B 5,739,529 11,405,882
Class C 371,666 1,005,793
Payment for shares redeemed:
Class A (1,165,388) (918,227)
Class B (5,834,556) (2,323,287)
Class C (394,952) (229,742)
Net asset value of shares issued in reinvestment of distributions:
Class A 83,004 45,806
Class B 406,441 307,457
Class C 37,702 24,916
- ------------------------------------------------------------------------------ ----------- -----------
Net increase in net assets resulting from capital share transactions 593,406 11,306,175
- ------------------------------------------------------------------------------ ----------- -----------
Total increase in net assets 167,116 13,788,317
Net assets:
Beginning of year 28,832,579 15,044,262
- ------------------------------------------------------------------------------ ----------- -----------
End of year [Including accumulated distributions in excess of net investment
income as follows: 1996--($84,575) and 1995--($27,037)] (Note 1) $28,999,695 $28,832,579
============================================================================== =========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 18
- --------------------------------------
Keystone Missouri Tax Free Fund
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
========= ============= ============= ============
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.4%)
Butler County, Missouri, Public Facilities Authority, Butler County
Jail Project (FGIC) 6.500% 12/01/2014 $1,105,000 $1,194,317
Cape Girardeau County, Missouri, Health Care Facilities, Southeast
Missouri Hospital Association (MBIA) 5.250 06/01/2016 1,500,000 1,464,120
Chesterfield, Missouri, General Obligation 6.300 02/15/2013 830,000 892,167
Clay County, Missouri, Public Building Authority (FGIC) 7.000 05/15/2014 1,000,000 1,128,430
Commonwealth of Puerto Rico, General Obligation 6.450 07/01/2017 500,000 538,585
Commonwealth of Puerto Rico, Highway and Transportation
Authority Revenue, Series Y 6.250 07/01/2014 1,000,000 1,096,790
Commonwealth of Puerto Rico, Linked BPO (MBIA) 7.000 07/01/2010 750,000 887,835
Jackson County, Missouri, Single Family Mortgage Revenue
(effective yield 6.29%)(b) 0.000 03/01/2015 3,750,000 1,305,150
Kansas City, Missouri, Municipal Assistance, Capital Improvement,
Series B (AMBAC) 5.650 01/15/2012 1,000,000 1,025,260
Missouri Higher Education, Loan Authority, Student Loan, Series B 6.750 02/15/2009 1,000,000 1,044,770
Missouri State Environmental Improvement and Energy Resource
Authority, Water Pollution Control, Capital Appreciation, State
Revolving Fund-Series D (effective yield 6.25%)(b) 0.000 01/01/2016 985,000 333,432
Missouri State Environmental Improvement and Energy Resource
Authority, Water Pollution Control, Capital Appreciation, State
Revolving Fund-Series D (effective yield 6.25%)(b) 0.000 01/01/2017 975,000 311,824
Missouri State Environmental Improvement and Energy Resource
Authority, Water Pollution Control, State Revolving Fund,
Kansas City, Series A 5.750 01/01/2016 1,000,000 1,030,550
Missouri State Environmental Improvement and Energy Resource
Authority, Water Pollution Control, State Revolving Fund,
Series B 7.200 07/01/2016 600,000 687,054
Missouri State Health and Educational Facilities Authority, BJC
Health Systems, Series A 6.500 02/15/2020 500,000 550,495
Missouri State Health and Educational Facilities Authority,
Bethesda Health Group, Project A 7.500 08/15/2012 1,000,000 1,032,120
Missouri State Health and Educational Facilities Authority, Jefferson
Memorial Hospital Association Project 6.000 08/15/2023 250,000 239,715
Missouri State Health and Educational Facilities Authority, Jefferson
Memorial Hospital Obligation Group 6.800 05/15/2025 1,000,000 1,035,300
Missouri State Health and Educational Facilities Authority, Lake of
Ozarks General Hospital 6.500 02/15/2021 500,000 512,295
Missouri State Health and Educational Facilities Authority, SSM
Health Care, Series AA (MBIA) 6.250 06/01/2016 1,500,000 1,586,235
Missouri State Housing Development Commission, Single Family,
GNMA, Series A 7.125 12/01/2014 270,000 292,648
</TABLE>
(continued on next page)
<PAGE>
PAGE 19
- --------------------------------------
SCHEDULE OF INVESTMENTS--November 30, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
========= ============= ============ ==============
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (continued)
Missouri State Housing Development Commission, Single Family,
GNMA, Series B 6.250% 09/01/2015 $ 500,000 $ 511,235
Missouri State Housing Development Commission, Single Family,
GNMA, Series B 6.450 09/01/2027 1,250,000 1,281,962
St. Louis County, Missouri, Industrial Development Authority,
Health Facilities Revenue, GNMA, Mother of Perpetual Help 6.400 08/01/2035 500,000 528,105
St. Louis, Missouri, Municipal Finance Corp. Leasehold Revenue
Improvement--City Justice Center, Series A (AMBAC) 5.750 02/15/2011 1,200,000 1,229,268
Sikeston, Missouri, Electric Revenue (MBIA) 6.000 06/01/2013 1,250,000 1,353,913
Sikeston, Missouri, Electric Revenue (MBIA) 6.000 06/01/2015 500,000 541,540
University of Missouri Health Facilities Revenue, University of
Missouri Health System, Series A (AMBAC) 5.500 11/01/2016 650,000 651,970
Webb City, Missouri, School District R-VIII Facilities Group,
Leasehold Revenue 5.625 08/01/2016 250,000 250,498
Wentzville, Missouri, School District, Series A 5.600 03/01/2011 700,000 721,637
- ----------------------------------------------------------------- -------- ------------ ---------- ----------
TOTAL MUNICIPAL BONDS (Cost--$23,973,745) 25,259,220
================================================================= ==========
TEMPORARY TAX-EXEMPT INVESTMENT (3.6%)
Missouri State Health and Educational Facilities Authority,
Christian Health Services (Cost--$925,000)(a) 3.400 12/01/2019 925,000 925,000
- ----------------------------------------------------------------- -------- ------------ ---------- ----------
TOTAL INVESTMENTS (Cost--$24,898,745)(c) 26,184,220
OTHER ASSETS AND LIABILITIES--NET (-1.0%) (262,873)
- ----------------------------------------------------------------- ----------
NET ASSETS (100.0%) $25,921,347
================================================================= ==========
</TABLE>
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at the date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
(c) The cost of investments for federal income tax purposes amounted to
$24,911,786. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at November 30, 1996 are as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $1,288,569
Gross unrealized depreciation (16,135)
----------
Net unrealized appreciation $1,272,434
==========
</TABLE>
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Federal Guaranty Insurance Corporation
GNMA--Government National Mortgage Association
MBIA--Municipal Bond Investors Assurance
See Notes to Financial Statements.
<PAGE>
PAGE 20
- --------------------------------------
Keystone Missouri Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1994
(Commencement of
Year Ended November 30, Operations) to
1996 1995 November 30, 1994
=============== =============== ===================
<S> <C> <C> <C>
Net asset value beginning of year $ 9.91 $ 8.72 $10.00
- ------------------------------------------------------- ------ ------ -----
Income from investment operations:
Net investment income 0.50 0.50 0.44
Net realized and unrealized gain (loss) on investments
and closed futures contracts (0.06) 1.19 (1.28)
- ------------------------------------------------------- ------ ------ -----
Total from investment operations 0.44 1.69 (0.84)
- ------------------------------------------------------- ------ ------ -----
Less distributions from:
Net investment income (0.47) (0.47) (0.44)
In excess of net investment income (0.02) (0.03) 0(e)
- ------------------------------------------------------- ------ ------ -----
Total distributions (0.49) (0.50) (0.44)
- ------------------------------------------------------- ------ ------ -----
Net asset value end of year $ 9.86 $ 9.91 $ 8.72
======================================================= ====== ====== =====
Total return (d) 4.66% 19.86% (8.55%)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.76%(b) 0.72%(b) 0.43%(a)
Total expenses excluding reimbursement 1.22% 1.32% 1.54%(a)
Net investment income 4.93% 5.26% 5.38%(a)
Portfolio turnover rate 126% 74% 25%
- ------------------------------------------------------- ------ ------ -----
Net assets end of year (thousands) $2,610 $4,848 $3,581
======================================================= ====== ====== =====
</TABLE>
(a) Annualized
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 0.75% and 0.69% for the years ended November 30, 1996 and 1995,
respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Excluding applicable sales charges.
(e) Amount represents less than $0.01 per share.
See Notes to Financial Statements.
<PAGE>
PAGE 21
- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1994
(Commencement of
Year Ended November 30, Operations) to
1996 1995 November 30, 1994
=============== =============== ===================
<S> <C> <C> <C>
Net asset value beginning of year $ 9.80 $ 8.67 $ 10.00
- ------------------------------------------------------- ------- ------- ------
Income from investment operations:
Net investment income 0.40 0.44 0.40
Net realized and unrealized gain (loss) on investments
and closed futures contracts (0.04) 1.15 (1.29)
- ------------------------------------------------------- ------- ------- ------
Total from investment operations 0.36 1.59 (0.89)
- ------------------------------------------------------- ------- ------- ------
Less distributions from:
Net investment income (0.40) (0.43) (0.40)
In excess of net investment income (0.02) (0.03) (0.04)
- ------------------------------------------------------- ------- ------- ------
Total distributions (0.42) (0.46) (0.44)
- ------------------------------------------------------- ------- ------- ------
Net asset value end of year $ 9.74 $ 9.80 $ 8.67
======================================================= ======= ======= ======
Total return (d) 3.83% 18.79% (9.06%)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.52%(b) 1.47%(b) 1.16%(a)
Total expenses excluding reimbursement 2.00% 2.08% 2.49%(a)
Net investment income 4.20% 4.56% 4.70%(a)
Portfolio turnover rate 126% 74% 25%
- ------------------------------------------------------- ------- ------- ------
Net assets end of year (thousands) $21,925 $21,231 $12,906
======================================================= ======= ======= ======
</TABLE>
(a) Annualized
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 1.50% and 1.44% for the years ended November 30, 1996 and 1995,
respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 22
- --------------------------------------
Keystone Missouri Tax Free Fund
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1994
(Commencement of
Operations) to
Year Ended November 30,
1996 1995 November 30, 1994
=============== =============== ===================
<S> <C> <C> <C>
Net asset value beginning of year $ 9.79 $ 8.66 $ 10.00
- ------------------------------------------------------- -------- -------- ---------
Income from investment operations:
Net investment income 0.39 0.43 0.39
Net realized and unrealized gain (loss) on investments
and closed futures contracts (0.03) 1.16 (1.29)
- ------------------------------------------------------- -------- -------- ---------
Total from investment operations 0.36 1.59 (0.90)
- ------------------------------------------------------- -------- -------- ---------
Less distributions from:
Net investment income (0.40) (0.43) (0.39)
In excess of net investment income (0.02) (0.03) (0.05)
- ------------------------------------------------------- -------- -------- ---------
Total distributions (0.42) (0.46) (0.44)
- ------------------------------------------------------- -------- -------- ---------
Net asset value end of year $ 9.73 $ 9.79 $ 8.66
======================================================= ======== ======== =========
Total return (d) 3.83% 18.78% (9.25%)(c)
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.52%(b) 1.46%(b) 1.15%(a)
Total expenses excluding reimbursement 1.99% 2.07% 2.60%(a)
Net investment income 4.18% 4.56% 4.72%(a)
Portfolio turnover rate 126% 74% 25%
- ------------------------------------------------------- -------- -------- ---------
Net assets end of year (thousands) $ 1,387 $ 1,788 $ 1,045
======================================================= ======== ======== =========
</TABLE>
(a) Annualized
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratios would have
been 1.50% and 1.44% for the years ended November 30, 1996 and 1995,
respectively.
(c) Total return is calculated from February 1, 1994 (Commencement of
Operations) to November 30, 1994.
(d) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 23
- --------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments at market value
(identified cost--$24,898,745) $26,184,220
Cash 2,922
Receivable for:
Investments sold 259,881
Interest 484,398
Due from Investment Adviser 11,882
Unamortized organization expenses 1,610
Prepaid expenses 149
- ----------------------------------------------------- -----------
Total assets 26,945,062
- ----------------------------------------------------- -----------
Liabilities
Payable for:
Investments purchased 894,339
Fund shares redeemed 5,234
Distributions to shareholders 96,541
Due to related parties 5,669
Other accrued expenses 21,932
- ----------------------------------------------------- -----------
Total liabilities 1,023,715
- ----------------------------------------------------- -----------
Net assets $25,921,347
===================================================== ===========
Net assets represented by
Paid-in capital $25,012,832
Accumulated distributions in excess of
net investment income (78,953)
Accumulated net realized loss on investments
and closed futures contracts (298,007)
Net unrealized appreciation on investments 1,285,475
- ----------------------------------------------------- -----------
Total net assets $25,921,347
===================================================== ===========
Net asset value per share (Note 2)
Class A Shares
Net asset value of $2,609,659 \ 264,722 shares
outstanding $9.86
Maximum offering price per share ($9.86 \ 0.9525)
(based on a sales charge of 4.75% of the offering
price on November 30, 1996) $10.35
Class B Shares
Net asset value of $21,924,518 \ 2,250,766 shares
outstanding $9.74
Class C Shares
Net asset value of $1,387,170 \ 142,514 shares
outstanding $9.73
===================================================== ===========
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
Year Ended November 30, 1996
<TABLE>
<S> <C> <C>
Investment income
Interest $1,516,777
- -------------------------------------- ----------
Expenses (Notes 4, 5 and 6)
Management fee $ 146,922
Transfer agent fees 35,133
Custodian fees 36,477
Accounting fees 24,104
Auditing and legal fees 19,644
Organization expenses 750
Distribution Plan expenses 212,358
Other 27,698
Reimbursement from Investment
Adviser (127,049)
- -------------------------------------- ---------
Total expenses 376,037
Less: Indirectly paid expenses (3,594)
- -------------------------------------- ---------
Net expenses 372,443
- -------------------------------------- ----------
Net investment income 1,144,334
- -------------------------------------- ----------
Net realized and unrealized loss on
investments and closed futures
contracts (Note 3)
Realized gain (loss) on:
Investments 508,612
Closed futures contracts (100,090)
- -------------------------------------- ---------
Net realized gain on investments and
closed futures contracts 408,522
Net change in unrealized
appreciation (depreciation) on
investments (559,081)
- -------------------------------------- ----------
Net realized and unrealized loss
on investments and closed futures
contracts (150,559)
- -------------------------------------- ----------
Net increase in net assets
resulting from operations $ 993,775
====================================== ==========
</TABLE>
<PAGE>
PAGE 24
- --------------------------------------
Keystone Missouri Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended November 30,
1996 1995
================================================================================ ======== ========
<S> <C> <C>
Operations
Net investment income $ 1,144,334 $ 1,018,144
Net realized gain (loss) on investments and closed futures contracts 408,522 (405,181)
Net change in unrealized appreciation (depreciation) on investments (559,081) 3,088,294
- --------------------------------------------------------------------------------- ----------- -----------
Net increase in net assets resulting from operations 993,775 3,701,257
- --------------------------------------------------------------------------------- ----------- -----------
Distributions to shareholders from (Note 1)
Net investment income:
Class A (180,167) (153,289)
Class B (901,652) (791,351)
Class C (62,515) (73,504)
In excess of net investment income:
Class A (7,679) (11,167)
Class B (38,432) (57,652)
Class C (2,665) (5,355)
- --------------------------------------------------------------------------------- ----------- -----------
Total distributions to shareholders (1,193,110) (1,092,318)
- --------------------------------------------------------------------------------- ----------- -----------
Capital share transactions (Note 2)
Proceeds from shares sold:
Class A 1,540,859 4,076,405
Class B 3,156,266 7,170,581
Class C 163,392 931,369
Payment for shares redeemed:
Class A (3,827,386) (3,330,599)
Class B (2,803,559) (1,245,399)
Class C (586,879) (414,529)
Net asset value of shares issued in reinvestment of distributions:
Class A 119,315 103,984
Class B 448,603 392,566
Class C 42,351 42,017
- --------------------------------------------------------------------------------- ----------- -----------
Net increase (decrease) in net assets resulting from capital share transactions (1,747,038) 7,726,395
- --------------------------------------------------------------------------------- ----------- -----------
Total increase (decrease) in net assets (1,946,373) 10,335,334
- --------------------------------------------------------------------------------- ----------- -----------
Net assets:
Beginning of year 27,867,720 17,532,386
- --------------------------------------------------------------------------------- ----------- -----------
End of year [Including accumulated distributions in excess of net investment
income as follows: 1996--($78,953) and 1995--($39,999)] (Note 1) $25,921,347 $27,867,720
================================================================================= =========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 25
- --------------------------------------
Keystone State Tax Free Fund--Series II
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone State Tax Free Fund--Series II (the "FUND") is a Massachusetts business
trust for which Keystone Investment Management Company ("Keystone") is the
Investment Adviser and Manager. Keystone is a wholly-owned subsidiary of
Keystone Investments, Inc. ("KII"). On December 11, 1996, KII, and indirectly
each of its subsidiaries, were acquired by First Union National Bank of North
Carolina (Note 7). The FUND is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end investment company. The FUND
currently consists of two separate, non-diversified series of shares evidencing
interests in different portfolios of securities (individually the "Fund",
collectively the "Funds"). These financial statements include the Keystone
California Tax Free Fund (formerly Keystone California Insured Tax Free Fund)
("California Fund") and the Keystone Missouri Tax Free Fund ("Missouri Fund").
Each Fund currently offers several classes of shares. The Funds seek the highest
possible current income exempt from federal income taxes, while preserving
capital.
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, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Funds.
A. Valuation of Securities
Securities held by the Funds are valued by an independent pricing service. In
determining value for normal institutional-size transactions, the pricing
service uses methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders. Securities for which valuations are not available from an
independent pricing service (including restricted securities) are valued at fair
value as determined in good faith according to procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Futures Contracts
In order to gain exposure to or protect against changes in security values, the
Funds may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill their obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
C. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of discounts and premiums.
<PAGE>
PAGE 26
- ------------------------
D. Organization Expenses
Organization expenses are amortized to operations over a five-year period on
a straight-line basis. In the event any of the initial shares of the Funds
are redeemed by Keystone during the five-year amortization period, redemption
proceeds will be reduced by any unamortized organization expenses in the same
proportion as the number of initial shares being redeemed bears to the number
of initial shares outstanding at the time of redemption.
E. Federal Income Taxes
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
"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 also intends to avoid excise
tax liability by making the required distributions under the Code.
Accordingly, no provision for federal income taxes is required.
F. Distributions
Each Fund declares dividends from net investment income daily and
distributes such dividends monthly and distributes net capital gains, if any,
at least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing book and tax accounting treatment of market discount on securities.
G. Class Allocations
Class A shares are offered at a public offering price which includes 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 that is payable upon
redemption and decreases depending on how long the shares have been held.
Class B shares purchased on or after June 1, 1995 that have been outstanding
for eight years will automatically convert to Class A shares. Class B shares
purchased prior to June 1, 1995 that have been outstanding for seven years
will automatically convert to Class A shares. Class C shares are sold subject
to a contingent deferred sales charge payable on shares redeemed within one
year of purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the
relative net assets of each class. Currently, class specific expenses are
limited to expenses incurred under the Distribution Plans for each class.
(2.) Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest with no par value Shares of
beneficial interest of each Fund are currently divided into Class A, Class B
and Class C. Transactions in shares of each Fund were as follows:
Year Ended November 30,
1996 1995
- ------------------------ --------- -----------
California Fund
Class A
Shares sold 140,002 210,863
Shares redeemed (121,799) (99,402)
Shares issued in
reinvestment
of dividends and
distributions 8,643 4,943
- ------------------------ --------- -----------
Net increase 26,846 116,404
<PAGE>
PAGE 27
- --------------------------------------
Year Ended November 30,
1996 1995
- ------------------------------------------------------------------
California Fund
Class B
Shares sold 597,313 1,223,780
Shares redeemed (612,458) (254,280)
Shares issued in
reinvestment of
dividends and
distribution 42,516 33,291
- ------------------------------------------------------------------
Net increase 27,371 1,002,791
- ------------------------------------------------------------------
Class C
Shares sold 38,530 107,136
Shares redeemed (41,822) (25,172)
Shares issued in
reinvestment of
dividends and
distributions 3,949 2,687
- ------------------------------------------------------------------
Net increase 657 84,651
- ------------------------------------------------------------------
Missouri Fund
Class A
Shares sold 156,363 429,776
Shares redeemed (392,880) (362,420)
Shares issued in
reinvestment of
dividends and
distributions 12,216 11,139
- ------------------------------------------------------------------
Net increase (decrease) (224,301) 78,495
- ------------------------------------------------------------------
Class B
Shares sold 330,193 769,123
Shares redeemed (292,558) (134,192)
Shares issued in
reinvestment of
dividends and
distributions 46,792 42,162
- ------------------------------------------------------------------
Net increase 84,427 677,093
- ------------------------------------------------------------------
Year Ended November 30,
1996 1995
- ------------------------------------------------------------------
Missouri Fund
Class C
Shares sold 17,038 101,419
Shares redeemed (61,550) (44,088)
Shares issued in
reinvestment of
dividends and
distributions 4,411 4,503
- ------------------------------------------------------------------
Net increase (decrease) (40,101) 61,834
- ------------------------------------------------------------------
(3.) Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the year ended November 30, 1996 were as follows:
<TABLE>
<CAPTION>
Cost Proceeds
of Purchases From Sales
------------------ --------------
<S> <C> <C>
California Fund $34,732,540 $35,232,134
Missouri Fund 32,872,843 34,481,866
</TABLE>
As of November 30, 1996 the Funds had approximate capital loss carryovers
for federal tax purposes as follows:
California Fund
-----------------
Expires 2002 $173,000
Missouri Fund
---------------
Expires 2003 $285,000
(4.) Distribution Plans
Each Fund bears some of the costs of selling its shares under Distribution Plans
adopted for its Class A, B and C shares pursuant to Rule 12b-1 under the 1940
Act. Under the Distribution Plans, each Fund pays its principal underwriter,
Keystone Investment Distributors Company
<PAGE>
PAGE 28
- --------------------------------------
Keystone State Tax Free Fund--Series II
("KIDC"), a wholly-owned subsidiary of Keystone, amounts which are calculated
and paid daily.
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.15% annually of the average daily net assets of the Class A shares,
to pay expenses related to the distribution of Class A shares.
Pursuant to each Fund's Class B and Class C Distribution Plans, the Funds pay a
distribution fee which currently may not exceed 0.90% of the average daily net
assets of Class B and Class C shares, respectively. Of that amount, 0.75% is
used to pay distribution expenses and 0.15% is used to pay service fees.
During the year ended November 30, 1996 amounts paid to KIDC pursuant to each
Fund's Class A, Class B, and Class C Distribution Plans were as follows:
California Fund
-----------------
Class A $ 7,037
Class B prior to June 1, 1995 108,867
Class B on or after June l, 1995 101,701
Class C 14,365
Missouri Fund
---------------
Class A $ 5,369
Class B prior to June 1, 1995 147,608
Class B on or after June l, 1995 45,956
Class C 13,425
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of any Distribution
Plan, and subject to the discretion of the Independent Trustees, payments to
KIDC may continue as compensation for services which had been earned while the
Distribution Plan was in effect.
KIDC intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from each Fund. KIDC intends to seek full
payment of such distribution costs from each Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
At November 30, 1996 total unpaid distribution costs for Class B shares were as
follows:
California Fund
-----------------
Shares purchased prior to June 1, 1995 $785,384
Shares purchased on or after June 1, 1995 758,782
Missouri Fund
---------------
Shares purchased prior to June 1, 1995 $942,344
Shares purchased on or after June 1, 1995 347,805
At November 30, 1996 total unpaid distribution costs for Class C shares were as
follows:
California Fund $100,058
Missouri Fund 133,757
Contingent deferred sales charges paid by redeeming shareholders are paid to
KIDC.
(5.) Investment Management Agreement and Other Affiliated Transactions
Under the terms of the Investment Advisory and Management Agreement between
Keystone and the FUND, Keystone provides investment management and
administrative services to each Fund. In return, Keystone is paid a management
fee that is computed and paid daily. The management fee is calculated by
applying percentage rates, which start at 0.55% and decline to 0.25% per annum
as net assets increase, to the average daily net asset value of each Fund.
Keystone has voluntarily limited the expenses of Class A shares to 0.75% of
its average daily net assets and has limited the expenses of Class B and C to
1.50% of the average daily net assets of each respective class.
<PAGE>
PAGE 29
- --------------------------------------
For the year ended November 30, 1996 Keystone reimbursed the Funds as follows:
California Fund $124,138
Missouri Fund 127,049
During the year ended November 30, 1996, each Fund paid or accrued to
Keystone for certain accounting services as follows:
California Fund $24,104
Missouri Fund 24,104
During the year ended November 30, 1996, each Fund paid or accrued to
Keystone Investor Resource Center, Inc., a wholly-owned subsidiary of Keystone,
for services rendered as the Fund's transfer and dividend disbursing agent as
follows:
California Fund $30,208
Missouri Fund 35,133
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of each Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from each Fund. Currently the Independent Trustees of the
Fund receive no compensation for their services.
(6.) Expense Offset Arrangement
The Funds have entered into an expense offset arrangement with its custodian.
For the year ended November 30, 1996, the California Fund and the Missouri Fund
incurred total custody fees in the amount of $37,531 and $36,477, respectively,
and received a credit of $4,860 and $3,594, respectively, pursuant to this
expense offset arrangement, resulting in a net custody expense of $32,671 and
$32,883, respectively. The assets deposited with the custodian under this
expense offset arrangement could have been invested in income-producing assets.
(7.) Subsequent Events
On December 11, 1996, KII and indirectly each of its subsidiaries, including
Keystone, the FUND's investment adviser, were acquired (the "Acquisition") by
First Union National Bank of North Carolina ("FUNB"), a wholly-owned subsidiary
of First Union Corporation ("First Union").
Consequently, the FUND entered into a new Investment Advisory and
Management Agreement (the "New Advisory Agreement") with Keystone. The terms of
the New Advisory Agreement are substantially identical to the current agreement.
In addition, the FUND has entered into a principal underwriting agreement with
Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds Distributor,
Inc.) ("EKD"), a wholly-owned subsidiary of BISYS Group Inc. EKD replaces
Evergreen Keystone Investment Services, Inc. (formerly, Keystone Investment
Distributors Company ("KIDC")) as the FUND's principal underwriter.
Also, in connection with the Acquisition, KIRC changed its name to
Evergreen Keystone Service Company.
It is expected that the Acquisition will not affect services provided to
the FUND.
<PAGE>
PAGE 30
- --------------------------------------
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 accompanying statements of assets and liabilities of
Keystone California Tax Free Fund (formerly Keystone California Insured Tax Free
Fund) and Keystone Missouri Tax Free Fund, portfolios of Keystone State Tax Free
Fund--Series II (the "FUND"), including the schedules of investments as of
November 30, 1996, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the two-year period ended November 30, 1996, 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, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone California Tax Free Fund and Keystone Missouri Tax Free Fund as of
November 30, 1996, the results of their operations for the year then ended, the
changes in their net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years or periods specified
in the first paragraph above in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
December 27, 1996
<PAGE>
PAGE 31
- --------------------------------------
FEDERAL TAX STATUS-FISCAL 1996 DISTRIBUTIONS
(Unaudited)
The per share distributions paid to you for fiscal 1996, whether taken in shares
or cash, are as follows:
Tax-Exempt Income Dividends
--------------------------------
Class A Class B Class C
---------- ---------- ---------
California Tax Free Fund $0.50 $0.43 $0.43
Missouri Tax Free Fund 0.49 0.42 0.42
In January 1997, we sent you complete information on distributions paid during
the calendar year 1996 to assist you in completing your federal tax return.
<PAGE>
[cover]
KEYSTONE AMERICA
FAMILY OF FUNDS
[diamond]
Balanced Fund II
California Tax Free Fund
Capital Preservation and Income Fund
Florida Tax Free Fund
Fund for Total Return
Fund of the Americas
Global Opportunities Fund
Global Resources and Development Fund
Government Securities Fund
Hartwell Emerging Growth Fund, Inc.
Intermediate Term Bond Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Omega Fund
Pennsylvania Tax Free Fund
Small Company Growth Fund II
Strategic Income Fund
Tax Free Income Fund
World Bond 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 logo] KEYSTONE
I N V E S T M E N T S
P.O. Box 2121
Boston, Massachusetts 02106-2121
CAMO-R-1/97 [recycle logo]
4M
K E Y S T O N E
[photo of American flag waving in front of building]
STATE
TAX FREE FUND
SERIES II
CALIFORNIA TAX FREE FUND
MISSOURI TAX FREE FUND
[Keystone logo]
ANNUAL REPORT
NOVEMBER 30, 1996
