PAGE 1
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Keystone Tax Free Fund
Seeks high current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Dear Shareholder:
We are writing to report to you on the activities of Keystone Tax Free Fund
for the twelve-month period which ended December 31, 1996. Following this
letter, we have included a discussion with your Fund's manager
discussing portfolio strategy.
Performance
For the twelve-month period, your Fund returned 3.15%. These results include
price changes and reinvestment of dividends. The Lehman Municipal Bond
Index--a widely recognized benchmark of municipal bond performance--returned
4.43% for the same twelve-month period.
We were satisfied with your Fund's performance, which showed steady
improvement in the second half of last year.
Municipal bond yields rose by less than 1/4% in 1996. However, this modest
year-over-year increase masks the wide fluctuations that occurred during the
past twelve months.
The municipal bond market experienced a period of adjustment in the first
half of 1996. Interest rates reversed course quickly from the rally that had
characterized much of the prior year, as investors responded to stronger than
expected economic growth and anticipated rising inflation. The possibility of
tax-reform and uncertainty regarding the national elections also caused
municipal bond investors to exercise caution and push prices lower.
Clearer economic and political trends began to emerge by mid-year, causing
the market's tone to improve. Although economic growth was confirmed to be
moderate--stronger than many investors had originally expected--inflation
remained well-contained. Investors also grew more comfortable with political
agendas as the campaign season got underway, and tax-law changes became
increasingly less of a possibility. The municipal bond market rebounded from
its earlier lows to generate a positive performance in the second half of the
year.
Outlook
We enter 1997 with a cautiously optimistic outlook that municipal bond prices
will be relatively stable. We expect the economy to continue to grow at a
moderate rate and inflation to remain well-contained. While we continually
monitor the political environment, currently there appear to be no issues
that would have the impact of last year's potential tax-law changes and the
national elections. Although short periods of price fluctuations could
occasionally occur, for the most part we look for interest rates to move
within a narrow range.
Last year's municipal bond market performance also serves as a reminder that
periods of adjustment are a natural part of the financial markets. As
investors, we need to diversify our personal portfolios to help reduce the
effects of temporary volatility. We also need to maintain a long-term
perspective. Financial markets eventually stabilize; and total return builds
over time.
<PAGE>
PAGE 2
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Keystone Tax Free Fund
We appreciate your continued support of Keystone funds. If you have any
questions or comments about your investment, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III
Albert H. Elfner, III
Chairman
Keystone Investment Management Company
/s/ George S. Bissell
George S. Bissell
Chairman of the Board
Keystone Funds
[photo] [photo]
Albert H. Elfner, III George S. Bissell
February 1997
<PAGE>
PAGE 3
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A Discussion With
Your Fund's Manager
[photo]
Betsy A. Hutchings is vice president and senior
portfolio manager at Keystone specializing in tax-free municipal
bonds. A professional with 17 years of investment experience, Ms.
Hutchings is the portfolio manager of Keystone Tax Free Fund.
Q What does the Fund offer investors?
A Keystone Tax Free Fund is designed for tax-sensitive investors who seek
capital preservation and a high level of current income that is exempt from
federal income tax. For investors in certain tax situations, a portion of
income may be subject to the federal alternative minimum tax (AMT). The Fund
offers professional management and portfolio diversification. We believe
these are important attributes since many investors do not have the time or
resources to monitor credit quality, the economy and interest rates. Further,
we think that professional management and diversification can reduce credit
risk and enhance price stability.
Q How do you select securities for the Fund?
A Our management team employs an intensive research process, paying careful
attention to credit quality and financial stability. We structure the
portfolio with bonds that meet our high credit standards. Our holdings
typically have the characteristics that we believe are necessary for good
performance in the current and anticipated interest rate environment. We
emphasize diversification and focus on maximizing the Fund's income.
Q What was the environment like for municipal bonds over the past twelve
months?
A Municipal bond rates rose modestly in 1996. The interest rate environment
was volatile in the first half of the year and favorable in the second half
of 1996. The economy grew faster than expected in the first six months of
1996, causing concerns about future inflation. In addition to economic
uncertainties, municipal bond investors prepared for the national elections
and the possibility of tax-reform.
In the second half of last year, the uncertainties became resolved and
municipal bonds staged an impressive turnaround. The economy was confirmed to
be growing at a moderate pace. Inflation remained well-contained. As the
campaign season progressed, investors grew more comfortable with political
agendas; and tax-reform became increasingly less likely.
Other factors also helped shape the environment for municipal bonds.
Although new issuance rose approximately 14% to $183 billion--its highest
level since 1993 and demand from individuals was light, strong demand from
insurance companies helped to create a stable balance in the supply/demand
relationship. From a credit standpoint, upgrades exceeded downgrades and the
yields of lower-rated bonds fell--pushing their prices higher--relative to
higher-rated bonds. Municipal revenues were higher than past years and for
the most part, state fund balances were healthy.
Fund Profile
Objective: Seeks high current income, exempt from federal income taxes, while
preserving capital by investing in high quality municipal bonds.
Inception Date: April 12, 1977
Average Portfolio Quality: AA
Total assets: $1.56 billion
<PAGE>
PAGE 4
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Keystone Tax Free Fund
Q How did you manage the Fund during this time?
A We shortened the Fund's average maturity and swapped out of lower yielding
issues into higher yielding issues that we considered to be undervalued. We
later focused on bonds whose primary component in total return, we believed
would be price appreciation, rather than income. These bonds had coupons that
ranged from 5% to 5.50%, and had maturities of 15-20 years. Throughout the
year we emphasized call protection. In fact, as of December 31, 1996,
approximately one-third of the Fund's net assets were non-callable.
The Fund had a longer average maturity early in 1996, which had a negative
effect on performance when interest rates became volatile. We shortened
average maturity modestly as interest rates rose. This change, combined with
the Fund's focus on bonds that emphasized price appreciation, resulted in the
Fund's total return showing solid improvement throughout the rest of the
year. The Fund posted a total return higher than that of the Lipper average
for the fourth quarter. As of December 31, 1996, Keystone Tax Free Fund had
an average maturity of just under 19 years. Average quality stood at AA.
Q What is your outlook for the next six months?
A We anticipate the overall economic and interest rate environment to be
favorable for municipal bonds, but look for periods of volatility as we
expect many investors to over-react to individual pieces of economic data. We
expect the economy to continue on its path of moderate growth with low
inflation. The political climate should also should be supportive. Voters
have approved over $10 billion in new municipal bond issues for 1997 to
improve infrastructures, particularly highways and schools. We believe new
volume will increase at a rate between 8%-10% per year, over the next few
years.
We will continue to emphasize bonds that we believe maximize price
appreciation and will seek to capitalize on situations that are undervalued.
Over the long-term, we believe this strategy can provide investors with solid
total returns and an attractive level of income that is exempt from federal
income tax.
The Benefits of Tax Free Investing
Federal Tax Bracket
--------------- ---------------------------
31%(1) 36%(2) 39.6%(3)
--------------- ------ ------ -------
Tax Free Yield Taxable Equivalent Yield
--------------- ---------------------------
5.0% 7.25% 7.81% 8.28%
6.0% 8.70% 9.38% 9.93%
7.0% 10.14% 10.94% 11.59%
The equivalent yield for a tax free yield of 6.0% is 9.38% for an investor in
the 36% tax bracket. In other words, a tax free yield of 6.0% is equal to a
taxable yield of 9.38% if you are in the 36% federal tax bracket.
(1) Single filers earning $53,501-$115,000; joint filers earning $89,151-
$140,000.
(2) Single filers earning $115,001-$250,000; joint filers earning $140,001-
$250,000.
(3) Single filers earning over $250,000; joint filers earning over $250,000.
[diamond]
This column is intended to answer
questions about your Fund. If you have a question
you would like answered, please write to:
Evergreen Keystone Investment Services, Inc.
Attn: Shareholder Communications, 22nd Floor
200 Berkeley Street, Boston, Massachusetts 02116-5034.
<PAGE>
PAGE 5
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Your Fund's Performance
Growth of an investment in
Keystone Tax Free Fund
[mountain chart]
In Thousands
Initial Reinvested
Investment Distributions
12/86 10,000 10,000
9,152 9,986
12/88 9,253 11,074
9,118 12,083
12/90 8,937 12,888
9,129 14,280
12/92 9,095 15,358
9,186 17,072
12/94 8,032 15,819
8,891 18,447
12/96 8,722 19,027
A $10,000 investment in Keystone Tax Free Fund made on December 31, 1986 with
all distributions reinvested was worth $19,027 on December 31, 1996. Past
performance is no guarantee of future results.
Twelve-Month Performance as of December 31, 1996
Total return* 3.15%
Net asset value 12/31/95 $7.86
12/31/96 $7.71
Dividends $0.39
Capital gains None
* Before deduction of any contingent deferred sales charge (CDSC).
Historical Record as of December 31, 1996
If you If you did
Cumulative total return redeemed not redeem
1-year 0.21% 3.15%
5-year 33.24% 33.24%
10-year 90.27% 90.27%
Average annual total return
1-year 0.21% 3.15%
5-year 5.91% 5.91%
10-year 6.64% 6.64%
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. You may also exchange funds using Keystone's Automated Response Line
(KARL). The Fund reserves the right to change or terminate the exchange
offer.
<PAGE>
PAGE 6
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Keystone Tax Free Fund
Growth of an Investment
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, 1986 through December 31, 1996
Fund Average
Annual Total Return
- ---------------------------
1 Year 5 Year 10 Year
0.21% 5.91% 6.64%
[line chart]
Lehman Municipal Consumer
Bond Index Price Index
Fund (LMBI) (CPI)
12/86 10,000 10,000 10,000
9,986 10,150 10,441
12/88 11,074 11,179 10,903
12,083 12,385 11,409
12/90 12,888 13,288 12,105
14,280 14,901 12,476
12/92 15,358 16,215 12,836
17,072 18,206 13,190
12/94 15,819 17,269 13,542
18,447 20,285 13,886
12/96 19,027 21,183 14,348
Past performance is no guarantee of future results. The one-year return
reflects the deduction of the Fund's 3% contingent deferred sales charge for
shares held for at least one year. CPI is through
This chart graphically compares your Fund's 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 three lines that represent the accumulated value of
an initial $10,000 investment for the period indicated. The lines illustrate
a hypothetical investment in:
1. Keystone 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 contingent deferred 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.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
Understanding What the Chart Means
The chart demonstrates your Fund's performance in relation to a well known
investment index and to increases in the cost of living. It is important to
understand what the chart shows and does not show.
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 7
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Limitations of the Chart
The chart, however, limits the evaluation of Fund performance in several
ways. Because the measurement is based on total returns over an extended
period of time, the comparison often favors those funds which emphasize
capital appreciation when the market is rising. Likewise, when the market is
declining, the comparison usually favors those funds which take less risk.
Performance Can Be Distorted
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to
buy stocks that have been traded on a stock exchange for a minimum number of
years or of a certain company size. Indexes usually do not have the same
investment restrictions as your fund.
Indexes Do Not Include Costs of Investing
The comparison is further limited in its utility because the index does not
take into account any deductions for sales charges, transactions 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 MeasuresKeystone Tax Free Fund
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 perfomance 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 8
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Keystone Tax Free Fund
Glossary of
Mutual Fund Terms
MUTUAL FUND--A company which combines the investment money of many people
whose financial goals are similar, and invests that money in a variety of
securities. A mutual fund allows the smaller investor the benefits of
diversification, professional management and constant supervision usually
available only to large investors.
PORTFOLIO MANAGER--An investment professional who is responsible for
managing a portfolio's assets prudently and making appropriate investment
decisions, such as which securities to buy, hold and sell, based on the
investment objectives of the portfolio.
STOCK--Equity or ownership interest in a corporation, which represents a
claim on the corporation's assets and earnings.
BOND--Security issued by a government or corporation to those from whom it
has borrowed money. A bond usually promises to pay interest income to the
bondholder at regular intervals and to repay the entire amount borrowed at
maturity date.
CONVERTIBLE SECURITY--A corporate security (usually preferred stock or
bonds) that is exchangeable for a set number of another security type
(usually common stocks) at a pre-stated price.
MONEY MARKET FUND--A mutual fund whose assets are invested in a diversified
portfolio of short-term securities, including commercial paper, bankers'
acceptances, certificates of deposit and other short-term instruments. The
fund pays income which can fluctuate daily. Liquidity and safety of principal
are primary objectives.
NET ASSET VALUE (NAV) PER SHARE--The value of one share of a mutual fund.
The NAV per share is determined by subtracting a fund's total liabilities
from its total assets, and dividing that amount by the number of fund shares
outstanding.
DIVIDEND--A per share distribution of the income earned from the fund's
portfolio holdings. When a dividend distribution is made, the fund's net
asset value drops by the amount of the distribution because the distribution
is no longer considered part of the fund's assets.
CAPITAL GAIN--The profit from the sale of securities, less any losses.
Capital gains are paid to fund shareholders on a per share basis. When a
capital gain distribution is made, the fund's net asset value drops by the
amount of the distribution because the distribution is no longer considered
part of the fund's assets.
YIELD--The annualized rate of income as measured against the current net
asset value of fund shares.
TOTAL RETURN--The change in value of a fund investment over a specified
period of time, taking into account the change in a fund's market price and
the reinvestment of all fund distributions.
SHORT-TERM--An investment with a maturity of one year or less.
LONG-TERM--An investment with a maturity of greater than one year.
AVERAGE MATURITY--The average number of days until the notes, drafts,
acceptances, bonds or other debt instruments in a portfolio become due and
payable.
OFFERING PRICE--The offering price of a share of a mutual fund is the price
at which the share is sold to the public.
<PAGE>
PAGE 9
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SCHEDULE OF INVESTMENTS--December 31, 1996
<TABLE>
<CAPTION>
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (98.0%)
ALABAMA
Alabama Agricultural and Mechanic University (MBIA) 6.500% 11/01/2025 $ 2,035,000 $ 2,208,626
Alabama Housing Finance Authority, Single Family,
Collateralized Home Mortgage, Series D1 6.000 10/01/2016 2,065,000 2,089,945
Mobile, Alabama, Industrial Development Board, Solid
Waste Disposal, Mobile Energy Services Company Project 6.950 01/01/2020 3,500,000 3,681,790
ALASKA
Alaska Energy Authority, Utilities Revenue, Linked
Bulls/Bears Floaters (FGIC) (d) 6.600 07/01/2015 15,000,000 16,346,550
Alaska State Housing Finance Corporation, Collateralized
Home Mortgage, Series A 8.000 12/01/2013 405,000 419,835
North Slope Borough, Alaska, General Obligation, Series
A (MBIA) 5.900 06/30/2003 3,000,000 3,171,030
Valdez, Alaska, Marine Terminal Revenue, Union Alaska
Pipeline Company Project 6.200 05/01/2008 3,000,000 3,007,620
ARIZONA
Central Arizona, Water Conservation District, Contract
Revenue, Central Arizona Project, Series A 5.500 11/01/2008 4,250,000 4,369,467
Central Arizona, Water Conservation District, Contract
Revenue, Central Arizona Project, Series A 5.500 11/01/2009 11,000,000 11,267,190
Chandler, Arizona, Water and Sewer Revenue (FGIC) 6.750 07/01/2006 850,000 920,193
Maricopa County, Arizona, Elementary School District
#008, Osborn Refunding (MBIA) 7.500 07/01/2007 2,000,000 2,410,100
Maricopa County, Arizona, Elementary School District
#068, Series A (AMBAC) 6.750 07/01/2014 3,750,000 4,180,537
Maricopa County, Arizona, Unified School District (MBIA) 8.125 01/01/2010 6,000,000 6,918,060
Northern Arizona University, College and University
Revenue (FGIC) 6.300 06/01/2005 2,770,000 2,980,742
Pima County, Arizona, Industrial Development Authority,
Health Care Corporation Revenue (MBIA) 8.000 07/01/2013 370,000 396,337
Pima County, Arizona, Unified School District, Tucson
Refunding (FGIC) 7.500 07/01/2003 2,030,000 2,356,769
Santa Cruz County, Arizona, Unified School District,
Capital Appreciation (AMBAC) (effective yield 5.95%)
(b) 0.000 01/01/2008 1,100,000 621,115
Santa Cruz County, Arizona, Unified School District,
Capital Appreciation (AMBAC) (effective yield 5.95%)
(b) 0.000 07/01/2008 1,100,000 605,187
ARKANSAS
Arkansas State Development Finance Authority, Single
Family Mortgage Revenue Refunding 8.000 08/15/2011 1,985,000 2,127,920
CALIFORNIA
California Educational Facilities Authority, Stanford
University Project, Series H 5.000 01/01/2015 250,000 234,938
California Health Facilities Financing, St. Francis
Medical Center, Series A 5.500 10/01/2009 200,000 207,158
California Housing Finance Agency, Revenue Bonds, Home
Mortgage, Series H 6.250 08/01/2027 2,000,000 2,019,520
(continued on next page)
<PAGE>
PAGE 10
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Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
CALIFORNIA (continued)
California State Department of Water Reserves, Series O 5.000% 12/01/2022 $ 6,360,000 $ 5,825,251
California State Public Works Board, Lease Department
Correctional State Prison, Series E 5.500 06/01/2015 3,700,000 3,652,973
California State Public Works Board, Various California
University Projects, Series B 5.500 06/01/2019 350,000 333,515
East Bay, California, Municipal Utility District,
Wastewater Treatment System Revenue (FGIC) 5.000 06/01/2026 3,500,000 3,213,175
Eden Township, California, Hospital District Revenue 7.400 11/01/2019 5,615,000 5,904,509
Los Angeles, California, Transportation Commission,
Series A (MBIA) 6.250 07/01/2013 6,800,000 7,139,184
Metropolitan Water District, Southern California
Waterworks Revenue, Series B 4.750 07/01/2021 6,000,000 5,346,540
Oakland, California, Revenue Refunding, Series A (FGIC) 7.600 08/01/2021 4,265,000 4,565,427
San Francisco, California, City and County Airport
Commission, International Airport Revenue, Second
Series, Issue 12B (FGIC) 5.625 05/01/2021 5,000,000 4,970,300
Southern California Public Power Authority, Transmission
Project Revenue (FGIC) (effective yield 5.93%) (b) 0.000 07/01/2015 10,000,000 3,431,500
Walnut Valley, California, Unified School District,
Series A (MBIA) 6.000 08/01/2014 190,000 202,361
COLORADO
Arapahoe County, Colorado, Single Family Mortgage
Revenue, Capital Appreciation, Series A (effective
yield 6.00%) (b) 0.000 09/01/2010 4,000,000 1,825,240
City and County of Denver, Colorado, Airport System,
Series A 7.000 11/15/1999 2,000,000 2,120,980
City and County of Denver, Colorado, Airport System,
Series A 7.500 11/15/2023 6,625,000 7,376,540
City and County of Denver, Colorado, Airport System,
Series A 8.500 11/15/2023 7,750,000 8,909,943
City and County of Denver, Colorado, Airport System,
Series A 8.750 11/15/2023 23,830,000 28,280,967
City and County of Denver, Colorado, Airport System,
Series A 8.000 11/15/2025 525,000 594,142
City and County of Denver, Colorado, Airport System,
Series B 7.250 11/15/2012 3,500,000 3,829,140
City and County of Denver, Colorado, Airport System,
Series C 6.650 11/15/2005 5,980,000 6,362,840
City and County of Denver, Colorado, Airport System,
Series C 5.600 11/15/2011 5,000,000 4,963,450
City and County of Denver, Colorado, Airport System,
Series C 6.000 12/01/2025 5,000,000 5,019,400
City and County of Denver, Colorado, Airport System,
Series D 7.750 11/15/2013 7,100,000 8,733,000
City and County of Denver, Colorado, Airport System,
Series D 7.750 11/15/2021 12,250,000 13,593,825
Colorado Health Facilities Authority, Sisters Charity
Health Care,
Series A (MBIA) 6.250 05/15/2009 1,880,000 2,061,213
El Paso County, Colorado, School District #11, Colorado
Springs 6.500 12/01/2012 2,310,000 2,588,817
El Paso County, Colorado, School District #11, Colorado
Springs 7.100 12/01/2013 2,000,000 2,371,120
El Paso County, Colorado, School District #11, Colorado
Springs 7.100 12/01/2016 1,000,000 1,190,880
Larimer County, Colorado, School District (MBIA) 7.000 12/15/2016 2,250,000 2,736,923
CONNECTICUT
Connecticut State Special Tax Obligation, Series B 6.500 10/01/2012 1,600,000 1,786,256
Connecticut State Resources Recovery Authority,
Bridgeport Resco Company Project 8.500 01/01/2000 1,375,000 1,424,692
<PAGE>
PAGE 11
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
DELAWARE
Delaware State Health Facilities Authority, Medical
Center of Delaware (MBIA) 7.000% 10/01/2015 $ 1,600,000 $ 1,712,064
Delaware State Housing Authority Revenue, Residential
Mortgage, Series A 9.375 06/01/2012 120,000 120,334
FLORIDA
Broward County, Florida, Professional Sports Facilities
Tax Revenue, Series A (MBIA) 5.625 09/01/2028 2,500,000 2,477,075
Broward County, Florida, Resource Recovery, South
Project 7.950 12/01/2008 8,400,000 9,238,572
City of Tarpon Springs Health Facilities Authority,
Florida, Hospital Refunding, Tarpon Springs Hospital
Foundation, Inc., 8.750 05/01/2012 500,000 526,825
Dade County, Florida, General Obligation (FGIC) 5.125 10/01/2016 7,650,000 7,322,886
Dade County, Florida, Solid Waste System, Special
Obligation Revenue (AMBAC) 5.250 10/01/2004 2,025,000 2,074,127
Escambia County, Florida, Pollution Control Revenue,
Champion International Corporation Project 6.400 09/01/2030 2,500,000 2,530,400
Florida Housing Finance Agency, GNMA Collateralized Home
Mortgage 8.000 12/01/2020 640,000 673,856
Florida State, Bond Finance Department, Environmental
Preservation 5.250 07/01/2010 5,925,000 5,914,809
Florida State, Jacksonville Transportation Authority 9.200 01/01/2015 3,580,000 4,859,492
Hillsborough County, Florida, Housing Finance Agency,
Single Family Mortgage Revenue 7.300 04/01/2022 495,000 511,167
Indian River County, Florida, Water and Sewer Revenue
(FGIC) 5.250 09/01/2020 2,860,000 2,758,642
Jacksonville, Florida, Health Facilities Authority, New
Children's Hospital (MBIA) 7.000 06/01/2021 1,800,000 1,971,036
Lakeland, Florida, Electric and Water Revenue 5.625 10/01/2036 4,000,000 3,942,600
Lee County, Florida, Hospital Board of Directors,
Hospital Revenue, Linked RIBs/SAVRs (d) 6.350 03/26/2020 12,500,000 13,028,375
Lee County, Florida, Solid Waste System, Series B 7.000 10/01/2011 300,000 330,732
Martin County, Florida, Industrial Development
Authority, Indiantown Cogeneration Project--Series A 7.875 12/15/2025 9,000,000 10,260,180
Orlando-Orange County, Florida, Expressway Authority 8.250 07/01/2014 3,000,000 3,960,330
Orlando-Orange County, Florida, Expressway Authority
(FGIC) 8.250 07/01/2015 2,960,000 3,918,803
Palm Beach County, Florida, Health Revenue, John F.
Kennedy Hospital 9.500 08/01/2013 2,985,000 3,859,665
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project 6.700 02/15/2015 3,000,000 2,764,890
Palm Beach County, Florida, Solid Waste Industrial
Development, Okeelanta Power Project 6.850 02/15/2021 7,500,000 6,964,125
Palm Beach County, Florida, Solid Waste, Osceola Power
Project, Series A 6.950 01/01/2022 7,500,000 7,042,575
St. Petersburg, Florida, Health Facilities Authority
(MBIA) 7.000 12/01/2015 3,250,000 3,588,683
Sunrise, Florida, Utility Systems Revenue, Series A
(AMBAC) 5.750 10/01/2026 9,000,000 9,026,640
Tampa, Florida, Allegheny Health Systems 6.500 12/01/2023 500,000 550,155
Tampa, Florida, Guaranteed Entitlement, Series A 8.375 10/01/2008 3,145,000 3,367,760
Tampa, Florida, Subordinate Guaranteed Entitlement,
Series B (Pre-refunded) 8.500 10/01/2018 1,825,000 1,958,042
(continued on next page)
<PAGE>
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Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
GEORGIA
Forsyth County, Georgia, School District 6.750% 07/01/2016 $ 3,000,000 $ 3,465,000
Georgia Municipal Electric Authority Power Revenue,
Series B 6.375 01/01/2016 9,800,000 10,716,986
Georgia State, General Obligation, Series B 6.800 03/01/2011 10,000,000 11,595,900
Georgia State, General Obligation, Series C 5.250 04/01/2011 11,700,000 11,763,180
Georgia State, General Obligation, Series D 6.700 08/01/2010 1,500,000 1,725,960
Metropolitan Atlanta Rapid Transit Authority, Georgia,
Sales Tax Revenue, Series P (AMBAC) 6.250 07/01/2011 4,255,000 4,700,371
HAWAII
Hawaii State Department of Budget and Finance, Special
Purpose Revenue, Hawaii Electric Company (MBIA) 7.375 12/01/2020 8,000,000 8,776,560
IDAHO
Idaho Housing Finance Authority, Single Family Mortgage
Bonds, Series D-1 8.000 01/01/2020 1,110,000 1,182,827
ILLINOIS
Chicago, Illinois, Gas Supply Revenue, People's Gas
Light and Coke Company, Series A 8.100 05/01/2020 15,860,000 17,552,421
Cook County, Illinois, General Obligation, District
Number 508, Lease Certificates, Series C (MBIA) 7.700 12/01/2005 5,970,000 7,061,734
Illinois Development Finance Authority, Pollution
Control Revenue Refunding, Commonwealth Edison Company
Project, Series D 6.750 03/01/2015 4,000,000 4,379,280
Illinois State, Sales Tax, Series P 6.500 06/15/2022 9,000,000 10,042,290
Kankakee, Illinois, Sewer Revenue (FGIC) 6.875 05/01/2011 2,965,000 3,260,018
Metropolitan Fair and Exposition Authority, Illinois,
Series A 5.000 06/01/2015 3,000,000 2,717,310
Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue, McCormick Place Expansion
Project (FGIC) (effective yield 6.70%) (b) 0.000 06/15/2015 19,440,000 6,736,349
Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue, McCormick Place Expansion
Project (MBIA) (effective yield 6.60%) (b) 0.000 06/15/2013 5,625,000 2,204,212
Metropolitan Pier and Exposition Authority, Illinois,
McCormick Place Expansion Project 7.250 06/15/2005 10,180,000 11,670,352
Quincy, Illinois, Blessing Hospital Revenue 6.000 11/15/2018 4,950,000 4,813,727
INDIANA
Indianapolis, Indiana, Local Public Improvement Bond
Bank, Series 1992D 6.750 02/01/2020 2,000,000 2,142,600
KANSAS
Burlington, Kansas, Pollution Control, Kansas Gas and
Electric Company (MBIA) 7.000 06/01/2031 2,000,000 2,202,580
KENTUCKY
Carroll County, Kentucky, Kentucky Utility Company,
Series A 7.450 09/15/2016 8,000,000 9,073,200
Jefferson County, Kentucky, Hospital Revenue, Linked
ACES/Inverse Floaters (MBIA) (d) 6.435 10/23/2014 6,000,000 6,311,580
<PAGE>
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SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
KENTUCKY (continued)
Kentucky Housing Corporation, Housing Revenue Bond,
Series C 7.900% 01/01/2021 $ 4,610,000 $ 4,857,050
Trimble County, Kentucky, Pollution Control, Louisville
Gas and Electric Company 7.625 11/01/2020 2,725,000 3,009,735
Trimble County, Kentucky, Pollution Control, Louisville
Gas and Electric Company, Series A (Pre-refunded) 7.625 11/01/2020 545,000 612,275
LOUISIANA
Louisiana Public Facilities Authority, Hospital Revenue,
Woman Hospital Foundation Project 7.250 10/01/2022 1,750,000 1,869,000
New Orleans, Louisiana, Capital Appreciation (AMBAC)
(effective yield 5.77%) (b) 0.000 09/01/2011 5,000,000 2,210,150
New Orleans, Louisiana, Capital Appreciation (AMBAC)
(effective yield 5.82%) (b) 0.000 09/01/2012 4,700,000 1,944,108
New Orleans, Louisiana, Capital Appreciation (AMBAC)
(effective yield 6.05%) (b) 0.000 09/01/2014 6,960,000 2,549,866
Orleans Parish, Louisiana, School Board (ETM) 9.050 02/01/2010 5,175,000 6,870,485
Orleans Parish, Louisiana, School Board, Refunding
Bonds, Series B 5.200 02/01/2014 3,000,000 2,893,530
Ouachita Parish, Louisiana, Louisiana Hospital Service
Revenue, Glenwood Regional Medical Center 7.500 07/01/2021 2,000,000 2,265,280
MAINE
Maine State Housing Authority, Mortgage Purchase,
Series A3 7.800 11/15/2015 2,580,000 2,643,881
Regional Waste System, Maine, Solid Waste Resources
Recovery Revenue 8.150 07/01/2011 2,500,000 2,706,150
MARYLAND
Maryland State Community Development Administration,
Multi-Family Housing 8.750 05/15/2012 3,345,000 3,363,732
Maryland State and Local Facilities Loan, 3rd Series 5.000 10/15/2010 11,250,000 11,055,938
MASSACHUSETTS
Lawrence, Massachusetts, General Obligation (AMBAC) 6.250 02/15/2009 550,000 592,564
Massachusetts Bay Transportation Authority, Refunding,
General Transportation Systems, Series A 7.000 03/01/2008 4,550,000 5,266,625
Massachusetts Bay Transportation Authority, General
Transportation Systems, Series A 7.000 03/01/2007 5,000,000 5,775,650
Massachusetts Bay Transportation Authority, Series A 7.000 03/01/2011 6,110,000 7,105,808
Massachusetts Bay Transportation Authority, Series A 6.250 03/01/2012 7,600,000 8,309,232
Massachusetts Bay Transportation Authority, Series B 6.200 03/01/2016 2,125,000 2,315,506
Massachusetts Bay Transportation Authority, Series B 5.250 03/01/2020 4,500,000 4,302,315
Massachusetts Industrial Finance Agency, Harvard
Community Health Plan, Incorporated, Series B 8.125 10/01/2017 13,750,000 14,602,362
Massachusetts Industrial Finance Agency, Solid Waste
Disposal Revenue, Senior Lien, Massachusetts Recycling
Association, Series A 9.000 08/01/2016 8,000,000 4,000,000
Massachusetts Municipal Wholesale Electric, Power Supply
Systems Revenue, Series B 6.750 07/01/2008 6,050,000 6,465,393
Massachusetts State Consumer Loan, Series B (FGIC) 5.500 06/01/2012 6,385,000 6,438,762
(continued on next page)
<PAGE>
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Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
MASSACHUSETTS (continued)
Massachusetts State, General Obligation, Consolidated
Loan, Series C (FGIC) 6.600% 11/01/2008 $ 8,000,000 $ 8,952,960
Massachusetts State Health and Educational Facilities
Authority, Brigham & Women's Hospital (MBIA) 6.750 07/01/2024 2,000,000 2,159,400
Massachusetts State Health and Educational Facilities
Authority, Capital Asset Program (MBIA) 7.300 10/01/2018 2,000,000 2,181,040
Massachusetts State Health and Educational Facilities
Authority, Massachusetts General Hospital, Series F
(AMBAC) 6.250 07/01/2012 5,000,000 5,457,200
Massachusetts State Health and Educational Facilities
Authority, McLean Hospital Issue, Series C 6.500 07/01/2010 500,000 539,710
Massachusetts State Health and Educational Facilities
Authority, Milton Hospital, Series B 7.250 07/01/2005 700,000 767,494
Massachusetts State Health and Educational Facilities
Authority, New England Deaconess Hospital 6.875 04/01/2022 500,000 527,665
Massachusetts State Health and Educational Facilities
Authority, New England Deaconess Hospital (AMBAC) 6.875 04/01/2022 2,980,000 3,252,640
Massachusetts State, Water Pollution Abatement Trust,
Pooled Loan Program, Series 2 6.125 02/01/2008 85,000 92,837
Massachusetts State Water Resources Authority, Series A 7.125 04/01/2000 1,500,000 1,620,480
Massachusetts State Water Resources Authority, Series A
(MBIA) 6.000 08/01/2014 1,500,000 1,549,140
Massachusetts State Water Resources Authority, Series B 4.000 12/01/2018 19,870,000 15,353,748
Massachusetts State Water Resources Authority, Series B
(MBIA) 5.000 12/01/2016 250,000 233,490
MICHIGAN
Monroe County, Michigan, Economic Development
Corporation, Detroit Edison Company (FGIC) 6.950 09/01/2022 9,500,000 11,383,850
Okemos, Michigan, Public School District, Series I
(effective yield 7.35%) (b) 0.000 05/01/2021 51,525,000 11,080,966
Romulus, Michigan, Community Schools, Capital
Appreciation, Series I (effective yield 8.02%) (b) 0.000 05/01/2017 39,490,000 11,206,472
West Ottawa, Michigan, Public School District, Capital
Appreciation (effective yield 7.55%) (b) 0.000 05/01/2015 35,490,000 11,505,148
MINNESOTA
Dakota County, Minnesota, Single Family Mortgage 8.100 09/01/2012 1,285,000 1,344,611
Minnesota State Housing Finance Agency, Single Family
Mortgage, Series D 8.000 01/01/2023 1,385,000 1,434,625
MISSISSIPPI
Harrison County, Mississippi, Wastewater Treatment
Management 8.500 02/01/2013 1,000,000 1,352,510
MISSOURI
Kansas City, Missouri, Municipal Assistance Corporation,
Refunding Leasehold, H Roe Bartle, Revenue Bonds,
Series A 5.000 04/15/2020 11,500,000 10,663,720
Missouri State Health and Educational Facilities
Authority, Barnes Jewish Hospital (MBIA) 5.150 05/15/2010 5,000,000 4,908,150
<PAGE>
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SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
MISSOURI (continued)
Missouri State Housing Development Commission, Mortgage
Revenue, Single Family, Series B 6.450% 09/01/2027 $ 1,000,000 $ 1,018,750
University of Missouri, University Improvement Systems
Facilities 5.500 11/01/2023 25,000 24,693
NEBRASKA
Nebraska Higher Education Loan Program 6.450 06/01/2018 8,320,000 8,643,981
NEVADA
Clark County, Nevada, School District, Series A (MBIA) 6.750 03/01/2007 3,000,000 3,245,370
Clark County, Nevada, Series A (AMBAC) 7.500 06/01/2009 6,000,000 7,203,780
NEW HAMPSHIRE
New Hampshire Higher Education & Health Facilities
Authority, Frisbie Memorial Hospital, Revenue Bonds 6.125 10/01/2013 8,155,000 8,136,325
NEW JERSEY
Camden County, New Jersey, Municipal Utilities
Authority, Sewer Revenue 5.125 07/15/2017 4,650,000 4,343,890
Gloucester County, New Jersey Improvement Authority,
Solid Waste Resource Recovery Revenue, Gloucester
County Project A 8.125 07/01/2010 1,000,000 1,027,070
New Jersey Health Care Facilities Financing Authority,
Jersey Shore Medical Center (AMBAC) 6.125 07/01/2012 1,000,000 1,036,460
New Jersey Health Care Facilities Financing Authority,
Kimball Medical Center, Series C 8.000 07/01/2013 3,000,000 3,211,530
New Jersey Health Care Facilities Financing Authority,
St. Elizabeth's Hospital, Series B 7.750 07/01/1998 1,200,000 1,227,876
NEW MEXICO
Albuquerque, New Mexico, Joint Water and Sewer System
Revenue, Series A (FGIC) (effective yield 6.90%) (b) 0.000 07/01/2008 2,950,000 1,590,581
City of Albuquerque, New Mexico, Hospital System,
Series A (MBIA) 6.375 08/01/2007 1,500,000 1,613,190
New Mexico Educational Assistance Foundation, Series B 6.300 12/01/2004 2,225,000 2,401,687
University of New Mexico, University Revenues,
Subordinate Lien (MBIA) 5.375 06/01/2026 3,750,000 3,598,012
NEW YORK
Battery Park City Authority, New York, Junior Bonds,
Series A (AMBAC) 5.500 11/01/2029 2,000,000 1,946,920
Metropolitan Transportation Authority, New York,
Dedicated Tax Fund, Series A (MBIA) 5.500 04/01/2015 4,500,000 4,493,925
Metropolitan Transportation Authority, New York,
Dedicated Tax Fund, Series A (MBIA) 5.250 04/01/2026 10,250,000 9,751,338
New York City, New York, City Municipal Water Finance
Authority, Water & Sewer System, Revenue Bonds,
Series B (MBIA) 5.750 06/15/2026 10,000,000 10,041,600
New York City, New York, City Municipal Water Finance
Authority, Water and Sewer System Revenue (FGIC) 7.000 06/15/2015 4,270,000 4,672,618
New York City, New York, City Municipal Water Finance
Authority, Water and Sewer System Revenue, Series B 5.875 06/15/2026 7,500,000 7,501,200
New York City, New York, General Obligation, Fiscal
1992, Series A 5.875 03/15/2011 6,000,000 5,881,620
(continued on next page)
<PAGE>
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Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
NEW YORK (continued)
New York City, New York, General Obligation, Fiscal
1992, Series A 7.750% 08/15/2014 $ 5,125,000 $ 5,885,038
New York City, New York, General Obligation, Prerefunded
Balance, Series A 7.750 08/15/2008 8,475,000 9,712,774
New York City, New York, General Obligation, Refunding,
Series A (FGIC) 5.750 08/01/2010 400,000 405,104
New York City, New York, General Obligation, Series E
(FGIC) 6.000 08/01/2016 4,500,000 4,620,960
New York City, New York, General Obligation, Unrefunded
Balance, Series A 7.750 08/15/2008 1,525,000 1,705,880
New York City, New York, General Obligation, Unrefunded
Balance, Series A 7.750 08/15/2014 335,000 372,979
New York City, New York, Industrial Special Facility,
Terminal One Group Association Project 6.000 01/01/2015 2,500,000 2,496,825
New York City, New York, Prerefunded, Series A 7.750 08/15/2015 7,980,000 9,163,434
New York State Care Facilities, New York Hospital,
Series A 6.800 08/15/2024 3,800,000 4,181,976
New York State Dormitory Authority Revenue, City
University Educational Facilities 6.000 07/01/2026 9,500,000 9,424,095
New York State Dormitory Authority Revenue, City
University Educational Facilities (FGIC) 7.000 07/01/2009 3,780,000 4,447,019
New York State Dormitory Authority Revenue, City
University Educational Facilities (FGIC) 5.375 07/01/2014 1,000,000 984,810
New York State Dormitory Authority Revenue, Mental
Health Facility (MBIA) 5.125 02/15/2021 7,535,000 7,064,213
New York State Dormitory Authority Revenue, State
University Educational Facilities, Refunding, Series B 7.500 05/15/2011 10,500,000 12,274,815
New York State Dormitory Authority Revenue, State
University Educational Facilities, Series B (FGIC) 5.250 05/15/2013 9,500,000 8,947,385
New York State Dormitory Authority Revenue, State
University Educational Facilities, Series B 5.250 05/15/2019 3,850,000 3,535,956
New York State Dormitory Authority Revenue, State
University Educational Facilities, Series C 7.375 05/15/2010 1,100,000 1,267,805
New York State Energy Research and Development
Authority, Consolidated Edison Project 7.750 01/01/2024 7,400,000 7,721,678
New York State Energy Research and Development
Authority, Gas Facilities Revenue, Brooklyn Union Gas
Company Project, Series A 5.500 01/01/2021 1,000,000 977,880
New York State Environmental Facilities Corporation,
State Water Pollution Control (New York City Water
Finance Authority) Series E 6.875 06/15/2010 5,000,000 5,489,450
New York State Local Government Assistance Corporation,
Series C 5.500 04/01/2017 2,000,000 1,997,220
New York State Local Government Assistance Corporation,
Series D 6.750 04/01/2021 900,000 1,005,462
New York State Medical Care Facilities, Finance Agency
Revenue (AMBAC) 6.375 11/15/2019 2,255,000 2,388,947
New York State Medical Care Facilities, Finance Agency
Revenue (FGIC) 6.375 08/15/2014 2,900,000 3,072,463
New York State Medical Care Facilities, Finance Agency
Revenue, Health Center Projects, Series A 6.375 11/15/2019 1,250,000 1,311,275
<PAGE>
PAGE 17
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SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
NEW YORK (continued)
New York State Medical Care Facilities, Finance Agency
Revenue, New York Hospital, Series A 6.750% 08/15/2014 $ 2,000,000 $ 2,194,560
New York State Medical Care Facilities, Finance Agency
Revenue, Series A 7.700 02/15/2009 5,300,000 5,986,880
New York State Mortgage Agency, Homeowner Mortgage,
Series 27 6.900 04/01/2015 4,500,000 4,792,545
New York State Mortgage Agency, Series A 6.875 04/01/2017 1,565,000 1,580,321
New York State Power Authority Revenue and General
Purpose Revenue 7.000 01/01/2018 1,125,000 1,301,479
New York State Urban Development Corporation Revenue,
Correctional Capital Facilities, Series 6 5.375 01/01/2025 4,690,000 4,289,005
New York State Urban Development Corporation Revenue,
Correctional Facilities, Refunding, Series A 6.500 01/01/2010 15,920,000 17,052,549
New York State Urban Development Corporation Revenue,
Correctional Facilities, Series A 6.500 01/01/2009 575,000 618,821
New York State Urban Development Corporation Revenue,
Correctional Facilities, Series A 7.500 04/01/2011 9,500,000 10,764,165
New York, New York, Unrefunded Balance, Series A 7.750 08/15/2015 270,000 300,375
Niagara Falls, New York, Public Improvement (MBIA) 7.500 03/01/2014 300,000 369,879
Port Authority, New York and New Jersey, Consolidated
104th Series (AMBAC) 4.750 01/15/2026 3,000,000 2,632,500
Port Authority, New York and New Jersey, Special
Obligation Revenue 6.750 10/01/2011 4,500,000 4,641,120
Triborough Bridge and Tunnel Authority, New York,
General Purpose, Series X 6.625 01/01/2012 12,750,000 14,565,855
OHIO
Adams County, Ohio Valley Local School District 7.000 12/01/2015 2,000,000 2,378,960
Cleveland, Ohio, Parking Facilities Revenue (MBIA) 5.500 09/15/2022 7,430,000 7,369,446
Cleveland, Ohio, Public Power Systems, First Mortgage,
Series A (MBIA) 7.000 11/15/2016 7,000,000 8,070,370
Cleveland, Ohio, Public Power Systems, First Mortgage,
Series A (MBIA) 7.000 11/15/2024 1,000,000 1,163,470
Columbus, Ohio, General Obligation 12.375 02/15/2006 1,285,000 1,963,313
Montgomery County, Ohio, Hospital Revenue, Kettering
Medical Center (MBIA) 6.250 04/01/2020 1,500,000 1,642,440
Ohio State Building Authority, State Facilities, Adult
Correctional, Series A (AMBAC) 5.500 04/01/2016 2,000,000 1,998,960
Ohio State Higher Educational Facility Commission (MBIA) 6.125 11/15/2017 1,000,000 1,055,870
Ohio State Housing Finance Agency, Single Family
Mortgage Revenue, Series C (GNMA) 9.000 09/01/2018 10,000,000 11,120,500
Ohio State Turnpike Commission, Turnpike Revenue,
Series A (MBIA) 5.500 02/15/2026 5,000,000 4,914,950
Ohio State Water Development Authority (AMBAC) 9.375 12/01/2018 30,000 30,975
OKLAHOMA
Oklahoma State Industrial Authority, Baptist Medical
Center 7.000 08/15/2014 2,250,000 2,493,495
OREGON
Oregon Health Sciences University, Revenue Bonds,
Series A 5.250 07/01/2025 5,000,000 4,671,900
Western Generation Agency, Oregon, Wauna Cogeneration
Project, Series B (c) 7.400 01/01/2016 3,300,000 3,447,213
(continued on next page)
<PAGE>
PAGE 18
- --------------------
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
PENNSYLVANIA
Allegheny County, Pennsylvania, Sewer Revenue Refunding
(FGIC) (effective yield 6.10%) (b) 0.000% 06/01/2015 $2,500,000 $ 866,700
Beaver County, Pennsylvania, Industrial Development
Authority, Ohio Edison Project, Series A 7.750 09/01/2024 80,000 83,880
Beaver County, Pennsylvania, Ohio Edison (FGIC) 7.000 06/01/2021 4,390,000 4,736,371
Delaware County, Pennsylvania, Hospital Revenue, Crozier
Chester Medical Center (Pre-refunded) 7.500 12/15/2020 2,545,000 2,875,366
Delaware County, Pennsylvania, Industrial Development
Authority 7.375 04/01/2021 500,000 542,225
Delaware County, Pennsylvania, Industrial Development
Authority, Resource Recovery Project, Series A (LOC
Security Pacific) 8.100 12/01/2013 7,500,000 7,843,575
Lebanon County, Pennsylvania, Good Samaritan Hospital
Authority, Project Revenue 6.000 11/15/2018 2,000,000 1,956,640
McKeesport, Pennsylvania, Hospital Authority Revenue,
McKeesport Hospital 6.500 07/01/2008 875,000 877,380
Montgomery County, Pennsylvania, Industrial Development
and Pollution Control, Philadelphia Electric Company 7.600 04/01/2021 900,000 965,151
North Penn, Pennsylvania, Water Authority (FGIC) 6.875 11/01/2019 2,500,000 2,860,700
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project (c) 6.400 01/01/2009 9,500,000 9,405,570
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project (c) 6.500 01/01/2013 4,000,000 3,954,680
Pennsylvania Economic Development Financing Authority,
Resources Recovery, Northampton Project (c) 6.600 01/01/2019 3,800,000 3,751,322
Pennsylvania Housing Finance Agency, Multi-Family,
Section 8 8.200 07/01/2024 8,000,000 8,547,120
Pennsylvania Housing Finance Agency, Residential
Development, Section 8, Series A 7.600 07/01/2013 5,545,000 5,936,532
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series P 8.000 04/01/2016 3,000,000 3,081,390
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series T 7.750 10/01/2009 4,000,000 4,185,920
Pennsylvania Housing Finance Agency, Single Family
Mortgage, Series V 7.800 04/01/2016 3,950,000 4,097,177
Pennsylvania Intergovernmental Cooperative Authority,
Philadelphia Funding (FGIC) 6.750 06/15/2021 1,910,000 2,158,854
Pennsylvania State Higher Educational Facilities
Authority, Allegheny General Hospital, Series A 7.125 09/01/2007 4,000,000 4,355,040
Pennsylvania State Higher Educational Facilities
Authority, Thomas Jefferson University, Series A 6.625 08/15/2009 150,000 163,605
Pennsylvania State Industrial Development Authority 7.000 01/01/2006 500,000 573,780
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Albert Einstein Medical Center 7.625 04/01/2011 2,350,000 2,490,459
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Albert Einstein Medical Center 7.000 10/01/2021 3,000,000 3,181,260
Philadelphia, Pennsylvania, Hospital and Higher
Education Facilities, Community College, Series B
(MBIA) 6.500 05/01/2007 280,000 309,117
<PAGE>
PAGE 19
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SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
PENNSYLVANIA (continued)
Philadelphia, Pennsylvania, Municipal Development
Authority, Criminal Justice Center, Series A (MBIA) 7.100% 11/15/2006 $ 4,095,000 $ 4,575,466
Philadelphia, Pennsylvania, Water and Wastewater, Linked
Bull/Bear Forward BPO (FGIC) (d) 10.000 06/15/2005 10,000,000 13,293,600
Philadelphia, Pennsylvania, Water and Wastewater (MBIA) 6.250 08/01/2012 1,750,000 1,906,887
Pittsburgh, Pennsylvania, Urban Redevelopment Authority,
Multi-Family Housing Mortgage, 1985 Series A 9.250 12/01/2027 3,175,000 3,307,842
Sayre, Pennsylvania, Health Care Facilities Authority,
Guthrie Healthcare, Series A 7.100 03/01/2017 6,350,000 6,849,872
Westmoreland County, Pennsylvania, Municipal Authority,
Capital Appreciation, Series C (effective yield 5.69%)
(b) 0.000 08/15/2015 5,000,000 1,738,050
PUERTO RICO
Puerto Rico Commonwealth Aquaduct and Sewer Authority
Revenue Bond 5.000 07/01/2019 6,000,000 5,463,780
Puerto Rico Commonwealth Highway and Transportation
Authority Revenue, Series Y (FSA) 5.250 07/01/2015 500,000 487,810
Puerto Rico Commonwealth, General Obligation, Linked BPO
(MBIA) (d) 7.000 07/01/2010 13,300,000 15,519,105
Puerto Rico Commonwealth, General Obligation, Linked BPO
(AMBAC) (d) 7.000 07/01/2010 5,000,000 5,834,250
Puerto Rico Commonwealth, General Obligation, Refunding 6.450 07/01/2017 3,000,000 3,206,790
Puerto Rico Electric Power Authority, Refunding,
Series S 7.000 07/01/2007 2,000,000 2,270,040
Puerto Rico Electric Power Authority, Series Y (MBIA) 6.500 07/01/2006 4,000,000 4,509,760
Puerto Rico Industrial, Tourist, Educational, Medical,
Environmental Control Facilities Finance Authority
(MBIA) 6.250 07/01/2024 1,500,000 1,578,945
Puerto Rico Industrial, Tourist, Educational, Medical,
Environmental Control Facilities Finance Authority 5.500 08/01/2024 1,000,000 879,320
Puerto Rico Public Buildings Authority, Guaranteed
Public Education
and Health Facilities, Series M 5.700 07/01/2009 1,800,000 1,857,888
Puerto Rico Public Buildings Authority, Guaranteed
Public Education and Health Facilities, Series M, Step
Bond (effective yield 5.74%) (b) 3.750 07/01/2016 6,250,000 5,779,875
RHODE ISLAND
Rhode Island State Health and Educational Building
Corporation, Hospital Financing Revenue, Roger
Williams General Hospital 9.500 07/01/2016 5,710,000 5,819,575
SOUTH CAROLINA
South Carolina State Ports Authority, Ports Revenue
(AMBAC) 6.750 07/01/2021 9,000,000 9,604,980
South Carolina State Public Services Authority, Fixed
Option Bonds (MBIA) 5.342 06/30/2006 10,400,000 10,508,160
TENNESSEE
Bristol, Tennessee, Health and Education Authority,
Bristol Memorial Hospital (FGIC) 6.750 09/01/2010 4,200,000 4,820,676
Knox County, Tennessee, Health and Educational
Facilities, Fort Sanders Hospital Alliance, Series B
(MBIA) 7.250 01/01/2010 7,000,000 8,253,630
Knox County, Tennessee, Health and Educational
Facilities, Fort Sanders Hospital Alliance, Series C
(MBIA) 5.250 01/01/2015 3,500,000 3,373,195
(continued on next page)
<PAGE>
PAGE 20
- --------------------
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TENNESSEE (continued)
Metro Government, Nashville & Davidson Counties,
Tennessee, Step Bond (FGIC) (effective yield 4.26%)
(b) 0.000% 01/01/2012 $ 9,000,000 $ 9,716,220
Tennessee Housing Development Authority, Home Ownership
Program, Issue H 7.825 07/01/2015 5,655,000 5,782,860
TEXAS
Alliance Airport Authority Income, Texas, Federal
Express Corporation Project 6.375 04/01/2021 14,500,000 14,525,375
Austin, Texas, Utility Systems Capital Appreciation
(AMBAC) (effective yield 6.80%) (b) 0.000 11/15/2011 12,000,000 5,221,200
Bexar, Texas, Metropolitan Water District Waterworks
Systems, Prerefunded (AMBAC) 6.625 05/01/2014 1,825,000 2,026,133
Bexar, Texas, Metropolitan Water District Waterworks
Systems, Unrefunded Balance (AMBAC) 6.625 05/01/2014 25,000 26,839
Brazos River Authority, Texas Revenue Refunding, Houston
Light and Power Company, Project C 8.100 05/01/2019 8,500,000 9,061,935
Brownsville, Texas, Utility System Revenue (MBIA) 6.250 09/01/2014 2,400,000 2,632,848
Cypress-Fairbanks, Texas, Independent School District,
Capital Appreciation, Series A (effective yield 6.03%)
(b) 0.000 02/15/2013 6,675,000 2,707,981
Fort Bend County, Texas, Levee Improvement (MBIA) 6.900 09/01/2020 1,165,000 1,277,224
Fort Bend County, Texas, Levee Improvement District # 11
(MBIA) 6.900 09/01/2018 1,245,000 1,364,931
Fort Bend County, Texas, Levee Improvement District # 11
(MBIA) 6.900 09/01/2019 1,000,000 1,093,040
Harris County, Texas, Flood Control District (effective
yield 7.20%) (b) 0.000 10/01/2006 7,000,000 3,798,200
Harris County, Texas, Health Facilities Development
Corporation 6.600 06/01/2014 5,000,000 5,225,900
Harris County, Texas, Health Facilities Development
Corporation, Hermann Hospital Project (MBIA) 6.375 10/01/2017 2,480,000 2,623,344
Harris County, Texas, Health Facilities, Memorial
Hospital System 7.125 06/01/2015 2,525,000 2,714,956
Harris County, Texas, Senior Lien, Toll Road, Series A
(MBIA) 6.375 08/15/2024 4,000,000 4,307,080
Harris County, Texas, Toll Road 7.000 08/15/2010 3,000,000 3,504,660
Houston, Texas, Airport System Revenue, Senior Lien 8.200 07/01/2017 4,565,000 4,885,189
Houston, Texas, General Obligation 7.000 03/01/2008 15,000,000 17,460,000
Houston, Texas, Hotel Occupancy Tax, Refunding, Senior
Lien, Revenue Bonds 5.500 07/01/2015 3,000,000 2,982,420
Houston, Texas, Water and Sewer System Revenue,
Refunding, Junior Lien, Series C (effective yield
6.85%) (b) 0.000 12/01/2010 2,700,000 1,257,930
Houston, Texas, Water and Sewer System Revenue, Series C
(effective yield 6.90%) (b) 0.000 12/01/2011 13,000,000 5,699,980
Lower Colorado River Authority, Texas, Series B (AMBAC)
(effective yield 7.05%) (b) 0.000 01/01/2005 2,135,000 1,436,492
Northwest Texas, Independent School District, Capital
Appreciation (AMBAC) (effective yield 7.28%) (b) 0.000 08/15/2010 3,690,000 1,744,853
Rio Grande Valley, Texas, Health Facilities Corporation,
Hospital Revenue, Baptist Medical Center Project
(MBIA) 8.000 08/01/2017 1,085,000 1,159,355
<PAGE>
PAGE 21
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TEXAS (continued)
Tarrant County, Texas, Health Facilities Development
Revenue, Harris Methodist Health System, Series A
(AMBAC) 5.125% 09/01/2018 $ 5,000,000 $ 4,638,300
Tarrant County, Texas, Housing Finance Corporation,
Series A (MBIA) (effective yield 11.00%) (b) 0.000 09/15/2016 6,415,000 2,010,397
Texas Housing Agency, Residential Development, Series D 8.400 01/01/2021 4,085,000 4,260,369
Texas Housing Agency, Single Family Mortgage 8.200 03/01/2016 2,525,000 2,590,423
Texas Municipal Power Agency, Capital Appreciation
(effective yield 9.62%) (b) 0.000 09/01/2008 4,500,000 2,426,670
Texas Municipal Power Agency (effective yield 9.13%) (b) 0.000 09/01/2006 4,455,000 2,721,426
Texas Municipal Power Agency, Refunding Bonds (MBIA) 5.250 09/01/2012 175,000 170,933
Texas Municipal Power Agency, Revenue Bonds 6.100 09/01/2009 130,000 140,574
Texas State, Linked RIBs/SAVRs (d) 6.200 09/30/2011 5,000,000 5,377,350
Titus County, Texas, Water District #1, Southwest
Electric Power 8.200 08/01/2011 9,000,000 10,296,090
Tomball, Texas, Hospital Authority, Tomball Regional
Hospital 6.125 07/01/2023 11,000,000 10,698,270
University of Texas, University Revenues, Prerefunded
Balance, Series B 6.750 08/15/2013 705,000 781,796
University of Texas, University Revenues, Unrefunded
Balance, Series B 6.750 08/15/2013 1,475,000 1,604,240
Waller, Texas, General Obligation, Independent School
District 5.250 02/15/2021 3,450,000 3,278,086
UTAH
Intermountain Power Agency, Utah, Power Supply, Series B 10.375 07/01/2011 3,000,000 3,593,820
Intermountain Power Agency, Utah, Power Supply, Series C
(effective yield 21.29%) (b) 0.000 07/01/2020 6,500,000 1,033,240
Intermountain Power Agency, Utah, Power Supply, Series D 8.375 07/01/2012 3,020,000 3,151,189
Intermountain Power Agency, Utah, Power Supply,
Series G, Step Bond (effective yield 7.65%) (b) 0.000 07/01/2012 24,350,000 24,311,040
Murray City, Utah, Hospital Revenue, Health Services
Incorporated (MBIA) 4.750 05/15/2020 4,145,000 3,605,611
Utah State Housing Finance Agency, Single Family
Mortgage, Series C 2 7.950 07/01/2010 325,000 344,058
VERMONT
Vermont Housing Finance Agency, Single Family, Series 1 8.150 05/01/2025 1,485,000 1,566,526
VIRGINIA
Fairfax County, Virginia, Industrial Development
Authority 5.000 08/15/2023 9,355,000 8,463,375
Fredericksburg, Virginia, Industrial Development
Authority, Hospital Facilities Revenue, Medicorp
Health System Obligation (AMBAC) 5.250 06/15/2023 3,500,000 3,309,075
Hampton Roads, Virginia, Regional Jail Authority,
Regional Jail Facilities Revenue, Series A (MBIA) 5.625 07/01/2016 5,850,000 5,904,288
Pittsylvania County, Virginia, Industrial Development
Authority, Series A (c) 7.450 01/01/2009 2,000,000 2,089,560
Virginia State Housing Development Authority,
Residential Mortgage, Series B (effective yield
10.62%) (b) 0.000 09/01/2014 790,000 126,866
Virginia State Transportation Board Revenue, North
Virginia Transportation District, Series A 5.125 05/15/2016 2,600,000 2,493,270
Winchester, Virginia, Industrial Development Hospital
Revenue, Winchester Medical Center (AMBAC) 6.150 01/01/2015 2,300,000 2,170,303
(continued on next page)
<PAGE>
PAGE 22
- --------------------
Keystone Tax Free Fund
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
VIRGINIA (continued)
Winchester, Virginia, Industrial Development Hospital
Revenue, Winchester Medical Center (AMBAC) 6.300% 01/01/2015 $ 3,200,000 $ 3,033,024
WASHINGTON
Tacoma, Washington, Electric Systems Revenue, Linked
RIBs/SAVRs (AMBAC) (d) 6.514 01/02/2015 12,000,000 12,747,480
Washington Public Power Supply System, Nuclear Project
#3 (effective yield 10.09%) (b) 0.000 07/01/2012 4,000,000 1,642,680
Washington State General Obligation, Series A 5.375 07/01/2021 10,000,000 9,664,000
Washington State General Obligation, Series B 5.500 05/01/2018 14,000,000 13,946,240
Washington State Health Care Facilities Authority,
Multi-Care Medical Center of Tacoma (FGIC) 7.875 08/15/2011 1,300,000 1,393,132
WISCONSIN
Wisconsin Health and Education Facilities Authority,
Bellin Memorial Hospital, Incorporated (Pre-refunded) 7.625 04/01/2019 5,000,000 5,452,500
Wisconsin Housing and Economic Development Authority,
Home Ownership 8.000 03/01/2021 1,195,000 1,248,883
Wisconsin State, General Obligation, Series 2 5.125 11/01/2011 5,000,000 4,938,500
WYOMING
Wyoming Community Development Authority, Housing
Revenue, Series 5 6.250 06/01/2027 10,000,000 10,021,300
Wyoming Community Development Authority, Single Family
Mortgage, Series B 8.125 06/01/2021 2,610,000 2,737,759
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TOTAL MUNICIPAL BONDS (Cost--$1,448,532,894) 1,527,775,935
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TEMPORARY TAX-EXEMPT INVESTMENTS (1.0%)
California Health Facilities Financing Authority
Revenue, St. Joseph Health, Series A (a) 5.000 07/01/2013 295,000 295,000
Dade County, Florida, Water & Sewer System Revenue
(FGIC) (a) 4.000 10/05/2022 2,235,000 2,235,000
Los Angeles County, California, Pension, Series C (a) 3.900 06/30/2007 975,000 975,000
Massachusetts State Health and Educational Facilities
Authority Revenue, Capital Assets Program, Series D
(MBIA) (a) 4.900 01/01/2035 2,240,000 2,240,000
Missouri State Health and Educational Facilities
Authority Revenue, Christian Health Services, Series B
(a) 4.050 12/01/2019 1,635,000 1,635,000
New York City, New York, General Obligation, Series B,
Subseries B3 (a) 5.000 08/15/2004 160,000 160,000
New York City, New York, General Obligation, Subseries
A8 (a) 5.000 06/15/2024 5,000 5,000
Peninsula Ports Authority, Virginia, Ports Authority
Revenue (a) 5.000 12/01/2005 2,000,000 2,000,000
Perry County, Mississippi, Pollution Control Revenue,
Leaf River Forest Project (a) 5.000 03/01/2002 2,000,000 2,000,000
Sayre, Pennsylvania, Health Care Facilities Authority
Revenue, Series K (AMBAC) (a) 4.000 12/01/2020 1,495,000 1,495,000
Uinta County, Wyoming, Pollution Control Revenue,
Chevron USA Incorporated Project (a) 5.000 08/15/2020 1,000,000 1,000,000
<PAGE>
PAGE 23
- --------------------
SCHEDULE OF INVESTMENTS--December 31, 1996
Coupon Maturity Principal Market
Rate Date Amount Value
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TEMPORARY TAX-EXEMPT INVESTMENTS (continued)
Washington State Health Care Facilities Authority
Revenue, Sisters of Providence, Series D (a) 5.000% 10/01/2005 $850,000 $ 850,000
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (Cost--$14,890,000) 14,890,000
- ---------------------------------------------------------- ------ ---------- ---------- --------------
TOTAL INVESTMENTS (Cost--$1,463,422,894) (e) 1,542,665,935
OTHER ASSETS AND LIABILITIES--NET (1.0%) 15,219,857
- ---------------------------------------------------------- ------ ---------- ---------- --------------
NET ASSETS (100.0%) $1,557,885,792
- ---------------------------------------------------------- ------ ---------- ---------- --------------
</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) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as mended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(d) 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 (see Note 1).
(e) The cost of investments for federal income tax purposes amounted to
$1,463,520,567. Gross unrealized appreciation and unrealized depreciation
of investments, based on identified tax cost, at December 31, 1996 are as
follows:
Gross unrealized appreciation $86,747,523
Gross unrealized depreciation (7,602,155)
-------------
Net unrealized appreciation $79,145,368
-------------
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.
BPO--Bond Payment Obligation
SAVRs--Select Auction Variable Rate Securities
RIBs--Residual Interest Bonds
ACES--Auction Rate Securities
See Notes to Financial Statements.
<PAGE>
PAGE 24
- --------------------
Keystone Tax Free Fund
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992 1991
================================ ========= ========= ========= ========= ========= ===========
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of
year $ 7.86 $ 7.10 $ 8.12 $ 8.04 $ 8.07 $ 7.90
-------------------------------- ------- ------- ------- ------- ------- ---------
Income from investment
operations:
Net investment income 0.41 0.41 0.37 0.39 0.46 0.46
Net realized and unrealized gain
(loss) on investments and
closed futures contracts (0.17) 0.74 (0.96) 0.48 0.12 0.36
-------------------------------- ------- ------- ------- ------- ------- ---------
Total from investment operations 0.24 1.15 (0.59) 0.87 0.58 0.82
-------------------------------- ------- ------- ------- ------- ------- ---------
Less distributions from:
Net investment income (0.39) (0.39) (0.37) (0.39) (0.46) (0.46)
In excess of net investment
income 0.00 0.00 (0.06) (0.06) (0.04) (0.07)
Net realized gain on investments 0.00 0.00 0.00 (0.33) (0.11) (0.12)
In excess of net realized gain
on investments 0.00 0.00 0.00 (0.01) 0.00 0.00
-------------------------------- ------- ------- ------- ------- ------- ---------
Total distributions (0.39) (0.39) (0.43) (0.79) (0.61) (0.65)
-------------------------------- ------- ------- ------- ------- ------- ---------
Net asset value end of year $ 7.71 $ 7.86 $ 7.10 $ 8.12 $ 8.04 $ 8.07
================================ ======= ======= ======= ======= ======= =========
Total Return (b) 3.15% 16.61% (7.34%) 11.15% 7.55% 10.80%
================================ ======= ======= ======= ======= ======= =========
Ratios/supplemental data
Ratios to average net assets:
Total expenses 0.87%(c) 0.95%(c) 1.55% 1.66% 1.38% 1.75%
Net investment income 5.34% 5.41% 4.92% 4.72% 5.71% 5.78%
Portfolio turnover rate 69% 56% 84% 76% 78% 77%
-------------------------------- ------- ------- ------- ------- ------- ---------
Net assets end of year
(thousands) $1,557,886 $1,204,468 $1,197,727 $1,548,503 $1,453,199 $1,146,185
================================ ======= ======= ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1990 (a) 1989 1988 1987
================================ ========= ========= ========= ===========
<S> <C> <C> <C> <C>
Net asset value beginning of
year $ 8.06 $ 8.18 $ 8.09 $ 8.85
-------------------------------- ------- ------- ------- ---------
Income from investment
operations:
Net investment income 0.52 0.57 0.55 0.56
Net realized and unrealized gain
(loss) on investments and
closed futures contracts (0.01) 0.15 0.30 (0.58)
-------------------------------- ------- ------- ------- ---------
Total from investment operations 0.51 0.72 0.85 (0.02)
-------------------------------- ------- ------- ------- ---------
Less distributions from:
Net investment income (0.52) (0.60) (0.63) (0.64)
In excess of net investment
income (0.03) 0.00 0.00 0.00
Net realized gain on investments (0.12) (0.24) (0.13) (0.10)
In excess of net realized gain
on investments 0.00 0.00 0.00 0.00
-------------------------------- ------- ------- ------- ---------
Total distributions (0.67) (0.84) (0.76) (0.74)
-------------------------------- ------- ------- ------- ---------
Net asset value end of year $ 7.90 $ 8.06 $ 8.18 $ 8.09
================================ ======= ======= ======= =========
Total Return (b) 6.66% 9.11% 10.89% (0.14%)
================================ ======= ======= ======= =========
Ratios/supplemental data
Ratios to average net assets:
Total expenses 1.18% 1.23% 1.79% 1.70%
Net investment income 6.54% 6.94% 6.74% 6.80%
Portfolio turnover rate 64% 69% 61% 43%
-------------------------------- ------- ------- ------- ---------
Net assets end of year
(thousands) $1,060,826 $901,912 $903,132 $894,768
================================ ======= ======= ======= =========
</TABLE>
(a) Calculation based on average shares outstanding.
(b) Excluding applicable sales charges.
(c) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would
have been 0.86% and 0.94% for the years ended December 31, 1996 and 1995,
respectively.
See Notes to Financial Statements.
<PAGE>
PAGE 25
- --------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
Assets (Note 2)
Investments at market value
(identified cost--$1,463,422,894) $1,542,665,935
Receivable for:
Investments sold 3,000,875
Fund shares sold 161,661
Interest 25,970,285
Other assets 166,675
- ------------------------------------------------- ----------
Total assets 1,571,965,431
- ------------------------------------------------- ----------
Liabilities (Note 2)
Payable for:
Investments purchased 4,919,751
Fund shares redeemed 2,049,565
Distributions to shareholders 6,333,173
Accrued Trustees' fees and expenses 3,006
Other accrued expenses 774,144
- ------------------------------------------------- ----------
Total liabilities 14,079,639
- ------------------------------------------------- ----------
Net assets $1,557,885,792
- ------------------------------------------------- ----------
Net assets represented by
Paid-in capital $1,489,589,329
Undistributed net investment income 2,957,507
Accumulated net realized loss on investments and
closed futures contracts (13,904,085)
Net unrealized appreciation on investments 79,243,041
- ------------------------------------------------- ----------
Total net assets $1,557,885,792
- ------------------------------------------------- ----------
Net asset value per share (Note 2)
Net asset value of $1,557,885,792 / 201,937,602
outstanding shares of beneficial interest $ 7.71
================================================= ==========
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
Investment income
Interest $ 97,670,668
- ------------------------------------ --------- ----------
Expenses (Notes 4, 5 and 6)
Investment management fee $ 6,642,609
Distribution Plan expenses 4,706,968
Transfer agent fees 1,591,303
Other administrative service fees 666,547
Trustees' fees and expenses 48,506
Reimburseable accounting expenses 19,501
- ------------------------------------ --------- ----------
Total expenses 13,675,434
Less: Expenses paid indirectly (172,145)
- ------------------------------------ --------- ----------
Net expenses 13,503,289
- ------------------------------------ --------- ----------
Net investment income 84,167,379
- ------------------------------------ --------- ----------
Net realized and unrealized loss on
investments (Note 3)
Net realized gain on investments 15,476,735
Net change in unrealized
appreciation or depreciation on
investments (Note 7) (48,955,108)
- ------------------------------------ --------- ----------
Net realized and unrealized loss on
investments (33,478,373)
- ------------------------------------ --------- ----------
Net increase in net assets resulting
from operations $ 50,689,006
==================================== ========= ==========
See Notes to Financial Statements.
<PAGE>
PAGE 26
- --------------------
Keystone Tax Free Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
===================================================================== ================ ==================
<S> <C> <C>
Operations
Net investment income $ 84,167,379 $ 65,921,672
Net realized gain on investments and closed futures contracts 15,476,735 8,930,765
Net change in unrealized appreciation or depreciation on
investments (48,955,108) 113,250,664
- ------------------------------------------------------------------- ------------ --------------
Net increase in net assets resulting from operations 50,689,006 188,103,101
- ------------------------------------------------------------------- ------------ --------------
Distributions to shareholders from net investment income (Note 1) (79,617,449) (63,827,615)
- ------------------------------------------------------------------- ------------ --------------
Capital share transactions (Notes 2 and 7)
Shares issued in connection with the acquisition of Keystone
Tax Exempt Trust 658,278,376 0
Proceeds from shares sold 107,614,922 133,114,586
Payment for shares redeemed (424,558,360) (283,907,474)
Net asset value of shares issued in reinvestment of dividends and
distributions 41,011,255 33,258,548
- ------------------------------------------------------------------- ------------ --------------
Net increase (decrease) in net assets resulting from capital share
transactions 382,346,193 (117,534,340)
- ------------------------------------------------------------------- ------------ --------------
Total increase in net assets 353,417,750 6,741,146
Net assets
Beginning of year 1,204,468,042 1,197,726,896
- ------------------------------------------------------------------- ------------ --------------
End of year [including undistributed net investment income
(accumulated distributions in excess of net investment income)
as follows: 1996--$2,957,507 and 1995--($1,663,086)] $1,557,885,792 $1,204,468,042
=================================================================== ============ ==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 27
- --------------------
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Keystone Tax Free Fund (the "Fund") is a Massachusetts business trust for
which Keystone Investment Management Company ("Keystone") is the Investment
Adviser and Manager. Keystone was formerly a wholly-owned subsidiary of
Keystone Investments, Inc. ("KII") and is currently a subsidiary of First
Union Keystone, Inc. First Union Keystone, Inc. is a wholly-owned subsidiary
of First Union National Bank of North Carolina which in turn is a
wholly-owned subsidiary of First Union Corporation ("First Union"). The Fund
is registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a diversified, open-end investment company. The Fund's investment
objective is to provide shareholders with the highest possible current
income, exempt from federal income taxes, while preserving capital by
investing in high quality municipal bonds.
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. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net
assets of the Fund.
A. Valuation of Securities
Tax-exempt bonds are valued at prices provided by an independent pricing
service. In determining value for normal institutional-size transactions, the
pricing service uses methods based on market transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. Securities for which valuations are not
available from an independent pricing service (including restricted
securities) are valued at fair value as determined in good faith according to
procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
securities with greater than 60 days to maturity are valued at market value.
B. Futures Contracts
In order to gain exposure to or protect against changes in security values,
the 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
<PAGE>
PAGE 28
- --------------------
Keystone Tax Free Fund
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 amortization of discounts and premiums.
E. Federal Income Taxes
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 (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly,
no provision for federal income taxes is required.
F. Distributions
The Fund declares dividends from net investment income daily and distributes
such dividends monthly. The Fund distributes net capital gains, if any, at
least, annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment of market discount on securities.
2. Capital Share Transactions
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest with no par value. Transactions in
shares of the Fund were as follows:
Year ended December 31,
1996 1995
================================= ============ ==============
Shares issued in connection with
the acquisition of Keystone Tax
Exempt Trust (Note 7) 84,656,452 -0-
Shares sold 14,063,760 17,669,831
Shares redeemed (55,439,349) (37,618,182)
Shares issued in reinvestment of
dividends and distributions 5,361,695 4,437,352
--------------------------------- ------------ --------------
Net increase (decrease) 48,642,558 (15,510,999)
================================= ============ ==============
3. Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and U.S. government securities) for the year ended
December 31, 1996 were $1,379,241,478 and $1,041,052,842, respectively.
As of December 31, 1996, the Fund has a capital loss carryover for federal
income tax purposes of approximately $13,723,000 which expires as follows:
$10,370,000--2002 and $3,353,000--2003.
4. Distribution Plans
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 its principal underwriter amounts which are
calculated and paid monthly.
Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(formerly, Keystone Investment Distributors Company) ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the Fund's principal underwriter. On
December 11, 1996, the Fund entered into a principal underwriting agreement
with Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds
Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of
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BISYS Group Inc. At that time, EKD replaced EKIS as the Fund's principal
underwriter.
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 year ended December 31, 1996, the Fund received $696,350 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 earned while the
Distribution Plan was in effect.
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 Management Agreement and Other Affiliated Transactions
Under an investment advisory agreement dated December 11, 1996, Keystone
serves as the Investment Adviser and Manager to the Fund. Keystone provides
the Fund with investment advisory and management services. In return,
Keystone is paid a management fee, computed and paid daily, 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 as net assets
increase to 0.25% per annum, to the average daily net asset value of the
Fund.
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 $666,547
which consisted of $533,237 for custodian fees, $18,769 for audit and legal
and $114,541 for printing, registration, insurance and other miscellaneous
expenses. KMI has been reimbursed for these expenses by the Fund.
During the year ended December 31, 1996, the Fund paid or accrued $19,501 to
Keystone for certain accounting services.
Officers of the Fund and affiliated Trustees receive no compensation
directly from the Fund.
6. Expense Offset Arrangement
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended December 31, 1996, the Fund incurred total custody fees of
$533,237 and received a credit of $172,145 pursuant to this expense offset
arrangement, resulting in a net custody expense of $361,092. 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
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Keystone Tax Free Fund
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 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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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, 1996, 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 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, 1996 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Tax Free Fund, as of December 31, 1996 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
January 31, 1997
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Keystone Tax Free Fund
FEDERAL TAX STATUS-FISCAL 1996 DISTRIBUTIONS
(Unaudited)
The per share distributions paid to you for fiscal 1996, whether taken in
shares or cash, are as follows:
Income Dividends
Tax-exempt Taxable
- ------------ -----------
$0.39 $0.00
============ ===========
In January 1997 complete information on calendar year 1996 distributions was
forwarded to you to assist in completing your 1996 federal income tax return.
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Additional Information
(Unaudited)
Shareholders of the Fund considered and acted upon the proposals listed below
at a special meeting of shareholders held Monday, December 9, 1996. In
addition, next to each proposal are the results of that vote.
1. To elect the following Trustees:
Affirmative Withheld
============================ =========== ===========
Frederick Amling 144,022,770 4,053,136
Laurence B. Ashkin 143,990,875 4,085,031
Charles A. Austin III 144,085,020 3,990,886
Foster Bam 143,983,688 4,092,218
George S. Bissell 143,979,383 4,096,523
Edwin D. Campbell 144,015,759 4,060,147
Charles F. Chapin 144,037,486 4,038,420
K. Dun Gifford 144,088,419 3,987,487
James S. Howell 143,983,258 4,092,648
Leroy Keith, Jr. 144,096,560 3,979,346
F. Ray Keyser, Jr. 143,988,564 4,087,342
Gerald M. McDonell 144,031,045 4,044,861
Thomas L. McVerry 144,024,241 4,051,665
William Walt Pettit 144,010,323 4,065,583
David M Richardson 144,101,685 3,974,221
Russell A. Salton, III M.D. 144,092,464 3,983,442
Michael S. Scofield 144,026,816 4,049,090
Richard J. Shima 144,066,939 4,008,967
Andrew J. Simons 144,068,774 4,007,132
2. To approve an Investment Advisory and Management Agreement between the
Fund and Keystone Investment Management Company.
Affirmative 139,291,841
Against 3,308,095
Abstain 5,475,971
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Keystone Tax Free Fund
Keystone's Services
for Shareholders
KEYSTONE AUTOMATED RESPONSE LINE (KARL)--Receive up-to-date account
information on your balance, last transaction and recent Fund distribution.
You may also process transactions such as investments, redemptions and
exchanges using a touch-tone telephone as well as receive quotes on price,
yield, and total return of your Keystone Fund. Call toll-free,
1-800-346-3858.
EASY ACCESS TO INFORMATION ON YOUR ACCOUNT--Information about your
Keystone account is available 24 hours a day through KARL. To speak with a
Shareholder Services representative about your account, call toll-free
1-800-343-2898 between 8:00 A.M. and 6:00 P.M. Eastern time. Retirement Plan
investors should call 1-800-247-4075.
ADDITIONS TO YOUR ACCOUNT--You can buy additional shares for your account
at any time, with no minimum additional investment.
REINVESTMENT OF DISTRIBUTIONS--You can compound the return on your
investment by automatically reinvesting your Fund's distributions at net
asset value with no sales charge.
EXCHANGE PRIVILEGE--You may move your money among funds in the same
Keystone family quickly and easily for a nominal service fee. KARL gives you
the added ability to move your money any time of day, any day of the week.
Keystone offers a variety of funds with different investment objectives for
your changing investment needs.
ELECTRONIC FUNDS TRANSFER (EFT)--Referred to as the "paper-less
transaction," EFT allows you to take advantage of a variety of preauthorized
account transactions, including automatic monthly investments and systematic
monthly or quarterly withdrawals. EFT is a quick, safe and accurate way to
move money between your bank account and your Keystone account.
CHECK WRITING--Shareholders of Keystone Liquid Trust may exercise the
check writing privilege to draw from their accounts.
EASY REDEMPTION--KARL makes redemption services available to you 24 hours
a day, every day of the year. The amount you receive may be more or less than
your original account value depending on the value of fund shares at time of
redemption.
RETIREMENT PLANS--Keystone offers a full range of retirement plans,
including IRA, SEP-IRA, profit sharing, money purchase, and defined
contribution plans. For more information, please call Retirement Plan
Services, toll-free at 1-800-247-4075.
Keystone is committed to providing you with quality, responsive account
service. We will do our best to assist you and your financial adviser in
carrying out your investment plans.
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[wrap cover]
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 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.
[GRAPHIC] Evergreen Keystone Logo
P.O. Box 2121
Boston, Massachusetts 02106-2121
KTF-R-2/97
48M [recycle symbol]
KEYSTONE
[GRAPHIC] U.S. flag
TAX FREE
FUND
[GRAPHIC] Evergreen Keystone Logo
ANNUAL REPORT
DECEMBER 31, 1996
