PAGE 1
KEYSTONE TAX FREE FUND
Dear Shareholder:
We are pleased to report on the performance of Keystone Tax Free Fund for the
six-month fiscal period that ended on June 30, 1997. Following this letter is a
discussion with your Fund's manager, discussing portfolio strategy.
PERFORMANCE
For the six-month period your Fund returned 2.52%; for the twelve months period
it returned 7.07%. These results include price changes and reinvestment of
dividends. The Lehman Municipal Bond Index-- a widely recognized benchmark of
municipal bond performance-- returned 3.20% for the same six-month period and
7.81% for the same twelve-month period.
We believe your Fund performed satisfactorily in a difficult interest rate
environment over the past six months. While interest rates ended the period
relatively unchanged, they rose during much of the first half of 1997 and later
declined. Investors continued to be concerned about stronger-than-expected
economic growth, future inflation and higher interest rates. This created an
atmosphere of uncertainty and gave the market a vigilant tone.
Interest rates declined late in the period as employment growth showed signs
of slowing. Throughout the year's first half, inflation remained well contained.
We managed your Fund conservatively during this changing environment. We
improved the overall quality of the portfolio, primarily by reducing positions
in BBB-rated securities and increasing holdings in AAA-rated bonds. We increased
your Fund's net assets invested in AAA-rated bonds from 46% on December 31, 1996
to 54% on June 30, 1997. Your Fund's average quality was AA+, also as of the end
of the reporting period.
In the last half of this period, we increased your Fund's sensitivity to
interest rate changes, as it appeared interest rates would decline and bond
prices would rise. We did this by selling bonds with 5-10 year maturities and
reinvesting proceeds in bonds with 15-20 year maturities.
We also focused on bonds with lower coupons, as well as some attractively
priced zero-coupon bonds. We believe these changes enhanced your Fund's total
return when interest rates fell.
OUTLOOK
Going forward, we are cautiously optimistic about the municipal bond market.
Supply/demand technicals remain favorable. The stronger economic growth has
benefited many municipalities by increasing tax revenues and strengthening their
credit outlook. Higher revenues also have reduced the need for debt financing,
which has restricted the supply of municipal bonds. Meanwhile, demand has
remained steady. This reduced supply and steady demand has helped support
municipal bond prices.
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE TAX FREE FUND
We also expect the economy to grow at a moderate pace and inflation to remain
low, an environment which historically has been favorable for fixed-income
investments. Improvements in productivity have increased efficiency throughout
the world. We believe that, combined with the steadfast efforts of the Federal
Reserve Board to thwart inflation, this will enable the economic expansion to
continue without a resurgence of higher prices.
Thank you for your support of Keystone Tax Free Fund.
Sincerely,
Albert H. Elfner, III
(Signature of Albert H. Elfner, III)
CHAIRMAN AND PRESIDENT
KEYSTONE INVESTMENT MANAGEMENT COMPANY
(Signature of George S. Bissell)
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
<TABLE>
<S> <C>
(Photo of (Photo of George S. Bissell)
Albert H. Elfner,III)
ALBERT H. ELFNER, III GEORGE S. BISSELL
</TABLE>
August 1997
<PAGE>
PAGE 3
A Discussion With
Your Fund's Manager
(Photo of Betsy A. Hutchings)
BETSY A. HUTCHINGS, A SENIOR VICE PRESIDENT AND GROUP LEADER OF THE
MUNICIPAL BOND TEAM OF KEYSTONE INVESTMENT MANAGEMENT COMPANY, IS
PORTFOLIO MANAGER OF THE FUND. A PROFESSIONAL WITH MORE THAN 15 YEARS OF
EXPERIENCE IN INVESTMENT MANAGEMENT, MS. HUTCHINGS ALSO IS PORTFOLIO
MANAGER OF KEYSTONE TAX FREE INCOME FUND. PRIOR TO JOINING KEYSTONE IN
1988, MS. HUTCHINGS SERVED IN PORTFOLIO MANAGER AND RESEARCH POSITIONS AT
SCUDDER, STEVENS & CLARK, NY; AND JOHN NUVEEN & COMPANY, CHICAGO. MS.
HUTCHINGS IS ACTIVE IN BOSTON MUNICIPAL ANALYSTS FORUM AND THE MUNICIPAL
BOND BUYERS CONFERENCE. SHE IS A GRADUATE OF WHEATON COLLEGE.
Q WHY IS THE FUND ATTRACTIVE TO INVESTORS?
A Keystone Tax Free Fund is appropriate for tax-sensitive investors. The Fund is
designed to provide a high level of current income that is exempt from federal
income tax and capital preservation. A portion of income may be subject to the
federal alternative minimum tax (AMT). The Fund offers professional management
and diversification. We believe this is especially important, since many
investors do not have the time or resources to monitor credit quality, the
economy and interest rates. We diversify the Fund by selecting securities with
various maturities from across the nation. We believe this can help reduce the
potential for wide fluctuations in the Fund's share price.
Q HOW DO YOU SELECT THE FUND'S SECURITIES?
A Our management team employs an intensive research process, emphasizing credit
quality and financial stability. The bonds we select must meet our high credit
standards and possess attributes that we believe will enable them to perform
well in our anticipated interest rate and economic environment. We also focus on
diversification and maximizing the Fund's income.
Q WHAT WAS THE INTEREST RATE ENVIRONMENT LIKE OVER THE PAST SIX MONTHS?
A Interest rates rose for much of the first half of 1997 and later declined,
ending the period relatively unchanged. Faster-than-expected economic growth
during the year's first quarter caused investors to become concerned about
future inflation, a trend we witnessed throughout 1996. The Federal Reserve
Board confirmed those concerns in March 1997 by raising the federal funds rate,
the rate at which banks lend to each other overnight, by 1/4%. Interest rates
reversed course as signs of slower employment growth began to appear in early
May. Inflation remained low throughout the first half of the year.
Q HOW DID THAT SPECIFICALLY AFFECT MUNICIPAL BONDS?
A The economy's strength benefited municipal bond investors in several ways.
State and local governments enjoyed higher tax revenues, which helped improve
the fiscal conditions and credit standings of many municipalities. Higher
revenues also enabled these governments to reduce their need for debt financing,
which then restricted supply in the tax-exempt market. During 1996, new
municipal supply issuance stood at $185 billion, compared to $292 billion in
1993. This steady demand and thinner supply gave support to municipal bond
prices.
<PAGE>
PAGE 4
KEYSTONE TAX FREE FUND
Q WHAT STRATEGIES DID YOU USE IN MANAGING THE FUND?
A We used two main strategies. First, we focused on relative value. We did this
by increasing assets in AAA-rated bonds and bonds not subject to the alternative
minimum tax (AMT); and reducing BBB-rated and AMT positions. The yields of
BBB-rated bonds have moved closer to those of AAA-rated bonds, so that we were
able to upgrade the portfolio without giving up much yield. As of June 30, 1997,
approximately 54% of the portfolio's net assets were invested in AAA-rated
securities, versus 46% on December 31, 1996. The Fund's average quality was AA+
also as of June 30, 1997. Similarly, AMT bonds have higher yields than non-AMT
bonds. The yields of the AMT bonds have fallen to the point that they provided
little additional yield compared to non-AMT bonds. We believed that the non-AMT
and higher-rated securities provided better relative value.
We also increased the Fund's sensitivity to interest rate changes. The first
part of this strategy was to invest in bonds with lower coupons. These so-called
"discount" coupons typically generate higher total returns in a declining
interest rate environment. A second part of this strategy was to target new
investments in the 15-20 year maturity range, selling positions that had 5-10
year maturities and buying zero-coupon bonds. As of June 30, 1997, the Fund's
average maturity stood at 18.6 years. We believe these changes enhanced total
return in the latter part of the reporting period.
Q WHAT IS YOUR OUTLOOK OVER THE NEXT SIX MONTHS?
A We are cautiously optimistic in our outlook for municipal bonds, expecting to
see a continuation of many of the trends that have existed over the past six
months. We anticipate steady economic growth, low inflation and a positive
relationship between supply and demand.
We believe that improvements in productivity-- specifically from investment in
computers and information processing-- can enable the economy to grow at a
steady pace without a resurgence in inflation. In our opinion, this type of
environment should continue to benefit municipalities by producing higher tax
revenues, which reduces their need to issue bonds while improving the credit
quality on their outstanding bonds.
Investors also have responded positively to news out of Washington. The
federal deficit continues to decline; and many investors believe that members of
Congress are making progress on settling their differences.
Longer term, we also think demographics could have a favorable effect on
municipal bonds. The first of the baby-boomers have reached fifty and may be
looking for a greater portion of their portfolios to be income-producing,
tax-advantaged investments.
--
THIS COLUMN IS INTENDED TO ANSWER QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
201 SOUTH COLLEGE STREET, SUITE 400
CHARLOTTE, N.C. 28288-1195
<PAGE>
PAGE 5
Your Fund's Performance
(Chart appears below with the following plot points)
Tax Value $19,746
Keystone Tax Free Fund
(In thousands)
Dividend Initial
Reinvestment Investment
6/87 10,000 10,000
6/89 11,859 10,024
6/91 13,484 9,495
6/93 16,588 10,036
6/95 17,478 9,063
6/97 19,746 9,255
The cumulative and average annual total returns with sales charge calculations
reflect the deduction of the 3% contingent deferred sales charge (CDSC) for
those investors who sold Fund shares after one calendar year. Investors who
retained their investment earned the returns in the without sales charge lines.
<TABLE>
<CAPTION>
HISTORICAL RECORD
<S> <C>
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C>
6 mos w/o sales charge 2.52%
1 yr w/o sales charge 7.07%
1 yr w/ sales charge 4.07%
5 years 31.39%
10 years 97.46%
AVERAGE ANNUAL TOTAL RETURN
1 yr w/o sales charge 7.07%
1 yr w/ sales charge 4.07%
5 years 5.61%
10 years 7.04%
</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 Classic fund by phone or in
writing. The Fund reserves the right to change or terminate the exchange offer.
<PAGE>
PAGE 6
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM INVESTMENTS-- 97.9%
ALABAMA-- 0.9%
$ 2,035,000 Alabama Agricultural and
Mechanic University
6.50%, 11/1/25, (MBIA)...... $ 2,211,211
2,065,000 Alabama Housing Finance
Authority, Single Family,
Collateralized Home
Mortgage, Series D1
6.00%, 10/1/16.............. 2,110,554
4,000,000 Jefferson County, Alabama,
Sewer Revenue, Warrants,
Series D
5.70%, 2/1/18, (FGIC)....... 4,011,600
3,500,000 Mobile, Alabama, Industrial
Development Board, Solid
Waste Disposal, Mobile
Energy Serv. Co. Project
6.95%, 1/1/20............... 3,733,625
12,066,990
ALASKA-- 1.2%
15,000,000 Alaska Energy Authority,
Utilities Revenue, Linked
Bulls/Bears Floaters (c)
6.60%, 7/1/15, (FGIC)....... 16,437,150
265,000 Alaska State Housing Finance
Corporation, Collateralized
Home Mortgage, Series A
8.00%, 12/1/13.............. 273,976
16,711,126
ARIZONA-- 2.3%
11,000,000 Central Arizona, Water
Conservation District,
Contract Revenue, Central
Arizona Project, Series A
5.50%, 11/1/09.............. 11,353,760
850,000 Chandler, Arizona, Water and
Sewer Revenue
6.75%, 7/1/06, (FGIC)....... 916,309
Maricopa County, Arizona,
Elementary School District:
2,000,000 #008, Osborn Refunding
7.50%, 7/1/07, (MBIA)......... 2,420,440
3,750,000 #068, Series A
6.75%, 7/1/14, (AMBAC)........ 4,177,012
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
ARIZONA-- CONTINUED
$ 6,000,000 Maricopa County, Arizona,
Unified School District
8.13%, 1/1/10, (MBIA)....... $ 7,232,220
3,785,000 Northern Arizona University,
College and University
Revenue
5.00%, 6/1/15, (FGIC)....... 3,590,981
370,000 Pima County, Arizona,
Industrial Development
Authority, Health Care
Corporation Revenue
8.00%, 7/1/13, (MBIA)....... 390,613
2,030,000 Pima County, Arizona, Unified
School District, Tucson
Refunding
7.50%, 7/1/03, (FGIC)....... 2,339,717
32,421,052
ARKANSAS-- 0.1%
1,725,000 Arkansas State Development
Finance Authority, Single
Family Mortgage Revenue
Refunding
8.00%, 8/15/11.............. 1,851,753
CALIFORNIA-- 7.6%
California Health Facilities
Financing Authority Revenue:
9,800,000 Children's Hospital
5.38%, 7/1/20, (MBIA)......... 9,443,182
2,500,000 Pomona Valley Hospital,
Series A
5.63%, 7/1/19, (MBIA)......... 2,489,050
200,000 St. Francis Medical Center,
Series A
5.50%, 10/1/09................ 208,434
1,995,000 California Housing Finance
Agency, Revenue Bonds, Home
Mortgage, Series H
6.25%, 8/1/27............... 2,034,681
California State Public Works
Board, Lease Department
Correctional State Prison:
9,000,000 Series A
5.25%, 1/1/21, (AMBAC)........ 8,602,470
3,700,000 Series E
5.50%, 6/1/15................. 3,699,334
</TABLE>
<PAGE>
PAGE 7
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
CALIFORNIA-- CONTINUED
California State Public Works
Board, Various California
University Projects:
$ 4,000,000 Series A
5.35%, 12/1/15................ $ 3,925,840
350,000 Series B
5.50%, 6/1/19................. 346,027
Central Coast Water Authority
California Revenue, State
Water Project, Regional
Facilities, Series A:
6,420,000 5.00%, 10/1/16, (AMBAC)....... 6,004,241
5,000,000 5.00%, 10/1/22, (AMBAC)....... 4,603,100
5,615,000 Eden Township, California,
Hospital District Revenue
7.40%, 11/1/19.............. 5,948,531
5,000,000 Los Angeles County,
California, Public Works
Financing Authority Lease
Revenue, Series A
5.25%, 9/1/13, (MBIA)....... 4,913,150
6,800,000 Los Angeles, California,
Transportation Commission,
Series A
6.25%, 7/1/13, (MBIA)....... 7,164,888
6,015,000 Oakland, California, Revenue
Refunding, Series A
7.60%, 8/1/21, (FGIC)....... 6,346,306
Riverside County, California,
Asset Leasing Corp.,
Leasehold Revenue, Riverside
County Hospital Project:
1,750,000 (effective yield 5.80%) (b)
0.00%, 6/1/15, (MBIA)......... 631,785
1,395,000 (effective yield 5.85%) (b)
0.00%, 6/1/16, (MBIA)......... 471,398
5,000,000 San Diego, California, Public
Facilities Financing
Authority, Sewer Revenue,
Series A
5.25%, 5/15/22, (FGIC)...... 4,760,000
22,500,000 San Francisco, California,
State Building Authority,
Lease Revenue, San Francisco
Civic Center Complex, Series
A
5.25%, 12/1/21, (AMBAC)..... 21,429,450
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
CALIFORNIA-- CONTINUED
$ 7,050,000 San Jose, California,
Redevelopment Agency Tax
Allocation, Merged Area
Redevelopment Project
6.00%, 8/1/09, (MBIA)....... $ 7,687,602
10,000,000 Southern California Public
Power Authority,
Transmission Project Revenue
(effective yield 5.93%) (b)
0.00%, 7/1/15, (FGIC)....... 3,741,200
Victor Valley, California,
Joint Unified High School
District, Capital
Appreciation:
2,635,000 (effective yield 6.20%) (b)
0.00%, 9/1/10, (MBIA)......... 1,306,881
3,780,000 (effective yield 6.25%) (b)
0.00%, 9/1/11, (MBIA)......... 1,753,202
107,510,752
COLORADO-- 6.0%
4,000,000 Araphoe County, Colorado,
Single Family Mortgage
Revenue, Capital
Appreciation, Series A
(effective yield 6.00%) (b)
0.00%, 9/1/10............... 1,963,560
City and County of Denver,
Colorado, Airport System:
Series A:
6,625,000 7.50%, 11/15/23............... 7,507,251
525,000 8.00%, 11/15/25............... 584,740
7,750,000 8.50%, 11/15/23............... 8,729,445
23,830,000 8.75%, 11/15/23............... 27,895,160
3,500,000 Series B
7.25%, 11/15/12............... 3,823,785
Series D:
7,100,000 7.75%, 11/15/13............... 8,729,734
12,250,000 7.75%, 11/15/21............... 13,671,245
1,880,000 Colorado Health Facilities
Authority, Sisters Charity
Health Care, Series A
6.25%, 5/15/09, (MBIA)...... 2,080,596
El Paso County, Colorado,
School District #11,
Colorado Springs:
2,310,000 6.50%, 12/1/12................ 2,612,125
2,000,000 7.10%, 12/1/13................ 2,391,180
1,000,000 7.10%, 12/1/16................ 1,202,940
</TABLE>
<PAGE>
PAGE 8
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
COLORADO-- CONTINUED
$ 2,250,000 Larimer County, Colorado,
School District
7.00%, 12/15/16, (MBIA)..... $ 2,748,397
83,940,158
CONNECTICUT-- 0.2%
1,375,000 Connecticut State Resources
Recovery Authority,
Bridgeport Project, Series B
8.50%, 1/1/00............... 1,419,082
1,600,000 Connecticut State Special Tax
Obligation, Series B
6.50%, 10/1/12.............. 1,798,688
3,217,770
DELAWARE-- 0.1%
1,600,000 Delaware State Health
Facilities Authority,
Medical Center of Delaware
7.00%, 10/1/15, (MBIA)...... 1,700,544
110,000 Delaware State Housing
Authority Revenue,
Residential Mortgage, Series
A
9.38%, 6/1/12............... 110,372
1,810,916
FLORIDA-- 6.5%
9,400,000 Broward County, Florida,
Resource Recovery, South
Project
7.95%, 12/1/08.............. 10,231,712
7,440,000 Dade County, Florida, School
District
5.00%, 2/15/15, (MBIA)...... 7,078,416
Dade County, Florida, Water
and Sewer Systems Revenue:
5,000,000 5.25%, 10/1/21, (FGIC)........ 4,794,700
10,000,000 5.25%, 10/1/26, (FGIC)........ 9,527,300
2,500,000 Escambia County, Florida,
Pollution Control Revenue,
Champion International
Corporation Project
6.40%, 9/1/30............... 2,564,825
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
FLORIDA-- CONTINUED
$ 580,000 Florida Housing Finance
Agency, GNMA Collateralized
Home Mortgage
8.00%, 12/1/20.............. $ 608,437
12,000,000 Florida State, Bond Finance
Department, Environmental
Preservation, Series A
5.00%, 7/1/10, (AMBAC)...... 11,726,880
3,580,000 Florida State, Jacksonville
Transportation Authority
9.20%, 1/1/15............... 4,947,918
Gainesville, Florida,
Utilities System Revenue:
7,250,000 Series A
5.20%, 10/1/22................ 6,869,592
435,000 Series B
7.50%, 10/1/08................ 527,503
495,000 Hillsborough County, Florida,
Housing Finance Agency,
Single Family Mortgage
Revenue
7.30%, 4/1/22............... 513,142
1,860,000 Indian River County, Florida,
Water and Sewer Revenue
5.25%, 9/1/20, (FGIC)....... 1,801,782
1,800,000 Jacksonville, Florida, Health
Facilities Authority, New
Children's Hospital
7.00%, 6/1/21, (MBIA)....... 1,959,372
300,000 Lee County, Florida, Solid
Waste System, Series B
7.00%, 10/1/11.............. 330,180
North Broward, Florida,
Hospital District Revenue,
Refunding & Improvement:
4,525,000 5.25%, 1/15/17................ 4,337,756
2,250,000 5.38%, 1/15/24................ 2,165,580
Orlando-Orange County,
Florida, Expressway
Authority:
3,000,000 8.25%, 7/1/14................. 3,979,620
2,960,000 8.25%, 7/1/15, (FGIC)......... 3,940,263
</TABLE>
<PAGE>
PAGE 9
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
FLORIDA-- CONTINUED
$ 2,985,000 Palm Beach County, Florida,
Health Revenue, John F.
Kennedy Hospital
9.50%, 8/1/13................. $ 3,873,127
3,250,000 St. Petersburg, Florida,
Health Facilities Authority
7.00%, 12/1/15, (MBIA)...... 3,578,315
500,000 Tampa, Florida, Allegheny
Health Systems Revenue
6.50%, 12/1/23.............. 549,310
3,145,000 Tampa, Florida, Guaranteed
Entitlement, Series A
8.38%, 10/1/08.............. 3,305,772
1,825,000 Tampa, Florida, Subordinate
Guaranteed Entitlement,
Series B (Pre-refunded)
8.50%, 10/1/18.............. 1,921,032
500,000 Tarpon Springs, Florida,
Health Facilities Authority,
Hospital Revenue, Tarpon
Springs Hospital
8.75%, 5/1/12............... 522,925
91,655,459
GEORGIA-- 3.5%
3,000,000 Forsyth County, Georgia,
School District
6.75%, 7/1/16............... 3,450,240
9,800,000 Georgia Municipal Electric
Authority Power Revenue,
Series B
6.38%, 1/1/16............... 10,703,168
Georgia State, General
Obligation:
10,000,000 Series B
6.80%, 3/1/11................. 11,676,900
10,700,000 Series C
5.25%, 4/1/11................. 10,874,731
Series D:
1,500,000 6.70%, 8/1/10................. 1,737,540
3,425,000 6.25%, 9/1/08................. 3,823,704
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
GEORGIA-- CONTINUED
$ 4,255,000 Metropolitan Atlanta Rapid
Transit Authority, Georgia,
Sales Tax Revenue, Series P
6.25%, 7/1/11, (AMBAC)...... $ 4,672,118
2,370,000 Private Colleges and
University Facilities
Authority Revenue, Georgia,
Mercer University Project
6.40%, 11/1/11, (MBIA)...... 2,641,412
49,579,813
HAWAII-- 0.6%
8,000,000 Hawaii State Department of
Budget and Finance, Special
Purpose Revenue, Hawaii
Electric Company
7.38%, 12/1/20, (MBIA)...... 8,713,200
IDAHO-- 0.1%
1,055,000 Idaho Housing Finance
Authority, Single Family
Mortgage Bonds, Series D-1
8.00%, 1/1/20............... 1,139,495
ILLINOIS-- 3.0%
15,860,000 Chicago, Illinois, Gas Supply
Revenue, People's Gas Light
and Coke Company, Series A
8.10%, 5/1/20............... 17,402,385
4,000,000 Illinois Development Finance
Authority, Pollution Control
Revenue Refunding,
Commonwealth Edison Company
Project, Series D,
6.75%, 3/1/15............... 4,380,280
9,000,000 Illinois State, Sales Tax,
Series P
6.50%, 6/15/22.............. 10,135,800
2,965,000 Kankakee, Illinois, Sewer
Revenue
6.88%, 5/1/11, (FGIC)....... 3,251,893
</TABLE>
<PAGE>
PAGE 10
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
ILLINOIS-- CONTINUED
$ 3,000,000 Metropolitan Fair and
Exposition Authority,
Illinois, Series A
5.00%, 6/1/15............... $ 2,724,660
4,950,000 Quincy, Illinois, Blessing
Hospital Revenue
6.00%, 11/15/18............. 4,878,869
42,773,887
KANSAS-- 0.2%
2,000,000 Burlington, Kansas, Pollution
Control, Kansas Gas and
Electric Company
7.00%, 6/1/31, (MBIA)....... 2,190,560
KENTUCKY-- 1.6%
8,000,000 Carroll County, Kentucky,
Kentucky Utility Company,
Series A
7.45%, 9/15/16.............. 9,020,320
6,000,000 Jefferson County, Kentucky,
Hospital Revenue, Linked
ACES/Inverse Floaters (c)
6.44%, 10/23/14, (MBIA)..... 6,301,200
4,360,000 Kentucky Housing Corporation,
Housing Revenue Bond,
Series C
7.90%, 1/1/21............... 4,590,775
2,725,000 Trimble County, Kentucky,
Pollution Control,
Louisville Gas and Electric
Company
7.63%, 11/1/20.............. 2,990,388
22,902,683
LOUISIANA-- 1.7%
1,750,000 Louisiana Public Facilities
Authority, Hospital Revenue,
Woman's Hospital Foundation
Project
7.25%, 10/1/22.............. 1,986,040
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
LOUISIANA-- CONTINUED
New Orleans, Louisiana,
Capital Appreciation:
$ 6,960,000 (effective yield 6.05%) (b)
0.00%, 9/1/14, (AMBAC)........ $ 2,688,857
2,800,000 (effective yield 7.10%) (b)
0.00%, 9/1/15, (AMBAC)........ 1,014,384
3,755,000 (effective yield 7.15%) (b)
0.00%, 9/1/17, (AMBAC)........ 1,204,491
5,000,000 Orleans Parish, Louisiana,
Parishwide School District
5.38%, 9/1/21, (AMBAC)...... 4,845,300
5,175,000 Orleans Parish, Louisiana,
School Board
9.05%, 2/1/10, (ETM)........ 6,870,796
3,000,000 Orleans Parish, Louisiana,
School Board, Refunding
Bonds, Series B
5.20%, 2/1/14............... 2,914,920
2,000,000 Ouachita Parish, Louisiana,
Louisiana Hospital Service
Revenue, Glenwood Regional
Medical Center
7.50%, 7/1/21............... 2,245,920
23,770,708
MAINE-- 0.7%
Maine State Housing Authority,
Mortgage Purchase:
2,580,000 Series A3
7.80%, 11/15/15............... 2,637,663
4,000,000 Series C2
6.05%, 11/15/28............... 4,019,960
2,500,000 Regional Waste System, Maine,
Solid Waste Resources
Recovery Revenue
8.15%, 7/1/11............... 2,676,800
9,334,423
MARYLAND-- 0.0%
115,000 Maryland State Community
Development Administration,
Multi-Family Housing
8.75%, 5/15/12.............. 115,714
</TABLE>
<PAGE>
PAGE 11
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
MASSACHUSETTS-- 9.2%
$ 225,000 Lawrence, Massachusetts,
General Obligation
6.25%, 2/15/09, (AMBAC)..... $ 243,893
Massachusetts Bay
Transportation Authority:
Series A:
7,550,000 6.25%, 3/1/12................. 8,321,610
6,110,000 7.00%, 3/1/11................. 7,180,961
2,125,000 Series B
6.20%, 3/1/16................. 2,339,030
Massachusetts Bay
Transportation Authority,
General Transportation
Systems, Series A:
8,000,000 5.00%, 3/1/23, (FGIC)......... 7,360,400
7,615,000 5.13%, 3/1/17, (FGIC)......... 7,281,996
5,000,000 7.00%, 3/1/07................. 5,785,400
4,550,000 Massachusetts Bay
Transportation Authority,
General Transportation
Systems, Refunding, Series A
7.00%, 3/1/08............... 5,301,159
13,750,000 Massachusetts Industrial
Finance Agency, Harvard
Community Health Plan,
Incorporated, Series B
8.13%, 10/1/17.............. 14,603,600
8,000,000 Massachusetts Industrial
Finance Agency, Solid Waste
Disposal Revenue, Senior
Lien, Massachusetts
Recycling Association,
Series A
9.00%, 8/1/16............... 3,200,000
26,000,000 Massachusetts Municipal
Wholesale Electric Company
Power Supply Systems
Revenue, Linked PARS and
INFLOS (c)
5.45%, 7/1/18............... 24,895,260
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
MASSACHUSETTS-- CONTINUED
Massachusetts State Health and
Educational Facilities
Authority:
$ 1,700,000 Brigham & Women's Hospital
6.75%, 7/1/24, (MBIA)......... $ 1,833,127
2,000,000 Capital Asset Program
7.30%, 10/1/18, (MBIA)........ 2,188,620
5,000,000 Massachusetts General
Hospital, Series F
6.25%, 7/1/12, (AMBAC)........ 5,546,800
600,000 McLean Hospital Issue,
Series C
6.50%, 7/1/10................. 651,582
400,000 Milton Hospital, Series B
7.25%, 7/1/05................. 435,964
New England Deaconess
Hospital:
1,000,000 6.88%, 4/1/22................. 1,069,960
2,980,000 6.88%, 4/1/22, (AMBAC)........ 3,252,551
Massachusetts State Water
Resources Authority:
1,500,000 Series A
7.13%, 4/1/00................. 1,598,040
5,000,000 Series B
5.00%, 12/1/16, (MBIA)........ 4,697,500
Massachusetts State, General
Obligation:
Consolidated Loan, Series C
8,000,000 6.60%, 11/1/08, (FGIC)........ 8,889,920
Series B
5,000,000 5.25%, 6/1/16, (FGIC)......... 4,859,050
Series C
7,600,000 6.00%, 8/1/09, (FGIC)......... 8,258,540
85,000 Massachusetts State, Water
Pollution Abatement Trust,
Pooled Loan Program,
Series 2
6.13%, 2/1/08............... 93,479
129,888,442
</TABLE>
<PAGE>
PAGE 12
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
MICHIGAN-- 2.8%
$ 3,000,000 Detroit, Michigan, Sewage
Disposal Revenue, Series A
5.00%, 7/1/22, (MBIA)....... $ 2,770,800
2,450,000 Michigan State University
Revenues, Series A
5.13%, 2/15/16, (AMBAC)..... 2,326,863
9,500,000 Monroe County, Michigan,
Economic Development
Corporation, Detroit Edison
Company
6.95%, 9/1/22, (FGIC)....... 11,381,570
51,525,000 Okemos, Michigan, Public
School District, Series I
(effective yield 7.35%) (b)
0.00%, 5/1/21............... 11,499,349
35,490,000 West Ottawa, Michigan, Public
School District, Capital
Appreciation (effective
yield 7.55%) (b)
0.00%, 5/1/15............... 11,872,115
39,850,697
MINNESOTA-- 1.0%
1,220,000 Dakota County, Minnesota,
Single Family Mortgage
8.10%, 9/1/12............... 1,272,643
1,330,000 Minnesota State Housing
Finance Agency, Single
Family Mortgage, Series D
8.00%, 1/1/23............... 1,382,176
11,925,000 University of Minnesota,
University Revenue, Series A
5.50%, 7/1/21............... 11,973,415
14,628,234
MISSISSIPPI-- 0.1%
1,000,000 Harrison County, Mississippi,
Wastewater Treatment
Management
8.50%, 2/1/13............... 1,346,750
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
MISSOURI-- 0.6%
$ 4,725,000 Missouri State Health and
Educational Facilities
Authority, Barnes Jewish
Hospital
5.15%, 5/15/10, (MBIA)...... $ 4,701,186
945,000 Missouri State Housing
Development Commission,
Mortgage Revenue, Single
Family, Series B
6.45%, 9/1/27............... 977,546
2,500,000 Sikeston, Missouri, Electric
Revenue
5.00%, 6/1/22, (MBIA)....... 2,309,175
7,987,907
NEVADA-- 0.7%
3,000,000 Clark County, Nevada, School
District, Series A
6.75%, 3/1/07, (MBIA)....... 3,226,560
6,000,000 Clark County, Nevada, Series A
7.50%, 6/1/09, (AMBAC)...... 7,253,760
10,480,320
NEW HAMPSHIRE-- 0.3%
New Hampshire Higher Education
& Health Facilities
Authority, Frisbie Memorial
Hospital, Revenue Bonds:
3,155,000 6.13%, 10/1/13................ 3,171,974
1,000,000 Gloucester County Project,
Series A
8.13%, 7/1/10................. 1,014,080
4,186,054
NEW JERSEY-- 0.8%
8,750,000 New Jersey Economic
Development Authority, Water
Facilities Revenue, New
Jersey American Water
Company Incorporated Project
6.50%, 4/1/22, (FGIC)....... 9,275,875
</TABLE>
<PAGE>
PAGE 13
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
NEW JERSEY-- CONTINUED
New Jersey Health Care
Facilities Financing
Authority:
$ 1,000,000 Jersey Shore Medical Center
6.13%, 7/1/12, (AMBAC)........ $ 1,044,790
1,200,000 St. Elizabeth's Hospital,
Series B
7.75%, 7/1/98................. 1,234,908
11,555,573
NEW MEXICO-- 0.2%
1,500,000 Albuquerque, New Mexico,
Hospital System Revenue,
Series A
6.38%, 8/1/07, (MBIA)....... 1,616,385
1,000,000 Albuquerque, New Mexico, Joint
Water and Sewer System
Revenue, Series A (effective
yield 6.90%) (b)
0.00%, 7/1/08, (FGIC)....... 565,010
1,230,000 New Mexico Educational
Assistance Foundation,
Series B
6.30%, 12/1/04.............. 1,328,781
3,510,176
NEW YORK-- 15.4%
4,500,000 Metropolitan Transportation
Authority, New York,
Dedicated Tax Fund, Series A
5.50%, 4/1/15, (MBIA)....... 4,493,925
3,050,000 Metropolitan Transportation
Authority, New York,
Transportation Facilities
Revenue, Series M
5.50%, 7/1/08, (FGIC)....... 3,192,374
7,980,000 New York City, New York,
General Obligation,
Prerefunded, Series A
7.75%, 8/15/15.............. 9,072,781
400,000 New York City, New York,
General Obligation,
Refunding, Series A
5.75%, 8/1/10, (FGIC)....... 409,512
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
NEW YORK-- CONTINUED
New York City, New York,
General Obligation,
Unrefunded Balance,
Series A :
$ 615,000 7.75%, 8/15/08................ $ 683,443
335,000 7.75%, 8/15/14................ 372,282
270,000 7.75%, 8/15/15................ 299,517
New York City, New York,
Municipal Water Finance
Authority, Water and Sewer
Systems Revenue:
Series A:
10,000,000 5.50%, 6/15/24................ 9,660,000
4,565,000 7.00%, 6/15/15, (FGIC)........ 4,960,146
Series B:
8,000,000 5.50%, 6/15/27, (MBIA)........ 7,783,520
5,000,000 5.75%, 6/15/26................ 4,986,550
New York State Dormitory
Authority Revenue, City
University Educational
Facilities:
1,000,000 5.38%, 7/1/14, (FGIC)......... 991,590
3,780,000 7.00%, 7/1/09, (FGIC)......... 4,421,164
4,535,000 New York State Dormitory
Authority Revenue, Mental
Health Facility
5.13%, 2/15/21, (MBIA)...... 4,254,374
New York State Dormitory
Authority Revenue, State
University Educational
Facilities:
3,000,000 5.25%, 5/15/15, (AMBAC)....... 2,941,500
4,000,000 5.50%, 5/15/13, (FSA)......... 4,062,600
7,000,000 Series A
5.25%, 5/15/15, (FSA)......... 6,887,090
9,500,000 Series B
5.25%, 5/15/13, (FSA)......... 9,446,990
Series C:
1,100,000 7.38%, 5/15/10................ 1,289,167
10,500,000 7.50%, 5/15/11................ 12,436,830
</TABLE>
<PAGE>
PAGE 14
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
NEW YORK-- CONTINUED
$ 7,400,000 New York State Energy Research
and Development Authority,
Consolidated Edison Project
7.75%, 1/1/24............... $ 7,628,512
5,000,000 New York State Environmental
Facilities Corporation,
State Water Pollution
Control (New York City Water
Finance Authority), Series E
6.88%, 6/15/10.............. 5,446,350
2,000,000 New York State Local
Government Assistance
Corporation, Series C
5.50%, 4/1/17............... 2,011,720
New York State Medical Care
Facilities, Finance Agency
Revenue:
2,900,000 6.38%, 8/15/14, (FGIC)........ 3,110,569
2,255,000 6.38%, 11/15/19, (AMBAC)...... 2,397,133
1,250,000 Health Center Projects,
Series A
6.38%, 11/15/19............... 1,320,712
3,500,000 New York Hospital, FHA Insured
Mortgage, Series A
6.80%, 8/15/24, (AMBAC)....... 3,891,195
2,000,000 New York Hospital, Series A
6.75%, 8/15/14................ 2,217,320
4,000,000 New York State Mortgage
Agency, Homeowner Mortgage,
Series 27
6.90%, 4/1/15............... 4,317,000
1,565,000 New York State Mortgage
Agency, Series A
6.88%, 4/1/17............... 1,582,857
1,125,000 New York State Power
Authority, General Purpose
Revenue
7.00%, 1/1/18............... 1,305,698
New York State Thruway
Authority, Highway and
Bridge Trust Fund, Series A:
1,500,000 5.25%, 4/1/16, (AMBAC)........ 1,459,590
3,300,000 5.25%, 4/1/17, (AMBAC)........ 3,208,557
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
NEW YORK-- CONTINUED
$10,000,000 New York State Thruway
Authority, General Revenue,
Series D
5.25%, 1/1/21............... $ 9,621,600
New York State Urban
Development Corporation
Revenue, Correctional
Facilities:
15,920,000 Refunding, Series A
6.50%, 1/1/10................. 17,370,312
4,000,000 Series 7
5.70%, 1/1/16................. 3,972,360
Series A:
575,000 6.50%, 1/1/09................. 628,952
9,000,000 7.50%, 4/1/11................. 10,102,230
10,550,000 New York State, General
Obligation
5.25%, 3/1/17............... 10,111,331
500,000 Niagara Falls, New York,
Public Improvement
7.50%, 3/1/14, (MBIA)....... 618,780
3,000,000 Port Authority, New York and
New Jersey, Consolidated
104th Series
4.75%, 1/15/26, (AMBAC)..... 2,642,730
Triborough Bridge and Tunnel
Authority Revenue, New York,
General Purpose Bonds:
14,120,000 Series B
5.30%, 1/1/17................. 13,750,621
6,000,000 Series Q
5.00%, 1/1/17, (MBIA)......... 5,629,560
10,000,000 Series Y
5.50%, 1/1/17................. 10,095,000
217,086,044
OHIO-- 1.4%
2,000,000 Adams County, Ohio Valley
Local School District
7.00%, 12/1/15.............. 2,388,720
Cleveland, Ohio, Public Power
Systems, First Mortgage,
Series A:
7,000,000 7.00%, 11/15/16, (MBIA)....... 8,044,960
1,000,000 7.00%, 11/15/24, (MBIA)....... 1,158,660
</TABLE>
<PAGE>
PAGE 15
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
OHIO-- CONTINUED
$ 1,285,000 Columbus, Ohio, General
Obligation
12.38%, 2/15/06............. $ 1,936,623
1,500,000 Montgomery County, Ohio,
Hospital Revenue, Kettering
Medical Center
6.25%, 4/1/20, (MBIA)....... 1,642,965
1,000,000 Ohio State Higher Educational
Facility Commission
6.13%, 11/15/17, (MBIA)..... 1,047,670
3,000,000 Ohio State Water Development
Authority Revenue, Safe
Water Series
6.00%, 12/1/07, (AMBAC)..... 3,272,940
19,492,538
OKLAHOMA-- 0.2%
2,250,000 Oklahoma State Industrial
Authority, Baptist Medical
Center
7.00%, 8/15/14.............. 2,463,997
PENNSYLVANIA-- 6.7%
2,500,000 Allegheny County,
Pennsylvania, Sewer Revenue
Refunding (effective yield
6.10%) (b)
0.00%, 6/1/15, (FGIC)....... 907,275
80,000 Beaver County, Pennsylvania,
Industrial Development
Authority, Ohio Edison
Project, Series A
7.75%, 9/1/24............... 84,547
4,390,000 Beaver County, Pennsylvania,
Ohio Edison
7.00%, 6/1/21, (FGIC)....... 4,716,923
500,000 Delaware County, Pennsylvania,
Industrial Development
Authority Pollution Control
Revenue
7.38%, 4/1/21............... 540,675
2,000,000 Lebanon County, Pennsylvania,
Good Samaritan Hospital
Authority, Project Revenue
6.00%, 11/15/18............. 1,998,680
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
PENNSYLVANIA-- CONTINUED
$ 900,000 Montgomery County,
Pennsylvania, Industrial
Development and Pollution
Control, Philadelphia
Electric Company
7.60%, 4/1/21............... $ 963,522
2,500,000 North Penn, Pennsylvania,
Water Authority
6.88%, 11/1/19, (FGIC)...... 2,849,675
7,500,000 Northumberland County,
Pennsylvania, Commonwealth
Lease Revenue, Capital
Appreciation (effective
yield 7.10%) (b)
0.00%, 10/15/10, (MBIA)..... 3,700,425
8,000,000 Pennsylvania Housing Finance
Agency, Multi-Family
Mortgage, Section 8
8.20%, 7/1/24............... 8,579,680
5,545,000 Pennsylvania Housing Finance
Agency, Residential
Development, Section 8,
Series A
7.60%, 7/1/13............... 5,940,691
Pennsylvania Housing Finance
Agency, Single Family
Mortgage:
3,000,000 Series P
8.00%, 4/1/16................. 3,089,310
4,000,000 Series T
7.75%, 10/1/09................ 4,179,200
3,950,000 Series V
7.80%, 4/1/16................. 4,084,695
1,260,000 Pennsylvania Intergovernmental
Cooperative Authority,
Philadelphia Funding
6.75%, 6/15/21, (FGIC)...... 1,424,304
4,000,000 Pennsylvania State Higher
Educational Facilities
Authority, Allegheny General
Hospital, Series A
7.13%, 9/1/07............... 4,345,560
3,750,000 Pennsylvania State Higher
Educational Facilities
Authority, State System
Higher Education, Series O
5.13%, 6/15/24, (AMBAC)..... 3,503,813
</TABLE>
<PAGE>
PAGE 16
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
PENNSYLVANIA-- CONTINUED
Philadelphia, Pennsylvania,
Hospital and Higher
Education Facilities:
Albert Einstein Medical Center
$ 3,000,000 7.00%, 10/1/21................ $ 3,184,830
2,350,000 7.63%, 4/1/11................. 2,488,979
280,000 Community College, Series B
6.50%, 5/1/07................. 311,693
2,500,000 Temple University Hospital
5.50%, 11/15/15............... 2,402,125
3,350,000 Philadelphia, Pennsylvania,
School District, Series B
5.25%, 4/1/17............... 3,232,750
15,500,000 Philadelphia, Pennsylvania,
Water and Wastewater Revenue
5.00%, 6/15/16, (FSA)....... 14,368,345
3,175,000 Pittsburgh, Pennsylvania,
Urban Redevelopment
Authority, Multi-Family
Housing Mortgage, 1985
Series A
9.25%, 12/1/27.............. 3,316,923
6,350,000 Sayre, Pennsylvania, Health
Care Facilities Authority,
Guthrie Healthcare, Series A
7.10%, 3/1/17............... 6,896,481
3,000,000 South Fork Municipal
Authority, Pennsylvania,
Hospital Revenue, Good
Samaritan Medical Center,
Series B
5.25%, 7/1/26............... 2,826,060
2,500,000 Southeastern Pennsylvania
Transportation Authority,
Special Revenue
5.38%, 3/1/22, (FGIC)....... 2,428,450
5,000,000 Westmoreland County,
Pennsylvania, Municipal
Authority, Capital
Appreciation, Series C
(effective yield 5.69%) (b)
0.00%, 8/15/15.............. 1,832,050
94,197,661
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
RHODE ISLAND-- 0.4%
$ 5,710,000 Rhode Island State Health and
Educational Building
Corporation, Hospital
Financing Revenue, Roger
Williams General Hospital
9.50%, 7/1/16............... $ 5,848,296
SOUTH CAROLINA-- 1.2%
5,000,000 Piedmont Municipal Power
Agency, South Carolina
Electric Revenue
5.38%, 1/1/25, (MBIA)....... 4,877,950
1,610,000 South Carolina State Housing
Finance and Development
Authority, Homeownership
Mortgage Purchase, Series B
7.90%, 7/1/32, (FHA)........ 1,686,716
9,000,000 South Carolina State Port
Authority, Port Revenue
6.75%, 7/1/21, (AMBAC)...... 9,660,780
16,225,446
TENNESSEE-- 2.4%
5,465,000 Bristol, Tennessee, Health and
Education Authority, Bristol
Memorial Hospital
6.75%, 9/1/10, (FGIC)....... 6,235,237
Knox County, Tennessee, Health
and Educational Facilities,
Fort Sanders Hospital
Alliance:
8,000,000 Series B
7.25%, 1/1/10................. 9,466,880
3,500,000 Series C
5.25%, 1/1/15................. 3,417,295
9,000,000 Metro Government, Nashville
and Davidson Counties,
Tennessee, Step Bond
(effective yield 4.92%) (b)
0.00%, 1/1/12, (FGIC)....... 10,009,170
5,055,000 Tennessee Housing Development
Authority, Home Ownership
Program, Issue H
7.83%, 7/1/15............... 5,184,004
34,312,586
</TABLE>
<PAGE>
PAGE 17
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
TEXAS-- 9.2%
$ 25,000 Bexar, Texas, Metropolitan
Water District Waterworks
Systems, Unrefunded Balance
6.63%, 5/1/14, (AMBAC)...... $ 26,849
8,500,000 Brazos River Authority, Texas
Revenue Refunding, Houston
Light and Power Company,
Project C
8.10%, 5/1/19............... 8,923,895
2,400,000 Brownsville, Texas, Utility
System Revenue
6.25%, 9/1/14, (MBIA)....... 2,645,928
6,675,000 Cypress-Fairbanks, Texas,
Independent School District,
Capital Appreciation, Series
A (effective yield 6.03%)
(b)
0.00%, 2/15/13.............. 2,821,990
Fort Bend County, Texas, Levee
Improvement:
1,165,000 6.90%, 9/1/20, (MBIA)......... 1,280,591
District # 11:
1,245,000 6.90%, 9/1/18, (MBIA)......... 1,364,632
1,000,000 6.90%, 9/1/19, (MBIA)......... 1,096,090
7,000,000 Harris County, Texas, Flood
Control District (effective
yield 7.20%) (b)
0.00%, 10/1/06.............. 3,902,080
Harris County, Texas, Health
Facilities Development
Corporation:
5,000,000 6.60%, 6/1/14................. 5,592,650
2,480,000 Hermann Hospital Project
6.38%, 10/1/17, (MBIA)........ 2,629,222
Memorial Hospital Project:
2,525,000 7.13%, 6/1/15................. 2,819,365
3,215,000 Series A
6.00%, 6/1/09................. 3,469,724
4,000,000 Harris County, Texas, Senior
Lien, Toll Road, Series A
6.38%, 8/15/24, (MBIA)...... 4,326,800
3,000,000 Harris County, Texas, Toll
Road
7.00%, 8/15/10.............. 3,529,980
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
TEXAS-- CONTINUED
$ 4,565,000 Houston, Texas, Airport System
Revenue, Senior Lien
8.20%, 7/1/17............... $ 4,819,134
15,000,000 Houston, Texas, General
Obligation
7.00%, 3/1/08............... 17,544,300
Houston, Texas, Water and
Sewer System Revenue, Junior
Lien:
2,700,000 Refunding, Series C
(effective yield 6.85%) (b)
0.00%, 12/1/10................ 1,311,093
2,000,000 Series C
5.25%, 12/1/22, (FGIC)........ 1,921,440
3,175,000 Port Arthur, Texas, General
Obligation
5.00%, 2/15/21, (MBIA)...... 2,962,339
1,085,000 Rio Grande Valley, Texas,
Health Facilities
Corporation, Hospital
Revenue, Baptist Medical
Project
8.00%, 8/1/17............... 1,143,948
11,250,000 San Antonio, Texas, Electric
and Gas Revenue
5.00%, 2/1/12............... 10,962,562
5,000,000 Tarrant County, Texas, Health
Facilities Development
Revenue, Harris Methodist
Health System, Series A
5.13%, 9/1/18, (AMBAC)...... 4,659,950
6,415,000 Tarrant County, Texas, Housing
Finance Corporation, Series
A (effective yield 11.00%)
(b)
0.00%, 9/15/16, (MBIA)...... 2,148,127
Texas Housing Agency:
3,940,000 Residential Development,
Series D
8.40%, 1/1/21................. 4,102,210
2,310,000 Single Family Mortgage
8.20%, 3/1/16................. 2,365,971
Texas Municipal Power Agency:
175,000 Refunding Bonds
5.25%, 9/1/12, (MBIA)......... 172,786
130,000 Revenue Bonds
6.10%, 9/1/09................. 141,254
</TABLE>
<PAGE>
PAGE 18
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
TEXAS-- CONTINUED
$10,800,000 Texas State Turnpike
Authority, Dallas North
Thruway Revenue, President
George Bush Turnpike
5.00%, 1/1/16............... $ 10,285,056
5,000,000 Texas State, Linked
RIBs/SAVRs (c)
6.20%, 9/30/11.............. 5,472,100
9,000,000 Titus County, Texas, Water
District #1, Southwest
Electric Power
8.20%, 8/1/11............... 10,228,860
1,475,000 University of Texas,
University Revenues,
Unrefunded Balance, Series B
6.75%, 8/15/13.............. 1,599,564
3,450,000 Waller, Texas, General
Obligation, Independent
School District
5.25%, 2/15/21.............. 3,310,137
129,580,627
UTAH-- 1.7%
Intermountain Power Agency,
Utah, Power Supply:
6,500,000 Series C (effective yield
6.80%) (b)
0.00%, 7/1/20................. 1,059,695
3,020,000 Series D
8.38%, 7/1/12................. 3,080,400
9,145,000 Murray City, Utah, Hospital
Revenue, Health Services
Incorporated
4.75%, 5/15/20, (MBIA)...... 7,988,066
270,000 Utah State Housing Finance
Agency, Single Family
Mortgage, Series C2
7.95%, 7/1/10............... 285,485
11,350,000 Utah State, General Obligation
5.50%, 7/1/07............... 11,914,549
24,328,195
VERMONT-- 0.1%
1,485,000 Vermont Housing Finance
Agency, Single Family,
Series 1
8.15%, 5/1/25............... 1,530,931
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
VIRGINIA-- 1.0%
$ 9,355,000 Fairfax County, Virginia,
Industrial Development
Authority
5.00%, 8/15/23.............. $ 8,649,633
Winchester, Virginia,
Industrial Development
Hospital Revenue, Winchester
Medical Center:
2,300,000 6.15%, 1/1/15, (AMBAC)........ 2,200,088
3,200,000 6.30%, 1/1/15, (AMBAC)........ 3,059,584
13,909,305
WASHINGTON-- 2.3%
2,595,000 Snohomish County, Washington,
Series A
5.13%, 12/1/16, (MBIA)...... 2,473,424
Tacoma, Washington, Electric
Systems Revenue:
3,000,000 5.25%, 1/1/15, (AMBAC)........ 2,896,290
12,000,000 Linked RIBs/SAVRs (c)
6.51%, 1/2/15, (AMBAC)........ 13,005,000
1,700,000 Tacoma, Washington, Solid
Waste Utilities Revenue,
Series B
5.50%, 12/1/17, (AMBAC)..... 1,677,254
4,000,000 Washington Public Power Supply
System, Nuclear Project #3
(effective yield 10.09%) (b)
0.00%, 7/1/12............... 1,719,640
10,000,000 Washington State General
Obligation, Series A
5.38%, 7/1/21............... 9,769,800
1,300,000 Washington State Health Care
Facilities Authority, Multi-
Care Medical Center of
Tacoma
7.88%, 8/15/11, (FGIC)...... 1,374,841
32,916,249
WISCONSIN-- 0.1%
785,000 Wisconsin Housing and Economic
Development Authority, Home
Ownership
8.00%, 3/1/21............... 822,068
</TABLE>
<PAGE>
PAGE 19
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
PUERTO RICO-- 3.8%
Puerto Rico Commonwealth
Highway and Transportation
Authority Revenue:
$ 400,000 Series Y
5.25%, 7/1/15, (FSA).......... $ 394,004
5,000,000 Series Z
6.00%, 7/1/18, (FSA).......... 5,440,550
Puerto Rico Commonwealth,
General Obligation, Linked
BPO (c):
12,800,000 7.00%, 7/1/10, (MBIA)......... 15,066,240
5,000,000 7.00%, 7/1/10, (AMBAC)........ 5,885,250
3,000,000 Puerto Rico Commonwealth,
General Obligation,
Refunding
6.45%, 7/1/17............... 3,223,230
Puerto Rico Electric Power
Authority Revenue:
2,000,000 Series AA
6.25%, 7/1/10, (MBIA)......... 2,218,100
2,000,000 Series S
7.00%, 7/1/07, (MBIA)......... 2,331,440
Puerto Rico Industrial,
Tourist, Educational,
Medical, Environmental
Control Facilities:
1,400,000 Finance Authority
6.25%, 7/1/24, (MBIA)......... 1,488,942
250,000 Hospital Auxilio Mutuo
Project, Series A
5.50%, 7/1/17, (MBIA)......... 250,338
4,000,000 Puerto Rico Municipal Finance
Agency, Series A
6.00%, 7/1/11, (FSA)........ 4,339,440
Puerto Rico Public Buildings
Authority Revenue,
Government Facilities,
Series B:
5,250,000 5.00%, 7/1/16, (MBIA)......... 4,983,877
2,000,000 5.25%, 7/1/21................. 1,883,560
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- CONTINUED
PUERTO RICO-- CONTINUED
$ 6,250,000 Puerto Rico Public Buildings
Authority Revenue,
Guaranteed Public Education
and Health Facilities,
Series M, Step coupon
(effective yield 5.74%) (b)
3.75%, 7/1/16............... $ 5,932,875
53,437,846
TOTAL LONG-TERM INVESTMENTS
(COST $1,323,071,464)..................... 1,381,292,401
<CAPTION>
SHORT-TERM INVESTMENTS-- 1.3%
<C> <S> <C>
CALIFORNIA-- 0.2%
30,000 California Health Facilities
Financing Authority Revenue,
St. Joseph's Health System,
Series A
3.70%, 7/1/13 (a)........... 30,000
2,600,000 Irvine, California,
Improvement Board Act of
1915 Updates, Assessment
District #89-10 3.75%,
9/2/15 (a).................. 2,600,000
2,630,000
FLORIDA-- 0.1%
<C> <S> <C>
180,000 Dade County, Florida, Health
Facilities Authority,
Hospital Revenue, Miami
Chidren's Hospital Project
4.15%, 9/1/25, (AMBAC)
(a)......................... 180,000
1,450,000 Dade County, Florida, Water
and Sewer Systems Revenue
4.15%, 10/5/22, (FGIC)
(a)......................... 1,450,003
1,630,003
MASSACHUSETTS-- 0.1%
<C> <S> <C>
1,800,000 Massachusetts State Health and
Educational Facilities
Authority, Capital Assets
Program, Series D
3.90%, 1/1/35, (MBIA) (a)... 1,800,000
</TABLE>
<PAGE>
PAGE 20
KEYSTONE TAX FREE FUND
SCHEDULE OF INVESTMENTS-- JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS-- CONTINUED
MISSISSIPPI-- 0.2%
<C> <S> <C>
$ 3,300,000 Jackson County, Mississippi,
Pollution Control Revenue,
Chevron U.S.A. Incorporated
Project
4.00%, 12/1/16 (a).......... $ 3,300,000
MISSOURI-- 0.1%
895,000 Missouri State Health and
Educational Facilities
Authority, Christian Health
Services, Series B
4.05%, 11/1/19 (a).......... 895,000
NEW YORK-- 0.3%
<C> <S> <C>
New York City, New York,
Municipal Water Finance
Authority, Water and Sewer
Systems Revenue:
325,000 Series C
4.15%, 6/15/22, (FGIC) (a).... 325,000
3,700,000 Series G
4.05%, 6/15/24, (FGIC) (a).... 3,700,000
4,025,000
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS-- CONTINUED
PENNSYLVANIA-- 0.1%
$ 1,160,000 Sayre, Pennsylvania, Health
Care Facilities Authority,
Pennsylvania Capital
Financing Project, Series K
4.15%, 12/1/20,
(AMBAC) (a)................. $ 1,160,000
WYOMING-- 0.2%
3,500,000 Uinta County, Wyoming,
Pollution Control Revenue,
Chevron U. S. A.
Incorporated Project
4.00%, 4/1/10 (a)........... 3,500,000
</TABLE>
<TABLE>
<C> <C> <S> <C> <C>
TOTAL SHORT-TERM
INVESTMENTS--
(COST $18,940,003)..................... 18,940,003
TOTAL INVESTMENTS--
(COST $1,342,011,467) 99.2% 1,400,232,404
OTHER ASSETS AND
LIABILITIES-- NET 0.8 11,335,402
NET ASSETS 100.0% $1,411,567,806
</TABLE>
(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) At the discretion of the portfolio manager, these securities may be
separated into securities with interest or principal payments that are
linked to another rate or index and therefore would be considered
derivative securities.
LEGEND OF PORTFOLIO ABBREVIATIONS:
ACES-- Auction Rate Securities
AMBAC-- American Municipal Bond Assurance Corp.
BPO-- Bond Payment Obligation
ETM-- Escrowed to Maturity
FGIC-- Federal Guaranty Insurance Co.
FHA-- Federal Housing Authority
FSA-- Federal Security Assurance
GNMA-- Government National Mortgage Association
INFLOs-- Inverse Floating Rate Securities
MBIA-- Municipal Bond Investors Assurance Corp.
PARs-- Periodic Auction Reset Securities
RIBs-- Residual Interest Bonds
SAVRs-- Select Auction Variable Rate Securities
FUTURES CONTRACTS-- SHORT POSITIONS
<TABLE>
<CAPTION>
INITIAL CONTRACT UNREALIZED
EXPIRATION NUMBER OF CONTRACTS AMOUNT APPRECIATION
<S> <C> <C> <C> <C>
September 1997 195 U.S. Treasury Bond Index $ 429,000 $ 197,320
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 21
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED DECEMBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $7.71 $7.86 $7.10 $8.12 $8.04 $8.07
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.20 0.41 0.41 0.37 0.39 0.46
Net realized and unrealized gain (loss)
on investments and closed futures contracts (0.01) (0.17) 0.74 (0.96) 0.48 0.12
Total from investment operations 0.19 0.24 1.15 (0.59) 0.87 0.58
LESS DISTRIBUTIONS FROM:
Net investment income (0.20) (0.39) (0.39) (0.37) (0.39) (0.46)
In excess of net investment income 0 0 0 (0.06) (0.06) (0.04)
Net realized gain on investments 0 0 0 0 (0.33) (0.11)
In excess of net realized gain on investments 0 0 0 0 (0.01) 0
Total distributions (0.20) (0.39) (0.39) (0.43) (0.79) (0.61)
NET ASSET VALUE END OF PERIOD $7.70 $7.71 $7.86 $7.10 $8.12 $8.04
TOTAL RETURN (B) 2.52% 3.15% 16.61% (7.34%) 11.15% 7.55%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.92%(c) 0.87% 0.95% 1.55% 1.66% 1.38%
Expenses excluding indirectly paid expenses 0.91%(c) 0.86% 0.94% -- -- --
Net investment income 5.19%(c) 5.34% 5.41% 4.92% 4.72% 5.71%
PORTFOLIO TURNOVER RATE 45% 69% 56% 84% 76% 78%
NET ASSETS END OF PERIOD (THOUSANDS) $ 1,411,568 $1,557,886 $1,204,468 $1,197,727 $1,548,503 $1,453,199
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1991 1990(A) 1989 1988 1987
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $7.90 $8.06 $8.18 $8.09 $8.85
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.46 0.52 0.57 0.55 0.56
Net realized and unrealized gain (loss)
on investments and closed futures contracts 0.36 (0.01) 0.15 0.30 (0.58)
Total from investment operations 0.82 0.51 0.72 0.85 (0.02)
LESS DISTRIBUTIONS FROM:
Net investment income (0.46) (0.52) (0.60) (0.63) (0.64)
In excess of net investment income (0.07) (0.03) 0 0 0
Net realized gain on investments (0.12) (0.12) (0.24) (0.13) (0.10)
In excess of net realized gain on investments 0 0 0 0 0
Total distributions (0.65) (0.67) (0.84) (0.76) (0.74)
NET ASSET VALUE END OF PERIOD $8.07 $7.90 $8.06 $8.18 $8.09
TOTAL RETURN (B) 10.80% 6.66% 9.11% 10.89% (0.14%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.75% 1.18% 1.23% 1.79% 1.70%
Expenses excluding indirectly paid expenses -- -- -- -- --
Net investment income 5.78% 6.54% 6.94% 6.74% 6.80%
PORTFOLIO TURNOVER RATE 77% 64% 69% 61% 43%
NET ASSETS END OF PERIOD (THOUSANDS) $1,146,185 $1,060,826 $ 901,912 $903,132 $894,768
</TABLE>
(a) Calculation based on average shares outstanding.
(b) Excluding applicable sales charges.
(c) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 22
KEYSTONE TAX FREE FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments at market value
(identified cost-- $1,342,011,467 $1,400,232,404
Receivable for investments sold 40,051,550
Interest receivable 24,203,183
Receivable for Fund shares sold 484,054
Receivable for daily variation margin
on open futures contracts 118,101
Other assets 166,675
Total assets 1,465,255,967
LIABILITIES
Payable for investments purchased 46,455,680
Dividends payable 3,197,905
Payable for Fund shares redeemed 1,598,482
Due to custodian 1,558,378
Distribution fee payable 314,118
Due to related parties 80,713
Accrued expenses and other liabilities 482,885
Total liabilities 53,688,161
NET ASSETS $1,411,567,806
NET ASSETS REPRESENTED BY
Paid-in capital $1,347,068,254
Undistributed net investment income 2,255,240
Accumulated net realized gain on
investments and closed futures contracts 3,826,055
Net unrealized appreciation on investments
and futures contracts 58,418,257
Total net assets $1,411,567,806
NET ASSET VALUE PER SHARE
Net asset value of
$1,411,567,8064183,328,013 outstanding
shares of beneficial interest $ 7.70
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest $44,403,380
EXPENSES
Investment management fee $ 3,071,270
Distribution Plan expenses 2,489,761
Transfer agent fees 694,124
Custodian fees 254,748
Administrative services fees 92,109
Other administrative services
fees 81,403
Trustees' fees and expenses 36,813
Total expenses 6,720,228
Less: Expenses paid indirectly (94,355)
Net expenses 6,625,873
Net investment income 37,777,507
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS
Net realized gain on investments
and closed futures contracts 17,730,140
Net change in unrealized
appreciation (depreciation) on
investments and futures
contracts (20,824,784)
Net realized and unrealized loss
on investments and futures
contracts (3,094,644)
Net increase in net assets
resulting from operations $34,682,863
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 23
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
<S> <C> <C>
OPERATIONS
Net investment income $ 37,777,507 $ 84,167,379
Net realized gain on investments and closed futures contracts 17,730,140 15,476,735
Net change in unrealized appreciation (depreciation) on investments and futures
contracts (20,824,784) (48,955,108)
Net increase in net assets resulting from operations 34,682,863 50,689,006
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (38,479,774) (79,617,449)
CAPITAL SHARE TRANSACTIONS
Shares issued in connection with the acquisition of Keystone
Tax Exempt Trust 0 658,278,376
Proceeds from shares sold 16,555,496 107,614,922
Payment for shares redeemed (182,669,241) (424,558,360)
Net asset value of shares issued in reinvestment of dividends
and distributions 23,592,670 41,011,255
Net increase (decrease) in net assets resulting from capital share transactions (142,521,075) 382,346,193
Total increase (decrease) in net assets (146,317,986) 353,417,750
NET ASSETS
Beginning of period 1,557,885,792 1,204,468,042
End of period [including undistributed net investment income as follows:
1997-- $2,255,240 and 1996-- $2,957,507] $1,411,567,806 $ 1,557,885,792
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 24
KEYSTONE TAX FREE FUND
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Tax Free Fund (the "Fund") is a Massachusetts business trust for which
Keystone Investment Management Company ("Keystone"), a subsidiary of First Union
Corporation ("First Union"), is the investment adviser and manager. The Fund is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a diversified, open-end management investment company.
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
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
An independent pricing service values the Fund's municipal bonds at fair value
using a variety of factors which may include yield, liquidity, interest rate
risk, credit quality, coupon, maturity and type of issue. Securities for which
valuations are not available from an independent pricing service, including
restricted securities, are valued at fair value as determined in good faith
according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value.
B. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values, the
Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill their obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
C. DERIVATIVE SECURITIES
The Fund may invest in derivative securities. A derivative security is any
investment that derives its value from an underlying security, asset or market
index. Greater market fluctuations may result if these securities are leveraged.
The Fund invests in these types of securities as it is consistent with its
investment objectives.
D. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts (and amortization of premiums).
E. FEDERAL INCOME TAXES
The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund will not incur any federal income tax liability since it
is expected to distribute all of its net investment company taxable income, net
tax-exempt income and net capital gains, if any, to its shareholders. The Fund
also intends to avoid any excise tax liability by making the required
distributions under the Code. Accordingly, no provision for federal income taxes
is required. To the extent that realized capital gains can be offset by capital
loss carryforwards, it is the Fund's policy not to distribute such gains.
<PAGE>
PAGE 25
F. DISTRIBUTIONS
Distributions from net investment income for the Fund is declared daily and paid
monthly. Distributions from net realized capital gains, if any, are paid at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment of market
discount on securities.
2. CAPITAL SHARE TRANSACTIONS
The Fund has an unlimited number of shares of beneficial interest with no par
value authorized. Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
SHARES AMOUNT
<S> <C> <C>
Shares sold 2,159,277 $ 16,555,496
Shares issued in
reinvestment of
distributions 3,077,289 23,592,670
Shares redeemed (23,846,155) (182,669,241)
Net decrease (18,609,589) $(142,521,075)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
SHARES AMOUNT
<S> <C> <C>
Shares sold 14,063,760 $ 107,614,922
Shares issued in
connection with the
acquisition of Keystone
Tax Exempt Trust 84,656,452 658,278,376
Shares issued in
reinvestment of
distributions 5,361,695 41,011,255
Shares redeemed (55,439,349) (424,558,360)
Net increase 48,642,558 $ 382,346,193
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the six months ended June 30, 1997 were $651,620,791
and $796,554,777, respectively.
As of December 31, 1996, the Fund had capital loss carryovers for federal
income tax purposes of approximately $13,723,000 which expires as follows:
$10,370,000 expiring in 2002 and $3,353,000 expiring in 2003.
4. DISTRIBUTION PLAN
Since December 11, 1996, Evergreen Keystone Distributor, Inc. ("EKD"), a
wholly-owned subsidiary of The BISYS Group Inc. ("BISYS"), has served as
principal underwriter to the Fund. Prior to December 11, 1996, Evergreen
Keystone Investment Services, Inc. ("EKIS"), a wholly-owned subsidiary of
Keystone, served as the Fund's principal underwriter.
The Fund has adopted a Distribution Plan as allowed by Rule 12b-1 of the 1940
Act. The Distribution Plan permits the Fund to reimburse its principal
underwriter for costs related to selling shares of the Fund and for various
other services. These costs, which consist primarily of commissions and services
fees to broker-dealers who sell shares of the Fund, are paid by shareholders
through expenses called "Distribution Plan expenses". Under the Distribution
Plan, the Fund pays a distribution fee which may not exceed 1.00% of the Fund's
average daily net assets, of which 0.75% is used to pay distribution expenses
and 0.25% may be used to pay shareholder service fees.
During the six months ended June 30, 1997, the Fund received $194,644 in
contingent deferred sales charges. Contingent deferred sales charges paid by
redeeming shareholders may be paid to EKIS and/or EKD.
The Distribution Plan may be terminated at any time by vote of the Independent
Trustees or by vote of a majority of the outstanding voting shares. However,
after the termination of the Distribution Plan, and subject to the discretion of
the Independent Trustees, payments to EKIS and/or EKD may continue as
compensation for services which had been provided while the Distribution Plan
was in effect.
<PAGE>
PAGE 26
KEYSTONE TAX FREE FUND
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Fund would be within permitted
limits.
5. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED
TRANSACTIONS
Keystone serves as the investment advisor and manager to the Fund. In return for
providing investment management and administrative services to the Fund, the
Fund pays Keystone a management fee that is calculated daily and paid monthly.
The management fee is computed at an annual rate of 2.00% of the Fund's gross
investment income plus an amount determined by applying percentage rates
starting at 0.50% and declining to 0.25% per annum as net assets increase, to
the average daily net asset value of the Fund. Effective January 1, 1997, BISYS
became sub-administrator to the Fund and is paid by Keystone for its services.
Prior to December 11, 1996, Keystone Management Inc. ("KMI"), a wholly-owned
subsidiary of Keystone, served as investment manager to the Fund and provided
investment management and administrative services. Under an investment advisory
agreement between KMI and Keystone, Keystone served as the investment adviser
and provided investment advisory and management services to the Fund. In return
for its services, Keystone received an annual fee equal to 85% of the management
fee received by KMI.
In providing or obtaining additional operating services, facilities and
supplies to the Fund, KMI had incurred administrative expenses of $935,920 which
consisted of $694,124 for transfer agent fees, $160,393 for net custodian fees,
$20,500 for audit and legal, $15,695 for printing, $35,039 for registration and
$10,169 for insurance and other miscellaneous expenses. KMI has been reimbursed
for these expenses by the Fund.
During the six months ended June 30, 1997, the Fund paid or accrued to EKIS
$92,109 for certain accounting services.
Evergreen Keystone Service Company ("EKSC"), a wholly-owned subsidiary of
Keystone, serves as the transfer and dividend disbursing agent for the Fund.
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds. As sub-administrator, BISYS provides the officers of the Fund.
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
7. FUND REORGANIZATION
On February 29, 1996, the Fund acquired the net assets of Keystone Tax Exempt
Trust in exchange for shares of the Fund pursuant to a plan of reorganization
approved by the shareholders of Keystone Tax Exempt Trust on February 29, 1996.
The acquisition was accomplished by a tax-free exchange of shares of the Fund
for the net assets of Keystone Tax Exempt Trust. The net assets of Keystone Tax
Exempt Trust on that date, including $40,609,975 of unrealized appreciation on
investments, were combined with the Fund. The aggregate net assets of the Fund
and Keystone Tax Exempt Trust immediately before the acquisition were
$1,142,691,716 and $658,278,376, respectively. The net assets of the Fund
immediately after the acquisition were $1,800,970,092.
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KEYSTONE
FAMILY OF FUNDS
--
Balanced Fund (K-1)
Diversified Bond Fund (B-2)
Growth and Income Fund (S-1)
High Income Bond Fund (B-4)
International Fund Inc.
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 information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Keystone funds, contact
your financial adviser or call Evergreen Keystone.
(Evergreen Keystone Funds Logo appears here)
P.O. Box 2121
Boston, Massachusetts 02106-2121
KTFF-R Rev01
KEYSTONE
TAX FREE
FUND
(Evergreen Keystone Funds(SM) Logo appears here)
SEMI-ANNUAL REPORT
JUNE 30, 1997
