<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 1997
File Nos. 33-73730
and 811-8254
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 5 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 6 [X]
KEYSTONE STATE TAX FREE FUND - SERIES II
(Exact name of Registrant as specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(617) 210-3200
Rosemary D. Van Antwerp, Esq.,
200 Berkeley Street, Boston, MA 02116
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
[X] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)(1)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has registered an indefinite amount of its shares under the Securities Act of
1933. A Rule 24f-2 Notice for Registrant's last fiscal year was filed on
January 24, 1997.
<PAGE>
KEYSTONE STATE TAX FREE FUND - SERIES II
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 5 to REGISTRATION STATEMENT
This Post-Effective Amendment No. 5 to Registration
Statement No. 33-73730/811-8254 consists of
the following pages, items of information and documents:
The Facing Sheet
The Contents Page
The Cross-Reference Sheet
PART A
Prospectus
PART B
Statement of Additional Information
PART C
PART C - OTHER INFORMATION - ITEM 24(a) and (b)
Exhibits
Financial Statements
PART C - OTHER INFORMATION - ITEMS 25-32 - AND SIGNATURE PAGES
Exhibits
Number of Holders of Securities
Indemnification
Business and Other Connections of Investment Adviser
Principal Underwriter
Location of Accounts and Records
Signatures
Exhibits (including Powers of Attorney)
<PAGE>
KEYSTONE STATE TAX FREE FUND - SERIES II
Cross-Reference Sheet pursuant to Rules 404 and 495 under the Securities of
1933.
Items in
Part A of
Form N-1A Prospectus Caption
- --------- ------------------
1 Cover Page
2 Expense Information
3 Financial Highlights
Performance Data
4 Additional Investment Information
Cover Page
The Trust and Its Funds
Investment Objectives and Policies
Investment Restrictions
Risk Factors
Appendix A
Additional Investment Information
5 Trust Management and Expenses
5A Not applicable
6 Alternative Sales Options
The Trust and Its Funds
Dividends and Taxes
Trust Shares
Shareholder Services
7 Pricing Shares
How to Buy Shares
Alternative Sales Options
Distribution Plans and Agreements
Shareholder Services
Appendix B
8 How to Redeem Shares
9 Not applicable
Items in
Part B of
Form N-1A Statement of Additional Information Caption
- --------- -------------------------------------------
10 Cover Page
11 Table of Contents
12 The Trust
13 Investment Restrictions
The Trust
Appendix A
Appendix B
14 Trustees and Officers
15 Additional Information
Expenses
16 Distribution Plans
Investment Adviser
Principal Underwriter
Service Providers
17 Brokerage
18 Declaration of Trust
The Trust
19 Distribution Plans
Sales Charges
Valuation of Securities
20 Dividends and Taxes
21 Principal Underwriter
Expenses
22 Standardized Total Return and Yield Quotations
23 Financial Statements
<PAGE>
KEYSTONE STATE TAX FREE FUND - SERIES II
PART A
PROSPECTUS
<PAGE>
KEYSTONE STATE TAX FREE FUND --
SERIES II
Keystone California Tax Free Fund
Keystone Missouri Tax Free Fund
PROSPECTUS MARCH 31, 1997
Keystone State Tax Free Fund -- Series II (the "Trust") is a mutual fund
that currently consists of two separate nondiversified series of shares
evidencing interests in different portfolios of securities ("Funds"): the
Keystone California Tax Free Fund (the "California Fund") and the Keystone
Missouri Tax Free Fund (the "Missouri Fund").
Each of the Funds seeks the highest possible current income exempt from
federal income taxes, while preserving capital. In addition, each Fund also
seeks to provide a maximum level of income to its shareholders that is exempt
from the personal income taxes of the state for which the Fund is named.
Each Fund invests principally in municipal obligations exempt from federal
income tax and municipal obligations issued by the state for which it is named
and its political subdivisions, agencies and instrumentalities. The Missouri
Fund also seeks to hold securities exempt from Missouri personal property taxes.
At least 80% of the municipal securities in the California Fund's portfolio will
be insured as to timely payment of both principal and interest. All securities
not insured by the issuer will be insured by a qualified municipal bond insurer.
None of the Funds' securiteis are insured against changes in market value,
therefore, each Fund's net asset value per share will fluctuate in response to
changes in the market value of its portfolio securities.
Each Fund offers Class A, B and C shares. Information on share classes and
their fee and sales charge structures may be found in the "Expense
Information," "How to Buy Shares," "Alternative Sales Options," "Contingent
Deferred Sales Charge and Waiver of Sales Charges," "Distribution Plans and
Agreements" and "Trust Shares" sections of this prospectus.
This prospectus concisely states information about the Trust and its Funds
that you should know before investing. Please read it and retain it for future
reference.
KEYSTONE STATE TAX FREE FUND --
SERIES II
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116-5034
CALL TOLL FREE 1-800-343-2898
Additional information about the Trust and its Funds is contained in a
statement of additional information dated March 31, 1997, which has been filed
with the Securities and Exchange Commission and is incorporated by reference
into this prospectus. For a free copy, or for other information about the
Trust and its Funds, write to the address or call the telephone number
provided on this page.
TABLE OF CONTENTS
Page
Expense Information 2
Financial Highlights 4
The Trust and Its Funds 10
Investment Objectives and Policies 10
Investment Restrictions 13
Risk Factors 14
Pricing Shares 16
Dividends and Taxes 17
Trust Management and Expenses 19
Distribution Plans and Agreements 22
How to Buy Shares 25
Alternative Sales Options 26
Contingent Deferred Sales Charge and
Waiver of Sales Charges 29
How to Redeem Shares 29
Shareholder Services 31
Performance Data 33
Trust Shares 33
Additional Information 34
Additional Investment Information (i)
Appendix A A-1
Appendix B B-1
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT INSURED OR OTHERWISE PROTECTED BY
THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
EXPENSE INFORMATION
KEYSTONE CALIFORNIA TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of shares of the California
Fund will bear directly or indirectly. For more complete descriptions of the
various cost and expenses, see the following sections of this prospectus:
"Trust Management and Expenses"; "How to Buy Shares"; "Alternative Sales
Options"; "Contingent Deferred Sales Charge and Waiver of Sales Charges";
"Distribution Plans and Agreements" and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT-END LOAD BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases ......... 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Charge ............................. 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of original purchase price or declining to 1.00% in the year and 0.00%
redemption proceeds, as applicable) sixth year and 0.00% thereafter
thereafter
ANNUAL FUND OPERATING EXPENSES(5)
(after expense reimbursements)
(as a percentage of average net assets)
Management Fees ................................... 0.55% 0.55% 0.55%
12b-1 Fees ........................................ 0.15% 0.90% 0.90%
Other Expenses .................................... 0.07% 0.07% 0.07%
---- ---- ----
Total Fund Operating Expenses ..................... 0.77% 1.52% 1.52%
==== ==== ====
<CAPTION>
EXAMPLES(7) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each period:
Class A .................................................................. $55 $71 $ 88 $138
Class B .................................................................. $65 $78 $103 $151
Class C .................................................................. $25 $48 $ 83 $181
You would pay the following expenses on the same investment, assuming no
redemption at the end of each period:
Class A .................................................................. $55 $71 $ 88 $138
Class B .................................................................. $15 $48 $ 83 $151
Class C .................................................................. $15 $48 $ 83 $181
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
- ------------
(1) Class B shares purchased after January 1, 1997, convert tax free to Class A shares after seven years. See "Class B Shares"
for more information.
(2) Class C shares are available only through broker-dealers who have entered into special distribution agreements with
Evergreen Keystone Distributor, Inc., the Funds' principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Alternative Sales
Options."
(4) Purchases of Class A shares made after January 1, 1997, in the amount of $1,000,000 or more are not subject to a sales
charge at the time of purchase, but may be subject to a contingent deferred sales charge. See the "Class A Shares" and
"Contingent Deferred Sales Charge and Waiver of Sales Charges" sections of this prospectus for an explanation of the
charge.
(5) Expense ratios are for the fiscal year ended November 30, 1996 after giving effect to the reimbursement by Keystone
Investment Management Company ("Keystone") of expenses in accordance with certain voluntary expense limitations.
Currently, Keystone has voluntarily limited annual expenses of the Fund's Class A, B and C shares to 0.75%, 1.50% and
1.50% of average net class assets, respectively. The Fund expects that Keystone will continue to voluntarily limit the
expenses of the Fund through the current year. However, since Keystone is under no
obligation to continue these waivers, the Fund cannot give complete assurance that it will continue to receive such assistance.
Absent voluntary expense limitations, expense ratios for the California Fund's fiscal year ended November 30, 1996 for
Class A, B and C shares would have been 1.19%, 1.94% and 1.94%, respectively. Total Fund Operating Expenses for the fiscal year
ended November 30, 1996 include indirectly paid expenses.
(6) The Class B and Class C Distribution Plans provide for payments at an annual rate of up to 1.00% of the average daily net
asset value of Class B and Class C shares; however, such payments, in connection with certain voluntary expense
limitations, are currently limited to 0.90% of the average daily net asset value of each respective class. Long-term
shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by rules adopted
by the National Association of Securities Dealers, Inc. (the "NASD").
(7) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual
returns for the Fund may be greater or less than 5%.
</TABLE>
<PAGE>
EXPENSE INFORMATION
KEYSTONE MISSOURI TAX FREE FUND
The purpose of this fee table is to assist investors in understanding the
costs and expenses that an investor in each class of shares of the Missouri
Fund will bear directly or indirectly. For more complete descriptions of the
various cost and expenses, see the following sections of this prospectus:
"Trust Management and Expenses"; "How to Buy Shares"; "Alternative Sales
Options"; "Contingent Deferred Sales Charge and Waiver of Sales Charges";
"Distribution Plans and Agreements" and "Shareholder Services."
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
FRONT-END BACK-END LEVEL LOAD
SHAREHOLDER TRANSACTION EXPENSES LOAD OPTION LOAD OPTION(1) OPTION(2)
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases ......... 4.75%(3) None None
(as a percentage of offering price)
Deferred Sales Charge ............................. 0.00%(4) 5.00% in the first year 1.00% in the first
(as a percentage of original purchase price or declining to 1.00% in the year and 0.00%
redemption proceeds, as applicable) sixth year and 0.00% thereafter
thereafter
ANNUAL FUND OPERATING EXPENSES(5)
(after expense reimbursements)
(as a percentage of average net assets)
Management Fees ................................... 0.55% 0.55% 0.55%
12b-1 Fees ........................................ 0.15% 0.90% 0.90%
Other Expenses .................................... 0.06% 0.07% 0.07%
---- ---- ----
Total Fund Operating Expenses ..................... 0.76% 1.52% 1.52%
==== ==== ====
<CAPTION>
EXAMPLES(7) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each period:
Class A .................................................................. $55 $71 $ 88 $137
Class B .................................................................. $65 $78 $103 $151
Class C .................................................................. $25 $48 $ 83 $181
You would pay the following expenses on the same investment, assuming no
redemption at the end of each period:
Class A .................................................................. $55 $71 $ 88 $137
Class B .................................................................. $15 $48 $ 83 $151
Class C .................................................................. $15 $48 $ 83 $181
AMOUNTS SHOWN IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
- ------------
(1) Class B shares purchased after January 1, 1997, convert tax free to Class A shares after seven years. See "Class B Shares"
for more information.
(2) Class C shares are available only through broker-dealers who have entered into special distribution agreements with
Evergreen Keystone Distributor, Inc., the Funds' principal underwriter.
(3) The sales charge applied to purchases of Class A shares declines as the amount invested increases. See "Alternative Sales
Options."
(4) Purchases of Class A shares made after January 1, 1997, in the amount of $1,000,000 or more are not subject to a sales
charge at the time of purchase, but may be subject to a contingent deferred sales charge. See the "Class A Shares" and
"Contingent Deferred Sales Charge and Waiver of Sales Charges" sections of the prospectus for an explanation of the
charge.
(5) Expense ratios are for the fiscal year ended November 30, 1996 after giving effect to the reimbursement by Keystone
Investment Management Company ("Keystone") of expenses in accordance with certain voluntary expense limitations.
Currently, Keystone has voluntarily limited annual expenses of the Fund's Class A, B and C shares to 0.75%, 1.50% and
1.50% of average net class assets, respectively. The Fund expects that Keystone will continue to voluntarily limit the
expenses of the Fund through the current year. However, since Keystone is under no obligation to continue these waivers, the
Fund cannot give complete assurance that it will continue to receive such assistance. Absent voluntary expense
limitations, expense ratios for the Missouri Fund's fiscal year ended November 30, 1996 for Class A, B and C shares would
have been 1.22%, 2.00% and 1.99%, respectively. Total Fund Operating Expenses for the fiscal year ended November 30, 1996
included indirectly paid expenses.
(6) The Class B and Class C Distribution Plans provide for payments at an annual rate of up to 1.00% of the average daily net
asset value of Class B and Class C shares; however, such payments, in connection with certain voluntary expense
limitations, are currently limited to 0.90% of the average daily net asset value of each respective class. Long-term
shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by rules adopted
by the National Association of Securities Dealers, Inc. (the "NASD").
(7) The Securities and Exchange Commission requires use of a 5% annual return figure for purposes of this example. Actual
returns for the Fund may be greater or less than 5%.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE CALIFORNIA TAX FREE FUND
CLASS A SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to
the California Fund and has been audited by KPMG Peat Marwick LLP, the Trust's
independent auditors. The table appears in the Trust's Annual Report and
should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are incorporated by reference
into the statement of additional information. Additional information about the
Trust's performance is contained in its Annual Report, which will be made
available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
YEAR ENDED NOVEMBER 30, (COMMENCEMENT OF
----------------------------- 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) (0.00)
------ ------ ------
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
====== ====== ======
(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.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE CALIFORNIA TAX FREE FUND
CLASS B SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to
the California Fund and has been audited by KPMG Peat Marwick LLP, the Trust's
independent auditors. The table appears in the Trust's Annual Report and
should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are incorporated by reference
into the statement of additional information. Additional information about the
Trust's performance is contained in its Annual Report, which will be made
available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
YEAR ENDED NOVEMBER 30, (COMMENCEMENT OF
------------------------------- 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
======= ======= =======
(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.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE CALIFORNIA TAX FREE FUND
CLASS C SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to
the California Fund and has been audited by KPMG Peat Marwick LLP, the Trust's
independent auditors. The table appears in the Trust's Annual Report and
should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are incorporated by reference
into the statement of additional information. Additional information about the
Trust's performance is contained in its Annual Report, which will be made
available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
YEAR ENDED NOVEMBER 30, (COMMENCEMENT OF
----------------------------- 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
====== ====== ======
(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.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE MISSOURI TAX FREE FUND
CLASS A SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to
the Missouri Fund and has been audited by KPMG Peat Marwick LLP, the Trust's
independent auditors. The table appears in the Trust's Annual Report and
should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are incorporated by reference
into the statement of additional information. Additional information about the
Trust's performance is contained in its Annual Report, which will be made
available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
YEAR ENDED NOVEMBER 30, (COMMENCEMENT OF
----------------------------- 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) 0.00(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 (b) ........................... 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
====== ====== ======
(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.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE MISSOURI TAX FREE FUND
CLASS B SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to
the Missouri Fund and has been audited by KPMG Peat Marwick LLP, the Trust's
independent auditors. The table appears in the Trust's Annual Report and
should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are incorporated by reference
into the statement of additional information. Additional information about the
Trust's performance is contained in its Annual Report, which will be made
available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
YEAR ENDED NOVEMBER 30, (COMMENCEMENT OF
----------------------------- 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 reimburement ....... 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
======= ======= =======
(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.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
KEYSTONE MISSOURI TAX FREE FUND
CLASS C SHARES
(For a share outstanding throughout each year)
The following table contains important financial information relating to
the Missouri Fund and has been audited by KPMG Peat Marwick LLP, the Trust's
independent auditors. The table appears in the Trust's Annual Report and
should be read in conjunction with the Trust's financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Trust's Annual Report. The Trust's financial statements,
related notes, and independent auditors' report are incorporated by reference
into the statement of additional information. Additional information about the
Trust's performance is contained in its Annual Report, which will be made
available upon request and without charge.
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
YEAR ENDED NOVEMBER 30, (COMMENCEMENT OF
----------------------------- OPERATIONS) TO
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
====== ====== ======
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid expenses. Excluding indirectly
paid expenses, the expense ratio 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.
</TABLE>
<PAGE>
THE TRUST AND ITS FUNDS
The Trust is an open-end management investment company, commonly known as a
mutual fund. The Trust was formed as a Massachusetts business trust on December
15, 1993. The Trust is one of more than thirty funds advised and managed by
Keystone Investment Management Company ("Keystone"), the Trust's investment
adviser.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
Each of the Funds seeks the highest possible current income exempt from
federal income taxes, while preserving capital.
Since each Fund considers preservation of capital as well as the level of
tax-exempt income, each Fund may realize less income than a mutual fund willing
to expose shareholders' capital to greater risk.
The investment objective of each Fund and the requirement that each Fund
invest, under ordinary circumstances, at least 80% of its assets in federally
tax-exempt municipal obligations that are also exempt from certain taxes in the
state for which it is named, as set forth above, are fundamental and may not be
changed without the vote of a majority of the affected Fund's outstanding
shares, as defined in the Investment Company Act of 1940 ("1940 Act"), which
means the lesser of (1) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (2) more than 50% of the
outstanding shares (a "1940 Act Majority").
Any investment involves risk, and there is no assurance that a Fund will
achieve its investment objective.
FUNDS' PRINCIPAL INVESTMENTS
Each Fund currently intends to invest at least 65% of its assets in securities
of the state for which it is named.
Under ordinary circumstances, each Fund invests substantially all and at least
80% of its assets in federally tax-exempt obligations, including municipal bonds
and notes and municipal tax-exempt commercial paper obligations, that are
obligations issued by or on behalf of states, territories and possessions of the
United States ("U.S."), the District of Columbia and their political
subdivisions, agencies and instrumentalities, the interest from which is exempt
from federal income taxes, including the alternative minimum tax. Thus it is
possible that up to 20% of a Fund's assets could be invested in securities
subject to the alternative minimum tax and/or in taxable obligations.
Municipal bonds include fixed, variable or floating rate general obligation
and revenue bonds (including municipal lease obligations, resource recovery
bonds and zero coupon bonds). Municipal notes include tax anticipation notes,
bond anticipation notes, revenue anticipation notes and project notes. Municipal
commercial paper obligations are unsecured promisory notes issued by
municipalities to meet short-term credit needs.
CALIFORNIA TAX FREE FUND
Under ordinary circumstances, the California Fund invests at least 80% of its
assets in securities, the interest from which is exempt from federal taxes and
California state income taxes. The California Fund invests in debt obligations
of the State of California and its political subdivisions, agencies, authorities
and instrumentalities and debt obligations of other qualifying issuers, such as
U.S. territories.
The California Fund invests only in investment grade municipal obligations --
bonds rated at the date of investment within the four highest grades by Standard
& Poor's Corporation ("S&P") (AAA, AA, A and BBB), Moody's Investors Service
("Moody's") (Aaa, Aa, A and Baa), or Fitch Investors Service, Inc. -- Municipal
Division ("Fitch") (AAA, AA, A and BBB) or, if not rated or rated under a
different system, are of comparable quality to obligations so rated as
determined by Keystone. Securities that are in the lowest investment grade (BBB
or Baa) may have speculative characteristics.
As more fully discussed below in the section entitled "Insurance," at least
80% of the municipal securities in the investment portfolio of the California
Fund will be insured as to timely payment of both principal and interest. The
purpose of insuring these investments is to minimize credit risks associated
with defaults in municipal securities owned by the Fund. Such insurance,
however, does not insure against market risk and therefore will not guarantee
the market value of the securities in the Fund's portfolio upon which the net
asset value of the Fund's shares is based.
For a further discussion of California tax treatment and the factors affecting
investment in California municipal obligations, see Appendix A.
MISSOURI TAX FREE FUND
Under ordinary circumstances, the Missouri Fund invests at least 80% of its
assets in securities, the interest from which is exempt from federal taxes,
Missouri state income taxes and Missouri personal property taxes. The Missouri
Fund invests in debt obligations of the State of Missouri and its political
subdivisions, agencies, authorities and instrumentalities and debt obligations
of other qualifying issuers, such as U.S. territories.
The Missouri Fund invests at least 80% of its assets in investment grade
municipal obligations -- bonds rated at the date of investment within the four
highest grades by S&P (AAA, AA, A and BBB), Moody's (Aaa, Aa, A and Baa), or
Fitch (AAA, AA, A and BBB) or, if not rated or rated under a different system,
are of comparable quality to obligations so rated as determined by Keystone. The
Missouri Fund may seek to maximize return with respect to a portion (not to
exceed 20%) of its assets. Such maximum return is ordinarily associated with
high yield, high risk municipal bonds in the lower rating categories of the
recognized rating agencies or that are unrated ("high yield bonds"). Such high
yield, high risk bonds generally involve greater volatility of price and risk of
principal and income than bonds in the higher rating categories and are, on
balance, considered predominantly speculative. High yield bonds are also
commonly known as "junk bonds."
For a further discussion of Missouri tax treatment and the factors affecting
investment in Missouri municipal obligations, see Apendix A.
MUNICIPAL OBLIGATIONS
Municipal obligations include debt obligations issued by or on behalf of a
political subdivision of the U.S. or any agency or instrumentality thereof to
obtain funds for various public purposes. In addition, municipal obligations
include certain types of industrial development bonds that have been or may be
issued by or on behalf of public authorities to finance privately operated
facilities. General obligation bonds involve the credit of an issuer possessing
taxing power and are payable from the issuer's general unrestricted revenues.
Their payment may be dependent upon an appropriation by the issuer's legislative
body and may be subject to quantitative limitations on the issuer's taxing
power. Limited obligation or revenue bonds are payable only from the revenues of
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, such as the user
of the facility.
While a Fund may invest in securities of any maturity, it is currently
expected that a Fund will not invest in securities with maturities of more than
30 years or less than 5 years (other than certain money market securities).
OTHER ELIGIBLE INVESTMENTS
A Fund may invest up to 20% of its assets under ordinary circumstances and up
to 100% of its assets for temporary defensive purposes in the following types of
instruments: (1) commercial paper, including master demand notes, that at the
date of investment is rated A-1 (the highest grade by S&P), PRIME-1 (the highest
grade by Moody's) or, if not rated by such services, is issued by a company that
at the date of investment has an outstanding issue rated A or better by S&P or
Moody's; (2) obligations, including certificates of deposit and bankers'
acceptances, of banks or savings and loan associations that have at least $1
billion in assets as of the date of their most recently published financial
statements and are members of the Federal Deposit Insurance Corporation,
including U.S. branches of foreign banks and foreign branches of U.S. banks; (3)
corporate obligations (maturing in 13 months or less) that at the date of
investment are rated A or better by S&P or Moody's; (4) obligations issued or
guaranteed by the U.S. government or by any agency or instrumentality of the
U.S.; (5) qualified "private activity" industrial development bonds, the income
from which, while exempt from federal income tax under Section 103 of the
Internal Revenue Code of 1986, as amended (the "Code") is includable in the
calculation of the federal alternative minimum tax; and (6) municipal
obligations, the income from which is exempt from federal income tax, but not
exempt from income tax in California or income or personal property tax in
Missouri. Each Fund may assume a temporary defensive position upon Keystone's
determination that market conditions so warrant. If a Fund is investing
defensively, it is not pursuing its investment objective.
Each Fund may enter into repurchase and reverse repurchase agreements,
purchase and sell securities on a when issued and delayed delivery basis, write
covered call and put options and purchase call and put options, including
purchasing call and put options to close out existing positions, and may employ
new investment techniques with respect to such options. Each Fund may also
engage in financial futures contracts and related options transactions for
hedging purposes and not for speculation and may employ new investment
techniques with respect to such futures contracts and related options. In
addition, each Fund may invest in municipal obligations denominated in foreign
currencies and may use subsequently developed investment techniques that are
related to any of its investment policies. Neither Fund is expected to enter
into repurchase agreements in the ordinary course of its business.
In addition to the options and futures mentioned above, if consistent with its
investment objectives, each Fund may also invest in certain other types of
"derivative instruments," including structured securities.
For further information about the types of investments and investment
techniques available to the Funds, including the associated risks, see
"Additional Investment Information" located at the back of this prospectus and
the statement of additional information.
INSURANCE
At least 80% of the municipal securities in the portfolio of the California
Fund will consist of obligations that at all times are fully insured as to the
payment of all principal and interest when due ("Insured Securities"). Each
Insured Security in the portfolio will be covered by either a "New Issue
Insurance Policy," a "Portfolio Insurance Policy" issued by a qualified
municipal bond insurer, or a "Secondary Insurance Policy." The insurance does
not insure against market risk and therefore does not guarantee the market value
of the securities in the California Fund's portfolio. Similarly, because the net
asset value of the California Fund's shares is based upon the market value of
the securities in the portfolio, such insurance does not cover or guarantee the
value of the California Fund's shares.
NEW ISSUE INSURANCE POLICIES
New Issue Insurance Policies are obtained by the respective issuers of the
municipal securities and all premiums respecting such securities have been paid
in advance by such issuers. Such policies are noncancellable and will continue
in force so long as the municipal securities are outstanding and the respective
insurers remain in business. Since New Issue Insurance Policies remain in effect
as long as the securities are outstanding, the insurance may have an effect on
the resale value of the Insured Securities. Therefore, New Issue Insurance
Policies may be considered to represent an element of market value with regard
to the Insured Securities, but the exact effect, if any, of this insurance on
such market value cannot be estimated. The California Fund will purchase
municipal securities subject to New Issue Insurance Policies only if the claims
paying ability of the insurer thereof is rated AAA by S&P or Aaa by Moody's.
PORTFOLIO INSURANCE POLICIES
Portfolio Insurance Policies are obtained by the California Fund from a
qualified municipal bond insurer and are effective only so long as the Fund is
in existence, the insurer is still in business and meeting its obligations, and
the Insured Securities described in the policy are held by the California Fund.
Premium rates for each issue of securities covered by the policy are fixed for
the life of the California Fund and are periodically adjusted to reflect
purchases and sales of covered securities. The premium on the Portfolio
Insurance Policy is an item of expense and will be reflected in the California
Fund's average annual expenses. Premiums are paid from the California Fund's
assets and reduce the current yield on its portfolio by the amount thereof. The
insurer cannot cancel coverage already in force with respect to Insured
Securities owned by the California Fund and covered by the policy, except for
nonpayment of premiums.
SECONDARY INSURANCE POLICIES
The California Fund may at any time purchase Secondary Insurance Policies on
any municipal security held by the Fund. Such insurance coverage will be
noncancellable and will ordinarily continue in force so long as the securities
so insured are outstanding. Secondary Insurance will likely be purchased by the
California Fund if, in the opinion of Keystone, the market value or net proceeds
of the sale of a security by the Fund would exceed the current value of such
security (without insurance) plus the cost of such insurance. When the
California Fund purchases Secondary Insurance, the single premium is added to
the cost basis of the security and is not considered an item of expense of the
Fund. One of the purposes of such insurance is to enable the securities covered
by such insurance to be sold as "AAA" or "Aaa" rated Insured Securities at a
market price higher than that which might otherwise be obtainable if the
securities were sold without the insurance coverage. Therefore, such insurance
may be considered to represent an element of market value of such Insured
Securities, although the exact effect, if any, on such market value cannot be
estimated. Any difference between the excess of such a security's market value
as an Aaa or AAA rated security over its market value without such rating,
including the single premium cost thereof, would inure to the California Fund in
determining the net capital gain or loss realized by the Fund upon the sale of
such Insured Security.
INVESTMENT RESTRICTIONS
Each Fund has adopted the fundamental restrictions summarized below, which may
not be changed without the vote of a 1940 Act Majority of such Fund's
outstanding shares. These restrictions and certain other fundamental and
non-fundamental restrictions are contained in the statement of additional
information. Unless otherwise stated, all references to a Fund's assets are in
terms of current market value.
Generally, each Fund may not:
(1) purchase any security of any issuer (other than issues of the U.S.
government, its agencies or instrumentalities) if as a result more than 25% of
its total assets would be invested in a single industry, including industrial
development bonds from the same facility or similar types of facilities;
governmental issuers of municipal bonds are not regarded as members of an
industry, and each Fund may invest more than 25% of its assets in industrial
development bonds; and
(2) borrow money or enter into reverse repurchase agreements, except that each
Fund may enter into reverse repurchase agreements or borrow money from banks for
temporary or emergency purposes in aggregate amounts up to one-third of the
value of the Fund's net assets; provided that while borrowings from banks (not
including reverse repurchase agreements) exceed 5% of the Fund's net assets, any
such borrowings will be repaid before additional investments are made.
Each Fund intends to follow policies of the Securities and Exchange Commission
as they are adopted from time to time with respect to illiquid securities,
including, at this time, (1) treating as illiquid, securities that may not be
sold or disposed of in the ordinary course of business within seven days at
approximately the value at which a Fund has valued such securities on its books,
and (2) limiting its holdings of such securities to 15% of net assets.
The Funds are nondiversified under the 1940 Act. As nondiversified funds,
there is no restriction under the 1940 Act on the percentage of assets that may
be invested at any time in the securities of any one issuer. Each Fund intends
to comply, however, with the diversification requirements and other requirements
applicable to a "regulated investment company" (a "RIC") under the Code to
ensure it will not be subject to U.S. federal income tax on income and capital
gain distributions to shareholders.
For this reason, each Fund has adopted the investment restriction set forth
below, which may not be changed without the approval of a majority of its
outstanding shares. Specifically, a Fund may not purchase a security if more
than 25% of the Fund's total assets would be invested in the securities of a
single issuer (other than the U.S. government, its agencies and
instrumentalities) or, with respect to 50% of the Fund's total assets, if more
than 5% of such assets would be invested in the securities of a single issuer
(other than the U.S. government, its agencies and instrumentalities).
RISK FACTORS
GENERAL
Like any investment, your investment in a Fund involves an element of risk.
Before you invest in a Fund, you should carefully evaluate your ability to
assume the risks your investment in the Fund poses.
Certain risks related to the Funds are discussed below. To the extent not
discussed in this section, specific risks attendant to individual securities or
investment practices are discussed in "Additional Investment Information and the
statement of additional information."
By itself, a Fund does not constitute a balanced investment program. The Funds
are not designed for investors seeking capital appreciation or maximum
tax-exempt income irrespective of fluctuations in principal or marketability.
Shares of a Fund would not be suitable for tax-exempt institutions and may not
be suitable for certain retirement plans that are unable to benefit from the
Fund's federally tax-exempt dividends. In addition, the Funds may not be
appropriate investments for entities that are "substantial users" of facilities
financed by industrial development bonds or related persons thereof.
To the extent the Funds are not fully diversified, they may be more
susceptible to adverse economic, political or regulatory developments affecting
a single issuer than would be the case if the Funds were more broadly
diversified.
Should a Fund need to raise cash to meet a large number of redemptions it
might have to sell portfolio securities at a time when it would be
disadvantageous to do so.
In addition, the market value of the fixed income securities in which a Fund
may invest may vary inversely to changes in prevailing interest rates.
MUNICIPAL OBLIGATIONS
A Fund's ability to achieve its objectives depends partially on the prompt
payment by issuers of the interest on and principal of the municipal obligations
held by the Fund. A moratorium, default or other nonpayment of interest or
principal when due on any municipal obligation, in addition to affecting the
market value and liquidity of that particular security, could affect the market
value and liquidity of other municipal obligations held by a Fund. In addition,
the market for municipal obligations is often thin and can be temporarily
affected by large purchases and sales, including those by a Fund.
From time to time, proposals have been introduced before the U.S. Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations, and similar proposals may well be introduced
in the future. If such a proposal were enacted, the availability of municipal
obligations for investment by each Fund and the value of the Fund's securities
could be materially affected. In such an event, the Trust would reevaluate its
Funds' investment objectives and policies and consider changes in the structure
of the Funds or dissolution.
If and when a Fund invests in municipal lease obligations, the possibility
exists that a municipality may not appropriate the funds for lease payments. The
Trust's Board of Trustees will be responsible for determining, on an ongoing
basis, the credit quality of such leases, including an assessment of the
likelihood of cancellation of any such lease.
NONINVESTMENT GRADE BONDS
The Missouri Fund's investment policy allows the Fund to invest a portion (not
to exceed 20%) of its assets in high yield, high risk municipal bonds, also
commonly known as "junk bonds." The degree to which the Fund will hold such
securities will, among other things, depend upon Keystone's economic forecast
and its judgment as to the comparative values offered by high yield, high risk
bonds and higher quality bonds. The Missouri Fund seeks to invest up to 20% of
its assets aggressively and to maximize return over time from a combination of
many factors, including high current income and capital appreciation from high
yield, high risk bonds. Although the total amount invested in high yield, high
risk bonds will not exceed 20% of the Missouri Fund, the Fund may (as a
nondiversified fund) invest as much as the entire 20% in the securities of a
single issuer. To that extent the Missouri Tax Free Fund may be more susceptible
to adverse economic, political or regulatory developments affecting a single
issuer than would be the case if the Fund were more broadly diversified.
Such aggressive investing involves risks that are greater than the risks of
investing in higher quality debt securities. These risks are discussed in
greater detail below and include risks from (1) interest rate fluctuations; (2)
changes in credit status, including weaker overall credit condition of issuers
and risks of default; (3) industry, market and economic risk; (4) volatility of
price resulting from broad and rapid changes in the value of underlying
securities and (5) greater price variability and credit risks of such high
yield, high risk securities as zero coupon bonds and PIK (payment-in-kind)
securities.
Specifically, investors should be aware of the following:
(1) securities rated BB or lower by S&P or Ba or lower by Moody's are
considered predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments;
(2) the value of high yield, high risk securities may be more susceptible to
real or perceived adverse economic, company or industry conditions than is the
case for higher quality securities;
(3) adverse market, credit or economic conditions could make it difficult at
certain times to sell certain high yield, high risk securities held by the Fund;
(4) the secondary market for high yield, high risk securities may be less
liquid than the secondary market for higher quality securities, which may affect
the value of certain high yield, high risk securities held by the Fund at
certain times; and
(5) high yield, high risk zero coupon securities may be subject to greater
changes in value due to market conditions, the absence of a cash interest
payment and the tendency of issuers of such securities to have weaker overall
credit conditions than other high yield, high risk securities.
These characteristics of high yield, high risk securities make them generally
more appropriate for long term investment.
These risks provide the opportunity for maximizing return over time on a
portion of the Missouri Fund's assets, but may result in greater upward and
downward movement of the net asset value per share of the Missouri Fund. As a
result, they should be carefully considered by investors.
The maximum return sought by the Missouri Fund with respect to up to 20% of
its assets is ordinarily associated with securities in the lower rating
categories of the recognized rating agencies or with securities that are
unrated. Such high yield, high risk securities are generally rated BB or lower
by S&P or Ba or lower by Moody's. The Fund may invest in securities that are
rated as low as D by S&P and C- by Moody's. These rating categories are
described in the section of this prospectus entitled "Additional Investment
Information." The Missouri Fund intends to invest in D rated debt only in cases
where, in Keystone's judgment, there is a distinct prospect of improvement in
the issuer's financial position as a result of the completion of reorganization
or otherwise. The Fund may also invest in unrated securities that, in Keystone's
judgment, offer comparable yields and risks to those of securities that are
rated, as well as non-investment quality zero coupon and PIK securities.
Since the Missouri Fund takes an aggressive approach to investing a portion of
its assets, Keystone tries to maximize the return by controlling the risk
associated with those investments through diversification, credit analyses,
review of sector and industry trends, interest rate forecasts and economic
analysis. Keystone's analysis of securities focuses on values based on factors
such as asset values, earnings prospects and the quality of management of the
company. In making investment recommendations, Keystone also considers current
income, potential for capital appreciation, maturity structure, quality
guidelines, coupon structure, average yield, percentage of zeros and PIKs,
percentage of non-accruing items and yield to maturity.
Keystone also considers the ratings of S&P and Moody's assigned to various
securities, but does not rely solely on ratings assigned by S&P and Moody's
because (1) S&P and Moody's assigned ratings are based largely on historical
financial data and may not accurately reflect the current financial outlook of
municipalities; and (2) there can be large differences among the current
financial conditions of issuers within the same rating category.
TAX CONSIDERATIONS
For a discussion of the tax considerations for each state and special factors,
including the risks associated with investing in the municipal securities of a
single state, see Appendix A to this prospectus and Appendix A to the statement
of additional information.
PRICING SHARES
Each Fund computes its net asset value as of the close of trading (currently
4:00 p.m. eastern time) on each day that the New York Stock exchange (the
"Exchange") is open. However, each Fund does not compute its net asset value on
days when changes in the value of a Fund's portfolio securities do not affect
the current net asset value of its shares. The Exchange currently is closed on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share of each Fund is arrived at by determining the value of the
Fund's assets, subtracting its liabilities and dividing the result by the number
of its shares outstanding.
Current values for each Fund's portfolio securities are determined as follows:
(1) Municipal obligations are valued on the basis of valuations provided by a
pricing service approved by the Trust's Board of Trustees, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value.
(2) Short-term investments with maturities of sixty days or less when
purchased are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market.
(3) Short-term investments having maturities of more than sixty days for which
market quotations are readily available are valued at current market value.
(4) Short-term investments maturing in more than sixty days when purchased
that are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest, approximates
market; and which, in either case, reflects fair value as determined by the
Board of Trustees.
(5) All other investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
according to procedures established by the Board of Trustees.
DIVIDENDS AND TAXES
Each Fund intends to declare dividends from net investment income daily and
distribute to its shareholders such dividends monthly and to declare and
distribute all net realized long-term capital gains annually. Shareholders
receive Fund distributions in the form of additional shares of that class of
shares upon which the distribution is based or, at the shareholder's option, in
cash. Shareholders of a Fund who have not opted to receive cash prior to the
payable date for any dividend from net investment income or the record date for
any capital gains distribution will have the number of such shares determined on
the basis of the Fund's net asset value per share computed at the end of that
day after adjustment for the distribution. Net asset value is used in computing
the number of shares in both capital gains and income distribution
reinvestments. There is a possibility that shareholders may lose the tax-exempt
status on accrued income on municipal bonds if shares of the Funds are redeemed
before a dividend has been declared.
Because Class A shares bear most of the costs of distribution of such shares
through payment of a front-end sales charge while Class B and Class C
shares bear such expenses through a higher annual distribution fee, expenses
attributable to Class B shares and Class C shares will generally be higher, and
income distributions paid by a Fund with respect to Class A shares will
generally be greater than those paid with respect to Class B and Class C shares.
Account statements and/or checks as appropriate will be mailed within seven
days after the Fund pays the distribution. Unless the Trust receives
instructions to the contrary before the record or payable date, as the case may
be, it will assume that a shareholder wishes to receive that distribution and
future capital gains and income distributions in shares. Instructions continue
in effect until changed in writing.
Each of the Funds has qualified and intends to continue to qualify as a RIC
under the Code. Each Fund is a separate taxable entity for purposes of Code
provisions applicable to RICs. Each of the Funds qualifies if, among other
things, it distributes to its shareholders at least 90% of its net investment
income for its fiscal year. Each Fund also intends to make timely distributions,
if necessary, sufficient in amount to avoid the nondeductible 4% excise tax
imposed on a RIC to the extent that it fails to distribute, with respect to each
calendar year, at least 98% of its ordinary income for such calendar year and
98% of its net capital gains for the one-year period ending on October 31 of
such calendar year. If a Fund qualifies as a RIC and if it distributes
substantially all of its net investment income and net capital gains, if any, to
shareholders, it will be relieved of any federal income tax liability.
Any taxable distribution declared in October, November or December to
shareholders of record in such a month and paid by the following January 31 will
be includable in the taxable income of the shareholder as if paid on December 31
of the year in which the dividend was declared.
Each Fund expects that substantially all of its dividends will be "exempt
interest dividends," which should be treated as excludable from federal gross
income. In order to pay exempt interest dividends, at least 50% of the value of
the Fund's assets must consist of federally tax-exempt obligations at the close
of each quarter. An exempt interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by the Fund with respect to its net
federally excludable municipal obligation interest and designated as an exempt
interest dividend in a written notice mailed to each shareholder not later than
60 days after the close of its taxable year. The percentage of the total
dividends paid by a Fund with respect to any taxable year that qualifies as
exempt interest dividends will be the same for all shareholders of the Fund
receiving dividends with respect to such year. If a shareholder receives an
exempt interest dividend with respect to any share and such share has been held
for six months or less, any loss on the sale or exchange of such share will be
disallowed to the extent of the exempt interest dividend amount.
Any shareholder of a Fund who may be a "substantial user" of a facility
financed with an issue of tax-exempt obligations or a "related person" to such a
user should consult his tax adviser concerning his qualification to receive
exempt interest dividends should the Fund hold obligations financing such
facility.
Under regulations to be promulgated, a Fund's exempt interest dividends,
otherwise tax exempt, will be treated as a tax preference item for alternative
minimum tax purposes. Corporate shareholders should also be aware that the
receipt of exempt interest dividends could subject them to alternative minimum
tax under the provisions of Section 56(g) of the Code relating to "adjusted
current earnings."
At least 50% of the value of a Fund's assets must be invested in tax-exempt
obligations in order for distributions to qualify as exempt interest dividends
at the end of each quarter. Under particularly unusual circumstances, such as
when a Fund is in a prolonged defensive investment position, it is possible that
no portion of a Fund's distributions of income to its shareholders for a fiscal
year would be exempt from federal income tax. The Trust does not presently
anticipate, however, that such unusual circumstances will occur.
Since none of a Fund's income will consist of corporate dividends, no
distributions will qualify for the 70% corporate dividends received deduction.
Each Fund intends to distribute its net capital gains as capital gain
dividends. Shareholders should treat such dividends as long-term capital gains.
Each Fund will designate capital gains distributions as such by a written notice
mailed to each shareholder no later than 60 days after the close of the Fund's
taxable year. If a shareholder receives a capital gain dividend and holds his
shares for six months or less, then any allowable loss on disposition of such
shares will be treated as a long-term capital loss to the extent of such capital
gain dividend.
Interest on indebtedness incurred or continued by shareholders to purchase or
carry shares of a Fund will not be deductible for federal income tax purposes to
the extent of the portion of the interest expense relating to exempt interest
dividends; that portion is determined by multiplying the total amount of
interest paid or accrued on the indebtedness by a fraction, the numerator of
which is the exempt interest dividends received by a shareholder in his taxable
year and the denominator of which is the sum of the exempt interest dividends
and the taxable distributions out of the Fund's investment income and long-term
capital gains received by the shareholder.
The Funds may acquire options to "put" specified securities to municipal bond
dealers or issuers from whom the securities are purchased. It is expected that
each Fund will be treated for federal income tax purposes as the owner of the
municipal bonds acquired subject to the put. The interest on the municipal bonds
will be tax-exempt to the Funds, and the purchase prices must be allocated
between such securities and the put based upon their respective fair market
values. The Internal Revenue Service has not issued a published ruling on this
matter and could reach a different conclusion.
STATE INCOME TAXES
The exemption of interest on municipal bonds for federal income tax purposes
does not necessarily result in exemption under the income, corporate or personal
property tax laws of any state or city. Generally, individual shareholders of
the Funds receive tax-exempt treatment at the state level for distributions
derived from municipal securities of their state of residency. Each Fund will
report to shareholders on a state by state basis the sources of its exempt
interest dividends. For a further discussion of state tax treatment relating to
each Fund, see Appendix A to this prospectus.
The foregoing is only a summary of some of the important tax considerations
generally affecting the Trust, its Funds and their shareholders. No attempt is
made to present a detailed explanation of the federal or state income or other
tax treatment of the Trust, its Funds or their shareholders, and this discussion
is not intended as a substitute for careful tax planning. Accordingly,
shareholders are urged to consult their tax advisers with specific reference to
their tax situations.
TRUST MANAGEMENT AND EXPENSES
TRUST MANAGEMENT
Under Massachusetts law, the Trust's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the Trust
and its Funds. Subject to the authority of the Board of Trustees, Keystone
provides investment advice, management and administrative services to the Trust.
INVESTMENT ADVISER
Keystone has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone is a wholly-owned
subsidiary of First Union Keystone, Inc. ("First Union Keystone"). First Union
Keystone provides accounting, bookkeeping, legal, personnel and general
corporate services to Keystone, its affiliates, and the Keystone Families of
Funds. Both Keystone and First Union Keystone are located at 200 Berkeley
Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, First Union Keystone succeeded to the business of a
corporation under different ownership. First Union Keystone is a wholly-owned
subsidiary of First Union National Bank of North Carolina ("FUNB"). FUNB is a
subsidiary of First Union Corporation ("First Union"), the sixth largest bank
holding company in the U.S. based on total assets as of December 31, 1996.
First Union is headquartered in Charlotte, North Carolina, and had $140
billion in consolidated assets as of December 31, 1996. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the U.S. The Capital Management Group of FUNB ("CMG") and
Evergreen Asset Management Corp. ("Evergreen Asset"), wholly-owned subsidiaries
of FUNB, manage or otherwise oversee the investment of over $60 billion in
assets as of December 31, 1996 belonging to a wide range of clients, including
the Evergreen Family of Funds.
Pursuant to its Investment Advisory and Management Agreement with the Trust
(the "Advisory Agreement"), Keystone manages the investment and reinvestment of
each Fund's assets, supervises the operation of the Trust and each Fund and
provides all necessary office space, facilities and equipment.
Each Fund pays Keystone a fee for its services at the annual rate set forth
below:
Aggregate
Net Asset Value
Management of the Shares
Fee of the Fund
- ------------------------------------------------------------------------------
0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts over $500,000,000
Keystone's fee is computed as of the close of business each business day and
payable monthly.
The Advisory Agreement continues in effect for two years from its effective
date and, thereafter, from year to year only so long as such continuance is
specifically approved at least annually by the Board of Trustees or by vote of
shareholders of each Fund. In either case, the terms of the Advisory Agreement
and continuance thereof must be approved by the vote of a majority of
Independent Trustees (Trustees who are not "interested persons" of the Trust, as
defined in the 1940 Act) cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement may be terminated as to any
Fund, without penalty, on 60 days' written notice by the Trust or Keystone, or
may be terminated as to a Fund by the vote of shareholders of such Fund. The
Advisory Agreement will terminate automatically upon its "assignment" as defined
in the 1940 Act.
PRINCIPAL UNDERWRITER
Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds Distributor,
Inc.) ("EKD"), a subsidiary of The BISYS Group, Inc. ("BISYS"),
which is not affiliated with First Union, is now the Trust's principal
underwriter (the "Principal Underwriter"). EKD replaced Evergreen Keystone
Investment Services, Inc. (formerly Keystone Investment Distributors Company)
("EKIS") as the Trust's principal underwriter. EKIS may no longer act as
principal underwriter of the Trust due to regulatory restrictions imposed by the
Glass-Steagall Act upon national banks such as FUNB and their affiliates, that
prohibit such entities from acting as the underwriters or distributors of mutual
fund shares. While EKIS may no longer act as principal underwriter of the Trust
as discussed above, EKIS may continue to receive compensation from the Trust or
the Principal Underwriter in respect of underwriting and distribution services
performed prior to the termination of EKIS as principal underwriter. In
addition, EKIS may also be compensated by the Principal Underwriter for the
provision of certain marketing support services to the Principal Underwriter at
an annual rate of up to 0.75% of the average daily net assets of each Fund,
subject to certain restrictions. EKD is located at 125 West 55th Street, New
York, New York 10019.
SUB-ADMINISTRATOR
BISYS or an affiliate provides officers and certain administrative services to
each Fund pursuant to a sub-administration agreement. For its services under
that agreement, BISYS receives a fee from Keystone at the maximum annual rate of
0.01% of the average daily net assets of each Fund. BISYS is located at 3435
Stelzer Road, Columbus, Ohio 43219.
PORTFOLIO MANAGERS
Daniel A. Rabasco, a Keystone Vice President and Portfolio Manager, is
responsible for the day-to-day management of the Missouri Fund. Mr. Rabasco
joined Keystone as an Analyst in 1990, and has more than 10 years of
investment experience.
George J. Kimball is responsible for the day-to-day management of the
California Fund. Mr. Kimball has been employed by Keystone or one of its
affiliates since 1991, and was an Analyst prior to becoming a Vice President and
Portfolio Manager. He has more than 10 years of investment experience.
FUND EXPENSES
Each Fund pays all of its expenses. In addition to the investment advisory and
management fees discussed above, the principal expenses that each Fund is
expected to pay include, but are not limited to, its pro rata portion of certain
fees and expenses of the Independent Trustees; transfer, dividend disbursing and
shareholder servicing agent costs and expenses; custodian costs and expenses;
Trustees' fees, fees of its independent auditors, fees of the Trust's legal
counsel and legal counsel to the Trust's Independent Trustees; fees payable to
government agencies, including registration and qualification fees of the Trust,
the Funds and their shares under federal and state securities laws; and certain
extraordinary expenses. In addition, each class of shares of a Fund will pay all
of the expenses attributable to it. Such expenses are currently limited to
Distribution Plan expenses. Each Fund also pays its brokerage commissions,
interest charges and taxes and certain extraordinary expenses. Total expenses
for each Fund include indirectly paid expenses.
For the fiscal year ended November 30, 1996, the California Fund and the
Missouri Fund paid or accrued to Keystone investment management and advisory
services fees of $163,334 and $146,922, respectively, which represented 0.55%
and 0.55% of the respective Fund's average net assets for the fiscal year ended
November 30, 1996.
For the fiscal year ended November 30, 1996, the California Fund and the
Missouri Fund paid or accrued $30,208 and $35,133, respectively, to Evergreen
Keystone Service Company (formerly Keystone Investor Resource Center, Inc.)
("EKSC") for services rendered as the Trust's transfer and dividend dispersing
agent. For the fiscal year ended November 30, 1996, the California Fund and the
Missouri Fund paid or accrued $24,104, and $24,104, respectively, to Keystone
for certain accounting services. EKSC, located at 200 Berkeley Street, Boston,
Massachusetts 02116-5034, is a wholly-owned subsidiary of Keystone.
Keystone has currently voluntarily limited the expenses of Class A shares of
each Fund to 0.75% of the average daily net assets of such class and has
currently voluntarily limited expenses of Class B and C shares of each Fund to
1.50% of the average daily net assets of each such class. Keystone currently
intends to continue the foregoing expense limitations on a calendar
month-by-month basis. Keystone will periodically evaluate the foregoing expense
limitations and may modify or terminate them in the future. Keystone will not be
required to make such reimbursement to the extent it would result in a Fund's
inability to qualify as a regulated investment company under the provisions of
the Code. In accordance with expense limitations in effect for the fiscal year
ended November 30, 1996, Keystone reimbursed the California Fund and the
Missouri Fund (i) $19,584 and $16,883, respectively, with respect to each Fund's
Class A shares; (ii) $97,897 and $103,150, respectively, with respect to each
Fund's Class B shares; and (iii) $6,657 and $7,016, respectively, with respect
to each Fund's Class C shares.
SECURITIES TRANSACTIONS
Under policies established by the Board of
Trustees, Keystone selects broker-dealers to execute transactions subject to the
receipt of best execution. When selecting broker-dealers to execute portfolio
transactions for a Fund, Keystone may consider the number of shares of the Fund
sold by the broker-dealer. In addition, broker-dealers executing portfolio
transactions may, from time to time, be affiliated with the Trust, Keystone, the
Trust's principal underwriter or their affiliates.
A Fund may pay higher commissions to broker-dealers that provide research
services. Keystone may use these services in advising a Fund as well as in
advising its other clients.
PORTFOLIO TURNOVER
For the fiscal years ended November 30, 1996, and 1995, the portfolio turnover
rates for the California Fund were 120% and 119%, respectively. For the same
periods the turnover rates for the Missouri Fund were 126% and 74%,
respectively. High portfolio turnover may involve correspondingly greater
brokerage commissions and other transaction costs, which would be borne directly
by a Fund, as well as additional gains and/or losses to shareholders. For
further information on the tax consequences of such realized gains and/or
losses, see the "Dividends and Taxes" section of this prospectus. For additional
information about brokerage and distributions, see the statement of additional
information.
CODE OF ETHICS
The Trust has adopted a Code of Ethics incorporating policies on personal
securities trading as recommended by the Investment Company Institute.
DISTRIBUTION PLANS AND AGREEMENTS
CLASS A DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan with respect to its Class A shares
(the "Class A Distribution Plan") that provides for expenditures by the Fund,
currently limited to 0.15% annually of the average daily net asset value of
Class A shares, in connection with the distribution of Class A shares. Payments
under the Class A Distribution Plan are currently made to the Principal
Underwriter (which may reallow all or part to others, such as broker-dealers),
as service fees at an annual rate of up to 0.15% of the average daily net asset
value of Class A shares maintained by the recipient and outstanding on the books
of such Fund for specified periods.
CLASS B DISTRIBUTION PLANS
Each Fund has adopted Distribution Plans with respect to its Class B shares
(the "Class B Distribution Plans") that provide for expenditures by each Fund at
an annual rate of up to 1.00% (currently limited to 0.90%) of the average daily
net asset value of Class B shares to pay expenses of the distribution of Class B
shares. Payments under the Class B Distribution Plans are currently made to the
Principal Underwriter (which may reallow all or part to others, such as
broker-dealers) and to EKIS, the predecessor to the Principal Underwriter, (1)
as commissions for Class B shares sold, (2) as shareholder service fees and (3)
as interest. Amounts paid or accrued to the Principal Underwriter or EKIS in the
aggregate may not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission equal to 4.00% of the price paid for each Class B share sold. The
broker-dealer or other party will also receive service fees at an annual rate of
0.15% of the value of Class B shares maintained by the recipient and outstanding
on the books of such Fund for specified periods. See "Distribution Plans
Generally" below.
CLASS C DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan with respect to its Class C shares
(the "Class C Distribution Plan") that provides for expenditures by the Fund at
an annual rate of up to 1.00% (currently limited to 0.90%) of the average daily
net asset value of Class C shares to pay expenses of the distribution of Class C
shares. Payments under the Class C Distribution Plan are currently made to the
Principal Underwriter (which may reallow all or part to others, such as
broker-dealers) and to EKIS, the predecessor to the Principal Underwriter, (1)
as commissions for Class C shares sold, (2) as shareholder service fees, and (3)
as interest. Amounts paid or accrued to the Principal Underwriter or EKIS in the
aggregate may not exceed the annual limitation referred to above.
The Principal Underwriter generally reallows to broker-dealers or others a
commission in the amount of 0.75% of the price paid for each Class C share sold,
plus the first year's service fee in advance in the amount of 0.25% of the price
paid for each Class C share sold, and, beginning approximately fifteen months
after purchase, a commission at an annual rate of 0.75% (subject to NASD rules
- -- see "Distribution Plans Generally") plus service fees which are paid at the
annual rate of 0.25%, respectively, of the value of Class C shares maintained by
the recipient and outstanding on the books of a Fund for specified periods. See
"Distribution Plans Generally" below.
DISTRIBUTION PLANS GENERALLY
As discussed above, each Fund bears some of the costs of selling its shares
under Distribution Plans adopted with respect to its Class A, Class B and Class
C shares pursuant to Rule 12b-1 under the 1940 Act.
The NASD limits the amount that a Fund may pay annually in distribution
costs for the sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1.00% of the aggregate average daily net asset value of
its shares, of which 0.75% may be used to pay distribution costs and 0.25% may
be used to pay shareholder service fees. The NASD also limits the aggregate
amount that a Fund may pay for such distribution costs to 6.25% of gross share
sales since the inception of the 12b-1 Distribution Plan, plus interest at the
prime rate plus 1.00% on such amounts (less any contingent deferred sales
charges ("CDSCs") paid by shareholders to the Principal Underwriter) remaining
unpaid from time to time.
In connection with financing its distribution costs, including commission
advances to broker-dealers and others, EKIS, the predecessor to the Principal
Underwriter, sold to a financial institution substantially all of its 12b-1 fee
collection rights and CDSC collection rights in respect of Class B shares sold
during the period beginning approximately June 1, 1995 through November 30,
1996. Each Fund has agreed not to reduce the rate of payment of 12b-1 fees in
respect of such Class B shares, unless it terminates such shares' Distribution
Plan completely. If it terminates such Distribution Plan, each Fund may be
subject to adverse distribution consequences.
The financing of payments made by the Principal Underwriter to compensate
broker-dealers or other persons for distributing shares of each Fund will be
provided by FUNB or its affiliates.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. If a Distribution Plan is terminated, the Principal
Underwriter and EKIS will ask the Independent Trustees to take whatever action
they deem appropriate under the circumstances with respect to payment of
Advances (as defined below).
For the California and Missouri Funds, unreimbursed Class B Distribution Plan
expenses at November 30, 1996 for Class B shares sold prior to June 1, 1995 were
$785, 384 (7.45% of such Class B net assets) and $942,344 (6.00% of such Class B
net assets), respectively. For the California and Missouri Funds, unreimbursed
Class B Distribution Plan expenses at November 30, 1996 for Class B shares sold
on or after June 1, 1995 were $758,782 (6.23% of such Class B net assets) and
$347,805 (5.59% of such Class B net assets), respectively.
For the California and Missouri Funds, unreimbursed Class C Distribution Plan
expenses at November 30, 1996 were $100,058 (6.58% of Class C net assets) and
$133,757 (9.64% of Class C net assets), respectively.
Broker-dealers or others may receive different levels of compensation
depending on which class of shares they sell. Payments pursuant to a
Distribution Plan are included in the operating expenses of the class.
DISTRIBUTION AGREEMENTS
The Trust has entered into principal underwriting agreements with the
Principal Underwriter (each a "Distribution Agreement") with respect to each
class. Pursuant to its Distribution Agreements, the Trust will compensate the
Principal Underwriter for its services as distributor at an annual rate that may
not exceed 0.25 of 1% of each Fund's average daily net assets attributable to
Class A shares, 0.75 of 1% of each Fund's average daily net assets attributable
to the Class B shares, subject to certain restrictions, and 0.75 of 1% of each
Fund's average daily net assets attributable to the Class C shares.
Each Fund may also make payments under its Distribution Plans, in amounts of
up to 0.25 of 1% of its average daily net assets on an annual basis,
attributable to Class A, B and C shares, respectively, to compensate
organizations, which may include, among others, the Principal Underwriter and
Keystone or their respective affiliates, for services rendered to shareholders
and/or the maintenance of shareholder accounts.
A Fund may not pay any distribution or servicing fees during any fiscal period
in excess of NASD limits. Since the Principal Underwriter's compensation under
the Distribution Agreements is not directly tied to the expenses incurred by the
Principal Underwriter, the amount of compensation received by it under the
Distribution Agreements during any year may, subject to certain conditions, be
more than its actual expenses and may result in a profit to the Principal
Underwriter. Distribution expenses incurred by the Principal Underwriter in one
fiscal year that exceed the level of compensation paid to the Principal
Underwriter for that year may be paid from distribution fees received from a
Fund in subsequent fiscal years.
The Principal Underwriter intends, but is not obligated, to continue to pay or
accrue distribution charges incurred in connection with the Class B Distribution
Plans that exceed current annual payments permitted to be received by the
Principal Underwriter from a Fund ("Advances"). The Principal Underwriter
intends to seek full reimbursement for such Advances from such Fund (together
with annual interest thereon at the prime rate plus 1.00%) at such time in the
future as, and to the extent that, payment thereof by the Fund would be within
the permitted limits. If the Trust's Independent Trustees authorize such
payments, the effect would be to extend the period of time during which a Fund
incurs the maximum amount of costs allowed by a Distribution Plan.
In states where the Principal Underwriter is not registered as a
broker-dealer, shares of a Fund will only be sold through other broker-dealers
or other financial institutions that are so registered.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Principal Underwriter may, from time to time, provide promotional
incentives, including reallowance of up to the entire sales charge, to certain
broker-dealers whose representatives have sold or are expected to sell
significant amounts of a Fund's shares. In addition, broker-dealers may, from
time to time, receive additional cash payments. The Principal Underwriter may
also provide written information to those broker-dealers with whom it has dealer
agreements that relates to sales incentive campaigns conducted by such
broker-dealers for their representatives as well as financial assistance in
connection with pre-approved seminars, conferences and advertising. No such
programs or additional compensation will be offered to the extent they are
prohibited by the laws of any state or any self-regulatory agency such as the
NASD. Broker-dealers to whom substantially the entire sales charge on Class A
shares is reallowed may be deemed to be underwriters as that term is defined
under the Securities Act of 1933.
The Principal Underwriter may, at its own expense, pay concessions in addition
to those described above to broker-dealers including, from time to time, to
First Union Brokerage Services, Inc., an affiliate of Keystone, that satisfy
certain criteria established from time to time by the Principal Underwriter.
These conditions relate to increasing sales of shares of the Keystone funds over
specified periods and certain other factors. Such payments may, depending on the
broker-dealer's satisfaction of the required conditions, be periodic and may be
up to 1.00% of the value of shares sold by such broker-dealer.
The Principal Underwriter may also pay a transaction fee (up to the level of
payments allowed to broker-dealers for the sale of shares, as described above)
to banks and other financial services firms that facilitate transactions in
shares of a Fund for their clients.
State securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as broker-dealers pursuant to state laws.
EFFECTS OF BANKING LAWS
The Glass-Steagall Act currently limits the ability of depository institutions
(such as a commercial bank or a savings and loan association) to become an
underwriter or distributor of securities. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from accepting payments under the
arrangement described above, or should Congress relax current restrictions on
depository institutions, the Board of Trustees will consider what action, if
any, is appropriate.
The Glass-Steagall Act and other banking laws and regulations also presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Trust. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer. Keystone
and its affiliates, since they are direct or indirect subsidiaries of FUNB, are
subject to and in compliance with the aforementioned laws and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could prevent Keystone or its affiliates from
performing the services required under the investment advisory contract or from
acting as agent in connection with the purchase of shares of a fund by its
customers. In such event, it is expected that the Trustees would identify, and
call upon each Fund's shareholders to approve, a new investment adviser. If this
were to occur, it is not anticipated that the shareholders of any Fund would
suffer any adverse financial consequences.
HOW TO BUY SHARES
You may purchase shares of each Fund from any broker-dealer that has a selling
agreement with the Principal Underwriter. In addition, you may purchase shares
of a Fund by mailing to the Trust, c/o Evergreen Keystone Service Company, P.O.
Box 2121, Boston, Massachusetts 02106-2121, a completed account application and
a check payable to the Trust. You may also telephone 1-800-343-2898 to obtain
the number of an account to which you can wire or electronically transfer funds
and then send in a completed account application. Subsequent investments in any
amount may be made by check, by wiring Federal funds, by direct deposit or by
electronic funds transfer ("EFT").
Orders for the purchase of shares of a Fund will be confirmed at the public
offering price, which is equal to the net asset value per share next determined
after receipt of the order in proper form by the Principal Underwriter
(generally as of the close of the Exchange on that day) plus, in the case of
Class A shares, the applicable sales charge. Orders received by broker-dealers
or other firms prior to the close of the Exchange and received by the Principal
Underwriter prior to the close of its business day will be confirmed at the
offering price effective as of the close of the Exchange on that day.
Broker-dealers and other financial services firms are obligated to transmit
orders promptly.
Orders for shares received other than as stated above will receive the public
offering price, which is equal to the net asset value per share next determined
(generally, the next business day's offering price) plus, in the case of Class A
shares, the applicable sales charge.
The Trust reserves the right to determine the net asset value more frequently
than once a day if deemed desirable.
The initial purchase must be at least $1,000. There is no minimum amount for
subsequent purchases.
The Trust reserves the right to withdraw all or any part of the offering made
by this prospectus, including the right to suspend sales, and to reject purchase
orders.
Shareholder inquiries should be directed to EKSC by calling toll free
1-800-343-2898 or writing to EKSC or to the firm from which you received this
prospectus.
ALTERNATIVE SALES OPTIONS
This prospectus provides information regarding the Class A, B, and C shares
offered by each Fund:
CLASS A SHARES -- FRONT-END LOAD OPTION
With certain exceptions, Class A shares are sold with a sales charge at the
time of purchase. Class A shares are not subject to a CDSC when they are
redeemed except as follows: Class A shares purchased after January 1, 1997, in
an amount equal to or exceeding $1 million, without a front-end sales charge,
will be subject to a CDSC during the month of purchase and the 12-month period
following the month of purchase.
CLASS B SHARES -- BACK-END LOAD OPTION
Class B shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are, with certain exceptions, subject to a
CDSC if redeemed during the month of purchase and the 72-month period following
the month of purchase. Class B shares purchased after January 1, 1997, that have
been outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without the imposition of a front-end sales charge or
exchange fee.
CLASS C SHARES -- LEVEL LOAD OPTION
Class C shares purchased after January 1, 1997, are sold without a sales
charge at the time of purchase, but are subject to a CDSC if they are redeemed
during the month of purchase and the 12-month period following the month of
purchase. Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Principal Underwriter.
Class A and B shares, pursuant to their Distribution Plans, currently pay an
annual service fee of 0.15% of each Fund's average daily net assets attributable
to their respective classes. Class C shares, pursuant to its Distribution Plan,
pays an annual service fee of 0.25% of each Fund's average daily net assets
attributable to that class. In addition to the service fee, the Class B and C
Distribution Plans provide for the payment of an annual distribution fee of up
to 0.75% of the average daily net assets attributable to their respective
classes. As a result, income distributions paid by a Fund with respect to Class
B and Class C shares will generally be less than those paid with respect to
Class A shares.
Investors who would rather pay the entire cost of distribution at the time of
investment, rather than spreading such cost over time, might consider Class A
shares. Other investors might consider Class B or Class C shares (in which case,
100% of the purchase price is invested immediately), depending on the amount of
the purchase and the intended length of investment.
The Funds will not normally accept any purchase of Class B shares in the
amount of $250,000 or more and will not normally accept any purchase of Class C
shares in the amount of $500,000 or more.
----------------------------------------
CLASS A SHARES
Class A shares are currently offered at the public offering price, which is
equal to net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
AS A % OF CONCESSION TO
AS A % OF NET AMOUNT DEALERS AS A % OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED* OFFERING PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 ....................... 4.75% 4.99% 4.25%
$50,000 but less than $100,000 .......... 4.50% 4.71% 4.25%
$100,000 but less than $250,000 ......... 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ......... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 ....... 2.00% 2.04% 1.75%
- ------------
*Rounded to the nearest one-hundredth percent.
</TABLE>
Purchases of a Fund's Class A shares made after January 1, 1997, (i) in the
amount of $1 million or more; (ii) by a corporate or certain other qualified
retirement plan or a non-qualified deferred compensation plan or a Title I tax
sheltered annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan"), or a TSA plan sponsored by a public
educational entity having 5,000 or more eligible employees (an "Educational TSA
Plan"); or (iii) by (a) institutional investors, which may include bank trust
departments and registered investment advisers; (b) investment advisers,
consultants or financial planners who place trades for their own accounts or the
accounts of their clients and who charge such clients a management, consulting,
advisory or other fee; (c) clients of investment advisers or financial planners
who place trades for their own accounts if the accounts are linked to the master
account of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased; (d) institutional clients of
broker-dealers, including retirement and deferred compensation plans and the
trusts used to fund these plans, which place trades through an omnibus account
maintained with the Fund by the broker-dealer; and (e) employees of FUNB and its
affiliates, EKD and any broker-dealer with whom EKD has entered into an
agreement to sell shares of the Fund, and members of the immediate families of
such employees, will each be at net asset value without the imposition of a
front-end sales charge. Certain broker-dealers or other financial institutions
may impose a fee on transactions in shares of the Funds.
With respect to purchases of the Funds' Class A shares made after January 1,
1997, in the amount of $1 million or more, the Principal Underwriter will pay
broker-dealers or others concessions at the following rate: 1.00% of the
investment amount up to $2,999,999; plus 0.50% of the investment amount between
$3,000,000 and $4,999,999; plus 0.25% of the investment amount over $4,999,999.
With respect to purchases of the Funds' Class A shares made after January 1,
1997, by Qualifying Plans and Educational TSA Plans, the Principal Underwriter
will pay broker-dealers and others concessions at the rate of 0.50% of the net
asset value of the shares purchased. These payments are subject to reclaim in
the event the shares are redeemed within twelve months after purchase.
Purchases of the Fund's Class A shares made after January 1, 1997, in the
amount of $1 million or more, are subject to a CDSC of 1.00% upon redemption
during the month of purchase and the 12-month period following the month of
purchase.
The sales charge is paid to the Principal Underwriter, which in turn normally
reallows a portion to your broker-dealer. In addition, your broker-dealer
currently will be paid periodic service fees at an annual rate of up to 0.15% of
the value of Class A shares maintained by such recipient and outstanding on the
books of the Fund for specified periods.
Upon written notice to broker-dealers with whom it has dealer agreements, the
Principal Underwriter may reallow up to the full applicable sales charge.
Initial sales charges may be eliminated for persons purchasing Class A shares
that are offered in connection with certain fee based programs, such as wrap
accounts sponsored or managed by broker-dealers, investment advisers, or others
who have entered into special agreements with the Principal Underwriter. Initial
sales charges may be reduced or eliminated for persons or organizations
purchasing Class A shares of a Fund alone or in combination with Class A shares
of other Keystone America Funds. See Exhibit B to this prospectus.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within 30
days after a change in the registered representative's employment when the
amount invested represents redemption proceeds from a registered open-end
management investment company not distributed or managed by Keystone or its
affiliates; and the shareholder either (1) paid a front-end sales charge, or (2)
was at some time subject to, but did not actually pay, a CDSC with respect to
the redemption proceeds.
Upon prior notification to the Principal Underwriter, Class A shares may be
purchased at net asset value by clients of registered representatives within 30
days after the redemption of shares of any registered open-end investment
company not distributed or managed by Keystone or its affiliates when the amount
invested represents redemption proceeds from such unrelated registered open-end
investment company, and the shareholder either (1) paid a front-end sales
charge, or (2) was at some time subject to, but did not actually pay, a CDSC
with respect to the redemption proceeds. This special net asset value purchase
is currently being offered on a calendar month-by-month basis and may be
modified or terminated in the future.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With respect to shares purchased after January 1, 1997, each Fund, with
certain exceptions, imposes a CDSC on Class B shares redeemed as follows:
CDSC
REDEMPTION TIMING IMPOSED
- ----------------- -------
Month of purchase and first twelve-month
period following the month of purchase ..... 5.00%
Second twelve-month period following the month
of purchase ................................ 4.00%
Third twelve-month period following the month
of purchase ................................ 3.00%
Fourth twelve-month period following the month
of purchase ................................ 3.00%
Fifth twelve-month period following the month
of purchase ................................ 2.00%
Sixth twelve-month period following the month
of purchase ................................ 1.00%
No CDSC is imposed on amounts redeemed thereafter.
When imposed, the CDSC is deducted from the redemption proceeds otherwise
payable to you. The CDSC is retained by the Principal Underwriter or its
predecessor. Amounts received by the Principal Underwriter or its predecessor
under the Class B Distribution Plans are reduced by CDSCs retained by the
Principal Underwriter or its predecessor. See "Contingent Deferred Sales Charge
and Waiver of Sales Charges" below.
Class B shares purchased after January 1, 1997, that have been outstanding for
seven years after the month of purchase, will automatically convert to Class A
shares (which are subject to a lower Distribution Plan charge) without
imposition of a front-end sales charge. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to EKSC.) The Class B shares so converted will no longer be subject
to the higher distribution expenses and other expenses, if any, borne by Class B
shares. Because the net asset value per share of Class A shares may be higher or
lower than that of the Class B shares at the time of conversion, although the
dollar value will be the same, a shareholder may receive more or fewer Class A
shares than the number of Class B shares converted. Under current law, it is the
Trust's opinion that such a conversion will not constitute a taxable event under
federal income tax law. In the event that this ceases to be the case, the Board
of Trustees will consider what action, if any, is appropriate and in the best
interest of such Class B shareholders.
CLASS C SHARES
Class C shares are offered only through broker-dealers who have special
distribution agreements with the Principal Underwriter. Class C shares are
offered at net asset value, without an initial sales charge. With certain
exceptions, each Fund imposes a CDSC of 1.00% on shares redeemed during the
month of purchase and the 12-month period following the month of purchase. No
CDSC is imposed on amounts redeemed thereafter. If imposed, the CDSC is deducted
from the redemption proceeds otherwise payable to you. The CDSC is retained by
the Principal Underwriter or its predecessor. See "Contingent Deferred Sales
Charge and Waiver of Sales Charges" below.
CONTINGENT DEFERRED SALES CHARGE AND WAIVER OF SALES CHARGES
Any CDSC imposed upon the redemption of Class A, Class B, or Class C shares
is a percentage of the lesser of (1) the net asset value of the shares redeemed
or (2) the net asset value at the time of purchase of such shares.
With respect to shares purchased after January 1, 1997, no CDSC is imposed
when you redeem amounts derived from (1) increases in the value of shares
redeemed above the net cost of such shares; (2) certain shares with respect to
which a Fund did not pay a commission on issuance, including shares acquired
through reinvestment of dividend income and capital gains distributions; (3)
certain Class A shares held for more than 12 months after the month of purchase;
(4) Class B shares held for more than 72 months after the month of purchase or
(5) Class C shares held for more than one year after the month of purchase. Upon
request for redemption, shares not subject to the CDSC will be redeemed first.
Thereafter, shares held the longest will be the first to be redeemed.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC will be
imposed on any redemptions made specifically by an individual participant in the
Qualifying Plan. This waiver is not available in the event a Qualifying Plan (as
a whole) redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of a Fund in the
event of (1) death or disability of the shareholder; (2) a lump-sum distribution
from a 401(k) plan or other benefit plan qualified under the Employee Retirement
Income Security Act of 1974 ("ERISA"); (3) automatic withdrawals from ERISA
plans if the shareholder is at least 59 1/2 years old; (4) involuntary
redemptions of accounts having an aggregate net asset value of less than $1,000;
(5) automatic withdrawals under the Systematic Income Plan of up to 1.00% per
month of the shareholder's initial account balance; (6) withdrawals consisting
of loan proceeds to a retirement plan participant; (7) financial hardship
withdrawals made by a retirement plan participant; or (8) withdrawals consisting
of returns of excess contributions or excess deferral amounts made to a
retirement plan participant.
Each Fund may also sell Class A, Class B or Class C shares at net asset value
without any initial sales charge or a CDSC to certain Directors, Trustees,
officers and employees of the Fund, First Union Keystone, Keystone, the
Principal Underwriter and certain of their affiliates, and to members of the
immediate families of such persons; to registered representatives of firms with
dealer agreements with the Principal Underwriter; and to a bank or trust company
acting as a trustee for a single account. See the statement of additional
information for more details.
HOW TO REDEEM SHARES
You may redeem Fund shares for cash at their net redemption value by writing
to the Trust, c/o EKSC, and presenting a properly endorsed share certificate (if
certificates have been issued) to the Trust. Your signature(s) on the written
order and certificates must be guaranteed as described below. In order to redeem
by telephone or to engage in telephone transactions generally, you must complete
the authorization in your account application. Proceeds for shares redeemed on
telephone order will be deposited by wire or EFT only to the bank account
designated in your account application.
You may also redeem your shares through your broker-dealer. The Principal
Underwriter, acting as agent for the Trust, stands ready to repurchase Fund
shares upon orders from broker-dealers and will calculate the net asset value on
the same terms as those orders for the purchase of shares received from
broker-dealers and described under "How to Buy Shares." If the Principal
Underwriter has received proper documentation, it will pay the redemption
proceeds, less any applicable CDSC, to the broker-dealer placing the order
within seven days thereafter. The Principal Underwriter charges no fee for this
service. Your broker-dealer, however, may charge a service fee.
The redemption value equals the net asset value per share adjusted for
fractions of a cent and may be more or less than your cost depending upon
changes in the value of a Fund's portfolio securities between purchase and
redemption. A CDSC may be imposed by a Fund at the time of redemption of certain
shares as explained in "How to Buy Shares." If imposed, the CDSC is deducted
from the redemption proceeds otherwise payable to you.
REDEMPTION OF SHARES IN GENERAL
At various times, the Trust may be requested to redeem shares for which it has
not yet received good payment. In such a case, the Trust will mail the
redemption proceeds upon clearance of the purchase check, which may take up to
15 days. Any delay may be avoided by purchasing shares either with a certified
check, by Federal Reserve or bank wire of funds, by direct deposit or by EFT.
Although the mailing of a redemption check or the wiring or EFT of redemption
proceeds may be delayed, the redemption value will be determined and the
redemption processed in the ordinary course of business upon receipt of proper
documentation. In such a case, after the redemption and prior to the release of
the proceeds, no appreciation or depreciation will occur in the value of the
redeemed shares, and no interest will be paid on the redemption proceeds. If the
payment of a redemption has been delayed, the check will be mailed or the
proceeds wired or sent EFT promptly after good payment has been collected.
The Trust computes the amount due you at the close of the Exchange at the end
of the day on which it has received all proper documentation from you. Payment
of the amount due on redemption, less any applicable CDSC (as described above),
will be made within seven days thereafter except as discussed herein.
For your protection, SIGNATURES ON CERTIFICATES, STOCK POWERS AND ALL WRITTEN
ORDERS OR AUTHORIZATIONS MUST BE GUARANTEED BY A U.S. STOCK EXCHANGE MEMBER, A
BANK OR OTHER PERSONS ELIGIBLE TO GUARANTEE SIGNATURES UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND EKSC'S POLICIES. The Trust or EKSC may waive this
requirement or may require additional documents in certain cases. Currently, the
requirement for a signature guarantee has been waived on redemptions of $50,000
or less when the account address of record has been the same for a minimum
period of 30 days. The Trust and EKSC reserve the right to withdraw this waiver
at any time.
If the Trust receives a redemption order, but you have not clearly indicated
the amount of money or number of shares involved, the Trust cannot execute the
order. In such cases, the Trust will request the missing information from you
and process the order on the day such information is received.
TELEPHONE REDEMPTIONS
Under ordinary circumstances, you may redeem up to $50,000 from your account
by telephone by calling toll free 1-800-343-2898. As mentioned above, to engage
in telephone transactions generally, you must complete the appropriate sections
of the Fund's application.
In order to insure that instructions received by EKSC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation of
your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if the
address and bank account of record have been the same for a minimum period of 30
days.
If you cannot reach the Trust by telephone, you should follow the procedures
for redeeming by mail or through a broker-dealer as set forth herein.
SMALL ACCOUNTS
Due to the high cost of maintaining small accounts, the Trust reserves the
right to redeem your account if its value has fallen below $1,000, the current
minimum investment level, as a result of your redemptions (but not as a result
of market action). You will be notified in writing and allowed 60 days to
increase the value of your account to the minimum investment level. No CDSCs are
applied to such redemptions.
GENERAL
The Trust reserves the right at any time to terminate, suspend, or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose fees.
Except as otherwise noted, neither the Trust, EKSC, nor the Principal
Underwriter assumes responsibility for the authenticity of any instructions
received by any of them from a shareholder over the Keystone Automated Response
Line ("KARL"), or by telephone. EKSC will employ reasonable procedures to
confirm that instructions received over KARL or by telephone are genuine.
Neither the Trust, EKSC, nor the Principal Underwriter will be liable when
following instructions received over KARL or by telephone that EKSC reasonably
believes to be genuine.
The Trust may temporarily suspend the right to redeem its shares when (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists and the Trust
cannot dispose of its investments or fairly determine their value; or (4) the
Securities and Exchange Commission so orders.
SHAREHOLDER SERVICES
Details on all shareholder services may be obtained from EKSC by writing or by
calling toll free 1-800-343-2898.
KEYSTONE AUTOMATED RESPONSE LINE
KARL offers you specific fund account information and price and yield
quotations as well as the ability to do account transactions, including
investments, exchanges and redemptions. You may access KARL by dialing toll free
1-800-346-3858 on any touch-tone telephone, 24 hours a day, seven days a week.
EXCHANGES
If you have obtained the appropriate prospectus you may exchange shares of a
Fund for shares of certain other Keystone America Funds and Keystone Liquid
Trust ("KLT") as follows:
Class A shares may be exchanged for Class A shares of other Keystone America
Funds and Class A shares of KLT;
Class B shares may be exchanged for the same type of Class B shares of other
Keystone America Funds and the same type of Class B shares of KLT; and
Class C shares may be exchanged for Class C shares of other Keystone America
Funds and Class C shares of KLT.
The exchange of Class B shares and Class C shares will not be subject to a
CDSC. However, if the shares being tendered for exchange are
(1) Class A shares acquired without a front-end sales charge,
(2) Class B shares that have been held for less than 72 months after the month
of purchase, or
(3) Class C shares that have been held for less than one year after the month
of purchase,
and are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction.
You may exchange shares for another Keystone fund by calling or writing to
EKSC or by using KARL. As noted above, if the shares being tendered for exchange
are still subject to a CDSC, such charge will carry over to the shares being
acquired in the exchange transaction. The Trust reserves the right to terminate
this exchange offer or to change its terms, including the right to charge for
any exchange, upon notice to shareholders pursuant to applicable law.
Orders to exchange a certain class of shares of the Fund for the corresponding
class of shares of KLT will be executed by redeeming the shares of the Fund and
purchasing the corresponding class of shares of KLT at the net asset value of
such shares next determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. In all other
cases, orders for exchanges received by the Trust prior to 4:00 p.m. eastern
time on any day the Trust is open for business will be executed at the
respective net asset values determined as of the close of business that day.
Orders for exchanges received after 4:00 p.m. eastern time on any business day
will be executed at the respective net asset values determined at the close of
the next business day.
An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to terminate the exchange privilege of any shareholder who makes more
than five exchanges of shares of the funds in a year or three in a calendar
quarter.
An exchange order must comply with the requirements for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. An exchange constitutes a sale for federal income tax purposes.
The exchange privilege is available only in states where shares of the fund
being acquired may legally be sold.
AUTOMATIC INVESTMENT PLAN
With an Automatic Investment Plan, you can automatically transfer as little as
$25 per month or $75 per quarter from your bank account or KLT to the Keystone
fund of your choice. Your bank account will be debited for each transfer. You
will receive confirmation with your next account statement.
To establish or terminate an Automatic Investment Plan or to change the amount
or schedule of your automatic investments, you may write to or call EKSC. Please
include your account numbers. Termination may take up to 30 days.
RETIREMENT PLANS
The Trust has various retirement plans available to you, including Individual
Retirement Accounts (IRAs); Rollover IRAs; Simplified Employee Pension Plans
(SEPs); Salary Reduction Plans (SARSEPs); Tax Sheltered Annuity Plans; 403(b)
(7) Plans; 401(k) Plans; Keogh Plans; Corporate Profit-Sharing Plans; and Money
Purchase Plans. For details, including fees and application forms, call toll
free 1-800-247-4075 or write to EKSC.
SYSTEMATIC INCOME PLAN
Under a Systematic Income Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $75 and may be as much as 1.0% per month
or 3.0% per quarter of the total net asset value of the Fund shares in your
account when the Systematic Income Plan was opened. Fixed withdrawal payments
are not subject to a CDSC. Excessive withdrawals may decrease or deplete the
value of your account. Moreover, because of the effect of the applicable sales
charge, a Class A investor should not make continuous purchases of the Fund's
shares while participating in a Systematic Income Plan.
DOLLAR COST AVERAGING
Through dollar cost averaging you can invest a fixed dollar amount each month
or each quarter in any Keystone America Fund. This results in more shares being
purchased when the selected fund's net asset value is relatively low and fewer
shares being purchased when the fund's net asset value is relatively high and
may result in a lower average cost per share than a less systematic investment
approach.
Prior to participating in dollar cost averaging, you must establish an account
in a Keystone America Fund or a money market fund managed or advised by
Keystone. You should designate on the application (1) the dollar amount of each
monthly or quarterly investment you wish to make and (2) the fund in which the
investment is to be made. Thereafter, on the first day of the designated month,
an amount equal to the specified monthly or quarterly investment will
automatically be redeemed from your initial account and invested in shares of
the designated fund.
If you are a Class A investor and paid a sales charge on your initial
purchase, the shares purchased will be eligible for Rights of Accumulation and
the sales charge applicable to the purchase will be determined accordingly. In
addition, the value of shares purchased will be included in the total amount
required to fulfill a Letter of Intent. If a sales charge was not paid on the
initial purchase, a sales charge will be imposed at the time of subsequent
purchases, and the value of shares purchased will become eligible for Rights of
Accumulation and Letters of Intent. See Appendix B -- "Reduced Sales Charges" at
the back of the prospectus.
TWO DIMENSIONAL INVESTING
You may elect to have income and capital gains distributions from any class of
Keystone America Fund shares you may own automatically invested to purchase the
same class of shares of any other Keystone America Fund. You may select this
service on your application and indicate the Keystone America Fund(s) into which
distributions are to be invested. The value of shares purchased will be
ineligible for Rights of Accumulation and Letters of Intent. See Appendix B -
"Reduced Sales Charges" at the back of the prospectus.
OTHER SERVICES
Under certain circumstances, you may, within 30 days after a redemption,
reinstate your account in the same class of shares that you redeemed at current
net asset value.
PERFORMANCE DATA
From time to time a Fund may advertise "total return" and "current yield." ALL
DATA IS BASED ON HISTORICAL RESULTS. PAST PERFORMANCE SHOULD NOT BE CONSIDERED
REPRESENTATIVE OF RESULTS FOR ANY FUTURE PERIOD OF TIME. Total return and
current yield are computed separately for each class of shares of a Fund.
Total return refers to a Fund's average annual compounded rates of return over
specified periods determined by comparing the initial amount invested in a
particular class to the ending redeemable value of that amount. The resulting
equation assumes reinvestment of all dividends and distributions and deduction
of the maximum sales charge or applicable contingent deferred sales charge and
all recurring charges, if any, applicable to all shareholder accounts.
Current yield quotations represent the yield on an investment for a stated
30-day period computed by dividing net investment income earned per share during
the base period by the maximum offering price per share on the last day of the
base period. Such yield will include income from sources other than municipal
obligations, if any.
Tax equivalent yield is, in general, the current yield divided by a factor
equal to one minus a stated income tax rate and reflects the yield a taxable
investment would have to achieve in order to equal on an after-tax basis a
tax-exempt yield.
Any given yield or total return quotation should not be considered
representative of a Fund's yield or total return for any future period.
The Trust may also include comparative performance information for each class
of shares when advertising or marketing the Trust's shares, such as data from
Lipper Analytical Services, Inc., Morningstar, Inc., CDS-Weisenberger and Value
Line or other industry publications.
TRUST SHARES
The Trust currently issues shares of two separate series evidencing interests
in different portfolio securities. Each Fund currently issues Class A, B and C
shares. The Trust is authorized to issue additional series or classes of shares.
Shares of a Fund participate in dividends and distributions and have equal
voting, liquidation and other rights except that (1) expenses related to the
distribution of each series or class of shares, or other expenses that the Board
of Trustees may designate as class expenses, from time to time, are borne solely
by each series or class; (2) each series or class of shares has exclusive voting
rights with respect to its Distribution Plan; (3) each series or class has
different exchange privileges; and (4) each series or class generally has a
different designation. When issued and paid for, the shares of each Fund will be
fully paid and nonassessable by the Trust. Shares of each Fund may be exchanged
as explained under "Shareholder Services," but will have no other preference,
conversion, exchange or preemptive rights. Shares are redeemable, transferable
and freely assignable as collateral. There are no sinking fund provisions.
Shareholders of a Fund are entitled to one vote for each full share owned and
fractional votes for fractional shares on all matters subject to Fund vote.
Shares of a Fund vote together except when required by law to vote separately by
class. The Trust does not have annual meetings. The Trust will have special
meetings, from time to time, as required under its Declaration of Trust and
under the 1940 Act. As provided in the Trust's Declaration of Trust,
shareholders have the right to remove Trustees by an affirmative vote of
two-thirds of the outstanding shares. A special meeting of the shareholders will
be held when holders of 10% of the outstanding shares request a meeting for the
purpose of removing a Trustee. The Fund is prepared to assist shareholders in
communications with one another for the purpose of convening such a meeting as
prescribed by Section 16(c) of the 1940 Act.
Under Massachusetts law, it is possible that a Trust shareholder may be held
personally liable for the Trust's obligations. The Trust's Declaration of Trust
provides, however, that shareholders shall not be subject to any personal
liability for the Trust's obligations and provides indemnification from Trust
assets for any shareholder held personally liable for the Trust's obligations.
ADDITIONAL INFORMATION
When the Trust determines from its records that more than one account in the
Trust is registered in the name of a shareholder or shareholders having the same
address, upon notice to those shareholders, the Trust intends, when an annual
report or a semi-annual report of the Trust is required to be furnished, to mail
one copy of such report to that address.
Except as otherwise stated in this prospectus or required by law, the Trust
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating. The following criteria are used in making that assessment:
1. amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note); and
2. source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 -- Strong capacity to pay principal and interest. Those issues
determined to possess a very strong capacity to pay debt service is given a
plus (+) designation.
2. SP-2 -- Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the terms of
the notes.
3. SP-3 -- Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+").
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
1. likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. nature of and provisions of the obligation; and
3. protection afforded by and relative position of the obligation in the
event of bankruptcy reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit quality,
ratings from "AA" to "BBB" may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the successful
completion of the project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion.
D. BOND RATINGS ARE AS FOLLOWS:
1. AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
2. AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
3. A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
4. BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
A Moody's rating for municipal short-term obligations will be designated
Moody's Investment Grade or (MIG). These ratings recognize the difference
between short-term credit risk and long-term risk. Factors affecting the
liquidity of the borrower and the short-term cyclical elements are critical in
short-term ratings.
A short-term rating may also be assigned on issues with a demand feature --
variable rate demand obligation (VRDO). Such ratings will be designated as VMIG.
Short-term ratings on issues with demand features are differentiated by the use
of the VMIG symbol to reflect such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on the external
liquidity.
The note ratings are as follows:
1. MIG1/VMIG1 This designation denotes the best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
2. MIG2/VMIG2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
3. MIG3/VMIG3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
4. MIG4/VMIG4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
B. CORPORATE AND MUNICIPAL BOND RATINGS
1. Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
2. Aa -- Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long term risks appear somewhat larger than in Aaa securities.
3. A -- Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
4. Baa -- Bonds rated Baa are considered to be medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
CON. (--) -- Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (1) earnings of projects under
construction, (2) earnings of projects unseasoned in operation experience, (3)
rentals that begin when facilities are completed, or (4) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the Aa, A, and Baa groups that Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, and Baa 1.
FITCH CORPORATE AND MUNICIPAL RATINGS
A. MUNICIPAL NOTES
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally three years or less. These
include commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes. The short-term rating places greater emphasis on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
The note ratings are as follows:
1. F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
2. F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
3. F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned the two higher ratings.
4. F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
B. CORPORATE AND MUNICIPAL BOND RATINGS
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
PLUS (+) OR MINUS (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA category.
A CONDITIONAL rating is premised on the successful completion of a project or
the occurrence of a specific event.
Debt rated BB, B, CCC, CC and C by S&P is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Debt rated C1 by S&P is debt (income bonds) on which no interest is being paid.
Debt rated D by S&P is in default and payment of interest and/ or repayment of
principal is in arrears. The Funds intend to invest in D-rated debt only in
cases where in Keystone's judgment there is a distinct prospect of improvement
in the issuer's financial position as a result of the completion of
reorganization or otherwise. Bonds that are rated Caa by Moody's are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds that are rated Ca by Moody's
represent obligations that are speculative in a high degree. Such issues are
often in default or have other market shortcomings. Bonds that are rated C by
Moody's are the lowest rated bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Debt rated BB, B, CCC, CC, and C by Fitch is regarded as speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
represents the highest degree of speculation. Debt rated DDD, DD, and D are in
default on interest and/or principal payments.
DESCRIPTIONS OF CERTAIN TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES
AVAILABLE TO THE FUNDS
Each Fund may engage in the following investment practices to the extent
described in the prospectus and statement of additional information.
OBLIGATIONS OF FOREIGN BRANCHES OF UNITED STATES BANKS
The obligations of foreign branches of U.S. banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation. Payment of interest
and principal upon these obligations may also be affected by governmental action
in the country of domicile of the branch (generally referred to as sovereign
risk). In addition, evidences of ownership of such securities may be held
outside the U.S. and a Fund may be subject to the risks associated with the
holding of such property overseas. Examples of governmental actions would be the
imposition of currency controls, interest limitations, withholding taxes,
seizure of assets or the declaration of a moratorium. Various provisions of
federal law governing domestic branches do not apply to foreign branches of
domestic banks.
OBLIGATIONS OF UNITED STATES BRANCHES OF FOREIGN BANKS
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as by
governmental action in the country in which the foreign bank has its head
office. In addition, there may be less publicly available information about a
U.S. branch of a foreign bank than about a domestic bank.
MASTER DEMAND NOTES
Master demand notes are unsecured obligations that permit the investment of
fluctuating amounts by a Fund at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the issuer as borrower. Master
demand notes may permit daily fluctuations in the interest rate and daily
changes in the amounts borrowed. A Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement,
or to decrease the amount. The borrower may repay up to the full amount of the
note without penalty. Notes purchased by a Fund permit a Fund to demand payment
of principal and accrued interest at any time (on not more than seven days'
notice). Notes acquired by a Fund may have maturities of more than one year,
provided that (1) the Fund is entitled to payment of principal and accrued
interest upon not more than seven days notice, and (2) the rate of interest on
such notes is adjusted automatically at periodic intervals which normally will
not exceed 31 days, but may extend up to one year. The notes are deemed to have
a maturity equal to the longer of the period remaining to the next interest rate
adjustment or the demand notice period. Because these types of notes are direct
lending arrangements between the lender and borrower, such instruments are not
normally traded and there is no secondary market for these notes, although they
are redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, a Fund's right to redeem is dependent on the
ability of the borrower to pay principal and interest on demand. In connection
with master demand note arrangements, Keystone considers, under standards
established by the Board of Trustees, earning power, cash flow and other
liquidity ratios of the borrower and will monitor the ability of the borrower to
pay principal and interest on demand. These notes are not typically rated by
credit rating agencies. Unless rated, a Fund will invest in them only if at the
time of an investment the issuer meets criteria established for commercial paper
established by Keystone.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with member banks of the Federal
Reserve System having at least $1 billion in assets, primary dealers in U.S.
government securities or other financial institutions believed by Keystone to be
creditworthy. Such persons must be registered as U.S. government securities
dealers with appropriate regulatory organizations. Under such agreements, the
bank, primary dealer or other financial institution agrees upon entering into
the contract to repurchase the security at a mutually agreed upon date and
price, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period. Under a repurchase agreement, the seller must maintain the value of the
securities subject to the agreement at not less than the repurchase price, such
value being determined on a daily basis by marking the underlying securities to
their market value. Although the securities subject to the repurchase agreement
might bear maturities exceeding a year, the Funds only intend to enter into
repurchase agreements that provide for settlement within a year and usually
within seven days. Securities subject to repurchase agreements will be held by
the Trust's custodian or in the Federal Reserve book entry system. The Funds do
not bear the risk of a decline in the value of the underlying security unless
the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, a Fund could
experience both delays in liquidating the underlying securities and losses,
including (1) possible declines in the value of the underlying securities during
the period while the Fund seeks to enforce its rights thereto; (2) possible
subnormal levels of income and lack of access to income during this period; and
(3) expenses of enforcing its rights. The Board of Trustees has established
procedures to evaluate the creditworthiness of each party with whom each Fund
enters into repurchase agreements by setting guidelines and standards of review
for Keystone and monitoring Keystone's actions with regard to repurchase
agreements.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, a Fund would sell securities and agree
to repurchase them at a mutually agreed upon date and price. Each Fund intends
to enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions. At
the time a Fund enters into a reverse repurchase agreement, it will establish a
segregated account with the Trust's custodian containing liquid assets such as
U.S. government securities or other high grade debt securities having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
that a Fund is obligated to repurchase may decline below the repurchase price.
"WHEN ISSUED" SECURITIES
Each Fund may also purchase and sell securities and currencies on a when
issued and delayed delivery basis. When issued or delayed delivery transactions
arise when securities or currencies are purchased or sold by a Fund with payment
and delivery taking place in the future in order to secure what is considered to
be an advantageous price and yield to the Fund at the time of entering into the
transaction. When a Fund engages in when issued and delayed delivery
transactions, the Fund relies on the buyer or seller, as the case may be, to
consummate the sale. Failure to do so may result in a Fund missing the
opportunity to obtain a price or yield considered to be advantageous. When
issued and delayed delivery transactions may be expected to occur a month or
more before delivery is due. However, no payment or delivery is made by a Fund
until it receives payment or delivery from the other party to the transaction. A
separate account of liquid assets equal to the value of such purchase
commitments will be maintained until payment is made.
When issued and delayed delivery agreements are subject to risks from changes
in value based upon changes in the level of interest rates, currency rates and
other market factors, both before and after delivery. A Fund does not accrue any
income on such securities or currencies prior to their delivery. To the extent
each Fund engages in when issued and delayed delivery transactions, it will do
so consistent with its investment objective and policies and not for the purpose
of investment leverage.
LOANS OF SECURITIES TO BROKER-DEALERS
Each Fund may lend securities to broker-dealers and dealers pursuant to
agreements requiring that the loans be continuously secured by cash or
securities of the U.S. government, its agencies or instrumentalities, or any
combination of cash and such securities, as collateral equal at all times in
value to at least the market value of the securities loaned. Such securities
loans will not be made with respect to a Fund if as a result the aggregate of
all outstanding securities loans exceeds 15% of the value of the Fund's total
assets taken at their current value. A Fund continues to receive interest or
dividends on the securities loaned and simultaneously earns interest on the
investment of the cash loan collateral in U.S. Treasury notes, certificates of
deposit, other high-grade, short-term obligations or interest bearing cash
equivalents. Although voting rights attendant to securities loaned pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by a Fund if, in the opinion of the Fund, a material
event affecting the investment is to occur. There may be risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. Loans may only be made to borrowers deemed to be of good standing,
under standards approved by the Board of Trustees, when the income to be earned
from the loan justifies the attendant risks.
DERIVATIVES
Each Fund may use derivatives in furtherance of its investment objective.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. These assets, rates,
and indices may include bonds, stocks, mortgages, commodities, interest rates,
currency exchange rates, bond indices and stock indices. Derivatives can be used
to earn income or protect against risk, or both. For example, one party with
unwanted risk may agree to pass that risk to another party who is willing to
accept the risk, the second party being motivated, for example, by the desire
either to earn income in the form of a fee or premium from the first party, or
to reduce its own unwanted risk by attempting to pass all or part of that risk
to the first party.
Derivatives can be used by investors such as the Funds to earn income and
enhance returns, to hedge or adjust the risk profile of the portfolio, and
either in place of more traditional direct investments or to obtain exposure to
otherwise inaccessible markets. Each Fund is permitted to use derivatives for
one or more of these purposes. Each of these uses entails greater risk than if
derivatives were used solely for hedging purposes. The Funds use futures
contracts and related options for hedging purposes. Derivatives are a valuable
tool which, when used properly, can provide significant benefit to a Fund's
shareholders. Keystone is not an aggressive user of derivatives with respect to
the Funds. However, a Fund may take positions in those derivatives that are
within its investment policies if, in Keystone's judgement, this represents an
effective response to current or anticipated market conditions. Keystone's use
of derivatives is subject to continuous risk assessment and control from the
standpoint of a Fund's investment objectives and policies.
Derivatives may be (1) standardized, exchange-traded contracts or (2)
customized, privately negotiated contracts. Exchange-traded derivatives tend to
be more liquid and subject to less credit risk than those that are privately
negotiated.
There are four principal types of derivative instruments -- options, futures,
forwards and swaps -- from which virtually any type of derivative transaction
can be created. Further information regarding options and futures, is provided
later in this section and is provided in the Trust's statement of additional
information.
Debt instruments that incorporate one or more of these building blocks for the
purpose of determining the principal amount of and/or rate of interest payable
on the debt instruments are often referred to as "structured securities." An
example of this type of structured security is indexed commercial paper. The
term is also used to describe certain securities issued in connection with the
restructuring of certain foreign obligations. See "Structured Securities" below.
The term "derivative" is also sometimes used to describe securities involving
rights to a portion of the cash flows from an underlying pool of mortgages or
other assets from which payments are passed through to the owner of, or that
collateralize, the securities.
While the judicious use of derivatives by experienced investment managers such
as Keystone can be beneficial, derivatives also involve risks different from,
and, in certain cases, greater than, the risks presented by more traditional
investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives that investors should understand before
investing in a Fund.
o Market Risk -- This is the general risk attendant to all investments that
the value of a particular investment will decline or otherwise change in a
way detrimental to a Fund's interest.
o Management Risk -- Derivative products are highly specialized instruments
that require investment techniques and risk analyses different from those
associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the
derivative itself, without the benefit of observing the performance of the
derivative under all possible market conditions. In particular, the use and
complexity of derivatives require the maintenance of adequate controls to
monitor the transactions entered into, the ability to assess the risk that a
derivative adds to a Fund's portfolio and the ability to forecast price,
interest rate or currency exchange rate movements correctly.
o Credit Risk -- This is the risk that a loss may be sustained by a Fund as a
result of the failure of another party to a derivative (usually referred to
as a "counterparty") to comply with the terms of the derivative contract.
The credit risk for exchange traded derivatives is generally less than for
privately negotiated derivatives, since the clearing house, which is the
issuer or counterparty to each exchange-traded derivative, provides a
guarantee of performance. This guarantee is supported by a daily payment
system (i.e., margin requirements) operated by the clearing house in order
to reduce overall credit risk. For privately negotiated derivatives, there
is no similar clearing agency guarantee. Therefore, a Fund considers the
creditworthiness of each counterparty to a privately negotiated derivative
in evaluating potential credit risk.
o Liquidity Risk -- Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid (as is the case with many
privately negotiated derivatives), it may not be possible to initiate a
transaction or liquidate a position at an advantageous price.
o Leverage Risk -- Since many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is
related to a notional principal amount, even if the parties have not made
any initial investment. Certain derivatives have the potential for unlimited
loss, regardless of the size of the initial investment.
o Other Risks -- Other risks in using derivatives include the risk of
mispricing or improper valuation and the inability of derivatives to
correlate perfectly with underlying assets, rates and indices. Many
derivatives, in particular privately negotiated derivatives, are complex and
often valued subjectively. Improper valuations can result in increased cash
payment requirements to counterparties or a loss of value to a Fund.
Derivatives do not always perfectly or even highly correlate or track the
value of the assets, rates or indices they are designed to closely track.
Consequently, a Fund's use of derivatives may not always be an effective
means of, and sometimes could be counterproductive to, furthering the Fund's
investment objective.
OPTIONS TRANSACTIONS
WRITING COVERED OPTIONS. Each Fund may write (i.e., sell) covered call and put
options. By writing a call option, the Fund becomes obligated during the term of
the option to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, a Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. Each Fund also may write straddles
(combinations of covered puts and calls on the same underlying security).
Each Fund may only write "covered" options. This means that so long as a Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills. If
a Fund has written options against all of its securities which are available for
writing options, the Fund may be unable to write additional options unless it
sells a portion of its portfolio holdings to obtain new securities against which
it can write options. If this were to occur, higher portfolio turnover and
correspondingly greater brokerage commissions and other transaction costs may
result. However, the Funds do not expect that this will occur.
Each Fund will be considered "covered" with respect to a put option it writes
if, so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. A Fund receives a premium from writing a call or
put option, which it retains whether or not the option is exercised. By writing
a call option, a Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option the Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.
PURCHASING OPTIONS. Each Fund may purchase put or call options, including
purchasing put or call options for the purpose of offsetting previously
written put or call options of the same series.
If a Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying
security or dispose of assets held in a segregated account until the options
expire or are exercised.
An option position may be closed out only in a secondary market for an option
of the same series. Although a Fund generally will write only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market will exist for any particular option at any particular
time, and for some options no secondary market may exist. In such event, it
might not be possible to effect a closing transaction in a particular option.
Options on some securities are relatively new, and it is impossible to predict
the amount of trading interest that will exist in such options. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair a Fund's ability to
use such options to achieve its investment objective.
OPTIONS TRADING MARKETS. Options in which each Fund will trade generally are
listed on national securities exchanges. Exchanges on which such options
currently are traded include the Chicago Board Options Exchange and the New
York, American, Pacific and Philadelphia Stock Exchanges. Options on some
securities may not be listed on any Exchange, but traded in the over-the-counter
market. Options traded in the over-the-counter market involve the additional
risk that securities dealers participating in such transactions could fail to
meet their obligations to a Fund. The use of options traded in the
over-the-counter market may be subject to limitations imposed by certain state
securities authorities. In addition to the limits on its use of options
discussed herein, each Fund is subject to the investment restrictions described
in this prospectus and in the statement of additional information.
The staff of the SEC is of the view that the premiums that a Fund pays for the
purchase of unlisted options, and the value of securities used to cover unlisted
options written by a Fund, are considered to be invested in illiquid securities
or assets for the purpose of calculating whether the Fund is in compliance with
its investment restriction relating to illiquid investments.
FUTURES TRANSACTIONS
Each Fund may enter into currency and other financial futures contracts and
write options on such contracts. Each Fund intends to enter into such contracts
and related options for hedging purposes. Each Fund will enter into futures on
securities or currencies or index-based futures contracts in order to hedge
against changes in interest or exchange rates or securities prices. A futures
contract on securities or currencies is an agreement to buy or sell securities
or currencies at a specified price during a designated month. A futures contract
on a securities index does not involve the actual delivery of securities, but
merely requires the payment of a cash settlement based on changes in the
securities index. A Fund does not make payment or deliver securities upon
entering into a futures contract. Instead, it puts down a margin deposit, which
is adjusted to reflect changes in the value of the contract and which continues
until the contract is terminated.
Each Fund may sell or purchase futures contracts. When a futures contract is
sold by a Fund, the value of the contract will tend to rise when the value of
the underlying securities or currencies declines and to fall when the value of
such securities or currencies increases. Thus, each Fund sells futures contracts
in order to offset a possible decline in the value of its securities or
currencies. If a futures contract is purchased by a Fund, the value of the
contract will tend to rise when the value of the underlying securities or
currencies increases and to fall when the value of such securities or currencies
declines. Each Fund intends to purchase futures contracts in order to establish
what is believed by Keystone to be a favorable price and rate of return for
securities or favorable exchange rate for currencies the Fund intends to
purchase.
Each Fund also intends to purchase put and call options on futures contracts
for hedging purposes. A put option purchased by a Fund would give it the right
to assume a position as the seller of a futures contract. A call option
purchased by a Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires a Fund to pay a premium. In exchange for the premium, a Fund becomes
entitled to exercise the benefits, if any, provided by the futures contract, but
is not required to take any action under the contract. If the option cannot be
exercised profitably before it expires, a Fund's loss will be limited to the
amount of the premium and any transaction costs.
Each Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. A Fund's ability to enter into closing
transactions depends on the development and maintenance of a liquid secondary
market. There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. As a result, there can be no
assurance that a Fund will be able to enter into an offsetting transaction with
respect to a particular contract at a particular time. If a Fund is not able to
enter into an offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the contract and to complete the contract
according to its terms, in which case it would continue to bear market risk on
the transaction.
Although futures and options transactions are intended to enable a Fund to
manage market, interest rate or exchange rate risk, unanticipated changes in
interest rates, exchange rates or market prices could result in poorer
performance than if it had not entered into these transactions. Even if Keystone
correctly predicts interest or exchange rate movements, a hedge could be
unsuccessful if changes in the value of a Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between a Fund's futures and securities or currencies positions may be caused by
differences between the futures and securities or currencies markets or by
differences between the securities or currencies underlying a Fund's futures
position and the securities or currencies held by or to be purchased for a Fund.
Keystone will attempt to minimize these risks through careful selection and
monitoring of the Fund's futures and options positions.
The Funds do not intend to use futures transactions for speculation or
leverage. Each Fund has the ability to write options on futures, but intends to
write such options only to close out options purchased by a Fund. The Funds will
not change these policies without supplementing the information in the Trust's
prospectus and statement of additional information.
FOREIGN CURRENCY TRANSACTIONS
As discussed above, each Fund may invest in securities of foreign issuers.
When a Fund invests in foreign securities they usually will be denominated in
foreign currencies, and the Fund temporarily may hold funds in foreign
currencies. Thus, the value of Fund shares will be affected by changes in
exchange rates.
As one way of managing exchange rate risk, in addition to entering into
currency futures contracts, a Fund may enter into forward currency exchange
contracts (agreements to purchase or sell currencies at a specified price and
date). The exchange rate for the transaction (the amount of currency a Fund will
deliver or receive when the contract is completed) is fixed when a Fund enters
into the contract. A Fund usually will enter into these contracts to stabilize
the U.S. dollar value of a security it has agreed to buy or sell. Each Fund
intends to use these contracts to hedge the U.S. dollar value of a security it
already owns, particularly if a Fund expects a decrease in the value of the
currency in which the foreign security is denominated. Although a Fund will
attempt to benefit from using forward contracts, the success of its hedging
strategy will depend on Keystone's ability to predict accurately the future
exchange rates between foreign currencies and the U.S. dollar. The value of a
Fund's investments denominated in foreign currencies will depend on the relative
strength of those currencies and the U.S. dollar, and a Fund may be affected
favorably or unfavorably by changes in the exchange rates or exchange control
regulations between foreign currencies and the dollar. Changes in foreign
currency exchange rates also may affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by a Fund. Each Fund
may also purchase and sell options related to foreign currencies in connection
with hedging strategies.
INVERSE FLOATING RATE SECURITIES. If permitted by its investment policies, a
Fund may also invest in securities with rates that move inversely to market
rates ("inverse floaters"). An inverse floater bears an interest rate that
resets in the opposite direction of the change in a specified interest rate
index. As market interest rates rise, the interest rate on the inverse floater
goes down, and vice versa. Inverse floaters tend to exhibit greater price
volatility than fixed-rate bonds of similar maturity and credit quality. The
interest rates on inverse floaters may be significantly reduced, even to zero,
if interest rates rise. Moreover, the secondary market for inverse floaters may
be limited in rising interest rate environments.
VARIABLE, FLOATING AND LEVERAGED INVERSE FLOATING RATE INSTRUMENTS.
Fixed-income securities may have fixed, variable or floating rates of interest.
Variable and floating rate securities pay interest at rates that are adjusted
periodically, according to a specified formula. A "variable" interest rate
adjusts at predetermined intervals (e.g., daily, weekly or monthly), while a
"floating" interest rate adjusts whenever a specified benchmark rate (such as
the bank prime lending rate) changes.
The Fund may invest in fixed-income securities that pay interest at a coupon
rate equal to a base rate, plus additional interest for a certain period of time
if short-term interest rates rise above a predetermined level or "cap." The
amount of such an additional interest payment typically is calculated under a
formula based on a short-term interest rate index multiplied by a designated
factor.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in market value.
STRUCTURED SECURITIES. Structured securities generally represent interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of debt obligations. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of structured securities backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
securities to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions, and the
extent of the payments made with respect to structured securities is dependent
on the extent of the cash flow on the underlying instruments. Because structured
securities typically involve no credit enhancement, their credit risk generally
will be equivalent to that of the underlying instruments. Structured securities
of a given class may be either subordinated or unsubordinated to the right of
payment of another class. Subordinated structured securities typically have
higher yields and present greater risks than unsubordinated structured
securities.
<PAGE>
APPENDIX A
KEYSTONE CALIFORNIA INSURED TAX FREE FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
In the opinion of Messrs. Orrick, Herrington & Sutcliffe, California tax
counsel to the California Fund, assuming that the California Fund qualifies as a
RIC for federal income tax purposes, dividends paid by the California Fund that
are derived from interest on debt obligations that is exempt from California
personal income tax will not be subject to California personal income tax when
received by the California Fund's shareholders. The pass through of
exempt-interest dividends is allowed only if the California Fund meets its
federal and California requirements that at least 50% of its total assets are
invested in such exempt obligations at the end of each quarter of its fiscal
year. Distributions to individual shareholders derived from interest on state or
municipal obligations issued by governmental authorities in states other than
California, short term capital gains and other taxable income will be taxed as
dividends for purposes of California personal income taxation. The Fund's long
term capital gains distributed to shareholders will be taxed as long term
capital gains to individual shareholders of the California Fund for purposes of
California personal income taxation. Present California law taxes both long term
and short term capital gains at the rates applicable to ordinary income.
Generally, for corporate taxpayers subject to the California franchise tax, all
distributions will be fully taxable.
RISK FACTORS AFFECTING CALIFORNIA
Through popular initiative and legislative activity, the ability of the State
and its local governments to raise money through property taxes and other taxes,
fees or charges and to increase spending has been the subject of considerable
debate and change in recent years. Various State Constitutional amendments, for
example, have been adopted that have the effect of limiting increases in
property taxes and other taxes, fees or charges and spending, while legislation
has sometimes added to these limitations and has at other times sought to reduce
their impact. It can be expected that similar types of State legislation or
Constitutional proposals will continue to be introduced. To date, these
developments do not appear to have severely decreased the ability of the State
and local governments to pay principal and interest on their obligations.
Because of the uncertain impact of the aforementioned efforts and legislation,
the possible inconsistencies in the terms of existing statutes, and the
impossibility of predicting the level of future appropriations and applicability
of related statutes to such questions, it is not currently possible to predict
the results of such legislation and policies on the long term ability of State
and municipal issuers to pay principal and interest on their obligations.
California's economy is large and diverse, accounting for over 12% of national
personal income. Growth was rapid in the 1980s and is expected to continue,
although more moderately. California's economy is one of the largest in the
world and the State ranks number one among the fifty states in manufacturing,
foreign trade, agriculture, construction and tourism. Through the 1980s, the
rate of state population growth was more than twice that for the nation, but it
has slowed since 1990.
California suffered a severe economic recession between 1990-1993, largely as
a result of deep federal defense budget cuts, which resulted in broad-based
revenue shortfalls for the State and many local governments. Southern California
was particularly hard-hit. California's fiscal condition has improved as its
economy has been in a sustained recovery since 1994, which is expected to
continue. During the recession, the State substantially reduced local
assistance, and further reductions could adversely affect the financial
condition of cities, counties and other government agencies facing constraints
in their own revenue collections.
An expanded discussion is contained in the statement of additional
information.
<PAGE>
KEYSTONE MISSOURI FUND
DESCRIPTION OF STATE AND LOCAL TAX TREATMENT
In the opinion of Messrs. Bryan Cave LLP, Missouri tax counsel to the Missouri
Fund, dividends paid by the Missouri Fund that qualify as tax
exempt dividends under Section 852(b)(5) of the Code will be exempt from
Missouri income tax to the extent that such dividends are derived from interest
on obligations issued by the State of Missouri or any of its political
subdivisions, or interest on obligations of the U.S. and its territories and
possessions to the extent exempt from Missouri income taxes under the laws of
the U.S.
Dividends paid by the Missouri Fund, if any, that do not qualify as
tax exempt dividends under Section 852(b)(5) of the Code, will be exempt from
Missouri income tax only to the extent that such dividends are derived from
interest on certain U.S. obligations that the State of Missouri is expressly
prohibited from taxing under the laws of the U.S. The portion of such dividends
that is not subject to taxation by the State of Missouri may be reduced by
interest, or other expenses, in excess of $500 paid or incurred by a shareholder
in any taxable year to purchase or carry shares of the Missouri Fund or
other investments producing income that is includable in federal gross income,
but exempt from Missouri income tax.
Dividends and distributions derived from the Missouri Fund's other
investment income and its capital gains, to the extent includable in Federal
adjusted gross income, will be subject to Missouri income tax. Dividends and
distributions paid by the Missouri Fund, including dividends that are
exempt from Missouri income tax as described above, may be subject to state
taxes in states other than Missouri or to local taxes. Shares in the Missouri
Fund are not subject to Missouri personal property taxes.
SPECIAL FACTORS AFFECTING MISSOURI
Missouri's economic base is diversified and includes agriculture, commerce,
manufacturing, services, trade and mining. The State's proximity to the
geographical and population centers of the nation makes the State an attractive
location for business and industry. The State has experienced a significant
increase in tourism.
In recent years, Missouri's wealth indicators have grown at a rate below the
1980s. The State's per capita personal income has been growing at a somewhat
slower rate than the nation as a whole. Missouri's unemployment levels have
equaled or exceeded the national average in recent years. Defense contracts are
important to the State's economy and adverse changes in military appropriations
could contribute to the continuation of this pattern.
The State operates from a General Revenue Fund. The General Fund includes
funds received from tax revenues and federal grants. The Missouri Constitution
imposes a limit on the amount of taxes that may be imposed by the General
Assembly during any fiscal year. No assurances can be given that the amount of
revenue derived from taxes will remain at its current level or that the amount
of federal grants previously provided to the State will continue.
An expanded discussion is contained in the statement of additional
information.
<PAGE>
APPENDIX B
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or organizations
purchasing Class A shares of a Fund alone or in combination with Class A
shares of other Keystone America Funds. Only Class A shares subject to an
initial or deferred sales charge are eligible for inclusion in reduced sales
charge programs.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or Letters of Intent, the term "Purchaser"
includes the following persons: an individual; an individual, his or her spouse
and children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501 (c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan whether or not qualified under Section 401 of the Internal Revenue Code; or
other organized groups of persons, whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
CONCURRENT PURCHASES
For purposes of qualifying for a reduced sales charge, a Purchaser may combine
concurrent direct purchases of Class A shares of two or more of the "Eligible
Funds," as defined below. For example, if a Purchaser concurrently invested
$75,000 in one of the other "Eligible Funds" and $75,000 in a Fund, the sales
charge would be that applicable to a $150,000 purchase, i.e., 3.75% of the
offering price, as indicated in the Sales Charge Schedule in the prospectus.
RIGHT OF ACCUMULATION
In calculating the sales charge applicable to current purchases of a Fund's
Class A shares, a Purchaser is entitled to accumulate current purchases with the
current value of previously purchased Class A shares of a Fund and Class A
shares of certain other eligible funds that are still held in (or exchanged for
shares of and are still held in) the same or another eligible fund ("Eligible
Fund(s)"). The Eligible Funds are the Keystone America Funds and Keystone Liquid
Trust.
For example, if a Purchaser held shares valued at $99,999 and purchased an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75% of the offering price as indicated in the Sales
Charge schedule. EKSC must be notified at the time of purchase that the
Purchaser is entitled to a reduced sales charge, which reduction will be granted
subject to confirmation of the Purchaser's holdings. The Right of Accumulation
may be modified or discontinued at any time.
LETTER OF INTENT
A Purchaser may qualify for a reduced sales charge on a purchase of Class A
shares of the Fund alone or in combination with purchases of Class A shares of
any of the other Eligible Funds by completing the Letter of Intent section of
the application. By so doing, the Purchaser agrees to invest within a
thirteen-month period a specified amount which, if invested at one time, would
qualify for a reduced sales charge. Each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
on the application, as described in this prospectus. The Letter of Intent does
not obligate the Purchaser to purchase, nor the Fund to sell, the amount
indicated.
After the Letter of Intent is received by EKSC, each investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the application. The Letter of Intent may be back-dated up to ninety days so
that any investments made in any of the Eligible Funds during the preceding
ninety-day period, valued at the Purchaser's cost, can be applied toward
fulfillment of the Letter of Intent. However, there will be no refund of sales
charges already paid during the ninety-day period. No retroactive adjustment
will be made if purchases exceed the amount specified in the Letter of Intent.
Income and capital gains distributions taken in additional shares will not apply
toward completion of the Letter of Intent.
If total purchases made pursuant to the Letter of Intent are less than the
amount specified, the Purchaser will be required to remit an amount equal to the
difference between the sales charge paid and the sales charge applicable to
purchases actually made. Out of the initial purchase (or subsequent purchases,
if necessary) 5% of the dollar amount specified on the application will be held
in escrow by EKSC in the form of shares registered in the Purchaser's name. The
escrowed shares will not be available for redemption, transfer or encumbrance by
the Purchaser until the Letter of Intent is completed or the higher sales charge
paid. All income and capital gains distributions on escrowed shares will be paid
to the Purchaser or his order.
When the minimum investment specified in the Letter of Intent is completed
(either prior to or by the end of the thirteen-month period), the Purchaser will
be notified and the escrowed shares will be released. If the intended investment
is not completed, the Purchaser will be asked to remit to the Principal
Underwriter any difference between the sales charge on the amount specified and
on the amount actually attained. If the Purchaser does not within 20 days after
written request by the Principal Underwriter or his dealer pay such difference
in sales charge, EKSC will redeem an appropriate number of the escrowed shares
in order to realize such difference. Shares remaining after any such redemption
will be released by EKSC. Any redemptions made by the Purchaser during the
thirteen-month period will be subtracted from the amount of the purchases for
purposes of determining whether the Letter of Intent has been completed. In the
event of a total redemption of the account prior to completion of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption and the balance will be forwarded to the Purchaser.
By signing the application, the Purchaser irrevocably constitutes and appoints
EKSC his attorney to surrender for redemption any or all escrowed shares with
full power of substitution.
The Purchaser or his dealer must inform the Principal Underwriter or EKSC that
a Letter of Intent is in effect each time a purchase is made.
<PAGE>
---------------------------------------
KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
---------------------------------------
- ---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
- ---------------------------------
Evergreen Keystone Distributor, Inc.
125 West 55th Street
New York, New York 10019
MOTFF-P 3/97
6M
540099 [recycle logo]
---------------------------------------
KEYSTONE
[graphic omitted]
MISSOURI
TAX FREE FUND
---------------------------------------
---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
---------------------------------
PROSPECTUS AND
APPLICATION
<PAGE>
---------------------------------------
KEYSTONE AMERICA
FUND FAMILY
()
Balanced Fund II
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Global Resources and Development Fund
Small Company Growth Fund II
---------------------------------------
- ---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
- ---------------------------------
Evergreen Keystone Distributor, Inc.
125 West 55th Street
New York, New York 10019
CATFF-P 3/97
6M
540096 [recycle logo]
---------------------------------------
KEYSTONE
[graphic omitted]
CALIFORNIA
TAX FREE FUND
---------------------------------------
---------------------------------
Evergreen Keystone
[logo] FUNDS [logo]
---------------------------------
PROSPECTUS AND
APPLICATION
<PAGE>
KEYSTONE STATE TAX FREE FUND - SERIES II
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
KEYSTONE STATE TAX FREE FUND - SERIES II
STATEMENT OF ADDITIONAL INFORMATION
MARCH 31, 1997
This statement of additional information ("SAI") is not a prospectus,
but relates to, and should be read in conjunction with, the prospectus of
Keystone State Tax Free Fund - Series II (the "Trust") dated March 31, 1997. You
may obtain a copy of the prospectus from the Fund's principal underwriter,
Evergreen Keystone Distributor, Inc. (formerly Evergreen Funds Distributor,
Inc.), or your broker-dealer. See "Service Providers" below.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
The Trust And Its Funds................................................2
Service Providers......................................................2
Investment Policies....................................................3
Investment Restrictions................................................5
Valuation And Redemption of Securities.................................7
Shareholder Services...................................................8
Brokerage..............................................................8
Sales Charges.........................................................10
Distribution Plans....................................................13
Trustees And Officers.................................................16
Investment Adviser....................................................19
Principal Underwriter.................................................21
Sub-administrator.....................................................22
Declaration of Trust..................................................22
Expenses .............................................................24
Standardized Total Return and Yield Quotations........................26
Financial Statements..................................................28
Additional Information................................................29
Appendix A...........................................................A-1
Appendix B...........................................................B-1
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THE TRUST AND ITS FUNDS
- --------------------------------------------------------------------------------
The Trust is an open-end management investment company commonly known
as a mutual fund. The Trust was formed as a Massachusetts business trust on
December 15, 1993. The Trust currently consists of two nondiversified separate
series evidencing interests in different portfolios of securities: Keystone
California Tax Free Fund ("California Fund") and Keystone Missouri Tax Free Fund
("Missouri Fund") (each a "Fund" and collectively, the "Funds.")
Essential information about the Trust and its Funds is contained in its
prospectus. This statement of additional information provides additional
information about the Trust and its Funds that may be of interest to some
investors.
For special factors affecting each Fund, see Appendix A to this
statement of additional information.
- --------------------------------------------------------------------------------
SERVICE PROVIDERS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Service Provider
- ----------------------------------------- -------------------------------------------------------
<S> <C>
Investment adviser (referred to Keystone Investment Management Company, 200 Berkeley
in this SAI as "Keystone") Street, Boston, Massachusetts 02116. (Keystone is a
wholly-owned subsidiary of First Union Keystone, Inc.,
("First Union Keystone") (formerly, Keystone Investments,
Inc.) also located at 200 Berkeley Street, Boston,
Massachusetts 02116.)
Principal underwriter ( referred Evergreen Keystone Distributor, Inc. (formerly Evergreen
to in this SAI as "EKD") Funds Distributor, Inc.), 125 West 55th Street, New York,
New York 10019.
Marketing services agent and Evergreen Keystone Investment Services, Inc. (formerly
predecessor to EKD (referred to Keystone Investment Distributors Company), 200 Berkeley
in this SAI as "EKIS") Street, Boston, Massachusetts 02116.
Sub-administrator (referred to in The BISYS Group, Inc., 3435 Stelzer Road, Columbus, Ohio
this SAI as "BISYS") 43219.
Transfer and dividend Evergreen Keystone Service Company, 200 Berkeley
disbursing agent (referred to in Street, Boston, Massachusetts 02116. (EKSC is a wholly-
this SAI as "EKSC") owned subsidiary of Keystone.)
Independent auditors KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110, Certified Public Accountants.
Custodian State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT POLICIES
- -------------------------------------------------------------------------------
Each Fund invests primarily in municipal obligations that are exempt
from federal income tax and are also exempt from certain specified taxes in the
state for which it is named. In addition, the Funds invest in certain other
securities as described below.
MUNICIPAL OBLIGATIONS
Municipal obligations include debt obligations issued by or on behalf
of a state, a territory or a possession of the United States ("U.S."), the
District of Columbia or any political subdivision, agency or instrumentality
thereof (for example, counties, cities, towns, villages, districts, authorities)
to obtain funds for various public purposes, including the construction of a
wide range of public facilities such as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which municipal obligations may be issued include the
refunding of outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to lend to public or private institutions for the
construction of facilities, such as educational, hospital and housing
facilities. In addition, certain types of industrial development bonds have been
or may be issued by or on behalf of public authorities to finance certain
privately-operated facilities, and certain local facilities for water supply,
gas, electricity or sewage or solid waste disposal. Such obligations are
included within the term municipal obligations if the interest paid thereon
qualifies as fully exempt from federal income tax. The income of certain types
of industrial development bonds used to finance certain privately-operated
facilities (qualified private activity bonds) issued after August 7, 1986, while
exempt from federal income tax, is includable for the purposes of the
calculation of the alternative minimum tax. Other types of industrial
development bonds, the proceeds from which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities, may constitute municipal obligations, although the current federal
tax laws place substantial limitations on the size of such issues.
The two principal classifications of municipal obligations are "general
obligation" and limited obligation or "revenue" bonds. General obligation bonds
are obligations involving the credit of an issuer possessing taxing power and
are payable from the issuer's general unrestricted revenues and not from any
particular fund or revenue source. Their payment may be dependent upon an
appropriation by the issuer's legislative body and may be subject to
quantitative limitations on the issuer's taxing power. The characteristics and
methods of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer. Limited obligation or revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, such as the user of the facility. Industrial
development bonds that are municipal obligations are, in most cases, revenue
bonds and generally are not payable from the unrestricted revenues of the
issuer. The credit quality of industrial development revenue bonds is usually
directly related to the credit standing of the owner or user of the facilities.
There are, of course, variations in the security of municipal obligations, both
within a particular classification and between classifications, depending on
numerous factors.
The yields on municipal obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the municipal obligations market, the size of
a particular offering, and the maturity of the obligation and rating of the
issue. The ratings of Standard & Poor's Corporation ("S&P"), Moody's Investors
Service ("Moody's"), and Fitch Investor Services, Inc. - Municipal Division
("Fitch"), as described herein and in the prospectus, represent their opinions
as to the quality of the municipal obligations that they undertake to rate. It
should be emphasized, however, that ratings are general and not absolute
standards of quality. Consequently, municipal obligations with the same
maturity, interest rate and rating may have different yields while municipal
obligations of the same maturity and interest rate with different ratings may
have the same yield. It should also be noted that the standards of disclosure
applicable to and the amount of information relating to the financial condition
of issuers of municipal obligations are not generally as extensive as those
generally relating to corporations.
Subsequent to its purchase by a Fund, an issue of municipal obligations
or other investment may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but Keystone will
consider such an event in its determination of whether the Fund should continue
to hold such obligation in its portfolio.
The ability of each Fund to achieve its investment objective is
dependent upon the continuing ability of issuers of municipal obligations to
meet their obligations to pay interest and principal when due. Obligations of
issuers of municipal obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the federal Bankruptcy Act, and laws, if any, that may be enacted by Congress
or state legislatures extending the time for payment of principal or interest,
or both, or imposing other constraints upon enforcement of such obligations.
There is also the possibility that as a result of litigation or other
conditions, the power or ability of any one or more issuers to pay, when due,
principal of and interest on its or their municipal obligations may be
materially affected. In addition, the market for municipal obligations is often
thin and can be temporarily affected by large purchases and sales, including
those by a Fund.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations, and similar proposals may well be introduced
in the future. The enactment of such a proposal could materially affect the
availability of municipal obligations for investment by the Funds and the value
of the Funds' portfolios. In which event the Trust would reevaluate the
investment objectives and policies of its Funds and consider changes in the
structure of the Funds or dissolution.
The Tax Reform Act of 1986 made significant changes in the federal tax
status of certain obligations that were previously fully federally tax-exempt.
As a result, three categories of such obligations issued after August 7, 1986
now exist: (1) "public purpose" bonds, the income from which remains fully
exempt from federal income tax; (2) qualified "private activity" industrial
development bonds, the income from which, while exempt from federal income tax
under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code")
is includable in the calculation of the federal alternative minimum tax; and (3)
"private activity" (private purpose) bonds, the income from which is not exempt
from federal income tax. A Fund will not invest in private purpose bonds and,
except as described under "Other Eligible Investments," will not invest in
qualified "private activity" industrial development bonds whose distributions
are subject to the alternative minimum tax.
OTHER ELIGIBLE INVESTMENTS
A Fund may invest up to 20% of its assets under ordinary circumstances
and up to 100% of its assets for temporary defensive purposes in the following
types of instruments: (1) commercial paper, including master demand notes, that
at the date of investment is rated A-1 (the highest grade by S&P), Prime-1 (the
highest grade by Moody's) or, if not rated by such services, is issued by a
company that at the date of investment has an outstanding issue rated A or
better by S&P or Moody's; (2) obligations, including certificates of deposit and
bankers' acceptances, of banks or savings and loan associations that have at
least $1 billion in assets as of the date of their most recently published
financial statements that are members of the Federal Deposit Insurance
Corporation, including U.S. branches of foreign banks and foreign branches of
U.S. banks; (3) corporate obligations (maturing in 13 months or less) that at
the date of investment are rated A or better by S&P or Moody's; (4) obligations
issued or guaranteed by the U.S. government or by any agency or instrumentality
of the U.S.; (5) qualified "private activity" industrial development bonds, the
income from which, while exempt from federal income tax under Section 103 of the
Code, is includable in the calculation of the federal alternative minimum tax;
and (6) municipal obligations, the income of which is exempt from federal income
tax. Each Fund will assume a temporary defensive position when, for example,
Keystone determines that market conditions so warrant. If a Fund is investing
defensively, it is not pursuing its objective.
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INVESTMENT RESTRICTIONS
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The investment restrictions set forth below are fundamental for each
Fund and may not be changed without the vote of a majority of such Fund's
outstanding shares (as defined in the Investment Company Act of 1940, as amended
(the "1940 Act")). Unless otherwise stated, all references to the assets of a
Fund are in terms of current market value. Each Fund may not do the following:
(1) purchase any security of any issuer (other than issues of the U.S.
government, its agencies or instrumentalities) if as a result more than 25% of
its total assets would be invested in a single industry, including in industrial
development bonds from the same facility or similar types of facilities;
governmental issuers of municipal bonds are not regarded as members of an
industry and a Fund may invest more than 25% of its assets in industrial
development bonds;
(2) invest more than 15% of its assets in securities which may not be
sold or disposed of in the ordinary course of business within seven days at
approximately the value at which a Fund has valued such securities on its books;
(3) invest more than 5% of its total assets in securities of any
company having a record, together with its predecessors, of less than three
years of continuous operation;
(4) pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis, or collateral
arrangement with respect to the writing of options on securities, are not deemed
to be a pledge of assets;
(5) issue senior securities; the purchase or sale of securities on a
"when issued" basis or collateral arrangement with respect to the writing of
options on securities, are not deemed to be the issuance of a senior security;
(6) borrow money or enter into reverse repurchase agreements, except
that a Fund may enter into reverse repurchase agreements or borrow money from
banks for temporary or emergency purposes in aggregate amounts up to one-third
of the value of the Fund's net assets; provided that while borrowings from banks
(not including reverse repurchase agreements) exceed 5% of the Fund's net
assets, any such borrowings will be repaid before additional investments are
made;
(7) purchase securities on margin except that it may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities;
(8) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or of securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short;
(9) make loans, except that a Fund may purchase or hold debt securities
consistent with its investment objectives, lend portfolio securities valued at
not more than 15% of its total assets to broker-dealers and enter into
repurchase agreements;
(10) purchase securities of other investment companies, except as part
of a merger, consolidation, purchase of assets or similar transaction;
(11) purchase or sell commodities or commodity contracts or real
estate, except that it may purchase and sell securities secured by real estate
and securities of companies which invest in real estate, and may engage in
currency or other financial futures contracts and related options transactions;
(12) underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective; and
(13) participate on a joint, or a joint and several, basis in any
trading account in securities; the "bunching" of orders for the sale or purchase
of portfolio securities with other funds advised by Keystone or its affiliates
to reduce brokerage commissions or otherwise to achieve best overall execution
is not considered participation in a trading account in securities.
The Funds are non-diversified under the federal securities laws. As
non-diversified Funds, there is no restriction under the 1940 Act on the
percentage of assets that may be invested at any time in the securities of any
one issuer. The Funds intend to comply, however, with the Code's diversification
requirements and other requirements applicable to "regulated investment
companies" so that they will not be subject to U.S. federal income tax on income
and capital gain distributions to shareholders. For this reason, each Fund has
adopted the additional investment restriction set forth below, which may not be
changed without the approval of shareholders. Specifically, a Fund may not
purchase a security if more than 25% of the Fund's total assets would be
invested in the securities of a single issuer (other than the U.S. government,
its agencies and instrumentalities) or, with respect to 50% of the Fund's total
assets, if more than 5% of such assets would be invested in the securities of a
single issuer (other than the U.S. government, its agencies and
instrumentalities).
As a matter of practice, each Fund treats reverse repurchase agreements
as borrowings for purposes of compliance with the limitations of the 1940 Act.
Reverse repurchase agreements will be taken into account along with borrowings
from banks for purposes of the 5% limit set forth in the sixth fundamental
investment restriction above.
To the extent the Funds are not fully diversified, they may be more
susceptible to adverse economic, political or regulatory developments affecting
a single issuer than would be the case if the Funds were more broadly
diversified.
None of the Funds presently intend to invest more than 25% of total
assets in municipal obligations, the payment of which depends on revenues
derived from a single facility or similar types of facilities. Since certain
municipal obligations may be related in such a way that an economic, business or
political development or change affecting one such security could likewise
affect the other securities, a change in this policy could result in increased
investment risk, but no change is presently contemplated.
For the purposes of the first, third, and twelfth fundamental
investment restrictions set forth above, each Fund will treat (1) each state,
territory and possession of the U.S., the District of Columbia and, if its
assets and revenues are separate from those of the entity or entities creating
it, each political subdivision, agency and instrumentality of any one (or more,
as in the case of a multistate authority or agency) of the foregoing as an
issuer of all securities that are backed primarily by its assets or revenues;
(2) each company as an issuer of all securities that are backed primarily by its
assets or revenues; and (3) each of the foregoing entities as an issuer of all
securities that it guarantees; provided, however, that for the purpose of the
first fundamental investment restriction no entity shall be deemed to be an
issuer of a security that it guarantees so long as no more than 10% of a Fund's
total assets (taken at current value) are invested in securities guaranteed by
the entity and securities of which it is otherwise deemed to be an issuer.
If a percentage limit is satisfied at the time of investment or
borrowing, a later increase or decrease resulting from a change in asset value
is not a violation of the limit.
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VALUATION AND REDEMPTION OF SECURITIES
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Current values for each Fund's portfolio securities may be determined
in the following manner:
(1) Municipal obligations are valued on the basis of valuations
provided by a pricing service approved by the Trust's Board of Trustees, which
uses information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and various relationships
between securities in determining value.
(2) Short-term investments with maturities of sixty days or less when
purchased are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market.
(3) Short-term investments having maturities of more than sixty days
for which market quotations are readily available are valued at current market
value.
(4) Short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day when purchased that are held on the
sixtieth day prior to maturity are valued at amortized cost (market value on the
sixtieth day adjusted for amortization of premium or accretion of discount),
which, when combined with accrued interest, approximates market; and which, in
either case, reflects fair value as determined by the Board of Trustees.
(5) All other investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
according to procedures established by the Board of Trustees.
The Trust believes that reliable market quotations are generally not
readily available for purposes of valuing municipal obligations. As a result,
depending on the particular municipal obligations owned by a Fund, it is likely
that most of the valuations for such obligations will be based upon their fair
value determined under procedures approved by the Board of Trustees. The Board
of Trustees has authorized the use of a pricing service to determine the fair
value of each Fund's municipal obligations and certain other securities.
Non tax-exempt securities for which market quotations are readily
available are valued on a consistent basis at that price quoted that, in the
opinion of the Board of Trustees or the person designated by the Board of
Trustees to make the determination, most nearly represents the market value of
the particular security.
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SHAREHOLDER SERVICES
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REINVESTMENT PRIVILEGE
A shareholder may elect to make a reinvestment purchase with any part
of the proceeds of a total or partial redemption of Fund shares. Upon making
such an election, the Trust will waive the applicable sales charge. Such an
election must be made within 30 days of the date of such redemption and the
purchase must be of shares of the same Fund. The number of shares credited upon
reinvesting will be based on the net asset value of the Fund's shares next
computed following receipt of the proceeds and request for reinvestment. If a
shareholder exercises this reinvestment privilege, any tax loss realized upon
the original sale of Fund shares will not be recognized for federal income tax
purposes. Any capital gains, however, would be recognized for federal income tax
purposes. This reinvestment privilege may be used only once with respect to any
shareholder. For tax reporting purposes, the Trust will treat a redemption and
subsequent reinvestment purchase as separate transactions.
OTHER SERVICES
Please refer to the prospectus for more information on shareholder
services.
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BROKERAGE
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SELECTION OF BROKERS
In effecting transactions in portfolio securities for a Fund, Keystone
seeks the best execution of orders at the most favorable prices. Keystone
determines whether a broker has provided a Fund with best execution and price in
the execution of a securities transaction by evaluating, among other things:
1. overall direct net economic result to such Fund;
2. the efficiency with which the transaction is effected;
3. the broker's ability to effect the transaction where a large
block is involved;
4. the broker's readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information.
The Funds' management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should a Fund or Keystone receive research and other statistical and
factual information from a broker, such Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone is required to perform
under the Advisory Agreement (as defined below). Keystone believes that the
cost, value and specific application of such information are indeterminable and
cannot be practically allocated between a Fund and its other clients who may
indirectly benefit from the availability of such information. Similarly, a Fund
may indirectly benefit from information made available as a result of
transactions effected for Keystone's other clients. Under the Advisory
Agreement, Keystone is permitted to pay higher brokerage commissions for
brokerage and research services in accordance with Section 28(e) of the
Securities Exchange Act of 1934. In the event Keystone follows such a practice,
it will do so on a basis that is fair and equitable to the Funds.
Neither any Fund nor Keystone intends on placing securities
transactions with any particular broker. The Trust's Board of Trustees has
determined, however, that a Fund may consider sales of such Fund's shares as a
factor in the selection of brokers to execute portfolio transactions, subject to
the requirements of best execution described above.
BROKERAGE COMMISSIONS
The Trust expects that purchases and sales of municipal obligations and
temporary instruments usually will be principal transactions. Municipal
obligations and temporary instruments are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. There usually
will be no brokerage commissions paid by a Fund for such purchases. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark up
or reflect a dealer's mark down. Where transactions are made in the
over-the-counter market, each Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase
prices, a Fund may participate, if and when practicable, in group bidding for
the direct purchase from an issuer of certain securities.
Keystone makes investment decisions for each Fund independently from
those of its other clients. It may frequently develop, however, that Keystone
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, Keystone will allocate
the transactions according to a formula that is equitable to each of its
clients. Although, in some cases, this system could have a detrimental effect on
the price or volume of a Fund's securities, the Trust believes that in other
cases its ability to participate in volume transactions will produce better
executions.
A Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, EKD, or any of their affiliated persons, as defined in
the 1940 Act.
The Board of Trustees will, from time to time, review the Trust's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the Board
of Trustees may change, modify or eliminate any of the foregoing practices.
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SALES CHARGES
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Each Fund offers three classes of shares that differ primarily with
respect to sales charges and distribution fees. As described below, depending
upon the class of shares that you purchase, a Fund will impose a sales charge
when you purchase Fund shares, a contingent deferred sales charge (a "CDSC")
when you redeem Fund shares or no sales charges at all. A Fund charges a CDSC as
reimbursement for certain expenses, such as commissions or shareholder servicing
fees, that it has incurred in connection with the sale of its shares (see
"Distribution Plans"). If imposed, a Fund deducts CDSCs from the redemption
proceeds you would otherwise receive. CDSCs attributable to your shares are, to
the extent permitted by the National Association of Securities Dealers, Inc.
(the "NASD"), paid to the Principal Underwriter or its predecessor. See the
prospectus for additional information on a particular class.
CLASS DISTINCTIONS
CLASS A SHARES
With certain exceptions, when you purchase Class A shares after January
1, 1997, you will pay a maximum sales charge of 4.75%, payable at the time of
purchase. (The prospectus contains a complete table of applicable sales charges
and a discussion of sales charge reductions or waivers that may apply to
purchases.) If you purchase Class A shares in the amount of $1 million or more,
without an initial sales charge, the Fund will charge a CDSC of 1.00% if you
redeem during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
CLASS B SHARES
Each Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares purchased after January 1, 1997,
each Fund charges a CDSC on shares redeemed as follows:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase...................5.00%
Second twelve-month
period following the month of purchase...................4.00%
Third twelve-month
period following the month of purchase...................3.00%
Fourth twelve-month
period following the month of purchase...................3.00%
Fifth twelve-month
period following the month of purchase...................2.00%
Sixth twelve-month
period following the month of purchase...................1.00%
Thereafter....................................................0.00%
Class B shares purchased after January 1, 1997, that have been
outstanding for seven years after the month of purchase, will automatically
convert to Class A shares without imposition of a front-end sales charge or
exchange fee. Conversion of Class B shares represented by stock certificates
will require the return of the stock certificate to EKSC, the Trust's transfer
and dividend disbursing agent. See "Calculation of Contingent Deferred Sales
Charge" below.
CLASS C SHARES
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with EKD. Each Fund offers Class C
shares at net asset value (without an initial sales charge). With certain
exceptions, however, a Fund will charge a CDSC of 1.00%, if you redeem shares
purchased after January 1, 1997, during the month of your purchase and the
12-month period following the month of your purchase. See "Calculation of
Contingent Deferred Sales Charge" below.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (1) the net asset value of the shares
redeemed or (2) the net cost of such shares. Upon request for redemption, a Fund
will redeem shares not subject to the CDSC first. Thereafter, a Fund will redeem
shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
EXCHANGES
A Fund does not charge a CDSC when you exchange your shares for the
shares of the same class of another Keystone America Fund (see "Additional
Information" for descriptions of the Keystone America Funds). However, if you
are exchanging shares that are still subject to a CDSC, the CDSC will carry over
to the shares you acquire by the exchange. Moreover, a Fund will compute any
future CDSC based upon the date you originally purchased the shares you tendered
for exchange.
WAIVER OF SALES CHARGES
The Fund may sell its shares at net asset value without an initial
sales charge to:
1. an investor purchasing shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax sheltered
annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan") or a TSA plan sponsored by a
public educational entity having 5,000 or more eligible employees (an
"Educational TSA Plan");
3. institutional investors, which may include bank trust departments and
registered investment advisers;
4. investment advisers, consultants or financial planners who place trades
for their own accounts or the accounts of their clients and who charge
such clients a management, consulting, advisory or other fee;
5. clients of investment advisers or financial planners who place trades
for their own accounts if the accounts are linked to the master account
of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased;
6. institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans,
which place trades through an omnibus account maintained with the Fund
by the broker-dealer;
7. employees of First Union National Bank of North Carolina ("FUNB") and
its affiliates, EKD and any broker-dealer with whom EKD has entered
into an agreement to sell shares of the Fund, and members of the
immediate families of such employees, will be at net asset value
without the imposition of a front-end sales charge;
8. certain Directors, Trustees, officers employees of the Fund, Keystone,
EKD or their affiliates and to the immediate families of such persons;
or
9. a bank or trust company in a single account in the name of such bank or
trust company as trustee if the initial investment in shares of the
Fund or any fund in the Keystone Investments Families of Funds
purchased pursuant to this waiver is at least $500,000 and any
commission paid at the time of such purchase is not more than 1% of the
amount invested.
With respect to items 8 and 9 above, the Fund will only sell shares to
these parties upon the purchasers written assurance that he or she is buying the
shares for investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. In addition, the Fund will not
charge a CDSC on redemptions by such purchasers.
WAIVER OF CDSCS
With respect to shares purchased after January 1, 1997, the Fund does
not impose a CDSC when the shares you are redeeming represent:
1. an increase in the value of the shares you redeem above the net cost of
such shares;
2. certain shares for which the Fund did not pay a commission on issuance,
including shares acquired through reinvestment of dividend income and
capital gains distributions;
3. shares that are in the accounts of a shareholder who has died or become
disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit plan
qualified under the Employee Retirement Income Security Act of 1974
("ERISA");
5. automatic withdrawals from the ERISA plan of a shareholder who is a
least 59 1/2 years old;
6. shares in an account that we have closed because the account has an
aggregate net asset value of less than $1,000;
7. automatic withdrawals under an Systematic Income Plan of up to 1.0% per
month of your initial account balance;
8. withdrawals consisting of loan proceeds to a retirement plan
participant;
9. financial hardship withdrawals made by a retirement plan participant;
10. withdrawals consisting of returns of excess contributions or excess
deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan that
purchased Class C shares (this waiver is not available in the event a
Qualifying Plan, as a whole, redeems substantially all of its assets).
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DISTRIBUTION PLANS
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Rule 12b-1 under the 1940 Act permits investment companies, such as the
Funds, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").
The Funds' Class A, B and C Distribution Plans have been approved by
the Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Distribution Plans or any agreement
related thereto (the "Independent Trustees").
The NASD limits the amount that a Fund may pay annually in distribution
costs for sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1.00% of the aggregate average daily net asset value of
its shares, of which 0.75% may be used to pay such distribution costs and 0.25%
may be used to pay shareholder service fees. The NASD also limits the aggregate
amount that a Fund may pay for such distribution costs to 6.25% of gross share
sales since the inception of the Distribution Plan, plus interest at the prime
rate plus 1% on such amounts (less any CDSCs paid by shareholders to the
Principal Underwriter) remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that a Fund may expend daily
amounts at an annual rate, which is currently limited to 0.15% of such Fund's
average daily net asset value attributable to Class A shares, to finance any
activity that is primarily intended to result in the sale of Class A shares,
including, without limitation, expenditures consisting of payments to EKD to
enable EKD to pay or to have paid to others who sell Class A shares a service or
other fee, at any such intervals as EKD may determine, in respect of Class A
shares maintained by any such recipient and outstanding on the books of such
Fund for specified periods.
Amounts paid by a Fund under the Class A Distribution Plan are
currently used to pay others, such as broker-dealers, service fees at an annual
rate of up to 0.15% of the average net asset value of Class A shares maintained
by such others and outstanding on the books of such Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Class B Distribution Plans provide that a Fund may expend daily
amounts at an annual rate of up to 1.00% (currently limited to 0.90%) of such
Fund's average daily net asset value attributable to Class B shares to finance
any activity that is primarily intended to result in the sale of Class B shares,
including, without limitation, expenditures consisting of payments to EKD and/or
its predecessor. Payments are made to EKD (1) to enable EKD to pay to others
(broker-dealers) commissions in respect of Class B shares sold since inception
of a Distribution Plan; (2) to enable EKD to pay or to have paid to others a
service fee, at such intervals as EKD may determine, in respect of Class B
shares maintained by any such recipient and outstanding on the books of such
Fund for specified periods; and (3) as interest.
EKD generally reallows to broker-dealers or others a commission equal
to 4.00% of the price paid for each Class B share sold. The broker-dealer or
other party may also receive service fees at an annual rate of 0.15% of the
average daily net asset value of such Class B share maintained by the recipient
and outstanding on the books of a Fund for specified periods.
EKD intends, but is not obligated, to continue to pay or accrue
distribution charges incurred in connection with the Class B Distribution Plans
that exceed current annual payments permitted to be received by EKD from a Fund
("Advances"). EKD intends to seek full reimbursement of such Advances from such
Fund (together with annual interest thereon at the prime rate plus 1%) at such
time in the future as, and to the extent that, payment thereof by such Fund
would be within the permitted limits. If the Trust's Independent Trustees
authorize such reimbursements of Advances, the effect would be to extend the
period of time during which such Fund incurs the maximum amount of costs allowed
by the Class B Distribution Plans.
In connection with financing its distribution costs, including
commission advances to broker-dealers and others, EKIS, the predecessor to EKD
sold to a financial institution substantially all of its 12b-1 fee collection
rights and CDSC collection rights in respect of Class B shares sold during the
period beginning approximately June 1, 1995 through November 30, 1996. The Trust
has agreed not to reduce the rate of payment of 12b-1 fees in respect of such
Class B shares unless it terminates such shares' Distribution Plans completely.
If it terminates such Distribution Plans, the Funds may be subject to adverse
distribution consequences.
The financing of payments made by EKD to compensate broker-dealers or
other persons for distributing shares of the Funds will be provided by FUNB or
its affiliates.
CLASS C DISTRIBUTION PLAN
The Class C Distribution Plan provides that a Fund may expend daily
amounts at an annual rate of up to 1.00% (currently limited to 0.90%) of such
Fund's average daily net asset value attributable to Class C shares to finance
any activity that is primarily intended to result in the sale of Class C shares,
including, without limitation, expenditures consisting of payments to EKD and/or
its predecessor. Payments are made to EKD (1) to enable EKD to pay to others
(broker-dealers) commissions in respect of Class C shares sold since inception
of the Distribution Plan; (2) to enable EKD to pay or to have paid to others a
service fee, at such intervals as EKD may determine, in respect of Class C
shares maintained by any such recipient and outstanding on the books of such
Fund for specified periods; and (3) as interest.
EKD generally reallows to broker-dealers or others a commission in the
amount of 0.75% of the price paid for each Class C share sold plus the first
year's service fee in advance in the amount of 0.25% of the price paid for each
Class C share sold. Beginning approximately fifteen months after purchase,
broker-dealers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25%,
respectively, of the average daily net asset value of each Class C share
maintained by the recipient and outstanding on the books of a Fund for specified
periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by a Fund under the foregoing arrangements may
not exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by a Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
Each of the Distribution Plans may be terminated at any time by a vote
of the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, the Principal Underwriter and EKIS will ask the Independent
Trustees to take whatever action they deem appropriate under the circumstances
with respect to payment of such Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of a Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by votes of
the majority of both (1) the Trust's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the Trust will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The Independent Trustees of the Trust have determined that the sales of
the Funds' shares resulting from payments under the Distribution Plans have
benefited the respective Fund.
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
Trustees and officers of the Trust, their principal occupations and
some of their affiliations over the last five years are as follows:
FREDERICK AMLING: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Professor, Finance Department, George Washington
University; President, Amling & Company (investment
advice); and former Member, Board of Advisers,
Credito Emilano (banking).
LAURENCE B. ASHKIN: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds other than Evergreen
Investment Trust; real estate developer and
construction consultant; and President of Centrum
Equities and Centrum Properties, Inc.
CHARLES A. AUSTIN III: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Investment Counselor to Appleton Partners, Inc.; and
former Managing Director, Seaward Management
Corporation (investment advice).
*FOSTER BAM:
Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds other than Evergreen
Investment Trust; Partner in the law firm of
Cummings & Lockwood; Director, Symmetrix, Inc.
(sulphur company) and Pet Practice, Inc. (veterinary
services); and former Director, Chartwell Group Ltd.
(Manufacturer of office furnishings and
accessories), Waste Disposal Equipment Acquisition
Corporation and Rehabilitation Corporation of
America (rehabilitation hospitals).
*GEORGE S. BISSELL: Chairman of the Board, Chief Executive Officer and
Trustee of the Fund; Chairman of the Board, Chief
Executive Officer and Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman of the Board and Trustee of Anatolia
College; Trustee of University Hospital (and
Chairman of its Investment Committee); former
Director and Chairman of the Board of Hartwell
Keystone; and former Chairman of the Board, Director
and Chief Executive Officer of Keystone Investments,
Inc.
EDWIN D. CAMPBELL: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Principal, Padanaram Associates, Inc.; and former
Executive Director, Coalition of Essential Schools,
Brown University.
CHARLES F. CHAPIN: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds; and
former Director, Peoples Bank (Charlotte, NC).
K. DUN GIFFORD: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee, Treasurer and Chairman of the Finance
Committee, Cambridge College; Chairman Emeritus and
Director, American Institute of Food and Wine;
Chairman and President, Oldways Preservation and
Exchange Trust (education); former Chairman of the
Board, Director, and Executive Vice President, The
London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive
Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Associates
(environmental consulting); and former Director,
Keystone Investments, Inc. and Keystone.
JAMES S. HOWELL: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman and Trustee or Director of all the funds in
the Evergreen Family of Funds; former Chairman of
the Distribution Foundation for the Carolinas; and
former Vice President of Lance Inc. (food
manufacturing).
LEROY KEITH, JR.: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman of the Board and Chief Executive Officer,
Carson Products Company; Director of Phoenix Total
Return Fund and Equifax, Inc.; Trustee of Phoenix
Series Fund, Phoenix Multi-Portfolio Fund, and The
Phoenix Big Edge Series Fund; and former President,
Morehouse College.
F. RAY KEYSER, JR.: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman and Of Counsel, Keyser, Crowley & Meub,
P.C.; Member, Governor's (VT) Council of Eco nomic
Advisers; Chairman of the Board and Director,
Central Vermont Public Service Corporation and Lahey
Hitchcock Clinic; Director, Vermont Yankee Nuclear
Power Corporation, Grand Trunk Corporation, Grand
Trunk Western Railroad, Union Mutual Fire Insurance
Company, New England Guaranty Insurance Company,
Inc., and the Investment Company Institute; former
Director and President, Associated Industries of
Vermont; former Director of Keystone, Central
Vermont Railway, Inc., S.K.I. Ltd., and Arrow
Financial Corp.; and former Director and Chairman of
the Board, Proctor Bank and Green Mountain Bank.
GERALD M. MCDONNELL: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; and Sales Representative
with Nucor-Yamoto, Inc. (Steel producer).
THOMAS L. MCVERRY: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; former Vice President and
Director of Rexham Corporation; and former Director
of Carolina Cooperative Federal Credit Union.
*WILLIAM WALT PETTIT: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; and Partner in the law
firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds; Vice
Chair and former Executive Vice President, DHR
International, Inc. (executive recruitment); former
Senior Vice President, Boyden International Inc.
(executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
RUSSELL A. SALTON, III MD: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; Medical Director, U.S.
Health Care/Aetna Health Services; and former
Managed Health Care Consultant; former President,
Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Trustee or Director of all the funds in the
Evergreen Family of Funds; and Attorney, Law Offices
of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Chairman, Environmental Warranty, Inc. (insurance
agency); Executive Consultant, Drake Beam Morin,
Inc. (executive outplacement); Director of Connect
icut Natural Gas Corporation, Hartford Hospital, Old
State House Association, Middlesex Mutual Assurance
Company, and Enhance Financial Services, Inc.;
Chairman, Board of Trustees, Hartford Graduate
Center; Trustee, Greater Hartford YMCA; former
Director, Vice Chairman and Chief Investment
Officer, The Travelers Corporation; former Trustee,
Kingswood-Oxford School; and former Managing
Director and Consultant, Russell Miller, Inc.
ANDREW J. SIMONS: Trustee of the Fund; Trustee or Director of all
other funds in the Keystone Families of Funds;
Partner, Farrell, Fritz, Caemmerer, Cleary, Barnosky
& Armentano, P.C.; Adjunct Professor of Law and
former Associate Dean, St. John's University School
of Law; Adjunct Professor of Law, Touro College
School of Law; and former President, Nassau County
Bar Association.
JOHN J. PILEGGI: President and Treasurer of the Fund; President and
Treasurer of all other funds in the Keystone
Families of Funds; President and Treasurer of all
the funds in the Evergreen Family of Funds; Senior
Managing Director, Furman Selz LLC since 1992;
Managing Director from 1984 to 1992; Consultant to
BISYS Fund Services since 1996; 230 Park Avenue,
Suite 910, New York, NY.
GEORGE O. MARTINEZ: Secretary of the Fund; Secretary of all other funds
in the Keystone Families of Funds; Secretary of all
the funds in the Evergreen Family of Funds; Senior
Vice President and Director of Administration and
Regulatory Services, BISYS Fund Services since 1995;
Vice President/Assistant General Counsel, Alliance
Capital Management from 1988-1995; 3435 Stelzer
Road, Columbus, Ohio.
* This Trustee may be considered an "interested person" of the Trust within the
meaning of the 1940 Act.
During the fiscal year ended November 30, 1996, no Trustee or officer
received any direct remuneration from the Trust. Annual retainers and meeting
fees paid by all funds in the Keystone Families of Funds (which includes more
than thirty mutual funds) for the fiscal year ended November 30, 1996 totaled
approximately $411,000. As of February 28, 1997, none of the Trustees or
officers beneficially owned any of the Trust's then outstanding Class A, Class B
and Class C shares, respectively.
Except as set forth above, the address of all of the Trust's Trustees
and the address of the Trust is 200 Berkeley Street, Boston, Massachusetts
02116-5034.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Subject to the general supervision of the Trust's Board of Trustees,
Keystone, located at 200 Berkeley Street, Boston, Massachusetts 02116-5034,
provides investment advice, management and administrative services to each Fund.
Keystone, organized in 1932, is a wholly-owned subsidiary of First Union
Keystone, 200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, the predecessor corporation to First Union
Keystone, Inc. ("Keystone Investments") and indirectly each subsidiary of
Keystone Investments, including Keystone, were acquired (the "Acquisition") by
FUNB, a wholly-owned subsidiary of First Union. The predecessor corporation to
First Union Keystone was acquired by FUNB by merger into a wholly-owned
subsidiary of FUNB, which entity then succeeded to the business of the
predecessor corporation.
Contemporaneously with the Acquisition, each Fund entered into a new
investment advisory agreement with Keystone and into a principal underwriting
agreement with EKD, a wholly-owned subsidiary of BYSIS. The new investment
advisory agreement (the "Advisory Agreement") was approved by the shareholders
of each Fund on December 9, 1996, and became effective on December 11, 1996.
First Union Keystone and each of its subsidiaries, including Keystone,
are now indirectly owned by First Union. First Union is headquartered in
Charlotte, North Carolina, and had $140 billion in consolidated assets as of
December 31, 1996. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Capital Management Group of FUNB and Evergreen Asset Management Corp.,
wholly-owned subsidiaries of FUNB, manage or otherwise oversee the investment of
over $60 billion in assets as of December 31, 1996, belonging to a wide range of
clients, including the Evergreen Family of Funds.
Pursuant to the Advisory Agreement and subject to the supervision of
the Trust's Board of Trustees, Keystone furnishes to each Fund investment
advisory, management and administrative services, office facilities, and
equipment in connection with its services for managing the investment and
reinvestment of each Fund's assets. Keystone pays for all of the expenses
incurred in connection with the provision of its services.
Each Fund pays for all charges and expenses, other than those
specifically referred to as being borne by Keystone, including, but not limited
to: (1) custodian charges and expenses; (2) bookkeeping and auditors' charges
and expenses; (3) transfer agent charges and expenses; (4) fees and expenses of
Independent Trustees; (5) brokerage commissions, brokers' fees and expenses; (6)
issue and transfer taxes; (7) costs and expenses under the Distribution Plan;
(8) taxes and trust fees payable to governmental agencies; (9) the cost of share
certificates; (10) fees and expenses of the registration and qualification of
such Fund and its shares with the SEC or under state or other securities laws;
(11) expenses of preparing, printing and mailing prospectuses, statements of
additional information, notices, reports and proxy materials to shareholders of
such Fund; (12) expenses of shareholders' and Trustees' meetings; (13) charges
and expenses of legal counsel for such Fund and for the Independent Trustees of
the Trust on matters relating to such Fund; (14) charges and expenses of filing
annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of such Fund.
Each Fund pays Keystone a fee for its services at the annual rate of:
Management Aggregate Net Asset Value
Fee Of the Shares of the Fund
0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000.
Keystone's fee is computed as of the close of business each business day and
payable monthly.
Under the Advisory Agreement, any liability of Keystone in connection
with rendering services thereunder is limited to situations involving its
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Trust or by a vote of a majority of a
Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of the Advisory Agreement and continuance thereof must be approved by the
vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Trust's Board of
Trustees or by a vote of a majority of outstanding shares. The Advisory
Agreement will terminate automatically upon its "assignment" as that term is
defined in the 1940 Act.
Keystone has voluntarily limited the expenses of Class A shares of each
Fund to 0.75% of average daily net assets of such class and has voluntarily
limited the expenses of Class B and C shares of each Fund to 1.50% of average
daily net assets of such class. Keystone currently intends to continue the
foregoing expense limitations on a calendar month-by-month basis. Keystone will
periodically evaluate the expense limitations and may modify or terminate them
in the future. Keystone will not be required to make such reimbursement to the
extent it would result in a Fund's inability to qualify as a regulated
investment company under the provisions of the Code. In accordance with certain
expense limitations, for the fiscal period ended November 30, 1996, Keystone
reimbursed the California Fund and the Missouri Fund (i) $19,584 and $16,883,
respectively, with respect to each Fund's Class A shares; (ii) $97,897 and
$103,150, respectively, with respect to each Fund's Class B shares; and (iii)
$6,657 and $7,016, respectively, with respect to each Fund's Class C shares.
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
The Trust has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaced EKIS as the Trust's Principal Underwriter.
EKIS may no longer act as principal underwriter of the Trust due to regulatory
restrictions imposed by the Glass-Steagall Act upon national banks such as FUNB
and their affiliates, that prohibit such entities from acting as the
underwriters of mutual fund shares. While EKIS may no longer act as principal
underwriter of the Trust as discussed above, EKIS may continue to receive
compensation from the Trust or the Principal Underwriter in respect of
underwriting and distribution services performed prior to the termination of
EKIS as principal underwriter. In addition, EKIS may also be compensated by the
Principal Underwriter for the provision of certain marketing support services to
the Principal Underwriter at an annual rate of up to 0.75% of the average daily
net assets of a Fund, subject to certain restrictions.
The Principal Underwriter, as agent, has agreed to use its best efforts
to find purchasers for the shares. The Principal Underwriter may retain and
employ representatives to promote distribution of the shares and may obtain
orders from broker-dealers, and others, acting as principals, for sales of
shares to them. The Underwriting Agreements provide that the Principal
Underwriter will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. The Principal
Underwriter or EKIS, its predecessor, may receive payments from the Trust
pursuant to the Distribution Plans.
All subscriptions and sales of shares by the Principal Underwriter are
at the public offering price of the shares, which is determined in accordance
with the provisions of the Trust's Declaration of Trust, By-Laws, current
prospectuses and statement of additional information. All orders are subject to
acceptance by the Trust and the Trust reserves the right, in its sole
discretion, to reject any order received. Under the Underwriting Agreements, the
Trust is not liable to anyone for failure to accept any order.
Each Fund has agreed under the Underwriting Agreements to pay all
expenses in connection with the registration of its shares with the SEC and
auditing and filing fees in connection with the registration of its shares under
the various state "blue-sky" laws.
The Principal Underwriter has agreed that it will, in all respects,
duly conform with all state and federal laws applicable to the sale of the
shares. The Principal Underwriter has also agreed that it will indemnify and
hold harmless the Trust and each person who has been, is, or may be a Trustee or
officer of the Trust against expenses reasonably incurred by any of them in
connection with any claim, action, suit, or proceeding to which any of them may
be a party that arises out of or is alleged to arise out of any
misrepresentation or omission to state a material fact on the part of the
Principal Underwriter or any other person for whose acts the Principal
Underwriter is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Trust.
Each Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (i) by a vote of a
majority of the Trust's Independent Trustees, and (ii) by vote of a majority of
the Trust's Trustees, in each case, cast in person at a meeting called for that
purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60
days' written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Principal Underwriter's judgment, it
could benefit the sales of shares, the Principal Underwriter may provide to
selected broker-dealers promotional materials and selling aids, including, but
not limited to, personal computers, related software, and data files.
- --------------------------------------------------------------------------------
SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
BISYS, or an affiliate, provides officers and certain administrative
services to each Fund pursuant to a sub-administrator agreement. For its
services under that agreement BISYS will receive from Keystone an annual fee at
the maximum annual rate of 0.01% of the average daily net assets of each Fund.
- --------------------------------------------------------------------------------
DECLARATION OF TRUST
- --------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated September 13, 1990 ("Declaration of Trust"). The
Trust is similar in most respects to a business corporation. The principal
distinction between the Trust and a corporation relates to the shareholder
liability described below. A copy of the Declaration of Trust was filed as an
exhibit to the Trust's Registration Statement. This summary is qualified in its
entirety by reference to the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of classes of shares. Each share of a Fund
represents an equal proportionate interest in such Fund with each other share of
the Fund. Upon liquidation, Fund shares are entitled to a pro rata share of the
Fund based on the relative net assets of each class.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If the Trust were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because the
Trust's Declaration of Trust (1) contains an express disclaimer of shareholder
liability for obligations of the Trust; (2) requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or the Trustees; and (3) provides for indemnification out
of Trust property for any shareholder held personally liable for the obligations
of the Trust.
VOTING RIGHTS
No amendment may be made to the Declaration of Trust that adversely
affects any class of shares without the approval of a majority of the shares of
that class. Shares have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Trustees can
elect 100% of the Trustees to be elected at a meeting and, in such event, the
holders of the remaining 50% or less of the shares voting will not be able to
elect any Trustees.
After the initial meeting to elect Trustees no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares. Any
Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only
for his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person; provided, however, that
nothing in the Declaration of Trust shall protect a Trustee against any
liability for his willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties.
The Trustees have absolute and exclusive control over the management
and disposition of all assets of the Funds and may perform such acts as in their
sole judgment and discretion are necessary and proper for conducting the
business and affairs of the Trust or promoting the interests of the Trust and
its Funds and the shareholders.
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY FEES
The table below lists the total dollar amounts paid by the California
Fund and the Missouri Fund to Keystone for services rendered under each Fund's
Advisory Agreement for the periods specified. For more information, see
"Investment Adviser."
CALIFORNIA FUND
Fiscal Period Fee Paid to Keystone for
Ended Services Rendered under the Percentage of Fund
November 30, Advisory Agreement Average Net Assets
- ------------------- ----------------------------- --------------------
1996 $163,334 0.55%
1995 $113,353 0.55%
Fiscal Period
February 1, 1994
(Commencement
of Operations) to
November 30,
1994 $ 49,627 0.55%
MISSOURI FUND
Fiscal Period Fee Paid to Keystone for
Ended Services Rendered under the Percentage of Fund
November 30, Advisory Agreement Average Net Assets
- --------------------- ------------------------------- --------------------
1996 $146,922 0.55%
1995 $120,166 0.55%
Fiscal Period
February 1, 1994
(Commencement
of Operations) to
November 30,
1994 $ 47,930 0.55%
DISTRIBUTION PLAN EXPENSES
Listed below are the amounts paid by each class of shares of the
California Fund and the Missouri Fund under their respective Distribution Plans
to EKIS for the fiscal year ended November 30, 1996. For more information, see
"Distribution Plans."
CALIFORNIA FUND
Class B Shares Sold Class B Shares Sold on Class C
Class A Shares Prior to June 1, 1995 or after June 1, 1995 Shares
- ----------------- ----------------------- ------------------------ -------
$7,037 $108,867 $101,701 $14,365
MISSOURI FUND
Class B Shares Sold Class B Shares Sold on Class C
Class A Shares Prior to June 1, 1995 or after June 1, 1995 Shares
- ----------------- ----------------------- ------------------------ -------
$5,369 $147,608 $45,956 $13,425
UNDERWRITING COMMISSIONS
The table below lists the aggregate dollar amounts of underwriting
commissions (front-end sales charges, plus distribution fees, plus CDSCs) paid
with respect to the public distribution of the California Fund and the Missouri
Fund shares for the periods specified. The table also indicates the aggregate
dollar amount of underwriting commissions retained by EKIS. For more
information, see "Principal Underwriter" and "Sales Charges."
CALIFORNIA FUND
Aggregate Dollar Amount of
Fiscal Year Ended Aggregate Dollar Amount of Underwriting Commissions
October 31, Underwriting Commissions Retained by EKIS
- ------------------- ---------------------------- --------------------------
1996 $341,589 $ 67,534
1995 $170,600 $(378,930)
Fiscal Period
February 1, 1994
(Commencement of
Operations) to
November 30, 1994 $ 83,775 $(514,551)
MISSOURI FUND
Aggregate Dollar Amount of
Fiscal Year Ended Aggregate Dollar Amount of Underwriting Commissions
October 31, Underwriting Commissions Retained by EKIS
- ------------------- ---------------------------- --------------------------
1996 $230,925 $ 94,279
1995 $165,772 $(152,326)
Fiscal Period
February 1, 1994
(Commencement of
Operations) to
November 30, 1994 $ 65,153 $(477,315)
BROKERAGE COMMISSIONS
The Trust paid no brokerage commissions during the fiscal years ended
November 30, 1996 and 1995 and for the fiscal period of February 1, 1994
(Commencement of Operations) to November 30, 1994.
- --------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
Total return quotations for a class of shares of a Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods.
TOTAL RETURN
Total return quotations for a class of shares of a Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods.
The annual total returns for Class A shares of the Funds (including
applicable sales charge) are as follows for the periods indicated:
For Period
One Year From 02/01/94*
NAME OF FUND ENDED 11/30/96 To 11/30/96
California Fund (0.95%) 2.78%
Missouri Fund (0.31%) 3.18%
- -------------
* Commencement of Operations
The average annual total returns for Class B shares of the Funds are as
follows for the periods indicated:
For Period
One Year From 02/01/94*
NAME OF FUND ENDED 11/30/96 To 11/30/96
California Fund (0.72%) 3.03%
Missouri Fund (0.14%) 3.17%
- -------------
*Commencement of Operations
The average annual total returns for Class C shares of the Funds are as
follows for the periods indicated:
For Period
One Year From 02/01/94*
NAME OF FUND ENDED 11/30/96 To 11/30/96
California Fund 3.34% 3.92%
Missouri Fund 3.83% 4.06%
- -------------
* Commencement of Operations
YIELD
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of a Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. Such yield will include
income from sources other than municipal obligations, if any.
The current yields for the Class A shares of the California Fund and
the Missouri Fund for the 30-day period ended November 30, 1996 were 4.76% and
5.00%, respectively.
The current yields for the Class B shares of the California Fund and
the Missouri Fund for the 30-day period ended November 30, 1996 were 4.26% and
4.50%, respectively.
The current yields for the Class C shares of the California Fund and
the Missouri Fund for the 30-day period ended November 30, 1996 were 4.26% and
4.50%, respectively.
TAX-EQUIVALENT YIELD
Tax equivalent yield is, in general, the current yield divided by a
factor equal to one minus a stated income tax rate and reflects the yield a
taxable investment would have to achieve in order to equal on an after-tax basis
a tax-exempt yield.
The tax equivalent yields for the Class A shares of the California Fund
and the Missouri Fund for an investor in the 31% federal tax bracket for the
30-day period ended November 30, 1996 were 6.89% and 7.24%, respectively.
The tax equivalent yields for the Class B shares of the California Fund
and the Missouri Fund for an investor in the 31% federal tax bracket for the
30-day period ended November 30, 1996 were 6.17% and 6.52%, respectively.
The tax equivalent yields for the Class C shares of the California Fund
and the Missouri Fund for an investor in the 31% federal tax bracket for the
30-day period ended November 30, 1996 were 6.17% and 6.52%, respectively.
Any given yield or total return quotation should not be considered
representative of the Fund's yield or total return for any future period.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following financial statements of the Fund are incorporated by
reference herein from the Fund's Annual Report, as filed with the SEC:
For the California Fund:
Schedule of Investments as of November 30, 1996;
Financial Highlights for each of the years in the two-year period ended
November 30, 1996, and the period from February 1, 1994 (Commencement
of Operations) to November 30, 1994 for Class A, B and C shares;
Statement of Assets and Liabilities as of November 30, 1996;
Statement of Operations for the year ended November 30, 1996;
Statements of Changes in Net Assets for each of the years in the
two-year period ended November 30, 1996;
Notes to Financial Statements; and
Independent Auditors' Report dated December 27, 1996.
For the Missouri Fund:
Schedule of Investments as of November 30, 1996;
Financial Highlights for each of the years in the two-year period ended
November 30, 1996, and the period from February 1, 1994 (Commencement
of Operations) to November 30, 1994 for Class A, B and C shares;
Statement of Assets and Liabilities as of November 30, 1996;
Statement of Operations for the year ended November 30, 1996;
Statements of Changes in Net Assets for each of the years in the
two-year period ended November 30, 1996;
Notes to Financial Statements; and
Independent Auditors' Report dated December 27, 1996.
Copies of the Trust's Annual Report will be furnished upon request and
without charge. Requests may be made in writing to EKSC, P.O. Box 2121, Boston,
Massachusetts 02106-2121, or by calling EKSC toll free at 1-800-343-2898.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorized payment to be made in
portfolio securities or other property. The Fund has obligated itself, however,
under the 1940 Act, to redeem for cash all shares presented for redemption by
any one shareholder up to the lesser of $250,000 or 1% of the Fund's net assets
in any 90-day period. Securities delivered in payment of redemptions would be
valued at the same value assigned to them in computing the net asset value per
share and would, to the extent permitted by law, be readily marketable.
Shareholders receiving such securities would incur brokerage costs upon the
securities' sale.
GENERAL
As of February 28, 1997, the following shareholder of record owned 5%
or more of the California Fund's outstanding Class A shares:
SHAREHOLDER OF RECORD % OF CLASS
MLPF&S 8.92%
for the Sole Benefit
Of its Customers
ATTN.: Fund Administration
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
As of February 28, 1997, the following shareholders of record owned 5%
or more of the California Fund's outstanding Class B shares:
SHAREHOLDER OF RECORD % OF CLASS
MLPF&S 15.09%
for the Sole Benefit
Of its Customers
ATTN.: Fund Administration
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
As of February 28, 1997, the following shareholders of record owned 5%
or more of the California Fund's outstanding Class C shares:
SHAREHOLDER OF RECORD % OF CLASS
MLPF&S 37.59%
for the Sole Benefit
Of its Customers
ATTN.: Fund Administration
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Victor & Lucille Rylander Trust 9.26%
Victor E. Rylander
Lucille Rylander Co TTEES
U/A DTD 09-18-96
4102 Caflur Avenue
San Diego, CA 92117-4436
Prudential Securities FBO 5.65%
Rakesh C. Gupta
Neelam Gupta CO-TTEES
FBO Gupta Family Living Trust 12/22/94
Hemet, CA 92544
Alex. Brown & Sons Inc. 5.65%
FBO 489-31533-14
PO Box 1346
Baltimore, MD 21203-1346
Smith Barney Inc. 5.53%
00154933343
388 Greenwich Street
New York, NY 10013
Alex. Brown & Sons Inc. 5.43%
FBO 489-30559-15
PO Box 1346
Baltimore, MD 21203-1346
Richard B Smith 5.24%
Doris M. Smith TTEE
U/A DTD 04-08-93
Smith Trust
4853 Mt. Royal Court
San Diego, CA 92117-2917
As of February 28, 1997, the following shareholders of record owned 5%
or more of the Missouri Fund's outstanding Class A shares:
SHAREHOLDER OF RECORD % OF CLASS
MLPF&S 9.39%
for the Sole Benefit
Of its Customers
ATTN.: Fund Administration
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Painewebber for the Benefit of 5.59%
Fred C Klingbeil TTEE
FBO Fred C Klingbeil Trust
DTD 6/15/72
15500 Hwy 72
Rolla, MO 65401
As of February 28, 1997, the following shareholder of record owned 5%
or more of the Missouri Fund's outstanding Class B shares:
SHAREHOLDER OF RECORD % OF CLASS
MLPF&S 25.99%
for the Sole Benefit
Of its Customers
ATTN.: Fund Administration
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
As of February 28, 1997, the following shareholders of record owned 5%
or more of the Missouri Fund's outstanding Class C shares:
SHAREHOLDER OF RECORD % OF CLASS
Painewebber For the Benefit of 15.11%
Dorothy K. Pruett Trustee
Dorothy K. Pruett Revocable
Trust UAD 7-10-92
c/o Mid America Mortgage
8645 College Blvd
Overland Park, KS 66210
Painewebber For the Benefit of 14.68%
Lorraine Wilder TTEE
Lorraine Wilder Rev Tr
U/A DTD 7-26-88
220 16th Street
Chillicothe, MO 64601
Painewebber For the Benefit of 11.29%
Jeannette M. Holz Trust
Jeannette M. Holz TTEE
U/A DTD 10/15/83
Box 698
Lake Ozark, MO 65049-0698
MLPF&S 11.24%
for the Sole Benefit
Of its Customers
ATTN.: Fund Administration
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Except as otherwise stated in its prospectus or required by law, the
Trust reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Trust's
prospectus, statement of additional information or in supplemental sales
literature issued by the Trust or the Principal Underwriter, and no person is
entitled to rely on any information or representation not contained therein.
The Trust's prospectus and statement of additional information omit
certain information contained in the registration statement filed with the
Commission, a copy of which may be obtained from the Commission's principal
office in Washington, D.C. upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
The Trust is one of 16 different investment companies in the Keystone
America Family, which offers a range of choices to serve shareholder needs. In
addition to the Trust, the Keystone America Family includes the following funds
having the various investment objectives described below:
KEYSTONE BALANCED FUND II - Seeks current income and capital appreciation
consistent with the preservation of capital.
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND - Seeks high level of current
income, consistent with low volatility of principal, by investing in adjustable
rate securities issued by the U.S. government, its agencies or
instrumentalities.
KEYSTONE FUND OF THE AMERICAS - Seeks long term growth of capital through
investments in equity and debt securities in North America (the United States
and Canada) and Latin America (Mexico and South and central America.
KEYSTONE FUND FOR TOTAL RETURN - Seeks total return from a combination of
capital growth and income from dividend paying quality common stocks, preferred
stocks, convertible bonds, other fixed-income securities and foreign securities
(up to 25%).
KEYSTONE GLOBAL OPPORTUNITIES FUND - Seeks long-term capital growth from foreign
and domestic securities.
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND - Seeks long term capital growth
by investing primarily in equity securities.
KEYSTONE GOVERNMENT SECURITIES FUND - Seeks income and capital preservation from
U.S. government securities.
KEYSTONE AMERICA HARTWELL EMERGING GROWTH FUND, INC. - Seeks capital
appreciation by investment primarily in small and medium-sized companies in a
relatively early stage of development that are principally traded in the
over-the-counter market.
KEYSTONE INTERMEDIATE TERM BOND FUND - Seeks income, capital preservation and
price appreciation potential from investment grade corporate bonds.
KEYSTONE OMEGA FUND - Seeks maximum capital growth from common stocks and
securities convertible into common stocks.
KEYSTONE SMALL COMPANY GROWTH FUND II - Seeks long term capital growth through
investments primarily in equity securities of companies with small market
capitalizations.
KEYSTONE STATE TAX FREE FUND - A mutual fund consisting of five separate series
of shares investing in different portfolio securities which seeks the highest
possible current income, exempt from federal income taxes and applicable state
taxes.
KEYSTONE STRATEGIC INCOME FUND - Seeks high yield and capital appreciation
potential from corporate bonds, discount bonds, convertible bonds, preferred
stock and foreign bonds (up to 25%).
KEYSTONE TAX FREE INCOME FUND - Seeks income exempt from federal income taxes
and capital preservation from the four highest grades of municipal bonds.
KEYSTONE WORLD BOND FUND - Seeks total return from interest income, capital
gains and losses and currency exchange gains and losses from investment in debt
securities denominated in U.S. and foreign currencies.
<PAGE>
A-1
APPENDIX A
KEYSTONE CALIFORNIA TAX FREE FUND
GENERAL
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of over 32 million represents over
12% of the total U.S. population and grew by 27% in the 1980's, and at about
half that rate in the first half of the 1990s. Total personal income in the
State, at an estimated $815 billion in 1996 -- a 13% increase in the last two
years -- accounts for more than 12% of all personal income in the nation. Total
civilian employment is over 14.3 million, the majority of which is in the
service, trade and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the
worst economic, fiscal and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Job losses were the
worst of any post-war recession. Employment levels stabilized by late 1993 and
steady growth has occurred since the start of 1994; pre-recession job levels
were reached in 1996. Unemployment, while higher than the national average, has
come down significantly from the January, 1994 peak of 10% and is now at the
pre-recession level. Economic indicators show a steady recovery underway in
California since the start of 1994, with greatest strength in manufacturing,
high technology, exports, services, entertainment and tourism. However, the
residential housing sector has been weaker than in previous recoveries. Any
delay or reversal of the economic recovery may cause a recurrence of revenue
shortfalls for the State.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
LIMITATION ON PROPERTY TAXES. Certain California municipal obligations
may be obligations of issuers that rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full cash
value the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme Court
announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through
ad valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed non-voter approved levy of "general taxes" that were
not dedicated to a specific use.
LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased without voter approval after December 31, 1994 must be
approved by a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
APPROPRIATION LIMITS. The State and its local governments are subject
to an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" excludes most State subventions to local governments. No limit is imposed
on appropriations of funds that are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population and any transfers of service
responsibilities between governmental units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% paid to schools and community colleges. With more liberal annual adjustment
factors since 1988, and depressed revenues for several years after 1990 because
of the recession, few governments, including the State, are currently operating
near their spending limits, but this condition may change over time. The State's
1996-97 Budget Act provides for State appropriations of more than $7 billion
under the Article XIIIB limit. Local governments may by voter approval exceed
their spending limits for up to four years.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and
XIIID, of the California Constitution, the ambiguities and possible
inconsistencies of their terms, and the impossibility of predicting future
appropriations or changes in population and cost of living, and the probability
of continuing legal challenges, it is not currently possible to determine fully
the impact of these articles on California municipal obligations. It is not
presently possible to predict the outcome of any pending litigation with respect
to the ultimate scope, impact or constitutionality of these articles, or the
impact of any such determinations upon State agencies or local governments, or
upon their ability to pay debt service on their obligations. Future initiatives
or legislative changes in laws or the California Constitution may also affect
the ability of the State or local issuers to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
As of March 1, 1997, the State had approximately $17.7 billion of
general obligation bonds outstanding, and $8.4 billion remained authorized but
unissued. The State also had outstanding at March 1, 1997 $369 million of
general obligation commercial paper notes which will be refunded into long-term
bonds at a later date. In addition, at March 1, 1997, the State had
lease-purchase obligations, payable from the State's General Fund, of
approximately $6.1 billion. State voters approve $7.1 billion of new bond
authorizations during 1996. In fiscal year 1995-1996, debt service on general
obligation bonds and lease-purchase debt was approximately 5.2% of General Fund
revenues. The State has paid the principal of and interest on its general
obligation bonds, lease-purchase debt and short-term obligations when due.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues in 1995-1996 were the
California personal income tax (45% of total revenues), the sales tax (34%),
bank and corporation taxes (13%), and the gross premium tax on insurance (3%).
The State maintains a Special Fund for Economic Uncertainties ("SFEU"), derived
from General Fund revenues, as a reserve to meet cash needs of the General Fund.
Because of the recession, the SFEU has not been funded for the past four years.
GENERAL. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently 35%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal, and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for health
and welfare programs. The State is also facing a structural imbalance in its
budget with the largest programs supported by the General Fund (education,
health, welfare and corrections) growing at rates higher than the growth rates
for the principal revenue sources of the General Fund. These structural concerns
will continue in future years with the expected need to increase capital and
operating costs of the correctional system in response to a "Three Strikes" law
enacted in 1994 which mandates life imprisonment for certain felony offenders.
RECENT BUDGETS. As a result of these factors, among others, from the
late 1980's until 1992-93, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years, and
the State accumulated and sustained a budget deficit in the budget reserve, the
SFEU approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for five years thereafter, each budget required
multi-billion dollar actions to bring projected revenues and expenditures into
balance and to close large "budget gaps" which were identified. The Legislature
and Governor eventually agreed on a number of different steps to produce Budget
Acts in the years 1991-92 to 1995-96 although not all these actions occurred in
each year), including:
* significant cuts in health and welfare program expenditures;
* transfers of program responsibilities and some funding sources from
the state to local governments, coupled with some reduction in mandates on local
government;
* transfer of about $3.6 billion in annual local property tax revenues
from cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools;
* reduction in growth of support for higher education programs, coupled
with increases in student fees;
* revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
* increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
* various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to large
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures,
and the turnaround of the economy by late 1993, finally led to the restoration
of positive financial results. While General Fund revenues and expenditures were
essentially equal in FY 1992-93 (following two years of excess expenditures over
revenues), the General Fund had positive operating results in FY 1993-94 through
FY 1995-96, which have reduced the accumulated budget deficit to less than $100
million as of June 30, 1996.
The State Department of Finance estimated that the General Fund
received revenues of about $46.3 billion in FY 1995-96, more than $2 billion
higher than was originally expected, as a result of the strengthening economy.
Expenditures totaled about $45.4 billion, also about $2 billion higher than
budgeted, because, among other factors, the State Constitution requires
disbursement of a percentage of revenues to local school districts and federal
actions to reduce welfare costs and to pay for costs of illegal immigrants were
not forthcoming to the extent expected.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the state's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
state to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller was forced to issue approximately $3.8 billion of
registered warrants ("IOUs") over a 2-month period to pay a variety of
obligations representing prior years' or continuing appropriations, and mandates
from court orders. Available funds were used to make constitutionally-mandated
payments such as debt service on bonds and warrants.
The State's cash condition became so serious that from late spring 1992
until 1995, the State had to rely on issuance of short-term notes which matured
in a subsequent fiscal year to finance its ongoing deficit and pay current
obligations. With the repayment of the last of these deficit notes in April,
1996, the State does not plan to rely further on external borrowing across
fiscal years, but will continue its normal cash flow borrowing during a fiscal
year.
CURRENT BUDGET. The 1996-97 Budget Act was signed by the Governor on
July 15, 1996, along with various implementing bills. The Legislature rejected
the Governor's proposed 15% cut in personal income taxes (to be phased over
three years), but did approve a 5% cut in bank and corporation taxes, to be
effective for income years starting on January 1, 1997. Revenues for the Fiscal
Year were estimated to total $47.643 billion, a 3.3 percent increase over the
final estimated 1995-96 revenues. The Budget Act contains General Fund
appropriations totaling $47.251 billion, a 4.0 percent increase over the final
estimated 1995-96 expenditures.
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts
increased by $1.65 billion total above revised 1995-96 levels. Almost half of
this money was budgeted to fund class-size reductions in kindergarten and grades
1-3. Also, for the second year in a row, the full cost of living allowance (3.2
percent) was funded. The funding increases have brought K-12 expenditures to
almost $4,800 per pupil, an almost 15% increase over the level prevailing during
the recession years.
2. Proposed cuts in health and welfare totaling $660 million.
All of these cuts required federal law changes (including welfare reform, which
was enacted), federal waivers, or federal budget appropriations in order to be
achieved. Ultimate federal actions after enactment of the Budget Act will allow
the State to save only about $360 million of this amount.
3. A 4.9 percent increase in funding for the University of
California and the California State University system, with no increases in
student fees for the second consecutive year.
4. The Budget Act assumed the federal government would provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash
flow borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The General Fund
balance, however, still reflects $1.6 billion of "loans" which the General Fund
made to local schools in the recession years, representing cash outlays above
the mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund and
from schools' entitlements. The 1996-97 Budget Act contained a $150 million
appropriation from the General Fund toward this settlement.
The Department of Finance projected, when the Budget Act was passed,
that, on June 30, 1997, the State's available internal borrowable (cash)
resources will be $2.9 billion, after payment of all obligations due by that
date, so that no external cross-fiscal year borrowing will be needed. The State
will continue to rely on internal borrowing and intra-year external note
borrowing to meet its cash flow requirements.
The Department of Finance has reported that, based on stronger than
expected revenues during the first six months of the 1996-97 fiscal year,
reflecting the continued strength of the State's economic recovery, General Fund
revenues for the full 1996-97 fiscal year will be almost $1 billion above
projections, at about $48.4 billion. This is expected to be offset by required
increased payments to schools, and lower than expected savings resulting from
federal welfare reform actions and federal aid for illegal immigrants. As a
result, the expected balance of the SFEU at June 30, 1997 has been slightly
reduced to about $197 million, still the first positive balance in the decade of
the 90's. The State has not yet given any prediction of how the federal welfare
reform law will impact the State's finances, or those of its local agencies; the
State is in the midst of making many decisions concerning implementation of the
new welfare law.
PROPOSED 1997-98 BUDGET. On January 9, 1997, the Governor released his
proposed budget for FY 1997-98. Assuming continuing strength in the economy, the
Governor projects General Fund revenues of $50.7 billion, and proposes
expenditures of $50.3 billion, to leave a budget reserve in the SFEU of $550
million at June 30, 1998. The Governor proposed further programs to reduce class
size in lower primary grades, using excess revenues from FY 1996-97. He also
proposed a further cut in corporate taxes, and sweeping changes in public
assistance programs to respond to the new federal welfare reform law.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
BOND RATINGS
The ratings on California's long-term general obligation bonds were
reduced in the early 1990's from "AAA" levels which had existed prior to the
recession. In 1996, Fitch and Standard & Poor's raised their ratings of
California's general obligation bonds, which are currently assigned ratings of
"A+" from Standard & Poor's, "A1" from Moody's and "A+" from Fitch. There can be
no assurance that such ratings will be maintained in the future. It should be
noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and that there is no obligation on the part of the State to
make payment on such obligations in the event of default.
LEGAL PROCEEDINGS
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues.
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number
of state agencies, instrumentalities and political subdivisions of the State
that issue municipal obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
STATE ASSISTANCE. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Through
1990-91, local assistance (including public schools) accounted for around 75% of
General Fund spending. To reduce State General Fund support for school
districts, the 1992-93 and 1993-94 Budget Acts caused local governments to
transfer a total of $3.9 billion of property tax revenues to school districts,
representing loss of all the post-Proposition 13 "bailout" aid. The largest
share of these transfers came from counties, and the balance from cities,
special districts and redevelopment agencies. In order to make up part of this
shortfall, the Legislature proposed, and voters approved, dedicating 0.5% of the
sales tax to counties and cities for public safety purposes. In addition, the
Legislature has changed laws to relieve local governments of certain mandates,
allowing them to reduce costs.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. A number of other counties
have indicated that their budgetary condition is extremely serious. In the
1995-96 and 1996-97 fiscal years, Los Angeles County, the largest in the State,
had to make significant cuts in services and personnel, particularly in the
health care system, in order to balance its budget. The County's debt was
downgraded by Moody's and S&P in the summer of 1995. Orange County, which
recently emerged from federal bankruptcy protection, has substantially reduced
services and personnel in order to live within much reduced means.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which will have to be enacted
by June, 1997 in order to comply with the federal welfare reform law. It is now
yet known how the State's legislation will turn out and what its overall impact
will be on local government finances.
ASSESSMENT BONDS. California municipal obligations that are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land that is undeveloped at the time of issuance, but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
CALIFORNIA LONG-TERM LEASE OBLIGATIONS. Certain California long-term
lease obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being leased
is unavailable for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common cases of abatement are failure to
complete construction of the facility before the end of the period during which
lease payments have been capitalized and uninsured casualty losses to the
facility (e.g. due to earthquake). In the event abatement occurs with respect to
a lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not be
paid when due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a State receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State was a named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the District's lease. The trial court upheld
the validity of the lease, and the case has subsequently been settled. Any
judgment in a similar case against the position taken by the Trustee may have
adverse implications for lease transactions of a similar nature by other
California entities.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on AD VALOREM property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
that increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which typically are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced that would modify existing taxes or other revenue raising
measures or that either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to predict the extent to which any
such legislation will be enacted. Nor is it presently possible to determine the
impact of any such legislation on California municipal obligations in which the
Fund may invest, future allocations of state revenues to local governments or
the abilities of state or local governments to pay the interest on, or repay the
principal of, such California municipal obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the California Fund could be affected by an
interruption of revenues because of damaged facilities, or, consequently, income
tax deductions for casualty losses or property tax assessment reductions.
Compensatory financial assistance could be constrained by the inability of (i)
an issuer to have obtained earthquake insurance coverage at reasonable rates;
(ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State governments to appropriate
sufficient funds within their respective budget limitations.
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KEYSTONE MISSOURI TAX FREE FUND
- --------------------------------------------------------------------------------
GENERAL
Missouri's economy includes manufacturing, commerce, trade, services,
agriculture, tourism and mining. The State's economy is diversified and closely
resembles that of the nation's although growth prospects are less favorable than
in the past. It is the nation's fifteenth largest state. The State employment
sectors, services, trade and manufacturing, also account for the primary sources
of national employment. Recent growth in the manufacturing sector has outpaced
the nation as a whole. Labor force growth has remained steady, totaling 2.65
million in 1993, up from 2.3 million in 1980. Through the 1980's and early
1990's the State's unemployment rate essentially mirrored that of the nation;
however, adverse changes in military appropriations, which play an important
role in the State's economy, could contribute to a significant increase in
unemployment. In 1996, according to the Bureau of Labor Statistics, the State
ranked seventeenth among the states in unadjusted nonagricultural employment. In
November 1996, the State's unemployment rate was estimated to be 4.0% as against
the national rate of 5.3%. In recent years, Missouri's wealth indicators have
grown at a slower rate than national levels and in 1995 the State's per capita
personal income was approximately 94.0% of the average for the nation as a
whole.
Missouri displayed strong fiscal performance during most of the 1980's.
However, Missouri has recently experienced difficulties in balancing its budget
as a result of increased expenses and declining sources of revenues. Other
factors contributing to Missouri's weak fiscal position relate to the reduction
of large manufacturing companies, including those in aerospace and the auto
industry. The Missouri portions of the St. Louis and Kansas City metropolitan
areas together contain over 50% of Missouri's population. Economic reversals in
either of these two areas would have a major impact on the overall economic
condition of the State of Missouri. Additionally, the State of Missouri has a
significant agricultural sector, which may experience problems comparable to
those which are occurring in other states. To the extent that any such problems
intensify, there could possibly be an adverse impact on the overall economic
condition of the State.
Currently, general obligations of Missouri are rated "AAA," "Aaa" and
"AAA," by S&P, Moody's and Fitch, respectively. There can be no assurance that
the economic conditions on which these ratings are based will continue or that
particular bond issues may not be adversely affected by changes in economic,
political or other conditions.
REVENUE AND LIMITATIONS THEREON
Article X, Section 16-24 of the Constitution of Missouri (the "Hancock
Amendment"), imposes limitations on the amount of State taxes which may be
imposed by the General Assembly of Missouri (the "General Assembly") as well as
on the amount of local taxes, licenses and fees (including taxes, licenses and
fees used to meet debt service commitments on debt obligations) which may be
imposed by local governmental units (such as cities, counties, school districts,
fire protection districts and other similar bodies) in the State of Missouri in
any fiscal year.
The State limit on taxes is tied to total State revenues for fiscal
year 1980-81, as defined in the Hancock Amendment, adjusted annually in
accordance with the formula set forth in the amendment, which adjusts the limit
based on increases in the average personal income of Missouri for certain
designated periods. The details of the Amendment are complex and clarification
from subsequent legislation and further judicial decisions may be necessary.
Generally, if the total State revenues exceed the State revenue limit imposed by
Section 18 of Article X by more than one percent, the State is required to
refund the excess. The State revenue limitation imposed by the Hancock Amendment
does not apply to taxes imposed for the payment of principal and interest on
bonds, approved by the voters and authorized by the Missouri constitution. The
revenue limit also can be exceeded by a constitutional amendment authorizing new
or increased taxes or revenue adopted by the voters of the State of Missouri.
The Hancock Amendment also limits new taxes, licenses and fees and
increases in taxes, licenses and fees by local governmental units in Missouri.
It prohibits counties and other political subdivisions (essentially all local
governmental units) from levying new taxes, licenses and fees or increasing the
current levy of an existing tax, license or fee without the approval of the
required majority of the qualified voters of that county or other political
subdivision voting thereon.
When a local government unit's tax base with respect to certain fees or
taxes is broadened, the Hancock Amendment requires the tax levy or fees to be
reduced to yield the same estimated gross revenue as on the prior base. It also
effectively limits any percentage increase in property tax revenues to the
percentage increase in the general price level (plus the value of new
construction and improvements), even if the assessed valuation of property in
the local governmental unit, excluding the value of new construction and
improvements, increases at a rate exceeding the increase in the general price
level.
INDUSTRY AND EMPLOYMENT
While Missouri has a diverse economy with a distribution of earnings
and employment among manufacturing, trade and service sectors closely
approximating the average national distribution, the national economic recession
of the early 1980's had a disproportionately adverse impact on the economy of
Missouri. During the 1970's, Missouri characteristically had a pattern of
unemployment levels well below the national averages. However, since the 1980 to
1983 recession periods Missouri unemployment levels generally approximated or
slightly exceeded the national average. A return to a pattern of high
unemployment could adversely affect the Missouri debt obligations acquired by
the Missouri Fund and, consequently, the value of the shares of the Fund.
The Missouri portions of the St. Louis and Kansas City metropolitan
areas contain approximately 1,945,813 and 1,016,457 residents, respectively,
constituting over fifty percent of Missouri's 1995 population census of
approximately 5,339,041. St. Louis is an important site for banking and
manufacturing activity, as well as a distribution and transportation center,
with nine Fortune 500 industrial companies (as well as other major educational,
financial, insurance, retail, wholesale and transportation companies and
institutions) headquartered there. Kansas City is a major agribusiness center
and an important center for finance and industry. Economic reversals in either
of these two areas would have a major impact on the overall economic condition
of the State of Missouri. Additionally, the State of Missouri has a significant
agricultural sector which is experiencing farm-related problems comparable to
those which are occurring in other states. To the extent that these problems
were to intensify, there could possibly be an adverse impact on the overall
economic condition of the State of Missouri.
Defense related business plays an important role in Missouri's economy.
There are a large number of civilians employed at the various military
installations and training bases in the state and recent action of the Defense
Base Closure and Realignment Commission will result in the loss of a substantial
number of civilian jobs in the St. Louis Metropolitan area. Further, aircraft
and related businesses in Missouri are the recipients of substantial annual
dollar volumes of defense contract awards. The contractor receiving the second
largest dollar volume of defense contracts in the United States in 1995 was
McDonnell Douglas Corporation which lost the number one position it held in 1994
by reason of the merger of the Lockheed and Martin Companies. McDonnell Douglas
Corporation is the State's largest employer, currently employing approximately
20,000 employees in Missouri. Recent changes in the levels of military
appropriations and the cancellation of the A-12 program has affected McDonnell
Douglas Corporation in Missouri and over the last four years it has reduced its
Missouri work force by approximately 30%. There can be no assurances that there
will be further changes in the levels of military appropriations, and, to the
extent that further changes in military appropriations are enacted by the United
States Congress, Missouri could be disproportionately affected. On December 15,
1996, The Boeing Company and McDonnell Douglass Corporation announced that The
Boeing Company planned to acquire McDonnell Douglas Corporation. It is
impossible to determine what effect, if any, completion of the acquisition will
have on the operations of McDonnell Douglas Corporation. However, any shift or
loss of production now conducted in Missouri would have a negative impact on the
economy of the state and particularly the economy of the St. Louis metropolitan
area.
OTHER FACTORS
Desegregation lawsuits in St. Louis and Kansas City continue to require
significant levels of state funding and are sources of uncertainty. Litigation
continues on many issues, court orders are unpredictable, and school district
spending patterns have proven difficult to predict. A recent Supreme Court
decision favorable to the State may decrease the level of State funding required
in the future, but the impact of this decision is uncertain. The State paid $282
million for desegregation costs in fiscal 1994, $315 million for fiscal 1995 and
$274 million for fiscal 1996. This expense accounted for close to 7% of total
state General Revenue Fund spending in fiscal 1994 and 1995, and close to 5% in
fiscal 1996.
<PAGE>
B-1
APPENDIX B
This Appendix is solely intended to provide additional investment
information and is qualified in its entirety by the information and language
contained in the Fund's prospectus.
CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria are used in making that
assessment:
a. Amortization schedule (the larger the final maturity relative to
other maturities the more likely it will be treated as a note), and
b. Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 - Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
2. SP-2 - Satisfactory capacity to pay principal and interest.
3. SP-3 - Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as
part of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+" ).
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal bond rating is a current assessment of
the creditworthiness of an obligor, including obligors outside the U.S., with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees. Ratings of foreign obligors do
not take into account currency exchange and related uncertainties. The ratings
are based on current information furnished by the issuer or obtained by S&P from
other sources it considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default and capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the
successful completion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC AND C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D. MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
Moody's ratings are as follows:
1. AAA - Bonds that are rated AAA are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. AA - Bonds that are rated AA are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in AAA securities.
3. A - Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present that suggest a susceptibility to impairment sometime in the
future.
4. BAA - Bonds that are rated BAA are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. BA - Bonds that are rated BA are judged to have speculative
elements. Their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
6. B - Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through BAA in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
CON. (---) - Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals that begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the AA, A, and BAA groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols AA 1, A 1, and BAA 1.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes), and obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
some of which may be subject to repurchase agreements.
COMMERCIAL PAPER
Commercial paper will consist of issues rated at the time of purchase
A-1, by Standard & Poor's Corporation (S&P), or PRIME-1 by Moody's Investors
Service, Inc., (Moody's) or F-1 by Fitch Investors Services, Inc. (Fitch's); or,
if not rated, will be issued by companies that have an outstanding debt issue
rated at the time of purchase AAA, AA or A by Moody's, or AAA, AA or A by S&P,
or will be determined by Keystone to be of comparable quality.
A. S&P RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1.A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
2.A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. MOODY'S RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
1. The rating PRIME-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated PRIME-1 (or related supporting institutions) are
deemed to have a superior capacity for repayment of short term promissory
obligations. Repayment capacity of PRIME-1 issuers is normally evidenced by the
following characteristics:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate reliance
on debt and ample asset protection;
4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and
5) well established access to a range of financial markets and
assured sources of alternate liquidity.
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for
the deposit of funds. The issuer agrees to pay the amount deposited plus
interest to the bearer of the receipt on the date specified on the certificate.
The certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks or of savings and loan associations, including their
branches abroad, and of U.S. branches of foreign banks, which are members of the
Federal Reserve System or the Federal Deposit Insurance Corporation, and have at
least $1 billion in deposits as of the date of their most recently published
financial statements.
The Funds will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the "World Bank", the
Asian Development Bank or the Inter-American Development Bank. Additionally, the
Funds do not currently intend to purchase foreign securities (except to the
extent that certificates of deposit of foreign branches of U.S. banks may be
deemed foreign securities) or purchase certificates of deposit, bankers'
acceptances or other similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by a Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance and securities issued by the Government
National Mortgage Association ("GNMA"). Treasury bills have maturities of one
year or less. Treasury notes have maturities of one to ten years and Treasury
bonds generally have maturities of greater than ten years at the date of
issuance. GNMA securities include GNMA mortgage pass-through certificates. Such
securities are supported by the full faith and credit of the U.S.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the U.S.,
Small Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration,
The Tennessee Valley Authority, District of Columbia Armory Board and Federal
National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, a Fund will invest in
the securities issued by such an instrumentality only when Keystone determines
under standards established by the Board of Trustees that the credit risk with
respect to the instrumentality does not make its securities unsuitable
investments. U.S. government securities do not include international agencies or
instrumentalities in which the U.S. government, its agencies or
instrumentalities participate, such as the World Bank, Asian Development Bank or
the Inter-American Development Bank, or issues insured by the Federal Deposit
Insurance Corporation.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations purchased primarily through Certificates of
Participation ("CPOs") are used by state and local governments to finance the
purchase of property, and function much like installment purchase obligations.
The payments made by the municipality under the lease are used to repay interest
and principal on the bonds issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. The lessor is, in effect, a lender secured by the property being
leased. A feature that distinguishes CPOs from municipal debt is that the lease
that is the subject of the transaction must contain a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that provides that, while
the municipality will use its best efforts to make lease payments, the
municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds. Local administrations,
being faced with increasingly tight budgets, therefore have more discretion to
curtail payments under COPs than they do to curtail payments on traditionally
funded debt obligations. If the government lessee does not appropriate
sufficient monies to make lease payments, the lessor or its agent is typically
entitled to repossess the property. In most cases, however, the private sector
value of the property will be less than the amount the government lessee was
paying.
Criteria considered by the rating agencies and Keystone in assessing
the risk of appropriation include the issuing municipality's credit rating,
evaluation of how essential the leased property is to the municipality and term
of the lease compared to the useful life of the leased property. The Board of
Trustees reviews the COPs held in each Fund's portfolio to assure that they
constitute liquid investments based on various factors reviewed by Keystone and
monitored by the Board. Such factors include (a) the credit quality of such
securities and the extent to which they are rated or, if unrated, comply with
existing criteria and procedures followed to ensure that they are of quality
comparable to the ratings required for each Fund's investment, including an
assessment of the likelihood that the leases will not be cancelled; (b) the size
of the municipal securities market, both in general and with respect to COPs;
and (c) the extent to which the type of COPs held by each Fund trade on the same
basis and with the same degree of dealer participation as other municipal bonds
of comparable credit rating or quality.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Funds intend to enter into financial futures contracts as a hedge
against changes in prevailing levels of interest rates to seek relative
stability of principal and to establish more definitely the effective return on
securities held or intended to be acquired by a Fund or as a hedge against
changes in the prices of securities held by a Fund or to be acquired by a Fund.
A Fund's hedging may include sales of futures as an offset against the effect of
expected increases in interest rates or securities prices and purchases of
futures as an offset against the effect of expected declines in interest rates.
For example, when a Fund anticipates a significant market or market
sector advance, it will purchase a stock index futures contract as a hedge
against not participating in such advance at a time when a Fund is not fully
invested. The purchase of a futures contract serves as a temporary substitute
for the purchase of individual securities which may then be purchased in an
orderly fashion. As such purchases are made, an equivalent amount of index based
futures contracts would be terminated by offsetting sales. In contrast, a Fund
would sell stock index futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Fund's portfolio. To the extent that the Fund's portfolio changes in value
in correlation with a given index, the sale of futures contracts on that index
would substantially reduce the risk to the portfolio of a market decline or
change in interest rates, and, by doing so, provide an alternative to the
liquidation of the Fund's securities positions and the resulting transaction
costs.
The Funds intend to engage in options transactions that are related to
financial futures contracts for hedging purposes and in connection with the
hedging strategies described above.
Although techniques other than sales and purchases of futures contracts
and related options transactions could be used to reduce the Funds' exposure to
interest rate and/or market fluctuations, the Funds may be able to hedge their
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Funds do not intend to
take delivery of the instruments underlying futures contracts they hold, the
Funds do not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
Futures contracts are transactions in the commodities markets rather
than in the securities markets. A futures contract creates an obligation by the
seller to deliver to the buyer the commodity specified in the contract at a
specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the commodity
specified at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify financial instruments or financially
based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal financial futures exchanges in the United States are The Board of
Trade of the City of Chicago, the Chicago Mercantile Exchange, the International
Monetary Market (a division of the Chicago Mercantile Exchange), the New York
Futures Exchange and the Kansas City Board of Trade. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
INTEREST RATE FUTURES CONTRACTS
The sale of an interest rate futures contract creates an obligation by
a Fund, as seller, to deliver the type of financial instrument specified in the
contract at a specified future time for a specified price. The purchase of an
interest rate futures contract creates an obligation by a Fund, as purchaser, to
accept delivery of the type of financial instrument specified at a specified
future time for a specified price. The specific securities delivered or
accepted, respectively, at settlement date, are not determined until at or near
that date. The determination is in accordance with the rules of the exchange on
which the futures contract sale or purchase was made.
Currently, interest rate futures contracts can be purchased or sold on
90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with
maturities between 6 1/2 and 10 years, GNMA certificates, 90-day domestic bank
certificates of deposit, 90-day commercial paper, and 90-day Eurodollar
certificates of deposit. It is expected that futures contracts trading in
additional financial instruments will be authorized. The standard contract size
is $100,000 for futures contracts in U.S. Treasury bonds, U.S. Treasury notes
and GNMA certificates, and $1,000,000 for the other designated contracts. While
U.S. Treasury bonds, U.S. Treasury bills and U.S. Treasury notes are backed by
the full faith and credit of the U.S. government and GNMA certificates are
guaranteed by a U.S. government agency, the futures contracts in U.S. government
securities are not obligations of the U.S. Treasury.
INDEX BASED FUTURES CONTRACTS, OTHER THAN STOCK INDEX BASED
It is expected that bond index and other financially based index
futures contracts will be developed in the future. It is anticipated that such
index based futures contracts will be structured in the same way as stock index
futures contracts but will be measured by changes in interest rates, related
indexes or other measures, such as the consumer price index. In the event that
such futures contracts are developed, the Funds will sell interest rate index
and other index based futures contracts to hedge against changes which are
expected to affect the Funds' portfolios.
The purchase or sale of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, to
initiate trading an amount of cash, cash equivalents, money market instruments,
or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of the contract
amount must be deposited by a Fund with the Broker. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to a Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and from
the Broker, are made on a daily basis as the value of the underlying instrument
or index fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as mark-to-market. For example, when a
Fund has purchased a futures contract and the price of the underlying financial
instrument or index has risen, that position will have increased in value, and
the Fund will receive from the Broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the underlying financial instrument or index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the Broker. At any time prior to expiration of the
futures contract, a Fund may elect to close the position. A final determination
of variation margin is then made, additional cash is required to be paid to or
released by the Broker, and the Fund realizes a loss or gain.
The Trust intends to enter into arrangements with its custodian and
with Brokers to enable the initial margin of a Fund and any variation margin to
be held in a segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which a Fund enters into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument or index and same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which a Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of any transaction costs
incurred by the Fund.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September U.S. Treasury bills on an
exchange may be fulfilled at any time before delivery of the contract is
required (i.e. on a specified date in September, the "delivery month") by the
purchase of one contract of September U.S. Treasury bills on the same exchange.
In such instance the difference between the price at which the futures contract
was sold and the price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to a Fund.
There can be no assurance, however, that a Fund will be able to enter
into an offsetting transaction with respect to a particular contract at a
particular time. If a Fund is not able to enter into an offsetting transaction,
the Fund will continue to be required to maintain the margin deposits on the
contract and to complete the contract according to its terms.
OPTIONS ON FINANCIAL FUTURES
The Funds intend to purchase call and put options on financial futures
contracts and sell such options to terminate an existing position. Options on
futures are similar to options on stocks except that an option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) rather than to purchase or sell
stock at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account. This amount
represents the amount by which the market price of the futures contract at
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised the last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and value of the futures contract.
The Funds intend to use options on financial futures contracts in
connection with hedging strategies. In the future the Funds may use such options
for other purposes.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS
The purchase of protective put options on financial futures contracts
is analogous to the purchase of protective puts on individual stocks, where an
absolute level of protection is sought below which no additional economic loss
would be incurred by a Fund. Put options may be purchased to hedge a portfolio
of stocks or debt instruments or a position in the futures contract upon which
the put option is based.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS
The purchase of call options on financial futures contracts represents
a means of obtaining temporary exposure to market appreciation at limited risk.
It is analogous to the purchase of a call option on an individual stock, which
can be used as a substitute for a position in the stock itself. Depending on the
pricing of the option compared to either the futures contract upon which it is
based, or upon the price of the underlying financial instrument or index itself,
purchase of a call option may be less risky than the ownership of the interest
rate or index based futures contract or the underlying securities. Call options
on commodity futures contracts may be purchased to hedge against an interest
rate increase or a market advance when a Fund is not fully invested.
USE OF NEW INVESTMENT TECHNIQUES INVOLVING FINANCIAL FUTURES CONTRACTS OR
RELATED OPTIONS
The Funds may employ new investment techniques involving financial
futures contracts and related options. The Funds intend to take advantage of new
techniques in these areas which may be developed from time to time and which are
consistent with the Fund's investment objective. The Trust believes that no
additional techniques have been identified for employment by the Funds in the
foreseeable future other than those described above.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS ON
SUCH FUTURES CONTRACTS
A Fund will not enter into a futures contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin deposits on such
futures contracts.
Each Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that a Fund owns, or futures contracts will be purchased to protect a
Fund against an increase in the price of securities it intends to purchase. The
Funds do not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents equal to the market value of the futures
contracts will be deposited in a segregated account with the Trust's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, a Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on futures
contracts as of the end of the year as well as those actually realized during
the year. Any gain or loss recognized with respect to a futures contract is
considered to be 60% long term and 40% short term, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year. The federal income tax treatment of gains or losses from transactions in
options on futures is unclear.
In order for a Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income. Any net gain realized
from the closing out of futures contracts, for purposes of the 90% requirement,
will be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of a Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, a Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
RISKS OF FUTURES CONTRACTS
Financial futures contracts prices are volatile and are influenced,
among other things, by changes in stock prices, market conditions, prevailing
interest rates and anticipation of future stock prices, market movements or
interest rate changes, all of which in turn are affected by economic conditions,
such as government fiscal and monetary policies and actions, and national and
international political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; differences between the
securities being hedged and the financial instruments and indexes underlying the
standard futures contracts available for trading, in such respects as interest
rate levels, maturities and creditworthiness of issuers, or identities of
securities comprising the index and those in a Fund's portfolio. In addition,
futures contract transactions involve the remote risk that a party be unable to
fulfill its obligations and that the amount of the obligation will be beyond the
ability of the clearing broker to satisfy. A decision of whether, when and how
to hedge involves the exercise of skill and judgment, and even a well conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out, and a 15% decrease would result in a loss equal to 150% of the
original margin deposit. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
However, a Fund would presumably have sustained comparable losses if, instead of
entering into the futures contract, it had invested in the underlying financial
instrument. Furthermore, in order to be certain that a Fund has sufficient
assets to satisfy its obligations under a futures contract, the Fund will
establish a segregated account in connection with its futures contracts which
will hold cash or cash equivalents equal in value to the current value of the
underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
RISKS OF OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above for financial futures
contracts, there are several special risks relating to options on futures
contracts. The ability to establish and close out positions on such options will
be subject to the development and maintenance of a liquid secondary market.
There is no assurance that a liquid secondary market will exist for any
particular contract or at any particular time. A Fund will not purchase options
on any futures contract unless and until it believes that the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with the futures contracts.
Compared to the use of futures contracts, the purchase of options on such
futures involves less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). However,
there may be circumstances when the use of an option on a futures contract would
result in a loss to a Fund, even though the use of a futures contract would not,
such as when there is no movement in the level of the futures contract.
<PAGE>
KEYSTONE STATE TAX FREE FUND - SERIES II
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
Item 24(a). Financial Statements
For the California Fund:
Schedule of Investments November 30, 1996
Financial Highlights
Class A, B and C Shares 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, 1984
Statement of Assets and Liabilities November 30, 1996
Statement of Operations Year ended November 30, 1996
Statements of Changes in Net Assets For each of the years in the two-year
period ended November 30, 1996
For the Missouri Fund:
Schedule of Investments November 30, 1996
Financial Highlights
Class A, B and C Shares 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, 1984
Statement of Assets and Liabilities November 30, 1996
Statement of Operations Year ended Novmeber 30, 1996
Statements of Changes in Net Assets For each of the years in the two-year
period ended November 30, 1996
Notes to Financial Statements
Independent Auditors' Report December 27, 1996
(24)(b) Exhibits
(1) Registrant's Declaration of Trust, as amended, (the "Declaration
of Trust")(1)
(2)(a) Registrant's By-Laws (the "By-Laws")(1)
(b) Amendment to By-Laws(2)
(3) Not applicable
(4)(a) The Declaration of Trust, Articles III, V, VI and VIII (1)
(b) The By-Laws, Article 2, Section 2.5 (1)
(5) Investment Advisory and Management Agreement between Registrant and
Keystone Investment Management Company ("KIMCO")(the "Advisory
Agreement")(3)
(6)(a) Forms of Principal Underwriting Agreements between Registrant and
Evergreen Keystone Distributor, Inc. for each class of the Registrant's
shares ("EKD") (the "Principal Underwriting Agreement")(3)
(b) Form of Dealer Agreement used by EKD(3)
(7) Not applicable
(8) Custodian, Fund Accounting and Recordkeeping Agreement between
Registrant and State Street Bank and Trust Company, as amended
("Custodian Agreement")(1)
(9)(a) Form of Marketing Services Agreement between EKD and Evergreen
Keystone Investment Services, Inc. ("EKIS")(the "Marketing
Services Agreement")(3)
(b) Form of Sub-administrator Agreement between KIMCO and The BISYS
Group, Inc.(the "Sub-administrator Agreement")(3)
(c) Principal Underwriting Agreements with EKIS (each a "Continuation
Agreement")(4)
(10)(a) Opinion and Consent of counsel on the legality of Keystone California
Tax Free Fund shares registered(4)
(b) Opinion and Consent of counsel on the legality of Keystone Missouri
Tax Free Fund shares registered(3)
(11)(a) Consent as to use of Independent Auditor's Report(2)
(b) Opinion and consent of California counsel(2)
(c) Opinion and consent of Missouri counsel(2)
(12) Not applicable
(13) Subscription Agreement(5)
(14) Model plans used in the establishment of retirement plans(6)
(15) Class A, Class B and Class C Distribution Plans(1)
(16) Performance Calculations(2)
(17) Financial Data Schedules(2)
(18) Multiple Class Plan(3)
(19) Powers of Attorney(2)
- ----------------------
(1) Filed with Post-Effective Amendment No. 3 ("Post-Effective Amendment
No. 3") to Registration Statement No. 33-73730/811-8254 (the "Registration
Statement") and incorporated by reference herein.
(2) Filed herewith.
(3) Filed with Post-Effective Amendment No. 4 ("Post-Effective Amendment
No. 4") to Registration Statement and incorporated by reference herein.
(4) Filed with Registrant's Rule 24f-2 Notice on January 24, 1997.
(the "24f-2 Notice") and incorporated by reference herein.
(5) Filed with the Registration Statement and incorporated by reference
herein.
(6) Filed with Post-Effective Amendment No. 66 to Registration Statement
No. 2-10527/811-96 and incorporated by reference herein.
Item 25. Persons Controlled by or Under Common Control With Registrant
Not applicable.
Item 26. Number of Holders of Securities
Number of Record
Title of Class Holders as of February 28, 1997
- -------------- -------------------------------
Keystone California Tax Free Fund
Shares of Beneficial Interest,
without par value:
Class A 159
Class B 591
Class C 54
Keystone Missouri Tax Free Fund
Shares of Beneficial Interest,
without par value:
Class A 117
Class B 761
Class C 63
Item 27. Indemnification
Provisions for the indemnification of the Registrant's Trustees and
officers are contained in Article VIII of Registrant's Declaration of
Trust, a copy of which was filed with Post-Effective Amendment No. 3
and is incorporated by reference herein.
Provisions for the indemnification of EKD, the Registrant's Principal
Underwriter, are contained in Section 10 of the Class A and C Principal
Underwriting Agreements, copies of the form of which were filed
with Post-Effective Amendment No. 4 and are incorporated by reference
herein.
Provisions for the indemnification of EKD are contained in Section 9
of the Class B-2 Principal Underwriting Agreement, a copy of the form
of which was filed with Post-Effective Amendment No. 4 and is
incorporated by reference herein.
Provisions for the indemnification of EKIS are contained in Section 5
of the Class A and C Continuation Agreement, a copy of which is filed
herewith.
Provisions for the indemnification of EKIS are contained in Section 9
of the Class B Continuation Agreements, copies of which are filed
herewith.
Provisions for the indemnification of KIMCO, Registrant's investment
adviser, are contained in Section 5 of the Advisory Agreement, a copy
of which was filed with Post-Effective Amendment No. 4 and is
incorporated by reference herein.
Item 28. Businesses and Other Connections of Investment Adviser
The following table lists the names of the various officers and
directors of KIMCO, Registrant's investment adviser, and their
respective positions. For each named individual, the table lists, for
at least the past two fiscal years, (i) any other organizations
(excluding investment advisory clients) with which the officer and/or
director has had or has substantial involvement; and (ii) positions
held with such organizations.
LIST OF OFFICERS AND DIRECTORS OF
KEYSTONE INVESTMENT MANAGEMENT COMPANY
<TABLE>
<CAPTION>
Position with
Keystone
Investment
Name Management Company Other Business Affiliations
- ---- ------------------ ---------------------------
<S> <C> <C>
Albert H. Chairman of Senior Vice President
Elfner, III the Board, First Union Keystone, Inc.
Chief Executive Keystone Asset Corporation
Officer President and Director:
Keystone Trust Company
Director or Trustee:
Evergreen Keystone Investment Services, Inc
Evergreen Keystone Service Company
Boston Children's Services Associates
Middlesex School
Middlebury College
Formerly:
Chairman of the Board,
Chief Executive Officer,
President and Director:
Keystone Management, Inc.
Keystone Software, Inc.
Keystone Capital Corporation
Trustee or Director:
Neworld Bank
Robert Van Partners, Inc.
Fiduciary Investment Company, Inc.
Formerly Chairman of the Board and Director:
Keystone Fixed Income Advisers, Inc.
Keystone Institutional Company, Inc.
Philip M. Byrne Senior Vice Formerly:
President President and Director:
Keystone Institutional Company, Inc.
Formerly Senior Vice President:
Keystone Investments, Inc.
Herbert L. Senior Vice None
Bishop, Jr. President
Donald C. Dates Senior Vice None
President
Gilman Gunn Senior Vice None
President
Edward F. Senior Vice Formerly Senior Vice President,
Godfrey President, Chief Financial Officer and Treasurer:
Chief Financial First Union Keystone, Inc.
Officer and Treasurer Evergreen Keystone Investment Services, Inc.
Formerly:
Treasurer:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Treasurer and Director:
Hartwell Keystone Advisers, Inc.
Rosemary D. Senior Vice
Van Antwerp President,
General Counsel Senior Vice President:
and Secretary Evergreen Keystone Service Company
Senior Vice President and Secretary:
Evergreen Keystone Investment Services, Inc.
Formerly:
Senior Vice President, General Counsel and Secretary:
Keystone Investments, Inc.
Senior Vice President and General Counsel:
Keystone Institutional Company, Inc.
Senior Vice President, General Counsel and Director:
Fiduciary Investment Company, Inc.
Senior Vice President, General Counsel, Director and Secretary:
Keystone Management, Inc.
Keystone Software, Inc.
Senior Vice President and Secretary:
Hartwell Keystone Advisers, Inc.
Vice President and Secretary:
Keystone Fixed Income Advisers, Inc.
J. Kevin Kenely Vice President Vice President:
Evergreen Keystone Investment Services, Inc.
Formerly:
Controller
Keystone Investments, Inc.
Keystone Investment Management Company
Keystone Investment Distributors Company
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Vice President:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Keystone Investments, Inc.
John D. Rogol Vice President Vice President and
Controller:
Evergreen Keystone Investment Services, Inc.
Treasurer and Vice President:
Evergreen Keystone Service Company
Controller:
Keystone Asset Corporation
Formerly:
Controller:
Keystone Institutional Company, Inc.
Keystone Management, Inc.
Keystone Software, Inc.
Fiduciary Investment Company, Inc.
Formerly Vice President and Controller:
Keystone Investments, Inc.
John Addeo Vice President None
Andrew Baldassarre Vice President None
David Benhaim Vice President None
Donald Bisson Vice President None
Francis X. Claro Vice President None
Kristine R. Vice President None
Cloyes
Christopher P. Senior Vice None
Conkey President
J. Gary Craven Senior Vice None
President
Richard Cryan Senior Vice None
President
Maureen E. Senior Vice None
Cullinane President
Betsy Hutchings Sr. Vice President None
Walter T. Senior Vice None
McCormick President
George F. Wilkins Senior Vice None
President
George E. Dlugos Vice President None
Antonio T. Docal Vice President None
Dana E. Erikson Vice President None
George J. Kimball Vice President None
JoAnn L. Lyndon Vice President None
John C. Vice President None
Madden, Jr.
Eleanor H. Marsh Vice President None
James D. Medvedeff Vice President None
Stanley M. Niksa Vice President None
Jonathan A. Noonan Vice President None
Robert E. O'Brien Vice President None
Margery C. Parker Vice President None
Joyce W. Petkovich Vice President None
Daniel A. Rabasco Vice President None
Harlen R. Sanderling Vice President None
Kathy K. Wang Vice President None
Judith A. Warners Vice President None
Peter Willis Vice President None
Richard A. Wisentaner Vice President None
Cheryle E. Womble Vice President None
Walter Zagrobski Vice President None
</TABLE>
All of the officers are located at Keystone Investment Management Company,
200 Berkeley Street, Boston, Massachusetts 02116.
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITER
Evergreen Keystone Distributor, Inc.
The Director and principal executive officers are:
Director Michael C. Petrycki
Officers Robert A. Hering President
Michael C. Petrycki Vice President
Lawrence Wagner VP, Chief Financial Officer
Steven D. Blecher VP, Treasurer, Secretary
Elizabeth Q. Solazzo Assistant Secretary
Evergreen Keystone Distributor, Inc. acts as Distributor for the
following registered investment companies or separate series thereof:
Evergreen Trust
Evergreen Fund
Evergreen Aggressive Growth Fund
Evergreen Equity Trust:
Evergreen Global Real Estate Equity Fund
Evergreen U.S. Real Estate Equity Fund
Evergreen Global Leaders Fund
The Evergreen Limited Market Fund, Inc.
Evergreen Growth and Income Fund
The Evergreen Total Return Fund
The Evergreen American Retirement Trust:
The Evergreen American Retirement Fund
Evergreen Small Cap Equity Income Fund
The Evergreen Foundation Trust:
Evergreen Foundation Fund
Evergreen Tax Strategic Foundation Fund
The Evergreen Municipal Trust:
Evergreen Short-Intermediate Municipal Fund
Evergreen Short-Intermediate Municipal Fund-CA
Evergreen Florida High Income Municipal Bond Fund
Evergreen Tax Exempt Money Market Fund
Evergreen Institutional Tax Exempt Money Market Fund
Evergreen Money Market Trust
Evergreen Money Market Fund
Evergreen Institutional Money Market Fund
Evergreen Institutional Treasury Money Market Fund
Evergreen Investment Trust
Evergreen Emerging Markets Growth Fund
Evergreen International Equity Fund
Evergreen Balanced Fund
Evergreen Value Fund
Evergreen Utility Fund
Evergreen Short-Intermediate Bond Fund(formerly Evergreen Fixed Income)
Evergreen U.S. Government Fund
Evergreen Florida Municipal Bond Fund
Evergreen Georgia Municipal Bond Fund
Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund
Evergreen Virginia Municipal Bond Fund
Evergreen High Grade Tax Free Fund
Evergreen Treasury Money Market Fund
The Evergreen Lexicon Fund:
Evergreen Intermediate-Term Government Securities Fund
Evergreen Intermediate-Term Bond Fund
Evergreen Tax Free Trust:
Evergreen Pennsylvania Tax Free Money Market Fund
Evergreen New Jersey Tax Free Income Fund
Evergreen Variable Trust:
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
Evergreen VA Global Leaders Fund
Keystone Quality Bond Fund (B-1)
Keystone Diversified Bond Fund (B-2)
Keystone High Income Bond Fund (B-4)
Keystone Balanced Fund (K-1)
Keystone Strategic Growth Fund (K-2)
Keystone Growth and Income Fund (S-1)
Keystone Mid-Cap Growth Fund (S-3)
Keystone Small Company Growth Fund (S-4)
Keystone Balanced Fund II
Keystone Capital Preservation and Income Fund
Keystone Fund for Total Return
Keystone Fund of the Americas
Keystone Global Opportunities Fund
Keystone Global Resources and Development Fund
Keystone Government Securities Fund
Keystone America Hartwell Emerging Growth Fund, Inc.
Keystone Institutional Adjustable Rate Fund
Keystone Institutional Trust
Keystone Institutional Small Capitalization Growth Fund
Keystone Intermediate Term Bond Fund
Keystone International Fund Inc.
Keystone Liquid Trust
Keystone Omega Fund
Keystone Precious Metals Holdings, Inc.
Keystone Small Company Growth Fund II
Keystone State Tax Free Fund
Keystone New York Tax Free Fund
Keystone Pennsylvania Tax Free Fund
Keystone Massachusetts Tax Free Fund
Keystone Florida Tax Free Fund
Keystone State Tax Free Fund - Series II
Keystone Missouri Tax Free Fund
Keystone California Tax Free Fund
Keystone Strategic Income Fund
Keystone Tax Free Fund
Keystone Tax Free Income Fund
Item 29(c). - Not applicable
Item 30. Location of Accounts and Records
First Union Keystone, Inc.
200 Berkeley Street
Boston, Massachusetts 02110
Iron Mountain
3431 Sharp Slot Road
Swansea, Massachusetts 02277
State Street Bank and Trust Company
776 Heritage Drive
Quincy, Massachusetts 02171
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant hereby undertakes to furnish to each person to whom a copy
of Registrant's prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders upon request and
without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for the effectiveness of this Amendment to its Registration
Statment pursuant to Rule 485(b) under the Securities act of 1933 and has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereto duly authorized in the City of Boston, and The
Commonwealth of Massachusetts, on the 28th day of March, 1997.
KEYSTONE STATE TAX FREE FUND - SERIES II
By: /s/ George S. Bissell
-----------------------------
George S. Bissell
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registrant's Registration Statement has been signed below by the following
persons in the capacities indicated on the 28th day of March, 1997.
<TABLE>
<S> <C> <C>
/s/ George S. Bissell /s/ Charles F. Chapin
- ------------------------ ------------------------- -------------------------
George S. Bissell Charles F. Chapin* William Walt Pettit
Chairman of the Board of Trustees Trustee Trustee
and Chief Executive Officer
/s/ John J. Pileggi /s/ K. Dun Gifford /s/ David M. Richardson
- ------------------------- ------------------------- -------------------------
John J. Pileggi K. Dun Gifford* David M. Richardson*
President and Treasurer (Principal Trustee Trustee
Financial and Accounting Officer)
/s/ Frederick Amling
- ------------------------- ------------------------- -------------------------
Frederick Amling* James S. Howell Russell A. Salton, III MD
Trustee Trustee Trustee
/s/ Laurence B. Ashkin /s/ Leroy Keith, Jr.
- ------------------------- ------------------------- -------------------------
Laurence B. Ashkin Leroy Keith, Jr.* Michael S. Scofield
Trustee Trustee Trustee
/s/ Charles A. Austin, III /s/ F. Ray Keyser, Jr. /s/ Richard J. Shima
- ------------------------- ------------------------- -------------------------
Charles A. Austin, III* F. Ray Keyser, Jr.* Richard J. Shima*
Trustee Trustee Trustee
/s/ Andrew J. Simons
- ------------------------- ------------------------- -------------------------
Foster Bam Gerald M. McDonell Andrew J. Simons*
Trustee Trustee Trustee
/s/ Edwin D. Campbell
- ------------------------- -------------------------
Edwin D. Campbell* Thomas L. McVerry
Trustee Trustee
</TABLE>
*By:/s/ Rosemary D. Van Antwerp
- -------------------------------
Rosemary D. Van Antwerp**
Attorney-in-Fact
** Rosemary D. Van Antwerp, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and attached hereto as Exhibit 24(b)(19).
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
1 Declaration of Trust, as amended(1)
2 (a) By-Laws(1)
(b) Amemdment to By-Laws(2)
5 Advisory Agreement(3)
6 (a) Form of Principal Underwriting Agreements(3)
(b) Form of Dealer Agreement(3)
8 Custodian Agreement(1)
9 (a) Form of Marketing Services Agreement (3)
(b) Form of Sub-administrator Agreement(3)
(c) Continuation Agreements(3)
10 Opinion and Consent of Counsel(2)(4)
13 Subscription Agreement(5)
14 Model Retirement Plans(6)
15 Class A, B and C Distribution Plans(1)
16 Performance Calculations(2)
17 Financial Data Schedules(2)
18 Multiple Class Plan(3)
19 Powers of Attorney(2)
- ---------------------
(1) Incorporated by reference herein to Post-Effective Amendment No. 3.
(2) Filed herewith.
(3) Incorporated by reference herein to Post-Effective Amendment No. 4.
(4) Incorporated by reference herein to Registrant's 24f-2 Notice
(5) Incorporated by reference herein to the Registration Statement
(6) Incorporated by reference herein to Post-Effective Amendment No. 66 to
Registration Statement No. 2-10527/811-96
KEYSTONE STATE TAX FREE FUND - SERIES II
Revised Article 4, Section 4.1 of the By-Laws as adopted by the Board
of Trustees on June 19, 1996:
4.1 Term. A Trustee shall serve until his or her death, retirment,
resignation or removal from office or until his or her successor is elected and
qualifies. A Trustee holding office shall automatically retire on December 31 of
the year in which he or she reaches the age of seventy-five.
FORM OF
PRINCIPAL UNDERWRITING AGREEMENT
KEYSTONE AMERICA FUND FAMILY
CLASS A AND C SHARES
AGREEMENT made this 11th day of December, 1996 by and between each of
the parties listed on Exhibit A attached hereto and made a part hereof, each for
itself and not jointly (each a "Fund"), and Evergreen Keystone Investment
Services, Inc., a Delaware corporation ("Principal Underwriter").
It is hereby mutually agreed as follows:
1. The Fund hereby appoints Principal Underwriter a principal
underwriter of the Class A and Class C shares of beneficial interest of the Fund
sold prior to December 11, 1996 ("Shares") as an independent contractor upon the
terms and conditions hereinafter set forth. Except as the Fund may from time to
time agree, Principal Underwriter will act as agent for the Fund and not as
principal.
2. Having assigned all rights to commission payments for Shares sold on
or after December 1, 1996 but before December 11, 1996 to Evergreen Keystone
Distributor, Inc., Principal Underwriter will not be entitled to commissions on
such Shares. Principal Underwriter shall be entitled to receive commission
payments for sales of the Class A and C shares (as set forth on Exhibit B
attached hereto and made a part hereof) with respect to all Class A and C shares
sold prior to December 1, 1996 and outstanding as of the opening of business on
such date ("Pre-Acquisition Shares") and to receive contingent deferred sales
charges on such Pre-Acquisition Shares as set forth in the then current
prospectus and/or statement of additional information of the Fund. For purposes
of this Principal Underwriting Agreement, Pre-Acquisition Shares shall be such
shares which are defined in Schedule I attached hereto as Distributor Shares
calculated as though the Distributor Last Sale Cut-Off Date, as such term is
defined in Schedule I, was November 30, 1996. Principal Underwriter may reallow
all or a part of such commissions to such brokers, dealers or other persons as
Principal Underwriter may determine.
3. Principal Underwriter shall not make any representations concerning
the Shares except those contained in the then current prospectus and/or
statement of additional information covering the Shares and in printed
information approved by the Fund as information supplemental to such prospectus
and statement of additional information.
4. Principal Underwriter agrees to comply with the Business Conduct
Rules of the National Association of Securities Dealers, Inc.
5. The Fund agrees to indemnify and hold harmless the Principal
Underwriter, its officers and Directors and each person, if any, who controls
the Principal Underwriter within the meaning of Section 15 of the Securities Act
of 1933 ("1933 Act"), against any losses, claims, damages, liabilities and
expenses (including the cost of any legal fees incurred in connection therewith)
which the Principal Underwriter, its officers, Directors or any such controlling
person may incur under the 1933 Act, under any other statute, at common law or
otherwise, arising out of or based upon
a) any untrue statement or alleged untrue statement of a
material fact contained in the Fund's registration statement, pros
pectus or statement of additional information (including amendments and
supplements thereto), or
b) any omission or alleged omission to state a material fact
required to be stated in the Fund's registration statement, prospectus
or statement of additional information necessary to make the statements
therein not misleading, provided, however, that insofar as losses,
claims, damages, liabilities or expenses arise out of or are based upon
any such untrue statement or omission or alleged untrue statement or
omission made in reliance and in conformity with information furnished
to the Fund by the Principal Underwriter for use in the Fund's
registration statement, prospectus or statement of additional
information, such indemnification is not applicable. In no case shall
the Fund indemnify the Principal Underwriter or its controlling person
as to any amounts incurred for any liability arising out of or based
upon any action for which the Principal Underwriter, its officers and
Directors or any controlling person would otherwise be subject to
liability by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of the
reckless disregard of its obligations and duties under this Agreement.
6. The Principal Underwriter agrees to indemnify and hold harmless the
Fund, its officers, Trustees and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act against any loss, claims,
damages, liabilities and expenses (including the cost of any legal fees incurred
in connection therewith) which the Fund, its officers, Directors or any such
controlling person may incur under the 1933 Act, under any other statute, at
common law or otherwise arising out of the acquisition of any Shares by any
person which
a) may be based upon any wrongful act by the Principal
Underwriter or any of its employees or representatives, or
b) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in the Fund's registration
statement, prospectus or statement of additional information (including
amendments and supplements thereto), or any omission or alleged
omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
or confirmed in writing to the Fund by the Principal Underwriter.
7. To the extent required by the Fund's 12b-1 Plans, Principal
Underwriter shall provide to the Board of Trustees of the Fund in connection
with such 12b-1 Plan, not less than quarterly, a written report of the amounts
expended pursuant to such 12b-1 Plan and the purpose for which such expenditures
were made.
8. The term of this Agreement shall begin on the date hereof and,
unless sooner terminated or continued as provided below, shall expire after two
years. This Agreement shall continue in effect after such term if its
continuance is specifically approved by a majority of the Trustees of the Fund
and a majority of the 12b-1 Trustees referred to in the 12b-1 Plans of the Fund
("Rule 12b-1 Trustees") at least annually in accordance with the 1940 Act and
the rules and regulations thereunder.
This Agreement may be terminated at any time, without payment
of any penalty, by vote of a majority of any Rule 12b-1 Trustees or by a vote of
a majority of the Fund's outstanding Shares on not more than sixty (60) days
written notice to any other party to the Agreement; and shall terminate
automatically in the event of its assignment (as defined in the 1940 Act).
9. This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts.
10. The Fund is a Massachusetts business trust established under a
Declaration of Trust, as it may be amended from time to time. The obligations of
the Fund are not personally binding upon, nor shall recourse be had against, the
private property of any of the Trustees, shareholders, officers, employees or
agents of the Fund, but only the property of the Fund shall be bound.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE BALANCED FUND II
KEYSTONE CAPITAL PRESERVATION AND INCOME FUND
KEYSTONE FUND FOR TOTAL RETURN
KEYSTONE FUND OF THE AMERICAS
KEYSTONE GLOBAL OPPORTUNITIES FUND
KEYSTONE GLOBAL RESOURCES AND DEVELOPMENT FUND
KEYSTONE GOVERNMENT SECURITIES FUND
KEYSTONE INTERMEDIATE TERM BOND FUND
KEYSTONE LIQUID TRUST
KEYSTONE OMEGA FUND
KEYSTONE SMALL COMPANY GROWTH FUND II
KEYSTONE STATE TAX FREE FUND
FLORIDA TAX FREE FUND
MASSACHUSETTS TAX FREE FUND
NEW YORK TAX FREE FUND
PENNSYLVANIA TAX FREE FUND
KEYSTONE STATE TAX FREE FUND-SERIES II
CALIFORNIA TAX FREE FUND
MISSOURI TAX FREE FUND
KEYSTONE STRATEGIC INCOME FUND
KEYSTONE TAX FREE INCOME FUND
KEYSTONE WORLD BOND FUND
each for itself and not jointly
By: /s/ George S. Bissell
-------------------------
George S. Bissell
Chairman
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
By: /s/ Rosemary D. Van Antwerp
---------------------------
Rosemary D. Van Antwerp
Senior Vice President
<PAGE>
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS B-1 SHARES
OF
KEYSTONE STATE TAX FREE FUND - SERIES II
AGREEMENT made this 11th day of December 1996 by and between Keystone
World Bond Fund, a Massachusetts business trust, ("Fund"), and Evergreen
Keystone Investment Services, Inc., a Delaware corporation (the "Principal
Underwriter").
The Fund, individually and/or on behalf of its series, if any,
referred to above in the title of this Agreement, to which series, if any, this
Agreement shall relate, as applicable (the "Fund"), may act as the distributor
of certain securities of which it is the issuer pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act"). Accordingly, it is hereby
mutually agreed as follows:
1. The Fund hereby appoints the Principal Underwriter a principal
underwriter of the Class B-1 shares of beneficial interest of the Fund ("B-1
Shares") as an independent contractor upon the terms and conditions hereinafter
set forth. The general term "Shares" as used herein has the same meaning as is
provided therefor in Schedule I hereto. Except as the Fund may from time to time
agree, the Principal Underwriter will act as agent for the Fund and not as
principal.
2. The Principal Underwriter will use its best efforts to find
purchasers for the B-1 Shares and to promote distribution of the B-1 Shares and
may obtain orders from brokers, dealers or other persons for sales of B-1 Shares
to them. No such dealer, broker or other person shall have any authority to act
as agent for the Fund; such dealer, broker or other person shall act only as
principal in the sale of B-1 Shares.
3. Sales of B-1 Shares by Principal Underwriter shall be at the public
offering price determined in the manner set forth in the prospectus and/or
statement of additional information of the Fund current at the time of the
Fund's acceptance of the order for B-2 Shares. All orders shall be subject to
acceptance by the Fund and the Fund reserves the right in its sole discretion to
reject any order received. The Fund shall not be liable to anyone for failure to
accept any order.
4. On all sales of B-1 Shares made prior to December 11, 1996. Fund
shall pay the Principal Underwriter Distribution Fees (as defined in Section 14
hereof), as commissions for the sale of B-1 Shares and other Shares, which shall
be paid in conjunction with distribution fees paid to the Principal Underwriter
by other classes of Shares of the Fund to the extent required in order to comply
with Section 14 hereof, and shall pay over to the Principal Underwriter CDSCs
(as defined in Section 14 hereof) as set forth in the Fund's current prospectus
and statement of additional information, and as required by Section 14 hereof.
The Principal Underwriter shall also receive payments consisting of shareholder
service fees ("Service Fees") at the rate of .25% per annum of the average daily
net asset value of the Class B-1 Shares outstanding prior to December 11, 1996.
The Principal Underwriter may allow all or a part of said Distribution Fees and
CDSCs received by it (not paid to others as hereinafter provided) to such
persons as Principal Underwriter may determine.
5. Payment to the Fund for B-1 Shares shall be in New York or Boston
Clearing House funds received by the Principal Underwriter within three business
days after notice of acceptance of the purchase order and the amount of the
applicable public offering price has been given to the purchaser. If such
payment is not received within such period, the Fund reserves the right, without
further notice, forthwith to cancel its acceptance of any such order. The Fund
shall pay such issue taxes as may be required by law in connection with the
issue of the B-1 Shares.
6. The Principal Underwriter shall not make in connection with the B-1
Shares any representations concerning the B-1 Shares except those contained in
the then current prospectus and/or statement of additional information covering
the Shares and in printed information approved by the Fund as information
supplemental to such prospectus and statement of additional information. [Copies
of the then current prospectus and statement of additional information and any
such printed supplemental information will be supplied by the Fund to the
Principal Underwriter in reasonable quantities upon request.]
7. The Principal Underwriter agrees to comply with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (as defined in
the Purchase and Sale Agreement, dated as of December 11, 1996 (the "Purchase
Agreement"), between the Principal Underwriter, Citibank, N.A. and Citicorp
North America, Inc., as agent (the "Rules of Fair Practice")).
8. The Fund appoints the Principal Underwriter as its agent to accept
orders for redemptions and repurchases of B-1 Shares at values and in the manner
determined in accordance with the then current prospectus and/or statement of
additional information of the Fund.
9. The Fund agrees to indemnify and hold harmless the Principal
Underwriter, its officers and Directors and each person, if any, who controls
the Principal Underwriter within the meaning of Section 15 of the Securities Act
of 1933 ("1933 Act"), against any losses, claims, damages, liabilities and
expenses (including the cost of any legal fees incurred in connection therewith)
which the Principal Underwriter, its officers, Directors or any such controlling
person may incur under the 1933 Act, under any other statute, at common law or
otherwise, arising out of or based upon
a. any untrue statement or alleged untrue statement of a material
fact contained in the Fund's registration statement, prospectus or
statement of additional information (including amendments and
supplements thereto) or
b. any omission or alleged omission to state a material fact required
to be stated in the Fund's registration statement, prospectus or
statement of additional information necessary to make the
statements therein not misleading, provided, however, that insofar
as losses, claims, damages, liabilities or expenses arise out of
or are based upon any such untrue statement or omission or alleged
untrue statement or omission made in reliance and in conformity
with information furnished to the Fund by the Principal
Underwriter for use in the Fund's registration statement,
prospectus or statement of additional information, such
indemnification is not applicable. In no case shall the Fund
indemnify the Principal Underwriter or its controlling person as
to any amounts incurred for any liability arising out of or based
upon any action for which the Principal Underwriter, its officers
and Directors or any controlling person would otherwise be subject
to liability by reason of willful misfeasance, bad faith, or gross
negligence in the performance of its duties or by reason of the
reckless disregard of its obligations and duties under this
Agreement.
10. The Principal Underwriter agrees to indemnify and hold harmless
the Fund, its officers and Trustees and each person, if any, who controls the
Fund within the meaning of Section 15 of the 1933 Act against any loss, claims,
damages, liabilities and expenses (including the cost of any legal fees incurred
in connection therewith) which the Fund, its officers, Directors or any such
controlling person may incur under the 1933 Act, under any other statute, at
common law or otherwise arising out of the acquisition of any Shares by any
person which (a) may be based upon any wrongful act by the Principal Underwriter
or any of its employees or representatives, or (b) may be based upon any untrue
statement or alleged untrue statement of a material fact contained in the Fund's
registration statement, prospectus or statement of additional information
(including amendments and supplements thereto), or any omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, if such statement or omission was
made in reliance upon information furnished or confirmed in writing to the Fund
by the Principal Underwriter.
11. The Fund agrees to execute such papers and to do such acts and
things as shall from time to time be reasonably requested by the Principal
Underwriter for the purpose of qualifying the B-1 Shares for sale under the
so-called "blue sky" laws of any state or for registering B-1 Shares under the
1933 Act or the Fund under the Investment Company Act of 1940 ("1940 Act"). The
Principal Underwriter shall bear the expenses of preparing, printing and
distributing advertising, sales literature, prospectuses, and statements of
additional information. The Fund shall bear the expense of registering B-1
Shares under the 1933 Act and the Fund under the 1940 Act, qualifying B-1 Shares
for sale under the so-called "blue sky" laws of any state, the preparation and
printing of prospectuses, statements of additional information and reports
required to be filed with the Securities and Exchange Commission and other
authorities, the preparation, printing and mailing of prospectuses and
statements of additional information to holders of B-1 Shares, and the direct
expenses of the issue of B-1 Shares.
The Principal Underwriter shall, at the request of the Fund, provide
to the Board of Trustees or Directors (together herein called the "Directors")
of the Fund in connection not less than quarterly a written report of the
amounts received from the Fund hereunder and the purpose for which such
expenditures by the Fund were made.
The term of this Agreement shall begin on the date hereof and, unless
sooner terminated or continued as provided below, shall expire after one year.
This Agreement shall continue in effect after such term if its continuance is
specifically approved by a majority of the outstanding voting securities of
Class B-1 of the Fund or by a majority of the Directors of the Fund and a
majority of the Directors who are not parties to this Agreement or "interested
persons", as defined in the Investment Company Act of 1940 (the "1940 Act"), of
any such party and who have no direct or indirect financial interest in the
operation of the Fund's Rule 12b-1 plan for Class B-1 Shares or in any
agreements related to the plan at least annually in accordance with the 1940 Act
and the rules and regulations thereunder.
This Agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Directors of the Fund, or a majority of
such Directors who are not parties to this Agreement or "interested persons", as
defined in the 1940 Act, of any such party and who have no direct or indirect
financial interest in the operation of the Fund's Rule 12b-1 plan for Class B-1
Shares or in any agreement related to the plan or by a vote of a majority of the
outstanding voting securities of Class B-1 on not more than sixty days written
notice to any other party to the agreement; and shall terminate automatically in
the event of its assignment (as defined in the 1940 Act), which shall not
include assignment of the Principal Underwriter's (as hereinafter defined)
provided for hereunder and/or rights related to such Allocable Portions.
14. The provisions of this Section 14 shall be applicable to the
extent necessary to enable the Fund to comply with the obligation of the Fund to
pay the Principal Underwriter its Allocable Portion of Distribution Fees paid in
respect of Shares while the Fund is required to do so pursuant to the Principal
Underwriting Agreement, of even date herewith, in respect of Class B-2 Shares,
and shall remain in effect so long as any payments are required to be made by
the Fund pursuant to the irrevocable payment instruction (as defined in the
Purchase Agreement (the "Irrevocable Payment Instruction")).
14.1 The Fund shall pay to the Principal Underwriter the Principal
Underwriter's Allocable Portion (as hereinafter defined) of a fee (the
"Distribution Fee") at the rate of .75% per annum of the average daily net asset
value of the Fund Shares sold prior to December 11, 1996, subject to the
limitation on the maximum aggregate amount of such fees under the Rules of Fair
Practice as applicable to such Distribution Fee on the date hereof.
14.2 The Principal Underwriter's Allocable Portion of Distribution
Fees paid by the Fund in respect of Shares sold prior to December 11, 1996 shall
be equal to the portion of the Asset Based Sales Charge allocable to Distributor
Shares (as defined in Schedule I hereto to this Agreement) in accordance with
Schedule I hereto. The Fund agrees to cause its transfer agent to maintain the
records and arrange for the payments on behalf of the Fund at the times and in
the amounts and to the accounts required by Schedule I hereto, as the same may
be amended from time to time. It is acknowledged and agreed that by virtue of
the operation of Schedule I hereto the Principal Underwriter's Allocable Portion
of Distribution Fees paid by the Fund in respect of Shares, may, to the extent
provided in Schedule I hereto, take into account Distribution Fees payable by
the Fund in respect of other existing classes and/or sub-classes of shares of
the Fund which would be treated as "Shares" under Schedule I hereto. The Fund
will limit amounts paid to any subsequent principal underwriters of Shares to
the portion of the Asset Based Sales Charge paid in respect of Shares which is
allocable to Post-distributor Shares (as defined in Schedule I hereto) in
accordance with Schedule I hereto. The Fund's payments to the Principal
Underwriter in consideration of its services in connection with the sale of B-1
Shares made prior to December 11, 1996 shall be the Distribution Fees
attributable to B-1 Shares sold prior to December 11, 1996 which are Distributor
Shares (as defined in Schedule I hereto) and all other amounts constituting the
Principal Underwriter's Allocable Portion of Distribution Fees shall be the
Distribution Fees related to the sale of other Shares which are Distributor
Shares (as defined in Schedule I hereto).
The Fund shall cause its transfer agent and sub-transfer agents to
withhold from redemption proceeds payable to holders of Shares on redemption
thereof the contingent deferred sales charges payable upon redemption thereof as
set forth in the then current prospectus and/or statement of additional
information of the Fund ("CDSCs") and to pay over to the Principal Underwriter
The Principal Underwriter's Allocable Portion of said CDSCs paid in respect of
Shares which shall be equal to the portion thereof allocable to Distributor
Shares (as defined in Schedule I hereto) in accordance with Schedule I hereto.
14.3 The Principal Underwriter shall be considered to have completely
earned the right to the payment of its Allocable Portion of the Distribution Fee
and the right to payment over to it of its' Allocable Portion of the CDSC in
respect of Shares as provided for hereby upon the completion of the sale of each
Commission Share (as defined in Schedule I hereto) taken into account as a
Distributor Share in computing the Principal Underwriter's Allocable Portion in
accordance with Schedule I hereto.
14.4 Except as provided in Section 14.5 hereof in respect of
Distribution Fees only, the Fund's obligation to pay the Principal Underwriter
the Distribution Fees and to pay over to the Principal Underwriter CDSCs
provided for hereby shall be absolute and unconditional and shall not be subject
to dispute, offset, counterclaim or any defense whatsoever (it being understood
that nothing in this sentence shall be deemed a waiver by the Fund of its right
separately to pursue any claims it may have against the Principal Underwriter
and enforce such claims against any assets (other than the Principal
Underwriter's right to its Allocable Portion of the Distribution Fees and CDSCs
(the "Collection Rights") of the Principal Underwriter).
14.5 Notwithstanding anything in this Agreement to the contrary, the
Fund shall pay to the Principal Underwriter its Allocable Portion of
Distribution Fees provided for hereby notwithstanding its termination as
Principal Underwriter for the Shares or any termination of this Agreement and
such payment of such Distribution Fees, and that obligation and the method of
computing such payment, shall not be changed or terminated except to the extent
required by any change in applicable law, including, without limitation, the
1940 Act, the Rules promulgated thereunder by the Securities and Exchange
Commission and the Rules of Fair Practice, in each case enacted or promulgated
after June 1, 1995, or in connection with a Complete Termination (as hereinafter
defined). For the purposes of this Section 14.5, "Complete Termination" means a
termination of the Fund's Rule 12b-1 plan for B-2 Shares involving the cessation
of payments of the Distribution Fees, and the cessation of payments of
distribution fees pursuant to every other Rule 12b-1 plan of the Fund for every
existing or future B-Class-of-Shares (as hereinafter defined) and the Fund's
discontinuance of the offering of every existing or future B-Class-of- Shares,
which conditions shall be deemed satisfied when they are first complied with
hereafter and so long thereafter as they are complied with prior to the earlier
of (i) the date upon which all of the B-2 Shares which are Distributor Shares
pursuant to Schedule I hereto shall have been redeemed or converted or (ii) June
1, 2005. For purposes of this Section 14.5, the term B-Class- of-Shares means
each of the B-1 Class of Shares of the Fund, the B-2 Class of Shares of the Fund
and each other class of shares of the Fund hereafter issued which would be
treated as Shares under Schedule I hereto or which has substantially similar
economic characteristics to the B-1 or B-2 Classes of Shares taking into account
the total sales charge, CDSC or other similar charges borne directly or
indirectly by the holder of the shares of such class. The parties agree that the
existing C Class of Shares of the Fund does not have substantially similar
economic characteristics to the B-1 or B-2 Classes of Shares taking into account
the total sales charge, CDSC or other similar charges borne directly or
indirectly by the holder of such shares. For purposes of clarity the parties to
this agreement hereby state that they intend that a new installment load class
of shares which may be authorized by amendments to Rule 6(c)-10 under the 1940
Act will be considered to be a B-Class-of-Shares if it has economic
characteristics substantially similar to the economic characteristics of the
existing B-1 or B-2 Classes of Shares taking into account the total sale charge,
CDSC or other similar charges borne directly or indirectly by the holder of such
shares and will not be considered to be a B-Class-of-Shares if it has economic
characteristics substantially similar to the economic characteristics of the
existing C Class of shares of the Fund taking into account the total sales
charge, CDSC or other similar charges borne directly or indirectly by the holder
of such shares.
14.6 The Principal Underwriter may assign any part of its Allocable
Portions and obligations of the Fund related thereto (but not the Principal
Underwriter's obligations to the Fund provided for in this Agreement) to any
person (an "Assignee") and any such assignment shall be effective as to the Fund
upon written notice to the Fund by the Principal Underwriter. In connection
therewith the Fund shall pay all or any amounts in respect of its Allocable
Portions directly to the Assignee thereof as directed in a writing by the
Principal Underwriter in the Irrevocable Payment Instruction, as the same may be
amended from time to time with the consent of the Fund, and the Fund shall be
without liability to any person if it pays such amounts when and as so directed,
except for underpayments of amounts actually due, without any amount payable as
consequential or other damages due to such underpayment and without interest
except to the extent that delay in payment of Distribution Fees and CDSCs
results in an increase in the maximum Sales Charge allowable under the Rules of
Fair Practice, which increases daily at a rate of prime plus one percent per
annum.
14.7 The Fund will not, to the extent it may otherwise be empowered to
do so, change or waive any CDSC with respect to B-1 Shares, except as provided
in the Fund's prospectus or statement of additional information without the
Principal Underwriter's or Assignee's consent, as applicable. Notwithstanding
anything to the contrary in this Agreement or any termination of this Agreement
or the Principal Underwriter as principal underwriter for the Shares of the
Fund, the Principal Underwriter shall be entitled to be paid its Allocable
Portion of the CDSCs whether or not the Fund's Rule 12b-1 plan for B-1 Shares is
terminated and whether or not any such termination is a Complete Termination, as
defined above.
15. This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts. All sales hereunder are to be made, and title
to the Shares shall pass, in Boston, Massachusetts.
16. The Fund is a Massachusetts business trust established under a
Declaration of Trust, as it may be amended from time to time. The obligations of
the Fund are not personally binding upon, nor shall recourse be had against the
private property of any of the Trustees, shareholders, officers, employees or
agents of the Fund, but only the property of the Fund shall be bound.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE STATE TAX FREE FUND - SERIES II
By: /s/ George S. Bissell
----------------------------
Title: Chairman
EVERGREEN KEYSTONE INVESTMENT
SERVICES, INC.
By: /s/ Rosemary D. Van Antwerp
---------------------------
Title: Senior Vice President
<PAGE>
SCHEDULE I
TO
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS B-1 SHARES
OF
KEYSTONE STATE TAX FREE FUND - SERIES II
TRANSFER AGENT PROCEDURES FOR DIFFERENTIATING
AMONG DISTRIBUTOR SHARES AND POST-DISTRIBUTOR SHARES
Amounts (in respect of Asset Based Sales Charges (as hereinafter
defined) and CDSCs (as hereinafter defined) in respect of Shares (as hereinafter
defined) of each Fund (as hereinafter defined) shall be allocated between
Distributor Shares (as hereinafter defined) and Post-distributor Shares (as
hereinafter defined) of such Fund in accordance with the rules set forth in
clauses (B) and (C). Clause (B) sets forth the rules to be followed by the
Transfer Agent for each Fund and the record owner of each Omnibus Account (as
hereinafter defined) in maintaining records relating to Distributor Shares and
Post-distributor Shares. Clause (C) sets forth the rules to be followed by the
Transfer Agent for each Fund and the record owner of each Omnibus Account in
determining what portion of the Asset Based Sales Charge (as hereinafter
defined) payable in respect of each class of Shares of such Fund and what
portion of the CDSC (as hereinafter defined) payable by the holders of Shares of
such Fund is attributable to Distributor Shares and Post-distributor Shares,
respectively.
(A) DEFINITIONS:
Generally, for purposes of this Schedule I, defined terms shall be
used with the meaning assigned to them in the Agreement, except that for
purposes of the following rules the following definitions are also applicable:
"Agreement" shall mean the Principal Underwriting Agreement for Class
B-2 Shares of the Instant Fund dated as of May 31, 1995 and the successor
Agreement dated December 11, 1996 between the Instant Fund and the Distributor.
"Asset Based Sales Charge" shall have the meaning set forth in Section
26(b)(8)(C) of the Rules of Fair Practice it being understood that for purposes
of this Exhibit I such term does not include the Service Fee.
"Business Day" shall mean any day on which the banks and the New York
Stock Exchange are not authorized or required to close in New York City.
"Capital Gain Dividend" shall mean, in respect of any Share of any
Fund, a Dividend in respect of such Share which is designated by such Fund as
being a "capital gain dividend" as such term is defined in Section 852 of the
Internal Revenue Code of 1986, as amended.
"CDSC" shall mean with respect to any Fund, the contingent deferred
sales charge payable, either directly or by withholding from the proceeds of the
redemption of the Shares of such Fund, by the shareholders of such Fund on any
redemption of Shares of such Fund in accordance with the Prospectus relating to
such Fund.
"Commission Share" shall mean, in respect of any Fund, a Share of such
Fund issued prior to Deceember 11, 1996 under circumstances where a CDSC would
be payable upon the redemption of such Share if such CDSC is not waived or shall
have not otherwise expired.
"Date of Original Purchase" shall mean, in respect of any Commission
Share of any Fund, the date on which such Commission Share was first issued by
such Fund; provided, that if such Share is a Commission Share and such Fund
issued the Commission Share (or portion thereof) in question in connection with
a Free Exchange for a Commission Share (or portion thereof) of another Fund, the
Date of Original Purchase for the Commission Share (or portion thereof) in
question shall be the date on which the Commission Share (or portion thereof) of
the other Fund was first issued by such other Fund (unless such Commission Share
(or portion thereof) was also issued by such other Fund in a Free Exchange, in
which case this proviso shall apply to that Free Exchange and this application
shall be repeated until one reaches a Commission Share (or portion thereof)
which was issued by a Fund other than in a Free Exchange).
"Distributor" shall mean Keystone Investment Distributors Company, its
successors and assigns.
"Distributor's Account" shall mean the account of the Distributor,
account no. 9903-584-2, ABA No. 011 0000 28, entitled "General Account"
maintained with State Street Bank & Trust Company or such other account as the
Distributor may designate in a notice to the Transfer Agent.
"Distributor Inception Date" shall mean, in respect of any Fund, the
date identified as the date Shares of such Fund are first sold by the
Distributor.
"Distributor Last Sale Cut-off Date" shall mean, in respect of any
Fund, the date identified as the last sale of a Commission Share during the
period the Distributor served as principal underwriter under the Agreement.
"Distributor Shares" shall mean, in respect of any Fund, all Shares of
such Fund the Month of Original Purchase of which occurs on or after the
Inception Date for such Fund and on or prior to the Distributor Last Sale
Cut-off Date in respect of such Fund.
"Dividend" shall mean, in respect of any Share of any Fund, any
dividend or other distribution by such Fund in respect of such Share.
"Free Exchange" shall mean any exchange of a Commission Share (or
portion thereof) of one Fund (the "Redeeming Fund") for a Share (or portion
thereof) of another Fund (the "Issuing Fund"), under any arrangement which
defers the exchanging Shareholder's obligation to pay the CDSC in respect of the
Commission Share (or portion thereof) of the Redeeming Fund so exchanged until
the later redemption of the Share (or portion thereof) of the Issuing Fund
received in such exchange.
"Free Share" shall mean, in respect of any Fund, each Share of such
Fund issued prior to December 11, 1996 other than a Commission Share, including,
without limitation: (i) Shares issued in connection with the automatic
reinvestment of Capital Gain Dividends or Other Dividends by such Fund, (ii)
Special Free Shares issued by such Fund and (iii) Shares (or portion thereof)
issued by such Fund in connection with an exchange whereby a Free Share (or
portion thereof) of another Fund is redeemed and the Net Asset Value of such
redeemed Free Share (or portion thereof) is invested in such Shares (or portion
thereof) of such Fund.
"Fund" shall mean each of the regulated investment companies or series
or portfolios of regulated investment companies identified in Schedule II to the
Irrevocable Payment Instruction, as the same may be amended from time to time in
accordance with the terms thereof.
"Instant Fund" shall mean Keystone State Tax Free Fund - Series II.
"ML Omnibus Account" shall mean, in respect of any Fund, the Omnibus
Account maintained by Merrill Lynch, Pierce, Fenner & Smith as subtransfer
agent.
"Month of Original Purchase" shall mean, in respect of any Share of
any Fund, the calendar month in which such Share was first issued by such Fund;
provided, that if such Share is a Commission Share and such Fund issued the
Commission Share (or portion thereof) in question in connection with a Free
Exchange for a Commission Share (or portion thereof) of another Fund, the Month
of Original Purchase for the Commission Share (or portion thereof) in question
shall be the calendar month in which the Commission Share (or portion thereof)
of the other Fund was first issued by such other Fund (unless such Commission
Share (or portion thereof) was also issued by such other Fund in a Free
Exchange, in which case this proviso shall apply to that Free Exchange and this
application shall be repeated until one reaches a Commission Share (or portion
thereof) which was issued by a Fund other than in a Free Exchange); provided,
further, that if such Share is a Free Share and such Fund issued such Free Share
in connection with the automatic reinvestment of dividends in respect of other
Shares of such Fund, the Month of Original Purchase of such Free Share shall be
deemed to be the Month of Original Purchase of the Share in respect of which
such dividend was paid; provided, further, that if such Share is a Free Share
and such Fund issued such Free Share in connection with an exchange whereby a
Free Share (or portion thereof) of another Fund is redeemed and the Net Asset
Value of such redeemed Free Share (or portion thereof) is invested in a Free
Share (or portion thereof) of such Fund, the Month of Original Issue of such
Free Share shall be the Month of Original Issue of the Free Share of such other
Fund so redeemed (unless such Free Share of such other Fund was also issued by
such other Fund in such an exchange, in which case this proviso shall apply to
that exchange and this application shall be repeated until one reaches a Free
Share which was issued by a Fund other than in such an exchange); and provided,
finally, that for purposes of this Schedule I each of the following periods
shall be treated as one calendar month for purposes of applying the rules of
this Schedule I to any Fund: (i) the period of time from and including the
Distributor Inception Date for such Fund to and including the last day of the
calendar month in which such Distributor Inception Date occurs; (ii) the period
of time commencing with the first day of the calendar month in which the
Distributor Last Sale Cutoff Date in respect of such Fund occurs to and
including such Distributor Last Sale Cutoff Date; and (iii) the period of time
commencing on the day immediately following the Distributor Last Sale Cutoff
Date in respect of such Fund to and including the last day of the calendar month
in which such Distributor Last Sale Cut-off Date occurs.
"Omnibus Account" shall mean any Shareholder Account the record owner
of which is a registered broker-dealer which has agreed with the Transfer Agent
to provide sub-transfer agent functions relating to each Sub-shareholder Account
within such Shareholder Account as contemplated by this Schedule I in respect of
each of the Funds.
"Omnibus Asset Based Sales Charge Settlement Date" shall mean, in
respect of each Omnibus Account, the Business Day next following the twentieth
day of each calendar month for the calendar month immediately preceding such
date so long as the record owner is able to allocate the Asset Based Sales
Charge accruing in respect of Shares of any Fund as contemplated by this
Schedule I no more frequently than monthly; provided, that at such time as the
record owner of such Omnibus Account is able to provide information sufficient
to allocate the Asset Based Sales Charge accruing in respect of such Shares of
such Fund owned of record by such Omnibus Account as contemplated by this
Schedule I on a weekly or daily basis, the Omnibus Asset Based Sales Charge
Settlement Date shall be a weekly date as in the case of the Omnibus CDSC
Settlement Date or a daily date as in the case of Asset Based Sales Charges
accruing in respect of Shareholder Accounts other than Omnibus Accounts, as the
case may be.
"Omnibus CDSC Settlement Date" shall mean, in respect of each Omnibus
Account, the third Business Day of each calendar week for the calendar week
immediately preceding such date so long as the record owner of such Omnibus
Account is able to allocate the CDSCs accruing in respect of any Shares of any
Fund as contemplated by this Schedule I for no more frequently than weekly;
provided, that at such time as the record owner of such Shares of such Fund
owned of record by such Omnibus Account is able to provide information
sufficient to allocate the CDSCs accruing in respect of such Omnibus Account as
contemplated by this Schedule I on a daily basis, the Omnibus CDSC Settlement
Date for such Omnibus Account shall be a daily date as in the case of CDSCs
accruing in respect of Shareholder Accounts other than Omnibus Accounts.
"Original Purchase Amount" shall mean, in respect of any Commission
Share of any Fund, the amount paid (i.e., the Net Asset Value thereof on such
date), on the Date of Original Purchase in respect of such Commission Share, by
such Shareholder Account or Sub-shareholder Account for such Commission Share;
provided, that if such Fund issued the Commission Share (or portion thereof) in
question in connection with a Free Exchange for a Commission Share (or portion
thereof) of another Fund, the Original Purchase Amount for the Commission Share
(or portion thereof) in question shall be the Original Purchase Amount in
respect of such Commission Share (or portion thereof) of such other Fund (unless
such Commission Share (or portion thereof) was also issued by such other Fund in
a Free Exchange, in which case this proviso shall apply to that Free Exchange
and this application shall be repeated until one reaches a Commission Share (or
portion thereof) which was issued by a Fund other than in a Free Exchange).
"Other Dividend" shall mean in respect of any Share, any Dividend paid
in respect of such Share other than a Capital Gain Dividend.
"Post-distributor Shares" shall mean, in respect of any Fund, all
Shares of such Fund the Month of Original Purchase of which occurs after the
Distributor Last Sale Cut-off Date for such Fund.
"Program Agent" shall mean Citicorp North America, Inc., as Program
Agent under the Purchase Agreement, and its successors and assigns in such
capacity.
"Purchase Agreement" shall mean that certain Purchase and Sale
Agreement dated as of May 31, 1995, among Keystone Investment Distributors
Company, as Seller, Citibank, N.A., as Purchaser, and Citicorp North America,
Inc., as Program Agent.
"Share" shall mean in respect of any Fund any share of the classes of
shares specified in Schedule II to the Irrevocable Payment Instruction opposite
the name of such Fund, as the same may be amended from time to time by notice
from the Distributor and the Program Agent to the Fund and the Transfer Agent;
provided, that such term shall include, after the Distributor Last Sale Cut-off
Date, a share of a new class of shares of such Fund: (i) with respect to each
record owner of Shares which is not treated in the records of each Transfer
Agent and Sub-transfer Agent for such Fund as an entirely separate and distinct
class of shares from the classes of shares specified Schedule II to the
Irrevocable Payment Instruction or (ii) the shares of which class may be
exchanged for shares of another Fund of the classes of shares specified on
Schedule II to the Irrevocable Payment Instruction of any class existing on or
prior to the Distributor Last Sale Cut-off Date; or (iii) dividends on which can
be reinvested in shares of the classes specified on Schedule II to the
Irrevocable Payment Instruction under the automatic dividend reinvestment
options; or (iv) which is otherwise treated as though it were of the same class
as the class of shares specified on Schedule II to the Irrevocable Payment
Instruction.
"Shareholder Account" shall have the meaning set forth in clause
(B)(1) hereof.
"Special Free Share" shall mean, in respect of any Fund, a Share
(other than a Commission Share) issued by such Fund other than in connection
with the automatic reinvestment of Dividends and other than in connection with
an exchange whereby a Free Share (or portion thereof) of another Fund is
redeemed and the Net Asset Value of such redeemed Share (or portion thereof) is
invested in a Share (or portion thereof) of such Fund.
"Sub-shareholder Account" shall have the meaning set forth in clause
(B)(1) hereof.
"Sub-transfer Agent" shall mean, in respect of each Omnibus Account,
the record owner thereof.
(B) RECORDS TO BE MAINTAINED BY THE TRANSFER AGENT FOR EACH FUND AND
THE RECORD OWNER OF EACH OMNIBUS ACCOUNT:
The Transfer Agent shall maintain Shareholder Accounts, and shall
cause each record owner of each Omnibus Account to maintain Sub-shareholder
Accounts, each in accordance with the following rules:
(1) Shareholder Accounts and Sub-shareholder Accounts. The Transfer
Agent shall maintain a separate account (a "Shareholder Account") for each
record owner of Shares of each Fund. Each Shareholder Account (other than
Omnibus Accounts) will represent a record owner of Shares of such Fund, the
records of which will be kept in accordance with this Schedule I. In the case of
an Omnibus Account, the Transfer Agent shall require that the record owner of
the Omnibus Account maintain a separate account (a "Sub-shareholder Account")
for each record owner of Shares which are reflected in the Omnibus Account, the
records of which will be kept in accordance with this Schedule I. Each such
Shareholder Account and Sub-shareholder Account shall relate solely to Shares of
such Fund and shall not relate to any other class of shares of such Fund.
(2) Commission Shares. For each Shareholder Account (other than an
Omnibus Account), the Transfer Agent shall maintain daily records of each
Commission Share of such Fund which records shall identify each Commission Share
of such Fund reflected in such Shareholder Account by the Month of Original
Purchase of such Commission Share.
For each Omnibus Account, the Transfer Agent shall require that the
Sub-transfer Agent in respect thereof maintain daily records of such
Sub-shareholder Account which records shall identify each Commission Share of
such Fund reflected in such Sub-shareholder Account by the Month of Original
Purchase; provided, that until the Sub-transfer Agent in respect of the ML
Omnibus Account develops the data processing capability to conform to the
foregoing requirements, such Sub-transfer Agent shall maintain daily records of
Sub-shareholder Accounts which identify each Commission Share of such Fund
reflected in such Sub-shareholder Account by the Date of Original Purchase. Each
such Commission Share shall be identified as either a Distributor Share or a
Post-distributor Share based upon the Month of Original Purchase of such
Commission Share (or in the case of a Sub-shareholder Account within the ML
Omnibus Account, based upon the Date of Original Purchase).
(3) Free Shares. The Transfer Agent shall maintain daily records of
each Shareholder Account (other than an Omnibus Account) in respect of any Fund
so as to identify each Free Share (including each Special Free Share) reflected
in such Shareholder Account by the Month of Original Purchase of such Free
Share. In addition, the Transfer Agent shall require that each Shareholder
Account (other than an Omnibus Account) have in effect separate elections
relating to reinvestment of Capital Gain Dividends and relating to reinvestment
of Other Dividends in respect of any Fund. Either such Shareholder Account shall
have elected to reinvest all Capital Gain Dividends or such Shareholder Account
shall have elected to have all Capital Gain Dividends distributed. Similarly,
either such Shareholder Account shall have elected to reinvest all Other
Dividends or such Shareholder Account shall have elected to have all Other
Dividends distributed.
The Transfer Agent shall require that the Sub-transfer Agent in
respect of each Omnibus Account maintain daily records for each Sub-shareholder
Account in the manner described in the immediately preceding paragraph for
Shareholder Accounts (other than Omnibus Accounts); provided, that until the
Sub-transfer Agent in respect of the ML Omnibus Account develops the data
processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall not be obligated to conform to the foregoing
requirements. Each Sub-shareholder Account shall also have in effect Dividend
reinvestment elections as described in the immediately preceding paragraph.
The Transfer Agent and each Sub-transfer Agent in respect of an
Omnibus Account shall identify each Free Share as either a Distributor Share or
a Post-distributor Share based upon the Month of Original Purchase of such Free
Share; provided, that until the Sub-transfer Agent in respect of the ML Omnibus
Account develops the data processing capability to conform to the foregoing
requirements, the Transfer Agent shall require such Sub-transfer Agent to
identify each Free Share of a given Fund in the ML Omnibus Account as a
Distributor Share, or Post-distributor Share, as follows:
(a) Free Shares of such Fund which are outstanding on the
Distributor Last Sale Cut-off Date for such Fund shall be
identified as Distributor Shares.
(b) Free Shares of such Fund which are issued (whether or not in
connection with an exchange for a Free Share of another Fund)
to the ML Omnibus Account during any calendar month (or
portion thereof) after the Distributor Last Sale Cut-off Date
for such Fund shall be identified as Distributor Shares in a
number computed as follows:
A X (B/C)
where:
A = Free Shares of such Fund issued to the ML Omnibus
Account during such calendar month (or portion
thereof)
B = Number of Commission Shares and Free Shares of such
Fund in the ML Omnibus Account identified as
Distributor Shares and outstanding as of the close of
business in the last day of the immediately preceding
calendar month (or portion thereof)
C = Total number of Commission Shares and Free Shares
of such Fund in the ML Omnibus Account and
outstanding as of the close of business on the last
day of the immediately preceding calendar month (or
portion thereof).
(c) Free Shares of such Fund which are issued (whether or not in
connection with an exchange for a free share of another Fund)
to the ML Omnibus Account during any calendar month (or
portion thereof) after the Distributor Last Sale Cut-off Date
for such Fund shall be identified as Post-distributor Shares
in a number computed as follows:
(A X (B/C)
where:
A = Free Shares of such Fund issued to the ML Omnibus
Account during such calendar month (or portion
thereof)
B = Number of Commission Shares and Free Shares of such
Fund in the ML Omnibus Account identified as
Post-distributor Shares and outstanding as of the
close of business in the last day of the immediately
preceding calendar month (or portion thereof)
C = Total number of Commission Shares and Free Shares
of such Fund in the ML Omnibus Account and
outstanding as of the close of business on the last
day of the immediately preceding calendar month (or
portion thereof).
(d) Free Shares of such Fund which are redeemed (whether or not in
connection with an exchange for Free Shares of another Fund or
in connection with the conversion of such Shares into a Class
A Share of such Fund) from the ML Omnibus Account in any
calendar month (or portion thereof) after the Distributor Last
Sale Cut-off Date for such Fund shall be identified as
Distributor Shares in a number computed as follows:
A X (B/C)
Where:
A = Free Shares of such Fund which are redeemed
(whether or not in connection with an exchange for
Free Shares of another Fund or in connection with the
conversion of such Shares into a class A share of
such Fund) from the ML Omnibus Account during such
calendar month (or portion thereof)
B = Free Shares of such Fund in the ML Omnibus Account
identified as Distributor Shares and outstanding as
of the close of business on the last day of the
immediately preceding calendar month.
C = Total number of Free Shares of such Fund in the ML
Omnibus Account and outstanding as of the close of
business on the last day of the immediately preceding
calendar month.
(e) Free Shares of such Fund which are redeemed (whether or not in
connection with an exchange for Free Shares of another Fund or
in connection with the conversion of such Shares into a class
A share of such Fund) from the ML Omnibus Account in any
calendar month (or portion thereof) after the Distributor Last
Sale Cut-off Date for such Fund shall be identified as
Post-distributor Shares in a number computed as follows:
A X (B/C)
where:
A = Free Shares of such Fund which are redeemed
(whether or not in connection with an exchange for
Free Shares of another Fund or in connection with the
conversion of such Shares into a class A share of
such Fund) from the ML Omnibus Account during such
calendar month (or portion thereof)
B = Free Shares of such Fund in the ML Omnibus Account
identified as Post-distributor Shares and outstanding
as of the close of business on the last day of the
immediately preceding calendar month.
C = Total number of Free Shares of such Fund in the ML
Omnibus Account and outstanding as of the close of
business on the last day of the immediately preceding
calendar month.
(4) Appreciation Amount and Cost Accumulation Amount. The Transfer
Agent shall maintain on a daily basis in respect of each Shareholder Account
(other than Omnibus Accounts) a Cost Accumulation Amount representing the total
of the Original Purchase Amounts paid by such Shareholder Account for all
Commission Shares reflected in such Shareholder Account as of the close of
business on each day. In addition, the Transfer Agent shall maintain on a daily
basis in respect of each Shareholder Account (other than Omnibus Accounts)
sufficient records to enable it to compute, as of the date of any actual or
deemed redemption or Free Exchange of a Commission Share reflected in such
Shareholder Account an amount (such amount an "Appreciation Amount") equal to
the excess, if any, of the Net Asset Value as of the close of business on such
day of the Commission Shares reflected in such Shareholder Account minus the
Cost Accumulation Amount as of the close of business on such day. In the event
that a Commission Share (or portion thereof) reflected in a Shareholder Account
is redeemed or under these rules is deemed to have been redeemed (whether in a
Free Exchange or otherwise), the Appreciation Amount for such Shareholder
Account shall be reduced, to the extent thereof, by the Net Asset Value of the
Commission Share (or portion thereof) redeemed, and if the Net Asset Value of
the Commission Share (or portion thereof) being redeemed equals or exceeds the
Appreciation Amount, the Cost Accumulation Amount will be reduced to the extent
thereof, by such excess. If the Appreciation Amount for such Shareholder Account
immediately prior to any redemption of a Commission Share (or portion thereof)
is equal to or greater than the Net Asset Value of such Commission Share (or
portion thereof) deemed to have been tendered for redemption, no CDSCs will be
payable in respect of such Commission Share (or portion thereof).
The Transfer Agent shall require that the Sub-transfer Agent in
respect of each Omnibus Account maintain on a daily basis in respect of each
Sub-shareholder Account reflected in such Omnibus Account a Cost Accumulation
Amount and sufficient records to enable it to compute, as of the date of any
actual or deemed redemption or Free Exchange of a Commission Share reflected in
such Sub-shareholder Account an Appreciation Amount in accordance with the
preceding paragraph and to apply the same to determine whether a CDSC is payable
(as though such Sub-shareholder Account were a Shareholder Account other than an
Omnibus Account; provided, that until the Sub- transfer Agent in respect of the
ML Omnibus Account develops the data processing capability to conform to the
foregoing requirements, such Sub-transfer Agent shall maintain for each
Sub-shareholder Account a separate Cost Accumulation Amount and a separate
Appreciation Amount for each Date of Original Purchase of any Commission Share
which shall be applied as set forth in the preceding paragraph as if each Date
of Original Purchase were a separate Month of Original Purchase.
(5) NASD Cap. On the date the distribution fees paid in respect of any
class of Shares equals the maximum amount thereon under the Rules of Fair
Practice, in respect of such class, all outstanding Shares of such class of such
Fund shall be converted into Class A shares of such Fund and will be deemed to
have been redeemed for their Net Asset Value for purposes of this Schedule I.
(6) Identification of Redeemed Shares. If a Shareholder Account (other
than an Omnibus Account) tenders a Share of a Fund for redemption (other than in
connection with an exchange of such Share for a Share of another Fund or in
connection with the conversion of such Share pursuant to a Conversion Feature),
such tendered Share will be deemed to be a Free Share if there are any Free
Shares reflected in such Shareholder Account immediately prior to such tender.
If there is more than one Free Share reflected in such Shareholder Account
immediately prior to such tender, such tendered Share will be deemed to be the
Free Share with the earliest Month of Original Purchase. If there are no Free
Shares reflected in such Shareholder Account immediately prior to such tender,
such tendered Share will be deemed to be the Commission Share with the earliest
Month of Original Purchase reflected in such Shareholder Account.
If a Sub-shareholder Account reflected in an Omnibus Account tenders a
Share for redemption (other than in connection with an Exchange of such Share
for a Share of another Fund or in connection with the conversion of such Share
pursuant to a Conversion Feature), the Transfer Agent shall require that the
record owner of each Omnibus Account supply the Transfer Agent sufficient
records to enable the Transfer Agent to apply the rules of the preceding
paragraph to such Sub-shareholder Account (as though such Sub-shareholder
Account were a Shareholder Account other than an Omnibus Account); provided,
that until the Sub-transfer Agent in respect of the ML Omnibus Account develops
the data processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall not be required to conform to the foregoing rules
regarding Free Shares (and the Transfer Agent shall account for such Free Shares
as provided in (3) above) but shall apply the foregoing rules to each Commission
Share with respect to the Date of Original Purchase of any Commission Share as
though each such Date were a separate Month of Original Purchase.
(7) Identification of Exchanged Shares. When a Shareholder Account
(other than an Omnibus Account) tenders Shares of one Fund (the "Redeeming
Fund") for redemption where the proceeds of such redemption are to be
automatically reinvested in shares of another Fund (the "Issuing Fund") to
effect an exchange (whether or not pursuant to a Free Exchange) into Shares of
the Issuing Fund: (1) such Shareholder Account will be deemed to have tendered
Shares (or portions thereof) of the Redeeming Fund with each Month of Original
Purchase represented by Shares of the Redeeming Fund reflected in such
Shareholder Account immediately prior to such tender in the same proportion that
the number of Shares of the redeeming Fund with such Month of Original Purchase
reflected in such Shareholder immediately prior to such tender bore to the total
number of Shares of the Redeeming Fund reflected in such Shareholder Account
immediately prior to such tender, and on that basis the tendered Shares of the
Redeeming Fund will be identified as Distributor Shares or Post-distributor
Shares; (2) such Shareholder Account will be deemed to have tendered Commission
Shares (or portions thereof) and Free Shares (or portions thereof) of the
Redeeming Fund of each category (i.e., Distributor Shares or Post-distributor
Shares) in the same proportion that the number of Commission Shares or Free
Shares (as the case may be) of the Redeeming Fund in such category reflected in
such Shareholder Account bore to the total number of Shares of the Redeeming
Fund in such category reflected in such Shareholder Account immediately prior to
such tender, (3) the Shares (or portions thereof) of the Issuing Fund issued in
connection with such exchange will be deemed to have the same Months of Original
Purchase as the Shares (or portions thereof) of the Redeeming Fund so tendered
and will be categorized as Distributor Shares and Post-distributor Shares
accordingly, and (4) the Shares (or portions thereof) of each Category of the
Issuing Fund issued in connection with such exchange will be deemed to be
Commission Shares and Free Shares in the same proportion that the Shares of such
Category of the Redeeming Fund were Commission Shares and Free Shares.
The Transfer Agent shall require that each record owner of an Omnibus
Account maintain records relating to each Sub-shareholder Account in such
Omnibus Account sufficient to apply the foregoing rules to each such
Sub-shareholder Account (as though such Sub-shareholder Account were a
Shareholder Account other than an Omnibus Account); provided, that until the
Sub-transfer Agent in respect of the ML Omnibus Account develops the data
processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall not be required to conform to the foregoing rules
relating to Free Shares (and the Sub-transfer Agent shall account for such Free
Shares as provided in (3) above) and shall apply a first-in-first-out procedure
(based upon the Date of Original Purchase) to determine which Commission Shares
(or portions thereof) of a Redeeming Fund were redeemed in connection with an
exchange.
(8) Identification of Converted Shares. The Transfer Agent records
maintained for each Shareholder Account (other than an Omnibus Account) will
treat each Commission Share of a Fund as though it were redeemed at its Net
Asset Value on the date such Commission Share converts into a class A share of
such Fund in accordance with an applicable Conversion Feature applied with
reference to its Month of Original Purchase and will treat each Free Share of
such Fund with a given Month of Original Purchase as though it were redeemed at
its Net Asset Value when it is simultaneously converted to a class A share at
the time the Commission Shares of such Fund with such Month of Original Purchase
are so converted.
The Transfer Agent shall require that each record owner of an Omnibus
Account maintain records relating to each Sub-shareholder Account in such
Omnibus Account sufficient to apply the foregoing rules to each such
Sub-shareholder Account (as though such Sub-shareholder Account were a
Shareholder Account other than an Omnibus Account) ; provided, that until the
Sub-transfer Agent in respect of the ML Omnibus Account develops the data
processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall apply the foregoing rules to Commission Shares with
reference to the Date of Original Issue of each Commission Share (as though each
such date were a separate Month of Original Issue) and shall not be required to
apply the foregoing rules to Free Shares (and the Sub-transfer Agent shall
account for such Free Shares as provided in (3) above).
(C) ALLOCATIONS OF ASSET BASED SALE CHARGES AND CDSCS AMONG DISTRI
BUTOR SHARES AND POST-DISTRIBUTOR SHARES:
The Transfer Agent shall use the following rules to allocate the
amounts of Asset Based Sales Charges and CDSCs payable by each Fund in respect
of Shares between Distributor Shares and Post-distributor Shares:
(1) Receivables Constituting CDSCs: CDSCs will be treated as relating
to Distributor Shares or Post-distributor Shares depending upon the Month of
Original Purchase of the Commission Share the redemption of which gives rise to
the payment of a CDSC by a Shareholder Account.
The Transfer Agent shall cause each Sub-transfer Agent to apply the
foregoing rule to each Sub-shareholder Account based on the records maintained
by such Sub-transfer Agent; provided, that until the Sub-transfer Agent in
respect of the ML Omnibus Account develops the data processing capability to
conform to the foregoing requirements, such Sub-transfer Agent shall apply the
foregoing rules to each Sub-shareholder Account with respect to the Date of
Original Purchase of any Commission Share as though each such date were a
separate Month of Original Purchase.
(2) Receivables Constituting Asset Based Sales Charges:
The Asset Based Sales Charges accruing in respect of each Shareholder
Account (other than an Omnibus Account) shall be allocated to each Share
reflected in such Shareholder Account as of the close of business on such day on
an equal per share basis. For example, the Asset Based Sales Charges
attributable to Distributor Shares on any day shall be computed and allocated as
follows:
A X (B/C)
where:
A. = Total amount of Asset Based Sales Charge accrued in
respect of such Shareholder Account (other than an
Omnibus Account) on such day.
B. = Number of Distributor Shares reflected in such
Shareholder Account (other than an Omnibus Account) on
the close of business on such day
C. = Total number of Distributor Shares and
Post-Distributor Shares reflected in such Shareholder
Account (other than an Omnibus Account) and outstanding
as of the close of business on such day.
The Portion of the Asset Based Sales Charges of such Fund accruing in respect of
such Shareholder Account for such day allocated to Post-distributor Shares will
be obtained using the same formula but substituting for "B" the number of
Post-distributor Shares, as the case may be, reflected in such Shareholder
Account and outstanding on the close of business on such day. The foregoing
allocation formula may be adjusted from time to time by notice to the Fund and
the transfer agent for the Fund from the Seller and the Program Agent pursuant
to Section 8.18 of the Purchase Agreement.
The Transfer Agent shall, based on the records maintained by the
record owner of such Omnibus Account, allocate the Asset Based Sales Charge
accruing in respect of each Omnibus Account on each day among all
Sub-shareholder Accounts reflected in such Omnibus Account on an equal per share
basis based upon the total number of Distributor Shares and Post-distributor
Shares reflected in each such Sub-shareholder Account as of the close of
business on such day. In addition, the Transfer Agent shall apply the foregoing
rules to each Sub-shareholder Account (as though it were a Shareholder Account
other than an Omnibus Account), based on the records maintained by the record
owner, to allocate the Asset Based Sales Charge so allocated to any Sub-
shareholder Account among the Distributor Shares and Post-distributor Shares
reflected in each such Sub-shareholder Account in accordance with the rules set
forth in the preceding paragraph; provided, that until the Sub-transfer Agent in
respect of the ML Omnibus Account develops the data processing capacity to apply
the rules of this Schedule I as applicable to Sub-shareholder Accounts other
than ML Omnibus Accounts, the Transfer Agent shall allocate the Asset Based
Sales Charge accruing in respect of Shares of any Fund in the ML Omnibus Account
during any calendar month (or portion thereof) among Distributor Shares and
Post-distributor Shares as follows:
(a) The portion of such Asset Based Sales Charge allocable to
Distributor Shares shall be computed as follows:
A X ((B + C)/2)
((D + E)/2)
where:
A = Total amount of Asset Based Sales Charge accrued
during such calendar month (or portion thereof) in
respect of Shares of such Fund in the ML Omnibus
Account
B = Shares of such Fund in the ML Omnibus Account and
identified as Distributor Shares and outstanding as of
the close of business on the last day of the
immediately preceding calendar month (or portion
thereof), times Net Asset Value per Share as of such
time
C = Shares of such Fund in the ML Omnibus Account and
identified as Distributor Shares and outstanding as of
the close of business on the last day of such calendar
month (or portion thereof), times Net Asset Value per
Share as of such time
D = Total number of Shares of such Fund in the ML Omnibus
Account and outstanding as of the close of business on
the last day of the immediately preceding calendar
month (or portion thereof), times Net Asset Value per
Share as of such time.
E = Total number of Shares of such Fund in the ML Omnibus
Account and outstanding as of the close of business on
the last day of such calendar month (or portion
thereof), times Net Asset Value per Share as of such
time.
(b) The portion of such Asset Based Sales Charge allocable to
Post-distributor Shares shall be computed s follows:
A X ((B + C)/2)
((D + E)/2)
where:
A = Total amount of Asset Based Sales Charge accrued
during such calendar month (or portion thereof) in
respect of Shares of such Fund in the ML Omnibus
Account
B = Shares of such Fund in the ML Omnibus Account and
identified as Post-distributor Shares and outstanding
as of the close of business on the last day of the
immediately preceding calendar month (or portion
thereof), times Net Asset Value per Share as of such
time
C = Shares of such Fund in the ML Omnibus Account and
identified as Post-distributor Shares and outstanding
as of the close of business on the last day of such
calendar month (or portion thereof), times Net Asset
Value per Share as of such time
D = Total number of Shares of such Fund in the ML Omnibus
Account and outstanding as of the close of business on
the last day of the immediately preceding calendar
month (or portion thereof), times Net Asset Value per
Share as of such time.
E = Total number of Shares of such Fund in the ML Omnibus
Account outstanding as of the close of business on the
last day of such calendar month, times Net Asset Value
per Share as of such time.
(3) Payments on behalf of each Fund.
On the close of business on each day the Transfer Agent shall cause payment to
be made of the amount of the Asset Based Sales Charge and CDSCs accruing on such
day in respect of the Shares of such Fund owned of record by Shareholder
Accounts (other than Omnibus Accounts) by two separate wire transfers, directly
from accounts of such Fund as follows:
1. The Asset Based Sales Charge and CDSCs accruing in respect
of Shareholder Accounts other than Omnibus Accounts and
allocable to Distributor Shares in accordance with the
preceding rules shall be paid to the Distributor's Account,
unless the Distributor otherwise instructs the Fund in any
irrevocable payment instruction; and
2. The Asset Based Sales Charges and CDSCs accruing in respect
of Shareholder Accounts other than Omnibus Accounts and
allocable to Post-distributor Shares in accordance with the
preceding rules shall be paid in accordance with direction
received from any future distributor of Shares of the Instant
Fund.
On each Omnibus CDSC Settlement Date, the Transfer Agent for each Fund
shall cause the applicable Sub-transfer Agent to cause payment to be made of the
amount of the CDSCs accruing during the period to which such Omnibus CDSC
Settlement Date relates in respect of the Shares of such Fund owned of record by
each Omnibus Account by two separate wire transfers directly from the account of
such Fund maintained by such Transfer Agent, as follows:
1. The CDSCs accruing in respect of such Omnibus Account and allocable
to Distributor Shares in accordance with the preceding rules shall be paid to
the Distributor's Account, unless the Distributor otherwise instructs the Fund
in any irrevocable payment instruction; and
2. The CDSCs accruing in respect of such Omnibus Account and allocable
to Post-distributor Shares in accordance with the preceding rules shall be paid
in accordance with direction received from any future distributor of Shares of
the Instant Fund.
On each Omnibus Asset Based Sales Charge Settlement Date the Transfer
Agent for each Fund shall cause payment to be made of the amount of the Asset
Based Sales Charge accruing for the period to which such Omnibus Asset Based
Sales Charge Settlement Date relates in respect of the Shares of such Fund owned
of record by each Omnibus Account by two separate wire transfers directly from
accounts of such Fund as follows:
1. The Asset Based Sales Charge accruing in respect of such Omnibus
Account and allocable to Distributor Shares shall be paid to the Distributor's
Collection Account, unless the Distributor otherwise instructs the Fund in any
irrevocable payment instruction; and
2. The Asset Based Sales Charge accruing in respect of such Omnibus
Account and allocable to Post-Distributor Shares shall be paid in accordance
with direction received from any future distributor of Shares of the Instant
Fund.
<PAGE>
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS B-2 SHARES
OF
KEYSTONE STATE TAX FREE FUND - SERIES II
AGREEMENT made this 11th day of December, 1996 by and between Keystone
World Bond Fund, a Massachusetts business trust, ("Fund"), and Evergreen
Keystone Investment Services, Inc., a Delaware corporation (the "Principal
Underwriter").
The Fund, individually and/or on behalf of its series, if any, referred
to above in the title of this Agreement, to which series, if any, this Agreement
shall relate, as applicable (the "Fund"), may act as the distributor of certain
securities of which it is the issuer pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (the "1940 Act"). Accordingly, it is hereby mutually agreed
as follows:
1. The Fund hereby appoints the Principal Underwriter a principal
underwriter of the Class B-2 shares of beneficial interest of the Fund ("B-2
Shares") as an independent contractor upon the terms and conditions hereinafter
set forth. The general term "Shares" as used herein has the same meaning as is
provided therefor in Schedule I hereto. Except as the Fund may from time to time
agree, the Principal Underwriter will act as agent for the Fund and not as
principal.
2. The Principal Underwriter will use its best efforts to find
purchasers for the B-2 Shares and to promote distribution of the B-2 Shares and
may obtain orders from brokers, dealers or other persons for sales of B-2 Shares
to them. No such dealer, broker or other person shall have any authority to act
as agent for the Fund; such dealer, broker or other person shall act only as
principal in the sale of B-2 Shares.
3. Sales of B-2 Shares by Principal Underwriter shall be at the public
offering price determined in the manner set forth in the prospectus and/or
statement of additional information of the Fund current at the time of the
Fund's acceptance of the order for B-2 Shares. All orders shall be subject to
acceptance by the Fund and the Fund reserves the right in its sole discretion to
reject any order received. The Fund shall not be liable to anyone for failure to
accept any order.
4. On all sales of B-2 Shares made prior to December 11, 1996. Fund
shall pay the Principal Underwriter Distribution Fees (as defined in Section 14
hereof), as commissions for the sale of B-2 Shares and other Shares, which shall
be paid in conjunction with distribution fees paid to the Principal Underwriter
by other classes of Shares of the Fund to the extent required in order to comply
with Section 14 hereof, and shall pay over to the Principal Underwriter CDSCs
(as defined in Section 14 hereof) as set forth in the Fund's current prospectus
and statement of additional information, and as required by Section 14 hereof.
The Principal Underwriter shall also receive payments consisting of shareholder
service fees ("Service Fees") at the rate of .25% per annum of the average daily
net asset value of the Class B-2 Shares outstanding prior to December 11, 1996.
The Principal Underwriter may allow all or a part of said Distribution Fees and
CDSCs received by it (not paid to others as hereinafter provided) to such
persons as Principal Underwriter may determine.
5. Payment to the Fund for B-2 Shares shall be in New York or Boston
Clearing House funds received by the Principal Underwriter within three business
days after notice of acceptance of the purchase order and the amount of the
applicable public offering price has been given to the purchaser. If such
payment is not received within such period, the Fund reserves the right, without
further notice, forthwith to cancel its acceptance of any such order. The Fund
shall pay such issue taxes as may be required by law in connection with the
issue of the B-2 Shares.
6. The Principal Underwriter shall not make in connection with the B-2
Shares any representations concerning the B-2 Shares except those contained in
the then current prospectus and/or statement of additional information covering
the Shares and in printed information approved by the Fund as information
supplemental to such prospectus and statement of additional information. [Copies
of the then current prospectus and statement of additional information and any
such printed supplemental information will be supplied by the Fund to the
Principal Underwriter in reasonable quantities upon request.]
7. The Principal Underwriter agrees to comply with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (as defined in
the Purchase and Sale Agreement, dated as of December 11, 1996 (the "Purchase
Agreement"), between the Principal Underwriter, Citibank, N.A. and Citicorp
North America, Inc., as agent (the "Rules of Fair Practice")).
8. The Fund appoints the Principal Underwriter as its agent to accept
orders for redemptions and repurchases of B-2 Shares at values and in the manner
determined in accordance with the then current prospectus and/or statement of
additional information of the Fund.
9. The Fund agrees to indemnify and hold harmless the Principal
Underwriter, its officers and Directors and each person, if any, who controls
the Principal Underwriter within the meaning of Section 15 of the Securities Act
of 1933 ("1933 Act"), against any losses, claims, damages, liabilities and
expenses (including the cost of any legal fees incurred in connection therewith)
which the Principal Underwriter, its officers, Directors or any such controlling
person may incur under the 1933 Act, under any other statute, at common law or
otherwise, arising out of or based upon
a. any untrue statement or alleged untrue statement of a material
fact contained in the Fund's registration statement,
prospectus or statement of additional information (including
amendments and supplements thereto) or
b. any omission or alleged omission to state a material fact
required to be stated in the Fund's registration statement,
prospectus or statement of additional information necessary to
make the statements therein not misleading, provided, however,
that insofar as losses, claims, damages, liabilities or
expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission
made in reliance and in conformity with information furnished
to the Fund by the Principal Underwriter for use in the Fund's
registration statement, prospectus or statement of additional
information, such indemnification is not applicable. In no
case shall the Fund indemnify the Principal Underwriter or its
controlling person as to any amounts incurred for any
liability arising out of or based upon any action for which
the Principal Underwriter, its officers and Directors or any
controlling person would otherwise be subject to liability by
reason of willful misfeasance, bad faith, or gross negligence
in the performance of its duties or by reason of the reckless
disregard of its obligations and duties under this Agreement.
10. The Principal Underwriter agrees to indemnify and hold harmless the
Fund, its officers and Trustees and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act against any loss, claims,
damages, liabilities and expenses (including the cost of any legal fees incurred
in connection therewith) which the Fund, its officers, Directors or any such
controlling person may incur under the 1933 Act, under any other statute, at
common law or otherwise arising out of the acquisition of any Shares by any
person which
(a) may be based upon any wrongful act by the Principal
Underwriter or any of its employees or representatives, or
(b) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in the Fund's
registration statement, prospectus or statement of additional
information (including amendments and supplements thereto), or
any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished or
confirmed in writing to the Fund by the Principal Underwriter.
11. The Fund agrees to execute such papers and to do such acts and
things as shall from time to time be reasonably requested by the Principal
Underwriter for the purpose of qualifying the B-2 Shares for sale under the
so-called "blue sky" laws of any state or for registering B-2 Shares under the
1933 Act or the Fund under the Investment Company Act of 1940 ("1940 Act"). The
Principal Underwriter shall bear the expenses of preparing, printing and
distributing advertising, sales literature, prospectuses, and statements of
additional information. The Fund shall bear the expense of registering B-2
Shares under the 1933 Act and the Fund under the 1940 Act, qualifying B-2 Shares
for sale under the so-called "blue sky" laws of any state, the preparation and
printing of prospectuses, statements of additional information and reports
required to be filed with the Securities and Exchange Commission and other
authorities, the preparation, printing and mailing of prospectuses and
statements of additional information to holders of B-2 Shares, and the direct
expenses of the issue of B-2 Shares.
The Principal Underwriter shall, at the request of the Fund, provide to
the Board of Trustees or Directors (together herein called the "Directors") of
the Fund in connection not less than quarterly a written report of the amounts
received from the Fund hereunder and the purpose for which such expenditures by
the Fund were made.
The term of this Agreement shall begin on the date hereof and, unless
sooner terminated or continued as provided below, shall expire after one year.
This Agreement shall continue in effect after such term if its continuance is
specifically approved by a majority of the outstanding voting securities of
Class B-2 of the Fund or by a majority of the Directors of the Fund and a
majority of the Directors who are not parties to this Agreement or "interested
persons", as defined in the Investment Company Act of 1940 (the "1940 Act"), of
any such party and who have no direct or indirect financial interest in the
operation of the Fund's Rule 12B-2 plan for Class B-2 Shares or in any
agreements related to the plan at least annually in accordance with the 1940 Act
and the rules and regulations thereunder.
This Agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Directors of the Fund, or a majority of
such Directors who are not parties to this Agreement or "interested persons", as
defined in the 1940 Act, of any such party and who have no direct or indirect
financial interest in the operation of the Fund's Rule 12B-2 plan for Class B-2
Shares or in any agreement related to the plan or by a vote of a majority of the
outstanding voting securities of Class B-2 on not more than sixty days written
notice to any other party to the agreement; and shall terminate automatically in
the event of its assignment (as defined in the 1940 Act), which shall not
include assignment of the Principal Underwriter's (as hereinafter defined)
provided for hereunder and/or rights related to such Allocable Portions.
14. The provisions of this Section 14 shall be applicable to the extent
necessary to enable the Fund to comply with the obligation of the Fund to pay
the Principal Underwriter its Allocable Portion of Distribution Fees paid in
respect of Shares while the Fund is required to do so pursuant to the Principal
Underwriting Agreement, of even date herewith, in respect of Class B-2 Shares,
and shall remain in effect so long as any payments are required to be made by
the Fund pursuant to the irrevocable payment instruction (as defined in the
Purchase Agreement (the "Irrevocable Payment Instruction")).
14.1 The Fund shall pay to the Principal Underwriter the Principal
Underwriter's Allocable Portion (as hereinafter defined) of a fee (the
"Distribution Fee") at the rate of .75% per annum of the average daily net asset
value of the Fund Shares sold prior to December 11, 1996, subject to the
limitation on the maximum aggregate amount of such fees under the Rules of Fair
Practice as applicable to such Distribution Fee on the date hereof.
14.2 The Principal Underwriter's Allocable Portion of Distribution Fees
paid by the Fund in respect of Shares sold prior to December 11, 1996 shall be
equal to the portion of the Asset Based Sales Charge allocable to Distributor
Shares (as defined in Schedule I hereto to this Agreement) in accordance with
Schedule I hereto. The Fund agrees to cause its transfer agent to maintain the
records and arrange for the payments on behalf of the Fund at the times and in
the amounts and to the accounts required by Schedule I hereto, as the same may
be amended from time to time. It is acknowledged and agreed that by virtue of
the operation of Schedule I hereto the Principal Underwriter's Allocable Portion
of Distribution Fees paid by the Fund in respect of Shares, may, to the extent
provided in Schedule I hereto, take into account Distribution Fees payable by
the Fund in respect of other existing classes and/or sub-classes of shares of
the Fund which would be treated as "Shares" under Schedule I hereto. The Fund
will limit amounts paid to any subsequent principal underwriters of Shares to
the portion of the Asset Based Sales Charge paid in respect of Shares which is
allocable to Post-distributor Shares (as defined in Schedule I hereto) in
accordance with Schedule I hereto. The Fund's payments to the Principal
Underwriter in consideration of its services in connection with the sale of B-2
Shares made prior to December 11, 1996 shall be the Distribution Fees
attributable to B-2 Shares sold prior to December 11, 1996 which are Distributor
Shares (as defined in Schedule I hereto) and all other amounts constituting the
Principal Underwriter's Allocable Portion of Distribution Fees shall be the
Distribution Fees related to the sale of other Shares which are Distributor
Shares (as defined in Schedule I hereto).
The Fund shall cause its transfer agent and sub-transfer agents to
withhold from redemption proceeds payable to holders of Shares on redemption
thereof the contingent deferred sales charges payable upon redemption thereof as
set forth in the then current prospectus and/or statement of additional
information of the Fund ("CDSCs") and to pay over to the Principal Underwriter
The Principal Underwriter's Allocable Portion of said CDSCs paid in respect of
Shares which shall be equal to the portion thereof allocable to Distributor
Shares (as defined in Schedule I hereto) in accordance with Schedule I hereto.
14.3 The Principal Underwriter shall be considered to have completely
earned the right to the payment of its Allocable Portion of the Distribution Fee
and the right to payment over to it of its' Allocable Portion of the CDSC in
respect of Shares as provided for hereby upon the completion of the sale of each
Commission Share (as defined in Schedule I hereto) taken into account as a
Distributor Share in computing the Principal Underwriter's Allocable Portion in
accordance with Schedule I hereto.
14.4 Except as provided in Section 14.5 hereof in respect of
Distribution Fees only, the Fund's obligation to pay the Principal Underwriter
the Distribution Fees and to pay over to the Principal Underwriter CDSCs
provided for hereby shall be absolute and unconditional and shall not be subject
to dispute, offset, counterclaim or any defense whatsoever (it being understood
that nothing in this sentence shall be deemed a waiver by the Fund of its right
separately to pursue any claims it may have against the Principal Underwriter
and enforce such claims against any assets (other than the Principal
Underwriter's right to its Allocable Portion of the Distribution Fees and CDSCs
(the "Collection Rights") of the Principal Underwriter).
14.5 Notwithstanding anything in this Agreement to the contrary, the
Fund shall pay to the Principal Underwriter its Allocable Portion of
Distribution Fees provided for hereby notwithstanding its termination as
Principal Underwriter for the Shares or any termination of this Agreement and
such payment of such Distribution Fees, and that obligation and the method of
computing such payment, shall not be changed or terminated except to the extent
required by any change in applicable law, including, without limitation, the
1940 Act, the Rules promulgated thereunder by the Securities and Exchange
Commission and the Rules of Fair Practice, in each case enacted or promulgated
after June 1, 1995, or in connection with a Complete Termination (as hereinafter
defined). For the purposes of this Section 14.5, "Complete Termination" means a
termination of the Fund's Rule 12B-2 plan for B-2 Shares involving the cessation
of payments of the Distribution Fees, and the cessation of payments of
distribution fees pursuant to every other Rule 12B-2 plan of the Fund for every
existing or future B-Class-of-Shares (as hereinafter defined) and the Fund's
discontinuance of the offering of every existing or future B-Class-of- Shares,
which conditions shall be deemed satisfied when they are first complied with
hereafter and so long thereafter as they are complied with prior to the earlier
of (i) the date upon which all of the B-2 Shares which are Distributor Shares
pursuant to Schedule I hereto shall have been redeemed or converted or (ii) June
1, 2005. For purposes of this Section 14.5, the term B-Class- of-Shares means
each of the B-2 Class of Shares of the Fund, the B-2 Class of Shares of the Fund
and each other class of shares of the Fund hereafter issued which would be
treated as Shares under Schedule I hereto or which has substantially similar
economic characteristics to the B-2 or B-2 Classes of Shares taking into account
the total sales charge, CDSC or other similar charges borne directly or
indirectly by the holder of the shares of such class. The parties agree that the
existing C Class of Shares of the Fund does not have substantially similar
economic characteristics to the B-2 or B-2 Classes of Shares taking into account
the total sales charge, CDSC or other similar charges borne directly or
indirectly by the holder of such shares. For purposes of clarity the parties to
this agreement hereby state that they intend that a new installment load class
of shares which may be authorized by amendments to Rule 6(c)-10 under the 1940
Act will be considered to be a B-Class-of-Shares if it has economic
characteristics substantially similar to the economic characteristics of the
existing B-2 or B-2 Classes of Shares taking into account the total sale charge,
CDSC or other similar charges borne directly or indirectly by the holder of such
shares and will not be considered to be a B-Class-of-Shares if it has economic
characteristics substantially similar to the economic characteristics of the
existing C Class of shares of the Fund taking into account the total sales
charge, CDSC or other similar charges borne directly or indirectly by the holder
of such shares.
14.6 The Principal Underwriter may assign any part of its Allocable
Portions and obligations of the Fund related thereto (but not the Principal
Underwriter's obligations to the Fund provided for in this Agreement) to any
person (an "Assignee") and any such assignment shall be effective as to the Fund
upon written notice to the Fund by the Principal Underwriter. In connection
therewith the Fund shall pay all or any amounts in respect of its Allocable
Portions directly to the Assignee thereof as directed in a writing by the
Principal Underwriter in the Irrevocable Payment Instruction, as the same may be
amended from time to time with the consent of the Fund, and the Fund shall be
without liability to any person if it pays such amounts when and as so directed,
except for underpayments of amounts actually due, without any amount payable as
consequential or other damages due to such underpayment and without interest
except to the extent that delay in payment of Distribution Fees and CDSCs
results in an increase in the maximum Sales Charge allowable under the Rules of
Fair Practice, which increases daily at a rate of prime plus one percent per
annum.
14.7 The Fund will not, to the extent it may otherwise be empowered to
do so, change or waive any CDSC with respect to B-2 Shares, except as provided
in the Fund's prospectus or statement of additional information without the
Principal Underwriter's or Assignee's consent, as applicable. Notwithstanding
anything to the contrary in this Agreement or any termination of this Agreement
or the Principal Underwriter as principal underwriter for the Shares of the
Fund, the Principal Underwriter shall be entitled to be paid its Allocable
Portion of the CDSCs whether or not the Fund's Rule 12B-2 plan for B-2 Shares is
terminated and whether or not any such termination is a Complete Termination, as
defined above.
15. This Agreement shall be construed in accordance with the laws of
The Commonwealth of Massachusetts. All sales hereunder are to be made, and title
to the Shares shall pass, in Boston, Massachusetts.
16. The Fund is a Massachusetts business trust established under a
Declaration of Trust, as it may be amended from time to time. The obligations of
the Fund are not personally binding upon, nor shall recourse be had against the
private property of any of the Trustees, shareholders, officers, employees or
agents of the Fund, but only the property of the Fund shall be bound.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their respective officers thereunto duly authorized at Boston,
Massachusetts, on the day and year first written above.
KEYSTONE STATE TAX FREE FUND - SERIES II
By: /s/ George S. Bissell
----------------------------
Title: Chairman
EVERGREEN KEYSTONE INVESTMENT
SERVICES, INC.
By: /s/ Rosemary D. Van Antwerp
---------------------------
Title: Senior Vice President
<PAGE>
SCHEDULE I
TO
PRINCIPAL UNDERWRITING AGREEMENT
FOR CLASS B-2 SHARES
OF
KEYSTONE STATE TAX FREE FUND - SERIES II
TRANSFER AGENT PROCEDURES FOR DIFFERENTIATING
AMONG DISTRIBUTOR SHARES AND POST-DISTRIBUTOR SHARES
Amounts (in respect of Asset Based Sales Charges (as hereinafter
defined) and CDSCs (as hereinafter defined) in respect of Shares (as hereinafter
defined) of each Fund (as hereinafter defined) shall be allocated between
Distributor Shares (as hereinafter defined) and Post-distributor Shares (as
hereinafter defined) of such Fund in accordance with the rules set forth in
clauses (B) and (C). Clause (B) sets forth the rules to be followed by the
Transfer Agent for each Fund and the record owner of each Omnibus Account (as
hereinafter defined) in maintaining records relating to Distributor Shares and
Post-distributor Shares. Clause (C) sets forth the rules to be followed by the
Transfer Agent for each Fund and the record owner of each Omnibus Account in
determining what portion of the Asset Based Sales Charge (as hereinafter
defined) payable in respect of each class of Shares of such Fund and what
portion of the CDSC (as hereinafter defined) payable by the holders of Shares of
such Fund is attributable to Distributor Shares and Post-distributor Shares,
respectively.
(A) DEFINITIONS:
Generally, for purposes of this Schedule I, defined terms shall be
used with the meaning assigned to them in the Agreement, except that for
purposes of the following rules the following definitions are also applicable:
"Agreement" shall mean the Principal Underwriting Agreement for Class
B-2 Shares of the Instant Fund dated as of May 31, 1995 and the successor
Agreement dated December 11, 1996 between the Instant Fund and the Distributor.
"Asset Based Sales Charge" shall have the meaning set forth in Section
26(b)(8)(C) of the Rules of Fair Practice it being understood that for purposes
of this Exhibit I such term does not include the Service Fee.
"Business Day" shall mean any day on which the banks and the New York
Stock Exchange are not authorized or required to close in New York City.
"Capital Gain Dividend" shall mean, in respect of any Share of any
Fund, a Dividend in respect of such Share which is designated by such Fund as
being a "capital gain dividend" as such term is defined in Section 852 of the
Internal Revenue Code of 1986, as amended.
"CDSC" shall mean with respect to any Fund, the contingent deferred
sales charge payable, either directly or by withholding from the proceeds of the
redemption of the Shares of such Fund, by the shareholders of such Fund on any
redemption of Shares of such Fund in accordance with the Prospectus relating to
such Fund.
"Commission Share" shall mean, in respect of any Fund, a Share of such
Fund issued prior to Deceember 11, 1996 under circumstances where a CDSC would
be payable upon the redemption of such Share if such CDSC is not waived or shall
have not otherwise expired.
"Date of Original Purchase" shall mean, in respect of any Commission
Share of any Fund, the date on which such Commission Share was first issued by
such Fund; provided, that if such Share is a Commission Share and such Fund
issued the Commission Share (or portion thereof) in question in connection with
a Free Exchange for a Commission Share (or portion thereof) of another Fund, the
Date of Original Purchase for the Commission Share (or portion thereof) in
question shall be the date on which the Commission Share (or portion thereof) of
the other Fund was first issued by such other Fund (unless such Commission Share
(or portion thereof) was also issued by such other Fund in a Free Exchange, in
which case this proviso shall apply to that Free Exchange and this application
shall be repeated until one reaches a Commission Share (or portion thereof)
which was issued by a Fund other than in a Free Exchange).
"Distributor" shall mean Keystone Investment Distributors Company, its
successors and assigns.
"Distributor's Account" shall mean the account of the Distributor,
account no. 9903-584-2, ABA No. 011 0000 28, entitled "General Account"
maintained with State Street Bank & Trust Company or such other account as the
Distributor may designate in a notice to the Transfer Agent.
"Distributor Inception Date" shall mean, in respect of any Fund, the
date identified as the date Shares of such Fund are first sold by the
Distributor.
"Distributor Last Sale Cut-off Date" shall mean, in respect of any
Fund, the date identified as the last sale of a Commission Share during the
period the Distributor served as principal underwriter under the Agreement.
"Distributor Shares" shall mean, in respect of any Fund, all Shares of
such Fund the Month of Original Purchase of which occurs on or after the
Inception Date for such Fund and on or prior to the Distributor Last Sale
Cut-off Date in respect of such Fund.
"Dividend" shall mean, in respect of any Share of any Fund, any
dividend or other distribution by such Fund in respect of such Share.
"Free Exchange" shall mean any exchange of a Commission Share (or
portion thereof) of one Fund (the "Redeeming Fund") for a Share (or portion
thereof) of another Fund (the "Issuing Fund"), under any arrangement which
defers the exchanging Shareholder's obligation to pay the CDSC in respect of the
Commission Share (or portion thereof) of the Redeeming Fund so exchanged until
the later redemption of the Share (or portion thereof) of the Issuing Fund
received in such exchange.
"Free Share" shall mean, in respect of any Fund, each Share of such
Fund issued prior to December 11, 1996 other than a Commission Share, including,
without limitation: (i) Shares issued in connection with the automatic
reinvestment of Capital Gain Dividends or Other Dividends by such Fund, (ii)
Special Free Shares issued by such Fund and (iii) Shares (or portion thereof)
issued by such Fund in connection with an exchange whereby a Free Share (or
portion thereof) of another Fund is redeemed and the Net Asset Value of such
redeemed Free Share (or portion thereof) is invested in such Shares (or portion
thereof) of such Fund.
"Fund" shall mean each of the regulated investment companies or series
or portfolios of regulated investment companies identified in Schedule II to the
Irrevocable Payment Instruction, as the same may be amended from time to time in
accordance with the terms thereof.
"Instant Fund" shall mean Keystone State Tax Free Fund - Series II.
"ML Omnibus Account" shall mean, in respect of any Fund, the Omnibus
Account maintained by Merrill Lynch, Pierce, Fenner & Smith as subtransfer
agent.
"Month of Original Purchase" shall mean, in respect of any Share of
any Fund, the calendar month in which such Share was first issued by such Fund;
provided, that if such Share is a Commission Share and such Fund issued the
Commission Share (or portion thereof) in question in connection with a Free
Exchange for a Commission Share (or portion thereof) of another Fund, the Month
of Original Purchase for the Commission Share (or portion thereof) in question
shall be the calendar month in which the Commission Share (or portion thereof)
of the other Fund was first issued by such other Fund (unless such Commission
Share (or portion thereof) was also issued by such other Fund in a Free
Exchange, in which case this proviso shall apply to that Free Exchange and this
application shall be repeated until one reaches a Commission Share (or portion
thereof) which was issued by a Fund other than in a Free Exchange); provided,
further, that if such Share is a Free Share and such Fund issued such Free Share
in connection with the automatic reinvestment of dividends in respect of other
Shares of such Fund, the Month of Original Purchase of such Free Share shall be
deemed to be the Month of Original Purchase of the Share in respect of which
such dividend was paid; provided, further, that if such Share is a Free Share
and such Fund issued such Free Share in connection with an exchange whereby a
Free Share (or portion thereof) of another Fund is redeemed and the Net Asset
Value of such redeemed Free Share (or portion thereof) is invested in a Free
Share (or portion thereof) of such Fund, the Month of Original Issue of such
Free Share shall be the Month of Original Issue of the Free Share of such other
Fund so redeemed (unless such Free Share of such other Fund was also issued by
such other Fund in such an exchange, in which case this proviso shall apply to
that exchange and this application shall be repeated until one reaches a Free
Share which was issued by a Fund other than in such an exchange); and provided,
finally, that for purposes of this Schedule I each of the following periods
shall be treated as one calendar month for purposes of applying the rules of
this Schedule I to any Fund: (i) the period of time from and including the
Distributor Inception Date for such Fund to and including the last day of the
calendar month in which such Distributor Inception Date occurs; (ii) the period
of time commencing with the first day of the calendar month in which the
Distributor Last Sale Cutoff Date in respect of such Fund occurs to and
including such Distributor Last Sale Cutoff Date; and (iii) the period of time
commencing on the day immediately following the Distributor Last Sale Cutoff
Date in respect of such Fund to and including the last day of the calendar month
in which such Distributor Last Sale Cut-off Date occurs.
"Omnibus Account" shall mean any Shareholder Account the record owner
of which is a registered broker-dealer which has agreed with the Transfer Agent
to provide sub-transfer agent functions relating to each Sub-shareholder Account
within such Shareholder Account as contemplated by this Schedule I in respect of
each of the Funds.
"Omnibus Asset Based Sales Charge Settlement Date" shall mean, in
respect of each Omnibus Account, the Business Day next following the twentieth
day of each calendar month for the calendar month immediately preceding such
date so long as the record owner is able to allocate the Asset Based Sales
Charge accruing in respect of Shares of any Fund as contemplated by this
Schedule I no more frequently than monthly; provided, that at such time as the
record owner of such Omnibus Account is able to provide information sufficient
to allocate the Asset Based Sales Charge accruing in respect of such Shares of
such Fund owned of record by such Omnibus Account as contemplated by this
Schedule I on a weekly or daily basis, the Omnibus Asset Based Sales Charge
Settlement Date shall be a weekly date as in the case of the Omnibus CDSC
Settlement Date or a daily date as in the case of Asset Based Sales Charges
accruing in respect of Shareholder Accounts other than Omnibus Accounts, as the
case may be.
"Omnibus CDSC Settlement Date" shall mean, in respect of each Omnibus
Account, the third Business Day of each calendar week for the calendar week
immediately preceding such date so long as the record owner of such Omnibus
Account is able to allocate the CDSCs accruing in respect of any Shares of any
Fund as contemplated by this Schedule I for no more frequently than weekly;
provided, that at such time as the record owner of such Shares of such Fund
owned of record by such Omnibus Account is able to provide information
sufficient to allocate the CDSCs accruing in respect of such Omnibus Account as
contemplated by this Schedule I on a daily basis, the Omnibus CDSC Settlement
Date for such Omnibus Account shall be a daily date as in the case of CDSCs
accruing in respect of Shareholder Accounts other than Omnibus Accounts.
"Original Purchase Amount" shall mean, in respect of any Commission
Share of any Fund, the amount paid (i.e., the Net Asset Value thereof on such
date), on the Date of Original Purchase in respect of such Commission Share, by
such Shareholder Account or Sub-shareholder Account for such Commission Share;
provided, that if such Fund issued the Commission Share (or portion thereof) in
question in connection with a Free Exchange for a Commission Share (or portion
thereof) of another Fund, the Original Purchase Amount for the Commission Share
(or portion thereof) in question shall be the Original Purchase Amount in
respect of such Commission Share (or portion thereof) of such other Fund (unless
such Commission Share (or portion thereof) was also issued by such other Fund in
a Free Exchange, in which case this proviso shall apply to that Free Exchange
and this application shall be repeated until one reaches a Commission Share (or
portion thereof) which was issued by a Fund other than in a Free Exchange).
"Other Dividend" shall mean in respect of any Share, any Dividend paid
in respect of such Share other than a Capital Gain Dividend.
"Post-distributor Shares" shall mean, in respect of any Fund, all
Shares of such Fund the Month of Original Purchase of which occurs after the
Distributor Last Sale Cut-off Date for such Fund.
"Program Agent" shall mean Citicorp North America, Inc., as Program
Agent under the Purchase Agreement, and its successors and assigns in such
capacity.
"Purchase Agreement" shall mean that certain Purchase and Sale
Agreement dated as of May 31, 1995, among Keystone Investment Distributors
Company, as Seller, Citibank, N.A., as Purchaser, and Citicorp North America,
Inc., as Program Agent.
"Share" shall mean in respect of any Fund any share of the classes of
shares specified in Schedule II to the Irrevocable Payment Instruction opposite
the name of such Fund, as the same may be amended from time to time by notice
from the Distributor and the Program Agent to the Fund and the Transfer Agent;
provided, that such term shall include, after the Distributor Last Sale Cut-off
Date, a share of a new class of shares of such Fund: (i) with respect to each
record owner of Shares which is not treated in the records of each Transfer
Agent and Sub-transfer Agent for such Fund as an entirely separate and distinct
class of shares from the classes of shares specified Schedule II to the
Irrevocable Payment Instruction or (ii) the shares of which class may be
exchanged for shares of another Fund of the classes of shares specified on
Schedule II to the Irrevocable Payment Instruction of any class existing on or
prior to the Distributor Last Sale Cut-off Date; or (iii) dividends on which can
be reinvested in shares of the classes specified on Schedule II to the
Irrevocable Payment Instruction under the automatic dividend reinvestment
options; or (iv) which is otherwise treated as though it were of the same class
as the class of shares specified on Schedule II to the Irrevocable Payment
Instruction.
"Shareholder Account" shall have the meaning set forth in clause
(B)(1) hereof.
"Special Free Share" shall mean, in respect of any Fund, a Share
(other than a Commission Share) issued by such Fund other than in connection
with the automatic reinvestment of Dividends and other than in connection with
an exchange whereby a Free Share (or portion thereof) of another Fund is
redeemed and the Net Asset Value of such redeemed Share (or portion thereof) is
invested in a Share (or portion thereof) of such Fund.
"Sub-shareholder Account" shall have the meaning set forth in clause
(B)(1) hereof.
"Sub-transfer Agent" shall mean, in respect of each Omnibus Account,
the record owner thereof.
(B) RECORDS TO BE MAINTAINED BY THE TRANSFER AGENT FOR EACH FUND AND
THE RECORD OWNER OF EACH OMNIBUS ACCOUNT:
The Transfer Agent shall maintain Shareholder Accounts, and shall
cause each record owner of each Omnibus Account to maintain Sub-shareholder
Accounts, each in accordance with the following rules:
(1) Shareholder Accounts and Sub-shareholder Accounts. The Transfer
Agent shall maintain a separate account (a "Shareholder Account") for each
record owner of Shares of each Fund. Each Shareholder Account (other than
Omnibus Accounts) will represent a record owner of Shares of such Fund, the
records of which will be kept in accordance with this Schedule I. In the case of
an Omnibus Account, the Transfer Agent shall require that the record owner of
the Omnibus Account maintain a separate account (a "Sub-shareholder Account")
for each record owner of Shares which are reflected in the Omnibus Account, the
records of which will be kept in accordance with this Schedule I. Each such
Shareholder Account and Sub-shareholder Account shall relate solely to Shares of
such Fund and shall not relate to any other class of shares of such Fund.
(2) Commission Shares. For each Shareholder Account (other than an
Omnibus Account), the Transfer Agent shall maintain daily records of each
Commission Share of such Fund which records shall identify each Commission Share
of such Fund reflected in such Shareholder Account by the Month of Original
Purchase of such Commission Share.
For each Omnibus Account, the Transfer Agent shall require that the
Sub- transfer Agent in respect thereof maintain daily records of such
Sub-shareholder Account which records shall identify each Commission Share of
such Fund reflected in such Sub- shareholder Account by the Month of Original
Purchase; provided, that until the Sub- transfer Agent in respect of the ML
Omnibus Account develops the data processing capability to conform to the
foregoing requirements, such Sub-transfer Agent shall maintain daily records of
Sub-shareholder Accounts which identify each Commission Share of such Fund
reflected in such Sub-shareholder Account by the Date of Original Purchase. Each
such Commission Share shall be identified as either a Distributor Share or a
Post-distributor Share based upon the Month of Original Purchase of such
Commission Share (or in the case of a Sub-shareholder Account within the ML
Omnibus Account, based upon the Date of Original Purchase).
(3) Free Shares. The Transfer Agent shall maintain daily records of
each Shareholder Account (other than an Omnibus Account) in respect of any Fund
so as to identify each Free Share (including each Special Free Share) reflected
in such Shareholder Account by the Month of Original Purchase of such Free
Share. In addition, the Transfer Agent shall require that each Shareholder
Account (other than an Omnibus Account) have in effect separate elections
relating to reinvestment of Capital Gain Dividends and relating to reinvestment
of Other Dividends in respect of any Fund. Either such Shareholder Account shall
have elected to reinvest all Capital Gain Dividends or such Shareholder Account
shall have elected to have all Capital Gain Dividends distributed. Similarly,
either such Shareholder Account shall have elected to reinvest all Other
Dividends or such Shareholder Account shall have elected to have all Other
Dividends distributed.
The Transfer Agent shall require that the Sub-transfer Agent in
respect of each Omnibus Account maintain daily records for each Sub-shareholder
Account in the manner described in the immediately preceding paragraph for
Shareholder Accounts (other than Omnibus Accounts); provided, that until the
Sub-transfer Agent in respect of the ML Omnibus Account develops the data
processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall not be obligated to conform to the foregoing
requirements. Each Sub-shareholder Account shall also have in effect Dividend
reinvestment elections as described in the immediately preceding paragraph.
The Transfer Agent and each Sub-transfer Agent in respect of an
Omnibus Account shall identify each Free Share as either a Distributor Share or
a Post-distributor Share based upon the Month of Original Purchase of such Free
Share; provided, that until the Sub-transfer Agent in respect of the ML Omnibus
Account develops the data processing capability to conform to the foregoing
requirements, the Transfer Agent shall require such Sub-transfer Agent to
identify each Free Share of a given Fund in the ML Omnibus Account as a
Distributor Share, or Post-distributor Share, as follows:
(a) Free Shares of such Fund which are outstanding on the
Distributor Last Sale Cut-off Date for such Fund shall be
identified as Distributor Shares.
(b) Free Shares of such Fund which are issued (whether or not in
connection with an exchange for a Free Share of another Fund)
to the ML Omnibus Account during any calendar month (or
portion thereof) after the Distributor Last Sale Cut-off Date
for such Fund shall be identified as Distributor Shares in a
number computed as follows:
A X (B/C)
where:
A = Free Shares of such Fund issued to the ML Omnibus
Account during such calendar month (or portion
thereof)
B = Number of Commission Shares and Free Shares of such
Fund in the ML Omnibus Account identified as
Distributor Shares and outstanding as of the close of
business in the last day of the immediately preceding
calendar month (or portion thereof)
C = Total number of Commission Shares and Free Shares
of such Fund in the ML Omnibus Account and
outstanding as of the close of business on the last
day of the immediately preceding calendar month (or
portion thereof).
(c) Free Shares of such Fund which are issued (whether or not in
connection with an exchange for a free share of another Fund)
to the ML Omnibus Account during any calendar month (or
portion thereof) after the Distributor Last Sale Cut-off Date
for such Fund shall be identified as Post-distributor Shares
in a number computed as follows:
(A X (B/C)
where:
A = Free Shares of such Fund issued to the ML Omnibus
Account during such calendar month (or portion
thereof)
B = Number of Commission Shares and Free Shares of such
Fund in the ML Omnibus Account identified as
Post-distributor Shares and outstanding as of the
close of business in the last day of the immediately
preceding calendar month (or portion thereof)
C = Total number of Commission Shares and Free Shares
of such Fund in the ML Omnibus Account and
outstanding as of the close of business on the last
day of the immediately preceding calendar month (or
portion thereof).
(d) Free Shares of such Fund which are redeemed (whether or not in
connection with an exchange for Free Shares of another Fund or
in connection with the conversion of such Shares into a Class
A Share of such Fund) from the ML Omnibus Account in any
calendar month (or portion thereof) after the Distributor Last
Sale Cut-off Date for such Fund shall be identified as
Distributor Shares in a number computed as follows:
A X (B/C)
Where:
A = Free Shares of such Fund which are redeemed
(whether or not in connection with an exchange for
Free Shares of another Fund or in connection with the
conversion of such Shares into a class A share of
such Fund) from the ML Omnibus Account during such
calendar month (or portion thereof)
B = Free Shares of such Fund in the ML Omnibus Account
identified as Distributor Shares and outstanding as
of the close of business on the last day of the
immediately preceding calendar month.
C = Total number of Free Shares of such Fund in the ML
Omnibus Account and outstanding as of the close of
business on the last day of the immediately preceding
calendar month.
(e) Free Shares of such Fund which are redeemed (whether or not in
connection with an exchange for Free Shares of another Fund or
in connection with the conversion of such Shares into a class
A share of such Fund) from the ML Omnibus Account in any
calendar month (or portion thereof) after the Distributor Last
Sale Cut-off Date for such Fund shall be identified as
Post-distributor Shares in a number computed as follows:
A X (B/C)
where:
A = Free Shares of such Fund which are redeemed
(whether or not in connection with an exchange for
Free Shares of another Fund or in connection with the
conversion of such Shares into a class A share of
such Fund) from the ML Omnibus Account during such
calendar month (or portion thereof)
B = Free Shares of such Fund in the ML Omnibus Account
identified as Post-distributor Shares and outstanding
as of the close of business on the last day of the
immediately preceding calendar month.
C = Total number of Free Shares of such Fund in the ML
Omnibus Account and outstanding as of the close of
business on the last day of the immediately preceding
calendar month.
(4) Appreciation Amount and Cost Accumulation Amount. The Transfer
Agent shall maintain on a daily basis in respect of each Shareholder Account
(other than Omnibus Accounts) a Cost Accumulation Amount representing the total
of the Original Purchase Amounts paid by such Shareholder Account for all
Commission Shares reflected in such Shareholder Account as of the close of
business on each day. In addition, the Transfer Agent shall maintain on a daily
basis in respect of each Shareholder Account (other than Omnibus Accounts)
sufficient records to enable it to compute, as of the date of any actual or
deemed redemption or Free Exchange of a Commission Share reflected in such
Shareholder Account an amount (such amount an "Appreciation Amount") equal to
the excess, if any, of the Net Asset Value as of the close of business on such
day of the Commission Shares reflected in such Shareholder Account minus the
Cost Accumulation Amount as of the close of business on such day. In the event
that a Commission Share (or portion thereof) reflected in a Shareholder Account
is redeemed or under these rules is deemed to have been redeemed (whether in a
Free Exchange or otherwise), the Appreciation Amount for such Shareholder
Account shall be reduced, to the extent thereof, by the Net Asset Value of the
Commission Share (or portion thereof) redeemed, and if the Net Asset Value of
the Commission Share (or portion thereof) being redeemed equals or exceeds the
Appreciation Amount, the Cost Accumulation Amount will be reduced to the extent
thereof, by such excess. If the Appreciation Amount for such Shareholder Account
immediately prior to any redemption of a Commission Share (or portion thereof)
is equal to or greater than the Net Asset Value of such Commission Share (or
portion thereof) deemed to have been tendered for redemption, no CDSCs will be
payable in respect of such Commission Share (or portion thereof).
The Transfer Agent shall require that the Sub-transfer Agent in
respect of each Omnibus Account maintain on a daily basis in respect of each
Sub-shareholder Account reflected in such Omnibus Account a Cost Accumulation
Amount and sufficient records to enable it to compute, as of the date of any
actual or deemed redemption or Free Exchange of a Commission Share reflected in
such Sub-shareholder Account an Appreciation Amount in accordance with the
preceding paragraph and to apply the same to determine whether a CDSC is payable
(as though such Sub-shareholder Account were a Shareholder Account other than an
Omnibus Account; provided, that until the Sub- transfer Agent in respect of the
ML Omnibus Account develops the data processing capability to conform to the
foregoing requirements, such Sub-transfer Agent shall maintain for each
Sub-shareholder Account a separate Cost Accumulation Amount and a separate
Appreciation Amount for each Date of Original Purchase of any Commission Share
which shall be applied as set forth in the preceding paragraph as if each Date
of Original Purchase were a separate Month of Original Purchase.
(5) NASD Cap. On the date the distribution fees paid in respect of any
class of Shares equals the maximum amount thereon under the Rules of Fair
Practice, in respect of such class, all outstanding Shares of such class of such
Fund shall be converted into Class A shares of such Fund and will be deemed to
have been redeemed for their Net Asset Value for purposes of this Schedule I.
(6) Identification of Redeemed Shares. If a Shareholder Account (other
than an Omnibus Account) tenders a Share of a Fund for redemption (other than in
connection with an exchange of such Share for a Share of another Fund or in
connection with the conversion of such Share pursuant to a Conversion Feature),
such tendered Share will be deemed to be a Free Share if there are any Free
Shares reflected in such Shareholder Account immediately prior to such tender.
If there is more than one Free Share reflected in such Shareholder Account
immediately prior to such tender, such tendered Share will be deemed to be the
Free Share with the earliest Month of Original Purchase. If there are no Free
Shares reflected in such Shareholder Account immediately prior to such tender,
such tendered Share will be deemed to be the Commission Share with the earliest
Month of Original Purchase reflected in such Shareholder Account.
If a Sub-shareholder Account reflected in an Omnibus Account tenders a
Share for redemption (other than in connection with an Exchange of such Share
for a Share of another Fund or in connection with the conversion of such Share
pursuant to a Conversion Feature), the Transfer Agent shall require that the
record owner of each Omnibus Account supply the Transfer Agent sufficient
records to enable the Transfer Agent to apply the rules of the preceding
paragraph to such Sub-shareholder Account (as though such Sub-shareholder
Account were a Shareholder Account other than an Omnibus Account); provided,
that until the Sub-transfer Agent in respect of the ML Omnibus Account develops
the data processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall not be required to conform to the foregoing rules
regarding Free Shares (and the Transfer Agent shall account for such Free Shares
as provided in (3) above) but shall apply the foregoing rules to each Commission
Share with respect to the Date of Original Purchase of any Commission Share as
though each such Date were a separate Month of Original Purchase.
(7) Identification of Exchanged Shares. When a Shareholder Account
(other than an Omnibus Account) tenders Shares of one Fund (the "Redeeming
Fund") for redemption where the proceeds of such redemption are to be
automatically reinvested in shares of another Fund (the "Issuing Fund") to
effect an exchange (whether or not pursuant to a Free Exchange) into Shares of
the Issuing Fund: (1) such Shareholder Account will be deemed to have tendered
Shares (or portions thereof) of the Redeeming Fund with each Month of Original
Purchase represented by Shares of the Redeeming Fund reflected in such
Shareholder Account immediately prior to such tender in the same proportion that
the number of Shares of the redeeming Fund with such Month of Original Purchase
reflected in such Shareholder immediately prior to such tender bore to the total
number of Shares of the Redeeming Fund reflected in such Shareholder Account
immediately prior to such tender, and on that basis the tendered Shares of the
Redeeming Fund will be identified as Distributor Shares or Post-distributor
Shares; (2) such Shareholder Account will be deemed to have tendered Commission
Shares (or portions thereof) and Free Shares (or portions thereof) of the
Redeeming Fund of each category (i.e., Distributor Shares or Post-distributor
Shares) in the same proportion that the number of Commission Shares or Free
Shares (as the case may be) of the Redeeming Fund in such category reflected in
such Shareholder Account bore to the total number of Shares of the Redeeming
Fund in such category reflected in such Shareholder Account immediately prior to
such tender, (3) the Shares (or portions thereof) of the Issuing Fund issued in
connection with such exchange will be deemed to have the same Months of Original
Purchase as the Shares (or portions thereof) of the Redeeming Fund so tendered
and will be categorized as Distributor Shares and Post- distributor Shares
accordingly, and (4) the Shares (or portions thereof) of each Category of the
Issuing Fund issued in connection with such exchange will be deemed to be
Commission Shares and Free Shares in the same proportion that the Shares of such
Category of the Redeeming Fund were Commission Shares and Free Shares.
The Transfer Agent shall require that each record owner of an Omnibus
Account maintain records relating to each Sub-shareholder Account in such
Omnibus Account sufficient to apply the foregoing rules to each such
Sub-shareholder Account (as though such Sub-shareholder Account were a
Shareholder Account other than an Omnibus Account); provided, that until the
Sub-transfer Agent in respect of the ML Omnibus Account develops the data
processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall not be required to conform to the foregoing rules
relating to Free Shares (and the Sub-transfer Agent shall account for such Free
Shares as provided in (3) above) and shall apply a first-in-first-out procedure
(based upon the Date of Original Purchase) to determine which Commission Shares
(or portions thereof) of a Redeeming Fund were redeemed in connection with an
exchange.
(8) Identification of Converted Shares. The Transfer Agent records
maintained for each Shareholder Account (other than an Omnibus Account) will
treat each Commission Share of a Fund as though it were redeemed at its Net
Asset Value on the date such Commission Share converts into a class A share of
such Fund in accordance with an applicable Conversion Feature applied with
reference to its Month of Original Purchase and will treat each Free Share of
such Fund with a given Month of Original Purchase as though it were redeemed at
its Net Asset Value when it is simultaneously converted to a class A share at
the time the Commission Shares of such Fund with such Month of Original Purchase
are so converted.
The Transfer Agent shall require that each record owner of an Omnibus
Account maintain records relating to each Sub-shareholder Account in such
Omnibus Account sufficient to apply the foregoing rules to each such
Sub-shareholder Account (as though such Sub-shareholder Account were a
Shareholder Account other than an Omnibus Account) ; provided, that until the
Sub-transfer Agent in respect of the ML Omnibus Account develops the data
processing capability to conform to the foregoing requirements, such
Sub-transfer Agent shall apply the foregoing rules to Commission Shares with
reference to the Date of Original Issue of each Commission Share (as though each
such date were a separate Month of Original Issue) and shall not be required to
apply the foregoing rules to Free Shares (and the Sub-transfer Agent shall
account for such Free Shares as provided in (3) above).
(C) ALLOCATIONS OF ASSET BASED SALE CHARGES AND CDSCS AMONG DISTRI
BUTOR SHARES AND POST-DISTRIBUTOR SHARES:
The Transfer Agent shall use the following rules to allocate the
amounts of Asset Based Sales Charges and CDSCs payable by each Fund in respect
of Shares between Distributor Shares and Post-distributor Shares:
(1) Receivables Constituting CDSCs: CDSCs will be treated as relating
to Distributor Shares or Post-distributor Shares depending upon the Month of
Original Purchase of the Commission Share the redemption of which gives rise to
the payment of a CDSC by a Shareholder Account.
The Transfer Agent shall cause each Sub-transfer Agent to apply the
foregoing rule to each Sub-shareholder Account based on the records maintained
by such Sub-transfer Agent; provided, that until the Sub-transfer Agent in
respect of the ML Omnibus Account develops the data processing capability to
conform to the foregoing requirements, such Sub-transfer Agent shall apply the
foregoing rules to each Sub- shareholder Account with respect to the Date of
Original Purchase of any Commission Share as though each such date were a
separate Month of Original Purchase.
(2) Receivables Constituting Asset Based Sales Charges:
The Asset Based Sales Charges accruing in respect of each Shareholder
Account (other than an Omnibus Account) shall be allocated to each Share
reflected in such Shareholder Account as of the close of business on such day on
an equal per share basis. For example, the Asset Based Sales Charges
attributable to Distributor Shares on any day shall be computed and allocated as
follows:
A X (B/C)
where:
A. = Total amount of Asset Based Sales Charge accrued in
respect of such Shareholder Account (other than an
Omnibus Account) on such day.
B. = Number of Distributor Shares reflected in such
Shareholder Account (other than an Omnibus Account) on
the close of business on such day
C. = Total number of Distributor Shares and
Post-Distributor Shares reflected in such Shareholder
Account (other than an Omnibus Account) and outstanding
as of the close of business on such day.
The Portion of the Asset Based Sales Charges of such Fund accruing in respect of
such Shareholder Account for such day allocated to Post-distributor Shares will
be obtained using the same formula but substituting for "B" the number of
Post-distributor Shares, as the case may be, reflected in such Shareholder
Account and outstanding on the close of business on such day. The foregoing
allocation formula may be adjusted from time to time by notice to the Fund and
the transfer agent for the Fund from the Seller and the Program Agent pursuant
to Section 8.18 of the Purchase Agreement.
The Transfer Agent shall, based on the records maintained by the
record owner of such Omnibus Account, allocate the Asset Based Sales Charge
accruing in respect of each Omnibus Account on each day among all
Sub-shareholder Accounts reflected in such Omnibus Account on an equal per share
basis based upon the total number of Distributor Shares and Post-distributor
Shares reflected in each such Sub- shareholder Account as of the close of
business on such day. In addition, the Transfer Agent shall apply the foregoing
rules to each Sub-shareholder Account (as though it were a Shareholder Account
other than an Omnibus Account), based on the records maintained by the record
owner, to allocate the Asset Based Sales Charge so allocated to any Sub-
shareholder Account among the Distributor Shares and Post-distributor Shares
reflected in each such Sub-shareholder Account in accordance with the rules set
forth in the preceding paragraph; provided, that until the Sub-transfer Agent in
respect of the ML Omnibus Account develops the data processing capacity to apply
the rules of this Schedule I as applicable to Sub-shareholder Accounts other
than ML Omnibus Accounts, the Transfer Agent shall allocate the Asset Based
Sales Charge accruing in respect of Shares of any Fund in the ML Omnibus Account
during any calendar month (or portion thereof) among Distributor Shares and
Post-distributor Shares as follows:
(a) The portion of such Asset Based Sales Charge allocable to
Distributor Shares shall be computed as follows:
A X ((B + C)/2)
((D + E)/2)
where:
A = Total amount of Asset Based Sales Charge accrued
during such calendar month (or portion thereof) in
respect of Shares of such Fund in the ML Omnibus
Account
B = Shares of such Fund in the ML Omnibus Account and
identified as Distributor Shares and outstanding as of
the close of business on the last day of the
immediately preceding calendar month (or portion
thereof), times Net Asset Value per Share as of such
time
C = Shares of such Fund in the ML Omnibus Account and
identified as Distributor Shares and outstanding as of
the close of business on the last day of such calendar
month (or portion thereof), times Net Asset Value per
Share as of such time
D = Total number of Shares of such Fund in the ML Omnibus
Account and outstanding as of the close of business on
the last day of the immediately preceding calendar
month (or portion thereof), times Net Asset Value per
Share as of such time.
E = Total number of Shares of such Fund in the ML Omnibus
Account and outstanding as of the close of business on
the last day of such calendar month (or portion
thereof), times Net Asset Value per Share as of such
time.
(b) The portion of such Asset Based Sales Charge allocable to
Post-distributor Shares shall be computed s follows:
A X ((B + C)/2)
((D + E)/2)
where:
A = Total amount of Asset Based Sales Charge accrued
during such calendar month (or portion thereof) in
respect of Shares of such Fund in the ML Omnibus
Account
B = Shares of such Fund in the ML Omnibus Account and
identified as Post-distributor Shares and outstanding
as of the close of business on the last day of the
immediately preceding calendar month (or portion
thereof), times Net Asset Value per Share as of such
time
C = Shares of such Fund in the ML Omnibus Account and
identified as Post-distributor Shares and outstanding
as of the close of business on the last day of such
calendar month (or portion thereof), times Net Asset
Value per Share as of such time
D = Total number of Shares of such Fund in the ML Omnibus
Account and outstanding as of the close of business on
the last day of the immediately preceding calendar
month (or portion thereof), times Net Asset Value per
Share as of such time.
E = Total number of Shares of such Fund in the ML Omnibus
Account outstanding as of the close of business on the
last day of such calendar month, times Net Asset Value
per Share as of such time.
(3) Payments on behalf of each Fund.
On the close of business on each day the Transfer Agent shall cause payment to
be made of the amount of the Asset Based Sales Charge and CDSCs accruing on such
day in respect of the Shares of such Fund owned of record by Shareholder
Accounts (other than Omnibus Accounts) by two separate wire transfers, directly
from accounts of such Fund as follows:
1. The Asset Based Sales Charge and CDSCs accruing in respect
of Shareholder Accounts other than Omnibus Accounts and
allocable to Distributor Shares in accordance with the
preceding rules shall be paid to the Distributor's Account,
unless the Distributor otherwise instructs the Fund in any
irrevocable payment instruction; and
2. The Asset Based Sales Charges and CDSCs accruing in respect
of Shareholder Accounts other than Omnibus Accounts and
allocable to Post-distributor Shares in accordance with the
preceding rules shall be paid in accordance with direction
received from any future distributor of Shares of the Instant
Fund.
On each Omnibus CDSC Settlement Date, the Transfer Agent for each Fund
shall cause the applicable Sub-transfer Agent to cause payment to be made of the
amount of the CDSCs accruing during the period to which such Omnibus CDSC
Settlement Date relates in respect of the Shares of such Fund owned of record by
each Omnibus Account by two separate wire transfers directly from the account of
such Fund maintained by such Transfer Agent, as follows:
1. The CDSCs accruing in respect of such Omnibus Account and allocable
to Distributor Shares in accordance with the preceding rules shall be paid to
the Distributor's Account, unless the Distributor otherwise instructs the Fund
in any irrevocable payment instruction; and
2. The CDSCs accruing in respect of such Omnibus Account and allocable
to Post-distributor Shares in accordance with the preceding rules shall be paid
in accordance with direction received from any future distributor of Shares of
the Instant Fund.
On each Omnibus Asset Based Sales Charge Settlement Date the Transfer
Agent for each Fund shall cause payment to be made of the amount of the Asset
Based Sales Charge accruing for the period to which such Omnibus Asset Based
Sales Charge Settlement Date relates in respect of the Shares of such Fund owned
of record by each Omnibus Account by two separate wire transfers directly from
accounts of such Fund as follows:
1. The Asset Based Sales Charge accruing in respect of such Omnibus
Account and allocable to Distributor Shares shall be paid to the Distributor's
Collection Account, unless the Distributor otherwise instructs the Fund in any
irrevocable payment instruction; and
2. The Asset Based Sales Charge accruing in respect of such Omnibus
Account and allocable to Post-Distributor Shares shall be paid in accordance
with direction received from any future distributor of Shares of the Instant
Fund.
Trustees and Shareholders of
Keystone State Tax Free Fund - Series II
We consent to the use of our report dated December 27, 1996 incorporated by
reference hrein and to the references to our firm under the caption "Financial
Highlights" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 28, 1997
ORRICK, HERRINGTON
& SUTCLIFFE LLP
March 24, 1997
Keystone State Tax Free Fund--Series II
200 Berkeley Street
Boston, Massachusetts 02116-5034
Re: Keystone California Tax Free Fund
Dear Sirs:
We have acted as special California tax counsel for Keystone
State Tax Free Fund--Series II, a Massachusetts business trust (the "Trust"), on
behalf of the Trust's Keystone California Tax Free Fund, a series of the Trust,
in connection with the preparation of Post Effective Amendment No. 5 to the
Trust's Registration Statement under the Securities Act of 1933 (File No.
33-73730) and Post Effective Amendment No. 6 to the Trust's Registration
Statement under the Investment Company Act of 1940 (File No. 811-8254) (such
Registration Statements as amended by such post-effective amendments,
hereinafter the "Registration Statement") and the Trust's prospectus (the
"Prospectus") and statement of additional information (the "Statement of
Additional Information"), each dated March 31, 1997.
We have not independently verified and are not passing upon,
and do not assume any responsibility for, the accuracy, completeness or fairness
of the information contained in the Registration Statement or the Prospectus and
Statement of Additional Information except with respect to the statements
relating to State of California taxation in such documents to the extent
described in the next paragraph.
We have participated in the preparation of the statements
relating to State of California taxation set forth in the Registration Statement
and Exhibit A to the Prospectus under the caption "Keystone California Insured
Tax Free Fund--Description of State and Local Taxation." We have had discussions
with representatives of the Trust concerning the information contained in the
Registration Statement and the Prospectus under such caption and have considered
the matters required to be stated therein and the statements contained therein.
Based upon the participation and discussions described above and our review of
the Registration Statement, the Prospectus and the Statement of Additional
Information (other than the financial statements, schedules and other financial
and statistical information included therein, as to which we express no
opinion), we are of the opinion that the statements relating to State of
California taxation set forth under such caption in the Prospectus accurately
reflect our opinion as set forth therein and, insofar as they constitute
statements of law or legal conclusions, are correct in all material respects and
address all material State of California tax issues.
This opinion is furnished by us, as the Trust's special
California tax counsel, to you, solely for the benefit of the Trust and its
Board of Trustees and solely with respect to the Trust's Registration Statement,
Prospectus and Statement of Additional Information referred to in the first
paragraph of this letter, upon the understanding that we are not hereby assuming
professional responsibility to any other person whatsoever. This opinion letter
may not be relied upon by any other person without our prior written approval.
We disclaim any obligation to update this opinion letter for events occurring or
coming to out attention after the date hereof.
Very truly yours,
ORRICK, HERRINGTON & SUTCLIFFE LLP
By: /s/ Kenneth G. Whyburn
<PAGE>
ORRICK, HERRINGTON
& SUTCLIFFE LLP
March 24, 1997
Keystone State Tax Free Fund--Series II
200 Berkeley Street
Boston, Massachusetts 02116-5034
Re: Keystone California Tax Free Fund
Ladies and Gentlemen:
We have acted as special California tax counsel for Keystone
State Tax Free Fund--Series II, a Massachusetts business trust (the "Trust"), on
behalf of the Keystone California Tax Free Fund series of the Trust, in
connection with the preparation of Post-effective Amendment No. 5 to the Trust's
Registration Statement under the Securities Act of 1933 (File No. 33-73730) and
Amendment No. 6 to the Trust's Registration Statement under the Investment
Company Act of 1940 (file No. 811-8254) on Form N-1A (as amended, the
"Registration Statement"). We hereby consent to the filing of this letter as an
exhibit to such Registration Statement and to the reference to our firm under
the caption "Keystone California Insured Tax Free Fund--Description of State and
Local Tax Treatment" in Exhibit A to the Prospectus which is a part of such
Registration Statement. In giving such consent, we do not thereby admit that we
are within the category of persons whose consent is required by Section 7 of the
Securities Act of 1933, as amended, and the rules and regulations thereunder.
Very truly yours,
ORRICK, HERRINGTON & SUTCLIFFE LLP
By: /s/ Kenneth G. Whyburn
BRYAN CAVE LLP
3500 ONE KANSAS CITY PLACE
1200 MAIN STREET
KANSAS CITY, MISSOURI 64105-2100
(816) 374-3200
FACSIMILE: (816) 374-3300
March 24, 1997
Keystone America State Tax Free Fund
200 Berkeley Street
Boston, MA 02116-5034
Re: Keystone America State Tax Free Fund - Series II
Ladies and Gentlemen:
We have acted as special Missouri tax counsel to the Keystone America
State Tax Free Fund - Series II (the "Fund") and you have asked for our opinion
of the Missouri income tax consequences, under Chapter 143 of the Missouri
Revised Statutes, and Missouri personal property tax consequences to Missouri
residents owning shares of beneficial interest of the Keystone America Missouri
Tax Free Fund (the "Missouri Series"), a separate class of beneficial interest
of the Fund.
We have assumed, with your permission, for purposes of rendering this
opinion, (i) that the Fund, a Massachusetts business trust, is an association
taxable as a corporation; (ii) each "series" of the Fund, including the Missouri
Series, qualifies for taxation as a regulated investment company under Part I,
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code");
(iii) that the Fund is authorized by its Indenture of Trust to issue various
classes of shares of beneficial interest, one of which is the Missouri Series;
(iv) that the Fund, pursuant to its Declaration of Trust, shall treat all
consideration received by it from the issue or sale of shares of the Missouri
Series, all assets in which such consideration is invested, and all income and
proceeds from the investment and disposition of such assets as belonging to the
shareholders of the Missouri Series, subject only to the rights of creditors;
(v) that dividends paid by the Missouri Series will constitute, in whole or in
part, "exempt-interest dividends" within the meaning of Section 852(b)(5) of the
Code; and (vi) that the Missouri Series will at the close of each quarter of its
taxable year invest at least 50% of the value of its assets in debt obligations,
the interest on which is excluded from gross income for purposes of Federal
income taxation.
Our opinion is based upon the present provisions of the Missouri
Revised Statutes, the Code of State Regulations (the "CSR") and the Missouri
Register publications as in effect on the date hereof. In particular, our
opinion is based upon the specific provisions of 12 CSR Section 10-2.155. No
assurance can be given that the opinions below may not be modified by
legislative, judicial or administrative changes which may be retrospective with
respect to transactions prior to the effective date of such changes, subject
only to the limitations in the Missouri and United States Constitutions against
retrospective legislation, administrative determinations or judicial decisions.
We have made no review and express no opinion with regard to (i) matters arising
under the laws of any jurisdiction other than the State of Missouri; (ii) the
creation of the Fund, its income tax status as a regulated investment company or
the validity of the Fund's creation and issuance of shares of the Missouri
Series; (iii) Missouri statutes or local ordinances imposing licensing and fee
requirements (some of which may use an income base for the determination of the
fee); (iv) the validity of various statutes considered herein under the Equal
Protection, Due Process or Commerce Clauses of the United States Constitution
(or similar provisions of the Missouri Constitution); (v) the validity or tax
status of any debt obligations which the Fund or the Missouri Series may
acquire; and (vi) any legislation pending before the current session of the
Missouri General Assembly.
Based on the foregoing, we are of the opinion that:
1. Under Missouri law by application of 12 CSR Section 10-2.155, the
portion of dividends distributed to the shareholders of the Missouri Series that
qualify as exempt interest dividends under Section 852(b)(5) of the Code equal
to the ratio of the interest income allocated to the Missouri Series under
section 851(h) of the Code and derived from the investment of assets of the
Missouri Series in obligations, the interest on which is excluded from gross
income for Federal income tax purposes and exempt from Missouri income taxation,
over the total interest income allocated to the Missouri Series under Section
851(h) of the Code and derived from the investment of the assets of the Missouri
Series in obligations, the interest on which is excluded from gross income for
Federal income tax purposes, will be exempt from the Missouri income tax imposed
by Chapter 143 of the Missouri Revised Statutes.
2. Capital gain dividends, as defined in Section 852(b)(3) of the Code,
distributable by the Fund to resident shareholders of the Missouri Series, to
the extent includable in Federal adjusted gross income, will be subject to
Missouri income taxation.
3. Shares of the Missouri series owned by shareholders will not be
subject to the Missouri personal property tax under the current Missouri
statutes. While under its Constitution the State of Missouri has the power to
impose an intangible personal property tax on such property, the State has not,
since the repeal of the operative provisions of Chapter 146 of the Missouri
Revised Statutes as of January 1, 1975, exercised that power.
We consent to the filing of this opinion as an exhibit to the
Registration Statement prepared in connection with the offering of the Fund and
the Missouri Series and to the references to this Firm, if any, in the
Registration Statement under the heading "Missouri Taxes".
Very truly yours,
/s/ Bryan Cave LLP
BRYAN CAVE LLP
<PAGE>
BRYAN CAVE LLP
3500 ONE KANSAS CITY PLACE
1200 MAIN STREET
KANSAS CITY, MISSOURI 64105-2100
(816) 374-3200
FACSIMILE: (816) 374-3300
March 24, 1997
Keystone State Tax Free Fund - Series II
200 Berkeley Street
Boston, Massachusetts
Re: Keystone State Tax Free Fund - Series II
Ladies and Gentlemen:
We have acted as special Missouri tax counsel to the Keystone State Tax
Free Fund Series II. With respect to Post-Effective Amendment Number 5 to the
Registration Statement on Form N-1A of the Securities Act of 1933, as amended,
we have viewed the material relative to Missouri taxes in the Registration
Statement. Subject to such review, our opinion is delivered to you and as filed
with the Securities and Exchange Commission remains unchanged.
We consent to the filing of this consent as an exhibit to the
Registration Statement and to the reference to us under the heading "Description
of State and Local Tax Treatment." In giving such consent, we do not thereby
admit we are in the category of persons whose consent is required under Section
7 of the Securities Act of 1933, as amended.
Sincerely yours,
/s/ Bryan Cave LLP
Bryan Cave LLP
STATE STREET BANK & TRUST COMPANY SEC STANDARDIZED ADVERTISING YIELD
42A5 CAL TAX FREE CLASS A PHASE II-ROLLING
A
PRICING DATE 11/26/96 TOTAL INCOME FOR PERIOD 22,532.37
30 DAY YTM 4.76211% TOTAL EXPENSES FOR PERIOD 2,901.07
AVERAGE SHARES OUTSTANDING 490,258.30
LAST PRICE DURING PERIOD 10.19
<TABLE>
<CAPTION>
PRICE ST VARIABLE LONG TERM ZERO COUPON TOTAL DIV
DATE INCOME INCOME INCOME INCOME FACTOR
<S> <C> <C> <C> <C> <C> <C>
1 10/28/96 44.68 4,524.17 168.94 4,737.79 15.88050270
2 10/29/96 144.12 4,167.11 169.68 4,480.91 15.81460680
3 10/30/96 75.97 4,470.50 169.04 4,715.51 15.81462580
4 10/31/96 70.25 4,465.59 169.07 4,704.91 15.83336760
5 11/01/96 58.66 4,465.45 169.10 4,693.21 15.85903720
6 11/02/96 58.66 4,465.45 169.10 4,693.21 15.85903720
7 11/03/96 58.66 4,465.45 169.10 4,693.21 15.85903720
8 11/04/96 55.77 4,465.32 169.19 4,690.28 15.87632310
9 11/05/96 64.69 4,460.67 169.21 4,694.57 16.14146780
10 11/06/96 20.76 4,540.03 169.20 4,729.99 16.14156500
11 11/07/96 17.84 4,535.52 169.23 4,722.59 16.14681640
12 11/08/96 9.07 4,536.10 169.25 4,714.42 16.20249400
13 11/09/96 9.07 4,536.10 169.25 4,714.42 16.20249400
14 11/10/96 9.07 4,536.10 169.25 4,714.42 16.20249400
15 11/11/96 9.07 4,538.07 169.34 4,716.48 16.20257770
16 11/12/96 8.90 4,532.67 169.37 4,710.94 16.20253880
17 11/13/96 78.95 4,379.76 169.39 4,628.10 16.26109590
18 11/14/96 84.73 4,375.71 169.41 4,629.85 16.30467890
19 11/15/96 64.91 4,376.86 169.38 4,611.15 16.43021770
20 11/16/96 64.91 4,376.86 169.38 4,611.15 16.43021770
21 11/17/96 64.91 4,376.86 169.38 4,611.15 16.43021770
22 11/18/96 94.09 4,325.12 169.46 4,588.67 16.43025160
23 11/19/96 96.74 4,322.51 169.49 4,588.74 16.42771130
24 11/20/96 95.00 4,320.01 169.51 4,584.52 16.42751810
25 11/21/96 12.46 4,458.71 169.54 4,640.71 16.43657880
26 11/22/96 4.71 4,455.30 169.56 4,629.57 16.14799420
27 11/23/96 4.71 4,455.30 169.56 4,629.57 16.14799420
28 11/24/96 4.71 4,455.30 169.56 4,629.57 16.14799420
29 11/25/96 7.99 4,452.69 169.61 4,630.29 16.12395000
30 11/26/96 155.62 4,016.72 169.64 4,341.98 16.28256040
1,549.68 132,852.01 5,080.19 139,481.88 484.66796600
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C> <C>
1 752.38 99484,047.387 484,047.387 9.98 752.38 99.92 484,047.387
2 708.64 99484,047.387 484,047.387 10.04 1,461.02 199.68 968,094.774
3 745.74 100484,047.387 484,036.938 10.05 2,206.76 299.91 1,452,142.161
4 744.95 100484,036.938 484,620.145 10.07 2,951.71 400.19 1,936,179.099
5 744.30 97484,620.145 484,620.145 10.07 3,696.01 497.29 2,420,799.244
6 744.30 97484,620.145 484,620.145 10.07 4,440.31 594.40 2,905,419.389
7 744.30 97484,620.145 484,994.145 10.07 5,184.61 691.50 3,390,039.534
8 744.64 97484,994.145 494,469.932 10.07 5,929.25 788.71 3,875,033.679
9 757.77 97494,469.932 494,469.932 10.10 6,687.02 886.03 4,369,503.611
10 763.49 97494,469.932 494,469.932 10.09 7,450.51 983.50 4,863,973.543
11 762.55 97494,469.932 494,469.932 10.11 8,213.06 1,080.86 5,358,443.475
12 763.85 97494,469.932 494,469.932 10.10 8,976.91 1,178.42 5,852,913.407
13 763.85 97494,469.932 494,469.932 10.10 9,740.76 1,275.99 6,347,383.339
14 763.85 97494,469.932 494,469.932 10.10 10,504.61 1,373.55 6,841,853.271
15 764.19 97494,469.932 494,469.932 10.10 11,268.80 1,470.88 7,336,323.203
16 763.29 97494,469.932 493,483.932 10.13 12,032.09 1,568.49 7,830,793.135
17 752.58 80493,483.932 494,969.932 10.10 12,784.67 1,648.85 8,324,277.067
18 754.88 96494,969.932 494,969.932 10.12 13,539.55 1,745.06 8,819,246.999
19 757.62 96494,969.932 494,969.932 10.12 14,297.17 1,841.48 9,314,216.931
20 757.62 96494,969.932 494,969.932 10.12 15,054.79 1,937.91 9,809,186.863
21 757.62 96494,969.932 494,969.932 10.12 15,812.41 2,034.33 10,304,156.795
22 753.93 96494,969.932 494,969.932 10.11 16,566.34 2,130.73 10,799,126.727
23 753.82 96494,969.932 494,969.932 10.13 17,320.16 2,227.12 11,294,096.659
24 753.12 96494,969.932 494,994.587 10.14 18,073.28 2,323.52 11,789,066.591
25 762.77 96494,994.587 484,737.587 10.15 18,836.05 2,420.14 12,284,061.178
26 747.58 96484,737.587 484,737.587 10.16 19,583.63 2,516.85 12,768,798.765
27 747.58 96484,737.587 484,737.587 10.16 20,331.21 2,613.56 13,253,536.352
28 747.58 96484,737.587 484,737.587 10.16 21,078.79 2,710.27 13,738,273.939
29 746.59 95484,737.587 484,737.587 10.18 21,825.38 2,805.67 14,223,011.526
30 706.99 95484,737.587 490,258.304 10.19 22,532.37 2,901.07 14,707,749.113
22,532.37 2,901.07 490,258.304
</TABLE>
STATE STREET BANK & TRUST COMPANY SEC STANDARDIZED ADVERTISING YIELD
42A5 CAL TAX FREE CLASS B PHASE II-ROLLING
B
PRICING DATE 11/26/96 TOTAL INCOME FOR PERIOD 109,727.27
30 DAY YTM 4.26192% TOTAL EXPENSES FOR PERIOD 28,168.71
AVERAGE SHARES OUTSTANDING 2,398,232.98
LAST PRICE DURING PERIOD 9.66
<TABLE>
<CAPTION>
PRICE ST VARIABLE LONG TERM ZERO COUPON TOTAL DIV
DATE INCOME INCOME INCOME INCOME FACTOR
<S> <C> <C> <C> <C> <C> <C>
1 10/28/96 44.68 4,524.17 168.94 4,737.79 78.81941560
2 10/29/96 144.12 4,167.11 169.68 4,480.91 78.90719640
3 10/30/96 75.97 4,470.50 169.04 4,715.51 78.90717410
4 10/31/96 70.25 4,465.59 169.07 4,704.91 78.88200850
5 11/01/96 58.66 4,465.45 169.10 4,693.21 79.01799520
6 11/02/96 58.66 4,465.45 169.10 4,693.21 79.01799520
7 11/03/96 58.66 4,465.45 169.10 4,693.21 79.01799520
8 11/04/96 55.77 4,465.32 169.19 4,690.28 78.99824580
9 11/05/96 64.69 4,460.67 169.21 4,694.57 78.74736700
10 11/06/96 20.76 4,540.03 169.20 4,729.99 78.74725240
11 11/07/96 17.84 4,535.52 169.23 4,722.59 78.74033770
12 11/08/96 9.07 4,536.10 169.25 4,714.42 78.66703980
13 11/09/96 9.07 4,536.10 169.25 4,714.42 78.66703980
14 11/10/96 9.07 4,536.10 169.25 4,714.42 78.66703980
15 11/11/96 9.07 4,538.07 169.34 4,716.48 78.66694470
16 11/12/96 8.90 4,532.67 169.37 4,710.94 78.66699610
17 11/13/96 78.95 4,379.76 169.39 4,628.10 78.57961240
18 11/14/96 84.73 4,375.71 169.41 4,629.85 78.53773670
19 11/15/96 64.91 4,376.86 169.38 4,611.15 78.37249340
20 11/16/96 64.91 4,376.86 169.38 4,611.15 78.37249340
21 11/17/96 64.91 4,376.86 169.38 4,611.15 78.37249340
22 11/18/96 94.09 4,325.12 169.46 4,588.67 78.37246390
23 11/19/96 96.74 4,322.51 169.49 4,588.74 78.38779950
24 11/20/96 95.00 4,320.01 169.51 4,584.52 78.38683640
25 11/21/96 12.46 4,458.71 169.54 4,640.71 78.37498450
26 11/22/96 4.71 4,455.30 169.56 4,629.57 78.64680970
27 11/23/96 4.71 4,455.30 169.56 4,629.57 78.64680970
28 11/24/96 4.71 4,455.30 169.56 4,629.57 78.64680970
29 11/25/96 7.99 4,452.69 169.61 4,630.29 78.67860550
30 11/26/96 155.62 4,016.72 169.64 4,341.98 78.46887120
1,549.68 132,852.01 5,080.19 139,481.88 2,359.98286270
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C> <C>
1 3,734.30 965.89 2,413,296.554 9.47 3,734.30 965.89 2,413,296.554
2 3,535.76 964.58 2,426,051.475 9.52 7,270.06 1,930.47 4,839,348.029
3 3,720.88 971.79 2,426,051.475 9.52 10,990.94 2,902.26 7,265,399.504
4 3,711.33 1,000.58 2,422,354.424 9.54 14,702.27 3,902.84 9,687,753.928
5 3,708.48 947.37 2,425,561.329 9.54 18,410.75 4,850.21 12,113,315.257
6 3,708.48 947.37 2,425,561.329 9.54 22,119.23 5,797.58 14,538,876.586
7 3,708.48 947.37 2,425,561.329 9.54 25,827.71 6,744.95 16,964,437.915
8 3,705.24 948.60 2,424,189.620 9.55 29,532.95 7,693.55 19,388,627.535
9 3,696.85 948.82 2,423,236.074 9.58 33,229.80 8,642.37 21,811,863.609
10 3,724.74 951.18 2,423,221.373 9.56 36,954.54 9,593.55 24,235,084.982
11 3,718.58 945.32 2,422,226.125 9.59 40,673.12 10,538.87 26,657,311.107
12 3,708.70 947.68 2,411,658.250 9.58 44,381.82 11,486.55 29,068,969.357
13 3,708.70 947.68 2,411,658.250 9.58 48,090.52 12,434.22 31,480,627.607
14 3,708.70 947.68 2,411,658.250 9.58 51,799.22 13,381.90 33,892,285.857
15 3,710.31 940.67 2,411,658.250 9.58 55,509.53 14,322.57 36,303,944.107
16 3,705.95 940.68 2,411,663.165 9.61 59,215.48 15,263.25 38,715,607.272
17 3,636.74 857.10 2,395,523.461 9.58 62,852.22 16,120.35 41,111,130.733
18 3,636.18 924.38 2,395,051.494 9.60 66,488.40 17,044.73 43,506,182.227
19 3,613.87 926.77 2,371,751.798 9.60 70,102.27 17,971.50 45,877,934.025
20 3,613.87 926.77 2,371,751.798 9.60 73,716.14 18,898.27 48,249,685.823
21 3,613.87 926.77 2,371,751.798 9.60 77,330.01 19,825.04 50,621,437.621
22 3,596.25 926.47 2,371,751.798 9.59 80,926.26 20,751.51 52,993,189.419
23 3,597.01 926.05 2,372,586.871 9.60 84,523.27 21,677.56 55,365,776.290
24 3,593.66 927.00 2,372,588.150 9.62 88,116.93 22,604.56 57,738,364.440
25 3,637.16 930.63 2,371,042.686 9.62 91,754.09 23,535.19 60,109,407.126
26 3,641.01 930.66 2,371,607.990 9.64 95,395.10 24,465.85 62,481,015.116
27 3,641.01 930.66 2,371,607.990 9.64 99,036.11 25,396.52 64,852,623.106
28 3,641.01 930.66 2,371,607.990 9.64 102,677.12 26,327.18 67,224,231.096
29 3,643.05 920.19 2,376,087.157 9.66 106,320.17 27,247.37 69,600,318.253
30 3,407.10 921.34 2,346,671.157 9.66 109,727.27 28,168.71 71,946,989.410
109,727.27 28,168.71 2,398,232.980
</TABLE>
STATE STREET BANK & TRUST COMPANY SEC STANDARDIZED ADVERTISING YIELD
42A5 CAL TAX FREE CLASS C PHASE II-ROLLING
C
PRICING DATE 11/26/96 TOTAL INCOME FOR PERIOD 7,222.21
30 DAY YTM 4.25896% TOTAL EXPENSES FOR PERIOD 1,855.02
AVERAGE SHARES OUTSTANDING 58,095.03
LAST PRICE DURING PERIOD 9.65
<TABLE>
<CAPTION>
PRICE ST FIXED LONG TERM ZERO COUPON TOTAL DIV
DATE INCOME INCOME INCOME INCOME FACTOR
<S> <C> <C> <C> <C> <C> <C>
1 10/28/96 44.68 4,524.17 168.94 4,737.79 5.30008170
2 10/29/96 144.12 4,167.11 169.68 4,480.91 5.27819680
3 10/30/96 75.97 4,470.50 169.04 4,715.51 5.27820020
4 10/31/96 70.25 4,465.59 169.07 4,704.91 5.28462390
5 11/01/96 58.66 4,465.45 169.10 4,693.21 5.12296770
6 11/02/96 58.66 4,465.45 169.10 4,693.21 5.12296770
7 11/03/96 58.66 4,465.45 169.10 4,693.21 5.12296770
8 11/04/96 55.77 4,465.32 169.19 4,690.28 5.12543110
9 11/05/96 64.69 4,460.67 169.21 4,694.57 5.11116520
10 11/06/96 20.76 4,540.03 169.20 4,729.99 5.11118270
11 11/07/96 17.84 4,535.52 169.23 4,722.59 5.11284600
12 11/08/96 9.07 4,536.10 169.25 4,714.42 5.13046620
13 11/09/96 9.07 4,536.10 169.25 4,714.42 5.13046620
14 11/10/96 9.07 4,536.10 169.25 4,714.42 5.13046620
15 11/11/96 9.07 4,538.07 169.34 4,716.48 5.13047760
16 11/12/96 8.9 4,532.67 169.37 4,710.94 5.13046510
17 11/13/96 78.95 4,379.76 169.39 4,628.10 5.15929170
18 11/14/96 84.73 4,375.71 169.41 4,629.85 5.15758440
19 11/15/96 64.91 4,376.86 169.38 4,611.15 5.19728890
20 11/16/96 64.91 4,376.86 169.38 4,611.15 5.19728890
21 11/17/96 64.91 4,376.86 169.38 4,611.15 5.19728890
22 11/18/96 94.09 4,325.12 169.46 4,588.67 5.19728460
23 11/19/96 96.74 4,322.51 169.49 4,588.74 5.18448920
24 11/20/96 95 4,320.01 169.51 4,584.52 5.18564550
25 11/21/96 12.46 4,458.71 169.54 4,640.71 5.18843670
26 11/22/96 4.71 4,455.30 169.56 4,629.57 5.20519610
27 11/23/96 4.71 4,455.30 169.56 4,629.57 5.20519610
28 11/24/96 4.71 4,455.30 169.56 4,629.57 5.20519610
29 11/25/96 7.99 4,452.69 169.61 4,630.29 5.19744450
30 11/26/96 155.62 4,016.72 169.64 4,341.98 5.24856850
1,549.68 132,852.01 5,080.19 139,481.88 155.34917210
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C> <C>
1 251.11 64162,522.652 162,522.652 9.46 251.11 64.89 162,522.652
2 236.51 64162,526.175 162,526.175 9.50 487.62 129.68 325,048.827
3 248.89 65162,526.175 162,526.175 9.51 736.51 194.79 487,575.002
4 248.64 65162,526.175 162,526.175 9.53 985.15 260.26 650,101.177
5 240.43 61157,492.238 157,492.238 9.53 1,225.58 321.66 807,593.415
6 240.43 61157,492.238 157,492.238 9.53 1,466.01 383.05 965,085.653
7 240.43 61157,492.238 157,492.238 9.53 1,706.44 444.45 1,122,577.891
8 240.40 61157,518.238 157,518.238 9.54 1,946.84 505.95 1,280,096.129
9 239.95 61157,518.238 157,518.238 9.56 2,186.79 567.51 1,437,614.367
10 241.76 61157,518.238 157,518.238 9.55 2,428.55 629.24 1,595,132.605
11 241.46 61157,518.238 157,518.238 9.57 2,670.01 690.89 1,752,650.843
12 241.87 61157,518.238 157,518.238 9.57 2,911.88 752.68 1,910,169.081
13 241.87 61157,518.238 157,518.238 9.57 3,153.75 814.46 2,067,687.319
14 241.87 61157,518.238 157,518.238 9.57 3,395.62 876.25 2,225,205.557
15 241.98 61157,518.238 157,518.238 9.57 3,637.60 938.02 2,382,723.795
16 241.69 61157,518.238 157,518.238 9.59 3,879.29 999.79 2,540,242.033
17 238.78 56157,518.238 157,518.238 9.56 4,118.07 1,056.16 2,697,760.271
18 238.79 61157,518.238 157,518.238 9.58 4,356.86 1,117.46 2,855,278.509
19 239.65 61157,518.238 157,518.238 9.58 4,596.51 1,178.90 3,012,796.747
20 239.65 61157,518.238 157,518.238 9.58 4,836.16 1,240.33 3,170,314.985
21 239.65 61157,518.238 157,518.238 9.58 5,075.81 1,301.77 3,327,833.223
22 238.49 61157,518.238 157,518.238 9.57 5,314.30 1,363.19 3,485,351.461
23 237.90 61157,155.046 157,155.046 9.59 5,552.20 1,424.62 3,642,506.507
24 237.74 61157,192.064 157,192.064 9.60 5,789.94 1,486.03 3,799,698.571
25 240.78 61157,192.064 157,192.064 9.61 6,030.72 1,547.46 3,956,890.635
26 240.98 61157,192.064 157,192.064 9.62 6,271.70 1,608.95 4,114,082.699
27 240.98 61157,192.064 157,192.064 9.62 6,512.68 1,670.43 4,271,274.763
28 240.98 61157,192.064 157,192.064 9.62 6,753.66 1,731.92 4,428,466.827
29 240.66 61157,192.064 157,192.064 9.64 6,994.32 1,793.47 4,585,658.891
30 227.89 61157,192.064 157,192.064 9.65 7,222.21 1,855.02 4,742,850.955
7,222.21 1,855.02 158,095.032
</TABLE>
STATE STREET BANK & TRUST COMPANY SEC STANDARDIZED ADVERTISING YIELD
42A6 MISSOURI CLASS A PHASE II-ROLLING
A
PRICING DATE 26-Nov-96 TOTAL INCOME FOR PERIOD 12,470.01
30 DAY YTM 4.99585% TOTAL EXPENSES FOR PERIOD 1,283.33
AVERAGE SHARES OUTSTANDING 263,068.16
LAST PRICE DURING PERIOD 10.32
<TABLE>
<CAPTION>
PRICE ST VARIABLE LONG TERM AMORTIZATION TOTAL DIV
DATE INCOME INCOME INCOME INCOME FACTOR
<S> <C> <C> <C> <C> <C> <C>
35365
1 28-Oct-96 47.85 3,822.30 308.44 4,178.59 9.91347750
2 29-Oct-96 26.48 3,854.91 308.97 4,190.36 9.91981495
3 30-Oct-96 23.18 3,855.58 309.03 4,187.79 9.91982925
4 31-Oct-96 20.35 3,851.56 309.14 4,181.05 9.92004100
5 01-Nov-96 15.71 3,852.82 309.19 4,177.72 9.92780193
6 02-Nov-96 15.71 3,852.82 309.19 4,177.72 9.92780193
7 03-Nov-96 15.71 3,852.82 309.19 4,177.72 9.92780193
8 04-Nov-96 15.24 3,814.47 309.35 4,139.06 9.92915155
9 05-Nov-96 14.77 3,848.62 309.72 4,173.11 9.92908902
10 06-Nov-96 14.09 3,852.23 309.73 4,176.05 9.95418514
11 07-Nov-96 14.09 3,848.34 309.85 4,172.28 9.95196652
12 08-Nov-96 29.37 3,849.97 309.88 4,189.22 9.96155501
13 09-Nov-96 29.37 3,849.97 309.88 4,189.22 9.96155501
14 10-Nov-96 29.37 3,849.97 309.88 4,189.22 9.96155501
15 11-Nov-96 9.79 3,851.77 310.02 4,171.58 9.96160952
16 12-Nov-96 9.90 3,847.52 310.13 4,167.55 10.01643457
17 13-Nov-96 8.83 3,854.38 310.11 4,173.32 10.01847551
18 14-Nov-96 39.48 3,800.24 310.21 4,149.93 10.01785360
19 15-Nov-96 39.48 3,786.88 310.24 4,136.60 10.01748290
20 16-Nov-96 39.48 3,786.88 310.24 4,136.60 10.01748290
21 17-Nov-96 39.48 3,786.88 310.24 4,136.60 10.01748290
22 18-Nov-96 49.24 3,788.75 310.37 4,148.36 10.01754080
23 19-Nov-96 49.23 3,786.79 310.42 4,146.44 10.04644879
24 20-Nov-96 47.79 3,784.65 310.56 4,143.00 10.04648950
25 21-Nov-96 47.79 3,784.06 310.61 4,142.46 10.02704302
26 22-Nov-96 47.79 3,783.09 310.67 4,141.55 10.06273074
27 23-Nov-96 47.79 3,783.09 310.67 4,141.55 10.06273074
28 24-Nov-96 47.79 3,783.09 310.67 4,141.55 10.06273074
29 25-Nov-96 53.23 3,780.27 310.97 4,144.47 10.06314524
30 26-Nov-96 47.09 3,779.28 311.04 4,137.41 10.06573993
935.47 0.00 114,624.00 9,298.61 124,858.08 299.62704715
<CAPTION>
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C> <C>
1 414.24 51.64 261,299.951 10.12 414.24 51.64 261,299.951
2 415.68 51.19 261,299.951 10.17 829.92 102.83 522,599.902
3 415.42 51.91 261,299.951 10.17 1,245.34 154.74 783,899.853
4 414.76 51.90 261,299.951 10.19 1,660.10 206.64 1,045,199.804
5 414.76 49.79 261,875.293 10.19 2,074.86 256.43 1,307,075.097
6 414.76 49.79 261,875.293 10.19 2,489.62 306.23 1,568,950.390
7 414.76 49.79 261,875.293 10.19 2,904.38 356.02 1,830,825.683
8 410.97 51.88 261,970.293 10.20 3,315.35 407.90 2,092,795.976
9 414.35 51.94 261,970.293 10.24 3,729.70 459.84 2,354,766.269
10 415.69 52.11 262,165.878 10.22 4,145.39 511.95 2,616,932.147
11 415.22 52.08 262,165.878 10.24 4,560.61 564.03 2,879,098.025
12 417.31 52.20 262,175.644 10.24 4,977.92 616.23 3,141,273.669
13 417.31 52.20 262,175.644 10.24 5,395.23 668.43 3,403,449.313
14 417.31 52.20 262,175.644 10.24 5,812.54 720.63 3,665,624.957
15 415.56 52.17 262,175.644 10.24 6,228.10 772.80 3,927,800.601
16 417.44 52.17 263,778.644 10.26 6,645.54 824.97 4,191,579.245
17 418.10 32.76 263,778.644 10.23 7,063.64 857.73 4,455,357.889
18 415.73 32.48 263,760.164 10.26 7,479.37 890.21 4,719,118.053
19 414.38 32.61 263,760.164 10.25 7,893.75 922.82 4,982,878.217
20 414.38 32.61 263,760.164 10.25 8,308.13 955.43 5,246,638.381
21 414.38 32.61 263,760.164 10.25 8,722.51 988.04 5,510,398.545
22 415.56 32.58 263,760.164 10.25 9,138.07 1,020.62 5,774,158.709
23 416.57 32.55 264,735.774 10.26 9,554.64 1,053.17 6,038,894.483
24 416.23 32.81 264,735.774 10.27 9,970.87 1,085.98 6,303,630.257
25 415.37 32.88 264,735.774 10.28 10,386.24 1,118.86 6,568,366.031
26 416.75 32.85 264,735.774 10.28 10,802.99 1,151.71 6,833,101.805
27 416.75 32.85 264,735.774 10.28 11,219.74 1,184.56 7,097,837.579
28 416.75 32.85 264,735.774 10.28 11,636.49 1,217.41 7,362,573.353
29 417.06 32.94 264,735.774 10.31 12,053.55 1,250.35 7,627,309.127
30 416.46 32.98 264,735.774 10.32 12,470.01 1,283.33 7,892,044.901
12,470.01 1,283.33 263,068.163
</TABLE>
<PAGE>
<TABLE>
STATE STREET BANK & TRUST COMPANY SEC STANDARDIZED ADVERTISING YIELD
42A6 MISSOURI CLASS B PHASE II-ROLLING
B
PRICING DATE 26-Nov-96 TOTAL INCOME FOR PERIOD 105,718.70
30 DAY YTM 4.50192% TOTAL EXPENSES FOR PERIOD 24,264.56
AVERAGE SHARES OUTSTANDING 2,256,910.02
LAST PRICE DURING PERIOD 9.71
<CAPTION>
PRICE ST VARIABLE LONG TERM TOTAL DIV
DATE INCOME INCOME INCOME FACTOR
<S> <C> <C> <C> <C> <C> <C> <C>
1 28-Oct-96 47.85 0.00 3,822.30 308.44 4,178.59 84.739013,540.90
2 29-Oct-96 26.48 0.00 3,854.91 308.97 4,190.36 84.750723,551.36
3 30-Oct-96 23.18 0.00 3,855.58 309.03 4,187.79 84.750703,549.18
4 31-Oct-96 20.35 0.00 3,851.56 309.14 4,181.05 84.745473,543.25
5 01-Nov-96 15.71 0.00 3,852.82 309.19 4,177.72 84.738643,540.14
6 02-Nov-96 15.71 0.00 3,852.82 309.19 4,177.72 84.738643,540.14
7 03-Nov-96 15.71 0.00 3,852.82 309.19 4,177.72 84.738643,540.14
8 04-Nov-96 15.24 0.00 3,814.47 309.35 4,139.06 84.737223,507.32
9 05-Nov-96 14.77 0.00 3,848.62 309.72 4,173.11 84.737323,536.18
10 06-Nov-96 14.09 0.00 3,852.23 309.73 4,176.05 84.702753,537.23
11 07-Nov-96 14.09 0.00 3,848.34 309.85 4,172.28 84.706173,534.18
12 08-Nov-96 29.37 0.00 3,849.97 309.88 4,189.22 84.691643,547.92
13 09-Nov-96 29.37 0.00 3,849.97 309.88 4,189.22 84.691643,547.92
14 10-Nov-96 29.37 0.00 3,849.97 309.88 4,189.22 84.691643,547.92
15 11-Nov-96 9.79 0.00 3,851.77 310.02 4,171.58 84.691593,532.98
16 12-Nov-96 9.90 0.00 3,847.52 310.13 4,167.55 84.640023,527.42
17 13-Nov-96 8.83 0.00 3,854.38 310.11 4,173.32 84.636913,532.17
18 14-Nov-96 39.48 0.00 3,800.24 310.21 4,149.93 84.637503,512.40
19 15-Nov-96 39.48 0.00 3,786.88 310.24 4,136.60 84.638083,501.14
20 16-Nov-96 39.48 0.00 3,786.88 310.24 4,136.60 84.638083,501.14
21 17-Nov-96 39.48 0.00 3,786.88 310.24 4,136.60 84.638083,501.14
22 18-Nov-96 49.24 0.00 3,788.75 310.37 4,148.36 84.638023,511.09
23 19-Nov-96 49.23 0.00 3,786.79 310.42 4,146.44 84.613453,508.45
24 20-Nov-96 47.79 0.00 3,784.65 310.56 4,143.00 84.613413,505.53
25 21-Nov-96 47.79 0.00 3,784.06 310.61 4,142.46 84.643203,506.31
26 22-Nov-96 47.79 0.00 3,783.09 310.67 4,141.55 84.588563,503.28
27 23-Nov-96 47.79 0.00 3,783.09 310.67 4,141.55 84.588563,503.28
28 24-Nov-96 47.79 0.00 3,783.09 310.67 4,141.55 84.588563,503.28
29 25-Nov-96 53.23 0.00 3,780.27 310.97 4,144.47 84.587963,505.72
30 26-Nov-96 47.09 0.00 3,779.28 311.04 4,137.41 84.584003,499.59
35.47 0.00 114,624.00 9,298.61 124,858.08 2540.126105,718.70
<CAPTION>
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C>
1 3,540.90 884.24 2,260,269.654 9.52 3,540.90 884.24 2,260,269.654
2 3,551.36 878.65 2,259,138.980 9.58 7,092.26 1,762.89 4,519,408.634
3 3,549.18 886.88 2,259,138.980 9.58 10,641.44 2,649.77 6,778,547.614
4 3,543.25 886.91 2,258,228.006 9.60 14,184.69 3,536.68 9,036,775.620
5 3,540.14 868.51 2,261,982.711 9.59 17,724.83 4,405.19 11,298,758.331
6 3,540.14 868.51 2,261,982.711 9.59 21,264.97 5,273.69 13,560,741.042
7 3,540.14 868.51 2,261,982.711 9.59 24,805.11 6,142.20 15,822,723.753
8 3,507.32 887.58 2,262,469.711 9.60 28,312.43 7,029.78 18,085,193.464
9 3,536.18 888.45 2,262,489.711 9.63 31,848.61 7,918.23 20,347,683.175
10 3,537.23 891.37 2,257,554.479 9.62 35,385.84 8,809.60 22,605,237.654
11 3,534.18 888.15 2,258,152.192 9.64 38,920.02 9,697.75 24,863,389.846
12 3,547.92 890.37 2,255,679.007 9.63 42,467.94 10,588.12 27,119,068.853
13 3,547.92 890.37 2,255,679.007 9.63 46,015.86 11,478.49 29,374,747.860
14 3,547.92 890.37 2,255,679.007 9.63 49,563.78 12,368.86 31,630,426.867
15 3,532.98 888.94 2,255,679.007 9.63 53,096.76 13,257.80 33,886,105.874
16 3,527.42 888.91 2,255,679.647 9.66 56,624.18 14,146.71 36,141,785.521
17 3,532.17 722.13 2,255,143.647 9.63 60,156.35 14,868.84 38,396,929.168
18 3,512.40 719.40 2,255,143.647 9.65 63,668.75 15,588.24 40,652,072.815
19 3,501.14 721.49 2,255,247.274 9.65 67,169.89 16,309.73 42,907,320.089
20 3,501.14 721.49 2,255,247.274 9.65 70,671.03 17,031.22 45,162,567.363
21 3,501.14 721.49 2,255,247.274 9.55 74,172.17 17,752.71 47,417,814.637
22 3,511.09 721.05 2,255,247.274 9.64 77,683.26 18,473.76 49,673,061.911
23 3,508.45 720.48 2,256,423.904 9.65 81,191.71 19,194.24 51,929,485.815
24 3,505.53 721.99 2,256,423.904 9.66 84,697.24 19,916.23 54,185,909.719
25 3,506.31 723.23 2,261,599.904 9.67 88,203.55 20,639.46 56,447,509.623
26 3,503.28 725.85 2,252,132.236 9.67 91,706.83 21,365.31 58,699,641.859
27 3,503.28 725.85 2,252,132.236 9.67 95,210.11 22,091.16 60,951,774.095
28 3,503.28 725.85 2,252,132.236 9.67 98,713.39 22,817.01 63,203,906.331
29 3,505.72 722.47 2,252,037.168 9.70 102,219.11 23,539.48 65,455,943.499
30 3,499.59 725.08 2,251,357.168 9.71 105,718.70 24,264.56 67,707,300.667
105,718.70 24,264.56 2,256,910.022
</TABLE>
<PAGE>
<TABLE>
STATE STREET BANK & TRUST COMPANY SEC STANDARDIZED ADVERTISING YIELD
42A6 MISSOURI CLASS C PHASE II-ROLLING
C
PRICING DATE 26-Nov-96 TOTAL INCOME FOR PERIOD 6,669.22
30 DAY YTM 4.50439% TOTAL EXPENSES FOR PERIOD 1,529.34
AVERAGE SHARES OUTSTANDING 142,483.67
LAST PRICE DURING PERIOD 9.70
<CAPTION>
PRICE ST FIXED ZERO COUPON LONG TERM TOTAL DIV
DATE INCOME AND DIV INC INCOME INCOME FACTOR
<S> <C> <C> <C> <C> <C> <C> <C>
1 28-Oct-96 47.85 0.00 3,822.30 308.44 4,178.59 5.34750810
2 29-Oct-96 26.48 0.00 3,854.91 308.97 4,190.36 5.32946115
3 30-Oct-96 23.18 0.00 3,855.58 309.03 4,187.79 5.32946710
4 31-Oct-96 20.35 0.00 3,851.56 309.14 4,181.05 5.33128800
5 01-Nov-96 15.71 0.00 3,852.82 309.19 4,177.72 5.33355439
6 02-Nov-96 15.71 0.00 3,852.82 309.19 4,177.72 5.33355439
7 03-Nov-96 15.71 0.00 3,852.82 309.19 4,177.72 5.33355439
8 04-Nov-96 15.24 0.00 3,814.47 309.35 4,139.06 5.33362538
9 05-Nov-96 14.77 0.00 3,848.62 309.72 4,173.11 5.33358237
10 06-Nov-96 14.09 0.00 3,852.23 309.73 4,176.05 5.34306298
11 07-Nov-96 14.09 0.00 3,848.34 309.85 4,172.28 5.34185885
12 08-Nov-96 29.37 0.00 3,849.97 309.88 4,189.22 5.34679654
13 09-Nov-96 29.37 0.00 3,849.97 309.88 4,189.22 5.34679654
14 10-Nov-96 29.37 0.00 3,849.97 309.88 4,189.22 5.34679654
15 11-Nov-96 9.79 0.00 3,851.77 310.02 4,171.58 5.34679137
16 12-Nov-96 9.90 0.00 3,847.52 310.13 4,167.55 5.34353938
17 13-Nov-96 8.83 0.00 3,854.38 310.11 4,173.32 5.34461120
18 14-Nov-96 39.48 0.00 3,800.24 310.21 4,149.93 5.34464220
19 15-Nov-96 39.48 0.00 3,786.88 310.24 4,136.60 5.34443690
20 16-Nov-96 39.48 0.00 3,786.88 310.24 4,136.60 5.34443690
21 17-Nov-96 39.48 0.00 3,786.88 310.24 4,136.60 5.34443690
22 18-Nov-96 49.24 0.00 3,788.75 310.37 4,148.36 5.34443138
23 19-Nov-96 49.23 0.00 3,786.79 310.42 4,146.44 5.34009138
24 20-Nov-96 47.79 0.00 3,784.65 310.56 4,143.00 5.34009338
25 21-Nov-96 47.79 0.00 3,784.06 310.61 4,142.46 5.32974788
26 22-Nov-96 47.79 0.00 3,783.09 310.67 4,141.55 5.34870066
27 23-Nov-96 47.79 0.00 3,783.09 310.67 4,141.55 5.34870066
28 24-Nov-96 47.79 0.00 3,783.09 310.67 4,141.55 5.34870066
29 25-Nov-96 53.23 0.00 3,780.27 310.97 4,144.47 5.34888578
30 26-Nov-96 47.09 0.00 3,779.28 311.04 4,137.41 5.35025039
935.47 0.00 114,624.00 9,298.61 124,858.08 160.2434037
<CAPTION>
ADJUSTED DAILY DAILY DAILY ACCUMULATED ACCUMULATED ACCUMULATED
INCOME EXPENSES SHARES PRICE INCOME EXPENSES SHARES
<S> <C> <C> <C> <C> <C> <C> <C>
1 223.45 55.71 142,742.957 9.51 223.45 55.71 142,742.957
2 223.32 55.45 142,170.512 9.57 446.77 111.16 284,913.469
3 223.19 55.77 142,170.512 9.57 669.96 166.93 427,083.981
4 222.90 55.77 142,170.512 9.59 892.86 222.70 569,254.493
5 222.82 54.65 142,478.871 9.59 1,115.68 277.35 711,733.364
6 222.82 54.65 142,478.871 9.59 1,338.50 332.01 854,212.235
7 222.82 54.65 142,478.871 9.59 1,561.32 386.66 996,691.106
8 220.76 55.86 142,513.871 9.59 1,782.08 442.52 1,139,204.977
9 222.58 55.92 142,513.871 9.62 2,004.66 498.44 1,281,718.848
10 223.13 56.10 142,513.871 9.61 2,227.79 554.54 1,424,232.719
11 222.88 56.02 142,513.871 9.63 2,450.67 610.56 1,566,746.590
12 223.99 56.15 142,513.871 9.63 2,674.66 666.71 1,709,260.461
13 223.99 55.91 142,513.871 9.63 2,898.65 722.62 1,851,774.332
14 223.99 55.91 142,513.871 9.63 3,122.64 778.53 1,994,288.203
15 223.05 56.11 142,513.871 9.63 3,345.69 834.64 2,136,802.074
16 222.69 56.12 142,513.871 9.65 3,568.38 890.76 2,279,315.945
17 223.05 45.60 142,513.871 9.62 3,791.43 936.36 2,421,829.816
18 221.80 45.44 142,513.871 9.64 4,013.23 981.80 2,564,343.687
19 221.08 45.56 142,513.871 9.64 4,234.31 1,027.36 2,706,857.558
20 221.08 45.56 142,513.871 9.64 4,455.39 1,072.92 2,849,371.429
21 221.08 45.56 142,513.871 9.64 4,676.47 1,118.48 2,991,885.300
22 221.71 45.53 142,513.871 9.63 4,898.18 1,164.01 3,134,399.171
23 221.42 45.49 142,513.871 9.64 5,119.60 1,209.50 3,276,913.042
24 221.24 45.57 142,513.871 9.66 5,340.84 1,255.07 3,419,426.913
25 220.78 45.64 142,513.871 9.66 5,561.62 1,300.71 3,561,940.784
26 221.52 45.68 142,513.871 9.66 5,783.14 1,346.39 3,704,454.655
27 221.52 45.68 142,513.871 9.66 6,004.66 1,392.07 3,846,968.526
28 221.52 45.68 142,513.871 9.66 6,226.18 1,437.75 3,989,482.397
29 221.68 45.74 142,513.871 9.69 6,447.86 1,483.49 4,131,996.268
30 221.36 45.85 142,513.871 9.70 6,669.22 1,529.34 4,274,510.139
6,669.22 1,529.34 142,483.671
</TABLE>
<TABLE>
<CAPTION>
KACATF CLASS A MTD YTD ONE YEAR THREE YEAR THREE YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
4.75% LOAD -2.45% -0.95% 8.09% 2.78%
no load 1.90% 2.41% 3.99% 13.48% 4.57%
Beg dates 31-Oct-96 29-Dec-95 30-Nov-95 01-Feb-94 01-Feb-94
Beg Value (LOAD) 11,692 11,634 11,457 10,499 10,499
Beg Value (no load) 11,137 11,081 10,913 10,000 10,000
End Value 11,348 11,348 11,348 11,348 11,348
TIME 2.8333333333
INCEPTION DATE 01-Feb-94
</TABLE>
<TABLE>
<CAPTION>
KACATF CLASS A FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
4.75% LOAD 8.09% 2.78% 8.09% 2.78%
no load 13.48% 4.57% 13.48% 4.57%
Beg dates 01-Feb-94 01-Feb-94 01-Feb-94 01-Feb-94
Beg Value (LOAD) 10,499 10,499 10,499 10,499
Beg Value (no load) 10,000 10,000 10,000 10,000
End Value 11,348 11,348 11,348 11,348
TIME 2.8333333333 2.8333333333
INCEPTION DATE 01-Feb-94
</TABLE>
<TABLE>
<CAPTION>
KACATF-B MTD YTD ONE YEAR THREE YEAR THREE YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
with cdsc N/A -3.06% -0.72% 8.84% 3.03%
W/O CDSC 1.95% 1.82% 3.23% 11.75% 4.00%
Beg dates 31-Oct-96 29-Dec-95 30-Nov-95 01-Feb-94 01-Feb-94
Beg Value (no load) 10,961 10,975 10,825 10,000 10,000
End Value (W/O CDSC) 11,175 11,175 11,175 11,175 11,175
End Value (with cdsc) 10,639 10,747 10,884 10,884
beg nav 9.54 9.92 9.82 10.00 10
end nav 9.69 9.69 9.69 9.69 9.69
shares originally purchased 1,148.94 1,106.32 1,102.32 1,000.00 1,000.00
5% cdsc thru 31-Jan-95
TIME 4% cdsc thru 31-Jan-96 2.8333333333
INCEPTION DATE 01-Feb-94 3% cdsc effe 31-Jan-98
2% cdsc effe 31-Jan-99
1% cdsc effe 01-Feb-00
</TABLE>
<TABLE>
<CAPTION>
KACATF-B FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
with cdsc NA NA NA NA
W/O CDSC NA NA NA NA
Beg dates 01-Feb-94 01-Feb-94 01-Feb-94 01-Feb-94
Beg Value (no load) 10,000 10,000 10,000 10,000
End Value (W/O CDSC) 11,175 11,175 11,175 11,175
End Value (with cdsc) 11,078 11077.6440212 11,175 11174.5440212
beg nav 10.00 10 10.00 10
end nav 9.69 9.69 9.69 9.69
shares originally purchased 1,000.00 1,000.00 1,000.00 1,000.00
TIME 2.8333333333 2.8333333333
INCEPTION DATE 31-Dec-96
</TABLE>
<TABLE>
<CAPTION>
KACATF-C MTD YTD ONE YEAR THREE YEAR THREE YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
with cdsc N/A 0.85% 3.34% 11.52% 3.92%
W/O CDSC 1.95% 1.82% 3.34% 11.52% 3.92%
Beg dates 31-Oct-96 29-Dec-95 30-Nov-95 01-Feb-94 01-Feb-94
Beg Value (no load) 10,938 10,952 10,791 10,000 10,000
End Value (W/O CDSC) 11,152 11,152 11,152 11,152 11,152
End Value (with cdsc) 11,045 11,152 11,152 11,152
beg nav 9.53 9.91 9.80 10.00 10
end nav 9.68 9.68 9.68 9.68 9.68
shares originally purchased 1,147.75 1,105.12 1,101.12 1,000.00 1,000.00
TIME 2.8333333333
INCEPTION DATE 01-Feb-94 1% cdsc effect. 01-Jan-96
</TABLE>
<TABLE>
<CAPTION>
KACATF-C FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
with cdsc 11.52% 3.92% NA NA
W/O CDSC 11.52% 3.92% NA NA
Beg dates 01-Feb-94 01-Feb-94 01-Feb-94 01-Feb-94
Beg Value (no load) 10,000 10,000 10,000 10,000
End Value (W/O CDSC) 11,152 11,152 11,152 11,152
End Value (with cdsc) 11,152 11151.540913 11,152 11151.540913
beg nav 10.00 10 10.00 10
end nav 9.68 9.68 9.68 9.68
shares originally purchased 1,000.00 1,000.00 1,000.00 1,000.00
TIME 2.8333333333 2.8333333333
INCEPTION DATE 31-Dec-96
cdsc thru date^
</TABLE>
<TABLE>
<CAPTION>
KAMOTF CLASS A MTD YTD ONE YEAR THREE YEAR THREE YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
4.75% LOAD -1.71% -0.31% 9.28% 3.18%
no load 1.97% 3.19% 4.66% 14.73% 4.97%
Beg dates 31-Oct-96 29-Dec-95 30-Nov-95 01-Feb-94 01-Feb-94
Beg Value (LOAD) 11,812 11,672 11,508 10,499 10,499
Beg Value (no load) 11,251 11,118 10,962 10,000 10,000
End Value 11,473 11,473 11,473 11,473 11,473
TIME 2.8333333333
INCEPTION DATE 01-Feb-94
</TABLE>
<TABLE>
<CAPTION>
KAMOTF CLASS A FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
4.75% LOAD 9.28% 3.18% 9.28% 3.18%
no load 14.73% 4.97% 14.73% 4.97%
Beg dates 01-Feb-94 01-Feb-94 01-Feb-94 01-Feb-94
Beg Value (LOAD) 10,499 10,499 10,499 10,499
Beg Value (no load) 10,000 10,000 10,000 10,000
End Value 11,473 11,473 11,473 11,473
TIME 2.8333333333 2.8333333333
INCEPTION DATE
</TABLE>
<TABLE>
<CAPTION>
KAMOTF-B MTD YTD ONE YEAR THREE YEAR THREE YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
with cdsc N/A -2.50% -0.14% 9.24% 3.17%
W/O CDSC 1.82% 2.42% 3.83% 12.16% 4.13%
Beg dates 31-Oct-96 29-Dec-95 30-Nov-95 01-Feb-94 01-Feb-94
Beg Value (no load) 11,015 10,951 10,802 10,000 10,000
End Value (W/O CDSC) 11,216 11,216 11,216 11,216 11,216
End Value (with cdsc) 10,678 10,787 10,924 10,924
beg nav 9.60 9.90 9.80 10.00 10
end nav 9.74 9.74 9.74 9.74 9.74
shares originally purchased 1,147.44 1,106.19 1,102.29 1,000.00 1,000.00
5% cdsc thru 31-Jan-95
TIME 4% cdsc thru 31-Jan-96 2.8333333333
INCEPTION DATE 01-Feb-94 3% cdsc effe 31-Jan-98
2% cdsc effe 31-Jan-99
</TABLE>
<TABLE>
<CAPTION>
KAMOTF-B FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
with cdsc 11.19% 3.81% NA NA
W/O CDSC 12.16% 4.13% NA NA
Beg dates 01-Feb-94 01-Feb-94 01-Feb-94 01-Feb-94
Beg Value (no load) 10,000 10,000 10,000 10,000
End Value (W/O CDSC) 11,216 11,216 11,216 11,216
End Value (with cdsc) 11,119 11118.84062 11,216 11216.24062
beg nav 10.00 10 10.00 10
end nav 9.74 9.74 9.74 9.74
shares originally purchased 1,000.00 1,000.00 1,000.00 1,000.00
TIME 2.8333333333 2.8333333333
INCEPTION DATE 31-Dec-96
</TABLE>
<TABLE>
<CAPTION>
KAMOTF-C MTD YTD ONE YEAR THREE YEAR THREE YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C> <C>
with cdsc N/A 1.44% 3.83% 11.93% 4.06%
W/O CDSC 1.82% 2.42% 3.83% 11.93% 4.06%
Beg dates 31-Oct-96 29-Dec-95 30-Nov-95 01-Feb-94 01-Feb-94
Beg Value (no load) 10,993 10,929 10,780 10,000 10,000
End Value (W/O CDSC) 11,193 11,193 11,193 11,193 11,193
End Value (with cdsc) 11,086 11,193 11,193 11,193
beg nav 9.59 9.89 9.79 10.00 10
end nav 9.73 9.73 9.73 9.73 9.73
shares originally purchased 1,146.26 1,105.02 1,101.12 1,000.00 1,000.00
TIME 2.8333333333
INCEPTION DATE 01-Feb-94 1% cdsc effe 01-Jan-96
1% cdsc thru date^
</TABLE>
<TABLE>
<CAPTION>
KAMOTF-C FIVE YEAR FIVE YEAR TEN YEAR TEN YEAR
29-Nov-96 TOTAL RETURN COMPOUNDED TOTAL RETURN COMPOUNDED
<S> <C> <C> <C> <C>
with cdsc 11.93% 4.06% NA NA
W/O CDSC 11.93% 4.06% NA NA
Beg dates 01-Feb-94 01-Feb-94 01-Feb-94 01-Feb-94
Beg Value (no load) 10,000 10,000 10,000 10,000
End Value (W/O CDSC) 11,193 11,193 11,193 11,193
End Value (with cdsc) 11,193 11193.200319 11,193 11193.200319
beg nav 10.00 10 10.00 10
end nav 9.73 9.73 9.73 9.73
shares originally purchased 1,000.00 1,000.00 1,000.00 1,000.00
TIME 2.8333333333 2.8333333333
INCEPTION DATE 31-Dec-96
</TABLE>
CALCULATION OF FEDERAL TAX EQUIVALENT YIELD
Fund: Keystone California Tax Free Fund/Class A
Calculation Period: 30 days ended November 30, 1996
Yield: 4.76%
The Keystone California Tax Free Fund intends to advertise tax
equivalent yield based on the yield of the Fund over a 30-day period. The
calculation includes the tax equivalent yield from an investment which is exempt
from federal taxes.
Calculation below assumes:
Joint Return, 31% tax bracker
Method:
Subtract federal rate from 1 and divide yield by the result:
1.00
0.31
-----
0.69
30 day yield 4.76% = 6.89% Federal Tax Equivalent Yield
-----
0.69
CALCULATION OF FEDERAL TAX EQUIVALENT YIELD
Fund: Keystone California Tax Free Fund/Class B
Calculation Period: 30 days ended November 30, 1996
Yield: 4.26%
The Keystone California Tax Free Fund intends to advertise tax
equivalent yield based on the yield of the Fund over a 30-day period. The
calculation includes the tax equivalent yield from an investment which is exempt
from federal taxes.
Calculation below assumes:
Joint Return, 31% tax bracker
Method:
Subtract federal rate from 1 and divide yield by the result:
1.00
0.31
-----
0.69
30 day yield 4.26% = 6.17% Federal Tax Equivalent Yield
-----
0.69
CALCULATION OF FEDERAL TAX EQUIVALENT YIELD
Fund: Keystone California Tax Free Fund/Class C
Calculation Period: 30 days ended November 30, 1996
Yield: 4.26%
The Keystone California Tax Free Fund intends to advertise tax
equivalent yield based on the yield of the Fund over a 30-day period. The
calculation includes the tax equivalent yield from an investment which is exempt
from federal taxes.
Calculation below assumes:
Joint Return, 31% tax bracker
Method:
Subtract federal rate from 1 and divide yield by the result:
1.00
0.31
-----
0.69
30 day yield 4.26% = 6.17% Federal Tax Equivalent Yield
-----
0.69
CALCULATION OF FEDERAL TAX EQUIVALENT YIELD
Fund: Keystone Missouri Tax Free Fund/Class A
Calculation Period: 30 days ended November 30, 1996
Yield: 5.00%
The Keystone Missouri Tax Free Fund intends to advertise tax
equivalent yield based on the yield of the Fund over a 30-day period. The
calculation includes the tax equivalent yield from an investment which is exempt
from federal taxes.
Calculation below assumes:
Joint Return, 31% tax bracker
Method:
Subtract federal rate from 1 and divide yield by the result:
1.00
0.31
-----
0.69
30 day yield 5.00% = 7.24% Federal Tax Equivalent Yield
-----
0.69
CALCULATION OF FEDERAL TAX EQUIVALENT YIELD
Fund: Keystone Missouri Tax Free Fund/Class B
Calculation Period: 30 days ended November 30, 1996
Yield: 4.50%
The Keystone Missouri Tax Free Fund intends to advertise tax
equivalent yield based on the yield of the Fund over a 30-day period. The
calculation includes the tax equivalent yield from an investment which is exempt
from federal taxes.
Calculation below assumes:
Joint Return, 31% tax bracker
Method:
Subtract federal rate from 1 and divide yield by the result:
1.00
0.31
-----
0.69
30 day yield 4.50% = 6.52% Federal Tax Equivalent Yield
-----
0.69
CALCULATION OF FEDERAL TAX EQUIVALENT YIELD
Fund: Keystone Missouri Tax Free Fund/Class C
Calculation Period: 30 days ended November 30, 1996
Yield: 4.50%
The Keystone Missouri Tax Free Fund intends to advertise tax
equivalent yield based on the yield of the Fund over a 30-day period. The
calculation includes the tax equivalent yield from an investment which is exempt
from federal taxes.
Calculation below assumes:
Joint Return, 31% tax bracker
Method:
Subtract federal rate from 1 and divide yield by the result:
1.00
0.31
-----
0.69
30 day yield 4.50% = 6.52% Federal Tax Equivalent Yield
-----
0.69
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> CALIFORNIA TAX FREE FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 28,245,995
<INVESTMENTS-AT-VALUE> 29,166,885
<RECEIVABLES> 502,508
<ASSETS-OTHER> 11,307
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 29,680,700
<PAYABLE-FOR-SECURITIES> 544,555
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 136,450
<TOTAL-LIABILITIES> 681,005
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,680,911
<SHARES-COMMON-STOCK> 488,904
<SHARES-COMMON-PRIOR> 462,058
<ACCUMULATED-NII-CURRENT> 8,236
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (66,932)
<ACCUM-APPREC-OR-DEPREC> 137,000
<NET-ASSETS> 4,759,215
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 272,499
<OTHER-INCOME> 0
<EXPENSES-NET> (35,306)
<NET-INVESTMENT-INCOME> 237,193
<REALIZED-GAINS-CURRENT> 40,315
<APPREC-INCREASE-CURRENT> (94,526)
<NET-CHANGE-FROM-OPS> 182,982
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (246,023)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 140,002
<NUMBER-OF-SHARES-REDEEMED> (121,799)
<SHARES-REINVESTED> 8,643
<NET-CHANGE-IN-ASSETS> 204,535
<ACCUMULATED-NII-PRIOR> 16,493
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (103,643)
<GROSS-ADVISORY-FEES> (25,856)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (54,891)
<AVERAGE-NET-ASSETS> 4,690,769
<PER-SHARE-NAV-BEGIN> 9.86
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> (0.11)
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.73
<EXPENSE-RATIO> 0.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 102
<NAME> CALIFORNIA TAX FREE FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 28,245,995
<INVESTMENTS-AT-VALUE> 29,166,885
<RECEIVABLES> 502,508
<ASSETS-OTHER> 11,307
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 29,680,700
<PAYABLE-FOR-SECURITIES> 544,555
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 136,450
<TOTAL-LIABILITIES> 681,005
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,155,728
<SHARES-COMMON-STOCK> 2,344,553
<SHARES-COMMON-PRIOR> 2,317,182
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (87,414)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (108,043)
<ACCUM-APPREC-OR-DEPREC> 759,195
<NET-ASSETS> 22,719,466
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,356,400
<OTHER-INCOME> 0
<EXPENSES-NET> (351,054)
<NET-INVESTMENT-INCOME> 1,005,346
<REALIZED-GAINS-CURRENT> 196,928
<APPREC-INCREASE-CURRENT> (483,223)
<NET-CHANGE-FROM-OPS> 719,051
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,054,277)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 597,313
<NUMBER-OF-SHARES-REDEEMED> (612,458)
<SHARES-REINVESTED> 42,516
<NET-CHANGE-IN-ASSETS> (23,812)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (41,332)
<OVERDIST-NET-GAINS-PRIOR> (287,040)
<GROSS-ADVISORY-FEES> (128,701)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (448,950)
<AVERAGE-NET-ASSETS> 23,327,299
<PER-SHARE-NAV-BEGIN> 9.82
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> (0.11)
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.69
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 103
<NAME> CALIFORNIA TAX FREE FUND CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 28,245,995
<INVESTMENTS-AT-VALUE> 29,166,885
<RECEIVABLES> 502,508
<ASSETS-OTHER> 11,307
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 29,680,700
<PAYABLE-FOR-SECURITIES> 544,555
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 136,450
<TOTAL-LIABILITIES> 681,005
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,499,444
<SHARES-COMMON-STOCK> 157,192
<SHARES-COMMON-PRIOR> 156,535
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (5,397)
<ACCUMULATED-NET-GAINS> 2,272
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24,695
<NET-ASSETS> 1,521,014
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 92,570
<OTHER-INCOME> 0
<EXPENSES-NET> (23,947)
<NET-INVESTMENT-INCOME> 68,623
<REALIZED-GAINS-CURRENT> 13,292
<APPREC-INCREASE-CURRENT> (37,920)
<NET-CHANGE-FROM-OPS> 43,995
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (72,018)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 38,530
<NUMBER-OF-SHARES-REDEEMED> (41,822)
<SHARES-REINVESTED> 3,949
<NET-CHANGE-IN-ASSETS> (13,607)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (2,198)
<OVERDIST-NET-GAINS-PRIOR> (9,798)
<GROSS-ADVISORY-FEES> (8,777)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (30,604)
<AVERAGE-NET-ASSETS> 1,591,342
<PER-SHARE-NAV-BEGIN> 9.80
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> (0.10)
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.68
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> MISSOURI TAX FREE FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 24,898,745
<INVESTMENTS-AT-VALUE> 26,184,220
<RECEIVABLES> 756,161
<ASSETS-OTHER> 4,681
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26,945,062
<PAYABLE-FOR-SECURITIES> 894,339
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 129,376
<TOTAL-LIABILITIES> 1,023,715
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,477,540
<SHARES-COMMON-STOCK> 264,722
<SHARES-COMMON-PRIOR> 489,023
<ACCUMULATED-NII-CURRENT> 13,126
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (43,018)
<ACCUM-APPREC-OR-DEPREC> 162,012
<NET-ASSETS> 2,609,660
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 210,238
<OTHER-INCOME> 0
<EXPENSES-NET> (27,793)
<NET-INVESTMENT-INCOME> 182,445
<REALIZED-GAINS-CURRENT> 86,220
<APPREC-INCREASE-CURRENT> (152,272)
<NET-CHANGE-FROM-OPS> 116,393
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (187,846)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 156,363
<NUMBER-OF-SHARES-REDEEMED> (392,880)
<SHARES-REINVESTED> 12,216
<NET-CHANGE-IN-ASSETS> (2,238,665)
<ACCUMULATED-NII-PRIOR> 17,162
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (124,133)
<GROSS-ADVISORY-FEES> (20,491)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (44,676)
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 9.91
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> (0.06)
<PER-SHARE-DIVIDEND> (0.49)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.86
<EXPENSE-RATIO> 0.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 102
<NAME> MISSOURI TAX FREE FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 24,898,745
<INVESTMENTS-AT-VALUE> 26,184,220
<RECEIVABLES> 756,161
<ASSETS-OTHER> 4,681
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26,945,062
<PAYABLE-FOR-SECURITIES> 894,339
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 129,376
<TOTAL-LIABILITIES> 1,023,715
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,196,861
<SHARES-COMMON-STOCK> 2,250,766
<SHARES-COMMON-PRIOR> 2,166,339
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (84,306)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (230,969)
<ACCUM-APPREC-OR-DEPREC> 1,042,931
<NET-ASSETS> 21,924,517
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,221,977
<OTHER-INCOME> 0
<EXPENSES-NET> (322,294)
<NET-INVESTMENT-INCOME> 899,683
<REALIZED-GAINS-CURRENT> 296,264
<APPREC-INCREASE-CURRENT> (363,620)
<NET-CHANGE-FROM-OPS> 832,327
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (940,084)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 330,193
<NUMBER-OF-SHARES-REDEEMED> (292,558)
<SHARES-REINVESTED> 46,792
<NET-CHANGE-IN-ASSETS> 693,553
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (51,813)
<OVERDIST-NET-GAINS-PRIOR> (497,665)
<GROSS-ADVISORY-FEES> (118,226)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (425,444)
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 9.80
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> (0.04)
<PER-SHARE-DIVIDEND> (0.42)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.74
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ACCOUNTING
RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
ACCOUNTING
RECORDS.
</LEGEND>
<SERIES>
<NUMBER> 103
<NAME> MISSOURI TAX FREE FUND CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 24,898,745
<INVESTMENTS-AT-VALUE> 26,184,220
<RECEIVABLES> 756,161
<ASSETS-OTHER> 4,681
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26,945,062
<PAYABLE-FOR-SECURITIES> 894,339
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 129,376
<TOTAL-LIABILITIES> 1,023,715
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,338,431
<SHARES-COMMON-STOCK> 142,514
<SHARES-COMMON-PRIOR> 182,615
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (7,773)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (24,020)
<ACCUM-APPREC-OR-DEPREC> 80,532
<NET-ASSETS> 1,387,170
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 84,562
<OTHER-INCOME> 0
<EXPENSES-NET> (22,356)
<NET-INVESTMENT-INCOME> 62,206
<REALIZED-GAINS-CURRENT> 26,038
<APPREC-INCREASE-CURRENT> (43,189)
<NET-CHANGE-FROM-OPS> 45,055
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (65,180)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,038
<NUMBER-OF-SHARES-REDEEMED> (61,550)
<SHARES-REINVESTED> 4,411
<NET-CHANGE-IN-ASSETS> (401,261)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (5,348)
<OVERDIST-NET-GAINS-PRIOR> (48,008)
<GROSS-ADVISORY-FEES> (8,205)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (29,372)
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 9.79
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> (0.03)
<PER-SHARE-DIVIDEND> (0.42)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.73
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and/or Chairman of the Board and Chief
Executive Officer and for which Keystone Custodian Funds, Inc. serves as Adviser
or Manager and registering from time to time the shares of such companies, and
generally to do all such things in my name and in my behalf to enable such
investment companies to comply with the provisions of the Securities Act of
1933, as amended, the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
my said attorneys to any and all registration statements and amendments thereto.
/s/ George S. Bissell
George S. Bissell
Director/Trustee,
Chairman of the Board
Dated: December 14, 1994
<PAGE>
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Frederick Amling
Frederick Amling
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles A. Austin III
Charles A. Austin III
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Edwin D. Campbell
Edwin D. Campbell
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Charles F. Chapin
Charles F. Chapin
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ K. Dun Gifford
K. Dun Gifford
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Leroy Keith, Jr.
Leroy Keith, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ F. Ray Keyser,Jr.
F. Ray Keyser, Jr.
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ David M. Richardson
David M. Richardson
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Richard J. Shima
Richard J. Shima
Director/Trustee
Dated: December 14, 1994
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Roger T. Wickers, Rosemary D. Van
Antwerp, Jean S. Loewenberg, Dorothy E. Bourassa, James M. Wall and Melina M. T.
Murphy, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-1 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Custodian
Funds, Inc. serves as Adviser or Manager and registering from time to time the
shares of such companies, and generally to do all such things in my name and in
my behalf to enable such investment companies to comply with the provisions of
the Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and all requirements and regulations of the Securities and Exchange
Commission thereunder, hereby ratifying and confirming my signature as it may be
signed by my said attorneys to any and all registration statements and
amendments thereto.
/s/ Andrew J. Simons
Andrew J. Simons
Director/Trustee
Dated: December 14, 1994
