Keystone Tax Free Fund
Seeks high current income, exempt from federal income taxes,
while preserving capital by investing in high quality municipal bonds.
Dear Shareholder:
We are pleased to report to you on activities of Keystone Tax Free Fund for
the six-month period which ended June 30, 1995.
Performance
Your Fund returned 9.15% for the six-month period and 7.63% for the
twelve-month period.
Your Fund's impressive performance was the result of our careful bond
selection and a strong rally in the municipal bond market. As interest rates
went down, municipal bond prices rose, more than recovering from the price
declines of 1994. This was good news for almost every municipal bond investor
including your Fund, and it demonstrated the importance of maintaining a
long-term perspective, especially after market setbacks.
The Federal Reserve's policy of controlling inflation began to take hold
during the six-month period as economic growth slowed and inflation remained
under control. Bond yields declined in response and bond prices rose
strongly. US Treasury bonds provided evidence of this as the benchmark
30-year bond yield fell almost one percentage point. Municipal bond yields
reflected the interest rate declines, but to a lesser extent, lagging the
performance of comparable US Treasuries.
Overall, municipal bond yields have come just about full circle. Below are
the yields on a typical 30-year AA-rated bond, illustrating the rise and fall
of rates during the twelve-month period which ended June 30, 1995.
<TABLE>
<CAPTION>
12 months ago 6 months ago Period end
<S> <C> <C> <C>
Yield 6.30% 6.75% 6.15%
</TABLE>
The recovery of municipal bond returns was also evident in market indexes.
The total return (which includes income and price changes) of the Lehman
Municipal Bond Index was 12.38% for the six-month period and 11.52% for the
twelve-month period.
Portfolio Strategy
During the six-month period, we shortened the average maturity of the
portfolio to control price fluctuations and reduce risk. At the end of the
period, the portfolio's average maturity was 18 years. We maintained our
barbell quality strategy, using a combination of AAA and BBB-rated bonds. The
high quality bonds contributed relative stability to the portfolio while the
lower-rated investment grade bonds allowed us to pursue income more
aggressively. We continued to emphasize non-callable bonds in order to
maintain an uninterrupted stream of income for shareholders.
--continued on next page--
1
<PAGE>
Keystone Tax Free Fund
Outlook
These returns were impressive yet, we think investors should maintain more
modest expectations for Fund performance going forward. We believe the
overall high quality of the bonds in the portfolio should offer some
protection if rates inch upward, and the Fund's higher yielding bond holdings
should continue to provide attractive tax-free income. In all market
conditions, Keystone Tax Free Fund will continue to seek attractive income
that is exempt from federal income taxes, allowing you to retain more of your
investment earnings.(1)
We appreciate your continued support of Keystone funds. If you have any
questions or comments about your investment, please feel free to write to us.
Sincerely,
[signature of Albert H. Elfner, III]
[picture of Albert H. Elfner, III]
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
[signature of George S. Bissell]
[picture of George S. Bissell]
George S. Bissell
Chairman of the Board
Keystone Funds
July 1995
(1)For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
2
<PAGE>
A Discussion With
Your Fund's Management
Keystone Tax Free Fund is managed by Betsy Blacher,
vice president and head of Keystone's municipal bond invest-
ment management department. Ms. Blacher has 16 years of
investment experience and holds a Bachelor's degree from
Wheaton College in economics and sociology. She is supported
by a team of six investment professionals who are dedicated to
researching, analyzing and evaluating municipal bonds. We
asked her several questions about the municipal bond market's
recent performance. Her responses follow.
Q. How did municipal bonds perform over the past six months?
A. The performance of municipal bonds has been very strong, especially since
the first of the year. Rates on long-term municipal bonds have dropped about
nine-tenths of a percentage point since January 1, and bond prices have risen
significantly.
Q. How did you position the portfolio?
A. Our basic strategy didn't change. We focused on high quality issues and
stayed as fully invested as possible to maximize the Fund's income potential.
We bought bonds in the 15- to 20-year maturity range because that is where we
found the best value. On June 30, 1995, the average maturity was 18 years and
the portfolio's average quality was AA.
Q. Investors have experienced significant price changes both this year and
last year. What did you do to minimize this?
A. To increase price stability, we emphasized investment grade bonds with
relatively generous yields and non-callable bonds. Both have historically
tended to provide relative stability across a broad spectrum of market
environments and interest rate changes. A non-callable bond cannot be bought
back or called away by its issuer before it matures, so we can usually count
on its earning power in the portfolio. Call protection is most valuable when
rates are going down, because that is when municipalities are most likely to
call their bonds to reduce the cost of their debt.
Portfolio Quality Summary
as of June 30, 1995
S&P Rating(2)
[The following is a typeset representation of a pie graph]
AAA (41%)
AA (21%)
A (17%)
BBB (10%)
Not rated (8%)
Cash (3%)
Average Quality: AA (as a percentage of portfolio investments)
(2) When a Standard & Poor's rating was not available, we used a rating assigned
by another nationally recognized statistical rating organizations such as Fitch
Investor's Service, Inc. or Moody's Investor's Services, Inc.
Fund profile
Objective: Seeks high current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Inception date: October 7, 1985
Average quality: AA
Average maturity: 18 years
Net assets: $1,213.5 million
3
<PAGE>
Keystone Tax Free Fund
Q. Did the financial difficulties in Orange County, California affect any of
the Fund's holdings?
A. The events did not affect any of the Fund's holdings. Orange County's
fiscal situation caused uneasiness throughout the municipal markets, and
called attention to the use of derivatives as an investment strategy. While
the Fund did not invest in derivatives during the six-month period, it has
the flexibility to invest in certain types of derivatives and maintains a
strict policy on their use in the portfolio.
Q. Do you believe that we've seen the end of the Federal Reserve Bank's
short-term interest rate increases?
A. We would be surprised to see a rate increase this year. While it is
difficult to predict the direction of interest rates, the Federal Reserve
Bank's rate increases in 1994 appear to have succeeded in slowing the pace of
economic growth so far this year, and the stock and bond markets have
responded positively.
Q. What is your outlook for the municipal bond market?
A. We remain cautiously optimistic. The economy is slowing and inflation is
moderate, which are generally viewed as positive factors for municipal bond
prices. Bond issuance has declined dramatically over the past few years, from
$293 billion in 1993 to $164 billion in 1994, with $130 billion in supply
expected for 1995. With a shrinking supply of available bonds, we could expect
to see a positive effect on the value of existing bonds if demand increases.
Q. Is there a lesson to be learned from the market activity of the past year?
A. Yes, we believe there is. The past year has demonstrated that tax-free
investors who stayed with their investments during the difficult market were
rewarded for their patience. There is always risk associated with investing,
and the extraordinary market conditions of 1994 are unlikely to be repeated.
However, we believe price changes tend to even out over time. In all market
conditions, Keystone Tax Free Fund will continue to invest in a diversified,
professionally managed portfolio in seeking income that is exempt from
federal taxation.(3)
Tax-Equivalent Yields(4)
Federal Tax Bracket
31% 36% 39.6%
Fund Yield Taxable Equivalent Yield
5.0% (arrow right) 7.2% 7.8% 8.3%
5.5% (arrow right) 8.0% 8.6% 9.1%
6.0% (arrow right) 8.7% 9.4% 9.9%
A tax free yield of 5.5% is equal to a taxable yield of 8.6% if you are in
the 36% federal tax bracket.
(3) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
(4) The table is based on federal tax brackets. The 31% bracket includes
single filers earnings $53,501-115,000 and joint filers earning
$89,151-140,000; the 36% bracket includes single filers earning
$115,001-250,000 and joint filers earning $140,001-250,000; the 39.6% bracket
includes single and joint filers earning over $250,000. Yields are
hypothetical and do not represent the returns of any particular investment.
*
This column is intended to answer
common questions about your Fund.
If you have a question you would like answered, please write to:
Keystone Investment Distributors Company, Inc.
Attn: Manager, Shareholder Communications
200 Berkeley Street, Boston, Massachusetts 02116-5034.
4
<PAGE>
Your Fund's Performance
[The following is a typeset representation of a mountain chart]
Growth of an investment in
Keystone Tax Free Fund
In Thousands
<TABLE>
<CAPTION>
<S> <C> <C>
6/85 10000.0 10000.0
10630.0 11665.0
6/87 10272.0 12530.0
10111.0 13326.0
6/89 10296.0 14860.0
9753.0 15707.0
6/91 9753.0 16896.0
10037.0 18331.0
6/93 10309.0 20785.0
9160.0 20346.0
6/95 9309.0 21899.0
</TABLE>
A $10,000 investment in Keystone Tax Free Fund made on June 30, 1985 with all
distributions reinvested was worth $21,901 on June 30, 1995. Past performance
is no guarantee of future results.
Six-Month Performance as of June 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Total return* 9.15%
Net asset value 12/31/94 $ 7.10
6/30/95 $ 7.54
Dividends $0.205
Capital Gains None
</TABLE>
* Before deduction of contingent deferred sales charge (CDSC)
Historical Record as of June 30, 1995
<TABLE>
<CAPTION>
Cumulative total return If you If you did
redeemed not redeem
<S> <C> <C>
1-year 4.63% 7.63%
5-year 39.43% 39.43%
10-year 119.01% 119.01%
Average annual total return
1-year 4.63% 4.63%
5-year 6.87% 6.87%
10-year 8.15% 8.15%
</TABLE>
The "if you redeemed" returns reflect the deduction of the 3% contingent
deferred sales charge for those investors who sold Fund shares after one
calendar year. Investors who retained their fund investment earned the
returns reported in the second column of the table.
The investment return and principal value will fluctuate so that your
shares, when redeemed, may be worth more or less than the original cost.
You may exchange your shares for another Keystone fund by phone or in
writing for a $10 fee. The exchange fee is waived for individual investors
who make an exchange using Keystone's Automated Response Line (KARL). The
Fund reserves the right to change or terminate the exchange offer.
5
<PAGE>
Keystone Tax Free Fund
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a
diversified portfolio of short-term securities, including commercial paper,
bankers' acceptances, certificates of deposit and other short-term
instruments. The fund pays income which can fluctuate daily. Liquidity and
safety of principal are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the
price at which the share is sold to the public.
6
<PAGE>
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (96.6%)
ALABAMA
Alabama Agricultural and Mechanic University (MBIA) 6.500% 11/01/2025 $ 2,035,000 $ 2,118,130
ALASKA
Alaska Energy Authority, Utilities Revenue (FGIC) 6.600 07/01/2015 13,500,000 14,191,470
Alaska State Housing Finance Corp., Series 1993 A 5.400 12/01/2023 5,000,000 4,354,050
North Slope Borough, Alaska, General Obligation,
Series G (ETM) 8.350 06/30/1998 2,000,000 2,181,800
North Slope Borough, Alaska, General Obligation,
Series A (MBIA) 5.900 06/30/2003 3,000,000 3,156,000
ARIZONA
Chandler, Arizona, Water and Sewer (FGIC) 6.750 07/01/2006 850,000 914,039
Maricopa County, Arizona, University School District
(MBIA) 8.125 01/01/2010 6,000,000 6,999,900
Phoenix, Arizona, Street and Highway User, Series
1992 A (FGIC) (effective yield 5.95%) (a) 0.000 07/01/2013 2,500,000 851,150
Pima County, Arizona, Industrial Development
Authority, Health Care Corp. Revenue 8.000 07/01/2013 3,015,000 3,374,840
Pima County, Arizona, Industrial Development
Authority, Health Care Corp. Revenue (MBIA) 8.000 07/01/2013 370,000 405,087
Pima County, Arizona, Industrial Development
Authority, Irvington Project (FSA) 7.250 07/15/2010 10,000,000 10,983,700
Salt River Project, Arizona, Agricultural
Improvement and Power District, Electric Systems
Revenue 5.000 01/01/2030 14,680,000 12,421,335
Salt River Project, Arizona, Electric Systems
Revenue, Salt River Project, Series C 5.500 01/01/2028 1,000,000 919,610
ARKANSAS
Arkansas State Development Finance Authority, SFMR
Refunding 8.000 08/15/2011 1,670,000 1,797,755
CALIFORNIA
California Health Facilities Financing, St. Francis
Medical Center, Series A 5.500 10/01/2009 200,000 194,664
California State Public Works Board (AMBAC) 5.250 12/01/2013 1,960,000 1,786,814
California State Public Works Board, Various
University California Projects, Series B 5.500 06/01/2019 350,000 315,182
California State Public Works, Board Lease
Department Correctional State Prison, Series E 5.500 06/01/2015 3,700,000 3,342,543
Contra Costa, California, Water District Revenue,
Series G (MBIA) 5.000 10/01/2026 2,000,000 1,694,300
Eden Township, California, Hospital District Revenue 7.400 11/01/2019 5,615,000 5,622,468
See Notes to Schedule of Investments. (continued on next page)
7
<PAGE>
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
CALIFORNIA (continued)
Fontana, California, Public Financing Authority, Tax
Allocation, Series A (MBIA) 5.000% 09/01/2020 $ 295,000 $ 253,482
Loma Linda, California, Refunding Loma Linda
University Medical Center C (MBIA) 5.375 12/01/2022 85,000 76,316
Los Angeles, California, Department Water and Power,
Electric Plant Revenue (MBIA) 5.300 02/15/2025 1,060,000 944,365
Los Angeles, California, Transportation Commission,
Series A (MBIA) 6.250 07/01/2013 6,500,000 6,585,345
Los Angeles, California, Convention and Exhibition
Center Authority Lease (MBIA) 5.125 08/15/2013 600,000 539,256
Los Angeles, California, Public Works Finance
Authority, Multi Capital Facilities Project (MBIA) 5.250 12/01/2016 5,000,000 4,494,750
Moulton Niguel, California, Water District
Improvement Authority (MBIA) 5.250 09/01/2013 210,000 191,579
Oakland, California, Pensions, Series A (FGIC) 7.600 08/01/2021 3,515,000 3,822,844
San Diego, California, Sewer Authority, Series A
(AMBAC) 5.000 05/15/2013 275,000 243,644
San Joaquin Hills, California, Transportation
Corridor Agency, Toll Road Revenue 7.000 01/01/2030 5,705,000 5,777,396
San Joaquin Hills, California, Transportation
Corridor Agency, Toll Road Revenue 6.750 01/01/2032 8,000,000 7,947,520
San Jose, California, Redevelopment Tax Allocation
(MBIA) 6.000 08/01/2015 250,000 249,962
Santa Margarita/Dan Point Authority, California,
Revenue, Series B (MBIA) 5.750 08/01/2020 5,000,000 4,715,150
Southern California Public Power Authority, Power
Project Revenue, Series A (AMBAC) 5.500 07/01/2012 2,300,000 2,166,301
Suisun City, California, Redevelopment Agency, Tax
Allocation (MBIA) 5.500 10/01/2023 4,000,000 3,628,400
Walnut Creek, California, John Muir Medical Center
(MBIA) 5.000 02/15/2016 350,000 303,240
COLORADO
City and County of Denver, Colorado, Airport System,
Series A 8.500 11/15/2023 1,750,000 1,945,475
City and County of Denver, Colorado, Airport System,
Series A 8.000 11/15/2025 525,000 569,016
City and County of Denver, Colorado, Airport System,
Series A 7.000 11/15/1999 2,000,000 2,088,560
City and County of Denver, Colorado, Airport System,
Series A 7.500 11/15/2023 5,625,000 5,948,213
City and County of Denver, Colorado, Airport System,
Series A 8.750 11/15/2023 16,380,000 18,654,035
City and County of Denver, Colorado, Airport System,
Series C 6.000 12/01/2025 3,000,000 3,051,990
See Notes to Schedule of Investments.
8
<PAGE>
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
COLORADO (continued)
City and County of Denver, Colorado, Airport System,
Series C 6.650% 11/15/2005 $ 5,980,000 $ 6,096,969
City and County of Denver, Colorado, Airport System,
Series D 7.750 11/15/2021 12,250,000 13,084,225
Colorado Health Facilities Authority, Rocky Mountain
Adventist Health Care 6.625 02/01/2022 3,000,000 2,895,990
Larimer County, Colorado, School District (MBIA) 7.000 12/15/2016 2,250,000 2,567,115
CONNECTICUT
Connecticut Special Tax Obligation, Series B 6.500 10/01/2012 1,600,000 1,713,392
DELAWARE
Delaware State Health Facilities Authority, Medical
Center of Delaware (MBIA) 6.250 10/01/2006 6,000,000 6,485,700
DISTRICT OF COLUMBIA
District of Columbia, General Obligation, Series E
(FSA) 6.000 06/01/2011 6,000,000 5,858,340
FLORIDA
Broward County, Florida, Resource Recovery, South
Project 7.950 12/01/2008 1,920,000 2,089,114
Broward County, Florida, Water and Sewer Utility
(AMBAC) 5.000 10/01/2018 2,000,000 1,773,540
Florida State Board of Education, Capital Outlay 6.400 06/01/2019 17,000,000 17,476,170
Florida State Board of Education, Capital Outlay 5.875 06/01/2024 5,500,000 5,311,460
Florida State Board of Education, Capital Outlay 5.125 06/01/2022 9,500,000 8,418,805
Florida State, Department of Transportation 5.800 07/01/2018 13,400,000 13,018,100
Florida State Municipal Power Agency Revenue, All
Requirements, Power Supply Project (AMBAC) 5.100 10/01/2025 5,000,000 4,375,050
Florida State Turnpike Authority, Series A (FGIC) 5.000 07/01/2019 1,000,000 874,730
Hillsborough County, Florida, Housing Finance
Agency, Single Family Mortgage Revenue 7.300 04/01/2022 495,000 510,187
Jacksonville, Florida, Health Facilities Authority,
Hospital Revenue (MBIA) 5.000 11/15/2015 2,000,000 1,764,060
Jacksonville, Florida, Health Facilities Authority,
New Children's Hospital (MBIA) 7.000 06/01/2021 1,800,000 1,961,136
Jacksonville, Florida, Transportation Authority
(ETM) 9.200 01/01/2015 2,000,000 2,829,780
Lee County, Florida, School Board, Certificates of
Participation, Series A (FSA) 7.750 08/01/2005 3,490,000 3,973,121
Okaloosa County, Florida, Gas District, Refunding
and Improvement (MBIA) 6.850 10/01/2014 1,550,000 1,720,205
Orlando, Florida, Utilities Commission, Water and
Electric Revenue Commission, Series D 5.000 10/01/2023 8,000,000 6,868,400
Orlando-Orange County, Florida, Expressway Authority
(FGIC) 8.250 07/01/2015 2,960,000 3,791,168
(continued on next page)
9
<PAGE>
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
FLORIDA (continued)
Orange County, Florida, Sales Tax Revenue, Series A
(FGIC) 5.250% 01/01/2016 $ 2,500,000 $ 2,285,675
Palm Bay, Florida, Utility Revenue Refunding, Palm
Bay Utility Corp. Project (MBIA) 5.000 10/01/2019 2,000,000 1,750,440
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project 6.850 02/15/2021 1,500,000 1,462,485
Pinellas Park, Florida, Public Improvement Revenue
Refunding, Series A (FGIC) 5.000 10/01/2018 3,805,000 3,374,160
Polk County, Florida, Housing Finance Authority 7.875 09/01/2022 385,000 401,135
St. Petersburg, Florida, Health Facilities Authority
(MBIA) 7.000 12/01/2015 3,250,000 3,585,140
Tampa, Florida, Subordinate Guaranteed Entitlement,
Series B (Pre-refunded) 8.500 10/01/2018 1,825,000 2,049,366
GEORGIA
Atlanta, Georgia, General Obligation, Series A 6.000 12/01/2015 2,790,000 2,812,655
Atlanta, Georgia, General Obligation, Series A 6.000 12/01/2014 2,690,000 2,723,033
De Kalb County, Georgia, Water and Sewer Revenue 5.250 10/01/2023 3,000,000 2,729,430
Georgia State, General Obligation, Series B 6.800 03/01/2011 6,000,000 6,762,120
Georgia State, General Obligation, Series C 5.250 04/01/2011 9,200,000 8,888,948
Metropolitan Atlanta Rapid Transit Authority,
Georgia, Sales Tax (AMBAC) 6.250 07/01/2011 4,255,000 4,479,238
Monroe County, Georgia, Pollution Control Revenue,
Georgia Power Co. (FGIC) 10.500 09/01/2015 7,100,000 7,304,764
HAWAII
Hawaii State Department of Budget and Finance,
Special Purpose Revenue, Hawaii Electric Co.
(MBIA) 7.375 12/01/2020 8,000,000 8,845,200
State of Hawaii, Airport System (MBIA) 6.450 07/01/2013 10,000,000 10,405,600
IDAHO
Idaho Housing Finance Authority, Single Family
Mortgage Bonds, Series D-1 8.000 01/01/2020 1,355,000 1,423,875
ILLINOIS
Chicago, Illinois, Gas Supply Revenue, People's Gas
Light and Coke Co., Series A 8.100 05/01/2020 6,740,000 7,516,583
Cook County, Illinois, General Obligation, District
Number 508, Lease Certificates, Series C (MBIA) 7.700 12/01/2005 5,970,000 7,070,271
Illinois Development Finance Authority, Pollution
Control Revenue Refunding, Edison Co. Project,
Series D (AMBAC) 6.750 03/01/2015 4,000,000 4,233,160
Illinois State, Sales Tax, Series P 6.500 06/15/2022 9,000,000 9,388,080
Kankakee, Illinois, Sewer Revenue (FGIC) 6.875 05/01/2011 2,965,000 3,183,254
Metropolitan Fair and Exposition Authority,
Illinois, Dedicated State Tax Revenue (MBIA) 5.000 06/01/2015 2,000,000 1,729,220
See Notes to Schedule of Investments.
10
<PAGE>
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
ILLINOIS (continued)
Metropolitan Pier and Exposition Authority,
Illinois, Dedicated State Tax Revenue (MBIA)
(effective yield 6.55%) (a) 0.000% 06/15/2013 $ 5,625,000 $ 1,844,606
Metropolitan Pier and Exposition Authority,
Illinois, Dedicated State Tax Revenue (effective
yield 6.62%) (a) 0.000 06/15/2015 19,440,000 5,629,435
Metropolitan Pier and Exposition Authority,
McCormick Place Expansion Project 7.250 06/15/2005 5,500,000 6,290,515
Robbins, Illinois, Robbins Resources Recovery,
Partners A 9.250 10/15/2014 11,500,000 12,596,065
INDIANA
Indianapolis, Indiana, Local Public Improvement Bond
Bank, Series 1992D 6.750 02/01/2020 2,000,000 2,040,080
KANSAS
Kansas City, Kansas, Utility Systems, Refunding and
Improvement (FGIC) 6.375 09/01/2023 7,150,000 7,420,914
KENTUCKY
Carroll County, Kentucky, Kentucky Utility Company,
Series A 7.450 09/15/2016 5,000,000 5,630,500
Jefferson County, Kentucky, Hospital Revenue (MBIA) 6.435 10/23/2014 6,000,000 6,131,820
Kentucky Housing Corp., Housing Revenue Bond, Series C 7.900 01/01/2021 5,925,000 6,287,373
Trimble County, Kentucky, Pollution Control,
Louisville Gas and Electric Co. 7.625 11/01/2020 2,725,000 2,975,019
Trimble County, Kentucky, Pollution Control,
Louisville Gas and Electric Co., Series
(Pre-refunded) 7.625 11/01/2020 545,000 623,556
LOUISIANA
Louisiana Public Facilities Authority (Crossover
refunded) 8.200 12/01/2015 7,250,000 8,113,910
Louisiana State, Series B (MBIA) 5.625 08/01/2013 3,000,000 2,904,660
Orleans Parish, Louisiana, School Board (ETM) 9.050 02/01/2010 5,175,000 6,843,886
MAINE
Regional Waste System, Maine 8.150 07/01/2011 2,500,000 2,757,825
MARYLAND
Maryland State Community Development Administration,
Multi-Family Housing 8.750 05/15/2012 3,345,000 3,427,254
MASSACHUSETTS
Boston, Massachusetts, Boston City Hospital 5.750 02/15/2023 735,000 693,348
Massachusetts Bay Transportation Authority 5.400 03/01/2008 12,000,000 11,843,400
Massachusetts Bay Transportation Authority, Series A 7.000 03/01/2011 4,100,000 4,586,424
Massachusetts Bay Transportation Authority, Series A 6.250 03/01/2012 4,000,000 4,154,080
Massachusetts Bay Transportation Authority, Series B 6.200 03/01/2016 1,500,000 1,538,535
Massachusetts Industrial Finance Agency, Harvard
Community Health Plan, Inc. 8.125 10/01/2017 11,750,000 12,677,662
(continued on next page)
11
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Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
MASSACHUSETTS (continued)
Massachusetts Industrial Finance Agency, Pollution
Control, Boston Edison Co., Series A 5.750% 02/01/2014 $ 1,000,000 $ 918,240
Massachusetts Industrial Finance Agency, Solid Waste
Disposal 9.000 08/01/2016 4,100,000 4,327,837
Massachusetts Municipal Wholesale Electric, Power
Supply Systems 6.750 07/01/2008 4,000,000 4,263,920
Massachusetts State Health and Educational
Facilities Authority (MBIA) 7.300 10/01/2018 2,000,000 2,183,520
Massachusetts State Health and Educational
Facilities Authority, Children's Hospital (MBIA) 6.750 07/01/2024 2,000,000 2,105,800
Massachusetts State Health and Educational
Facilities Authority, Children's Hospital 6.200 10/01/2016 3,890,000 3,912,445
Massachusetts State Health and Educational
Facilities Authority, Massachusetts General
Hospital, Series G (AMBAC) 5.375 07/01/2011 1,385,000 1,318,285
Massachusetts State Health and Educational
Facilities Authority, Massachusetts General
Hospital, Series F (AMBAC) 6.250 07/01/2012 1,000,000 1,038,140
Massachusetts State Health and Educational
Facilities Authority, Massachusetts General
Hospital, Series F (AMBAC) 6.250 07/01/2020 3,000,000 3,033,960
Massachusetts State Health and Educational
Facilities Authority, New England Deaconness
Hospital (AMBAC) 6.875 04/01/2022 2,980,000 3,169,945
Massachusetts State Health and Educational
Facilities Authority, Wellesley College 5.375 07/01/2019 680,000 623,846
Massachusetts State Housing Finance Agency, Single
Family Mortgage 9.500 12/01/2016 1,885,000 1,950,805
Massachusetts State, General Obligation,
Consolidated Loan, Series C (FGIC) 6.600 11/01/2008 8,000,000 8,674,640
Massachusetts State Water Resources Authority,
Series A (MBIA) 6.000 08/01/2024 1,500,000 1,487,940
Massachusetts State Water Resources Authority,
Series C 5.250 12/01/2020 3,510,000 3,081,569
Quincy, Massachusetts, Quincy Hospital (FSA) 5.250 01/15/2016 100,000 90,323
MICHIGAN
Michigan State Hospital Finance Authority, Hospital
Refunding (Daughters Charity Health Systems
-Providence Hospital) 10.000 11/01/2015 7,960,000 8,265,744
Monroe County, Michigan, Economic Development Corp.,
Detroit Edison Co. (FGIC) 6.950 09/01/2022 6,000,000 6,751,020
Okemos, Michigan, Public School District, Series I
(effective yield 6.61%) (a) 0.000 05/01/2021 51,525,000 10,159,700
Romulus, Michigan, Community Schools, Capital
Appreciation, Series I (effective yield 5.80%) (a) 0.000 05/01/2017 39,490,000 10,274,508
See Notes to Schedule of Investments.
12
<PAGE>
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
MICHIGAN (continued)
West Ottawa, Michigan, Public School District,
Capital Appreciation (effective yield 5.75%) (a) 0.000% 05/01/2015 $35,490,000 $10,573,891
MINNESOTA
Dakota County, Minnesota, Housing and Redevelopment
Authority, Single Family Mortgage (FGIC) 9.375 05/01/2018 30,000 31,881
Minnesota Housing Finance Agency, Housing
Development, Residential Mortgage, Series H 6.500 01/01/2026 3,500,000 3,486,560
St. Cloud, Minnesota, Hospital Facilities Revenue 5.300 10/01/2020 2,400,000 2,162,472
MISSISSIPPI
Mississippi Hospital Equipment and Facilities
Authority (Connie Lee) 6.400 01/01/2007 1,000,000 1,046,000
MISSOURI
Kansas City, Missouri, Municipal Assistance Corp.
Revenue (AMBAC) 6.000 04/15/2020 500,000 504,410
Missouri State Health and Educational Facilities
Authority (MBIA) 5.125 11/15/2019 1,000,000 888,560
Missouri State Health and Educational Facilities
Authority, Barnes Jewish Hospital (MBIA) 5.150 05/15/2010 5,000,000 4,667,900
Missouri State Health and Educational Facilities
Authority, Barnes Jewish Hospital 5.250 05/15/2021 2,200,000 2,000,416
Missouri State Health and Educational Facilities
Authority, Health Facility Refunding, Series Aa
(MBIA) 6.250 06/01/2016 2,400,000 2,446,032
Phelps County, Missouri, Phelps County Regional
Medical Center (Connie Lee) 6.000 05/15/2013 125,000 124,909
University of Missouri, University Improvement
Systems Facilities 5.500 11/01/2023 175,000 166,108
NEBRASKA
Nebraska Higher Education Loan Program 6.200 06/01/2013 5,800,000 5,747,916
NEVADA
Clark County, Nevada, Series A (AMBAC) 7.500 06/01/2009 4,000,000 4,695,760
Clark County, Nevada, School District, Series A
(MBIA) 6.750 03/01/2007 3,000,000 3,210,960
NEW JERSEY
New Jersey Health Care Facilities Financing
Authority, General Hospital Center at Passaic,
Inc., (Pre-refunded) (FHA) 9.625 08/01/2025 7,500,000 7,678,575
New Jersey Health Care Facilities Financing
Authority, General Hospital Center at Passaic,
Inc., Series B (Pre-refunded) 10.375 07/01/2014 3,850,000 3,966,154
New Jersey Health Care Facilities Financing
Authority, General Hospital Center at Passaic,
Inc., Series B (Pre-refunded) 10.125 07/01/2002 1,800,000 1,854,000
(continued on next page)
13
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Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
NEW JERSEY (continued)
New Jersey Health Care Facilities Financing
Authority, Jersey Shore Medical Center (AMBAC) 6.250% 07/01/2016 $2,000,000 $2,061,640
New Jersey Health Care Facilities Financing
Authority, Jersey Shore Medical Center (AMBAC) 6.125 07/01/2012 1,000,000 1,020,790
New Jersey Health Care Facilities Financing
Authority, Kimball Medical Center, Series C 8.000 07/01/2013 3,000,000 3,109,380
New Jersey Health Care Facilities Financing
Authority, St. Elizabeth's Hospital, Series B 7.750 07/01/1998 1,450,000 1,495,283
NEW MEXICO
City of Albuquerque, New Mexico, Hospital System,
Series A (MBIA) 6.375 08/01/2007 1,500,000 1,579,830
NEW YORK
Battery Park City Authority, New York, Refunding,
Series A 5.000 11/01/2013 3,715,000 3,266,637
Battery Park City Authority, New York, Refunding
Bonds 5.250 11/01/2017 1,000,000 885,750
New York City, New York, General Obligation 7.750 08/15/2014 5,460,000 5,963,084
New York City, New York, General Obligation, Fiscal
1992, Series A 7.750 08/15/2015 3,250,000 3,525,210
New York City, New York, General Obligation, Fiscal
1992, Series A 7.750 08/15/2008 6,000,000 6,489,000
New York City, New York, General Obligation, Series
D (MBIA) 6.000 08/01/2006 285,000 290,133
New York City, New York, Industrial Special
Facility, Terminal One Group Association Project 6.000 01/01/2015 2,500,000 2,381,025
New York City, New York, Municipal Water Finance
Authority, Water and Sewer System (FGIC) 7.000 06/15/2015 6,000,000 6,429,900
New York Energy Research and Development Authority,
Consolidated Edison Project 7.750 01/01/2024 2,900,000 3,093,923
New York State Care Facilities, New York Hospital,
Series A (AMBAC) 6.800 08/15/2024 3,800,000 4,053,042
New York State Dormitory Authority, City University
Educational Facilities (FGIC) 7.000 07/01/2009 4,180,000 4,715,291
New York State Dormitory Authority, City University
Educational Facilities (AMBAC) 6.250 07/01/2016 3,000,000 3,097,380
New York State Dormitory Authority Revenue, State
University Educational Facilities, Series B 7.500 05/15/2011 7,000,000 8,008,420
New York State Energy Research and Development
Authority 7.150 02/01/2022 7,250,000 7,355,053
New York State Environmental Facilities Corp., State
Water Pollution Control (New York City Water
Finance Authority) 6.875 06/15/2010 5,000,000 5,485,200
See Notes to Schedule of Investments.
14
<PAGE>
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
NEW YORK (continued)
New York State Environmental Facilities Corp., State
Water Pollution Control (New York City Water
Finance Authority) 5.875% 06/15/2014 $ 5,000,000 $ 5,011,500
New York State Local Government Assistance Corp.
(Pre-refunded) 6.750 04/01/2021 900,000 1,021,347
New York State Medical Care Facilities, Finance
Agency Revenue, Mental Health Services Facilities
(MBIA) 6.150 02/15/2015 5,000,000 5,069,700
New York State Medical Care Facilities, Finance
Agency Revenue, Mental Health Services Facilities
(MBIA) 6.000 08/15/2015 2,000,000 2,008,960
New York State Medical Care Facilities Finance
(FGIC) (effective yield 6.385%) 0.000 08/15/2014 2,900,000 2,992,887
New York State Mortgage Agency 6.900 04/01/2015 4,500,000 4,707,450
New York State Urban Development Corp., Correctional
Facilities, Series A 7.500 04/01/2011 8,000,000 8,821,760
New York State Urban Development Corp., Refunding
Correctional Facilities, Series A 6.500 01/01/2010 13,920,000 14,419,310
New York State Urban Development Corp., Revenue
Refunding, Correctional Facilities, Series A 5.500 01/01/2014 2,500,000 2,285,325
Port Authority of New York and New Jersey 6.000 12/01/2015 2,060,000 2,070,794
Triborough Bridge and Tunnel Authority, New York 5.000 01/01/2015 2,000,000 1,771,580
Triborough Bridge and Tunnel Authority, New York,
Series Q 5.000 01/01/2017 3,820,000 3,340,552
Triborough Bridge and Tunnel Authority, New York,
Special Obligation 6.625 01/01/2012 8,500,000 9,198,870
NORTH CAROLINA
North Carolina Eastern Municipal Power Agency, Power
Systems 7.250 01/01/2007 1,000,000 1,097,920
North Carolina Eastern Municipal Power Agency, Power
Systems 7.000 01/01/2013 6,000,000 6,322,440
North Carolina Eastern Municipal Power Agency, Power
Systems 6.250 01/01/2012 5,100,000 4,955,670
North Carolina Eastern Municipal Power Agency, Power
Systems, Series C 7.000 01/01/2007 1,750,000 1,869,035
NORTH DAKOTA
North Dakota State Housing Finance Agency, Single
Family Mortgage 8.375 07/01/2021 650,000 672,081
OHIO
Bedford, Ohio, City School District (MBIA) 6.250 12/01/2013 1,000,000 1,023,130
Cleveland, Ohio, Public Power Systems, First
Mortgage, Series A (MBIA) 7.000 11/15/2024 1,000,000 1,090,010
Cleveland, Ohio, Public Power Systems, First
Mortgage, Series A (MBIA) 7.000 11/15/2014 4,000,000 4,464,600
Columbus, Ohio, General Obligation 12.375 02/15/2006 1,285,000 2,012,361
(continued on next page)
15
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Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
OHIO (continued)
Ohio Housing Finance Agency, Single Family Mortgage
Revenue, Series C (GNMA) 9.000% 09/01/2018 $10,000,000 $11,294,300
Ohio Municipal Electric Generation Agency 5.375 02/15/2024 2,000,000 1,832,520
Ohio State Higher Educational Facility Commission
(MBIA) 6.125 11/15/2017 1,000,000 1,019,580
Ohio State Water Development Authority (AMBAC) 9.375 12/01/2018 570,000 595,080
Ohio State Water Development Authority (AMBAC) 9.250 12/01/2012 150,000 157,371
OREGON
Portland, Oregon, Sewer Systems, Series A (FGIC) 6.250 06/01/2015 700,000 728,287
PENNSYLVANIA
Allegheny County, Pennsylvania, Industrial
Development Authority Revenue 5.700 09/01/2030 2,000,000 1,823,220
Allegheny County, Pennsylvania, Sewer Revenue
Refunding (FGIC) (effective yield 6.5%) (a) 0.000 06/01/2015 2,500,000 744,225
Beaver County, Pennsylvania, Ohio Edison (FGIC) 7.000 06/01/2021 4,390,000 4,693,305
Bethlehem, Pennsylvania, Authority Water Revenue
(MBIA) 5.300 12/15/2017 2,200,000 1,998,788
Chester County, Pennsylvania, Health and Education
Facilities Authority, Mainline Health System 5.500 05/15/2015 6,240,000 5,769,130
Delaware County, Pennsylvania, Authority Health
Care, Mercy Health Company of Southeastern, PA
(Connie Lee) 5.375 11/15/2023 5,000,000 4,379,650
Delaware County, Pennsylvania, Hospital Revenue,
Crozier Chester Medical Center (Pre-refunded) 7.500 12/15/2020 2,545,000 2,936,370
Delaware County, Pennsylvania, Industrial
Development Authority, Resource Recovery Project,
Series A (LOC Security Pacific) 8.100 12/01/2013 4,000,000 4,212,360
Lehigh County, Pennsylvania, Pennsylvania Power &
Light Co. Project, Series A (MBIA) 6.400 11/01/2021 1,500,000 1,548,960
North Penn, Pennsylvania, Water Authority (FGIC) 6.875 11/01/2019 2,500,000 2,661,725
Northumberland County, Pennsylvania, Authority
Prisons Lease (Pre-refunded) 7.750 10/15/2004 2,110,000 2,455,998
Pennsylvania Economic Development Financing
Authority, Colver Project, Series D 7.150 12/01/2018 2,500,000 2,602,500
Pennsylvania Economic Development Financing
Authority, Resources Recovery, Colver Project,
Series D 7.050 12/01/2010 3,000,000 3,148,350
Pennsylvania Economic Development Financing
Authority, Resources Recovery, Colver Project,
Series D 7.125 12/01/2015 1,000,000 1,047,190
Pennsylvania Economic Development Financing
Authority, Resources Recovery, Northampton Project
(03/15/1994--$9,000,000) (b) 6.600 01/01/2019 9,000,000 8,695,980
Pennsylvania Economic Development Financing
Authority, Resources Recovery, Northampton Project
(11/29/1994--$5,500,000) (b) 6.500 01/01/2013 5,500,000 5,307,940
See Notes to Schedule of Investments.
16
<PAGE>
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
PENNSYLVANIA (continued)
Pennsylvania Economic Development Financing
Authority, Resources Recovery, Northampton Project
(09/27/1994--$4,000,000) (b) 6.400% 01/01/2009 $4,000,000 $3,860,360
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series T 7.750 10/01/2009 4,000,000 4,151,080
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Section 8 8.200 07/01/2024 6,000,000 6,510,600
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series 34 A 6.850 04/01/2016 500,000 512,885
Pennsylvania Intergovernmental Cooperative
Authority, Philadelphia Funding (FGIC) 6.750 06/15/2021 1,910,000 2,029,795
Pennsylvania Intergovernmental Cooperative
Authority, Philadelphia Funding (MBIA) 5.600 06/15/2016 1,000,000 945,670
Pennsylvania State, First Series 5.375 05/01/2013 1,000,000 937,900
Pennsylvania State, Second Series 5.600 06/15/2012 7,905,000 7,699,154
Pennsylvania State Higher Educational Facilities
Authority, Thomas Jefferson University (Connie
Lee) 5.300 11/01/2015 1,000,000 909,440
Pennsylvania State, General Obligation, First Series 5.375 05/01/2011 4,000,000 3,807,200
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Albert Einstein Medical
Center 7.000 10/01/2021 3,055,000 3,170,784
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Chestnut Hill Hospital 6.500 11/15/2022 5,000,000 4,986,950
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Community College, Series B
(MBIA) 6.500 05/01/2007 280,000 300,692
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Graduate Health System
Education Facilities Authority, Series A 7.250 07/01/2018 2,500,000 2,534,875
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Temple University Authority 6.625 11/15/2023 1,725,000 1,719,394
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Series A 6.000 06/01/2014 2,000,000 1,785,020
Philadelphia, Pennsylvania, Municipal Development
Authority, Criminal Justice Center, Series A
(MBIA) 7.100 11/15/2006 4,095,000 4,492,706
Philadelphia, Pennsylvania, Municipal Development
Authority, Series A (FGIC) 5.625 11/15/2018 2,000,000 1,898,920
Philadelphia, Pennsylvania, Water and Wastewater 5.750 06/15/2013 2,700,000 2,622,942
Philadelphia, Pennsylvania, Water and Wastewater
(FGIC) 10.000 06/15/2005 7,000,000 9,449,790
Philadelphia, Pennsylvania, Water and Wastewater,
Series A 6.250 08/01/2012 3,000,000 3,111,360
(continued on next page)
17
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SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
PENNSYLVANIA (continued)
Pittsburgh, Pennsylvania, Urban Redevelopment
Authority, Multi-Family Housing Mortgage, 1985
Series A 9.250% 12/01/2027 $ 3,185,000 $ 3,314,024
Pottsville, Pennsylvania, Hospital Authority,
Daughters of Charity Health Systems, Inc., Good
Samaritan Hospital (Pre-refunded) 8.250 08/01/2012 2,670,000 2,932,167
Ridley Park, Pennsylvania, Hospital Authority
Revenue 6.125 12/01/2020 2,500,000 2,074,000
Sayre, Pennsylvania, Health Care Facilities
Authority, Guthrie Healthcare, Series A 7.100 03/01/2017 1,250,000 1,336,888
PUERTO RICO
Puerto Rico Commonwealth, General Obligation (MBIA) 7.000 07/01/2010 12,000,000 13,437,120
Puerto Rico Commonwealth, Refunding (Capital
Guarantee) 6.450 07/01/2017 2,000,000 2,069,880
Puerto Rico Public Buildings Authority, Guaranteed
Public Education and Health Facilities, Series M 5.700 07/01/2009 1,000,000 967,850
Puerto Rico Telephone Authority (MBIA) 5.250 01/01/2005 16,900,000 16,857,581
RHODE ISLAND
Rhode Island State Health and Educational Building
Corp., Hospital Financing Revenue, Roger Williams
General Hospital 9.500 07/01/2016 4,210,000 4,364,128
SOUTH CAROLINA
Charleston, South Carolina, Waterworks and Sewer
Revenue (MBIA) 5.000 01/01/2022 1,500,000 1,294,995
South Carolina State Public Services Authority
(MBIA) 5.500 07/01/2021 2,000,000 1,854,280
South Carolina State Public Services Authority,
Fixed Option Bonds 5.342 06/30/2006 8,400,000 8,244,768
Sumter County, South Carolina, Hospital Facilities,
The Tuomey Hospital (Pre-refunded) 10.000 10/01/2004 250,000 258,460
TENNESSEE
Bristol, Tennessee, Health and Education Authority,
Bristol Memorial Hospital (FGIC) 6.750 09/01/2010 4,200,000 4,601,898
Knox County, Tennessee, Health and Educational
Facilities, Fort Sanders Hospital Alliance, Series
B (MBIA) 5.250 01/01/2015 3,500,000 3,218,950
Knox County, Tennessee, Health and Educational
Facilities, Fort Sanders Hospital Alliance, Series
C (MBIA) 7.250 01/01/2010 3,000,000 3,457,020
Tennessee Housing Development Authority, Home
Ownership Program, Issue H 7.825 07/01/2015 4,920,000 5,105,779
See Notes to Schedule of Investments.
18
<PAGE>
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
TEXAS
Austin, Texas, Utility Systems (MBIA) 5.250% 05/15/2018 $ 7,000,000 $ 6,310,010
Bexar County, Texas, Health Facilities Development
Corp., Revenue Refunding, Incarnate Word Health
Services (Crossover refunded) 9.500 11/01/2015 8,640,000 8,940,845
Bexar, Texas, Metropolitan Water District Waterworks
Systems (AMBAC) 6.625 05/01/2014 1,850,000 1,933,509
Copperas Cove, Texas, Health Facilities, Adventist
Health Systems (MBIA) 5.500 11/15/2017 2,000,000 1,845,060
Fort Bend County, Texas, Levee Improvement (MBIA) 6.900 09/01/2020 1,165,000 1,233,292
Harris County, Texas, Flood Control District
(effective yield 7.20%) (a) 0.000 10/01/2006 4,500,000 2,208,105
Harris County, Texas, Health Facilities Development
Corp. 6.600 06/01/2014 5,000,000 5,056,850
Harris County, Texas, Health Facilities Development
Corp., Hermann Hospital Project (MBIA) 6.375 10/01/2024 3,300,000 3,357,750
Harris County, Texas, Health Facilities Development
Corp., Hermann Hospital Project (MBIA) 6.375 10/01/2017 2,480,000 2,533,494
Harris County, Texas, Senior Lien, Toll Road, Series
A (MBIA) 6.375 08/15/2024 4,000,000 4,093,720
Houston, Texas, Airport 8.200 07/01/2017 1,840,000 2,026,521
Houston, Texas, General Obligation 7.000 03/01/2008 2,825,000 3,184,509
Lower Colorado River Authority, Texas Revenue 5.375 01/01/2016 255,000 228,824
Midland County, Texas, Hospital District, Midland
Memorial Hospital 7.500 06/01/2016 600,000 624,720
Port of Corpus Christi, Texas, Industrial
Development Corp., Valero Refining and Marketing
Co. Project, Series A 10.250 06/01/2017 11,050,000 12,288,042
Rio Grande Valley, Texas, Health Facilities Corp.,
Hospital Revenue, Baptist Medical Center Project
(MBIA) 8.000 08/01/2017 1,085,000 1,188,314
Rio Grande Valley, Texas, Health Facilities Corp.,
Hospital Revenue, Baptist Medical Center Project 8.000 08/01/2017 5,915,000 6,626,989
San Antonio, Texas, Electric and Gas 6.000 02/01/2014 2,400,000 2,383,584
San Antonio, Texas, Electric and Gas, Series A 5.000 02/01/2014 250,000 221,653
State of Texas, General Obligation, Series B 5.700 12/01/2014 250,000 232,428
State of Texas, Veterans Housing Assistance, Series
1992, General Obligation 6.050 12/01/2012 2,695,000 2,733,242
Tarrant County, Texas, Housing Finance Corp., Series
A (MBIA) (effective yield 7.40%) (a) 0.000 09/15/2016 6,415,000 1,688,107
Texas Housing Agency, Residential Development 8.400 01/01/2021 2,790,000 2,929,472
Texas Municipal Power Agency Revenue (MBIA)
(effective yield 6.95%) (a) 0.000 09/01/2013 12,500,000 4,132,375
(continued on next page)
19
<PAGE>
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
TEXAS (continued)
Texas Municipal Power Agency, Refunding Bonds (MBIA) 5.250% 09/01/2012 $ 175,000 $ 162,241
Texas National Research Laboratory Commission,
Financing Corp. Lease Revenue 6.950 12/01/2012 9,500,000 10,618,815
Texas State 6.058 09/30/2011 3,000,000 3,123,720
Titus County, Texas, Water District #1, Southwest
Electric Power 8.200 08/01/2011 5,500,000 6,297,940
Tomball, Texas, Hospital Authority, Tomball Regional
Hospital 6.125 07/01/2023 3,500,000 3,101,910
Tomball, Texas, Hospital Authority, Tomball Regional
Hospital 6.100 07/01/2008 1,860,000 1,753,366
Travis County, Texas Health Facilities Corp.,
Daughters Of Charity 6.000 11/15/2022 2,000,000 1,934,760
University of Texas, University Revenue, Series B 6.750 08/15/2013 2,000,000 2,135,980
UTAH
Intermountain Power Agency, Utah, Power Supply 7.750 07/01/2020 24,000,000 26,188,560
Intermountain Power Agency, Utah, Power Supply (ETM)
(effective yield 6.80%) (a) 0.000 07/01/2020 3,000,000 438,120
Intermountain Power Agency, Utah, Power Supply
(effective yield 6.25%) (a) 0.000 07/01/2012 20,350,000 18,220,983
Intermountain Power Agency, Utah, Power Supply,
Series A (effective yield 7.09%) (a) 0.000 07/01/2004 8,000,000 4,933,120
Intermountain Power Agency, Utah, Special Obligation 7.875 07/01/2014 4,210,000 4,409,554
Utah State Housing Finance Agency, Single Family
Mortgage 10.750 07/01/2008 30,000 30,693
Utah State Housing Finance Agency, Single Family
Mortgage, Series C 2 7.950 07/01/2010 490,000 525,089
VIRGINIA
Chesapeake, Virginia, Hospital Authority Facilities,
First Mortgage Revenue (MBIA) 5.250 07/01/2018 2,000,000 1,811,700
Loudoun County, Virginia, Sanitation Authority,
Water and Sewer Revenue (FGIC) 6.250 01/01/2016 2,000,000 2,055,080
Pittsylvania County, Virginia, Industrial
Development, Series A (06/01/1994--$1,000,000) (b) 7.500 01/01/2014 1,000,000 1,031,710
Virginia State Housing Development Authority,
Residential Mortgage, Series B (effective yield
9.97%) (a) 0.000 09/01/2014 590,000 82,346
WASHINGTON
Washington State Health Care Facilities Authority,
Multi-Care Medical Center of Tacoma (FGIC) 7.875 08/15/2011 1,300,000 1,420,289
WISCONSIN
Wisconsin Health and Education Facilities Authority,
Bellin Memorial Hospital, Inc. (Pre-refunded)
(AMBAC) 7.625 04/01/2019 5,000,000 5,616,000
See Notes to Schedule of Investments.
20
<PAGE>
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------- ---------- ---------- ---------- ------------
WISCONSIN (continued)
Wisconsin Housing and Economic Development
Authority, Home Ownership 8.000% 03/01/2021 $2,160,000 $ 2,261,347
WYOMING
Wyoming Community Development Authority, Single
Family Mortgage, Series B 8.125 06/01/2021 1,765,000 1,857,768
----------------------------------------------------- ---------- ---------- ---------- ------------
TOTAL MUNICIPAL BONDS (Cost--$1,125,218,185) 1,172,603,716
----------------------------------------------------- ---------- ---------- ---------- ------------
TEMPORARY TAX-EXEMPT INVESTMENTS (3.5%)
Arkansas State Development Finance Authority 4.000% 12/01/2015 1,000,000 1,000,000
Burke County, Georgia, Development Authority,
Pollution Control, Oglethorpe Power Corp. 4.200 01/01/2016 1,300,000 1,300,000
California State Revenue, Series C 5.750 04/25/1996 7,000,000 7,111,437
Charleston County, South Carolina, Industrial
Revenue, Massey Coal Term, South Carolina Corp. 4.100 01/01/2007 1,000,000 1,000,000
Dade County, Florida, Water and Sewer Revenue 4.200 10/05/2022 355,000 355,000
Indian Trace Community Development District, Florida 4.150 11/01/1999 4,280,000 4,280,000
Iowa School Corps, Warrants Certificates, Series B 5.750 02/01/1996 1,500,000 1,506,250
Lincoln County, Wyoming, Pollution Control, Exxon
Project B 4.250 11/01/2014 1,300,000 1,300,000
Lincoln County, Wyoming, Pollution Control, Project C 4.250 11/01/2014 4,000,000 4,000,000
Los Angelels County, California, Metropolitan
Transit, Union Station Gateway 4.050 08/01/2026 1,000,000 1,000,000
Los Angeles, California, Multi Family Revenue, Loans
to Lender Program A 4.200 08/01/2036 1,000,000 1,000,000
Los Angeles, California, Multi Family Revenue, Loans
to Lender Program A 4.200 04/25/1996 2,000,000 2,000,000
Louisiana Public Facilities Authority Revenue,
Kenner Hotel, Ltd. 4.350 06/15/2023 1,400,000 1,400,000
Louisiana State, Offshore 4.100 09/01/2006 900,000 900,000
New York City Municipal Water Finance Authority 4.250 06/15/2023 2,000,000 2,000,000
New York, New York, Series B 4.500 10/01/2021 3,700,000 3,700,000
New York State Power Authority, Series Y 4.050 01/01/2003 690,000 690,000
San Diego, California, Transportation Commission,
Series A 4.050 04/01/2008 90,000 90,000
Sayre, Pennsylvania, Health Care Facilities
Authority Revenue, Series K 3.950 12/01/2020 10,000 10,000
Snohomish County Water, Public Utilities, Generation
Systems 4.200 01/01/2025 5,000,000 5,000,000
Washington State Health Care Facilities, Providence B 4.100 10/01/2005 2,100,000 2,100,000
----------------------------------------------------- ---------- ---------- ---------- ------------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (Cost--$41,742,687)(C) 41,742,687
----------------------------------------------------------------------------------------------- ------------
TOTAL INVESTMENTS (Cost--$1,166,960,872) 1,214,346,403
OTHER ASSETS AND LIABILITIES--NET (-0.1%) (853,185)
----------------------------------------------------------------------------------------------- ------------
NET ASSETS (100.0%) $1,213,493,218
----------------------------------------------------------------------------------------------- ------------
(continued on next page)
</TABLE>
21
<PAGE>
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--June 30, 1995
(Unaudited)
Notes to Schedule of Investments:
(a) Effective yield (calculated at the date of purchase) is the yield at
which the bond accretes on an annual basis until maturity.
(b) All or a portion of these securities are restricted (i.e., securities
which may not be publicly sold without registration under the Federal
Securities Act of 1933) which are valued at fair value in the opinion of
management-in the case of bonds, at estimated value considering quality,
coupon, term, call feature, yield to maturity of the security and similar
issues which are actively traded, sinking fund, marketability, plus
adjustment, if any, for equity features or other special factors. The Fund
may make investments in an amount up to 15% of the value of the Fund's net
assets in such securities. Dates of acquisition and costs are set forth in
parentheses after the titles of restricted securities. On the date of
acquisition there was no market quotation or similar securities and the above
securities were valued at acquisition costs. At June 30, 1995, the fair value
of these restricted securities was $18,895,990 (1.56% of net assets). The
Fund will not pay the costs of disposition of the above restricted securities
other than ordinary brokerage fees, if any.
(c) Security is a variable or floating rate instrument with periodic demand
features. The Fund is entitled to full payment of principal and accrued
interest upon surrendering the security to the issuing agent according to the
terms of the demand features.
(d) At June 30, 1995, Bexar County, Texas, Health Facilities Development
Corp., Revenue Refunding, Incarnate Word Health Services, 9.500%, 11/01/2017,
par value $975,000 was pledged to cover margin requirements for open futures
contracts. (See Note 1 of Notes to Financial Statements.) At June 30, 1995,
the bonds pledged had a market value of $1,013,259. Information concerning
sales of futures contracts which were open as of June 30, 1995 is shown
below:
<TABLE>
<CAPTION>
Aggregate
Number Face Value Expiration
of of Date of Unrealized
Contracts Contracts Contracts Appreciation
- --------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Municipal
Bond
Futures 197 $22,650,387 September 1995 $321,668
=========== =============
- --------- ----------- ----------- --------------- -------------
</TABLE>
Legend of Portfolio Abbreviations:
AMBAC--American Municipal Bond Assurance Corp.
ETM--Escrow to Maturity
FGIC--Federal Guaranty Insurance Co.
FNMA--Federal National Mortgage Association
FSA--Financial Security Assurance
GNMA--Government National Mortgage Association
LOC--Letter of Credit
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
22
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
June 30, ------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990(c)
- --------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of period $ 7.10 $ 8.12 $ 8.04 $ 8.07 $ 7.90 $ 8.06
------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.21 0.37 0.39 0.46 0.46 0.52
Net realized and unrealized
gain (loss) on investments 0.44 (0.96) 0.48 0.12 0.36 (0.01)
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.65 (0.59) 0.87 0.58 0.82 0.51
- --------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.21) (0.37) (0.39) (0.46) (0.46) (0.52)
In excess of net investment
income (a) 0 (0.06) (0.06) (0.04) (0.07) (0.03)
Net realized gain on
investments 0 0 (0.33) (0.11) (0.12) (0.12)
In excess of net realized
gain on investments (a) 0 0 (0.01) 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (0.21) (0.43) (0.79) (0.61) (0.65) (0.67)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value
end of period $ 7.54 $ 7.10 $ 8.12 $ 8.04 $ 8.07 $ 7.90
- --------------------------------------------------------------------------------------------------------------------------
Total Return(b) 9.15% (7.34%) 11.15% 7.55% 10.80% 6.66%
Ratios/supplemental data
Ratios to average net assets:
Total expenses (c) 0.93%(d) 1.55% 1.66% 1.38% 1.75% 1.18%
Net investment income (c) 5.62%(d) 4.92% 4.72% 5.71% 5.78% 6.54%
Portfolio turnover rate 32% 84% 76% 78% 77% 64%
Net assets, end of period
(thousands) $1,213,493 $1,197,727 $1,548,503 $1,453,199 $1,146,185 $1,060,826
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Effective January 31, 1990 the Fund adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gains and Return of Capital Distributions by Investment Companies. As
a result, distribution amounts exceeding book basis net investment income (or
tax basis net income on a temporary basis) are presented as "Distributions in
excess of net investment income." Similarly, capital gain distributions in
excess of book basis capital gains (or tax basis gains on a temporary basis)
are presented as "Distributions in excess of realized gain." Prior to the
adoption of the Statement of Position, distribution amounts exceeding book
basis net investment income were presented as "Distributions from paid-in
capital."
(b) Excluding applicable sales charges.
(c) Calculation based on average shares outstanding.
(d) Annualized.
See Notes to Financial Statements.
23
<PAGE>
Keystone Tax Free Fund
STATEMENT OF ASSETS AND LIABILITIES--
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments at market value (identified cost--
$1,166,960,872) (Note 1) $1,214,346,403
Mark-to-market on futures contracts 9,663
Cash 273,344
Receivable for:
Fund shares sold 432,878
Interest 22,385,020
Other assets 100,602
- -------------------------------------------------- -------------
Total assets 1,237,547,910
- -------------------------------------------------- -------------
Liabilities (Notes 2, 4, and 5):
Payable for:
Distributions to shareholders 5,580,264
Investments purchased 10,935,867
Fund shares redeemed 7,358,335
Futures variation margin 111,836
Due to related parties 56,657
Other accrued expenses 11,733
- -------------------------------------------------- -------------
Total liabilities 24,054,692
- -------------------------------------------------- -------------
Net assets $1,213,493,218
- -------------------------------------------------- -------------
Net assets represented by (Note 1):
Paid-in capital $1,206,391,832
Accumulated distributions in excess of net
investment income (3,581,343)
Accumulated net realized gain (loss) on
investments and futures contracts (37,034,132)
Net unrealized appreciation (depreciation) on:
Investments 47,385,531
Futures contracts 331,330
- -------------------------------------------------- -------------
Total net assets applicable to outstanding
shares of beneficial interest ($7.54 per share
on 160,963,692 shares outstanding) (Note 2) $1,213,493,218
- -------------------------------------------------- -------------
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS--
Six Months Ended June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income (Note 1):
Interest $ 40,026,273
--------------------------------------- ---------- ----------
Expenses (Notes 2 and 4):
Investment management fee and
administrative services $ 3,419,122
Accounting services 9,919
Trustees' fees and expenses 28,138
Distribution Plan expenses 2,222,307
--------------------------------------- ---------- ----------
Total expenses 5,679,486
--------------------------------------- ---------- ----------
Net investment income 34,346,787
--------------------------------------- ---------- ----------
Net realized and unrealized gain (loss)
on investments and futures contracts
(Notes 1 and 3):
Realized gain (loss) on:
Investments 3,356,801
Closed futures contracts (2,741,582)
--------------------------------------- ---------- ----------
Net realized gain (loss) on
investments and futures contracts 615,219
--------------------------------------- ---------- ----------
Net change in unrealized appreciation
(depreciation) on:
Investments 73,057,683
Open futures contracts 321,668
--------------------------------------- ---------- ----------
Net gain (loss) on investments and
futures contracts 73,994,570
--------------------------------------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations $108,341,357
--------------------------------------- ---------- ----------
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, December 31,
1995 1994
- --------------------------------------------------------------------- ----------- ----------------
(Unaudited)
<S> <C> <C>
Operations: (Notes 1 and 3)
Net investment income $ 34,346,787 $ 67,393,387
Net realized gain (loss) on investments and futures contracts 615,219 (37,849,158)
Net change in unrealized appreciation (depreciation) 73,379,351 (139,738,811)
- --------------------------------------------------------------------- ----------- ------------
Net increase (decrease) in net assets resulting from operations 108,341,357 (110,194,582)
- --------------------------------------------------------------------- ----------- ------------
Distributions to shareholders from (Notes 1 and 5):
Net investment income (34,011,399) (68,740,949)
In excess of net investment income 0 (10,297,613)
- --------------------------------------------------------------------- ---------- ------------
Total distributions to shareholders (34,011,399) (79,038,562)
- --------------------------------------------------------------------- ---------- ------------
Capital share transactions (Note 2):
Proceeds from shares sold 76,562,006 126,813,101
Payments for shares redeemed (152,783,542) (326,066,785)
Net asset value of shares issued in reinvestment of distributions
from:
Net investment income and in excess of net investment income 17,657,900 37,710,385
- --------------------------------------------------------------------- ---------- ------------
Net increase (decrease) in net assets resulting from capital
share transactions (58,563,636) (161,543,299)
- --------------------------------------------------------------------- ---------- ------------
Total increase (decrease) in net assets 15,766,322 (350,776,443)
Net assets:
Beginning of period 1,197,726,896 1,548,503,339
- --------------------------------------------------------------------- ------------- -------------
End of period [Including undistributed net investment income
(accumulated distributions in excess of net investment income) as
follows: June, 1995-($3,581,343) and December, 1994-($3,916,731)] $1,213,493,218 $1,197,726,896
- --------------------------------------------------------------------- ------------- -------------
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
Keystone Tax Free Fund
NOTES TO FINANCIAL STATEMENTS
(1.) Significant Accounting Policies
Keystone Tax Free Fund (the "Fund") is a Massachusetts business trust for
which Keystone Management, Inc. ("KMI") is the Investment Manager and
Keystone Investment Management Company ("Keystone") (formerly Keystone
Custodian Funds, Inc.) is the Investment Adviser. The Fund is registered
under the Investment Company Act of 1940 as a diversified, open-end
investment company.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc.
("KII") (formerly Keystone Group, Inc.), a Delaware corporation. KII is
privately owned by an investor group consisting of members of current and
former management of Keystone. Keystone Investor Resource Center, Inc.
("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's transfer
agent.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Tax-exempt bonds are stated on the basis of valuations provided by a
pricing service, approved by the Board of Trustees, that uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Non-tax-exempt securities for which market
quotations are readily available are valued at the price quoted which, in the
opinion of the Board of Trustees or their representative, most nearly
represents their market value.
Short-term investments which are purchased with maturities of sixty days
or less are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount) which when combined with
accrued interest approximates market. Short-term investments maturing in more
than sixty days for which market quotations are readily available are valued
at current market value. Short-term investments maturing in more than sixty
days when purchased which are held on the sixtieth day prior to maturity are
valued at amortized cost (market value on the sixtieth day adjusted for
amortization of premium or accretion of discount) which when combined with
accrued interest approximates market. All other securities and other assets
are valued at fair value as determined in good faith using methods prescribed
by the Board of Trustees.
B. A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security, financial instrument, or, in the
case of a stock index, cash at a set price on a future date. Upon entering
into a futures contract, the Fund is required to deposit with a broker an
amount ("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin")
are made or received by the Fund each day, as the value of the underlying
instrument or index fluctuates, and are recorded for book purposes as
unrealized gains or losses by the Fund. For federal tax purposes, any futures
contracts which remain open at fiscal year-end are marked-to-market and the
resultant net gain or loss is included in federal taxable income. In addition
to market risk the Fund is subject to the credit risk that the other party
will not complete the obligations of the contract.
C. Securities transactions are accounted for no later than one business day
after the trade date. Realized gains and losses are recorded on the
identified cost basis. Interest income is recorded on the accrual basis. All
premiums and original issue discounts are amortized/accreted for both
financial reporting and federal income tax purposes.
D. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under
26
<PAGE>
the Internal Revenue Code of 1986, as amended ("Internal Revenue Code").
Thus, the Fund expects to be relieved of any federal income tax liability by
distributing all of its tax basis income and net capital gains, if any, to
its shareholders. The Fund intends to avoid excise tax liability by making
the required distributions under the Internal Revenue Code.
E. When the Fund enters into a repurchase agreement (a purchase of securities
whereby the seller agrees to repurchase the securities at a mutually agreed
upon date and price) the repurchase price of the securities will generally
equal the amount paid by the Fund plus a negotiated interest amount. The
seller under the repurchase agreement will be required to provide securities
("collateral") to the Fund whose value will be maintained at an amount not
less than the repurchase price, and which generally will be maintained at
101% of the repurchase price. The Fund monitors the value of collateral on a
daily basis, and if the value of collateral falls below required levels, the
Fund intends to seek additional collateral from the seller or terminate the
repurchase agreement. If the seller defaults, the Fund would suffer a loss to
the extent that the proceeds from the sale of the underlying securities were
less than the repurchase price. Any such loss would be increased by any cost
incurred on disposing of such securities. If bankruptcy proceedings are
commenced against the seller under the repurchase agreement, the realization
on the collateral may be delayed or limited. Repurchase agreements entered
into by the Fund will be limited to transactions with dealers or domestic
banks believed to present minimal credit risks, and the Fund will take
constructive receipt of all securities underlying repurchase agreements until
such agreements expire.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone Funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by
U.S. Treasury and/or Federal Agency obligations.
F. The Fund distributes net investment income to shareholders monthly and net
capital gains, if any, annually. Distributions from net investment income are
determined in accordance with income tax regulations. Dividends from net
investment income can exceed the Fund's book basis net investment income.
Effective January 1, 1993, the Fund adopted Statement of Position 93-2:
"Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies." As
a result, the Fund changed the financial statement classification of
distributions to shareholders to better disclose the differences between
financial statement amounts available for distribution and amounts
distributed to comply with income tax regulations. The significant difference
between financial statement amounts available for distribution and
distributions made in accordance with income tax regulations is due to the
difference in the treatment of 12b-1 Distribution Plan charges for financial
statement and federal tax purposes.
(2.) Capital Share Transactions
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest with no par value. Transactions in shares of
the Fund were as follows:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, December 31,
1995 1994
- -------------------------- ------------ --------------
<S> <C> <C>
Shares sold 10,244,467 16,871,171
Shares redeemed (20,489,621) (43,806,889)
Shares issued in
reinvestment of
dividends and
distributions 2,402,803 5,031,307
- -------------------------- ---------- ------------
Net increase (decrease) (7,842,351) (21,904,411)
- -------------------------- ---------- ------------
</TABLE>
27
<PAGE>
Keystone Tax Free Fund
The Fund bears some of the costs of selling its shares under a
Distribution Plan adopted pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The Distribution Plan provides that the Fund may incur certain
expenses which may not exceed a maximum amount equal to 0.3125% of the Fund's
average daily net assets for any quarter occurring after the inception of the
Distribution Plan. Under the Distribution Plan, the Fund pays Keystone
Investment Distributors Company ("KIDC") (formerly Keystone Distributors,
Inc.), the principal underwriter and a wholly-owned subsidiary of Keystone,
amounts which in total may not exceed the Distribution Plan maximum.
In connection with the Distribution Plan and subject to the limitations
discussed below, Fund shares are offered for sale at net asset value without
any initial sales charge. From the amounts received by KIDC in connection
with the Distribution Plan, and subject to the limitations discussed below,
KIDC generally pays brokers or others a commission equal to 3% of the price
paid to the Fund for each sale of Fund shares as well as a shareholder
service fee at a rate of 0.25% per annum of the net asset value of the shares
sold by such brokers or others and remaining outstanding on the books of the
Fund for specified periods.
To the extent Fund shares purchased prior to July 8, 1992 are redeemed
within four calendar years of original issuance, the Fund may be eligible to
receive a deferred sales charge from the investor as partial reimbursement
for sales commissions previously paid on those shares. This charge is based
on declining rates, which begin at 4.0%, applied to the lesser of the net
asset value of shares redeemed or the total cost of such shares.
Since July 8, 1992, contingent deferred sales charges applicable to shares
of the fund issued after January 1, 1992 have, to the extent permitted by the
NASD Rule, been paid to KIDC rather than to the Fund. During the six months
ended June 30, 1995, KIDC received $103,482 in contingent deferred sales
charges.
A rule of the National Association of Securities Dealers, Inc. ("NASD
Rule") limits the annual expenditures, which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay such distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD Rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales since the inception of the Fund's 12b-1
Distribution Plan, plus interest at the prime rate plus 1% on unpaid amounts
thereof (less any contingent deferred sales charges paid by the shareholders
to KIDC).
KIDC intends, but is not obligated, to continue to pay or accrue
distribution charges which exceed current annual payments permitted to be
received by KIDC from the Fund. KIDC intends to seek full payment of such
charges from the Fund (together with annual interest thereon at the prime
rate plus one percent) at such time in the future as, and to the extent that,
payment thereof by the Fund would be within permitted limits. KIDC currently
intends to seek payment of interest only on such charges paid or accrued by
KIDC subsequent to January 1, 1992.
During the six months ended June 30, 1995, the Fund recovered $379,549 in
contingent deferred sales charges. During the six months, the Fund paid KIDC
$2,601,857 under the Distribution Plan. The amount paid by the Fund under its
Distribution Plan, net of deferred sales charges, was $2,222,308 (0.36% of
the Fund's average daily net assets, on an annualized basis). During the
year, KIDC received $505,213, after payments of commissions on new sales and
service fees to dealers and others of $2,200,126.
(3.) Securities Transactions
As of December 31, 1994, the Fund had a capital loss carryover for Federal
income tax purposes of approximately $25,307,000 which expires in 2002.
28
<PAGE>
For the six months ended June 30, 1995, purchases and sales of investment
securities were as follows:
<TABLE>
<CAPTION>
Cost of Proceeds
Purchases from Sales
- ------------------------ ----------- -------------
<S> <C> <C>
Tax-exempt investments $377,261,316 $462,240,324
Short-term commercial
and tax-exempt notes 273,225,048 233,529,062
- ------------------------ ----------- -----------
$650,486,364 $695,769,386
- ------------------------ ----------- -----------
</TABLE>
(4.) Investment Management and Transactions with Affiliates
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund, as well as certain additional operating services, facilities and
supplies. In return, KMI is paid monthly, (i) a management fee calculated
daily at a rate of 2.0% of the Fund's gross investment income plus an amount
determined by applying percentage rates starting at 0.50% and declining as
net assets increase, to 0.25% per annum, to the net asset value of the Fund,
and (ii) an amount equal to KMI's reimbursable expenses accrued during the
year in providing such additional services. KMI has entered into an
Investment Advisory Agreement with Keystone under which Keystone provides
investment advisory and management services to the Fund and receives for its
services an annual fee representing 85% of the management fee received by
KMI.
During the six months ended June 30, 1995, the Fund paid or accrued to KMI
investment management and administrative services fees of $3,457,179.
Included in this amount is the management fee of $2,695,622, which
represented 0.44% of the Fund's average net assets. Of such management fee
paid to KMI, $2,291,279 was paid to Keystone for its services to the Fund.
Also included in the total investment management and administrative
services fee paid by the Fund were the following approximate amounts incurred
by KMI (and reimbursed by the Fund) in providing or obtaining for the Fund
the additional operating services, facilities and supplies required by the
Agreement: transfer agent fees, $489,466; audit and legal fees, $24,259;
custodian fees, $132,730; printing and supplies, $17,607; registration fees,
$18,198; and other, $41,240.
During the six months ended June 30, 1995, the Fund paid or accrued to KII
$9,919 for certain accounting services and to KIRC $489,466 for transfer
agent fees. This amount for transfer agent fees services is included in the
payments made by KMI described in the preceding paragraph.
(5.) Distribution to Shareholders
The net investment income of the Fund (interest income accrued as earned,
less expenses of the Fund) is determined as of the normal close of trading on
the New York Stock Exchange each business day on which the exchange is open.
The net investment income so determined each day is declared as a dividend to
shareholders of record at the time of such determination and is distributed
promptly after the end of each calendar month. Any net realized short-term
and long-term capital gains in excess of carried-over losses, will be
distributed annually. All distributions of net investment income will be paid
in cash unless the shareholder has directed that they be reinvested, in which
case such reinvestment will be at the net asset value on the last business
day of the month in which declared. Any distributions of capital gains will
be reinvested in additional shares of the Fund at net asset value on the
record date of the month in which declared unless the shareholder has
specified that they wish to receive cash. Shares acquired through
reinvestment of net investment income or capital gains are not subject to
contingent deferred sales charges.
29
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK.
<PAGE>
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free,
1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your
Keystone account is available 24 hours a day through KARL. To speak with a
Shareholder Services representative about your account, call toll-free
1-800-343-2898 between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan
investors should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account
at any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net
asset value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same
Keystone family quickly and easily for a nominal service fee. KARL gives you
the added ability to move your money any time of day, any day of the week.
Keystone offers a variety of funds with different investment objectives for
your changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to
move money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the
check writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours
a day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined
contribution plans. For more information, please call Retirement Plan
Services, toll-free at 1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
<PAGE>
[Cover]
KEYSTONE
FAMILY OF FUNDS
*
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)
Tax Exempt Trust
Tax Free Fund
This report was prepared primarily for the information of the Fund's
shareholders. Its use for other purposes is authorized only when it is
preceded or accompanied by the prospectus, describing all fees, charges and
other important facts about the Fund.
[Keystone logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
TFF-SAR-8/95
36M
KEYSTONE
[picture of mother and child
on porch with flag]
TAX FREE
FUND
SEMIANNUAL REPORT
JUNE 30, 1995
