PAGE 1
Keystone Tax Free Fund
Seeks current income, exempt from federal income taxes, while preserving capital
by investing in high quality municipal bonds.
Dear Shareholder:
We are writing to report to you on activities of Keystone Tax Free Fund for
the twelve-month period which ended December 31, 1995.
Performance
Your Fund's strong performance during the fiscal year represented a
significant recovery from the weak municipal bond market environment of 1994.
For the twelve-month period which ended December 31, 1995, your Fund returned
16.61%, including reinvestment of dividends. We were pleased with this
performance which resulted in significant price appreciation for
shareholders. This return was in line with municipal bond benchmarks during
the period. We attribute that performance to our careful credit analysis and
the positive performance of the municipal bond market in 1995.
Municipal bond market rebound
This was an unusually strong year for municipal bonds. After an unsettled
market in 1994, patience rewarded municipal bond investors in 1995. Interest
rates declined and bond prices rose as the slow growth economy kept inflation
under control. This 'soft landing' for the economy created a very positive
environment for bond investors, resulting in strong one-year total returns.
The Lehman Municipal Bond Index--a widely recognized benchmark of municipal
bond performance--returned 17.46% for the twelve-month period which ended
December 31, 1995.
The efforts of the Federal Reserve Board in 1994 to engineer a soft landing
for the U.S. economy appeared to succeed in 1995. While economic growth
slowed, the fiscal condition of many municipalities improved overall. Limited
supply also had a positive influence on the municipal bond market. New issue
supply continued to decline from $298 billion in 1993 to approximately half
that amount in 1995.
Portfolio strategy
During the twelve-month period, we emphasized bonds that we believed would
benefit from a declining interest rate environment. We concentrated on
non-callable, discount and zero coupon bonds which typically tend to perform
better when rates decline. During the second half of 1995, we lengthened your
Fund's average maturity from 18 years on June 30, 1995 to 20 years on
December 31, 1995. We continued to focus on bonds with maturities in the
20-year area for their attractive income and lower risk characteristics than
longer term bonds. We also maintained an average portfolio quality of AA as
of December 31, 1995.
Relatively attractive values
Despite the strong performance of municipal bonds in 1995, they remained
attractive versus comparable U.S. Treasury securities. In fact, yields on
AA-rated municipal bonds averaged about 92% of the yields on comparable
long-term U.S. Treasury bonds, a historically high level.(1) This meant that
many investors could obtain significantly better yields from municipal bonds
than Treasuries on an after-tax basis.
(1) Source: Keystone Investments, Inc. Based on the average yield of a
selection of 30-year AA-rated municipal bonds compared to the yield on a
30-year U.S. Treasury bond yield on December 31, 1995.
<PAGE>
PAGE 2
Keystone Tax Free Fund
Outlook
We anticipate a continuation of the positive environment for municipal bonds
over the next twelve months. Interest rates should trend down as the economy
continues to slow and level off. However, we do not expect a recession in
1996. A slow growth environment could result in some price appreciation for
shareholders, but we believe most of the returns should come from income.
Municipal bond supply should remain tight in 1996. With the possibility of
rising demand, we think these factors should continue to provide positive
support for municipal bond prices and your Fund.
We encourage you to maintain a long-term perspective about your Fund. Over
time, investment returns have tended to even out, rewarding patient municipal
bond investors who are able to tolerate short-term price fluctuations. This
has been particularly true for investors over the past couple of years. In
all market environments, we will continue to manage Keystone Tax Free Fund to
seek valuable tax-free income from a portfolio of quality municipal
obligations.(2)
We appreciate your continued support of Keystone funds. If you have any
questions or comments, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman and President
Keystone Investments, Inc.
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
February 1996
(2) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
[Photo of Albert H. Elfner, III] [Photo of George S. Bissell]
Albert H. Elfner, III George S. Bissell
Keystone Introduces Investment Insight Line for Shareholders
Now you can keep up-to-date on your fund's current strategy and outlook by
calling Keystone Investment Insight Line. You can hear senior portfolio
manager Betsy Blacher discuss her latest strategy for Keystone's tax- free
funds. You can also listen to Keystone's overall market outlook from James
McCall, chief investment officer and other fund updates. The service is
available 24 hours a day, seven days a week and updated at least monthly.
<TABLE>
<CAPTION>
<S> <C>
Keystone Investment Insight Line 1-800-346-3858, Press 2
Keystone Tax Free Fund Update Press 4
</TABLE>
<PAGE>
PAGE 3
A Discussion With
Your Fund Manager
Betsy A. Blacher is senior portfolio manager of your Fund and leads
Keystone's municipal bond investment team. Ms. Blacher is a professional with
16 years of investment experience specializing in municipal bonds. She holds
a Bachelor's degree from Wheaton College in economics and sociology.
Together, with portfolio managers Daniel Rabasco and George Kimball, analyst
David Moore, and trader Craig Kasap, the team evaluates credit quality and
the economic environment in selecting municipal bonds for Keystone tax free
funds.
Q What does the Fund offer investors?
A The Fund is designed for tax-sensitive investors. It seeks consistent,
attractive income that is exempt from federal income tax.(3) The Fund offers
professional management and diversification by investing in investment grade
municipal bonds. We manage the Fund with careful attention to credit quality
and financial stability.
Q How did municipal bonds perform over the past year?
A Municipal bonds rebounded strongly as a slowing economy reduced the threat
of higher interest rates and inflation. Most bond holders more than recovered
from their losses in 1994 and recorded double-digit total returns. This was a
reversal from 1994 when yields rose and bond prices declined. As economic
growth moderated at the start of 1995, municipal bonds rallied resulting in
unusually positive total returns.
Q How did the Fund perform?
A The Fund generated returns that paralleled the strong performance of the
municipal bond market. We were pleased with the Fund's unusually good
performance and attribute it to our careful credit analysis, sector selection
and evaluation of relative values.
Q What types of bonds did you emphasize?
A At the beginning of 1995 we expected economic growth to moderate and
interest rates to decline. So, we emphasized bonds that we expected to
benefit from declining rates: non-callable, discount and zero coupon bonds.
Since callable bonds are likely to be bought back by the issuer in this type
of environment, we emphasized noncallable bonds to preserve income as rates
declined. At the same time, these bonds became expensive relative to other
municipal bonds and this contributed to the Fund's price appreciation.
Discount bonds are sold at a discount from par, or value at maturity.
Historically these bonds have tended to provide more price appreciation in a
falling rate environment than bonds priced close to or above par.
Zero coupon bonds represented a small portion of the portfolio at about 4%
of net assets. But, these bonds were important contributors to the Fund's
strong price recovery. Because zero's pay income at maturity, they
Fund Profile
Objective: Seeks current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Commencement of investment operations: April 12, 1977
Average maturity: 20 years
Net assets: $1,204 million
Newspaper symbol: TxETr
(3) For investors in certain tax situations, a portion of income may be
subject to the federal alternative minimum tax (AMT).
<PAGE>
PAGE 4
Keystone Tax Free Fund
have historically tended to be the most sensitive to changes in interest
rates. As rates declined, they were among the best performing holdings in the
portfolio.
In evaluating bonds for the Fund, Keystone
looks for . . .
(bullet) Strong credit ratings; bonds rated in the top 4 categories (AAA, AA,
A, BBB)
(bullet) Responsible fiscal policies
(bullet) Solid financial positions
(bullet) Attractive values
Keystone's municipal bond team also evaluates local economic
conditions, the state legislative climate, the taxing power of the
issuer and expected cash flows from the project.
We were pleased with the results of this strategy which helped the Fund
participate in the strong recovery of municipal bonds this year.
Q Total returns were impressive, but municipal bond yields declined. Why?
A Yields declined for nearly every municipal bond investor, including
Keystone Tax Free Fund. Slower economic growth lessens the potential for
higher inflation which reduces net bond yields. We held a number of high
coupon bonds and attempted to lock in income by emphasizing selected
non-callable bonds. While the Fund's income still declined, we believe the
portfolio's holdings of these bonds helped the portfolio to maintain income
in a declining rate environment.
Q Did talk about a 'flat tax' in Washington affect municipal bonds?
A The 'flat tax' proposals have introduced an element of uncertainty into
the municipal bond market. There are a number of proposals which would remove
the tax advantage of municipal bonds. As the debate on the flat tax
continues, we will closely monitor its development.
Q What is your outlook?
A We continue to be cautiously optimistic about the municipal bond market.
We expect the economy to continue slowing to a sustainable, non-inflationary
level. This should provide the potential for stable-to-declining interest
rates over the next six months. In particular, we expect short-term interest
rates to decline further, which could result in some price appreciation.
Q Why do you think growth will remain slow?
A Demographics are important to economic growth. With new home sales and
new family formation slowing, we think economic growth should remain moderate
compared to the 1980s and early 1990s. In addition, world economic growth is
a factor. In Europe, growth has been slow, even with cuts in interest rates.
Because U.S. growth is increasingly dependent on world growth, economic
growth should not be a threat to bond investors for some time. Combined with
a proposal to balance the federal budget, these could be strong positives for
municipal bond investors over the long term.
----------------------------------------------------------------------------
[Pie Chart--Plot Points]
Portfolio Quality Summary
as of December 31, 1995
S&P Rating(4)
AAA (46%)
AA (19%)
A (14%)
BBB (12%)
Not Rated (7%)
Other(5) (2%)
Average portfolio quality: AA
(percentage of portfolio assets)
(4) Where Standard & Poor's (S&P) ratings were not available, we have used
ratings from Moody's Investor Service, Inc., Fitch Investor's Service,
Inc. or ratings assigned by another nationally recognized statistical
rating organization.
(5) Includes short-term obligations.
<PAGE>
PAGE 5
-----------------------------------------------------------------------------
[Bar Chart--Plot Points]
Relatively Attractive Municipal Bond Yields(6)
as of December 31, 1995
Municipal Bonds 5.45%
U.S. Treasury Bond 5.95%
Municpal bond yields recently equalled 92% of the yield on a comparable U.S.
Treasury bond.
-----------------------------------------------------------------------------
Q What should shareholders expect?
A We think shareholders should not expect a repeat of the unusually positive
performance in 1995; investors should look forward to returns to come
primarily from income rather than price appreciation in the months ahead.
Q Are municipal bond funds still a good value?
A Even after such a great year, we believe municipal bond yields are still
very attractive values compared to taxable bond yields. On December 31, 1995,
the yield on a 30-year AA-rated municipal bond equaled 92% of the yield on a
comparable U.S. Treasury bond. As rates declined, taxable bond yields
declined more than tax free yields. This increased the attractiveness of
municipal bonds compared to taxable bonds. As a result, the after-tax yield
of municipal bonds remains relatively high by historical standards.
Tax-Equivalent Yields
Federal Tax Bracket(7)
-------------------------------------
31% 36% 39.6%
-------------------------------------
Yield Taxable Equivalent Yield
-------------------------------------
4.5% 6.5% 7.0% 7.5%
5.0% 7.2% 7.8% 8.3%
5.5% 8.0% 8.6% 9.1%
-------------------------------------
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
(7) The table is based on federal tax brackets. The 31% bracket includes
single filers earning $56,550-117,950 and joint filers earning
$94,250-143,600; the 36% bracket includes single filers earning
$117,951-256,500 and joint filers earning $143,601-256,500; the 39.6%
bracket includes single and joint filers earning over $256,500. Yields
are hypothetical and do not represent the returns of any particular
investment.
|Bk
This column is intended to answer
questions about your Fund. If you have a question
you would like answered, please write to:
Keystone Investment Distributors, Inc.,
Attn: Shareholder Communications, 22nd Floor,
200 Berkeley Street, Boston, Massachusetts 02116-5034.
(6) Source: Keystone Investments, Inc. Based on the average yield of a
selection of 30-year AA-rated municipal bonds compared to the yield on
the 30-year U.S. Treasury bond on December 31, 1995.
<PAGE>
PAGE 6
Keystone Tax Free Fund
Your Fund's Performance
-----------------------------------------------------------------------------
[Mountain Chart--Plot Points]
Growth of an investment in
Keystone Tax Free Fund
In Thousands
Initial Reinvested
Investment Distributions
12/85 10000 10000
10625 11826
12/87 9724 11810
9832 13096
12/89 9688 14290
9495 15241
12/91 9700 16888
9663 18162
12/93 9760 20189
8534 18707
12/95 9447 21815
Total Value: $21,815
A $10,000 investment in Keystone Tax Free Fund made on December 31, 1985 with
all distributions reinvested was worth $21,815 on December 31, 1995. Past
performance is no guarantee of future results.
-----------------------------------------------------------------------------
Twelve-Month Performance as of December 31, 1995
============================================================================
<TABLE>
<CAPTION>
<S> <C>
Total return* 16.61%
Net asset value 12/31/94 $ 7.10
12/31/95 $ 7.86
Dividends $ 0.39
Capital gains None
</TABLE>
* Before deduction of contingent deferred sales charge (CDSC).
Historical Record as of December 31, 1995
=============================================================================
<TABLE>
<CAPTION>
If you If you did
Cumulative total return redeemed not redeem
<S> <C> <C>
1-year 13.61% 16.61%
5-year 43.13% 43.13%
10-year 118.15% 118.15%
Average annual total return
1-year 13.61% 16.61%
5-year 7.44% 7.44%
10-year 8.11% 8.11%
</TABLE>
The "if you redeemed" returns reflect the deduction of the 3% CDSC 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.
<PAGE>
PAGE 7
Growth of an Investment
-----------------------------------------------------------------------------
[Line Chart--Plot Points]
Comparison of change in value of a $10,000 investment in Keystone Tax Free
Fund, the Lehman Municipal Bond Index and the Consumer Price Index.
In Thousands December 31, 1985 through December 31, 1995
Fund Average
Annual Total Return
---------------------------------
1 Year 5 Year 10 Year
13.61% 7.44% 8.11%
LMBI $24,204
Fund $21,815
CPI $14,053
Lehman Municipal
Fund Bond Index (LMBI) CPI
12/85 10000 10000 10000
11826 11932 10110
12/87 11810 12111 10558
13096 13339 11025
12/89 14290 14777 11537
15241 15855 12241
12/91 16888 17780 12617
18162 19348 12983
12/93 20189 21723 13339
18707 20606 13696
12/95 21815 24204 14053
== Fund -- Lehman Municipal Bond Index (LMBI) ++ Consumer Price Index
Past performance is no guarantee of future results. The one-year return
reflects the deduction of the Fund's 3% contingent deferred sales charges for
shares held for at least one year. CPI is through November 30, 1995.
-----------------------------------------------------------------------------
This chart graphically compares your Fund's total return performance to
certain investment indexes. It is the result of fund performance guidelines
issued by the Securities and Exchange Commission. The intent is to provide
investors with more information about their investment.
Components of the Chart
The chart is composed of several lines that represent the accumulated value
of an initial $10,000 investment for the period indicated. The lines
illustrate a hypothetical investment in:
1. Keystone Tax Free Fund
Your Fund seeks current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds. The return
is quoted after deducting sales charges (if applicable), fund expenses, and
transaction costs and assumes reinvestment of all distributions.
2. Lehman Municipal Bond Index (LMBI)
The LMBI is a broad-based, unmanaged market index of securities issued by
state and local governments. It represents the price change and coupon income
of several thousand securities with various maturities and qualities.
Securities are selected and compiled by Lehman Brothers, Inc. according to
criteria that may be unrelated to your Fund's investment objective.
3. Consumer Price Index (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable
benchmark for investors who seek to outperform increases in the cost of
living.
The indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate the indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help
you evaluate fund performance in conjunction with the other important
financial considerations such as safety, stability and consistency.
<PAGE>
PAGE 8
Keystone Tax Free Fund
Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your Fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the indexes do not
take into account any deductions for sales charges, transaction costs or
other fund expenses. Your Fund's performance figures do reflect such
deductions. Sales charges--whether up-front or deferred--pay for the cost of
the investment advice of your financial adviser. Transaction costs pay for
the costs of buying and selling securities for your Fund's portfolio. Fund
expenses pay for the costs of investment management and various shareholder
services. None of these costs are reflected in index total returns. The
comparison is not completely realistic because an index cannot be duplicated
by an investor--even an unmanaged index--without incurring some charges and
expenses.
One of Several Measures
The chart is one of several tools you can use to understand your investment.
It should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your
personal financial situation, can best explain the features of your Keystone
fund and how it applies to your financial needs.
Future Returns May Be Different
Shareholders also should be mindful that the long-run performance of either
the Fund or the indexes is not representative of what shareholders should
expect to receive from their Fund investment in the future; it is presented
to illustrate only past performance and is not a guarantee of future returns.
<PAGE>
PAGE 9
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.
<PAGE>
PAGE 10
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.7%)
ALABAMA
Alabama Agricultural and Mechanic University (MBIA) 6.500% 11/01/2025 $ 2,035,000 $ 2,241,756
Mobile, Alabama, Industrial Development Board, Solid Waste
Disposal, Mobile Energy Services Co. Project 6.950 01/01/2020 500,000 532,420
ALASKA
Alaska Energy Authority, Utilities Revenue (FGIC) 6.600 07/01/2015 13,500,000 15,248,790
Alaska State Housing Finance Corp., Series 1993 A 5.400 12/01/2023 5,000,000 4,867,550
North Slope Borough, Alaska, General Obligation, Series A
(MBIA) 5.900 06/30/2003 3,000,000 3,232,050
North Slope Borough, Alaska, General Obligation, Series G
(ETM) 8.350 06/30/1998 2,000,000 2,184,800
ARIZONA
Arizona University Resh Park Development Revenue (MBIA) 5.000 07/01/2021 625,000 595,638
Chandler, Arizona, Water and Sewer (FGIC) 6.750 07/01/2006 850,000 931,651
Maricopa County, Arizona, University School District (MBIA) 8.125 01/01/2010 6,000,000 7,098,240
Phoenix, Arizona, Street and Highway User, Series 1992 A
(FGIC) (effective yield 6.55%) (b) 0.000 07/01/2013 2,500,000 966,275
Pima County, Arizona, Industrial Development Authority,
Health Care Corp. Revenue 8.000 07/01/2013 3,015,000 3,349,122
Pima County, Arizona, Industrial Development Authority,
Health Care Corp. Revenue (MBIA) 8.000 07/01/2013 370,000 409,416
Pima County, Arizona, Industrial Development Authority,
Irvington Project (FSA) 7.250 07/15/2010 10,000,000 10,935,700
ARKANSAS
Arkansas State Development Finance Authority, Single Family
Mortgage Revenue Refunding 8.000 08/15/2011 1,645,000 1,791,306
CALIFORNIA
California Health Facilities Financing, St. Francis Medical
Center, Series A 5.500 10/01/2009 200,000 213,700
California State Public Works Board, Lease Department
Correctional State Prison, Series E 5.500 06/01/2015 3,700,000 3,690,787
California State Public Works Board, Various University
California Projects, Series B 5.500 06/01/2019 350,000 342,325
Contra Costa, California, Water District Revenue, Series G 5.000 10/01/2026 2,000,000 1,900,980
Eden Township, California, Hospital District Revenue 7.400 11/01/2019 5,615,000 5,800,800
Los Angeles, California, Convention and Exhibition Center
Authority Lease (MBIA) 5.125 08/15/2013 600,000 582,600
Los Angeles, California, Metropolitan Transportation
Authority, Proposition C, Series A (AMBAC) 5.500 07/01/2017 4,500,000 4,544,010
Los Angeles, California, Metropolitan Transportation
Authority, Proposition C, Series A (AMBAC) 5.000 07/01/2025 5,650,000 5,375,297
Los Angeles, California, Transportation Commission, Series
A (MBIA) 6.250 07/01/2013 6,500,000 6,900,530
Los Angeles, California, Water System, Series A (MBIA) 5.875 06/01/2024 680,000 700,747
Oakland, California, Pensions, Series A (FGIC) 7.600 08/01/2021 2,265,000 2,490,526
San Diego County, California, Water Authority, Water
Revenue 5.681 04/23/2008 1,650,000 1,739,232
</TABLE>
<PAGE>
PAGE 11
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA (CONTINUED)
San Joaquin Hills, California, Transportation Corridor
Agency, Toll Road Revenue 7.000% 01/01/2030 $ 5,705,000 $ 6,070,462
San Joaquin Hills, California, Transportation Corridor
Agency, Toll Road Revenue 6.750 01/01/2032 5,000,000 5,234,500
San Jose, California, Redevelopment Tax Allocation (MBIA) 6.000 08/01/2015 250,000 273,408
Suisun City, California, Redevelopment Agency, Tax
Allocation 5.500 10/01/2023 1,000,000 995,830
Walnut Creek, California, John Muir Medical Center (MBIA) 5.000 02/15/2016 350,000 331,671
Walnut Valley, California, Unified School District, Series
A (MBIA) 6.000 08/01/2014 190,000 206,057
COLORADO
City and County of Denver, Colorado, Airport System, Series A 7.000 11/15/1999 2,000,000 2,135,180
City and County of Denver, Colorado, Airport System, Series A 7.500 11/15/2023 5,625,000 6,253,369
City and County of Denver, Colorado, Airport System, Series A 8.500 11/15/2023 1,750,000 1,995,088
City and County of Denver, Colorado, Airport System, Series A 8.750 11/15/2023 16,380,000 19,397,032
City and County of Denver, Colorado, Airport System, Series A 8.000 11/15/2025 525,000 589,040
City and County of Denver, Colorado, Airport System, Series
A (MBIA) 5.600 11/15/2020 6,000,000 6,038,580
City and County of Denver, Colorado, Airport System, Series
A (MBIA) 5.700 11/15/2025 3,000,000 3,037,350
City and County of Denver, Colorado, Airport System, Series C 6.650 11/15/2005 5,980,000 6,425,331
City and County of Denver, Colorado, Airport System, Series C 6.000 12/01/2025 3,000,000 3,073,590
City and County of Denver, Colorado, Airport System, Series D 7.750 11/15/2021 12,250,000 13,705,178
Colorado Health Facilities Authority, Rocky Mountain
Adventist Health Care 6.625 02/01/2022 3,000,000 3,050,610
Colorado Health Facilities Authority, Sisters Charity
Health Care, Series A (MBIA) 6.250 05/15/2009 1,880,000 2,096,764
Larimer County, Colorado, School District (MBIA) 7.000 12/15/2016 2,250,000 2,744,258
CONNECTICUT
Connecticut Special Tax Obligation, Series B 6.500 10/01/2012 1,600,000 1,836,208
DELAWARE
Delaware State Health Facilities Authority, Medical Center
of Delaware (MBIA) 6.250 10/01/2006 6,000,000 6,749,820
FLORIDA
Broward County, Florida, Resource Recovery, South Project 7.950 12/01/2008 4,080,000 4,579,800
Broward County, Florida, Water and Sewer Utility 5.000 10/01/2018 2,000,000 1,910,980
Escambia County, Florida, Pollution Control, Champion
International Corp. Project 6.900 08/01/2022 600,000 642,234
Florida State Board of Education, Capital Outlay 5.800 06/01/2019 2,000,000 2,051,540
Florida State Board of Education, Capital Outlay 5.875 06/01/2024 8,000,000 8,221,280
Florida State, Department of Transportation 5.800 07/01/2018 13,400,000 13,748,266
Florida State, Jacksonville Transportation Authority 9.200 01/01/2015 2,000,000 2,833,080
Florida State Turnpike Authority, Series A (FGIC) 5.625 07/01/2025 3,000,000 3,045,990
Hillsborough County, Florida, Housing Finance Agency,
Single Family Mortgage Revenue 7.300 04/01/2022 495,000 518,602
</TABLE>
(continued on next page)
<PAGE>
PAGE 12
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FLORIDA (CONTINUED)
Jacksonville, Florida, Health Facilities Authority, New
Children's Hospital (MBIA) 7.000% 06/01/2021 $1,800,000 $ 2,013,570
Lee County, Florida, School Board, Certificates of
Participation, Series A (FSA) 7.750 08/01/2005 3,490,000 4,068,572
Orange County, Florida, Health Facilities Authority,
Adventist Health System (AMBAC) 5.250 11/15/2020 2,500,000 2,432,575
Orlando-Orange County, Florida, Expressway Authority (FGIC) 8.250 07/01/2015 2,960,000 4,032,467
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project 6.850 02/15/2021 2,500,000 2,548,325
Palm Beach County, Florida, Solid Waste, Osceola Power
Project, Series A 6.950 01/01/2022 3,800,000 3,908,224
Polk County, Florida, Housing Finance Authority 7.875 09/01/2022 385,000 407,357
Reedy Creek, Florida, District Utilities Improvement,
Series 1 (MBIA) 5.000 10/01/2019 8,500,000 8,158,045
St. Petersburg, Florida, Health Facilities Authority (MBIA) 7.000 12/01/2015 3,250,000 3,689,075
St. Petersburg, Florida, Professional Sports Facility,
Sales Tax Revenue (MBIA) 5.625 10/01/2020 3,500,000 3,568,775
Tampa, Florida, Subordinate Guaranteed Entitlement, Series
B (Pre-refunded) 8.500 10/01/2018 1,825,000 2,031,043
GEORGIA
Atlanta, Georgia, General Obligation, Series A 6.000 12/01/2015 1,790,000 1,883,671
Georgia State, General Obligation, Series B 6.800 03/01/2011 6,000,000 7,073,280
Georgia State, General Obligation, Series C 5.250 04/01/2011 9,200,000 9,399,732
Metropolitan Atlanta Rapid Transit Authority, Georgia,
Sales Tax (AMBAC) 6.250 07/01/2011 4,255,000 4,769,344
HAWAII
Hawaii State Department of Budget and Finance, Special
Purpose Revenue, Hawaii Electric Co. (MBIA) 7.375 12/01/2020 8,000,000 9,000,080
IDAHO
Idaho Housing Finance Authority, Single Family Mortgage
Bonds, Series D-1 8.000 01/01/2020 1,275,000 1,387,506
ILLINOIS
Chicago, Illinois, Gas Supply Revenue, People's Gas Light
and Coke Co., Series A 8.100 05/01/2020 6,740,000 7,657,516
Cook County, Illinois, General Obligation, District Number
508, Lease Certificates, Series C (MBIA) 7.700 12/01/2005 5,970,000 7,272,356
Illinois Development Finance Authority, Pollution Control
Revenue Refunding, Commonwealth Edison Co. Project,
Series D 6.750 03/01/2015 4,000,000 4,420,640
Illinois State, Sales Tax, Series P 6.500 06/15/2022 9,000,000 10,546,920
Kankakee, Illinois, Sewer Revenue (FGIC) 6.875 05/01/2011 2,965,000 3,279,942
Metropolitan Fair and Exposition Authority, Illinois,
Dedicated State Tax Revenue (MBIA) 5.000 06/01/2015 2,000,000 1,860,940
Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue (effective yield 6.60%) (b) 0.000 06/15/2013 5,625,000 2,135,306
</TABLE>
<PAGE>
PAGE 13
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ILLINOIS (CONTINUED)
Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue (effective yield 6.70%) (b) 0.000% 06/15/2015 $19,440,000 $ 6,541,560
Metropolitan Pier and Exposition Authority, McCormick Place
Expansion Project 7.250 06/15/2005 5,500,000 6,467,835
Robbins, Illinois, Robbins Resources Recovery, Partners A 9.250 08/15/2014 6,000,000 6,437,760
INDIANA
Indianapolis, Indiana, Local Public Improvement Bond Bank,
Series 1992D 6.750 02/01/2020 2,000,000 2,121,700
KANSAS
Kansas City, Kansas, Utility Systems, Refunding and
Improvement (FGIC) 6.375 09/01/2023 7,150,000 7,832,897
KENTUCKY
Carroll County, Kentucky, Kentucky Utility Company, Series
A 7.450 09/15/2016 5,000,000 5,773,550
Jefferson County, Kentucky, Hospital Revenue (MBIA) 6.435 10/23/2014 6,000,000 6,465,420
Kentucky Housing Corp., Housing Revenue Bond, Series C 7.900 01/01/2021 5,570,000 5,952,659
Trimble County, Kentucky, Pollution Control, Louisville Gas
and Electric Co. 7.625 11/01/2020 2,725,000 3,088,052
Trimble County, Kentucky, Pollution Control, Louisville Gas
and Electric Co., Series A (Pre-refunded) 7.625 11/01/2020 545,000 628,156
LOUISIANA
Louisiana Public Facilities Authority, Health and
Educational Facilities, Our Lady of the Lake Hospital 8.200 12/01/2015 7,250,000 8,142,910
Louisiana State, Series B (MBIA) 5.625 08/01/2013 3,000,000 3,116,940
New Orleans, Louisiana, Capital Appreciation (AMBAC)
(effective yield 7.05%) (b) 0.000 09/01/2011 5,000,000 2,141,150
New Orleans, Louisiana, Capital Appreciation (AMBAC)
(effective yield 7.05%) (b) 0.000 09/01/2012 1,000,000 403,760
Orleans Parish, Louisiana, School Board (ETM) 9.050 02/01/2010 5,175,000 7,145,744
MAINE
Regional Waste System, Maine 8.150 07/01/2011 2,500,000 2,781,000
MARYLAND
Maryland State Community Development Administration,
Multi-Family Housing 8.750 05/15/2012 3,345,000 3,398,855
MASSACHUSETTS
Boston, Massachusetts, Boston City Hospital 5.750 02/15/2023 735,000 731,105
Massachusetts Bay Transportation Authority, Series A 7.000 03/01/2011 3,610,000 4,247,021
Massachusetts Bay Transportation Authority, Series A 6.250 03/01/2012 4,000,000 4,417,160
Massachusetts Bay Transportation Authority, Series B 6.200 03/01/2016 1,500,000 1,650,255
Massachusetts Industrial Finance Agency, Harvard Community
Health Plan, Inc. 8.125 10/01/2017 11,750,000 12,807,618
Massachusetts Industrial Finance Agency, Solid Waste
Disposal 9.000 08/01/2016 4,100,000 4,111,726
Massachusetts Municipal Wholesale Electric, Power Supply
Systems 5.100 07/01/2007 5,000,000 5,056,250
</TABLE>
(continued on next page)
<PAGE>
PAGE 14
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MASSACHUSETTS (CONTINUED)
Massachusetts Municipal Wholesale Electric, Power Supply
Systems 6.750% 07/01/2008 $ 4,000,000 $ 4,408,840
Massachusetts State Health and Educational Facilities
Authority, Brigham & Womens Hospital (MBIA) 6.750 07/01/2024 2,000,000 2,186,700
Massachusetts State Health and Educational Facilities
Authority, Cape Islands Rehabilitation Hospital, Series A 7.875 08/15/2024 1,500,000 1,539,045
Massachusetts State Health and Educational Facilities
Authority, Childrens' Hospital 6.200 10/01/2016 2,640,000 2,767,486
Massachusetts State Health and Educational Facilities
Authority, Dana Farber Cancer Project, Series G-1 5.500 12/01/2027 375,000 355,684
Massachusetts State Health and Educational Facilities
Authority (MBIA) 7.300 10/01/2018 2,000,000 2,254,420
Massachusetts State Health and Educational Facilities
Authority, Massachusetts General Hospital, Series F
(AMBAC) 6.250 07/01/2012 1,000,000 1,116,360
Massachusetts State Health and Educational Facilities
Authority, Massachusetts General Hospital, Series F
(AMBAC) 6.250 07/01/2020 3,000,000 3,186,780
Massachusetts State Health and Educational Facilities
Authority, New England Deaconness Hospital (AMBAC) 6.875 04/01/2022 2,980,000 3,283,662
Massachusetts State, General Obligation, Consolidated Loan,
Series C (FGIC) 6.600 11/01/2008 8,000,000 9,058,240
Massachusetts State, Water Pollution, Abatement Trust
Pooled Loan Program, Series 2 6.125 02/01/2008 85,000 94,931
Massachusetts State, Water Pollution, Abatement Trust Water
Pollution Abatement Revenue (MWRA Loan Program), Series A 5.000 08/01/2014 150,000 144,686
Massachusetts State Water Resources Authority, Series A
(MBIA) 6.000 08/01/2014 1,500,000 1,574,130
Massachusetts State Water Resources Authority, Series B 4.000 12/01/2018 10,275,000 8,488,897
Quincy, Massachusetts, Quincy Hospital (FSA) 5.250 01/15/2016 100,000 97,328
MICHIGAN
Monroe County, Michigan, Economic Development Corp.,
Detroit Edison Co. (FGIC) 6.950 09/01/2022 6,000,000 7,406,580
Okemos, Michigan, Public School District, Series I
(effective yield
7.35%) (b) 0.000 05/01/2021 51,525,000 10,688,861
Romulus, Michigan, Community Schools, Capital Appreciation,
Series I (effective yield 8.02%) (b) 0.000 05/01/2017 39,490,000 10,809,993
West Ottawa, Michigan, Public School District, Capital
Appreciation (effective yield 7.55%) (b) 0.000 05/01/2015 35,490,000 11,092,754
MINNESOTA
Dakota County, Minnesota, Housing and Redevelopment
Authority, Single Family Mortgage (FGIC) 9.375 05/01/2018 20,000 21,919
MISSISSIPPI
Mississippi Hospital Equipment and Facilities Authority
(Connie Lee) 6.400 01/01/2007 1,000,000 1,075,620
MISSOURI
Kansas City, Missouri, Municipal Assistance Corp. Revenue 6.000 04/15/2020 500,000 517,825
</TABLE>
<PAGE>
PAGE 15
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MISSOURI (CONTINUED)
Missouri State Health and Educational Facilities Authority,
Barnes Jewish Hospital (MBIA) 5.150% 05/15/2010 $ 4,500,000 $ 4,581,180
Missouri State Health and Educational Facilities Authority,
Barnes Jewish Hospital 5.250 05/15/2021 2,200,000 2,096,446
Phelps County, Missouri, Phelps County Regional Medical
Center (Connie Lee) 6.000 05/15/2013 125,000 127,514
NEBRASKA
Nebraska Higher Education Loan Program 6.200 06/01/2013 5,300,000 5,516,770
NEVADA
Clark County, Nevada, School District, Series A (MBIA) 6.750 03/01/2007 3,000,000 3,273,150
Clark County, Nevada, Series A (AMBAC) 7.500 06/01/2009 4,000,000 4,870,160
NEW JERSEY
New Jersey Health Care Facilities Financing Authority,
Jersey Shore Medical Center (AMBAC) 6.125 07/01/2012 1,000,000 1,065,730
New Jersey Health Care Facilities Financing Authority,
Jersey Shore Medical Center (AMBAC) 6.250 07/01/2016 2,000,000 2,159,780
New Jersey Health Care Facilities Financing Authority,
Kimball Medical Center, Series C 8.000 07/01/2013 3,000,000 3,209,130
New Jersey Health Care Facilities Financing Authority, St.
Elizabeth's Hospital, Series B 7.750 07/01/1998 1,100,000 1,145,727
New Jersey State Transportation Authority, Transportation
System, Series A (MBIA) 5.500 06/15/2013 2,000,000 2,046,200
NEW MEXICO
City of Albuquerque, New Mexico, Hospital System, Series A
(MBIA) 6.375 08/01/2007 1,500,000 1,630,560
NEW YORK
Battery Park City Authority, New York, Refunding Bonds 5.250 11/01/2017 1,000,000 950,010
Battery Park City Authority, New York, Refunding Bonds,
Series A 5.000 11/01/2013 3,715,000 3,468,027
New York City, New York, General Obligation 7.750 08/15/2014 5,460,000 6,236,084
New York City, New York, General Obligation, Fiscal 1992,
Series A 7.750 08/15/2008 6,000,000 6,774,180
New York City, New York, General Obligation, Fiscal 1992,
Series A 7.750 08/15/2015 3,250,000 3,689,725
New York City, New York, General Obligation, Series D
(MBIA) 6.000 08/01/2006 285,000 295,816
New York City, New York, Industrial Special Facility,
Terminal One Group Association Project 6.000 01/01/2015 2,500,000 2,534,350
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System (FGIC) 7.000 06/15/2015 6,000,000 6,707,316
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System, Series A 6.000 06/15/2025 18,000,000 18,854,100
New York Energy Research and Development Authority,
Consolidated Edison Project 7.750 01/01/2024 2,900,000 3,123,184
New York State Dormitory Authority Revenue, State
University Educational Facilities, Series B 7.500 05/15/2011 7,000,000 8,421,280
</TABLE>
(continued on next page)
<PAGE>
PAGE 16
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
New York State Medical Care Facilities, Finance Agency
Revenue, Mental Health Services Facilities 6.150% 02/15/2015 $ 5,000,000 $ 5,272,650
New York State Medical Care Facilities, Finance Agency
Revenue, Mental Health Services Facilities 6.000 08/15/2015 2,000,000 2,103,500
New York State Urban Development Corp., Revenue Refunding,
Correctional Facilities, Series A (FSA) 6.500 01/01/2010 3,000,000 3,402,480
New York State Urban Development Corp., Revenue Refunding,
Correctional Facilities, Series A 5.500 01/01/2014 2,500,000 2,468,400
New York State Care Facilities, New York Hospital, Series A 6.800 08/15/2024 3,800,000 4,246,994
New York State Dormitory Authority, City University
Educational Facilities (FGIC) 7.000 07/01/2009 3,780,000 4,489,468
New York State Dormitory Authority, City University
Educational Facilities (AMBAC) 6.250 07/01/2016 3,000,000 3,230,850
New York State Dormitory Authority, State University
Educational Facilities, Series A 5.500 05/15/2019 2,000,000 1,958,740
New York State Energy Research and Development Authority,
Consolidated Edison Co. New York, Series A (AMBAC) 6.100 08/15/2020 5,000,000 5,247,300
New York State Environmental Facilities Corp., State Water
Pollution Control (New York City Water Finance
Authority) Series E 6.875 06/15/2010 5,000,000 5,633,850
New York State Housing Finance Agency, Service Contract,
Series A 5.500 09/15/2022 8,860,000 8,420,633
New York State Local Government Assistance Corp., Series C 5.500 04/01/2017 2,000,000 2,019,900
New York State Local Government Assistance Corp., Series D 6.750 04/01/2021 900,000 1,030,635
New York State Medical Care Facilities Finance (FGIC) 6.375 08/15/2014 2,900,000 3,110,192
New York State Mortgage Agency 6.900 04/01/2015 4,500,000 4,829,400
New York State Throughway Authority, Highway & Bridge Fund,
Series B (MBIA) 5.125 04/01/2015 2,000,000 1,943,660
New York State Urban Development Corp., Refunding
Correctional Facilities, Series A 6.500 01/01/2010 13,920,000 15,202,728
New York Urban Development Corp., Correctional Facilities,
Series A 7.500 04/01/2011 8,000,000 9,296,720
New York Urban Development Corp., State Facilities 5.750 04/01/2012 5,250,000 5,336,468
Triborough Bridge and Tunnel Authority, New York, Series Q 5.000 01/01/2017 3,820,000 3,661,737
Triborough Bridge and Tunnel Authority, New York, Special
Obligation 6.625 01/01/2012 8,500,000 9,763,525
NORTH DAKOTA
North Dakota State Housing Finance Agency, Single Family
Mortgage 8.375 07/01/2021 580,000 608,188
OHIO
Bedford, Ohio, City School District (MBIA) 6.250 12/01/2013 1,000,000 1,067,130
Cleveland, Ohio, Public Power Systems, First Mortgage,
Series A (MBIA) 7.000 11/15/2016 4,000,000 4,632,280
Cleveland, Ohio, Public Power Systems, First Mortgage,
Series A (MBIA) 7.000 11/15/2024 1,000,000 1,131,770
Columbus, Ohio, General Obligation 12.375 02/15/2006 1,285,000 2,044,641
Ohio Housing Finance Agency, Single Family Mortgage
Revenue, Series C (GNMA) 9.000 09/01/2018 10,000,000 11,382,800
Ohio State Higher Educational Facility Commission (MBIA) 6.125 11/15/2017 1,000,000 1,068,710
Ohio State Water Development Authority (Pre-refunded) 9.250 12/01/2012 75,000 78,897
</TABLE>
<PAGE>
PAGE 17
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OHIO (CONTINUED)
Ohio State Water Development Authority (AMBAC) 9.375% 12/01/2018 $ 400,000 $ 417,932
OREGON
Oregon State, Department of Administrative Services, Series
A (MBIA) 5.375 11/01/2016 2,000,000 1,983,700
PENNSYLVANIA
Allegheny County, Pennsylvania, Industrial Development
Authority Revenue 5.700 09/01/2030 2,000,000 1,991,820
Allegheny County, Pennsylvania, Sewer Revenue Refunding
(FGIC) (effective yield 6.10%) (b) 0.000 06/01/2015 2,500,000 859,225
Beaver County, Pennsylvania, Ohio Edison (FGIC) 7.000 06/01/2021 4,390,000 4,799,499
Chester County, Pennsylvania, Health and Education
Facilities Authority, Mainline Health System 5.500 05/15/2015 6,240,000 6,143,467
Delaware County, Pennsylvania, Hospital Authority, Delaware
County Memorial Hospital (MBIA) 5.500 08/15/2019 5,000,000 5,044,750
Delaware County, Pennsylvania, Hospital Revenue, Crozier
Chester Medical Center (Pre-refunded) 7.500 12/15/2020 2,545,000 2,951,793
Delaware County, Pennsylvania, Industrial Development
Authority, Resource Recovery Project, Series A (LOC
Security Pacific) 8.100 12/01/2013 4,000,000 4,187,920
Lancaster County, Pennsylvania, Hospital Authority, Mesonic
Homes Health Center Project, (AMBAC) 5.000 11/15/2020 3,200,000 2,984,448
North Penn, Pennsylvania, Water Authority (FGIC) 6.875 11/01/2019 2,500,000 2,925,250
Northumberland County, Pennsylvania, Authority Prisons
Lease (Pre-refunded) 7.750 10/15/2004 2,110,000 2,472,983
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project, Series D 7.050 12/01/2010 3,000,000 3,221,850
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project, Series D 7.125 12/01/2015 1,000,000 1,075,720
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Colver Project, Series D 7.150 12/01/2018 2,500,000 2,683,925
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project 6.400 01/01/2009 4,000,000 3,944,880
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project 6.500 01/01/2013 5,500,000 5,441,590
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project 6.600 01/01/2019 1,300,000 1,292,161
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series T 7.750 10/01/2009 4,000,000 4,245,240
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Section 8 8.200 07/01/2024 6,000,000 6,537,300
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series 34 A 6.850 04/01/2016 500,000 529,005
Pennsylvania Intergovernmental Cooperative Authority,
Philadelphia Funding (FGIC) 6.750 06/15/2021 1,910,000 2,150,641
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Albert Einstein Medical Center 7.000 10/01/2021 3,055,000 3,277,160
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Community College, Series B (MBIA) 6.500 05/01/2007 280,000 312,777
</TABLE>
(continued on next page)
<PAGE>
PAGE 18
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Graduate Health System Education Facilities
Authority 7.250% 07/01/2018 $ 2,500,000 $ 2,648,075
Philadelphia, Pennsylvania, Hospital and Higher Education
Facilities, Temple University Authority 6.625 11/15/2023 1,725,000 1,780,442
Philadelphia, Pennsylvania, Hospital and Higher Education,
Chestnut Hill Hospital 6.500 11/15/2022 5,000,000 5,198,800
Philadelphia, Pennsylvania, Municipal Development
Authority, Criminal Justice Center, Series A (MBIA) 7.100 11/15/2006 4,095,000 4,612,239
Philadelphia, Pennsylvania, Water and Wastewater (FGIC) 10.000 06/15/2005 7,000,000 9,810,850
Philadelphia, Pennsylvania, Water and Wastewater, Series A 6.250 08/01/2012 3,000,000 3,353,850
Pittsburgh, Pennsylvania, Urban Redevelopment Authority,
Multi-Family Housing Mortgage, 1985 Series A 9.250 12/01/2027 3,185,000 3,358,105
Ridley Park, Pennsylvania, Hospital Authority Revenue 6.125 12/01/2020 2,500,000 2,314,850
Sayre, Pennsylvania, Health Care Facilities Authority,
Guthrie Healthcare, Series A 7.100 03/01/2017 1,250,000 1,367,200
PUERTO RICO
Puerto Rico Commonwealth, Refunding (Capital Guarantee) 6.450 07/01/2017 2,000,000 2,141,120
Puerto Rico Commonwealth, General Obligation 7.000 07/01/2010 9,750,000 11,612,738
Puerto Rico Commonwealth, General Obligation (MBIA) 5.375 07/01/2022 5,035,000 5,018,838
Puerto Rico Electric Power Authority, Series X 5.500 07/01/2025 1,000,000 985,810
Puerto Rico Electric Power Authority, Series Y (MBIA) 6.500 07/01/2006 2,000,000 2,272,680
Puerto Rico Public Buildings Authority, Guaranteed Public
Education and Health Facilities, Series M 5.700 07/01/2009 1,000,000 1,038,910
Puerto Rico Public Buildings Authority, Guaranteed Public
Education and Health Facilities, Series M 3.750 07/01/2016 6,250,000 5,986,563
Puerto Rico Telephone Authority (MBIA) 5.250 01/01/2005 16,900,000 17,520,230
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 4,336,889
SOUTH CAROLINA
South Carolina State Public Services Authority 6.250 01/01/2022 20,500,000 21,755,625
South Carolina State Public Services Authority, Fixed
Option Bonds 5.342 06/30/2006 8,400,000 8,708,784
TENNESSEE
Bristol, Tennessee, Health and Education Authority, Bristol
Memorial Hospital (FGIC) 6.750 09/01/2010 4,200,000 4,889,430
Knox County, Tennessee, Health and Educational Facilities,
Fort Sanders Hospital Alliance, Series B (MBIA) 5.250 01/01/2015 3,500,000 3,466,540
Knox County, Tennessee, Health and Educational Facilities,
Fort Sanders Hospital Alliance, Series C (MBIA) 7.250 01/01/2010 3,000,000 3,649,320
Metro Government, Nashville & Davidson Counties, Tennessee
(FGIC) (effective yield 4.26%) (b) 0.000 01/01/2012 6,000,000 6,328,320
Tennessee Housing Development Authority, Home Ownership
Program, Issue H 7.825 07/01/2015 4,520,000 4,680,415
</TABLE>
<PAGE>
PAGE 19
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TEXAS
Austin, Texas, Utility Systems Capital Appreciation (AMBAC)
(effective yield 6.80%) (b) 0.000% 11/15/2011 $12,000,000 $ 5,130,240
Austin, Texas, Utility Systems Capital Appreciation (AMBAC)
(effective yield 6.80%) (b) 0.000 11/15/2012 12,200,000 4,911,354
Bexar, Texas, Metropolitan Water District Waterworks
Systems (AMBAC) 6.625 05/01/2014 1,850,000 2,096,308
Brownsville, Texas, Utilities System Revenue (AMBAC) 5.250 09/01/2020 5,750,000 5,602,628
Copperas Cove, Texas, Health Facilities, Adventist Health
Systems (MBIA) 5.500 11/15/2017 2,000,000 1,997,340
Cypress-Fairbanks, Texas, Independent School
District,Capital Appreciation, Series A
(effective yield 6.03%) (b) 0.000 02/15/2013 4,000,000 1,572,840
Fort Bend County, Texas, Levee Improvement (MBIA) 6.900 09/01/2020 1,165,000 1,286,661
Grapevine-Colleyville, Texas, Independent School District 5.125 08/15/2022 3,000,000 2,844,060
Harris County, Texas, Flood Control District (effective
yield 7.20%) (b) 0.000 10/01/2006 4,500,000 2,338,560
Harris County, Texas, Health Facilities Development Corp. 6.600 06/01/2014 5,000,000 5,300,450
Harris County, Texas, Health Facilities Development Corp.,
Hermann Hospital Project (MBIA) 6.375 10/01/2017 2,480,000 2,653,550
Harris County, Texas, Health Facilities Development Corp.,
Hermann Hospital Project (MBIA) 6.375 10/01/2024 7,300,000 7,784,574
Harris County, Texas, Senior Lien, Toll Road, Series A
(MBIA) 6.375 08/15/2024 4,000,000 4,294,960
Houston, Texas, Airport System Revenue, Senior Lien 8.200 07/01/2017 1,840,000 2,030,716
Houston, Texas, General Obligation 7.000 03/01/2008 14,675,000 17,419,959
Houston, Texas, Water & Sewer System, Junior Lien, Series A
(MBIA) 6.200 12/01/2023 10,000,000 10,610,300
Midland County, Texas, Hospital District, Midland Memorial
Hospital 7.500 06/01/2016 600,000 632,502
Northwest Texas, Independent School District, Capital
Appreciation (AMBAC) (effective yield 7.28%) (b) 0.000 08/15/2010 2,500,000 1,131,225
Port of Corpus Christi, Texas, Industrial Development
Corp., Valero Refining and Marketing Co. Project, Series A 10.250 06/01/2017 11,050,000 12,179,421
Rio Grande Valley, Texas, Health Facilities Corp., Hospital
Revenue, Baptist Medical Center Project (MBIA) 8.000 08/01/2017 1,085,000 1,192,578
Rio Grande Valley, Texas, Health Facilities Corp., Hospital
Revenue, Baptist Medical Center Project (Pre-refunded) 8.000 08/01/2017 5,915,000 6,579,550
Tarrant County, Texas, Housing Finance Corp., Series A
(MBIA) (effective yield 11.00%) (b) 0.000 09/15/2016 6,415,000 1,925,462
Texas Housing Agency, Residential Development 8.400 01/01/2021 2,680,000 2,832,304
Texas Municipal Power Agency Revenue (effective yield
6.10%) (b) 0.000 09/01/2013 12,100,000 4,634,663
Texas Municipal Power Agency, Refunding Bonds (MBIA) 5.250 09/01/2012 175,000 174,382
Texas National Research Lab, Super Conducting, Super
Collider 6.950 12/01/2012 9,500,000 11,164,970
Texas State, General Obligation 6.200 09/30/2011 3,000,000 3,352,740
Texas State Public Finance Authority Building Revenue,
Series A (AMBAC) 5.750 02/01/2015 250,000 257,515
Texas State, Veterans Housing Assistance 6.050 12/01/2012 2,480,000 2,539,520
Texas State, Veterans Housing Assistance, Series B1 5.700 12/01/2014 250,000 245,103
Titus County, Texas, Water District #1, Southwest Electric
Power 8.200 08/01/2011 5,500,000 6,469,650
Tomball, Texas, Hospital Authority, Tomball Regional
Hospital 6.100 07/01/2008 1,860,000 1,839,317
Tomball, Texas, Hospital Authority, Tomball Regional
Hospital 6.125 07/01/2023 7,350,000 6,980,516
</TABLE>
(continued on next page)
<PAGE>
PAGE 20
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXAS (CONTINUED)
Travis County, Texas Health Facilities, Daughters Of
Charity 6.000% 11/15/2022 $ 2,000,000 $ 2,053,300
University of Texas, University Revenue, Series B 6.750 08/15/2013 2,000,000 2,219,620
UTAH
Intermountain Power Agency, Utah, Power Supply 7.750 07/01/2020 19,250,000 21,067,970
Intermountain Power Agency, Utah, Power Supply, Series A
(effective yield 7.10%) (b) 0.000 07/01/2004 8,000,000 5,422,560
Intermountain Power Agency, Utah, Power Supply, Series C
(effective yield 21.28%) (b) 0.000 07/01/2020 3,000,000 459,000
Intermountain Power Agency, Utah, Power Supply, Series G
(effective yield 7.65%) (b) 0.000 07/01/2012 20,350,000 19,648,129
Intermountain Power Agency, Utah, Special Obligation 7.875 07/01/2014 4,210,000 4,371,159
Utah State Housing Finance Agency, Single Family Mortgage 10.750 07/01/2008 5,000 5,128
Utah State Housing Finance Agency, Single Family Mortgage,
Series C 2 7.950 07/01/2010 475,000 512,991
VIRGINIA
Fairfax County, Virginia, Economic Development Authority 5.500 05/15/2018 4,000,000 3,989,680
Hanover County, Virginia, Industrial Development Authority,
Memorial Regional Medical Center Project (MBIA) 5.500 08/15/2025 3,625,000 3,609,703
Norfolk, Virginia, Water Revenue (MBIA) 5.875 11/01/2020 5,000,000 5,207,750
Pittsylvania County, Virginia, Industrial Development
Authority, Series A 7.300 01/01/2004 3,200,000 3,429,920
Pittsylvania County, Virginia, Industrial Development
Authority, Series A 7.500 01/01/2014 1,000,000 1,074,350
Pittsylvania County, Virginia, Industrial Development
Authority, Series A 7.550 01/01/2019 3,100,000 3,304,848
Virginia State Housing Development Authority, Residential
Mortgage, Series B (effective yield 10.62%) (b) 0.000 09/01/2014 590,000 86,642
WASHINGTON
Washington State Health Care Facilities Authority,
Multi-Care Medical Center of Tacoma (FGIC) 7.875 08/15/2011 1,300,000 1,425,021
WISCONSIN
Wisconsin Health and Education Facilities Authority, Bellin
Memorial Hospital, Inc. (Pre-refunded) 7.625 04/01/2019 5,000,000 5,600,850
Wisconsin Housing and Economic Development Authority, Home
Ownership 8.000 03/01/2021 1,960,000 2,077,384
WYOMING
Wyoming Community Development Authority, Single Family
Mortgage, Series B 8.125 06/01/2021 1,475,000 1,567,646
----------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (COST--$1,088,958,150) 1,176,546,324
================================================================================================================
TEMPORARY TAX-EXEMPT INVESTMENTS (1.9%)
Anaheim, California, Certificate of Participation (AMBAC) (a) 5.300 08/01/2019 1,175,000 1,175,000
Dade County, Florida, Water & Sewer System Revenue (FGIC) (a) 4.900 10/05/2022 2,785,000 2,785,000
Jackson County, Mississippi, Pollution Control, Chevron USA
Inc. Project (a) 5.900 06/01/2023 1,600,000 1,600,000
Kansas City, Missouri, Industrial Development Hospital,
Resh Health Services System (MBIA) (a) 5.900 04/15/2015 3,000,000 3,000,000
</TABLE>
<PAGE>
PAGE 21
SCHEDULE OF INVESTMENTS--December 31, 1995
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEMPORARY TAX-EXEMPT INVESTMENTS (CONTINUED)
New York City, New York, General Obligation, Series A (a) 5.900% 08/01/2015 $2,715,000 $ 2,715,000
New York City, New York, General Obligation, Series A (a) 5.900 08/01/2016 1,300,000 1,300,000
New York City, New York, General Obligation, Series B
(MBIA) (a) 5.900 08/15/2003 200,000 200,000
New York City, New York, General Obligation, Series B
(MBIA) (a) 5.900 08/15/2023 500,000 500,000
New York City, New York, Municipal Water Finance Authority,
Series C (FGIC) (a) 5.900 06/15/2022 2,700,000 2,700,000
New York City, New York, Municipal Water Finance Authority,
Series G (FGIC) (a) 5.900 06/15/2024 1,200,000 1,200,000
Texas Hospital Equipment Financing Council (MBIA) (a) 5.450 04/07/2005 439,000 439,000
Uinta County, Wyoming, Pollution Control, Chevron USA Inc.
Project (a) 5.900 08/15/2020 2,700,000 2,700,000
West Feliciana Parish, Louisiana, Pollution Control, Series
D (a) 5.900 12/01/2015 600,000 600,000
West Feliciana Parish, Louisiana, Pollution Control, Series
D (a) 5.900 12/01/2020 1,700,000 1,700,000
----------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (COST--$22,614,000) 22,614,000
================================================================================================================
TOTAL INVESTMENTS (COST--$1,111,572,150) (c) 1,199,160,324
----------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (0.4%) 5,307,718
================================================================================================================
NET ASSETS (100.0%) $1,204,468,042
==============================================================================================================
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) 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.
(b) Effective yield (calculated at date of purchase) is the annual yield at
which the bond accretes until its maturity date.
(c) The cost of investments for federal income tax purposes amounted to
$1,111,726,488. Gross unrealized appreciation and unrealized depreciation
of investments, based on identified tax cost, at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $88,363,597
Gross unrealized depreciation (929,761)
----------
Net unrealized appreciation $87,433,836
==========
</TABLE>
Legend of Portfolio Abbreviations:
AMBAC--American Municipal Bond Assurance Corp.
ETM--Escrowed to Maturity
FGIC--Federal Guaranty Insurance Co.
FSA--Financial Security Assurance
GNMA--Government National Mortgage Association
LOC--Line of Credit
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements.
<PAGE>
PAGE 22
Keystone Tax Free Fund
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)See Notes to Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
========================== ========= ========= ========= ========= ===========
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $7.10 $8.12 $8.04 $8.07 $7.90
- -------------------------- ------- ------- ------- ------- ---------
Income from investment
operations:
Net investment income 0.41 0.37 0.39 0.46 0.46
Net realized and
unrealized gain (loss)
on investments 0.74 (0.96) 0.48 0.12 0.36
Net commissions paid on
fund share sales (a) 0.00 0.00 0.00 0.00 0.00
- -------------------------- ------- ------- ------- ------- ---------
Total from investment
operations 1.15 (0.59) 0.87 0.58 0.82
- -------------------------- ------- ------- ------- ------- ---------
Less distributions from:
Net investment income (0.39) (0.37) (0.39) (0.46) (0.46)
In excess of net
investment income 0.00 (0.06) (0.06) (0.04) (0.07)
Net realized gain on
investments 0.00 0.00 (0.33) (0.11) (0.12)
In excess of net realized
gain on investments 0.00 0.00 (0.01) 0.00 0.00
- -------------------------- ------- ------- ------- ------- ---------
Total distributions (0.39) (0.43) (0.79) (0.61) (0.65)
- -------------------------- ------- ------- ------- ------- ---------
Net asset value,
end of year $7.86 $7.10 $8.12 $8.04 $8.07
========================== ======= ======= ======= ======= =========
Total Return (c) 16.61% (7.34%) 11.15% 7.55% 10.80%
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.95%(d) 1.55% 1.66% 1.38% 1.75%
Net investment income 5.41% 4.92% 4.72% 5.71% 5.78%
Portfolio turnover rate 56% 84% 76% 78% 77%
- -------------------------- ------- ------- ------- ------- ---------
Net assets, end of year
(thousands) $1,204,468 $1,197,727 $1,548,503 $1,453,199 $1,146,185
========================== ======= ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1990(b) 1989 1988 1987 1986
========================== ========= ========= ========= ========= ===========
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $8.06 $8.18 $8.09 $8.85 $8.31
- -------------------------- ------- ------- ------- ------- ---------
Income from investment
operations:
Net investment income 0.52 0.57 0.55 0.56 0.68
Net realized and
unrealized gain (loss)
on investments (0.01) 0.15 0.30 (0.58) 0.88
Net commissions paid on
fund share sales (a) 0.00 0.00 0.00 0.00 (0.08)
- -------------------------- ------- ------- ------- ------- ---------
Total from investment
operations 0.51 0.72 0.85 (0.02) 1.48
- -------------------------- ------- ------- ------- ------- ---------
Less distributions from:
Net investment income (0.52) (0.60) (0.63) (0.64) (0.68)
In excess of net
investment income (0.03) 0.00 0.00 0.00 0.00
Net realized gain on
investments (0.12) (0.24) (0.13) (0.10) (0.26)
In excess of net realized
gain on investments 0.00 0.00 0.00 0.00 0.00
- -------------------------- ------- ------- ------- ------- ---------
Total distributions (0.67) (0.84) (0.76) (0.74) (0.94)
- -------------------------- ------- ------- ------- ------- ---------
Net asset value,
end of year $7.90 $8.06 $8.18 $8.09 $8.85
========================== ======= ======= ======= ======= =========
Total Return (c) 6.66% 9.11% 10.89% (0.14%) 18.26%
Ratios/supplemental data
Ratios to average net
assets:
Total expenses 1.18% 1.23% 1.79% 1.70% 0.83%
Net investment income 6.54% 6.94% 6.74% 6.80% 7.79%
Portfolio turnover rate 64% 69% 61% 43% 44%
- -------------------------- ------- ------- ------- ------- ---------
Net assets, end of year
(thousands) $1,060,826 $901,912 $903,132 $894,768 $1,025,084
========================== ======= ======= ======= ======= =========
</TABLE>
(a) Prior to June 30, 1987, net commissions paid on new sales of shares under
the Fund's Rule 12b-1 Distribution Plan had been treated for both
financial statement and tax purposes as capital charges.
(b) Calculation based on average shares outstanding.
(c) Excluding applicable sales charges.
(d) "Ratio of total expenses to average net assets" for the year ended
December 31, 1995 includes indirectly paid expenses. Excluding indirectly
paid expenses for the year ended December 31, 1995, the expense ratio
would have been 0.94%.
See Notes to Financial Statements.
<PAGE>
PAGE 23
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
=============================================================================
<TABLE>
<CAPTION>
Assets (Note 1)
<S> <C>
Investments at market value (identified cost--
$1,111,572,150) $1,199,160,324
Cash 226,289
Receivable for:
Investments sold 5,143,753
Fund shares sold 181,716
Interest 20,318,672
Prepaid expenses 100,306
-------------------------------------------------- --------
Total assets 1,225,131,060
-------------------------------------------------- --------
Liabilities (Notes 2 and 4)
Payable for:
Investments purchased 14,001,422
Fund shares redeemed 1,450,612
Distributions to shareholders 4,934,817
Accrued Trustees' fees 16,832
Other accrued expenses 259,335
-------------------------------------------------- --------
Total liabilities 20,663,018
-------------------------------------------------- --------
Net assets $1,204,468,042
-------------------------------------------------- --------
Net assets represented by (Notes 1 and 2)
Paid-in capital $1,147,477,232
Accumulated distributions in excess of net
investment income (1,663,086)
Accumulated net realized loss on investments and
closed futures contracts (28,934,278)
Net unrealized appreciation on investments 87,588,174
-------------------------------------------------- --------
Total net assets $1,204,468,042
================================================== ========
Net asset value per share (Note 2)
Net asset value of $1,204,468,042 / 153,295,044
outstanding shares of beneficial interest $ 7.86
================================================== ========
</TABLE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
=============================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income (Note 1)
Interest $ 77,382,761
----------------------------------- ------ -------
Expenses (Notes 2 and 4)
Investment management fee $ 5,327,202
Other administrative service fees 736,118
Shareholder service fees 1,433,700
Accounting 21,661
Trustees' fees and expenses 55,248
Distribution Plan expenses 4,035,311
----------------------------------- ------ -------
Total expenses 11,609,240
Less: Expenses paid indirectly
(Note 4) (148,151)
----------------------------------- ------ -------
Net expenses 11,461,089
----------------------------------- ------ -------
Net investment income 65,921,672
----------------------------------- ------ -------
Net realized and unrealized gain on
investments and closed futures
contracts (Notes 1 and 3)
Net realized gain (loss) on:
Investments 11,953,543
Closed futures contracts (3,022,778)
----------------------------------- ------ -------
Net realized gain on investments
and closed futures contracts 8,930,765
Net change in unrealized
appreciation on investments 113,250,664
----------------------------------- ------ -------
Net realized and unrealized gain on
investments and closed futures
contracts 122,181,429
----------------------------------- ------ -------
Net increase in net assets
resulting from operations $188,103,101
=================================== ====== =======
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 24
Keystone Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
========================================================================== =========== ==============
<S> <C> <C>
Operations
Net investment income $ 65,921,672 $ 67,393,387
Net realized gain (loss) on investments and closed futures contracts 8,930,765 (37,849,158)
Net change in unrealized appreciation (depreciation) on investments 113,250,664 (139,738,811)
------------------------------------------------------------------------ ------- ---------
Net increase (decrease) in net assets resulting from operations 188,103,101 (110,194,582)
------------------------------------------------------------------------ ------- ---------
Distributions to shareholders from (Note 1)
Net investment income (63,827,615) (68,740,949)
In excess of net investment income 0 (10,297,613)
------------------------------------------------------------------------ ------- ---------
Total distributions to shareholders (63,827,615) (79,038,562)
------------------------------------------------------------------------ ------- ---------
Capital share transactions (Note 2)
Proceeds from shares sold 133,114,586 126,813,101
Payment for shares redeemed (283,907,474) (326,066,785)
Net asset value of shares issued in reinvestment dividends and
distributions 33,258,548 37,710,385
------------------------------------------------------------------------ ------- ---------
Net decrease in net assets resulting from capital share transactions (117,534,340) (161,543,299)
------------------------------------------------------------------------ ------- ---------
Total increase (decrease) in net assets 6,741,146 (350,776,443)
------------------------------------------------------------------------ ------- ---------
Net assets:
Beginning of year 1,197,726,896 1,548,503,339
------------------------------------------------------------------------ ------- ---------
End of year [Including accumulated distributions in excess of net
investment income as follows: 1995--($1,663,086) and 1994--
($3,916,731)](Note 1) $1,204,468,042 $1,197,726,896
======================================================================== ======= =========
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 25
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 (formerly Keystone Custodian Funds,
Inc.) ("Keystone") is the Investment Adviser. The Fund is registered under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
seeks current income, exempt from federal income taxes, while preserving
capital by investing in high quality municipal bonds.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. (formerly
Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is privately owned
by an investor group consisting of current and former members of management
of Keystone and its affiliates. KMI is a wholly-owned subsidiary 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
which requires management to make estimates and assumptions that affect
amounts reported herein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
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 maturing in 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. The Fund may enter into futures contracts. 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 the market risk,
the Fund is subject to
<PAGE>
PAGE 26
Keystone Tax Free Fund
the credit risk that the other party will not be able to complete the
obligations of the contract.
C. 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.
D. Securities transactions are accounted for no later than the day following
the trade date. Realized gains and losses are recorded on the identified cost
basis. Interest income is recorded on the accrual basis. All premiums and
original issue discounts are amortized/ accreted for both financial reporting
and federal income tax purposes.
E. The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under 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 net taxable
investment income and net taxable capital gains, if any, to its shareholders.
The Fund intends to avoid any excise tax liability by making the required
distributions under the Internal Revenue Code.
F. The Fund distributes net investment income monthly and capital gains, if
any, annually. Distributions are determined in accordance with income tax
regulations. The significant differences between financial statement amounts
available for distribution and distributions made in accordance with income
tax regulations are the differences in 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>
Year Ended
12/31/95 12/31/94
============================ =========== =============
<S> <C> <C>
Sales 17,669,831 16,871,171
Redemptions (37,618,182) (43,806,889)
Reinvestment of dividends
and distributions 4,437,352 5,031,307
- ---------------------------- --------- -----------
Net decrease (15,510,999) (21,904,411)
- ---------------------------- --------- -----------
</TABLE>
The Fund bears some of the costs of selling its shares under a Distribution
Plan adopted pursuant to Rule 12b-1 under the 1940 Act. Under the
Distribution Plan, the Fund pays Keystone Investment Distributors Company
(formerly Keystone Distributors, Inc.) ("KIDC"),
<PAGE>
PAGE 27
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 3.00% 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 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 4.00%, applied to the lesser of the net asset
value of shares redeemed or the total cost of such shares.
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 calendar quarter (approximately 1.25% annually) occurring
after the inception of the Distribution Plan. 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 1.00% 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 Distribution Plan, plus
interest at the prime rate plus 1.00% on unpaid amounts thereof (less any
contingent deferred sales charges paid by the shareholders to KIDC).
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 year, KIDC
received $95,377 in deferred sales charges.
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 1.00%) 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 since January 1,
1992.
During the year ended December 31, 1995, the Fund recovered $684,386 in
contingent deferred sales charges. During the year ended December 31, 1995,
the Fund paid KIDC $4,719,697 under the Distribution Plan. The amount paid by
the Fund under its Distribution Plan, net of deferred sales charges, was
$4,035,311 (1.00% of the Fund's average daily net assets). During the year
ended December 31, 1995, KIDC received $757,439, after payments of
commissions on new sales and service fees to dealers and others of
$3,962,258.
(3.) Securities Transactions
As of December 31, 1995, the Fund had a capital loss carryover for federal
income tax purposes of approxi-
<PAGE>
PAGE 28
Keystone Tax Free Fund
mately $28,660,000 which expires as follows: $25,307,000 in 2002 and
$3,353,000 in 2003.
For the year ended December 31, 1995, cost of purchases and proceeds from
sales of investment securities (excluding short-term securities) were
$657,975,531 and $789,712,237, respectively.
(4.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily. The
management fee is calculated at an annual 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.
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 year ended December 31, 1995, the Fund paid or accrued a
management fee of $5,327,202 which represented 0.44% of the Fund's average
net assets. Of such amount paid to KMI, $4,528,122 was paid to Keystone for
its services to the Fund.
Included in the administrative services fee paid by the Fund were the
following amounts incurred by KMI (and reimbursed by the Fund) in providing
or obtaining for the Fund additional operating services, facilities and
supplies: audit and legal--$77,500, custodian fees--$503,476, printing and
supplies-- $94,700, registration fees--$54,450, and other-- $5,992. In
addition during the year ended December 31, 1995, the Fund paid to KIRC
$1,433,700 for shareholder services. This amount for shareholder services is
included in the payments made by KMI.
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended December 31, 1995, the Fund paid custody fees in the
amount of $355,325 and received a credit of $148,151 pursuant to the expense
offset arrangement, resulting in a total expense of $503,476. The assets
deposited with the custodian under the expense offset arrangement could have
been invested in income-producing assets.
For the year ended December 31, 1995, the Fund paid to KII $21,661 for
certain accounting services.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund.
<PAGE>
PAGE 29
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Tax Free Fund
We have audited the accompanying statement of assets and liabilities of
Keystone Tax Free Fund, including the schedule of investments, as of December
31, 1995, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
ten-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation
of securities owned as of December 31, 1995 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Tax Free Fund as of December 31, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the years
in the two-year period then ended, and the financial highlights for each of
the years in the ten-year period then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 2, 1996
<PAGE>
PAGE 30
Keystone Tax Free Fund
Federal Tax Status--Fiscal 1995
Distributions (Unaudited)
The per-share distributions paid to you for the fiscal year ended December
31, 1995, whether taken in shares or cash, are as follows:
<TABLE>
<CAPTION>
Income Dividends
Tax-exempt Taxable
--------------------------
<S> <C>
$0.39 $0.00
==========================
</TABLE>
In January 1996, complete information on the distributions paid during the
calendar year were sent to assist you in completing your federal tax return.
<PAGE>
PAGE 31
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 representitive 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.
ELECTRONICS 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 save 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>
KEYSTONE
FAMILY OF FUNDS
[diamond]
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
Liquid Trust
Mid-Cap Growth Fund (S-3)
Precious Metals Holdings, Inc.
Quality Bond Fund (B-1)
Small Company Growth Fund (S-4)
Strategic Growth Fund (K-2)Tax Free Fund
This report was prepared primarily for the infomration of the Fund's
shareholders. It is authorized for distribution if preceded or accompnaied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you
invest or send money. For a free prospectus on other Keystone funds, contact
your financial adviser or call Keystone.
[Keystone logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
K E Y S T O N E
[Photo]
TAX FREE
FUND
[Keystone logo]
ANNUAL REPORT
DECEMBER 31, 1995
TFF-AR-2/96
34.1M
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