[front cover]
KEYSTONE
[photo of man teaching boy to ride two-wheeler]
LIQUID TRUST
[keystone logo]
ANNUAL REPORT
JUNE 30, 1996
<PAGE>
PAGE 1
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Keystone Liquid Trust
Seeks stability of principal and liquidity with current
income from high quality money market instruments.
Dear Shareholder:
We are pleased to report to you on the activities of Keystone Liquid Trust
for the twelve-month period which ended June 30, 1996.
Performance
Your Fund provided the following returns:
Class A shares returned 4.73% for the period, which includes reinvestment of
the 4.6 cent-per-share dividend.
Class B shares returned 3.76% for the period, which includes reinvestment of
the 3.7 cent-per-share dividend.
Class C shares returned 3.75% for the period, which includes reinvestment of
the 3.7 cent-per-share dividend.
Your Fund maintained a constant net asset value of $1 per share during the
period, and continued to focus on high-quality, short-term money market
instruments.
We believe this was satisfactory performance, reflecting a transition from a
generally declining interest rate environment in the second half of 1995 to a
period of rising rates during the first half of 1996.
Market Environment and Strategy
Short-term interest rates responded to changing expectations of economic
strength during the twelve-month period. Throughout the last half of 1995 and
early 1996, money market yields declined on expectations that the Federal
Reserve Board would continue to reduce interest rates. Those beliefs changed
in the first quarter of 1996 as strength in employment growth laid the
foundation for a stronger economy. Investors became concerned that this
growth might cause inflation to rise. As a result, short-term interest rates
rose modestly.
We believe that Keystone Liquid Trust was well positioned for this changing
environment. We shortened your Fund's average maturity to 37 days from 60
days, just before interest rates began to rise. This enabled us to invest the
portfolio's assets in higher yielding securities sooner. We emphasized
commercial paper, which offered higher yields and we believe better value
than other short-term obligations. As of June 30, 1996, the Fund's average
maturity was 37 days.
Keystone's Commitment to Quality and Liquidity
Our policy with respect to Keystone Liquid Trust is to emphasize quality and
liquidity. As of June 30, 1996, the average credit quality of the portfolio
was A-1+/P-1, the highest commercial paper rating given by Moody's and
Standard & Poor's.
Your Fund also requires an issuer to have the highest commercial paper
rating, as well as a minimum of a single "A" rating by all major credit
rating agencies on its long-term debt. For bank obligations, we concentrate
on large, well capitalized banks with diverse investment portfolios; and
invest only in the obligations of the bank itself. Our research team tracks
eligible issuers on an ongoing basis, monitoring liquidity ratios and other
financial data that measures a company's creditworthiness. During this
twelve-month period, your Fund did not invest in derivative securities.
Our Outlook
We believe that short-term rates may move modestly higher over the next few
months, if strong economic growth continues. Longer term, we think that the
current level of higher interest rates should slow future economic growth. We
think inflation could move a bit higher than in the recent past, but should
be well contained by historical standards.
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PAGE 2
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Keystone Liquid Trust
Keystone Liquid Trust remains committed to providing investors with safety
and liquidity by investing in high quality money market instruments. We
intend to continue with our conservative management policies in all market
environments, and we believe these instruments can provide particular value
during periods of uncertainty.
As you evaluate your investment and market conditions, we encourage you to
remember a few investment principles that have withstood the test of time in
all types of markets. Diversify your investments. By putting your money in
different types of investments, you can minimize your risk. Take a long-term
perspective. The longer you keep your money invested, the more time you have
to weather the market's fluctuations. Invest regularly. By making periodic
investments over time, you can lower your average cost per share. Of course,
your investment will fluctuate with market conditions, and there is no
assurance that it will be worth more when you sell shares.
Your investment adviser can help you with these strategies by developing a
plan to meet your particular needs. He or she is a professional with the
resources and expertise to help you achieve your investment goals. We
encourage you to take advantage of the services your adviser can provide.
We appreciate your continued support of Keystone funds. If you have any
questions or comments about your investment, we encourage you to write to us.
Sincerely,
/s/Albert H. Elfner, III /s/George S. Bissell
Albert H. Elfner, III George S. Bissell
Chairman and President Chairman of the Board
Keystone Investments, Inc. Keystone Funds
August 1996
[dalbar Dalbar Key Honors
logo]
Honoring Commitment to Excellence
Keystone was recently recognized by Dalbar, an independent mutual
fund rating organization, for demonstrating a commitment to serving
the needs of customers. The award is intended to distinguish
companies who are committed to investors and have a proven ability
to provide good service.
[receiver Keystone Introduces Investment Insight Line for Shareholders
graphic]
Now you can keep up-to-date on your fund's current strategy and
outlook by calling Keystone Investment Insight Line. You can hear
Keystone portfolio managers discuss their latest strategies or
listen to Keystone's overall market outlook from James McCall,
chief investment officer. Of course, your financial adviser can
provide you with more complete information on Keystone Funds. This
service is available 24 hours a day, seven days a week and updated
at least monthly.
Keystone Investment Insight Line 1-800-346-3858, Press 2 after
the greeting
[telephone graphic]
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PAGE 3
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SCHEDULE OF INVESTMENTS--June 30, 1996
<TABLE>
<CAPTION>
Maturity Principal Market
Date Amount Value
- -------------------------------------------------------- ------- ---------- -------------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT (17.4%)
Algemene Bank Nederland NV, Euro CD, 5.08% 07/16/96 $ 5,000,000 $ 4,999,222
Bayerische Landesbank, Euro CD, 5.41% 10/29/96 5,000,000 4,996,354
Bayerische Vereinsbank, Euro CD, 5.35% 07/05/96 5,000,000 4,999,919
Bayerische Vereinsbank, Yankee CD, 5.12% 08/05/96 5,000,000 4,998,157
Deutsche Bank, Yankee CD, 5.37% 07/15/96 5,000,000 4,999,933
Deutsche Bank AG, New York, Yankee CD, 5.62% 01/15/97 5,000,000 4,994,081
First Alabama Bank, CD, 5.34% 07/29/96 10,000,000 9,999,346
NBD Bank NA, CD, 5.35% 08/07/96 10,000,000 9,999,992
Rabobank Nederland NV, Yankee CD, 5.31% 07/18/96 5,000,000 4,999,562
Union Bank Switzerland, Euro CD, 5.05% 07/08/96 5,000,000 4,999,595
- -------------------------------------------------------- ------- ---------- -------------
TOTAL CERTIFICATES OF DEPOSIT (Cost--$60,002,903) 59,986,161
- --------------------------------------------------------------------------------- -------------
COMMERCIAL PAPER (62.7%)
ABN-AMRO North America Finance Co. 08/22/96 5,000,000 4,961,000
American Express Credit Corp. 07/16/96 5,000,000 4,988,875
American Express Credit Corp. 07/17/96 5,000,000 4,988,156
Ameritech Corp. (b) 08/12/96 7,000,000 6,955,900
Ameritech Corp. 08/23/96 8,000,000 7,936,871
Associates Corp. 07/03/96 5,000,000 4,998,533
Associates Corp. of North America 07/09/96 5,000,000 4,994,122
Associates Corp. of North America 07/12/96 5,000,000 4,991,918
Bell Atlantic Capital Funding Corp. 07/01/96 4,815,000 4,815,000
Bell Atlantic Financial Services, Inc. 07/26/96 10,000,000 9,962,778
BellSouth Telecommunications, Inc. 07/25/96 9,000,000 8,968,320
BellSouth Telecommunications, Inc. 08/27/96 5,000,000 4,957,329
Coca-Cola Co. 07/19/96 5,000,000 4,986,750
Coca-Cola Co. 07/22/96 10,000,000 9,968,967
Commerzbank AG, New York 07/08/96 5,000,000 4,994,828
duPont (E.I.) deNemours & Co. 07/12/96 5,000,000 4,991,887
duPont (E.I.) deNemours & Co. 07/24/96 5,000,000 4,983,006
duPont (E.I.) deNemours & Co. 08/15/96 5,000,000 4,966,563
Emerson Electric Co. 07/23/96 5,000,000 4,983,744
General Electric Co. 07/26/96 6,000,000 5,976,681
General Electric Capital Corp. 08/13/96 5,000,000 4,967,571
General Electric Capital Corp. 01/06/97 5,000,000 4,851,688
Heinz (H.J.) Co. 07/02/96 5,000,000 4,999,267
Heinz (H.J.) Co. 07/18/96 4,500,000 4,488,695
Heinz (H.J.) Co. 07/30/96 5,000,000 4,978,371
Hewlett Packard Co. 07/11/96 5,000,000 4,992,597
Hewlett Packard Co. 07/30/96 5,000,000 4,978,451
Hewlett Packard Co. 08/29/96 4,200,000 4,162,486
(continued on next page)
<PAGE>
PAGE 4
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Keystone Liquid Trust
Maturity Principal Market
Date Amount Value
- -------------------------------------------------------- ------- ---------- -------------
COMMERCIAL PAPER (continued)
Kellogg Co. 07/31/96 $10,400,000 $ 10,353,633
Nestle Capital Corp. 07/02/96 7,000,000 6,998,973
Nestle Capital Corp. 07/16/96 3,100,000 3,093,141
Pitney Bowes Credit Corp. 07/23/96 5,200,000 5,183,285
Proctor & Gamble Co. 07/10/96 10,000,000 9,986,675
Proctor & Gamble Co. 08/28/96 4,500,000 4,460,705
Unilever Capital Corp. (b) 07/09/96 5,000,000 4,994,111
Unilever Capital Corp. (b) 09/03/96 5,500,000 5,446,711
Unilever Capital Corp. (b) 10/15/96 5,000,000 4,919,322
Wal Mart Stores, Inc. 07/01/96 3,825,000 3,825,000
- -------------------------------------------------------- ------- ---------- -------------
TOTAL COMMERCIAL PAPER (Cost--$217,073,278) 217,051,910
- --------------------------------------------------------------------------------- -------------
U.S. GOVERNMENT (AND AGENCY) ISSUES (14.4%)
FFCB, 5.30% 08/01/96 7,000,000 6,999,551
FHLB Medium Term Notes, 5.82% 05/01/97 3,000,000 2,997,639
FHLMC Discount Notes 07/03/96 10,000,000 9,997,083
FHLMC Discount Notes 07/15/96 5,000,000 4,989,763
FHLMC Discount Notes 08/05/96 5,000,000 4,974,333
FHLMC Discount Notes 08/22/96 5,000,000 4,961,650
FNMA Discount Notes 08/06/96 5,150,000 5,122,808
FNMA Discount Notes 08/20/96 5,000,000 4,963,056
FNMA Discount Notes 09/10/96 5,000,000 4,947,243
- -------------------------------------------------------- ------- ---------- -------------
TOTAL U.S. GOVERNMENT (AND AGENCY) ISSUES (Cost--$49,956,759) 49,953,126
- --------------------------------------------------------------------------------- -------------
Maturity
Value
- -------------------------------------------------------- ------- ---------- -------------
REPURCHASE AGREEMENTS (5.6%)
Keystone Joint Repurchase Agreement (Investments in
repurchase agreements, in a joint trading account,
5.55%, purchased 6/28/96) (c) 07/01/96 $18,008,325 18,000,000
State Street Bank & Trust, Co., 5.00%, purchased
6/28/96 (Collateralized by $1,080,000 U.S. Treasury
Bond, 10.75%, due 8/15/05) 07/01/96 1,400,583 1,400,000
- -------------------------------------------------------- ------- ---------- -------------
TOTAL REPURCHASE AGREEMENTS (Cost--$19,400,000) 19,400,000
- --------------------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (COST--$346,432,940) (a) 346,391,197
OTHER ASSETS AND LIABILITIES--NET (-0.1%) (268,054)
- --------------------------------------------------------------------------------- -------------
NET ASSETS--(100.0%) $346,123,143
- --------------------------------------------------------------------------------- -------------
</TABLE>
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PAGE 5
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SCHEDULE OF INVESTMENTS--June 30, 1996
(a) The cost of investments for federal income tax purposes is identical.
Gross unrealized appreciation and depreciation of investments, based on
identified tax cost, at June 30, 1996 are as follows:
Gross unrealized appreciation $ 0
Gross unrealized depreciation (41,743)
---------
Net unrealized depreciation $(41,743)
=========
(b) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Federal
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(c) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at June 30, 1996.
Legend of Portfolio Abbreviations
FFCB--Federal Farm Credit Bank
FHLB--Federal Home Loan Bank
FHLMC--Federal Home Loan Mortgage Corporation
FNMA--Federal National Mortgage Association
See Notes to Financial Statements.
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PAGE 6
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Keystone Liquid Trust
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------- ------------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------- ------------ ------- ------- ------- ---------
Income from investment operations:
Net investment income .0464 .0454 .0235 .0230 .0386
Net realized and unrealized gain (loss)
on investments (.0001) 0 0 (.0001) .0003
--------------------------------------- ------------ ------- ------- ------- ---------
Total from investment operations .0463 .0454 .0235 .0229 .0389
--------------------------------------- ------------ ------- ------- ------- ---------
Less distributions to shareholders (.0463) (.0454) (.0235) (.0229) (.0389)
--------------------------------------- ------------ ------- ------- ------- ---------
Net asset value end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------- ------------ ------- ------- ------- ---------
Total return 4.73% 4.63% 2.37% 2.31% 3.96%
Ratios/supplemental data
Ratios to average net assets:
Net investment income 4.66% 4.42% 2.50% 2.29% 3.99%
Total expenses 0.98%(a) 0.92% 1.02% 1.11% 1.10%
Net assets end of year (thousands) $332,796 $245,308 $398,617 $189,167 $227,115
--------------------------------------- ------------ ------- ------- ------- ---------
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1991 1990 1989 1988 1987
--------------------------------------- ------------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------- ------------ ------- ------- ------- ---------
Income from investment operations:
Net investment income .0634 .0760 .0786 .0597 .0524
Net realized and unrealized gain (loss)
on investments 0 0 .0001 (.0001) 0
--------------------------------------- ------------ ------- ------- ------- ---------
Total from investment operations .0634 .0760 .0787 .0596 .0524
--------------------------------------- ------------ ------- ------- ------- ---------
Less distributions to shareholders (.0634) (.0760) (.0787) (.0596) (.0524)
--------------------------------------- ------------ ------- ------- ------- ---------
Net asset value end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------- ------------ ------- ------- ------- ---------
Total return 6.47% 7.81% 8.18% 6.31% 5.35%
Ratios/supplemental data
Ratios to average net assets:
Net investment income 6.51% 7.53% 7.88% 5.99% 5.30%
Total expenses 0.92% 1.00% 1.00% 1.00% 1.00%
Net assets end of year (thousands) $400,597 $406,306 $475,640 $461,032 $375,542
--------------------------------------- ------------ ------- ------- ------- ---------
</TABLE>
(a) "Ratio of total expenses to average net assets" for the year ended June
30, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended June 30, 1996, the expense ratio would have
been 0.95%.
See Notes to Financial Statements.
<PAGE>
PAGE 7
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FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1993
Year Ended June 30, (Date of Initial
-------------------------------- Public Offering) to
1996 1995 1994 June 30, 1993
- --------------------------------------------- ------------ ------ ------ --------------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------- ------------ ------ ------ --------------------
Income from investment operations:
Net investment income .0369 .0362 .0142 .0047
Net realized and unrealized loss on
investments 0 0 0 (.0001)
- --------------------------------------------- ------------ ------ ------ --------------------
Total from investment operations .0369 .0362 .0142 .0046
- --------------------------------------------- ------------ ------ ------ --------------------
Less distributions to shareholders (.0369) (.0362) (.0142) (.0046)
- --------------------------------------------- ------------ ------ ------ --------------------
Net asset value end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------- ------------ ------ ------ --------------------
Total return (c) 3.76% 3.68% 1.43% 0.46%
Ratios/supplemental data
Ratios to average net assets:
Net investment income 3.73% 3.66% 1.84% 1.08%(b)
Total expenses 1.91%(a) 1.84% 1.85% 2.15%(b)
Net assets end of year (thousands) $10,042 $ 7,281 $11,198 $ 241
- --------------------------------------------- ------------ ------ ------ --------------------
</TABLE>
(a) "Ratio of total expenses to average net assets" for the year ended June
30, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended June 30, 1996, the expense ratio would have
been 1.88%.
(b) Annualized.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 8
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Keystone Liquid Trust
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
February 1, 1993
Year Ended June 30, (Date of Initial
-------------------------------- Public Offering) to
1996 1995 1994 June 30, 1993
- --------------------------------------------- ------------ ------ ------ --------------------
<S> <C> <C> <C> <C>
Net asset value beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------- ------------ ------ ------ --------------------
Income from investment operations:
Net investment income .0370 .0362 .0142 .0045
Net realized and unrealized loss on
investments (.0001) 0 0 (.0002)
- --------------------------------------------- ------------ ------ ------ --------------------
Total from investment operations .0369 .0362 .0142 .0043
- --------------------------------------------- ------------ ------ ------ --------------------
Less distributions to shareholders (.0369) (.0362) (.0142) (.0043)
- --------------------------------------------- ------------ ------ ------ --------------------
Net asset value end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------- ------------ ------ ------ --------------------
Total return (c) 3.75% 3.68% 1.43% 0.43%
Ratios/supplemental data
Ratios to average net assets:
Net investment income 3.72% 3.52% 1.97% 1.01% (b)
Total expenses 1.94%(a) 1.82% 1.86% 2.09% (b)
Net assets end of year (thousands) $ 3,285 $ 4,112 $ 6,599 $ 34
- --------------------------------------------- ------------ ------ ------ --------------------
</TABLE>
(a) "Ratio of total expenses to average net assets" for the year ended June
30, 1996 includes indirectly paid expenses. Excluding indirectly paid
expenses for the year ended June 30, 1996, the expense ratio would have
been 1.91%.
(b) Annualized.
(c) Excluding applicable sales charges.
See Notes to Financial Statements.
<PAGE>
PAGE 9
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STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
Assets (Note 1)
Investments at market value
(identified cost--$346,432,940) $346,391,197
Cash 147,619
Receivable for:
Fund shares sold 100
Interest 941,675
Prepaid expenses and other assets 56,798
- ------------------------------------------- -------------
Total assets 347,537,389
- ------------------------------------------- -------------
Liabilities (Note 1)
Payable for:
Fund shares redeemed 232,880
Distributions to shareholders 1,132,539
Accrued expenses 48,827
- ------------------------------------------- -------------
Total liabilities 1,414,246
- ------------------------------------------- -------------
Net assets $346,123,143
- ------------------------------------------- -------------
Net assets represented by (Note 2)
Class A Shares ($1.00 a share on
332,795,671 shares outstanding) $332,795,671
Class B Shares ($1.00 a share on
10,042,074 shares outstanding) 10,042,074
Class C Shares ($1.00 a share on 3,285,398
shares outstanding) 3,285,398
- ------------------------------------------- -------------
$346,123,143
- ------------------------------------------- -------------
Net asset value and offering price per
share (Class A, B and C) $1.00
- ------------------------------------------- -------------
STATEMENT OF OPERATIONS
Year Ended June 30, 1996
Investment income (Note 1)
Interest $15,264,626
- -------------------------------------- --------- ------------
Expenses (Notes 2 and 3)
Management fees $1,359,239
Transfer agent fees 759,359
Accounting, auditing and legal fees 52,723
Custodian fees 148,640
Trustees' fees and expenses 34,299
Distribution Plan expenses 278,755
Miscellaneous 149,465
- -------------------------------------- --------- ------------
Total expenses 2,782,480
Less: Expenses paid indirectly
(Note 3) (81,434)
- -------------------------------------- --------- ------------
Net expenses 2,701,046
- -------------------------------------- --------- ------------
Net investment income 12,563,580
- -------------------------------------- --------- ------------
Net realized and unrealized gain
(loss) on investments (Note 1)
Net realized gain on investments 4,475
Net change in unrealized
depreciation on investments (39,780)
- -------------------------------------- --------- ------------
Net realized and unrealized loss on
investments (35,305)
- -------------------------------------- --------- ------------
Net increase in net assets resulting
from operations $12,528,275
- -------------------------------------- --------- ------------
See Notes to Financial Statements.
<PAGE>
PAGE 10
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Keystone Liquid Trust
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------
1996 1995
- ------------------------------------------------------------------------------ ----------- --------------
<S> <C> <C>
Operations
Net investment income $ 12,563,580 $ 16,854,349
Net realized gain (loss) on investments 4,475 (71)
Net change in unrealized depreciation on investments (39,780) (685)
- ------------------------------------------------------------------------------ ----------- --------------
Net increase in net assets resulting from operations 12,528,275 16,853,593
- ------------------------------------------------------------------------------ ----------- --------------
Distributions to shareholders (Note 1)
Class A Shares (12,043,595) (16,168,849)
Class B Shares (383,777) (435,508)
Class C Shares (100,903) (249,236)
- ------------------------------------------------------------------------------ ----------- --------------
Total distributions to shareholders (12,528,275) (16,853,593)
- ------------------------------------------------------------------------------ ----------- --------------
Capital share transactions (Note 2)
Class A Shares 87,487,588 (153,308,964)
Class B Shares 2,760,515 (3,916,029)
Class C Shares (826,275) (2,487,651)
- ------------------------------------------------------------------------------ ----------- --------------
Net increase (decrease) in net assets resulting from capital share
transactions 89,421,828 (159,712,644)
- ------------------------------------------------------------------------------ ----------- --------------
Total increase (decrease) in net assets 89,421,828 (159,712,644)
Net assets
Beginning of year 256,701,315 416,413,959
- ------------------------------------------------------------------------------ ----------- --------------
End of year $346,123,143 $ 256,701,315
- ------------------------------------------------------------------------------ ----------- --------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
PAGE 11
- ----------------------
NOTES TO FINANCIAL STATEMENTS
(1.) Summary of Accounting Policies
Keystone Liquid Trust (the "Fund") is an open-end diversified investment
management company for which Keystone Management, Inc. ("KMI") is the
Investment Manager and Keystone Investment Management Company ("Keystone") is
the Investment Adviser. The Fund is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund is a money market mutual
fund that seeks high current income from short-term securities while
preserving capital and maintaining liquidity.
The Fund offers Class A, B, and C shares. Class A shares are offered without
an initial sales charge. Class B shares are offered without an initial sales
charge, although a contingent deferred sales charge may be imposed at the
time of redemption, which decreases depending on when the shares were
purchased and how long the shares have been held. Class C shares are offered
without an initial sales charge, although a contingent deferred sales charge
may be imposed on redemptions within one year of purchase. Class C shares are
available only through dealers who have entered into special distribution
agreements with Keystone Investment Distributors Company ("KIDC"), the Fund's
principal underwriter.
Keystone is a wholly-owned subsidiary of Keystone Investments, Inc. ("KII"),
a Delaware corporation. KII is a private corporation owned by an investor
group consisting predominantly of current and former members of management of
Keystone and its affiliates.
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.
Valuation of Securities--Money market investments maturing in sixty days or
less are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market. Money market investments maturing in
more than sixty days for which market quotations are readily available are
valued at current market value. Money market investments maturing in more
than sixty days when purchased that are held on the sixtieth day prior to
maturity are valued at amortized cost (market value on the sixtieth day
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest approximates market.
Repurchase Agreements--When the Fund enters into a repurchase agreement (a
purchase of securities whereby the seller agrees to repurchase the securities
at a mutually agreed upon date and price) the repurchase price of the
securities will generally equal the amount paid by the Fund plus a negotiated
interest amount. The seller under the repurchase agreement will be required
to provide securities (collateral) to the Fund whose value will be maintained
at an amount not less than the repurchase price. The Fund monitors the value
of the collateral on a daily basis, and, if the value of the collateral falls
below required levels, the Fund intends to seek additional collateral from
the seller or terminate the repurchase agreement. If the seller defaults, the
Fund would suffer a loss to the extent that the proceeds from the sale of the
underlying securities were less than the repurchase price. Any such loss
would be increased by any cost incurred on disposing of such securities. If
bankruptcy proceedings are commenced against the seller under the repurchase
agree-
<PAGE>
PAGE 12
- ----------------------
Keystone Liquid Trust
ment, the realization on the collateral may be delayed or limited. Repurchase
agreements entered into by the Fund will be limited to transactions with
dealers or domestic banks believed to present minimal credit risks, and the
Fund will take constructive receipt of all securities underlying repurchase
agreements until such agreements expire.Keystone Liquid Trust
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other Keystone funds, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are fully collateralized
by U.S. Treasury and/or Federal Agency obligations.
Distributions--The Fund declares dividends daily, pays dividends monthly and
automatically reinvests such dividends in additional shares at net asset
value, unless shareholders request payment in cash. Dividends are declared
from the total of net investment income, plus realized and unrealized gain
(loss) on investments.
Securities Transactions and Investment Income--Secu rities transactions are
accounted for no later than one business day after the trade date. Realized
gains and losses from securities transactions are computed on the identified
cost basis. Interest income is recorded on the accrual basis.
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 ("Internal Revenue Code"). Thus, the Fund expects to be
relieved of any federal income tax liability by distributing all of its net
tax basis investment income and net tax basis capital gains, if any, to its
shareholders. The Fund intends to avoid any excise tax liability by making
the required distributions under the Internal Revenue Code.
(2.) Shares of Beneficial Interest
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of shares of beneficial interest without par value. Since the Fund
sold, redeemed and reinvested shares at $1.00 net asset value, the shares and
dollar amount are the same. Transactions in Fund shares were as follows:
Year Ended June 30,
Class A Shares 1996 1995
- -------------------------- ------------ --------------
Sales $ 1,105,810,542 $ 725,781,933
Redemptions (1,027,927,276) (892,973,139)
Reinvestment of
distributions from
available sources 9,604,322 13,882,242
- -------------------------- ------------ --------------
Net increase (decrease) $ 87,487,588 $(153,308,964)
========================== ============ ==============
Class B Shares
- -------------------------- ------------ --------------
Sales $ 31,488,209 $ 30,267,166
Redemptions (29,034,624) (34,518,836)
Reinvestment of
distributions from
available sources 306,930 335,641
- -------------------------- ------------ --------------
Net increase (decrease) $ 2,760,515 $ (3,916,029)
========================== ============ ==============
Class C Shares
- -------------------------- ------------ --------------
Sales $ 7,581,549 $ 11,924,336
Redemptions (8,502,653) (14,624,256)
Reinvestment of
distributions from
available sources 94,829 212,269
- -------------------------- ------------ --------------
Net decrease $ (826,275) $ (2,487,651)
========================== ============ ==============
<PAGE>
PAGE 13
- ----------------------
The Fund bears some of the costs of selling its shares under Distribution
Plans adopted with respect to its Class A, Class B and Class C shares
pursuant to Rule 12b-1 under the 1940 Act.
The Fund's Class A Distribution Plan provides for expenditures, which are
currently limited to 0.25% annually of the average daily net asset value of
Class A shares, to pay expenses associated with the distribution of Class A
shares. Amounts paid by the Fund to KIDC under the Class A Distribution Plan
are currently used to pay others, such as dealers, service fees at an annual
rate of up to 0.25% of the average daily net asset value of Class A shares
maintained by such others.
The Fund's Class B Distribution Plans provide for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class B shares to
pay expenses associated with the distribution of Class B shares. For Class B
shares sold on or after June 1, 1995, amounts paid by the Fund under such
shares' Class B Distribution Plan are currently used to pay others (dealers)
a commission at the time of purchase normally equal to 4.00% of the price
paid for each Class B share sold plus the first year's service fee in advance
in the amount of 0.25% of the price paid for each Class B share sold.
Beginning approximately 12 months after the purchase of such Class B shares,
the dealer or other party will receive service fees at an annual rate of
0.25% of the average daily net asset value of such Class B shares maintained
by such others. A contingent deferred sales charge will be imposed, if
applicable, on Class B shares purchased on or after June 1, 1995 at rates
ranging from a maximum of 5% of amounts redeemed during the first 12 month
period from and including the month of purchase to 1% of amounts redeemed
during the sixth twelve month period. Class B shares purchased on or after
June 1, 1995 that have been outstanding for eight years from and including
the month of purchase will automatically convert to Class A shares without a
front-end sales charge or exchange fee. Class B shares purchased prior to
June 1, 1995 convert to Class A shares after seven years.
The Fund's Class C Distribution Plan provides for expenditures at an annual
rate of up to 1.00% of the average daily net asset value of Class C shares to
pay expenses associated with the distribution of Class C shares. Amounts paid
by the Fund under the Class C Distribution Plan are currently used to pay
others (dealers) a commission at the time of purchase in the amount of 0.75%
of the price paid for each Class C share sold plus the first year's service
fee in advance in the amount of 0.25% of the price paid for each Class C
share. Beginning approximately 15 months after purchase date, the dealer or
other party will receive a commission at an annual rate of 0.75% of the
average net asset value (subject to applicable limitations imposed by rules
adopted by the National Association of Securities Dealers, Inc.("NASD")) plus
service fees at the annual rate of 0.25% of the average net asset value of
each Class C share maintained by such others on the Fund's books for
specified periods.
Each of the Distribution Plans may be terminated at any time by a vote of
the Independent Trustees or by vote of a majority of the outstanding voting
shares of the respective class. However, after the termination of any
Distribution Plan, at the discretion of the Board of Trustees, payments to
KIDC may continue as compensation for its services which had been earned
while the Distribution Plans were in effect.
During the year ended June 30, 1996, the Fund paid or accrued to KIDC
$148,564 under its Class A Distribution Plan. During the year ended June 30,
1996 under its Class B Distribution Plans, the Fund
<PAGE>
PAGE 14
- ----------------------
Keystone Liquid Trust
paid or accrued to KIDC $77,113 for Class B shares sold prior to June 1, 1995
and $25,876 for Class B shares sold on or after June 1, 1995. During the year
ended June 30, 1996, the Fund paid or accrued $27,202 under its Class C
Distribution Plan.Keystone Liquid Trust
Under applicable NASD rules, the maximum uncollected amounts for which KIDC
may seek payment from the Fund under its Distribution Plans as of June 30,
1996 are $1,069,672 for Class B shares purchased prior to June 1, 1995,
$201,443 for Class B shares purchased on or after June 1, 1995, and
$1,036,758 for Class C shares.
Presently, the Fund's class-specific expenses are limited to Distribution
Plan expenses incurred by a class of shares pursuant to its Distribution
Plan.
(3.) Investment Management Agreement and Other Transactions
Under the terms of the Investment Management Agreement between KMI and the
Fund, KMI provides investment management and administrative services to the
Fund. In return, KMI is paid a management fee computed and paid daily
calculated by applying percentage rates, starting at 0.50%, and declining as
net assets increase, to 0.40% per annum, to the net asset value of the Fund.
KMI has entered into an Investment Advisory Agreement with Keystone under
which Keystone provides investment advisory and management services to the
Fund and receives for its services an annual fee representing 85% of the
management fee received by KMI.
During the year ended June 30, 1996, the Fund paid or accrued to KMI
investment management and administration services fees of $1,359,239, which
represented 0.50% of the Fund's average net assets. Of such amount paid to
KMI, $1,155,353 was paid to Keystone for its services to the Fund.
During the year ended June 30, 1996, the Fund paid or accrued $17,571 to KII
as reimbursement for certain accounting services provided to the Fund.
Keystone Investor Resource Center, Inc. ("KIRC"), a wholly-owned subsidiary
of Keystone, is the Fund's transfer and dividend disbursing agent. For the
year ended June 30, 1996, the Fund paid or accrued $759,359 to KIRC for
transfer agent fees.
The Fund has entered into an expense offset arrangement with its custodian.
For the year ended June 30, 1996, the Fund paid custody fees in the amount of
$67,206 and received a credit of $81,434 pursuant to the expense offset
arrangement, resulting in a total expense of $148,640. The assets deposited
with the custodian under this expense offset arrangement could have been
invested in income-producing assets.
Certain officers and/or Directors of Keystone are also officers and/or
Trustees of the Fund. Officers of Keystone and affiliated Trustees receive no
compensation directly from the Fund.
- ------------------------------------------------------------------------------
FEDERAL TAX STATUS--FISCAL 1996 DISTRIBUTIONS (Unaudited)
During the fiscal year ended June 30, 1996, dividends of $0.0463, $0.0369 and
$0.0369 per share were paid or are payable to shareholders of Keystone Liquid
Trust Class A, B, and C, respectively. All dividends are taxable to
shareholders as ordinary income in the year in which received by them or
credited to their accounts and are not eligible for the corporate dividend
received deduction. In January 1997 we will send you information on the
distributions paid during the calendar year to help you in completing your
federal tax return.
<PAGE>
PAGE 15
- ----------------------
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Keystone Liquid Trust
We have audited the accompanying statement of assets and liabilities of
Keystone Liquid Trust, including the schedule of investments, as of June 30,
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 for Class A shares, and for each of the years in
the three-year period then ended and the period from February 1, 1993 (date
of initial public offering) to June 30, 1993 for Class B and Class C shares.
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 June 30, 1996, by correspondence with the custodian.
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 Liquid Trust as of June 30, 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 or periods specified in the first paragraph above in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
July 26, 1996
<PAGE>
[back 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 Keystone funds, contact your
financial adviser or call Keystone.
[keystone logo] KEYSTONE
INVESTMENTS
P.O. Box 2121
Boston, Massachusetts 02106-2121
KLT-R-8/96
17.6M [recycle logo]
